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 June 30, 2011
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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.
(Address of Principal
Executive Offices)
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20001
(Zip
Code)
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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 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
(Do not check if a smaller
reporting company)
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Smaller reporting
company
o
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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 July 31, 2011
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Common Stock, $0.01 par value
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35,137,816
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Blackboard
Inc.
Quarterly Report on
Form 10-Q
For the Quarter Ended June 30, 2011
INDEX
Throughout this Quarterly Report on
Form 10-Q,
the terms we, us, our and
Blackboard refer to Blackboard Inc. and its
subsidiaries.
ii
PART I
FINANCIAL INFORMATION
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Item 1.
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Consolidated
Financial Statements
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BLACKBOARD
INC.
(in thousands, except share and per share
data)
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December 31,
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June 30,
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2010
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2011
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Current assets:
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Cash and cash equivalents
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$
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70,314
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$
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84,676
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Accounts receivable, net of allowance for doubtful accounts of
$994 and $1,435, respectively
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89,914
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154,986
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Prepaid expenses and other current assets
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16,961
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23,400
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Deferred tax asset, current portion
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5,818
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5,818
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Deferred cost of revenues
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3,256
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4,788
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Total current assets
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186,263
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273,668
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Deferred tax asset, noncurrent portion
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15,185
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25,577
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Restricted cash
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5,741
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5,714
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Property and equipment, net
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43,002
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45,388
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Other assets
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1,582
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1,670
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Goodwill
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478,728
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481,935
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Intangible assets, net
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116,649
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105,328
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Total assets
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$
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847,150
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$
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939,280
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Current liabilities:
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Accounts payable
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$
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1,818
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$
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5,042
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Accrued expenses
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41,018
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64,183
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Deferred rent, current portion
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450
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789
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Deferred revenues, current portion
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211,752
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214,433
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Revolving credit facility
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46,000
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Convertible senior notes, net of debt discount of $2,674 at
December 31, 2010
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162,326
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165,000
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Total current liabilities
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417,364
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495,447
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Deferred rent, noncurrent portion
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11,978
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11,561
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Deferred tax liability, noncurrent portion
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3,502
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4,943
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Deferred revenues, noncurrent portion
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6,223
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4,764
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Total liabilities
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439,067
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516,715
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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, $0.01 par value; 200,000,000 shares
authorized; 34,666,197 and 35,110,317 shares issued and
outstanding, respectively
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347
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351
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Additional paid-in capital
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465,908
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486,540
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Accumulated other comprehensive income, net
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794
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2,056
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Accumulated deficit
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(58,966
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)
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(66,382
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)
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Total stockholders equity
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408,083
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422,565
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Total liabilities and stockholders equity
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$
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847,150
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$
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939,280
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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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Six Months Ended
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June 30,
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June 30,
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2010
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2011
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2010
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2011
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Revenues:
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Product
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$
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97,474
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$
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114,297
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$
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191,204
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$
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223,682
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Professional services
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10,254
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9,864
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17,590
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19,235
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Total revenues
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107,728
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124,161
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208,794
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242,917
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Operating expenses:
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Cost of product revenues, excludes $2,816 and $1,085 for the
three months ended June 30, 2010 and 2011, respectively,
and $5,324 and $2,645 for the six months ended June 30,
2010 and 2011, respectively, in amortization of acquired
technology included in amortization of intangibles resulting
from acquisitions shown below(1)
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27,409
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32,542
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51,943
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66,952
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Cost of professional services revenues(1)
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5,386
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6,284
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9,865
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12,963
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Research and development(1)
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12,047
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16,866
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24,252
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33,437
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Sales and marketing(1)
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27,930
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40,382
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53,245
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75,021
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General and administrative(1)
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16,851
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24,300
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31,556
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42,970
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Amortization of intangibles resulting from acquisitions
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9,359
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7,644
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18,337
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16,815
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Total operating expenses
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98,982
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128,018
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189,198
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248,158
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Income (loss) from operations
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8,746
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(3,857
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)
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19,596
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(5,241
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)
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Other expense, net:
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Interest expense
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(2,908
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)
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(2,937
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)
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(5,796
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)
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(6,099
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)
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Interest income
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50
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12
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71
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34
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Other expense, net
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(379
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)
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(198
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)
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(906
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)
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(630
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)
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Income (loss) before (provision for) benefit from income taxes
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5,509
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(6,980
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)
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12,965
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(11,936
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)
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(Provision for) benefit from income taxes
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(1,149
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)
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2,920
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(3,569
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)
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|
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4,520
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Net income (loss)
|
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$
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4,360
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$
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(4,060
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)
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$
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9,396
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$
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(7,416
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)
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Net income (loss) per common share:
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Basic
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$
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0.13
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$
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(0.12
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)
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$
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0.28
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|
$
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(0.21
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)
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Diluted
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$
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0.13
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|
$
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(0.12
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)
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$
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0.27
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|
$
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(0.21
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)
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Weighted average number of common shares:
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Basic
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34,128,218
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35,030,028
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33,798,698
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34,895,971
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|
|
|
|
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Diluted
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34,769,318
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35,030,028
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34,629,788
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34,895,971
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(1) Includes the following amounts related to stock-based
compensation:
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Cost of product revenues
|
|
$
|
264
|
|
|
$
|
332
|
|
|
$
|
607
|
|
|
$
|
686
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|
Cost of professional services revenues
|
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|
149
|
|
|
|
162
|
|
|
|
297
|
|
|
|
366
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|
Research and development
|
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|
296
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|
|
|
334
|
|
|
|
563
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|
670
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|
Sales and marketing
|
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|
1,858
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|
|
|
2,294
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|
|
|
3,721
|
|
|
|
4,382
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General and administrative
|
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|
2,500
|
|
|
|
2,496
|
|
|
|
4,835
|
|
|
|
4,885
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|
See notes to unaudited consolidated financial statements.
