UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
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For the quarterly period ended
September 30,
2010
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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Commission file number
000-50784
Blackboard Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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52-2081178
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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650 Massachusetts Avenue, N.W.
Washington D.C.
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20001
(Zip Code)
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(Address of Principal Executive
Offices)
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Registrants telephone number, including area code:
(202) 463-4860
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to
submit and post such
files). Yes
þ
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
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Class
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Outstanding at October 31, 2010
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Common Stock, $0.01 par value
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34,394,911
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Blackboard
Inc.
Quarterly Report on
Form 10-Q
For the Quarter Ended September 30, 2010
INDEX
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PART I. FINANCIAL INFORMATION
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Item 1.
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Consolidated Financial Statements
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Unaudited Consolidated Balance Sheets as of December 31,
2009 and September 30, 2010
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1
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Unaudited Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 2009 and 2010
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2
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Unaudited Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2009 and 2010
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3
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Notes to Unaudited Consolidated Financial Statements
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4
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Item 2.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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22
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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34
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Item 4.
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Controls and Procedures
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34
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PART II. OTHER INFORMATION
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Item 1.
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Legal Proceedings
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35
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Item 1A.
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Risk Factors
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35
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Item 6.
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Exhibits
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45
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Signature
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46
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Throughout this Quarterly Report on
Form 10-Q,
the terms we, us, our and
Blackboard refer to Blackboard Inc. and its
subsidiaries.
ii
BLACKBOARD
INC.
(In thousands, except share and per share data)
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December 31,
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September 30,
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2009
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2010
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Current assets:
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Cash and cash equivalents
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$
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167,353
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$
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86,425
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Accounts receivable, net of allowance for doubtful accounts of
$1,184 and $1,463, respectively
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69,098
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137,069
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Inventories
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1,557
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181
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Prepaid expenses and other current assets
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15,232
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18,225
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Deferred tax asset, current portion
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2,692
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1,090
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Deferred cost of revenues
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7,664
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6,026
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Total current assets
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263,596
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249,016
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Deferred tax asset, noncurrent portion
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18,188
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17,999
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Investment in common stock warrant
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3,124
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3,124
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Restricted cash
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3,923
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4,801
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Property and equipment, net
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34,483
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38,857
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Other assets
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1,453
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2,178
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Goodwill
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328,858
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429,798
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Intangible assets, net
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71,309
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103,966
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Total assets
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$
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724,934
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$
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849,739
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Current liabilities:
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Accounts payable
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$
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2,360
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$
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1,322
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Accrued expenses
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28,264
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41,877
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Deferred rent, current portion
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1,021
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462
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Deferred tax liability, current portion
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1,326
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Deferred revenues, current portion
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186,702
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229,673
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Convertible senior notes, net of debt discount of $4,213
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160,787
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Total current liabilities
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218,347
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435,447
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Convertible senior notes, net of debt discount of $8,823
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156,177
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Deferred rent, noncurrent portion
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11,507
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12,487
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Deferred tax liability, noncurrent portion
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1,474
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5,586
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Deferred revenues, noncurrent portion
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5,957
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7,007
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Total liabilities
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393,462
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460,527
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Commitments and contingencies
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Stockholders equity:
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Preferred stock, $0.01 par value; 5,000,000 shares
authorized; no shares issued or outstanding
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Common stock, $0.01 par value; 200,000,000 shares
authorized; 33,100,139 and 34,370,838 shares issued and
outstanding, respectively
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331
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343
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Additional paid-in capital
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406,751
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449,509
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Accumulated other comprehensive loss, net
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(159
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)
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Accumulated deficit
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(75,610
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)
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(60,481
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)
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Total stockholders equity
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331,472
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389,212
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Total liabilities and stockholders equity
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$
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724,934
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$
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849,739
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See notes to unaudited consolidated financial statements.
1
BLACKBOARD
INC.
(In
thousands, except share and per share data)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2009
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2010
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2009
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2010
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Revenues:
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Product
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$
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87,862
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$
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112,307
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$
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251,369
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$
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303,511
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Professional services
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10,546
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8,515
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25,597
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26,105
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Total revenues
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98,408
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120,822
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276,966
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329,616
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Operating expenses:
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Cost of product revenues, excludes $2,480 and $2,348 for the
three months ended September 30, 2009 and 2010,
respectively, and $8,153 and $7,672 for the nine months ended
September 30, 2009 and 2010, respectively, in amortization
of acquired technology included in amortization of intangibles
resulting from acquisitions shown below(1)
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23,849
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28,425
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67,055
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80,368
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Cost of professional services revenues(1)
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5,550
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5,989
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15,020
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15,854
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Research and development(1)
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11,428
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15,081
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33,848
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39,333
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Sales and marketing(1)
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24,670
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32,563
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74,008
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85,808
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General and administrative(1)
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14,636
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18,077
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42,476
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49,633
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Patent-related impairment and other costs
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10,984
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Amortization of intangibles resulting from acquisitions
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9,282
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9,677
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25,728
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28,014
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Total operating expenses
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89,415
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109,812
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269,119
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299,010
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Income from operations
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8,993
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11,010
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7,847
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30,606
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Other expense, net:
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Interest expense
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(3,015
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)
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(3,182
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)
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(8,877
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)
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|
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(8,978
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)
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Interest income
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36
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34
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202
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105
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Other income (expense), net
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300
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|
361
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1,103
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(545
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)
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Income before provision for income taxes
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6,314
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|
|
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8,223
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|
275
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21,188
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Provision for income taxes
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(2,007
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)
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(2,490
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)
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(77
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)
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|
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(6,059
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)
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Net income
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$
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4,307
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|
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$
|
5,733
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$
|
198
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|
$
|
15,129
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|
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Net income per common share:
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|
|
|
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Basic
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$
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0.13
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|
$
|
0.17
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|
|
$
|
0.01
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|
|
$
|
0.45
|
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|
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|
|
|
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Diluted
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$
|
0.13
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$
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0.16
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$
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0.01
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|
$
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0.44
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|
|
|
|
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|
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Weighted average number of common shares:
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|
|
|
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Basic
|
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|
32,073,491
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|
|
|
34,295,259
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|
|
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31,682,212
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|
|
|
33,929,754
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|
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|
|
|
|
|
|
|
|
|
|
|
|
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Diluted
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|
33,045,337
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34,790,856
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32,466,179
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|
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34,660,010
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(1) Includes the following amounts related to stock-based
compensation:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
$
|
347
|
|
|
$
|
316
|
|
|
$
|
923
|
|
|
$
|
923
|
|
Cost of professional services revenues
|
|
|
138
|
|
|
|
179
|
|
|
|
398
|
|
|
|
476
|
|
Research and development
|
|
|
284
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|
|
|
335
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|
|
|
768
|
|
|
|
898
|
|
Sales and marketing
|
|
|
1,501
|
|
|
|
2,122
|
|
|
|
4,625
|
|
|
|
5,843
|
|
General and administrative
|
|
|
1,775
|
|
|
|
1,957
|
|
|
|
5,270
|
|
|
|
6,792
|
|
See notes to unaudited consolidated financial statements.
2
BLACKBOARD
INC.
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
198
|
|
|
$
|
15,129
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Deferred tax (benefit) provision
|
|
|
(2,455
|
)
|
|
|
3,355
|
|
Excess tax benefit from stock-based compensation
|
|
|
(763
|
)
|
|
|
(2,751
|
)
|
Amortization of debt discount and issuance costs
|
|
|
4,689
|
|
|
|
4,711
|
|
Depreciation and amortization
|
|
|
14,045
|
|
|
|
14,808
|
|
Amortization of intangibles resulting from acquisitions
|
|
|
25,728
|
|
|
|
28,014
|
|
Patent-related impairment charge
|
|
|
7,447
|
|
|
|
|
|
Change in allowance for doubtful accounts
|
|
|
1,233
|
|
|
|
(712
|
)
|
Stock-based compensation
|
|
|
11,984
|
|
|
|
14,932
|
|
Gain on investment in common stock warrant
|
|
|
(1,136
|
)
|
|
|
|
|
Changes in operating assets and liabilities, net of effect of
acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
987
|
|
|
|
(57,036
|
)
|
Inventories
|
|
|
(357
|
)
|
|
|
1,375
|
|
Prepaid expenses and other current assets
|
|
|
(3,319
|
)
|
|
|
(605
|
)
|
Deferred cost of revenues
|
|
|
(483
|
)
|
|
|
1,639
|
|
Accounts payable
|
|
|
2,885
|
|
|
|
(3,315
|
)
|
Accrued expenses
|
|
|
8,780
|
|
|
|
9,591
|
|
Deferred rent
|
|
|
1,345
|
|
|
|
421
|
|
Deferred revenues
|
|
|
19,002
|
|
|
|
34,926
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
89,810
|
|
|
|
64,482
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(91,784
|
)
|
|
|
(155,069
|
)
|
Purchases of property and equipment
|
|
|
(15,919
|
)
|
|
|
(16,327
|
)
|
Purchases of
available-for-sale
securities
|
|
|
(6,586
|
)
|
|
|
|
|
Redemptions of
available-for-sale
securities
|
|
|
6,586
|
|
|
|
|
|
Payments for patent enforcement costs
|
|
|
(414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(108,117
|
)
|
|
|
(171,396
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Releases of letters of credit
|
|
|
110
|
|
|
|
61
|
|
Payments on letters of credit
|
|
|
|
|
|
|
(184
|
)
|
Payment for debt issuance costs
|
|
|
|
|
|
|
(1,727
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
763
|
|
|
|
2,751
|
|
Proceeds from exercise of stock options
|
|
|
7,737
|
|
|
|
25,085
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
8,610
|
|
|
|
25,986
|
|
Net decrease in cash and cash equivalents
|
|
|
(9,697
|
)
|
|
|
(80,928
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
141,746
|
|
|
|
167,353
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
132,049
|
|
|
$
|
86,425
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
3
BLACKBOARD
INC.
For the Three and Nine Months Ended September 30,
2009 and 2010
In these Notes to Unaudited Consolidated Financial
Statements, the terms the Company and
Blackboard refer to Blackboard Inc. and its
subsidiaries
.
|
|
1.
|
Nature of
Business and Organization
|
Blackboard Inc. (the Company) is a leading provider
of enterprise software applications and related services to the
education industry. The Companys clients include colleges,
universities, schools and other education providers, textbook
publishers and student-focused merchants who serve these
education providers and their students, and corporate and
government clients.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial information
and the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
notes required by U.S. generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have
been included. The results of operations for the three and nine
months ended September 30, 2010 are not necessarily
indicative of the results that may be expected for the full
fiscal year. The consolidated balance sheet at December 31,
2009 has been derived from the audited consolidated financial
statements at that date but does not include all of the
information and notes required by U.S. generally accepted
accounting principles for complete financial statements.
These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements
as of December 31, 2008 and 2009 and for each of the three
years in the period ended December 31, 2009 included in the
Companys Annual Report on
Form 10-K
filed with the Securities and Exchange Commission on
February 17, 2010.
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries after elimination
of all significant intercompany balances and transactions.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Fair
Value Measurements
Fair value is defined as the price that would be received from
selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
When determining the fair value measurements for assets and
liabilities required or permitted to be recorded at fair value,
the Company considers the principal or most advantageous market
in which it would transact and it considers assumptions that
market participants would use when pricing the asset or
liability. The Company evaluates the fair value of certain
assets and liabilities using the following fair value hierarchy
which ranks the quality and reliability of inputs, or
assumptions, used in the determination of fair value:
Level
1 quoted prices in active markets
for identical assets and liabilities
Level 2
inputs other than Level 1
quoted prices that are directly or indirectly observable
Level 3
unobservable inputs that are not
corroborated by market data
4
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company evaluates assets and liabilities subject to fair
value measurements on a recurring and nonrecurring basis to
determine the appropriate level to classify them for each
reporting period. This determination requires significant
judgments to be made by the Company. The following tables set
forth the Companys assets and liabilities that were
measured at fair value as of December 31, 2009 and
September 30, 2010, by level within the fair value
hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents(1)
|
|
$
|
137,748
|
|
|
$
|
137,748
|
|
|
$
|
|
|
|
$
|
|
|
Investment in common stock warrant
|
|
|
3,124
|
|
|
|
|
|
|
|
|
|
|
|
3,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
140,872
|
|
|
$
|
137,748
|
|
|
$
|
|
|
|
$
|
3,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible senior notes(2)
|
|
$
|
169,125
|
|
|
$
|
169,125
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
September 30,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
|
2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Investment in common stock warrant
|
|
|
3,124
|
|
|
|
|
|
|
|
|
|
|
|
3,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,124
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible senior notes(2)
|
|
$
|
166,031
|
|
|
$
|
166,031
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Cash equivalents consist of money market funds with original
maturity dates of less than three months for which the fair
value is based on quoted market prices.
|
|
(2)
|
|
The fair value of the Companys convertible senior notes is
based on the quoted market price.
|
Assets and liabilities that are measured at fair value on a
non-recurring basis include intangible assets and goodwill.
These items are recognized at fair value when they are
considered to be impaired. During the three and nine months
ended September 30, 2010, there were no fair value
adjustments for assets and liabilities measured on a
non-recurring basis.
The Company has determined that although some market data was
available, the investment in the common stock warrant was
principally valued using the Companys own assumptions in
calculating the estimate of fair value including a discounted
cash flow and comparable company analysis and, as a result, is
classified as a Level 3 instrument. There were no changes
in the fair value of the investment in common stock warrant
during the three and nine months ended September 30, 2010.
The Company discloses fair value information about financial
instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. Due to their
short-term nature, the carrying amounts reported in the
consolidated financial statements approximate the fair value for
accounts receivable, accounts payable and accrued expenses.
5
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investment
in Common Stock Warrant
The Company holds a warrant to purchase common stock in an
entity that provides technology support services to educational
institutions, including the Companys customers, that is
exercisable for 9.9% of the common shares of the entity. This
common stock warrant meets the definition of a derivative. In
determining the fair value of the common stock warrant, the
Company considered discounted cash flow and comparable company
analyses, and at times may consider market data such as equity
financings similar to the one the investee received in 2009. The
fair value of the common stock warrant of $3.1 million is
recorded as investment in common stock warrant on the
Companys unaudited consolidated balance sheets as of
December 31, 2009 and September 30, 2010. The Company
will continue to evaluate the fair value of this instrument in
subsequent reporting periods and any changes in value will be
recognized in the consolidated statements of operations.
Revenue Recognition and Deferred Revenue
The Company derives revenues from two sources: product sales and
professional services sales. Product revenues include software
license fees, subscription fees from customers accessing the
Companys on-demand application services, hardware, premium
support and maintenance, and hosting revenues. Professional
services revenues include training and consulting services. The
Companys software does not require significant
modification and customization services. Where services are not
essential to the functionality of the software, the Company
begins to recognize software licensing revenues when all of the
following criteria are met: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the
fee is fixed and determinable; and (4) collectibility is
probable.
The Company does not have vendor-specific objective evidence
(VSOE) of fair value for support and maintenance
separate from software for the majority of its products.
Accordingly, when licenses are sold in conjunction with the
Companys support and maintenance, the Company recognizes
license revenue over the term of the maintenance service period.
When licenses of certain offerings are sold in conjunction with
support and maintenance where the Company does have VSOE, the
Company recognizes the license revenue upon delivery of the
license and recognizes the support and maintenance revenue over
the term of the maintenance service period.
Hosting fees and
set-up
fees
are recognized ratably over the term of the hosting agreement.
After any necessary installation services are performed,
hardware revenues are recognized when all of the following
criteria are met: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the fee is
fixed and determinable; and (4) collectibility is probable.
The Company early adopted new accounting guidance on
January 1, 2010 that impacts the Companys accounting
for (a) non-software components of tangible products and
(b) software components of tangible products that are sold,
licensed, or leased with tangible products when the software
components and non-software components of the tangible product
function together to deliver the tangible products
essential functionality. The Company has applied this guidance
on a prospective basis for arrangements executed or
significantly modified after December 31, 2009. The Company
allocates the overall consideration from such sales to each
deliverable using a best estimate of the selling price of
individual deliverables in the arrangement in the absence of
VSOE or other third-party evidence of the selling price. Prior
to the adoption of this new accounting guidance, in the absence
of VSOE, all revenue from such sales was recognized ratably over
the term of the applicable maintenance service period.
As a result of the adoption of this new accounting guidance, the
product revenues and cost of product revenues related to
hardware and software sales in the
Blackboard Transact
product line will generally be recognized upfront upon
delivery of the product to the customer. Product revenues in the
Blackboard Transact
product line generally consist of
hardware, software and support. Generally, the consideration
allocated to the hardware and software deliverables is
determined using a best estimate of selling price which the
Company estimates based on an analysis of market data and the
Companys internal cost to deliver each element. Generally,
the consideration allocated to the
6
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
support deliverable is based on third party evidence. During the
three and nine months ended September 30, 2010, the Company
recognized product revenues of approximately $17.8 million
and $27.5 million, respectively, under this new accounting
guidance, which related to ratable and non-ratable revenue
streams and is comprised of arrangements executed or
significantly modified after December 31, 2009. In
addition, approximately $3.3 million is recorded as
deferred revenues on the unaudited consolidated balance sheet as
of September 30, 2010 related to these arrangements
executed or significantly modified after December 31, 2009.
The effect of changes in either selling price or the method or
assumptions used to determine selling price for a specific
deliverable could have a material effect on the allocation of
the overall consideration of an arrangement.
As a result of the adoption of this new accounting guidance,
revenues, income from operations, net income and basic and
diluted earnings per share are approximately $10.4 million,
$8.0 million, $5.5 million, $0.16 and $0.16,
respectively, higher during the three months ended
September 30, 2010 than if the Company had accounted for
these sales under the accounting guidance in effect prior to
January 1, 2010. Further, revenues, income from operations,
net income and basic and diluted earnings per share are
approximately $15.9 million, $12.3 million,
$8.5 million, $0.25 and $0.24, respectively, higher during
the nine months ended September 30, 2010 than if the
Company had accounted for these sales under the accounting
guidance in effect prior to January 1, 2010. The Company
expects the adoption of this new accounting guidance to continue
to have a material effect on the Companys consolidated
results of operations and financial condition.