2
BLACKBOARD
INC.
(in thousands)
|
|
|
|
|
|
|
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Six Months
|
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|
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Ended June 30,
|
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2010
|
|
|
2011
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,396
|
|
|
$
|
(7,416
|
)
|
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
1,266
|
|
|
|
(10,096
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
(2,799
|
)
|
|
|
(174
|
)
|
Amortization of debt discount and issuance costs
|
|
|
3,065
|
|
|
|
2,996
|
|
Depreciation and amortization
|
|
|
9,537
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|
|
|
12,252
|
|
Amortization of intangibles resulting from acquisitions
|
|
|
18,337
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|
|
|
16,815
|
|
Change in allowance for doubtful accounts
|
|
|
(120
|
)
|
|
|
442
|
|
Stock-based compensation
|
|
|
10,023
|
|
|
|
10,989
|
|
Changes in operating assets and liabilities, net of effect of
acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(15,317
|
)
|
|
|
(65,152
|
)
|
Prepaid expenses and other current assets
|
|
|
(1,183
|
)
|
|
|
(6,502
|
)
|
Deferred cost of revenues
|
|
|
2,156
|
|
|
|
(1,532
|
)
|
Accounts payable
|
|
|
171
|
|
|
|
3,189
|
|
Accrued expenses
|
|
|
8,384
|
|
|
|
23,134
|
|
Deferred rent
|
|
|
(256
|
)
|
|
|
(78
|
)
|
Deferred revenues
|
|
|
(46,227
|
)
|
|
|
866
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(3,567
|
)
|
|
|
(20,267
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(40,158
|
)
|
|
|
(6,107
|
)
|
Purchases of property and equipment
|
|
|
(12,791
|
)
|
|
|
(14,638
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(52,949
|
)
|
|
|
(20,745
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Releases of letters of credit
|
|
|
61
|
|
|
|
27
|
|
Payment for debt issuance costs
|
|
|
|
|
|
|
(300
|
)
|
Proceeds from revolving credit facility
|
|
|
|
|
|
|
46,000
|
|
Excess tax benefits from stock-based compensation
|
|
|
2,799
|
|
|
|
174
|
|
Proceeds from exercise of stock options
|
|
|
23,587
|
|
|
|
9,473
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
26,447
|
|
|
|
55,374
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(30,069
|
)
|
|
|
14,362
|
|
Cash and cash equivalents at beginning of period
|
|
|
167,353
|
|
|
|
70,314
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
137,284
|
|
|
$
|
84,676
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
3
BLACKBOARD
INC.
For the Three and Six Months Ended June 30, 2010 and
2011
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 Companys software applications are
delivered in six product lines:
Blackboard
Learn
tm
;
Blackboard
Transact
tm
;
Blackboard
Connect
tm
;
Blackboard
Mobile
tm
;
Blackboard
Collaborate
tm
;
and
Blackboard
Analytics
tm
.
The Company also offers application hosting for clients who
prefer to outsource the management of their
Blackboard Learn
systems, and the
Blackboard Student
Services
sm
offering, which includes student lifecycle management and IT
support services. In addition, the Company offers a variety of
professional services, including strategic consulting, project
management, custom application development and training.
Proposed
Merger with an Affiliate of Providence Equity Partners
L.L.C.