The Companys sales arrangements may include professional
services sold separately under professional services agreements
that include training and consulting services. Revenues from
these arrangements are accounted for separately from the license
revenue because they meet the criteria for separate accounting.
The more significant factors considered in determining whether
revenues should be accounted for separately include the nature
of the professional services, such as consideration of whether
the professional services are essential to the functionality of
the licensed product, degree of risk, availability of
professional services from other vendors and timing of payments.
Professional services that are sold separately from license
revenue are recognized as the professional services are
performed on a
time-and-materials
basis.
The Company does not offer specified upgrades or incrementally
significant discounts. Advance payments are recorded as deferred
revenues until the product is shipped, services are delivered or
obligations are met and the revenues can be recognized. Deferred
revenues represent the excess of amounts invoiced over amounts
recognized as revenues. The Company provides non-specified
upgrades of its products only on a
when-and-if-available
basis. The Company accounts for any contingencies, such as
rights of return, conditions of acceptance, warranties and price
protection, as a separate element. Historically, the effect of
accounting for these contingencies included in revenue
arrangements has not been material.
Cost
of Revenues and Deferred Cost of Revenues
Cost of revenues includes all direct materials, direct labor,
direct shipping and handling costs, telecommunications costs
related to the
Blackboard Connect
product, and those
indirect costs related to revenue such as indirect labor,
materials and supplies, equipment rent, and amortization of
software developed internally and software license rights. Cost
of product revenues excludes amortization of acquired technology
intangibles resulting from acquisitions, which is separately
included on the unaudited consolidated statements of operations
as amortization of intangibles acquired in acquisitions.
Amortization expense related to acquired technology was
$2.5 million and $2.3 million for the three months
ended September 30, 2009 and 2010, respectively, and
$8.2 million and $7.7 million for the nine months
ended September 30, 2009 and 2010, respectively.
Deferred cost of revenues represents the cost of hardware (if
sold as part of a complete system) and software that has been
purchased and has been sold in conjunction with the
Companys products. As a result of new accounting guidance
adopted on January 1, 2010, the Company generally
recognizes these costs upon shipment of the products to its
clients. In general, prior to the adoption of the new accounting
guidance on January 1, 2010, the Company initially deferred
these costs and recognized them into expense over the period in
which the related
7
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
revenue was recognized. The Company does not have transactions
in which the deferred cost of revenues exceeds deferred revenues.
Basic
and Diluted Net Income per Common Share
Basic net income per common share excludes dilution for
potential common stock issuances and is computed by dividing net
income by the weighted-average number of common shares
outstanding for the period. Diluted net income per common share
reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or
converted into common stock.
The following table provides a reconciliation of the numerators
and denominators used in computing basic and diluted net income
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Net income
|
|
$
|
4,307
|
|
|
$
|
5,733
|
|
|
$
|
198
|
|
|
$
|
15,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
|
|
32,073,491
|
|
|
|
34,295,259
|
|
|
|
31,682,212
|
|
|
|
33,929,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options to purchase common stock
|
|
|
971,846
|
|
|
|
495,597
|
|
|
|
783,967
|
|
|
|
730,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, diluted
|
|
|
33,045,337
|
|
|
|
34,790,856
|
|
|
|
32,466,179
|
|
|
|
34,660,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.13
|
|
|
$
|
0.17
|
|
|
$
|
0.01
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$
|
0.13
|
|
|
$
|
0.16
|
|
|
$
|
0.01
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The dilutive effect of options to purchase an aggregate of
2,577,649 and 2,472,619 shares were not included in the
computations of diluted net income per common share for the
three months ended September 30, 2009 and 2010,
respectively, as their effect would be anti-dilutive. The
dilutive effect of options to purchase an aggregate of 3,383,508
and 2,116,429 shares were not included in the computations
of diluted net income per common share for the nine months ended
September 30, 2009 and 2010, respectively, as their effect
would be anti-dilutive.
Comprehensive
Net Income (Loss)
Comprehensive net income (loss) includes net income (loss),
combined with unrealized gains and losses not included in
earnings and reflected as a separate component of
stockholders equity. For the Company, such items consist
primarily of foreign currency translation losses, which were
$0.2 million for the three and nine months ended
September 30, 2009 and 2010, representing the difference
between net income and comprehensive net loss for the respective
periods.
|
|
3.
|
Mergers
and Acquisitions
|
Saf-T-Net,
Inc. Merger
On March 19, 2010, the Company completed its merger with
Saf-T-Net, Inc. (Saf-T-Net) pursuant to the
Agreement and Plan of Merger dated March 7, 2010. Pursuant
to the Agreement and Plan of Merger, the Company paid merger
consideration of $34.4 million. The effective cash portion
of the purchase price of Saf-T-Net before
8
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
transaction costs of approximately $0.5 million was
$34.2 million, net of Saf-T-Nets March 19, 2010
cash balance of $0.2 million. The transaction costs are
reflected in general and administrative expenses in the
consolidated statements of operations. The Company has included
the financial results of Saf-T-Net in its consolidated financial
statements beginning March 20, 2010.
Saf-T-Net is the provider of AlertNow, a leading messaging and
mass notification solution for the K-12 marketplace. The Company
believes the merger with Saf-T-Net supports the Companys
long-term strategic direction and the demands for innovative
technology in the education industry. The Company believes that
the merger with Saf-T-Net will help the Company meet the growing
demands of its clients, including the ability to send mass
communications via various means.
The Company has accounted for the merger under the acquisition
method of accounting. Assets acquired and liabilities assumed
were recorded at their fair values as of March 19, 2010.
The total preliminary purchase price was $34.4 million,
excluding the estimated acquisition related transaction costs of
approximately $0.5 million and excluding acquired cash.
Acquisition-related transaction costs include investment
banking, legal and accounting fees, and other external costs
directly related to the merger.
Preliminary
Purchase Price Allocation
Under the acquisition method of accounting, the total estimated
purchase price was allocated to Saf-T-Nets net tangible
liabilities and intangible assets based on their estimated fair
values as of March 19, 2010. The Company recorded the
excess of the purchase price over the net tangible liabilities
and identifiable intangible assets as goodwill. The preliminary
allocation of the purchase price shown in the table below was
based upon managements preliminary valuation, which was
based on estimates and assumptions that are subject to change.
The areas of the purchase price allocation that are not yet
finalized relate primarily to income and non-income based taxes.
The preliminary estimated purchase price is allocated as follows
(in thousands):
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
238
|
|
Accounts receivable
|
|
|
468
|
|
Prepaid expenses and other current assets
|
|
|
30
|
|
Property and equipment
|
|
|
14
|
|
Accounts payable
|
|
|
(1,459
|
)
|
Other accrued liabilities
|
|
|
(586
|
)
|
Deferred tax liabilities, net
|
|
|
(3,176
|
)
|
Deferred revenue
|
|
|
(2,835
|
)
|
|
|
|
|
|
Net tangible liabilities acquired
|
|
|
(7,306
|
)
|
Definite-lived intangible assets acquired
|
|
|
15,680
|
|
Goodwill
|
|
|
26,021
|
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
34,395
|
|
|
|
|
|
|
Prior to the end of the measurement period for finalizing the
purchase price allocation, if information becomes available that
would indicate adjustments to the purchase price allocation are
required, any such adjustments will be included in the purchase
price allocation retrospectively.
Of the total estimated purchase price, a preliminary estimate of
$7.3 million has been allocated to net tangible liabilities
acquired, and $15.7 million has been allocated to
definite-lived intangible assets acquired. Definite-lived
intangible assets consist of the value assigned to
Saf-T-Nets customer relationships of $12.7 million,
developed and core technology of $2.3 million, and
trademarks of $0.7 million.
9
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The value assigned to Saf-T-Nets customer relationships
was determined by discounting the estimated cash flows
associated with the existing customers as of the date the merger
was consummated taking into consideration estimated attrition of
the existing customer base. The estimated cash flows were based
on revenues for those existing customers net of operating
expenses and net of capital charges for other tangible and
intangible assets that contribute to the projected cash flow
from those customers. The projected revenues were based on
assumed revenue growth rates and customer renewal rates.
Operating expenses were estimated based on the supporting
infrastructure expected to sustain the assumed revenue growth
rates. Net capital charges for assets that contribute to
projected customer cash flow were based on the estimated fair
value of those assets. A discount rate of 19% was deemed
appropriate for valuing the existing customer base and was based
on the risks associated with the respective cash flows taking
into consideration the Companys weighted average cost of
capital. The Company amortizes the value of Saf-T-Nets
customer relationships on a straight-line basis over seven years
from the acquisition date. Amortization of customer
relationships is not deductible for tax purposes.
The value assigned to Saf-T-Nets developed and core
technology was determined by discounting the estimated royalty
savings associated with an estimated royalty rate for the use of
the technology to their present value. Developed and core
technology, which consists of products that have reached
technological feasibility, includes products in Saf-T-Nets
current product line. The royalty rates used to value the
technology were based on estimates of prevailing royalty rates
paid for the use of similar technology and technology in market
transactions involving licensing arrangements of companies that
operate in service-related industries. A discount rate of 19%
was deemed appropriate for valuing developed and core technology
and was based on the risks associated with the respective
royalty savings taking into consideration the Companys
weighted average cost of capital. The Company amortizes the
developed and core technology on a straight-line basis over
three years from the acquisition date. Amortization of developed
and core technology is not deductible for tax purposes.
The value assigned to Saf-T-Nets trademarks was determined
by discounting the estimated royalty savings associated with an
estimated royalty rate for the use of the trademarks to their
present value. The trademarks consist of Saf-T-Nets trade
name and various trademarks related to its existing product
lines. The royalty rates used to value the trademarks were based
on estimates of prevailing royalty rates paid for the use of
similar trade names and trademarks in market transactions
involving licensing arrangements of companies that operate in
service-related industries. A discount rate of 19% was deemed
appropriate for valuing Saf-T-Nets trademarks and was
based on the risks associated with the respective royalty
savings taking into consideration the Companys weighted
average cost of capital. The Company amortizes the trademarks on
a straight-line basis over three years from the acquisition
date. Amortization of trademarks is not deductible for tax
purposes.
Of the total estimated purchase price, approximately
$26.0 million has been allocated to goodwill and is not
deductible for tax purposes. Goodwill represents factors
including expected synergies from combining operations and is
the excess of the purchase price of an acquired business over
the fair value of the net tangible and intangible assets
acquired. Goodwill will not be amortized but instead will be
tested for impairment at least annually (or more frequently if
indicators of impairment arise). In the event that management
determines that the goodwill has become impaired, the Company
will incur an accounting charge for the amount of the impairment
during the fiscal quarter in which the determination is made.
As a result of the Saf-T-Net merger, the Company recorded a net
deferred tax liability of approximately $3.2 million in its
preliminary purchase price allocation. This balance is comprised
of approximately $6.0 million in deferred tax liabilities
resulting primarily from the estimated amortization expense of
identified intangibles, and approximately $2.8 million in
deferred tax assets that relate primarily to federal and state
net operating loss carry forwards.
Deferred
Revenue
In connection with the preliminary purchase price allocation,
the Company determined the estimated fair value of the support
obligation assumed from Saf-T-Net in connection with the merger
utilizing a cost
build-up
approach.
10
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The cost
build-up
approach determines fair value by estimating the costs relating
to fulfilling the obligation plus a normal profit margin. The
sum of the costs and operating profit approximates the amount
that the Company would be required to pay a third party to
assume the support obligation. The Company based its estimated
costs to fulfill the support obligation on Saf-T-Nets
historical direct costs related to providing the support
services and correcting any errors in Saf-T-Nets software
products. These estimated costs did not include any costs
associated with selling efforts or research and development or
the related fulfillment margins on these costs. Profit
associated with selling efforts is excluded because Saf-T-Net
had concluded the selling effort on the support contracts prior
to March 19, 2010. The Company estimated the profit margin
to be approximately 24%, which approximates the Companys
operating profit margin to fulfill the obligations. In
allocating the purchase price, the Company recorded an
adjustment to reduce the carrying value of Saf-T-Nets
March 19, 2010 deferred support revenue by approximately
$2.6 million to $2.8 million, which represents the
Companys estimate of the fair value of the support
obligation assumed. As former Saf-T-Net customers renew these
support contracts, the Company will recognize revenue for the
full value of the support contracts over the remaining term of
the contracts, the majority of which are one year.
Elluminate,
Inc.
On August 4, 2010, the Company completed a merger with
Elluminate, Inc. (Elluminate) pursuant to an
Arrangement Agreement dated July 2, 2010. Pursuant to the
Arrangement Agreement, the Company paid merger consideration of
approximately $59.5 million in cash (or $58.4 million
net of $1.1 million in cash acquired), excluding
transaction costs of approximately $1.0 million, which are
reflected in general and administrative expenses in the
consolidated statements of operations.
Elluminate is a provider of web, audio, video and social
networking solutions optimized for teaching, learning and
collaboration. The Company believes the merger with Elluminate
supports the Companys long-term strategic direction and
the demands for innovative technology in the education industry
and will help the Company meet the growing demands of its
clients, including the ability to provide synchronous learning
and collaboration.
Preliminary
Purchase Price Allocation
The Company has accounted for the merger under the acquisition
method of accounting. The total preliminary purchase price was
allocated to Elluminates net tangible and intangible
assets acquired and liabilities assumed based on their estimated
fair values as of August 4, 2010. The Company recorded the
excess of the purchase price over the net tangible liabilities
and identifiable intangible assets as goodwill. The preliminary
allocation of the purchase price shown in the table below was
based on managements preliminary valuation of the fair
value of tangible and intangible assets acquired and liabilities
assumed, which are based on estimates and assumptions that
11
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
are subject to change. The areas of the purchase price
allocation that are not yet finalized relate primarily to income
and non-income based taxes. The preliminary estimated purchase
price is allocated as follows (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,060
|
|
Accounts receivable
|
|
|
5,161
|
|
Prepaid expenses and other current assets
|
|
|
1,176
|
|
Property and equipment
|
|
|
1,030
|
|
Accounts payable
|
|
|
(657
|
)
|
Accrued liabilities
|
|
|
(3,734
|
)
|
Deferred tax liabilities, net
|
|
|
(7,331
|
)
|
Deferred revenue
|
|
|
(2,747
|
)
|
|
|
|
|
|
Net tangible liabilities assumed
|
|
|
(6,042
|
)
|
Definite-lived intangible assets acquired
|
|
|
24,190
|
|
Goodwill
|
|
|
41,304
|
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
59,452
|
|
|
|
|
|
|
Prior to the end of the measurement period for finalizing the
purchase price allocation, if information becomes available
which would indicate adjustments are required to the purchase
price allocation, such adjustments will be included in the
purchase price allocation retrospectively.
Of the total estimated purchase price, a preliminary estimate of
$6.0 million has been allocated to net tangible liabilities
assumed, and $24.2 million has been allocated to
definite-lived intangible assets acquired. Definite-lived
intangible assets of $24.2 million consist of the value
assigned to Elluminates customer relationships of
$18.2 million, developed and core technology of
$3.7 million, and trademarks of $2.3 million.
The value assigned to Elluminates customer relationships
was determined by discounting the estimated cash flows
associated with the existing customers as of the date the merger
was consummated taking into consideration estimated attrition of
the existing customer base. The estimated cash flows were based
on revenues for those existing customers net of operating
expenses and net of capital charges for other tangible and
intangible assets that contribute to the projected cash flow
from those customers. The projected revenues were based on
assumed revenue growth rates and customer renewal rates.
Operating expenses were estimated based on the supporting
infrastructure expected to sustain the assumed revenue growth
rates. Net capital charges for assets that contribute to
projected customer cash flow were based on the estimated fair
value of those assets. A discount rate of 16.5% was deemed
appropriate for valuing the existing customer base and was based
on the risks associated with the respective cash flows taking
into consideration the Companys weighted average cost of
capital. The Company amortizes the value of Elluminates
customer relationships on a straight-line basis over seven years
from the acquisition date. Amortization of customer
relationships is not deductible for tax purposes.
The value assigned to Elluminates developed and core
technology was determined by discounting the estimated royalty
savings associated with an estimated royalty rate for the use of
the technology to their present value. Developed and core
technology, which consists of products that have reached
technological feasibility, includes products in
Elluminates current product line. The royalty rates used
to value the technology were based on estimates of prevailing
royalty rates paid for the use of similar technology and
technology in market transactions involving licensing
arrangements of companies that operate in service-related
industries. A discount rate of 16.5% was deemed appropriate for
valuing developed and core technology and was based on the risks
associated with the respective royalty savings taking into
consideration the Companys weighted average cost of
capital. The Company amortizes the developed and core technology
on a straight-line basis over three years from the acquisition
date. Amortization of developed and core technology is not
deductible for tax purposes.
12
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The value assigned to Elluminates trademarks was
determined by discounting the estimated royalty savings
associated with an estimated royalty rate for the use of the
trademarks to their present value. The trademarks consist of
Elluminates trade name and various trademarks related to
its existing product lines. The royalty rates used to value the
trademarks were based on estimates of prevailing royalty rates
paid for the use of similar trade names and trademarks in market
transactions involving licensing arrangements of companies that
operate in service-related industries. A discount rate of 16.5%
was deemed appropriate for valuing Elluminates trademarks
and was based on the risks associated with the respective
royalty savings taking into consideration the Companys
weighted average cost of capital. The Company amortizes the
trademarks on a straight-line basis over three years from the
acquisition date. Amortization of trademarks is not deductible
for tax purposes.
Of the total estimated purchase price, approximately
$41.3 million has been allocated to goodwill and is not
deductible for tax purposes. Goodwill represents factors
including expected synergies from combining operations and is
the excess of the purchase price of an acquired business over
the fair value of the net tangible and intangible assets
acquired and liabilities assumed. Goodwill will not be amortized
but instead will be tested for impairment at least annually (or
more frequently if indicators of impairment arise). In the event
that management determines that the goodwill has become
impaired, the Company will incur an accounting charge for the
amount of the impairment during the fiscal quarter in which the
determination is made.