On June 30, 2011, the Company, Bulldog Holdings, LLC, a
Delaware limited liability company (Parent), and
Bulldog Acquisition Sub, Inc., a Delaware corporation and a
wholly owned subsidiary of Parent (Acquisition Sub),
entered into an Agreement and Plan of Merger (the merger
agreement) pursuant to which Acquisition Sub will, upon
the terms and subject to the conditions thereof, merge with and
into Blackboard (the merger), with Blackboard
surviving the merger as a wholly owned subsidiary of Parent.
Parent and Acquisition Sub are affiliates of Providence Equity
Partners L.L.C. The Companys stockholders must adopt the
merger agreement for the merger to occur.
Upon the merger becoming effective (the Effective
Time), each share of the Companys common stock
issued and outstanding immediately prior to the Effective Time
will be converted into the right to receive $45.00 in cash,
without interest (the Per Share Consideration), on
the terms and subject to the conditions set forth in the merger
agreement, excluding shares that are: (i) held by the
Company or any wholly owned subsidiary of the Company (or held
in the Companys treasury); (ii) held by Parent,
Acquisition Sub or any other direct or indirect wholly owned
subsidiary of Parent; or (iii) held by any stockholders of
the Company who properly exercise their appraisal rights under
Delaware law.
The completion of the merger is subject to various customary
closing conditions, including (i) the adoption of the
merger agreement by the stockholders of the Company entitled to
vote thereon, (ii) no court having issued an injunction
that prohibits the consummation of the merger and no court or
governmental entity having enacted a law, rule or regulation
that prohibits the consummation of the merger and (iii) the
expiration or termination of the waiting period applicable to
the consummation of the merger under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended. The transaction
is expected to close during the second half of 2011.
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2.
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Significant
Accounting Policies
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Basis
of Presentation
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 six
months ended June 30, 2011 are not necessarily indicative
of the results that may be expected for the full fiscal year.
The consolidated balance sheet at December 31, 2010 has
4
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2009 and 2010 and for each of the three
years in the period ended December 31, 2010 included in the
Companys Annual Report on
Form 10-K
filed with the Securities and Exchange Commission on
February 18, 2011.
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.
Reclassifications
Certain amounts in the prior years financial statements
have been reclassified to conform to the current year
presentation.
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
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
5
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
liabilities that were measured at fair value as of
December 31, 2010 and June 30, 2011, by level within
the fair value hierarchy (in thousands):
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Quoted Prices in
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Significant
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Active Markets for
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Significant Other
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Unobservable
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December 31,
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Identical Assets
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Observable Inputs
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Inputs
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2010
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(Level 1)
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(Level 2)
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(Level 3)
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Assets:
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Cash equivalents(1)
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$
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40,009
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$
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40,009
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$
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$
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Liabilities:
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Convertible senior notes(2)
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$
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169,538
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$
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169,538
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$
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$
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Quoted Prices in
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Significant
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Active Markets for
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Significant Other
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Unobservable
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June 30,
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Identical Assets
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Observable Inputs
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Inputs
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2011
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(Level 1)
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(Level 2)
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(Level 3)
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Assets:
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Cash equivalents(1)
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$
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31,020
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$
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31,020
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$
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$
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Liabilities:
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Convertible senior notes(2)
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$
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165,000
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$
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165,000
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$
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$
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(1)
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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.
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(2)
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The fair value of the Companys convertible senior notes is
based on the quoted market price.
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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 six months ended
June 30, 2010 and 2011, there were no fair value
adjustments for assets and liabilities measured on a
non-recurring basis.
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, accrued expenses and
amounts outstanding under the revolving credit facility.
Revenue
Recognition and Deferred Revenue
The Companys revenues are derived from two sources:
product sales and professional services sales. Product revenues
include software license fees, subscription fees from customers
accessing its on-demand application services, student support
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 and
hosting separate from software for the majority of its products.
Accordingly, when licenses are sold in conjunction with the
Companys support and maintenance and hosting, license
revenue is recognized over the term of the service period. When
licenses of certain offerings are sold in conjunction with
support and maintenance and hosting where the Company does have
VSOE, the Company recognizes the license revenue upon
6
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
delivery of the license and recognizes the support and
maintenance and hosting revenues over the term of the service
period.
Software and hosting
set-up
fees
are recognized ratably over the term of the agreements.
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.
Product revenues and cost of product revenues related to
hardware and software sales executed or significantly modified
after December 31, 2009 in the
Blackboard Transact
product line are generally 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 support deliverable is based
on third party evidence. 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.