As a result of the acquisition of Elluminate, the Company
recorded a net deferred tax liability of approximately
$7.3 million in its preliminary purchase price allocation.
This balance is comprised of approximately $8.9 million in
deferred tax liabilities resulting primarily from the estimated
amortization expense of identified intangibles and approximately
$1.6 million in deferred tax assets that relate primarily
to Canadian tax credits and net operating loss carryforwards.
Deferred
Revenue
In connection with the preliminary purchase price allocation,
the Company determined the estimated fair value of the support
obligation assumed from Elluminate in connection with the merger
utilizing a cost
build-up
approach. The cost
build-up
approach determines fair value by estimating the costs relating
to fulfilling the obligation plus a normal profit margin. The
sum of the costs and operating profit approximates the amount
that the Company would be required to pay a third party to
assume the support obligation. The Company based its estimated
costs to fulfill the support obligation on Elluminates
historical direct costs related to providing the support
services and correcting any errors in Elluminates software
products. These estimated costs did not include any costs
associated with selling efforts or research and development or
the related fulfillment margins on these costs. Profit
associated with selling efforts is excluded because Elluminate
had concluded the selling effort on the support contracts prior
to August 4, 2010. The Company estimated the profit margin
to be approximately 24%, which approximates the Companys
operating profit margin to fulfill the obligations. In
allocating the purchase price, the Company recorded an
adjustment to reduce the carrying value of Elluminates
August 4, 2010 deferred support revenue by approximately
$10.2 million to $2.7 million, which represents the
Companys estimate of the fair value of the support
obligation assumed. As former Elluminate customers renew these
support contracts, the Company will recognize revenue for the
full value of the support contracts over the remaining term of
the contracts, the majority of which are one year.
Wimba,
Inc.
On August 5, 2010, the Company completed a merger with
Wimba, Inc. (Wimba) pursuant to an Agreement and
Plan of Merger dated July 2, 2010. Pursuant to the
Agreement and Plan of Merger, the Company paid merger
consideration of approximately $59.6 million in cash (or
$57.5 million net of $2.1 million in cash acquired),
excluding transaction costs of approximately $0.6 million,
which are reflected in general and administrative expenses in
the consolidated statements of operations.
Wimba is a provider of collaborative learning software
applications and services to the education industry. The Company
believes the merger with Wimba supports the Companys
long-term strategic direction and the demands
13
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for innovative technology in the education industry and will
help the Company meet the growing demands of its clients,
including the ability to provide synchronous learning and
collaboration.
Preliminary
Purchase Price Allocation
The Company has accounted for the merger under the acquisition
method of accounting. The total preliminary purchase price was
allocated to Wimbas net tangible and intangible assets
acquired and liabilities assumed based on their estimated fair
values as of August 5, 2010. The Company recorded the
excess of the purchase price over the net tangible assets and
identifiable intangible assets as goodwill. The preliminary
allocation of the purchase price shown in the table below was
based on managements preliminary valuation of the fair
value of tangible and intangible assets acquired and liabilities
assumed, which are based on estimates and assumptions that are
subject to change. The areas of the purchase price allocation
that are not yet finalized relate primarily to income and
non-income based taxes. The preliminary estimated purchase price
is allocated as follows (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,144
|
|
Accounts receivable
|
|
|
4,593
|
|
Prepaid expenses and other current assets
|
|
|
308
|
|
Property and equipment
|
|
|
1,767
|
|
Deferred tax assets, net
|
|
|
7,063
|
|
Restricted cash
|
|
|
753
|
|
Accounts payable
|
|
|
(161
|
)
|
Accrued liabilities
|
|
|
(2,496
|
)
|
Deferred revenue
|
|
|
(3,547
|
)
|
|
|
|
|
|
Net tangible assets acquired
|
|
|
10,424
|
|
Definite-lived intangible assets acquired
|
|
|
15,430
|
|
Goodwill
|
|
|
33,713
|
|
Total estimated purchase price
|
|
$
|
59,567
|
|
|
|
|
|
|
Prior to the end of the measurement period for finalizing the
purchase price allocation, if information becomes available
which would indicate adjustments are required to the purchase
price allocation, such adjustments will be included in the
purchase price allocation retrospectively.
Of the total estimated purchase price, a preliminary estimate of
$10.4 million has been allocated to net tangible assets
acquired, and $15.4 million has been allocated to
definite-lived intangible assets acquired. Definite-lived
intangible assets of $15.4 million consist of the value
assigned to Wimbas customer relationships of
$12.3 million, developed and core technology of
$1.8 million, and trademarks of $1.3 million.
The value assigned to Wimbas customer relationships was
determined by discounting the estimated cash flows associated
with the existing customers as of the date the merger was
consummated taking into consideration estimated attrition of the
existing customer base. The estimated cash flows were based on
revenues for those existing customers net of operating expenses
and net of capital charges for other tangible and intangible
assets that contribute to the projected cash flow from those
customers. The projected revenues were based on assumed revenue
growth rates and customer renewal rates. Operating expenses were
estimated based on the supporting infrastructure expected to
sustain the assumed revenue growth rates. Net capital charges
for assets that contribute to projected customer cash flow were
based on the estimated fair value of those assets. A discount
rate of 16.5% was deemed appropriate for valuing the existing
customer base and was based on the risks associated with the
respective cash flows taking into consideration the
Companys weighted average cost of capital. The Company
amortizes the value of Wimbas customer relationships on a
straight-line basis over seven years from the acquisition date.
Amortization of customer relationships is not deductible for tax
purposes.
14
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The value assigned to Wimbas developed and core technology
was determined by discounting the estimated royalty savings
associated with an estimated royalty rate for the use of the
technology to their present value. Developed and core
technology, which consists of products that have reached
technological feasibility, includes products in Wimbas
current product line. The royalty rates used to value the
technology were based on estimates of prevailing royalty rates
paid for the use of similar technology and technology in market
transactions involving licensing arrangements of companies that
operate in service-related industries. A discount rate of 16.0%
was deemed appropriate for valuing developed and core technology
and was based on the risks associated with the respective
royalty savings taking into consideration the Companys
weighted average cost of capital. The Company amortizes the
developed and core technology on a straight-line basis over
three years from the acquisition date. Amortization of developed
and core technology is not deductible for tax purposes.
The value assigned to Wimbas trademarks was determined by
discounting the estimated royalty savings associated with an
estimated royalty rate for the use of the trademarks to their
present value. The trademarks consist of Wimbas trade name
and various trademarks related to its existing product lines.
The royalty rates used to value the trademarks were based on
estimates of prevailing royalty rates paid for the use of
similar trade names and trademarks in market transactions
involving licensing arrangements of companies that operate in
service-related industries. A discount rate of 16.0% was deemed
appropriate for valuing Wimbas trademarks and was based on
the risks associated with the respective royalty savings taking
into consideration the Companys weighted average cost of
capital. The Company amortizes the trademarks on a straight-line
basis over three years from the acquisition date. Amortization
of trademarks is not deductible for tax purposes.
Of the total estimated purchase price, approximately
$33.7 million has been allocated to goodwill and is not
deductible for tax purposes. Goodwill represents factors
including expected synergies from combining operations and is
the excess of the purchase price of an acquired business over
the fair value of the net tangible and intangible assets
acquired. Goodwill will not be amortized but instead will be
tested for impairment at least annually (or more frequently if
indicators of impairment arise). In the event that management
determines that the goodwill has become impaired, the Company
will incur an accounting charge for the amount of the impairment
during the fiscal quarter in which the determination is made.
As a result of the acquisition of Wimba, the Company recorded a
net deferred tax asset of approximately $7.1 million in its
preliminary purchase price allocation. This balance is comprised
of approximately $13.1 million in deferred tax assets that
relate primarily to federal and state net operating loss carry
forwards and approximately $6.0 million in deferred tax
liabilities resulting primarily from the estimated amortization
expense of identified intangibles.
Deferred
Revenue
In connection with the preliminary purchase price allocation,
the Company determined the estimated fair value of the support
obligation assumed from Wimba in connection with the merger
utilizing a cost
build-up
approach. The cost
build-up
approach determines fair value by estimating the costs relating
to fulfilling the obligation plus a normal profit margin. The
sum of the costs and operating profit approximates the amount
that the Company would be required to pay a third party to
assume the support obligation. The Company based its estimated
costs to fulfill the support obligation on Wimbas
historical direct costs related to providing the support
services and correcting any errors in Wimbas software
products. These estimated costs did not include any costs
associated with selling efforts or research and development or
the related fulfillment margins on these costs. Profit
associated with selling efforts is excluded because Wimba had
concluded the selling effort on the support contracts prior to
August 5, 2010. The Company estimated the profit margin to
be approximately 24%, which approximates the Companys
operating profit margin to fulfill the obligations. In
allocating the purchase price, the Company recorded an
adjustment to reduce the carrying value of Wimbas
August 5, 2010 deferred support revenue by approximately
$6.9 million to $3.5 million, which represents the
Companys estimate of the fair value of the support
obligation assumed. As former Wimba customers renew these
support contracts, the Company will recognize revenue for the
full value of the support contracts over the remaining term of
the contracts, the majority of which are one year.
15
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ANGEL
Learning, Inc. Merger
On May 8, 2009, the Company completed its merger with ANGEL
Learning, Inc. (ANGEL) pursuant to the Agreement and
Plan of Merger dated May 1, 2009. Pursuant to the Agreement
and Plan of Merger, the Company paid merger consideration of
$101.3 million, which includes $87.4 million in cash
and $13.9 million in shares of the Companys common
stock, or approximately 0.5 million shares of common stock.
The effective cash portion of the purchase price of ANGEL before
transaction costs was approximately $80.8 million, net of
ANGELs May 8, 2009 cash balance of approximately
$6.6 million. The Company has included the financial
results of ANGEL in its consolidated financial statements
beginning May 9, 2009.
Pro
Forma Financial Information
The unaudited financial information in the table below
summarizes the combined results of operations of the Company,
Saf-T-Net, Elluminate and Wimba on a pro forma basis, as though
the companies had been combined as of the beginning of each of
the periods presented. The pro forma financial information is
presented for informational purposes only and is not indicative
of the results of operations that would have been achieved if
the mergers had taken place at the beginning of each of the
periods presented. The pro forma financial information for all
periods presented also includes amortization expense from
acquired intangible assets, adjustments to interest expense,
interest income and related tax effects.
The unaudited pro forma financial information for the three
months ended September 30, 2010 combines the historical
results for the Company for the three months ended
September 30, 2010, the historical results for Elluminate
for the period from July 1, 2010 to August 4, 2010 and
the historical results for Wimba for the period from
July 1, 2010 to August 5, 2010. The unaudited pro
forma financial information for the nine months ended
September 30, 2010 combines the historical results for the
Company for the nine months ended September 30, 2010, the
historical results for Saf-T-Net for the period from
January 1, 2010 to March 19, 2010, the historical
results for Elluminate for the period from January 1, 2010
to August 4, 2010 and the historical results for Wimba for
the period from January 1, 2010 to August 5, 2010. The
unaudited pro forma financial information for the three and nine
months ended September 30, 2009 combines the historical
results for the Company for the three and nine months ended
September 30, 2009 and the historical results for
Saf-T-Net, Elluminate and Wimba for the same period and also
gives effect to the Companys merger with ANGEL on
May 8, 2009 as if all transactions had occurred on
January 1, 2009. The consolidated financial results for the
Company for the three months ended September 30, 2010
include revenue and net income for Saf-T-Net for the period from
July 1, 2010 to September 30, 2010 of
$2.7 million and $0.6 million, respectively. The
consolidated financial results for the Company for the nine
months ended September 30, 2010 include revenue and net
loss for Saf-T-Net for the period from March 20, 2010 to
September 30, 2010 of $4.7 million and
$0.4 million, respectively. The consolidated financial
results for the Company for the three and nine months ended
September 30, 2010 include revenue and net loss for
Elluminate for the period from August 5, 2010 to
September 30, 2010 of $1.0 million and
$3.7 million, respectively. The consolidated financial
results for the Company for the three and nine months ended
September 30, 2010 include revenue and net loss for Wimba
for the period from August 6, 2010 to September 30,
2010 of $1.0 million and $2.5 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
|
(Unaudited)
|
|
|
(In thousands, except per share amounts)
|
|
Total revenues
|
|
$
|
109,132
|
|
|
$
|
124,257
|
|
|
$
|
317,360
|
|
|
$
|
354,980
|
|
Net income (loss)
|
|
$
|
(812
|
)
|
|
$
|
4,855
|
|
|
$
|
(13,058
|
)
|
|
$
|
8,254
|
|
Basic net income (loss) per common share
|
|
$
|
(0.03
|
)
|
|
$
|
0.14
|
|
|
$
|
(0.41
|
)
|
|
$
|
0.24
|
|
Diluted net income (loss) per common share
|
|
$
|
(0.03
|
)
|
|
$
|
0.14
|
|
|
$
|
(0.41
|
)
|
|
$
|
0.24
|
|
16
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Stock-Based
Compensation
|
Stock
Incentive Plans
In June 2010, the Companys stockholders approved an
increase in the total number of shares of common stock issuable
under the Companys Amended and Restated 2004 Stock
Incentive Plan (the 2004 Plan) from 10,500,000 to
12,000,000. As of September 30, 2010, approximately
4.5 million shares of common stock were available for
future grants under the 2004 Plan and no options were available
for future grants under the Companys Amended and Restated
Stock Incentive Plan adopted in 1998. Awards granted under the
2004 Plan generally vest over a three to four-year period and
have an eight to ten-year expiration period.
The compensation cost that has been recognized in the unaudited
consolidated statements of operations for the Companys
stock incentive plans was $12.0 million and
$14.9 million for the nine months ended September 30,
2009 and 2010, respectively. The total excess tax benefits
recognized for stock-based compensation arrangements was
$0.8 million and $2.8 million for the nine months
ended September 30, 2009 and 2010, respectively and are
classified as a financing cash inflow with a corresponding
operating cash outflow. For stock subject to graded vesting, the
Company uses the straight-line method for allocating
compensation expense by period.
Stock
Options
A summary of stock option activity under the Companys
stock incentive plans as of September 30, 2010, and changes
during the nine months then ended are as follows (aggregate
intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Price/Share
|
|
|
Intrinsic Value
|
|
|
Exercisable at December 31, 2009
|
|
|
2,141,431
|
|
|
$
|
28.01
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
4,607,782
|
|
|
|
29.83
|
|
|
|
|
|
Granted
|
|
|
1,058,500
|
|
|
|
38.62
|
|
|
|
|
|
Exercised
|
|
|
(1,019,162
|
)
|
|
|
24.52
|
|
|
$
|
17,821
|
|
Cancelled
|
|
|
(218,306
|
)
|
|
|
33.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010
|
|
|
4,428,814
|
|
|
|
32.97
|
|
|
|
19,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2010
|
|
|
2,041,186
|
|
|
$
|
31.07
|
|
|
$
|
11,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual lives for all options
outstanding under the Companys stock incentive plans at
September 30, 2009 and 2010 were 5.6 and 5.7 years,
respectively. The weighted average remaining contractual lives
for exercisable stock options at September 30, 2009 and
2010 were 4.7 and 4.8 years, respectively. As of
September 30, 2010, there was approximately
$30.1 million of total unrecognized compensation cost
related to outstanding but unvested stock options. The cost is
expected to be recognized through September 2014 with a
weighted average recognition period of approximately
1.4 years.
The Company recognizes compensation expense for share-based
awards based on estimated fair values on the date of grant. The
weighted average fair value of the options at the date of grant
for the nine months ended September 30, 2009 and 2010 was
$12.37 and $15.60, respectively. The fair value of options that
vested during the nine months ended September 30, 2009 and
2010 was $10.5 million and $12.2 million,
respectively. The fair value of each option is estimated on the
date of grant using the Black-Scholes option-pricing model with
the following
17
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
weighted-average assumptions for stock options granted during
the three and nine months ended September 30, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
47.2
|
%
|
|
|
43.8
|
%
|
|
|
47.5
|
%
|
|
|
44.7
|
%
|
Risk-free interest rate
|
|
|
2.5
|
%
|
|
|
1.6
|
%
|
|
|
1.8
|
%
|
|
|
2.1
|
%
|
Expected life of options
|
|
|
4.9 years
|
|
|
|
4.6 years
|
|
|
|
4.9 years
|
|
|
|
4.7 years
|
|
Forfeiture rate
|
|
|
18.5
|
%
|
|
|
14.7
|
%
|
|
|
15.0
|
%
|
|
|
12.8
|
%
|
Dividend yield
The Company has never declared
or paid dividends on its common stock and does not anticipate
paying dividends in the foreseeable future.
Expected volatility
Volatility is a measure
of the amount by which a financial variable such as a share
price has fluctuated (historical volatility) or is expected to
fluctuate (expected volatility) during a period. The Company
uses the daily historical volatility of its stock price over the
expected life of the options to calculate the expected
volatility.
Risk-free interest rate
The average
U.S. Treasury rate (for a term that most closely
approximates the expected life of the option) during the period
in which the option was granted.
Expected life of the options
The period of
time that the equity grants are expected to remain outstanding.
For grants that have been exercised, the Company uses actual
exercise data to estimate option exercise timing. For grants
that have not been exercised, the Company generally uses the
midpoint between the end of the vesting period and the
contractual life of the grant to estimate option exercise
timing. Options granted during the three and nine months ended
September 30, 2009 and 2010 have a maximum term of eight
years.
Forfeiture rate
The estimated percentage of
equity grants that are expected to be forfeited or cancelled on
an annual basis before becoming fully vested. The Company
estimates the forfeiture rate based on past turnover data, level
of employee receiving the equity grant and vesting terms and
revises the rate if subsequent information, such as the passage
of time, indicates that the actual number of options that will
vest is likely to differ from previous estimates. The cumulative
effect on current and prior periods of a change in the estimated
number of options likely to vest is recognized in compensation
cost in the period of the change.
Restricted
Stock and Restricted Stock Units
Restricted stock is a stock award subject to a risk of
forfeiture that entitles the holder to receive shares of the
Companys common stock as the award vests over time. A
restricted stock unit is a stock award that entitles the holder
to receive shares of the Companys common stock after a
vesting requirement is satisfied. The Company estimates the fair
value of each restricted stock award and restricted stock unit
award using the intrinsic value method which is based on the
closing price of the common stock on the date of grant. The
Company recognizes compensation expense for restricted stock and
restricted stock unit awards over the vesting period on a
straight-line basis.
As of September 30, 2010, there was approximately
$18.7 million of total unrecognized compensation cost
related to outstanding but unvested restricted stock and
restricted stock unit awards. The cost is expected to be
recognized through December 2015 with a weighted average
recognition period of approximately 2.2 years.
18
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of restricted stock and restricted stock unit activity
under the Companys stock incentive plans as of
September 30, 2010, and changes during the nine months then
ended are as follows (aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Number of
|
|
|
Fair Value/
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Share
|
|
|
Intrinsic Value
|
|
|
Unvested at December 31, 2009
|
|
|
500,250
|
|
|
$
|
34.67
|
|
|
|
|
|
Granted
|
|
|
244,600
|
|
|
|
37.91
|
|
|
|
|
|
Vested and issued
|
|
|
(68,250
|
)
|
|
|
29.41
|
|
|
|
|
|
Cancelled
|
|
|
(53,250
|
)
|
|
|
35.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2010
|
|
|
623,500
|
|
|
$
|
36.45
|
|
|
$
|
22,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying amounts of inventories as of December 31, 2009
and September 30, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
611
|
|
|
$
|
6
|
|
Work-in-process
|
|
|
261
|
|
|
|
1
|
|
Finished goods
|
|
|
685
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
1,557
|
|
|
$
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Goodwill
and Intangible Assets
|
Goodwill and intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
Amortization
|
|
|
|
2009
|
|
|
2010
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
(In years)
|
|
|
Goodwill
|
|
$
|
328,858
|
|
|
$
|
429,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired technology
|
|
$
|
68,955
|
|
|
$
|
76,892
|
|
|
|
2.9
|
|
Accumulated amortization
|
|
|
(59,849
|
)
|
|
|
(66,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired technology, net
|
|
|
9,106
|
|
|
|
10,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts and customer lists
|
|
|
130,675
|
|
|
|
173,735
|
|
|
|
5.5
|
|
Accumulated amortization
|
|
|
(69,388
|
)
|
|
|
(88,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts and customer lists, net
|
|
|
61,287
|
|
|
|
84,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and domain names
|
|
|
1,976
|
|
|
|
6,198
|
|
|
|
2.8
|
|
Accumulated amortization
|
|
|
(1,105
|
)
|
|
|
(2,092
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and domain names, net
|
|
|
871
|
|
|
|
4,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and related costs
|
|
|
101
|
|
|
|
5,601
|
|
|
|
10.5
|
|
Accumulated amortization
|
|
|
(56
|
)
|
|
|
(745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and related costs, net
|
|
|
45
|
|
|
|
4,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
71,309
|
|
|
$
|
103,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible assets from acquisitions are generally amortized over
one to seven years. Amortization expense related to intangible
assets was approximately $25.7 million and
$28.0 million for the nine months ended September 30,
2009 and 2010, respectively. Amortization expense for the years
ended December 31, 2010, 2011, 2012, 2013 and 2014 is
expected to be approximately $38.3 million,
$28.3 million, $24.3 million, $14.7 million and
$8.5 million, respectively.
During the nine months ended September 30, 2010, the
Company invested in the acquisition of intangible assets, which
will be amortized over ten years and eight months.
Convertible
Senior Notes
In June 2007, the Company issued and sold $165.0 million
aggregate principal amount of 3.25% Convertible Senior
Notes due 2027 (the Notes) in a public offering. The
Notes bear interest at a rate of 3.25% per year on the principal
amount, accruing from June 20, 2007. Interest is payable
semi-annually on January 1 and July 1. The Company made
interest payments of $2.7 million on each of June 30,
2009, December 31, 2009 and July 1, 2010. The Notes
will mature on July 1, 2027, subject to earlier conversion,
redemption or repurchase.
The liability and equity components of the Notes are separately
accounted for in a manner that reflects the Companys
nonconvertible debt borrowing rate because their terms include
partial cash settlement. The Company amortizes the resulting
debt discount over the period the convertible debt is expected
to be outstanding as additional non-cash interest expense. The
Company has determined that its nonconvertible borrowing rate at
the time the Notes were issued was 6.9%. Accordingly, the
Company estimated the fair value of the liability (debt)
component as $144.1 million upon issuance of the Notes. The
Company allocated the excess of the proceeds received over the
estimated fair value of the liability component totaling
$20.9 million to the conversion (equity) component. The
carrying amount of the equity component of the Notes was
$8.2 million and $4.1 million at December 31,
2009 and September 30, 2010, respectively, and is recorded
as a debt discount and is netted against the remaining principal
amount outstanding on the Companys unaudited consolidated
balance sheets.
In connection with obtaining the Notes, the Company incurred
$4.5 million in debt issuance costs, of which
$4.0 million was allocated to the liability component and
$0.5 million was allocated to the equity component. The
carrying amount of the liability component of the debt issuance
costs was $0.6 million and $0.1 million at
December 31, 2009 and September 30, 2010,
respectively, and is recorded as a debt discount and is netted
against the remaining principal amount outstanding on the
Companys unaudited consolidated balance sheets.
The debt discount, which includes the equity component and the
liability component of the debt issuance costs, is being
amortized as interest expense using the effective interest
method through July 1, 2011, the first redemption date of
the Notes. The Company recorded total interest expense of
approximately $2.9 million for each of the three months
ended September 30, 2009 and 2010, which consisted of
$1.3 million in interest expense at a rate of 3.25% per
year and $1.6 million in amortization of the debt discount.
The Company recorded total interest expense of approximately
$8.8 million and $8.7 million for the nine months
ended September 30, 2009 and 2010, respectively, which
consisted of $4.0 million in interest expense at a rate of
3.25% per year and $4.8 million and $4.7 million in
amortization of the debt discount for the nine months ended
September 30, 2009 and 2010, respectively.
The principal amount of the liability component of the Notes was
$165.0 million at each of December 31, 2009 and
September 30, 2010. The unamortized debt discount was
$8.8 million and $4.2 million at December 31,
2009 and September 30, 2010, respectively. The net carrying
amount of the liability component of the Notes was
$156.2 million and $160.8 million at December 31,
2009 and September 30, 2010, respectively. As the first
redemption date of the Notes is July 1, 2011, the Company
reclassified the net carrying amount of the liability component
to current liabilities in the unaudited consolidated balance
sheet as of September 30, 2010.
The Company has evaluated whether certain features of the Notes
cause the Notes to be considered to be indexed to the
Companys own stock using a two-step approach to evaluate
the Notes contingent exercise and
20
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
settlement provisions. The Company has determined that the
Notes embedded conversion options are indexed to the
Companys own stock and, therefore, do not require
bifurcation and separate accounting.
Revolving
Credit Facility
On August 4, 2010, the Company entered into a five-year
$175.0 million senior secured revolving credit facility
agreement with a syndicate of banks led by JPMorgan Chase Bank,
N.A. as administrative agent, which is available until
August 4, 2015 (the Credit Agreement).
Borrowings under the Credit Agreement are available for general
corporate purposes which may include outstanding debt repayments
and acquisitions. Loans under the Credit Agreement bear interest
at a rate per annum equal to, at the election of the Company,
(i) the Adjusted LIBO Rate (as defined in the Credit
Agreement) plus a margin which will vary between 2.25% and 3.00%
based on the Companys Leverage Ratio (as defined in the
Credit Agreement) or (ii) an Alternate Base Rate (as
defined in the Credit Agreement) plus a margin which will vary
between 1.25% and 2.00% based on the Companys Leverage
Ratio. Overdue amounts under the Credit Agreement bear interest
at a rate per annum equal to 2% plus the rate otherwise
applicable to such loan.
The Company is required to pay a commitment fee at a rate per
annum which will vary between 0.30% and 0.50% based on the
Companys Leverage Ratio on the average daily unused amount
of the credit facility commitments during the period for which
payment is made, payable quarterly in arrears. The Company
records this fee in interest expense. The Company may optionally
prepay loans or reduce the credit facility commitments at any
time, without penalty.
In connection with obtaining the senior secured credit facility,
the Company incurred $1.7 million in debt issuance costs in
August 2010, which is amortized as interest expense over the
term of the senior secured credit facility using the effective
interest method. The Company recorded total interest expense of
approximately $0.1 million, for the three and nine months
ended September 30, 2010.
Under the terms of the Credit Agreement and related loan
documents, the loans and other obligations of the Company are
guaranteed by the material domestic subsidiaries of the Company,
and are secured by substantially all of the tangible and
intangible assets of the Company and each material domestic
subsidiary guarantor (including, without limitation,
intellectual property and the capital stock of certain
subsidiaries). In addition, the Credit Agreement contains
customary affirmative and negative covenants applicable to the
Company and its subsidiaries with respect to its operations and
financial conditions, including a leverage ratio, a senior
leverage ratio, an interest coverage ratio and a minimum
liquidity covenant. The Company continues to be in full
compliance with all covenants contained in the Credit Agreement.
As of September 30, 2010 and November 5, 2010, no
amounts were outstanding under the credit facility.
|
|
8.
|
Commitments
and Contingencies
|
The Company, from time to time, is subject to litigation
relating to matters in the ordinary course of business. The
Company believes that any ultimate liability resulting from any
such litigation will not have a material adverse effect on the
Companys results of operations, financial position or cash
flows.
|
|
9.
|
Quarterly
Financial Information
|
The Companys quarterly operating results normally
fluctuate as a result of seasonal variations in its business,
principally due to the timing of client budget cycles and
student attendance at client facilities. Historically, the
Company has had lower new sales in its first and fourth quarters
than in the remainder of the year. The Companys expenses,
however, do not vary significantly with these changes, and, as a
result, such expenses do not fluctuate significantly on a
quarterly basis. Historically, the Company has performed a
disproportionate amount of its professional services, for which
revenue is recognized as services are performed, in its second
and third quarters each year. The Company expects quarterly
fluctuations in operating results to continue as a result of the
uneven seasonal demand for its licenses and services offerings.
21
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
This report contains forward-looking statements. For this
purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words
believes, anticipates,
plans, expects, intends and
similar expressions are intended to identify forward-looking
statements. The important factors discussed under the caption
Risk Factors, presented below, could cause actual
results to differ materially from those indicated by
forward-looking statements made herein. We undertake no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise.
General
We are a leading provider of enterprise software applications
and related services to the education industry. Our clients use
our software to integrate technology into the education
experience and campus life, and to support activities such as a
professor assigning digital materials on a class website; a
student collaborating with peers or completing research online;
an administrator managing a departmental website; a
superintendant sending mass communications via voice, email and
text messages to parents and students; or a merchant conducting
cash-free transactions with students and faculty through
pre-funded debit accounts. Our clients include colleges,
universities, schools and other education providers, textbook
publishers, student-focused merchants, and corporate and
government clients.
We generate revenues from sales and licensing of products and
from professional services. Our product revenues consist
principally of revenues from annual software licenses,
subscription fees from customers accessing our on-demand
application services, client hosting engagements and the sale of
hardware systems. We typically sell our licenses and hosting
services under annually renewable agreements, and our clients
generally pay the annual fees at the beginning of the contract
term. We recognize revenues from these agreements ratably over
the contractual term, which is typically 12 months. We
initially record billings associated with licenses and hosting
services as deferred revenues and then recognize them ratably
into revenues over the contract term. We also generate product
revenues from the sale of hardware, including third-party
hardware. As a result of new accounting guidance adopted on
January 1, 2010, we generally recognize these revenues upon
shipment of the products to our clients.
We derive professional services revenues primarily from
training, implementation, installation and other consulting
services. We perform substantially all of our professional
services on a
time-and-materials
basis. We recognize these revenues as the services are performed.
We have grown through internal growth and strategic
acquisitions. In January 2008, we acquired The NTI Group, Inc.,
or NTI, and in March 2010, we acquired Saf-T-Net, Inc., or
Saf-T-Net. These acquisitions allow us to offer clients the
ability to send mass communications via voice, email and text
messages. We acquired the technology underlying our
Blackboard Connect
service, which we began offering in
February 2008, from NTI. We acquired the technology underlying
the
AlertNow
service from Saf-T-Net. In May 2009, we
acquired ANGEL Learning, Inc., or ANGEL, a leading developer of
e-learning
software to the U.S. education industry. In July 2009, we
acquired the business assets of Terriblyclever Design, LLC,
which provides the foundation for the
Blackboard Mobile
platform
. Blackboard Mobile
allows us to offer our
clients a comprehensive suite of mobile Web applications for
education and enables educational institutions to deliver
education and campus life services and content to mobile devices
to connect students, parents, faculty, prospective students and
alumni to the campus experience. In August 2010, we acquired
Elluminate Inc., or Elluminate, and Wimba Inc., or Wimba. These
acquisitions provide the foundation for our newest platform
Blackboard Collaborate
, which provides learning software
applications for synchronous learning and collaboration.
We typically license our individual applications either on a
stand-alone basis or bundled as part of one of our five existing
platforms:
Blackboard
Learn
tm
;
Blackboard
Transact
tm
;
Blackboard
Connect
tm
;
Blackboard
Mobile
tm
;
and
Blackboard
Collaborate
tm
.
We offer
Blackboard Learn
in all of our markets,
Blackboard Transact
primarily to U.S. and Canadian
postsecondary clients,
Blackboard Connect
to primarily
U.S. K-12, postsecondary and government clients,
22
Blackboard Mobile
primarily to U.S. postsecondary
and K-12 clients, and
Blackboard Collaborate
primarily to
U.S. and Canadian postsecondary and K-12 clients. We also
offer application hosting for clients who prefer to outsource
the management of their
Blackboard Learn
systems. In
addition to our products, we offer a variety of professional
services, including strategic consulting, project management,
custom application development and training.
We generally price our software licenses on the basis of
full-time equivalent students or users. Accordingly, annual
license fees are generally greater for larger institutions.
Our operating expenses consist of cost of product revenues, cost
of professional services revenues, research and development
expenses, sales and marketing expenses, general and
administrative expenses and amortization of intangibles
resulting from acquisitions.
Major components of our cost of product revenues include license
and other fees that we owe to third parties upon licensing
software, and the cost of hardware that we bundle with our
software. As a result of new accounting guidance adopted on
January 1, 2010, we generally recognize these costs upon
shipment of the products to our clients. In general, prior to
the adoption of the new accounting guidance on January 1,
2010 we initially deferred these costs and recognized them into
expense over the period in which the related revenue was
recognized. Cost of product revenues also includes amortization
of internally developed technology available for sale,
telecommunications costs related to the
Blackboard Connect
product, all direct materials and shipping and handling
costs, employee compensation, including bonuses, stock-based
compensation and benefits for personnel supporting our hosting,
support and production functions, as well as related facility
rent, communication costs, utilities, depreciation expense and
cost of external professional services used in these functions.
We expense all of these costs as incurred. Cost of product
revenues excludes amortization of acquired technology
intangibles resulting from acquisitions, which is separately
included on our unaudited consolidated statements of operations
as amortization of intangibles acquired in acquisitions.
Amortization expense related to acquired technology was
$8.2 million and $7.7 million for the nine months
ended September 30, 2009 and 2010, respectively.
Cost of professional services revenues primarily includes the
costs of compensation, including bonuses,
stock-based
compensation and benefits for employees and external consultants
who are involved in the performance of professional services
engagements for our clients, as well as travel and related
costs, facility rent, communication costs, utilities and
depreciation expense used in these functions. We expense all of
these costs as incurred.
Research and development expenses include the costs of
compensation, including bonuses, stock-based compensation and
benefits for employees who are associated with the creation and
testing of the products we offer, as well as the costs of
external professional services, travel and related costs
attributable to the creation and testing of our products,
related facility rent, communication costs, utilities and
depreciation expense used in these functions. We expense all of
these costs as incurred.
Sales and marketing expenses include the costs of compensation,
including bonuses and commissions,
stock-based
compensation and benefits for employees who are associated with
the generation of revenues, as well as marketing expenses, costs
of external marketing-related professional services, investor
relations, facility rent, utilities, communications, travel
attributable to those sales and marketing employees in the
generation of revenues and bad debt expense. We expense all of
these costs as incurred.
General and administrative expenses include the costs of
compensation, including bonuses, stock-based compensation and
benefits for employees in the human resources, legal, finance
and accounting, management information systems, facilities
management, executive management and other administrative
functions that are not directly associated with the generation
of revenues or the creation and testing of products. In
addition, general and administrative expenses include the costs
of external professional services and insurance, as well as
related facility rent, communication costs, utilities and
depreciation expense used in these functions. We expense all of
these costs as incurred.
Amortization of intangibles includes the amortization of costs
associated with products, acquired technology, customer lists,
non-compete agreements and other identifiable intangible assets.
We record these intangible assets at the time of our
acquisitions and they relate to contractual agreements,
technology and products that we continue to utilize in our
business.
23
Critical
Accounting Policies and Estimates
The discussion of our financial condition and results of
operations is based upon our consolidated financial statements,
which have been prepared in accordance with U.S. generally
accepted accounting principles. During the preparation of these
consolidated financial statements, we are required to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, fair value measures,
and related disclosures of contingent assets and liabilities. On
an ongoing basis, we evaluate our estimates and assumptions,
including those related to revenue recognition, bad debts, fixed
assets, long-lived assets, including purchase accounting and
goodwill, and income taxes. We base our estimates on historical
experience and on various other assumptions that we believe are
reasonable under the circumstances. The results of our analysis
form the basis for making assumptions about the carrying values
of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates
under different assumptions or conditions, and the impact of
such differences may be material to our consolidated financial
statements. Our critical accounting policies have been discussed
with the audit committee of our board of directors.