For hardware and software sales executed before
December 31, 2009, in the absence of VSOE, all revenue from
such sales was recognized ratably over the term of the
applicable maintenance service period.
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. Non-specified upgrades of the
Companys product are provided only on a
when-and-if-available
basis. Any contingencies, such as rights of return, conditions
of acceptance, warranties and price protection, are accounted
for as a separate element. The effect of accounting for these
contingencies included in revenue arrangements has not
historically 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 included as
amortization of intangibles acquired in acquisitions.
Amortization expense related to acquired technology was
$2.8 million and $1.1 million for the three months
ended June 30, 2010 and 2011, respectively, and
$5.3 million and $2.6 million for the six months ended
June 30, 2010 and 2011, respectively.
Deferred cost of revenues represents third-party support costs
and the cost of certain software that has been purchased and
sold in conjunction with the Companys products. These
costs are recognized as cost of revenues ratably over the same
period that deferred revenue is recognized as revenues. The
Company does not have transactions in which the deferred cost of
revenues exceed deferred revenues.
7
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Basic
and Diluted Net Income (Loss) per Common Share
Basic net income (loss) per common share excludes dilution for
potential common stock issuances and is computed by dividing net
income (loss) by the weighted-average number of common shares
outstanding for the period. Diluted net income (loss) per common
share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were
exercised or converted into common stock.
The following table provides a reconciliation of the numerators
and denominators used in computing basic and diluted net income
(loss) per common share:
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2010
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2011
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2010
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2011
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(In thousands, except share and per share amounts)
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Net income (loss)
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$
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4,360
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$
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(4,060
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)
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$
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9,396
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$
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(7,416
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)
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Weighted average shares outstanding, basic
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34,128,218
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35,030,028
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33,798,698
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34,895,971
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Dilutive effect of:
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Options to purchase common stock
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641,100
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831,090
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Weighted average shares outstanding, diluted
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34,769,318
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35,030,028
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34,629,788
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34,895,971
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Basic net income (loss) per common share
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$
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0.13
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$
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(0.12
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)
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$
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0.28
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$
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(0.21
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Diluted net income (loss) per common share
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$
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0.13
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$
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(0.12
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$
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0.27
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$
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(0.21
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The dilutive effect of restricted stock and options to purchase
an aggregate of 2,008,325 and 1,835,750 shares were not
included in the computations of diluted net income per common
share for the three and six months ended June 30, 2010,
respectively, as their effect would be anti-dilutive. The
dilutive effect of restricted stock and options to purchase an
aggregate of 4,753,444 shares were not included in the
computations of diluted net loss per common share for each of
the three and six months ended June 30, 2011, as their
effect would be anti-dilutive. In addition, the dilutive effect
of the 2,544,333 shares of common stock issuable upon
conversion at the base conversion price of the Companys
convertible promissory notes were not included in the
computation of diluted net income (loss) per common share for
each of the three and six months ended June 30, 2010 and
2011, 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
of foreign currency translation gains and losses, which was a
gain of $0.2 million and $1.3 million for the three
and six months ended June 30, 2011, representing the
difference between net loss and comprehensive net loss for the
period. There were no differences between net income and
comprehensive net income for the three and six months ended
June 30, 2010.
Recent
Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board
(FASB) amended the accounting standards related to
fair value measurements to provide a consistent definition of
fair value and ensure that the fair value measurement and
disclosure requirements are similar between U.S. GAAP and
International Financial Reporting Standards. The
8
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amended guidance changes certain fair value measurement
principles and enhances the disclosure requirements particularly
for Level 3 fair value measurements. This guidance is
effective for fiscal years, and interim periods within those
years, beginning after December 15, 2011 and early adoption
is not permitted. The Company does not believe the adoption of
this guidance will have a material impact on its consolidated
financial statements.
In June 2011, the FASB amended the accounting standards for the
presentation of comprehensive income. The amended guidance
requires an entity to present the total of comprehensive income,
the components of net income, and the components of other
comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive
statements. This guidance eliminates the option to present the
components of other comprehensive income as part of the
statement of equity. This guidance is effective for fiscal
years, and interim periods within those years, beginning after
December 15, 2011, and early adoption is permitted. The
Company does not believe the adoption of this guidance will have
a material impact on its consolidated financial statements.
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3.
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Mergers
and Acquisitions
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txttools
Limited Acquisition
During the three months ended March 31, 2011, the Company
acquired the outstanding equity of txttools Limited
(txttools) pursuant to the Share Purchase Agreement,
for £3.85 million in cash, or approximately
$6.1 million at the time of closing, net of cash acquired.