We believe that the following critical accounting policies
affect the more significant judgments and estimates used in the
preparation of our consolidated financial statements. See the
information in our filings with the SEC from time to time;
including Part I, Item 1A. Risk Factors in
our Annual Report on
Form 10-K
for the year ended December 31, 2009, and our subsequent
periodic and current reports, for certain matters that may bear
on our results of operations. The following discussion of
selected critical accounting policies supplements the
information relating to our critical accounting policies
described in Part II, Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and
Estimates in our Annual Report on
Form 10-K
for the year ended December 31, 2009.
Revenue recognition.
We derive revenues from
two sources: product sales and professional services sales.
Product revenues include software license fees, subscription
fees from customers accessing our on-demand application
services, hardware, premium support and maintenance, and hosting
revenues. Professional services revenues include revenues from
training and consulting services. Our software does not require
significant modification and customization services. Where
services are not essential to the functionality of the software,
we begin to recognize software licensing revenues when all of
the following criteria are met: (1) persuasive evidence of
an arrangement exists; (2) delivery has occurred;
(3) the fee is fixed and determinable; and
(4) collectibility is probable.
We do not have vendor-specific objective evidence, known as
VSOE, of fair value for our support and maintenance separate
from our software for the majority of our products. Accordingly,
when licenses are sold in conjunction with our support and
maintenance, we recognize the license revenue over the term of
the maintenance service period. When licenses of certain
offerings are sold in conjunction with our support and
maintenance where we do have VSOE, we recognize the license
revenue upon delivery of the license and recognize the support
and maintenance revenue over the term of the maintenance service
period.
We recognize hosting revenues and
set-up
fees
ratably over the term of the hosting agreement.
After any necessary installation services are performed,
hardware revenues are recognized when all of the following
criteria are met: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the fee is
fixed and determinable; and (4) collectibility is probable.
We early adopted new accounting guidance on January 1, 2010
that impacts our accounting for
(a) non-software
components of tangible products and (b) software components
of tangible products that are sold, licensed, or leased with
tangible products when the software components and non-software
components of the tangible product function together to deliver
the tangible products essential functionality. We have
applied this guidance on a prospective basis for arrangements
executed or significantly modified after December 31, 2009.
We allocate the overall consideration from such sales to each
deliverable using a best estimate of the selling price of
individual deliverables in the arrangement in the absence of
VSOE or other third-party evidence of the selling price. Prior
to the adoption of this new accounting guidance, in the absence
of VSOE, all revenue from such sales was recognized ratably over
the term of the applicable maintenance service period.
24
As a result of the adoption of this new accounting guidance, the
product revenues and cost of product revenues related to
hardware and software sales in the
Blackboard Transact
product line will generally be recognized upfront upon
delivery of the product to the customer. Product revenues in the
Blackboard Transact
product line generally consist of
hardware, software and support. Generally, the consideration
allocated to the hardware and software deliverables is
determined using a best estimate of selling price which we
estimate based on an analysis of market data and our internal
cost to deliver each element. Generally, the consideration
allocated to the support deliverable is based on third party
evidence. During the three and nine months ended
September 30, 2010, we recognized product revenues of
approximately $17.8 million and $27.5 million,
respectively, under this new accounting guidance, which related
to ratable and non-ratable revenue streams and is comprised of
arrangements executed or significantly modified after
December 31, 2009. In addition, approximately
$3.3 million is recorded as deferred revenues on the
unaudited consolidated balance sheet as of September 30,
2010 related to these arrangements executed or significantly
modified after December 31, 2009. The effect of changes in
either selling price or the method or assumptions used to
determine selling price for a specific deliverable could have a
material effect on the allocation of the overall consideration
of an arrangement.
As a result of the adoption of this new accounting guidance,
revenues, income from operations, net income and basic and
diluted earnings per share are approximately $10.4 million,
$8.0 million, $5.5 million, $0.16 and $0.16,
respectively, higher during the three months ended
September 30, 2010 than if we had accounted for these sales
under the accounting guidance in effect prior to January 1,
2010. Further, revenues, income from operations, net income and
basic and diluted earnings per share are approximately
$15.9 million, $12.3 million, $8.5 million, $0.25
and $0.24, respectively, higher during the nine months ended
September 30, 2010 than if we had accounted for these sales
under the accounting guidance in effect prior to January 1,
2010. We expect the adoption of this new accounting guidance to
continue to have a material effect on our consolidated results
of operations and financial condition.
Our sales arrangements may include professional services sold
separately under professional services agreements that include
training and consulting services. We account for revenues from
these arrangements separately from the license revenue because
they meet the criteria for separate accounting. The more
significant factors we consider in determining whether revenue
should be accounted for separately include the nature of the
professional services, such as consideration of whether the
professional services are essential to the functionality of the
licensed product, degree of risk, availability of professional
services from other vendors and timing of payments. We recognize
professional services revenues that are sold separately from
license revenue as the professional services are performed on a
time-and-materials
basis.
We do not offer specified upgrades or incrementally significant
discounts. We record advance payments as deferred revenues until
the product is shipped, services are delivered or obligations
are met and the revenue can be recognized. Deferred revenues
represent the excess of amounts invoiced over amounts recognized
as revenues. We provide non-specified upgrades of our product
only on a
when-and-if-available
basis. We account for any contingencies, such as rights of
return, conditions of acceptance, warranties and price
protection as a separate element. The effect of accounting for
these contingencies included in revenue arrangements has not
historically been material.
Important
Factors Considered by Management
We consider several factors in evaluating both our financial
position and our operating performance. These factors, while
primarily focused on relevant financial information, also
include other measures such as general market and economic
conditions, competitor information and the status of the
regulatory environment.
To understand our financial results, it is important to
understand our business model and its impact on our consolidated
financial statements. The accounting for the majority of our
contracts requires us to initially record deferred revenues on
our consolidated balance sheet upon invoicing the sale and then
to recognize revenue in subsequent periods ratably over the term
of the contract in our consolidated statements of operations.
Therefore, to better understand our operations, one must look at
both revenues and deferred revenues.
25
In evaluating our revenues, we analyze them in two categories:
recurring revenues and non-recurring revenues.
|
|
|
|
|
Recurring revenues include those product revenues that recur
each year, assuming that clients renew their contracts. These
revenues include revenues from the licensing of all of our
software products, hosting arrangements, subscription fees from
customers accessing our on-demand application services and
enhanced support and maintenance contracts related to our
software products, including certain professional services
performed by our professional services groups.
|
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|
|
Non-recurring revenues include those product revenues that do
not contractually recur. These revenues include certain hardware
components of our
Blackboard Transact
products, certain
third-party hardware and software sold to our clients in
conjunction with our software licenses, professional services,
fees from our off-campus payment merchant program and certain
sales of licenses, as well as the supplies and commissions we
earn from publishers related to digital course supplement
downloads.
|
Many of our product revenues are recognized ratably over the
contract term, which is typically one year. As a result, in the
case of both recurring revenues and non-recurring revenues, an
increase or decrease in the revenues in one period may be
attributable primarily to increases or decreases in sales in
prior periods.
Other factors that we consider in making strategic cash flow and
operating decisions include cash flows from operations, capital
expenditures, total operating expenses and earnings.
Our operating results and cash flows normally fluctuate as a
result of seasonal variations in our business, principally due
to the timing of client budget cycles and student attendance at
client facilities. Historically, we have had lower new sales in
our first and fourth quarters than in the remainder of the year.
Our expenses, however, do not generally vary significantly with
these changes on a quarterly basis. Historically, we have
performed a disproportionate amount of our professional
services, for which revenue is recognized as the services are
performed, in our second and third quarters each year. We expect
quarterly fluctuations in operating results to continue as a
result of the uneven seasonal demand for our licenses and
services offerings.
Results
of Operations
The following table sets forth selected unaudited consolidated
statement of operations data expressed as a percentage of total
revenues for each of the periods indicated.
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|
|
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|
|
|
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Three Months Ended
|
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|
Nine Months Ended
|
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|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
89
|
%
|
|
|
93
|
%
|
|
|
91
|
%
|
|
|
92
|
%
|
Professional services
|
|
|
11
|
|
|
|
7
|
|
|
|
9
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues, excludes amortization of acquired
technology included in amortization of intangibles resulting
from acquisitions shown below
|
|
|
24
|
|
|
|
24
|
|
|
|
24
|
|
|
|
24
|
|
Cost of professional services revenues
|
|
|
6
|
|
|
|
5
|
|
|
|
6
|
|
|
|
5
|
|
Research and development
|
|
|
12
|
|
|
|
12
|
|
|
|
12
|
|
|
|
12
|
|
Sales and marketing
|
|
|
25
|
|
|
|
27
|
|
|
|
27
|
|
|
|
26
|
|
General and administrative
|
|
|
15
|
|
|
|
15
|
|
|
|
15
|
|
|
|
15
|
|
Patent-related impairment and other costs
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
Amortization of intangibles resulting from acquisitions
|
|
|
9
|
|
|
|
8
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
91
|
|
|
|
91
|
|
|
|
97
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
9
|
%
|
|
|
9
|
%
|
|
|
3
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Three
Months Ended September 30, 2010 Compared to Three Months
Ended September 30, 2009
Our total revenues for the three months ended September 30,
2010 were $120.8 million, representing an increase of
$22.4 million, or 23%, as compared to $98.4 million
for the three months ended September 30, 2009.
A detail of our total revenues by classification is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
Professional
|
|
|
|
|
|
|
|
|
Professional
|
|
|
|
|
|
|
Product
|
|
|
Services
|
|
|
|
|
|
Product
|
|
|
Services
|
|
|
|
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Total
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Total
|
|
|
|
(Unaudited)
|
|
|
|
(In millions)
|
|
|
Recurring revenues
|
|
$
|
76.9
|
|
|
$
|
2.3
|
|
|
$
|
79.2
|
|
|
$
|
100.7
|
|
|
$
|
1.7
|
|
|
$
|
102.4
|
|
Non-recurring revenues
|
|
|
11.0
|
|
|
|
8.2
|
|
|
|
19.2
|
|
|
|
11.6
|
|
|
|
6.8
|
|
|
|
18.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
87.9
|
|
|
$
|
10.5
|
|
|
$
|
98.4
|
|
|
$
|
112.3
|
|
|
$
|
8.5
|
|
|
$
|
120.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues.
Our product revenues,
including domestic and international, for the three months ended
September 30, 2010 were $112.3 million, representing
an increase of $24.4 million, or 28%, as compared to
$87.9 million for the three months ended September 30,
2009. Recurring product revenues increased by
$23.8 million, or 31%, for the three months ended
September 30, 2010 as compared to the three months ended
September 30, 2009. This increase in recurring revenues was
primarily due to a $10.4 million increase in revenues
recognized from
Blackboard Transact
due to our early
adoption of the change in revenue recognition guidance under
which more revenue is recognized upfront. Further, there was a
$3.4 million increase in revenues recognized from
Blackboard Learn
enterprise licenses, which was
attributable to current and prior period sales to new and
existing clients, the continued shift of our existing clients
from
Blackboard Learn
basic products to
Blackboard
Learn
enterprise products and the cross-selling of other
enterprise products to existing clients.
Blackboard Learn
enterprise products have additional functionality that is
not available in
Blackboard Learn
basic products and
consequently some
Blackboard Learn
basic product clients
upgrade to
Blackboard Learn
enterprise products. Licenses
of the enterprise version of
Blackboard Learn
products
have higher average pricing, which normally results in at least
twice the contractual value as compared to
Blackboard Learn
basic product licenses. The remaining increase in recurring
product revenues primarily resulted from an increase in
Blackboard Mobile
revenues of $3.8 million, a
$2.2 million increase in revenues for subscription fees
from customers accessing our
on-demand
application services primarily related to
Blackboard
Connect
, a $2.0 million increase resulting from the
Elluminate and Wimba mergers that closed in August 2010 and a
$1.8 million increase in hosting revenues. The increase in
non-recurring product revenues primarily relates to an increase
in revenues from
Blackboard Transact
hardware and
third-party hardware sales.
Of our total revenues, our total international revenues for the
three months ended September 30, 2010 were
$19.0 million, representing an increase of
$1.4 million, or 8%, as compared to $17.6 million for
the three months ended September 30, 2009. International
revenues as a percentage of total revenues decreased to 16% for
the three months ended September 30, 2010 from 18% for the
three months ended September 30, 2009, primarily due to an
increase in domestic revenues. International product revenues,
which consist primarily of recurring product revenues, were
$18.0 million for the three months ended September 30,
2010, representing an increase of $1.5 million, or 9%, as
compared to $16.5 million for the three months ended
September 30, 2009. The increase in international recurring
product revenues was primarily due to an increase in
international revenues from
Blackboard Learn
enterprise
products resulting from prior period sales to new and existing
clients. In addition, the increase in international revenues
also reflects our investment in increasing the size of our
international sales force and international marketing efforts
during prior periods, which has expanded our international
presence and enabled us to sell more of our products to new and
existing clients in our international markets.
Professional services revenues.
Our
professional services revenues for the three months ended
September 30, 2010 were $8.5 million, representing a
decrease of $2.0 million, or 19%, as compared to
$10.5 million for the three months ended September 30,
2009. The decrease in professional services was primarily
attributable to the timing of
27
delivery of service engagements. As a percentage of total
revenues, professional services revenues for the three months
ended September 30, 2009 and 2010 were 11% and 7%,
respectively.
Cost of product revenues.
Our cost of product
revenues for the three months ended September 30, 2010 was
$28.4 million, representing an increase of
$4.6 million, or 19%, as compared to $23.8 million for
the three months ended September 30, 2009. The increase in
cost of product revenues was primarily due to an increase of
$1.7 million in expenses related to hosting services due to
the increase in the number of clients contracting for new
hosting services and existing clients expanding their existing
hosting arrangements. In addition, product costs related to
Blackboard Transact
hardware and third-party hardware
sales increased by $2.4 million due to our early adoption
of the change in revenue recognition guidance under which more
revenue and related costs are recognized upfront. The remaining
increase was primarily due to increases in our technical support
expenses associated with increased headcount and personnel costs
to support an increase in licenses held by new and existing
clients. Cost of product revenues as a percentage of product
revenues decreased to 25% for the three months ended
September 30, 2010 from 27% for the three months ended
September 30, 2009.
Cost of product revenues excludes amortization of acquired
technology intangibles resulting from acquisitions, which is
reported separately on our unaudited consolidated statements of
operations. Amortization expense related to acquired technology
was $2.5 million and $2.3 million for the three months
ended September 30, 2009 and 2010, respectively. This
decrease was attributable to the completion of the amortization
of acquired technology acquired in the ANGEL merger that closed
in May 2009, offset, in part, by amortization of acquired
technology acquired in the Saf-T-Net merger that closed in March
2010 and the acquisitions of Elluminate and Wimba that closed in
August 2010. Cost of product revenues, including amortization of
acquired technology, as a percentage of product revenues was 27%
for the three months ended September 30, 2010 as compared
to 30% for the three months ended September 30, 2009.
Cost of professional services revenues.
Our
cost of professional services revenues for the three months
ended September 30, 2010 was $6.0 million,
representing an increase of $0.4 million, or 7%, as
compared to $5.6 million for the three months ended
September 30, 2009. The increase in the cost of
professional services revenues was primarily attributable to an
increase in personnel-related costs associated with professional
services revenues from new professional service engagements in
current and prior periods. Cost of professional services
revenues as a percentage of professional services revenues
increased to 71% for the three months ended September 30,
2010 from 53% for the three months ended September 30, 2009.
Research and development expenses.
Our
research and development expenses for the three months ended
September 30, 2010 were $15.1 million, representing an
increase of $3.7 million, or 32%, as compared to
$11.4 million for the three months ended September 30,
2009. This increase was primarily attributable to increased
personnel-related costs due to higher average headcount during
the three months ended September 30, 2010 as compared to
the three months ended September 30, 2009, including
increased personnel-related costs associated with the inclusion
of Saf-T-Net following the merger that closed in March 2010 and
Elluminate and Wimba following the mergers that closed in August
2010.
Sales and marketing expenses.
Our sales and
marketing expenses for the three months ended September 30,
2010 were $32.6 million, representing an increase of
$7.9 million, or 32%, as compared to $24.7 million for
the three months ended September 30, 2009. This increase
was primarily attributable to increased personnel-related costs
due to higher average headcount during the three months ended
September 30, 2010 as compared to the three months ended
September 30, 2009, including increased personnel-related
costs associated with the inclusion of
Saf-T-Net
following the merger that closed in March 2010 and Elluminate
and Wimba following the mergers that closed in August 2010.
General and administrative expenses.
Our
general and administrative expenses for the three months ended
September 30, 2010 were $18.1 million, representing an
increase of $3.5 million, or 24%, as compared to
$14.6 million for the three months ended September 30,
2009. This increase was primarily attributable to increased
personnel-related costs due to higher average headcount during
the three months ended September 30, 2010 as compared to
the three months ended September 30, 2009, including
increased personnel-related costs associated with the inclusion
of Saf-T-Net following the merger that closed in March 2010 and
Elluminate and Wimba following the mergers that closed in August
2010. The increase in general and administrative expenses was
also
28
attributable to transaction costs of approximately
$0.6 million related to the Elluminate and Wimba
acquisitions that were incurred during the three months ended
September 30, 2010.
Amortization of intangibles resulting from
acquisitions.
Our amortization of intangibles
resulting from acquisitions for the three months ended
September 30, 2010 were $9.7 million, representing an
increase of $0.4 million, or 4%, as compared to
$9.3 million for the three months ended September 30,
2009. This increase was attributable to amortization of certain
intangible assets acquired following the Saf-T-Net merger that
closed in March 2010 and the Elluminate and Wimba acquisitions
that closed in August 2010.
Net interest expense.
Our net interest expense
for the three months ended September 30, 2010 was
$3.1 million, representing an increase of
$0.1 million, or 3%, as compared to $3.0 million for
the three months ended September 30, 2009. Our net interest
expense is primarily the result of the interest expense incurred
on our convertible senior notes and the increase was due to
recognition of costs associated with our revolving credit
facility.
Other income (expense).
Our other income for
the three months ended September 30, 2010 was
$0.4 million, representing an increase of
$0.1 million, as compared to $0.3 million for the
three months ended September 30, 2009. This increase was
related to the remeasurement of our foreign subsidiaries
ledgers that are denominated in the respective subsidiarys
local currency, into U.S. dollars.
Provision for income taxes.
Our provision for
income taxes for the three months ended September 30, 2010
was $2.5 million, representing an increase of
$0.5 million, or 25%, as compared to $2.0 million for
the three months ended September 30, 2009. This change was
primarily due to an increase in our income before provision for
income taxes for the three months ended September 30, 2010,
as compared to the three months ended September 30, 2009.
Nine
Months Ended September 30, 2010 Compared to Nine Months
Ended September 30, 2009
Our total revenues for the nine months ended September 30,
2010 were $329.6 million, representing an increase of
$52.6 million, or 19%, as compared to $277.0 million
for the nine months ended September 30, 2009.
A detail of our total revenues by classification is as follows:
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Nine Months Ended September 30,
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2009
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2010
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Professional
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Professional
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Product
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Services
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Product
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Services
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Revenues
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Revenues
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Total
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Revenues
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Revenues
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Total
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(Unaudited)
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(In millions)
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Recurring revenues
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$
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220.5
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$
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5.0
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$
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225.5
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$
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264.7
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$
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5.4
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$
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270.1
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Non-recurring revenues
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30.9
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20.6
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51.5
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38.8
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20.7
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59.5
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Total revenues
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$
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251.4
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$
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25.6
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$
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277.0
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$
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303.5
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$
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26.1
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$
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329.6
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Product revenues.
Our product revenues,
including domestic and international, for the nine months ended
September 30, 2010 were $303.5 million, representing
an increase of $52.1 million, or 21%, as compared to
$251.4 million for the nine months ended September 30,
2009. Recurring product revenues increased by
$44.2 million, or 20%, for the nine months ended
September 30, 2010 as compared to the nine months ended
September 30, 2009. This increase in recurring revenues was
primarily due to a $15.9 million increase in revenues
recognized from
Blackboard Transact
due to our early
adoption of the change in revenue recognition guidance under
which more revenue is recognized upfront. Further, there was a
$14.8 million increase in revenues recognized from
Blackboard Learn
enterprise licenses, which was
attributable to current and prior period sales to new and
existing clients, the continued shift of our existing clients
from
Blackboard Learn
basic products to
Blackboard
Learn
enterprise products and the cross-selling of other
enterprise products to existing clients.
Blackboard Learn
enterprise products have additional functionality that is
not available in
Blackboard Learn
basic products and
consequently some
Blackboard Learn
basic product clients
upgrade to
Blackboard Learn
enterprise products. Licenses
of the enterprise version of
Blackboard Learn
products
have higher average pricing, which normally results in at least
twice the contractual value as compared to
Blackboard Learn
basic product licenses. The
29
remaining increase in recurring product revenues primarily
resulted from a $8.5 million increase in hosting revenues,
an increase in
Blackboard Mobile
revenues of
$3.8 million and a $2.0 million increase resulting
from the Elluminate and Wimba mergers that closed in August
2010. The increase in non-recurring product revenues primarily
relates to an increase in revenues from
Blackboard Transact
hardware and third-party hardware sales.
Of our total revenues, our total international revenues for the
nine months ended September 30, 2010 were
$56.6 million, representing an increase of
$5.1 million, or 10%, as compared to $51.5 million for
the nine months ended September 30, 2009. International
revenues as a percentage of total revenues decreased to 17% for
the nine months ended September 30, 2010 from 19% for the
nine months ended September 30, 2009, primarily due to an
increase in domestic revenues. International product revenues,
which consist primarily of recurring product revenues, were
$53.3 million for the nine months ended September 30,
2010, representing an increase of $5.5 million, or 12%, as
compared to $47.8 million for the nine months ended
September 30, 2009. The increase in international recurring
product revenues was primarily due to an increase in
international revenues from
Blackboard Learn
enterprise
products resulting from prior period sales to new and existing
clients. In addition, the increase in international revenues
also reflects our investment in increasing the size of our
international sales force and international marketing efforts
during prior periods, which has expanded our international
presence and enabled us to sell more of our products to new and
existing clients in our international markets.
Professional services revenues.
Our
professional services revenues for the nine months ended
September 30, 2010 were $26.1 million, representing an
increase of $0.5 million, or 2%, as compared to
$25.6 million for the nine months ended September 30,
2009. The increase in professional services was primarily
attributable to increased sales of consulting services. As a
percentage of total revenues, professional services revenues for
the nine months ended September 30, 2009 and 2010 were 9%
and 8%, respectively.
Cost of product revenues.
Our cost of product
revenues for the nine months ended September 30, 2010 was
$80.4 million, representing an increase of
$13.3 million, or 20%, as compared to $67.1 million
for the nine months ended September 30, 2009. The increase
in cost of product revenues was primarily due to an increase of
$5.9 million in expenses related to hosting services due to
the increase in the number of clients contracting for new
hosting services and existing clients expanding their existing
hosting arrangements. In addition, product costs related to
Blackboard Transact
hardware and third-party hardware
sales increased by $5.4 million due primarily to our early
adoption of the change in revenue recognition guidance under
which more revenue and related costs are recognized upfront. The
remaining increase was primarily due to increases in our
technical support expenses associated with increased headcount
and personnel costs to support an increase in licenses held by
new and existing clients. Cost of product revenues as a
percentage of product revenues decreased to 26% for the nine
months ended September 30, 2010 from 27% for the nine
months ended September 30, 2009.
Cost of product revenues excludes amortization of acquired
technology intangibles resulting from acquisitions, which is
reported separately on our unaudited consolidated statements of
operations. Amortization expense related to acquired technology
was $8.2 million and $7.7 million for the nine months
ended September 30, 2009 and 2010, respectively. This
decrease was attributable to the completion of the amortization
of acquired technology acquired in our acquisition of WebCT in
2006 and the ANGEL merger that closed in May 2009, offset, in
part, due to amortization of acquired technology acquired in the
Saf-T-Net merger that closed in March 2010 and the acquisitions
of Elluminate and Wimba that closed in August 2010. Cost of
product revenues, including amortization of acquired technology,
as a percentage of product revenues was 29% for the nine months
ended September 30, 2010 as compared to 30% for the nine
months ended September 30, 2009.
Cost of professional services revenues.
Our
cost of professional services revenues for the nine months ended
September 30, 2010 was $15.9 million, representing an
increase of $0.9 million, or 6%, as compared to
$15.0 million for the nine months ended September 30,
2009. The increase in the cost of professional services revenues
was primarily attributable to an increase in personnel-related
costs associated with the increase in professional services
revenues from new professional service engagements in current
and prior periods. Cost of professional services revenues as a
percentage of professional services revenues increased to 61%
for the nine months ended September 30, 2010 from 59% for
the nine months ended September 30, 2009.
Research and development expenses.
Our
research and development expenses for the nine months ended
September 30, 2010 were $39.3 million, representing an
increase of $5.5 million, or 16%, as compared to
30
$33.8 million for the nine months ended September 30,
2009. This increase was primarily attributable to increased
personnel-related costs due to higher average headcount during
the nine months ended September 30, 2010 as compared to the
nine months ended September 30, 2009, including increased
personnel-related costs associated with the inclusion of ANGEL
following the merger that closed in May 2009, as well as
Saf-T-Net following the merger that closed in March 2010 and
Elluminate and Wimba following the acquisitions that closed in
August 2010.
Sales and marketing expenses.
Our sales and
marketing expenses for the nine months ended September 30,
2010 were $85.8 million, representing an increase of
$11.8 million, or 16%, as compared to $74.0 million
for the nine months ended September 30, 2009. This increase
was primarily attributable to increased personnel-related costs
due to higher average headcount during the nine months ended
September 30, 2010 as compared to the nine months ended
September 30, 2009, including increased personnel-related
costs associated with the inclusion of ANGEL following the
merger that closed in May 2009, as well as Saf-T-Net following
the merger that closed in March 2010 and Elluminate and Wimba
following the acquisitions that closed in August 2010.
General and administrative expenses.
Our
general and administrative expenses for the nine months ended
September 30, 2010 were $49.6 million, representing an
increase of $7.1 million, or 17%, as compared to
$42.5 million for the nine months ended September 30,
2009. This increase was primarily attributable to increased
personnel-related costs due to higher average headcount during
the nine months ended September 30, 2010 as compared to the
nine months ended September 30, 2009, including increased
personnel-related costs associated with the inclusion of ANGEL
following the merger that closed in May 2009, as well as
Saf-T-Net following the merger that closed in March 2010 and
Elluminate and Wimba following the acquisitions that closed in
August 2010. The increase in general and administrative expenses
was also attributable to transaction costs of approximately
$2.1 million related to the Saf-T-Net, Elluminate and Wimba
acquisitions that were incurred during the nine months ended
September 30, 2010.
Patent-related impairment and other
costs.
During the nine months ended
September 30, 2009, we recorded expenses of approximately
$3.5 million related to the reversal of the 2008 judgment
in our patent dispute with Desire2Learn, Inc. Additionally,
during the nine months ended September 30, 2009, we
recorded a non-cash charge of approximately $7.5 million as
the result of impairment of capitalized patent costs due to the
reversal of the 2008 judgment.
Amortization of intangibles resulting from
acquisitions.
Our amortization of intangibles
resulting from acquisitions for the nine months ended
September 30, 2010 were $28.0 million, representing an
increase of $2.3 million, or 9%, as compared to
$25.7 million for the nine months ended September 30,
2009. This increase was attributable to amortization of certain
intangible assets acquired following the ANGEL merger that
closed in May 2009, as well as the Saf-T-Net merger that closed
in March 2010 and the Elluminate and Wimba acquisitions that
closed in August 2010 offset, in part, by the completion of the
amortization of intangible assets acquired in connection with
our acquisition of WebCT in 2006.
Net interest expense.
Our net interest expense
for the nine months ended September 30 2010 was
$8.9 million, representing an increase of
$0.2 million, or 2%, as compared to $8.7 million for
the nine months ended September 30, 2009. Our net interest
expense is primarily the result of the interest expense incurred
on our convertible senior notes and the increase was primarily
due to recognition of costs associated with our revolving credit
facility.
Other income (expense).
Our other expense for
the nine months ended September 30, 2010 was
$0.5 million, representing a decrease of $1.6 million,
as compared to other income of $1.1 million for the nine
months ended September 30, 2009. During the nine months
ended September 30, 2009, other income of approximately
$1.1 million was recorded in our consolidated statements of
operations related to the fair value adjustment of the common
stock warrant in connection with an equity transaction between
this entity and a venture capital firm that occurred in June
2009. The remaining change in other income (expense) is related
to the remeasurement of our foreign subsidiaries ledgers
that are denominated in the respective subsidiarys local
currency, into U.S. dollars.
Provision for income taxes.
Our provision for
income taxes for the nine months ended September 30, 2010
was $6.1 million, representing an increase of
$6.0 million, as compared to $0.1 million for the nine
months ended September 30, 2009. This change was primarily
due to an increase in our income before provision for income
taxes for the nine months ended September 30, 2010, as
compared to the nine months ended September 30, 2009.
31
Liquidity
and Capital Resources
Changes
in Cash and Cash Equivalents
Our cash and cash equivalents were $86.4 million at
September 30, 2010 as compared to $167.4 million at
December 31, 2009. The decrease in cash and cash
equivalents was primarily due to the net cash consideration of
approximately $150.1 million used for the acquisitions of
Saf-T-Net, Elluminate and Wimba, offset by net cash provided by
our operating activities of $64.5 million. Our cash and
cash equivalents consist of highly liquid investments, which are
readily convertible into cash and have original maturities of
three months or less.
Net cash provided by operating activities was $64.5 million
during the nine months ended September 30, 2010 as compared
to net cash provided by operating activities of
$89.8 million during the nine months ended
September 30, 2009. Amortization of intangibles resulting
from acquisitions was $28.0 million during the nine months
ended September 30, 2010 and related to the amortization of
identified intangibles resulting from acquisitions. We recognize
revenues on annually renewable agreements, which results in
deferred revenues. Deferred revenues increased by
$34.9 million during the nine months ended
September 30, 2010, net of the impact of acquired deferred
revenues related to the acquisitions of Saf-T-Net, Elluminate
and Wimba, due to the timing of certain client renewal invoicing
and sales to new and existing clients during the current period.
This increase in deferred revenues was partially offset by the
change in revenue recognition guidance primarily related to our
Blackboard Transact
product line in which more revenues
are recognized upfront. Accounts receivable increased by
$57.0 million during the nine months ended
September 30, 2010, net of the impact of acquired
receivables related to the acquisitions of Saf-T-Net, Elluminate
and Wimba, due to the timing of certain client renewal invoicing
and sales to new and existing clients during the current period.
Net cash used in investing activities was $171.4 million
during the nine months ended September 30, 2010 as compared
to $108.1 million during the nine months ended
September 30, 2009. During the nine months ended
September 30, 2010 we paid $34.2 million in net cash
consideration for the acquisition of Saf-T-Net,
$58.4 million in net cash consideration for the acquisition
of Elluminate and $57.5 million in net cash consideration
for the acquisition of Wimba. During the nine months ended
September 30, 2010, cash expenditures for purchases of
property and equipment were $16.3 million, which represents
5% of total revenues for the nine months ended
September 30, 2010.
Net cash provided by financing activities was $26.0 million
during the nine months ended September 30, 2010 as compared
to $8.6 million during the nine months ended
September 30, 2009. During the nine months ended
September 30, 2010, we received $25.1 million in
proceeds from the exercise of stock options as compared to
$7.7 million during the nine months ended
September 30, 2009.
Notes
Payable
In June 2007, we issued and sold $165.0 million aggregate
principal amount of 3.25% Convertible Senior Notes due 2027
(the Notes) in a public offering. The Notes bear
interest at a rate of 3.25% per year on the principal amount.
Interest is payable semi-annually on January 1 and July 1.
We made interest payments of $2.7 million on each of
June 30, 2009, December 31, 2009 and July 1,
2010. The Notes will mature on July 1, 2027, subject to
earlier conversion, redemption or repurchase.
If a make-whole fundamental change, as defined in the Notes,
occurs prior to July 1, 2011, we may be required in certain
circumstances to increase the applicable conversion rate for any
Notes converted in connection with such fundamental change by a
specified number of shares of our common stock. We may not
redeem the Notes prior to July 1, 2011. On or after
July 1, 2011, we may redeem the Notes, in whole at any
time, or in part from time to time, at a redemption price,
payable in cash, up to 100% of the principal amount of the Notes
plus accrued and unpaid interest, if any. Holders of the Notes
may require us to repurchase some or all of the Notes on
July 1, 2011, July 1, 2017 and July 1, 2022, or
in the event of certain fundamental change transactions, at 100%
of the principal amount on the date of repurchase, plus accrued
and unpaid interest, if any, payable in cash. If such an event
occurs, we would be required to pay the entire outstanding
principal amount of $165.0 million in cash, in addition to
any other rights that the investors may have under the Notes. As
the first redemption date of the Notes is July 1, 2011, we
reclassified
32
the net carrying amount of the liability component of
$160.8 million to current liabilities in our unaudited
consolidated balance sheet as of September 30, 2010.
The Notes are unsecured senior obligations and are effectively
subordinated to all of our existing and future senior
indebtedness to the extent of the assets securing such debt, and
are effectively subordinated to all indebtedness and liabilities
of our subsidiaries, including trade payables.
Revolving
Credit Facility
On August 4, 2010, we entered into a five-year
$175.0 million senior secured revolving credit facility
agreement with a syndicate of banks led by JPMorgan Chase Bank,
N.A. as administrative agent (the Credit Agreement).
Any amounts that we borrow under the Credit Agreement will be
due and payable on August 4, 2015. We may optionally prepay
amounts borrowed or otherwise reduce the credit facility
commitments at any time without penalty. Borrowings under the
Credit Agreement are available for general corporate purposes,
which may include outstanding debt repayments and acquisitions.
Amounts outstanding under the revolving credit facility bear
interest at a variable interest rate set forth in the Credit
Agreement equal to, at our election, (i) the Adjusted LIBO
Rate (as defined in the Credit Agreement) plus a margin which
will vary between 2.25% and 3.00% based on our Leverage Ratio
(as defined in the Credit Agreement) or (ii) an Alternate
Base Rate (as defined in the Credit Agreement) plus a margin
which will vary between 1.25% and 2.00% based on our Leverage
Ratio. Any overdue amounts under the Credit Agreement will bear
interest at a rate per annum equal to 2% plus the rate otherwise
applicable to such amount.
We are required to pay a commitment fee of between 0.30% and
0.50% of the average unused amount of the credit facility during
each quarter. We record this fee in interest expense.
In connection with obtaining the senior secured credit facility,
we incurred $1.7 million in debt issuance costs in August
2010, which is amortized as interest expense over the term of
the senior secured credit facility using the effective interest
method.
Under the terms of the Credit Agreement and related loan
documents, our obligations have been guaranteed by our material
domestic subsidiaries, and are secured by substantially all of
our tangible and intangible assets and those of each of our
material domestic subsidiaries. In addition, the Credit
Agreement contains customary affirmative and negative covenants
applicable to us and our subsidiaries with respect to our
operations and financial conditions, including maximum
permissible debt ratios and a minimum liquidity covenant. We
continue to be in full compliance with all covenants contained
in the Credit Agreement.
As of September 30, 2010 and November 5, 2010, no
amounts were outstanding under the credit facility.
Working
Capital Needs
We believe that our existing cash and cash equivalents, together
with future cash expected to be provided by operating activities
and amounts that may be borrowed under our new revolving credit
facility, will be sufficient to meet our working capital and
capital expenditure needs over at least the next 12 months,
as well as sufficient to repurchase some or all of the Notes, if
required by the Holders, or, at our discretion, to redeem the
Notes. Our future capital requirements will depend on many
factors, including our rate of revenue growth, the expansion of
our marketing and sales activities, the timing and extent of
spending to support product development efforts and expansion
into new territories, the timing of introductions of new
products or services, the timing of enhancements to existing
products and services and the timing of capital expenditures.
Also, we may make investments in, or acquisitions of,
complementary businesses, services or technologies, which could
also require us to seek additional equity or debt financing. To
the extent that available funds are insufficient to fund our
future activities, we may need to raise additional funds through
public or private equity or debt financing. Additional funds may
not be available on terms favorable to us or at all. From time
to time we may use our existing cash to repurchase shares of our
common stock, outstanding indebtedness or other outstanding
securities. Any such repurchases would depend on market
conditions, the market price of our common stock, and
managements assessment of our liquidity and cash flow
needs.
33
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements with
unconsolidated entities or related parties, and, accordingly,
there are no off-balance sheet risks to our liquidity and
capital resources.
Interest income on our cash and cash equivalents is subject to
interest rate fluctuations. For the three and nine months ended
September 30, 2010, a ten percent increase in interest
rates would not have had a material effect on our interest
income.
We have accounts on our foreign subsidiaries ledgers which
are maintained in the respective subsidiarys local
currency and remeasured into the U.S. dollar for reporting
of our consolidated results. As a result, we are exposed to
fluctuations in the exchange rates of various currencies against
the U.S. dollar and against the currencies of other
countries in which we maintain foreign denominated balances,
including the Canadian dollar, Euro, British pound, Japanese
yen, Australian dollar and others. Because of such foreign
currency exchange rate fluctuations, we recognized other income
of $0.4 million and other expense of $0.5 million
during the three and nine months ended September 30, 2010,
respectively. For the three and nine months ended
September 30, 2010, a ten percent adverse change in the
prevailing exchange rates as of September 30, 2010 would
not have had a material effect on our consolidated results of
operations or financial condition.
Item 4.
Controls
and Procedures.
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(a)
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Evaluation
of Disclosure Controls and Procedures.
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Our management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness
of our disclosure controls and procedures as of
September 30, 2010. The term disclosure controls and
procedures, as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to
be disclosed by a company in the reports that it files or
submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in
the SECs rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the
companys management, including its principal executive and
principal financial officers, as appropriate to allow timely
decisions regarding required disclosure. Management recognizes
that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving
their objectives, and management necessarily applies its
judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of September 30,
2010, our chief executive officer and chief financial officer
concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
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(b)
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Changes
in Internal Control over Financial Reporting.
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No changes in our internal control over financial reporting (as
defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) occurred during the fiscal quarter ended
September 30, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
34
PART II.
OTHER INFORMATION
Item 1.
Legal
Proceedings
We may be involved in various legal proceedings from time to
time incidental to the ordinary conduct of our business. We
believe that any ultimate liability resulting from any such
litigation will not have a material adverse effect on our
results of operations, financial position or cash flows.
Item 1A.
Risk
Factors.
We describe our business risk factors below. This description
includes any material changes to and supersedes the description
of the risk factors previously disclosed in Part I,
Item 1A of our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009 and
Part II, Item 1A of our Quarterly Reports on
Form 10-Q
for the quarters ended March 31, 2010 and June 30,
2010.
Challenging
economic conditions may adversely affect our
business.
The economic disruption experienced in the United States and
globally since 2008 and any continuing unfavorable economic
conditions may affect our sales and renewals of our products and
services, and could negatively affect our revenues and our
ability to maintain or grow our business. In addition, the
instability in the financial markets has resulted in a
tightening of the credit markets, which could impair the ability
of our customers to obtain credit to finance purchases of our
products. Our client base is diverse and each client or
potential client faces a unique set of risks. These risks
include, for example, the availability of public funds and the
possibility of state and local budget cuts, reduced enrollment,
or lower revenues, which could lead to a reduction in overall
spending, including information technology spending, by our
current and potential clients and a corresponding decline in
demand for our products and services. A prolonged economic
downturn may result in a reduction in overall demand for
educational software products and services, which could cause a
decline in both new sales and renewals of our existing products
and difficulty in establishing a market for our new products and
services. In addition, our accounts receivable may increase and
the relative aging of our receivables may deteriorate if our
clients delay or are unable to make their payments due to the
tightening of credit markets and the lack of available funding.
A prolonged economic downturn may make it difficult for
potential clients to buy our products and might compromise the
ability of existing clients to renew their licenses.
We
could lose revenues if there are changes in the spending
policies or budget priorities for government funding of
colleges, universities, schools and other education
providers.
Most of our clients and potential clients are colleges,
universities, schools and other education providers who depend
substantially on government funding. Accordingly, any general
decrease, delay or change in federal, state or local funding for
colleges, universities, schools and other education providers
could cause our current and potential clients to reduce their
purchases of our products and services, to exercise their right
to terminate licenses, or to decide not to renew licenses, any
of which would cause us to lose revenues. In addition, a
specific reduction in governmental funding support for products
such as ours would also cause us to lose revenues. In light of
the severe economic downturn experienced in the United States
and globally since 2008, many of our clients have experienced
and may continue to experience budgetary pressures, which may
have a negative impact on sales of our products.
Our
investments in product development and product acquisition may
not be successful; if our products do not gain market
acceptance, our revenues may decrease and we may not realize a
return on such investments.
We make substantial investments in improving our products and
acquiring products through mergers and acquisitions, and there
can be no assurance that our investments will be successful. Our
ability to grow our business will be compromised if we do not
develop products and services that achieve broad market
acceptance with our current and potential clients. We have
recently released a new version, Release 9.1, of our
Blackboard Learn
platform which offers enhanced
functionality over prior versions. If clients do not upgrade to
the latest version of the
Blackboard Learn
platform, the
functionality of their existing installed versions will not
compare as favorably to competing products which may cause a
reduction in renewal rates. Further, if the latest version of
our software does
35
not become widely adopted by clients, we may not be able to
justify the investments we have made and our financial results
will suffer.
If our newest products and services,
Blackboard Connect
,
AlertNow
, the
Blackboard Mobile
product line, and
the newly acquired
Blackboard Collaborate
products do not
gain widespread market acceptance, our financial results could
suffer. We acquired the technology underlying these products and
services through a number of strategic acquisitions. Our ability
to grow our business will depend, in part, on client acceptance
of these products. If we are not successful in gaining market
acceptance of these products and services, our revenues may fall
below our expectations.
We
face intense and growing competition, which could result in
price reductions, reduced operating margins and loss of market
share.
We operate in highly competitive markets and generally encounter
intense competition to win contracts. If we are unable to
successfully compete for new business and license renewals, our
revenue growth and operating margins may decline. The markets
for online education, transactional, portal, content management,
transaction systems and mass notification products are intensely
competitive and rapidly changing, and barriers to entry in these
markets are relatively low. With the introduction of new
technologies and market entrants, we expect competition to
intensify in the future. Some of our principal competitors offer
their products at a lower price, which has resulted in pricing
pressures. Such pricing pressures and increased competition
generally could result in reduced sales, reduced margins or the
failure of our product and service offerings to achieve or
maintain more widespread market acceptance.
Our primary competitors for the
Blackboard Learn
platform
are companies and open source projects that provide course
management systems, such as Desire2Learn Inc., Jenzabar, Inc.,
Microsoft, IBM, Oracle, Moodle, Pearson, The Sakai Project,
UCompass Educator and WebTycho; learning content management
systems, such as Giunti Labs S.r.I. and Concord USA, Inc.; and
education enterprise information portal technologies, such as
SunGard Higher Education Inc., an operating unit of SunGard Data
Systems Inc. We also face competition from clients and potential
clients who develop their own applications internally, large
diversified software vendors who offer products in numerous
markets including the education market and open source software
applications. Our competitors for the
Blackboard Transact
platform include companies that provide transaction systems,
security and access systems and off-campus merchant relationship
programs. Our competitors for
Blackboard Connect
include
a variety of competitors which provide mass notification
technologies including voice, email and text messaging
communications. Our competitors for the newly acquired
Blackboard Collaborate
products include a variety of
companies that provide software applications for synchronous
learning and similar technology.
We may also face competition from potential competitors that are
substantially larger than we are and have significantly greater
financial, technical and marketing resources, and established,
extensive direct and indirect sales and distribution channels.
Similarly, our competitors may also be acquired by larger and
more well-funded companies which have more resources than our
current competitors. These larger companies may be able to
respond more quickly to new or emerging technologies and changes
in client requirements, or to devote greater resources to the
development, promotion and sale of their products than we can.
In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or
prospective clients. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and
rapidly acquire significant market share to our detriment.
If
potential clients or competitors use open source software to
develop products that are competitive with our products and
services, we may face decreased demand and pressure to reduce
the prices for our products.
The growing acceptance and prevalence of open source software
may make it easier for competitors or potential competitors to
develop software applications that compete with our products, or
for clients and potential clients to internally develop software
applications that they would otherwise have licensed from us.
One of the aspects of open source software is that it can be
modified or used to develop new software that competes with
proprietary software applications, such as ours. Such
competition can develop without the degree of overhead and lead
time required by traditional proprietary software companies. As
open source offerings become more prevalent,
36
customers may defer or forego purchases of our products, which
could reduce our sales and lengthen the sales cycle for our
products or result in the loss of current clients to open source
solutions. If we are unable to differentiate our products from
competitive products based on open source software, demand for
our products and services may decline, and we may face pressure
to reduce the prices of our products, which would hurt our
profitability.
Our
recent acquisition transactions present many risks, and we may
not realize the financial and strategic goals that were
contemplated at the time of the transactions.
We have entered into a number of acquisition transactions as
part of our growth strategy. We completed acquisitions of ANGEL
and the business assets of Terriblyclever Design in 2009 and
Saf-T-Net, Elluminate and Wimba in 2010. We have entered into
these transactions with the expectation that each would result
in long-term benefits, including improved revenue and profits,
and enhancements to our product portfolio and customer base.
Risks that we may encounter in seeking to realize the benefits
of these and other potential acquisition transactions include:
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we may not realize the anticipated financial benefits if we are
unable to sell the acquired products to our current or future
customers, if a larger than predicted number of customers
decline to renew their contracts, or if the acquired contracts
do not allow us to recognize revenues on a timely basis;
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we may have difficulty incorporating the acquired technologies
or products with our existing product lines and maintaining
uniform standards, controls, procedures and policies;
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we may face contingencies related to product liability,
intellectual property, financial disclosures, and accounting
practices or internal controls;
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we may have higher than anticipated costs in supporting and
continuing development of the acquired company products and in
servicing new and existing clients of a company we acquire;
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we may not be able to retain key employees from the companies we
acquire;
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we may experience operational challenges due to the increased
size and complexity of the combined company after our
acquisitions; and
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we may lose anticipated tax benefits or have additional legal or
tax exposures.
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Our
business strategy contemplates future business combinations and
acquisitions which may be difficult to integrate, disrupt our
business, dilute stockholder value or divert management
attention.
A key element of our growth strategy is to pursue additional
acquisitions in the future. Any acquisition could be expensive,
disrupt our ongoing business and distract our management and
employees. We may not be able to identify suitable acquisition
candidates, and if we do identify suitable candidates, we may
not be able to make these acquisitions on acceptable terms or at
all. If we make an acquisition, we could have difficulty
integrating the acquired technology, employees or operations. In
addition, the key personnel of the acquired company may decide
not to work for us. Acquisitions also involve the risk of
potential unknown liabilities associated with the acquired
business.
As a result of these risks, we may not be able to achieve the
expected benefits of any acquisition. If we are unsuccessful in
completing or integrating future acquisitions, we would be
required to reevaluate our growth strategy, and we may have
incurred substantial expenses and devoted significant management
time and resources in seeking to complete and integrate the
acquisitions.
Future business combinations could involve the acquisition of
significant tangible and intangible assets, which could require
us to record in our statements of operations ongoing
amortization of identified intangible assets acquired in
connection with acquisitions, which we currently do with respect
to our historical acquisitions, including the NTI, ANGEL,
Saf-T-Net, Elluminate and Wimba mergers. In addition, we may
need to record write-downs from future impairments of identified
tangible and intangible assets and goodwill. These accounting
charges would reduce any future reported earnings, or increase a
reported loss. In future acquisitions, we could also incur
37
debt to pay for acquisitions, or issue additional equity
securities as consideration, which could cause our stockholders
to suffer significant dilution.
Additionally, our ability to utilize net operating loss
carryforwards, if any, acquired in any acquisitions may be
significantly limited or unusable by us under Section 382
or other sections of the Internal Revenue Code.
Our
indebtedness, and the restrictive covenants contained in our
revolving credit facility, could constrict our liquidity, result
in substantial cash outflows, and adversely affect our ability
to operate our business successfully and to obtain financing in
the future.
We entered into a five-year $175.0 million senior secured
revolving credit facility in August 2010. The credit agreement
limits our ability to incur additional indebtedness, create
liens, make investments, make restricted payments, and merge,
consolidate, sell or acquire assets, among other things. In
addition, we are required to comply with certain leverage and
other financial maintenance tests. As we borrow amounts under
this facility, this debt may impair our ability to obtain future
additional financing for working capital, capital expenditures,
acquisitions, general corporate or other purposes, and a
substantial portion of our cash flows from operations may be
dedicated to the debt repayment, thereby reducing the funds
available to us for other purposes, which could make us more
vulnerable to industry downturns and competitive pressures. Any
breach of our covenants set forth in the credit agreement, or
our failure to satisfy our obligations with respect to these
debt obligations could result in a default under the credit
facility, which could result in acceleration of the debt and
certain of our other financial obligations. As of
September 30, 2010 and November 5, 2010, no amounts
were outstanding under the revolving credit facility.
Our
existing indebtedness could adversely affect our financial
condition and we may not be able to fulfill our debt
obligations, including repayment of the Notes.
The outstanding Notes in the principal amount of
$165.0 million pose the following risks to our overall
business:
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upon conversion or redemption of the Notes, we will be required
to repay the principal amount of $165.0 million in cash;
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we will use a significant portion of our cash flow to pay
interest on our outstanding debt, limiting the amount available
for working capital, capital expenditures and other general
corporate purposes;
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lenders may be unwilling to lend additional amounts to us for
future working capital needs, additional acquisitions or other
purposes or may only be willing to provide funding on terms we
would consider unacceptable;
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if our cash flow were inadequate to make interest and principal
payments on our debt, we might have to refinance our
indebtedness or issue additional equity or other securities and
may not be successful in those efforts or may not obtain terms
favorable to us; and
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our ability to finance working capital needs and general
corporate purposes for the public and private markets, as well
as the associated cost of funding, is dependent, in part, on our
credit ratings, which may be adversely affected if we experience
declining revenues.
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We may be more vulnerable to adverse economic conditions than
less leveraged competitors and thus less able to withstand
competitive pressures. Any of these events could reduce our
ability to generate cash available for investment or debt
repayment or to make improvements or respond to events that
would enhance profitability. We may incur significantly more
debt in the future, which will increase each of the foregoing
risks related to our indebtedness.
We may
not be able to repurchase the Notes when required by the
holders, including upon a defined fundamental change or other
specified dates at the option of the holder, or pay cash upon
conversion of the Notes.
Upon the occurrence of a fundamental change as defined in the
Notes, holders of the Notes would have the right to require us
to repurchase the Notes at a price in cash equal to 100% of the
principal amount of the Notes plus
38
accrued and unpaid interest. Any future credit agreement or
other agreements relating to indebtedness to which we become a
party may contain similar provisions. Holders will also have the
right to require us to repurchase the Notes for cash or a
combination of cash and our common stock on July 1, 2011,
July 1, 2017 or July 1, 2022. Moreover, upon
conversion of the Notes, we are required to settle a portion of
the conversion obligation in cash. In the event that we are
required to repurchase the Notes or upon conversion of the
Notes, we may not have sufficient financial resources to satisfy
all of our obligations under the Notes and our other debt
instruments. Our failure to pay the repurchase price when due,
to pay cash upon conversion of the Notes, or similarly fail to
meet our payment obligations, would result in a default under
the indenture governing the Notes.
Conversion
of the Notes may affect the market price of our common stock and
may dilute the ownership of existing stockholders.
The conversion of some or all of the Notes and any sales in the
public market of our common stock issued upon such conversion
could adversely affect the market price of our common stock. The
existence of the Notes may encourage short selling by market
participants because the conversion of the Notes could depress
our common stock price. In addition, the conversion of some or
all of the Notes could dilute the ownership interests of
existing stockholders to the extent that shares of our common
stock are issued upon conversion.
Our
reported earnings per share may be more volatile because of the
contingent conversion provision of the Notes.
The Notes may have a dilutive effect on earnings per share in
any period in which the market price of our common stock exceeds
the conversion price for the Notes as a result of the inclusion
of the underlying shares in the fully diluted earnings per share
calculation. Volatility in our stock price could cause this
condition or other conversion conditions to be met in one
quarter and not in a subsequent quarter, increasing the
volatility of fully diluted earnings per share.
Because
most of our licenses are renewable on an annual basis, a
reduction in our license renewal rate could significantly reduce
our revenues.
Our clients have no obligation to renew their licenses for our
products after the expiration of the initial license period,
which is typically one year, and some clients have elected not
to do so. A decline in license renewal rates could cause our
revenues to decline. We have limited historical data with
respect to rates of renewals, so we cannot accurately predict
future renewal rates. Our license renewal rates may decline or
fluctuate as a result of a number of factors, including client
dissatisfaction with our products and services, our failure to
update our products to maintain their attractiveness in the
market or budgetary constraints or changes in budget priorities
faced by our clients.
We may experience difficulties that could delay or prevent the
successful development, introduction and sale of new products
under development. If introduced for sale, the new products may
not adequately meet the requirements of the marketplace and may
not achieve any significant degree of market acceptance, which
could cause our financial results to suffer. In addition, during
the development period for the new products, our customers may
defer or forego purchases of our products and services. We often
obtain renewable client contracts in acquisitions, and if we
experience a decrease in the renewal rate from expected levels
it could reduce revenues below our expectations.
Because
we generally recognize revenues ratably over the term of our
contract with a client, downturns or upturns in sales will not
be fully reflected in our operating results until future
periods.
We recognize most of our revenues from clients monthly over the
terms of their agreements, which are typically 12 months,
although terms can range from one month to over 60 months.
As a result, much of the revenue we report in each quarter is
attributable to agreements entered into during previous
quarters. Consequently, a decline in sales, client renewals, or
market acceptance of our products in any one quarter would not
necessarily be fully reflected in the revenues in that quarter,
and would negatively affect our revenues and profitability in
future
39
quarters. This ratable revenue recognition also makes it
difficult for us to rapidly increase our revenues through
additional sales in any period, as revenues from new clients
must be recognized over the applicable agreement term.
Our
operating margins may suffer if our professional services
revenues increase in proportion to total revenues because our
professional services revenues have lower gross
margins.
Because our professional services revenues typically have lower
gross margins than our product revenues, an increase in the
percentage of total revenues represented by professional
services revenues could have a detrimental impact on our overall
gross margins, and could adversely affect our operating results.
In addition, we sometimes subcontract professional services to
third parties, which further reduces our gross margins on these
professional services. As a result, an increase in the
percentage of professional services provided by third-party
consultants could lower our overall gross margins.
If our
products contain errors, new product releases are delayed or our
services are disrupted, we could lose new sales and be subject
to significant liability claims.
Because our software products are complex, they may contain
undetected errors or defects, known as bugs. Bugs can be
detected at any point in a products life cycle, but are
more common when a new product is introduced or when new
versions are released. In the past, we have encountered product
development delays and defects in our products. We expect that,
despite our testing, errors will be found in new products and
product enhancements in the future. In addition, our service
offerings may be disrupted causing delays or interruptions in
the services provided to our clients. Significant errors in our
products or disruptions in the provision of our services could
lead to:
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delays in or loss of market acceptance of our products;
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diversion of our resources;
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a lower rate of license renewals or upgrades;
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injury to our reputation; and
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increased service expenses or payment of damages.
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Because our clients use our products to store, retrieve and
utilize critical information, we may be subject to significant
liability claims if our products do not work properly or if the
provision of our services is disrupted. Such an event could
result in significant expenses, disrupt sales and affect our
reputation and that of our products. We cannot be certain that
the limitations of liability set forth in our licenses and
agreements would be enforceable or would otherwise protect us
from liability for damages and our insurance may not cover all
or any of the claims. A material liability claim against us,
regardless of its merit or its outcome, could result in
substantial costs, significantly harm our business reputation
and divert managements attention from our operations.
The
length and unpredictability of the sales cycle for our software
could delay new sales and cause our revenues and cash flows for
any given quarter to fail to meet our projections or market
expectations.
The sales cycle between our initial contact with a potential
client and the signing of a license with that client typically
ranges from 6 to 18 months. As a result of this lengthy
sales cycle, we have only a limited ability to forecast the
timing of sales. A delay in or failure to complete license
transactions could harm our business and financial results, and
could cause our financial results to vary significantly from
quarter to quarter. Our sales cycle varies widely, reflecting
differences in our potential clients decision-making
processes, procurement requirements and budget cycles, and is
subject to significant risks over which we have little or no
control, including:
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clients budgetary constraints and priorities;
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the timing of our clients budget cycles;
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the need by some clients for lengthy evaluations that often
include both their administrators and faculties; and
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the length and timing of clients approval processes.
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40
Potential clients typically conduct extensive and lengthy
evaluations before committing to our products and services and
generally require us to expend substantial time, effort and
money educating them as to the value of our offerings. In light
of the ongoing economic disruption in the U.S. and
globally, we have experienced some lengthening of sales cycles
and, depending on the future economic climate, may see a
continuation of this trend. Our client base is diverse and each
component faces a unique set of risks, including, for example,
the possibility of state and local budget cuts for K-12
institutions or reduced enrollment in higher education, which
may affect our revenues and our ability to grow our business. If
the economic downturn worsens or is prolonged, our clients and
prospective clients may defer or cancel their purchases with us.
Our
sales cycle with international postsecondary education providers
and U.S. K-12 schools may be longer than our historical U.S.
postsecondary sales cycle, which could cause us to incur greater
costs and could reduce our operating margins.
As we target more of our sales efforts at international
postsecondary education providers and U.S. K-12 schools, we
could face greater costs, longer sales cycles and less
predictability in completing some of our sales, which may harm
our business. A potential clients decision to use our
products and services may be a decision involving multiple
institutions and, if so, these types of sales would require us
to provide greater levels of education to prospective clients
regarding the use and benefits of our products and services. In
addition, we expect that potential international postsecondary
and U.S. K-12 clients may demand more customization,
integration services and features. As a result of these factors,
these sales opportunities may require us to devote greater sales
support and professional services resources to individual sales,
thereby increasing the costs and time required to complete sales
and diverting sales and professional services resources to a
smaller number of international and U.S. K-12 transactions.
We may
have exposure to greater than anticipated tax
liabilities.
We are subject to income taxes and other taxes in a variety of
jurisdictions and are subject to review by both domestic and
foreign taxation authorities. The determination of our provision
for income taxes and other tax liabilities requires significant
judgment and the ultimate tax outcome may differ from the
amounts recorded in our consolidated financial statements, which
may materially affect our financial results in the period or
periods for which such determination is made.
Our
ability to utilize our net operating loss carryforwards may be
limited.
Our federal net operating loss carryforwards are subject to
limitations on how much may be utilized on an annual basis. The
use of the net operating loss carryforwards may have additional
limitations resulting from future ownership changes or other
factors under Section 382 of the Internal Revenue Code.
If our net operating loss carryforwards are further limited, and
we have taxable income which exceeds the available net operating
loss carryforwards for that period, we would incur an income tax
liability even though net operating loss carryforwards may be
available in future years prior to their expiration. Any such
income tax liability may adversely affect our future cash flow,
financial position and financial results.
The
investment of our cash balances are subject to risks that may
cause losses and affect the liquidity of these
investments.
We hold our cash in a variety of marketable investments which
are generally investment grade, liquid, short-term securities
and money market instruments denominated in U.S. dollars.
If the carrying value of our investments exceeds the fair value,
and the decline in fair value is deemed to be
other-than-temporary,
we will be required to further write down the value of our
investments, which would be reflected in our statement of
operations for that period. With the continued unstable credit
environment, we might incur significant realized, unrealized or
impairment losses associated with these investments.
41
Our
future success depends on our ability to continue to retain and
attract qualified employees.
Our future success depends upon the continued service of our key
management, technical, sales and other critical personnel,
including employees who joined Blackboard in connection with our
recent acquisitions. Whether we are able to execute effectively
on our business strategy will depend in large part on how well
key management and other personnel perform in their positions
and are integrated within our company. Key personnel have left
our company over the years, including our former Chief Financial
Officer during 2010, and there may be additional departures of
key personnel from time to time. In addition, as we seek to
expand our global organization, the hiring of qualified sales,
technical and support personnel has been difficult due to the
limited number of qualified professionals. Failure to attract,
integrate and retain key personnel would result in disruptions
to our operations, including adversely affecting the timeliness
of product releases, the successful implementation and
completion of company initiatives and the results of our
operations.
If we
do not maintain the compatibility of our products with
third-party applications that our clients use in conjunction
with our products, demand for our products could
decline.
Our software applications can be used with a variety of
third-party applications used by our clients to extend the
functionality of our products, which we believe contributes to
the attractiveness of our products in the market. If we are not
able to maintain the compatibility of our products with
third-party applications, demand for our products could decline,
and we could lose sales. We may desire in the future to make our
products compatible with new or existing third-party
applications that achieve popularity within the education
marketplace, and these third-party applications may not be
compatible with our designs. Any failure on our part to modify
our applications to ensure compatibility with such third-party
applications would reduce demand for our products and services.
If we
are unable to obtain sufficient quantities of the hardware
products we sell in a timely manner, our sales could
decline.
We rely on various third-party companies to provide us with
hardware products which we sell to our clients. Such companies
include manufacturers of third-party products and manufacturers
of
Blackboard Transact
hardware products to which we have
outsourced our manufacturing operations. The failure to obtain
sufficient quantities of the products we sell to our clients or
any substantial delays or product quality problems associated
with our obtaining such products could decrease our sales.
If we
are unable to protect our proprietary technology and other
rights, it will reduce our ability to compete for
business.
If we are unable to protect our intellectual property, our
competitors could use our intellectual property to market
products similar to our products, which could decrease demand
for our products. In addition, we may be unable to prevent the
use of our products by persons who have not paid the required
license fee, which could reduce our revenues. We rely on a
combination of copyright, patent, trademark and trade secret
laws, as well as licensing agreements, third-party nondisclosure
agreements and other contractual provisions and technical
measures, to protect our intellectual property rights. These
protections may not be adequate to prevent our competitors from
copying or reverse-engineering our products, and these
protections may be costly and difficult to enforce. Our
competitors may independently develop technologies that are
substantially equivalent or superior to our technology. To
protect our trade secrets and other proprietary information, we
require employees, consultants, advisors and collaborators to
enter into confidentiality agreements. These agreements may not
provide meaningful protection for our trade secrets, know-how or
other proprietary information in the event of any unauthorized
use, misappropriation or disclosure of such trade secrets,
know-how or other proprietary information. The protective
mechanisms we include in our products may not be sufficient to
prevent unauthorized copying. Existing copyright laws afford
only limited protection for our intellectual property rights and
may not protect such rights in the event competitors
independently develop products similar to ours. In addition, the
laws of some countries in which our products are or may be
licensed do not protect our products and intellectual property
rights to the same extent as do the laws of the United States.
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If we
are found to have infringed the proprietary rights of others, we
could be required to redesign our products, pay significant
royalties or enter into license agreements with third
parties.
A third party may assert that our technology violates its
intellectual property rights. As the number of products in our
markets increases and the functionality of these products
further overlaps, we believe that infringement claims may become
more common. Any claims, regardless of their merit, could:
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be expensive and time consuming to defend;
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force us to stop licensing our products that incorporate the
challenged intellectual property;
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require us to redesign our products and reimburse certain costs
to our clients;
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divert managements attention and other company
resources; and
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require us to enter into royalty or licensing agreements in
order to obtain the right to use necessary technologies, which
may not be available on terms acceptable to us, or at all.
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The
nature of our business and our reliance on intellectual property
and other proprietary information subjects us to the risks of
litigation.
We are in an industry where litigation is common, including
litigation related to copyright, patent, trademark and trade
secret rights, and other types of claims. Litigation can be
expensive and disruptive to normal business operations. The
results of litigation are inherently uncertain and may result in
adverse rulings or decisions. We may enter into settlements or
be subject to judgments that may result in an obligation to pay
significant monetary damages, prevent us from operating one or
more elements of our business or otherwise hurt our operations.
Expansion
of our business internationally will subject our business to
additional economic and operational risks that could increase
our costs and make it difficult for us to operate
profitably.
One of our key growth strategies is to pursue international
expansion. Expansion of our international operations may require
significant expenditure of financial and management resources
and result in increased administrative and compliance costs. As
a result of such expansion, we will be increasingly subject to
the risks inherent in conducting business internationally,
including:
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foreign currency fluctuations, which could result in reduced
revenues and increased operating expenses;
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potentially longer payment and sales cycles;
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difficulty in collecting accounts receivable;
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the effect of applicable foreign tax structures, including tax
rates that may be higher than tax rates in the United States or
taxes that may be duplicative of those imposed in the United
States;
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tariffs and trade barriers;
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general economic and political conditions in each country;
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inadequate intellectual property protection in foreign countries;
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uncertainty regarding liability for information retrieved and
replicated in foreign countries;
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the difficulties and increased expenses of complying with a
variety of foreign laws, regulations and trade
standards; and
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unexpected changes in regulatory requirements.
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Unauthorized
disclosure of data, whether through breach of our computer
systems or otherwise, could expose us to protracted and costly
litigation or cause us to lose clients.
Maintaining the security of our systems is of critical
importance for our clients because they may involve the storage
and transmission of proprietary and confidential client and
student information, including personal student
43
information and consumer financial data, such as credit card
numbers. This area is heavily regulated in many countries in
which we operate, including the United States. Individuals
and groups may develop and deploy viruses, worms and other
malicious software programs that attack or attempt to infiltrate
our products. If our security measures are breached as a result
of third-party action, employee error, malfeasance or otherwise,
we could be subject to liability or our business could be
interrupted. Penetration of our network security could have a
negative impact on our reputation, could lead our present and
potential clients to choose competing offerings, and could
result in legal or regulatory action against us. Even if we do
not encounter a security breach ourselves, a well-publicized
breach of the consumer data security of another company could
lead to a general public loss of confidence in the use of our
products, which could significantly diminish the attractiveness
of our products and services.
Operational
failures in our network infrastructure could disrupt our remote
hosting services, could cause us to lose clients and sales to
potential clients and could result in increased expenses and
reduced revenues.
Unanticipated problems affecting our network systems could cause
interruptions or delays in the delivery of the hosting services
we provide to some of our clients. We provide remote hosting
through computer hardware that is currently located in
third-party co-location facilities in various locations in the
United States, The Netherlands and Australia. We do not control
the operation of these co-location facilities. Lengthy
interruptions in our hosting service could be caused by the
occurrence of a natural disaster, power loss, vandalism or other
telecommunications problems at the co-location facilities or if
these co-location facilities were to close without adequate
notice. Although we have developed redundancies in some of our
systems, we have experienced problems of this nature from time
to time in the past, and we will continue to be exposed to the
risk of network failures in the future. We currently do not have
adequate computer hardware and systems to provide alternative
service for most of our hosted clients in the event of an
extended loss of service at the co-location facilities. Some of
our co-location facilities are served by data backup redundancy
at other facilities. However, they are not equipped to provide
full disaster recovery to all of our hosted clients. If there
are operational failures in our network infrastructure that
cause interruptions, slower response times, loss of data or
extended loss of service for our remotely hosted clients, we may
be required to issue credits or pay penalties, current clients
may terminate their contracts or elect not to renew them, and we
may lose sales to potential clients. If we determine that we
need additional hardware and systems, we may be required to make
further investments in our network infrastructure.
U.S.
and foreign government regulation of our products and services
could cause us to incur significant expenses, and failure to
comply with applicable regulations could make our business less
efficient or even impossible.
The application of existing laws and regulations potentially
applicable to our products and services, including regulations
relating to issues such as privacy, telecommunications,
defamation, pricing, advertising, taxation, consumer protection,
content regulation, quality of products and services and
intellectual property ownership and infringement, can be
unclear. It is possible that U.S., state, local and foreign
governments might attempt to regulate our products and services
or prosecute us for violations of their laws. In addition, these
laws may be modified and new laws may be enacted in the future,
which could increase the costs of regulatory compliance for us
or force us to change our business practices. Any existing or
new legislation applicable to us could expose us to substantial
liability, including significant expenses necessary to comply
with such laws and regulations, and dampen the growth in use of
our products and services.
We may
be subject to state and federal financial services regulation,
and any violation of any present or future regulation could
expose us to liability, force us to change our business
practices or force us to stop selling or modify our products and
services.
Our transaction processing product and service offering could be
subject to state and federal financial services regulation or
industry-mandated requirements. The
Blackboard Transact
platform supports the creation and management of student
debit accounts and the processing of payments against those
accounts for both on-campus vendors and off-campus merchants.
For example, one or more federal or state governmental agencies
that regulate or monitor banks or other types of providers of
electronic commerce services may conclude that we are engaged in
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banking or other financial services activities that are
regulated by the Federal Reserve under the U.S. Federal
Electronic Funds Transfer Act or Regulation E thereunder or
by state agencies under similar state statutes or regulations.
Regulatory requirements may include, for example:
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disclosure of consumer rights and our business policies and
practices;
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restrictions on uses and disclosures of customer information;
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error resolution procedures;
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limitations on consumers liability for unauthorized
account activity;
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data security requirements;
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government registration; and
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reporting and documentation requirements.
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A number of states have enacted legislation regulating check
sellers, money transmitters or transaction settlement service
providers as banks. If we were deemed to be in violation of any
current or future regulations, we could be exposed to financial
liability and adverse publicity or forced to change our business
practices or stop selling some of our products and services. As
a result, we could face significant legal fees, delays in
extending our product and services offerings, and damage to our
reputation that could harm our business and reduce demand for
our products and services. Even if we are not required to change
our business practices, we could be required to obtain licenses
or regulatory approvals that could cause us to incur substantial
costs.
Item 6.
Exhibits.
(a) Exhibits:
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Exhibit
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No.
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Description
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31
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.1
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Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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31
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.2
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Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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32
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.1
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Certification of Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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32
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.2
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Certification of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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101
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The following financial information from the Registrants
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2010, filed with the
Securities and Exchange Commission on November 5, 2010,
formatted in eXtensible Business Reporting Language:
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(i) Unaudited Consolidated Balance Sheets at
September 30, 2010 and December 31, 2009,
(ii) Unaudited Consolidated Statement of Operations for the
Three and Nine months ended September 30, 2010 and 2009,
(iii) Unaudited Consolidated Statements of Cash Flows for
the Three and Nine months ended September 30, 2010 and 2009
and (iv) Notes to Unaudited Consolidated Financial
Statements (tagged as blocks of text).*
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*
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This exhibit will not be deemed filed for purposes
of Section 18 of the Securities Exchange Act of 1934
(15 U.S.C. 78r), or otherwise subject to the liability of
that section. Such exhibit will not be deemed to be incorporated
by reference into any filing under the Securities Act or
Securities Exchange Act, except to the extent that the
Registrant specifically incorporates it by reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Blackboard Inc.
John E. Kinzer
Chief Financial Officer
(On behalf of the registrant and as Principal
Financial Officer)
Dated: November 5, 2010
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