Transaction costs of approximately $0.1 million are
reflected in general and administrative expenses in the
consolidated statements of operations.
txttools is a provider of mass notification solutions in the
United Kingdom and Ireland for educational and government
organizations that allow clients to record, schedule, send and
track voice, email, text and short message service (SMS)
communications to their constituents. The Company believes the
acquisition of txttools supports the Companys long-term
strategic direction and the demands for innovative technology in
the education industry. Management believes that the acquisition
of txttools will help the Company meet the growing demands of
its clients in the United Kingdom and Ireland, including the
ability to send mass communications and notifications via
various means.
The Company has accounted for the merger under the acquisition
method of accounting. Of the total estimated purchase price of
$6.2 million, a preliminary estimate of $1.3 million
was allocated to net tangible liabilities assumed, and
$5.1 million was allocated to definite-lived intangible
assets acquired. Definite-lived intangible assets of
$5.1 million consist of the value assigned to
txttools customer relationships of $4.5 million and
developed and core technology of $0.6 million. The Company
will amortize the value of txttools customer relationships
over seven years and the developed and core technology over
three years. Approximately $2.4 million has been allocated
to goodwill and is not deductible for tax purposes. Goodwill
represents factors including expected synergies from combining
operations. The results of operations of txttools during the
three and six months ended June 30, 2011 were not material
to the Companys consolidated financial statements.
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 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.
Saf-T-Net was 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
9
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 accounted for the merger under the acquisition
method of accounting. Of the total purchase price of
$34.4 million, $6.9 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. The
Company amortizes the value of Saf-T-Nets customer
relationships over seven years and the developed and core
technology and trademarks, each over three years. Approximately
$25.6 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. The Company included the financial results of
Saf-T-Net in its consolidated financial statements beginning
March 20, 2010.
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4.
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Stock-Based
Compensation
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Stock
Incentive Plans
As of June 30, 2011, approximately 3.5 million shares
of common stock were available for future grants under the
Companys Amended and Restated 2004 Stock Incentive Plan
(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 four year period and have an
eight year expiration period.
The compensation cost that has been recognized in the unaudited
consolidated statements of operations for the Companys
stock incentive plans was $10.0 million and
$11.0 million for the six months ended June 30, 2010
and 2011, respectively. The total excess tax benefits recognized
for stock-based compensation arrangements was $2.8 million
and $0.2 million for the six months ended June 30,
2010 and 2011, 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 June 30, 2011, and changes
during the six months then ended are as follows (aggregate
intrinsic value in thousands):
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Number of
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Weighted Average
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|
|
Aggregate
|
|
|
|
Shares
|
|
|
Price/Share
|
|
|
Intrinsic Value
|
|
|
Exercisable at December 31, 2010
|
|
|
1,970,085
|
|
|
$
|
31.40
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
4,147,810
|
|
|
|
33.23
|
|
|
|
|
|
Granted
|
|
|
983,650
|
|
|
|
36.15
|
|
|
|
|
|
Exercised
|
|
|
(305,197
|
)
|
|
|
31.04
|
|
|
$
|
4,218
|
|
Cancelled
|
|
|
(192,819
|
)
|
|
|
35.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2011
|
|
|
4,633,444
|
|
|
|
33.89
|
|
|
|
44,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2011
|
|
|
2,266,225
|
|
|
$
|
32.51
|
|
|
$
|
24,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual lives for all options
outstanding under the Companys stock incentive plans at
June 30, 2010 and 2011 were 5.8 and 5.6 years,
respectively. The weighted average remaining contractual lives
for exercisable stock options at June 30, 2010 and 2011
were 4.9 and 4.4 years, respectively. As of June 30,
2011, 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 June 2015 with a weighted average recognition period of
approximately 1.4 years.
10
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 six months ended June 30, 2010 and 2011 was $15.95
and $13.58, respectively. The fair value of options that vested
was $8.9 million during each of the six months ended
June 30, 2010 and 2011. The fair value of each option is
estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions for stock options granted during the three and six
months ended June 30, 2010 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2010
|
|
2011
|
|
2010
|
|
2011
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
44.2
|
%
|
|
|
42.1
|
%
|
|
|
45.0
|
%
|
|
|
41.4
|
%
|
Risk-free interest rate
|
|
|
2.2
|
%
|
|
|
1.8
|
%
|
|
|
2.3
|
%
|
|
|
2.1
|
%
|
Expected life of options
|
|
|
4.6 years
|
|
|
|
4.6 years
|
|
|
|
4.7 years
|
|
|
|
4.6 years
|
|
Forfeiture rate
|
|
|
12.3
|
%
|
|
|
12.0
|
%
|
|
|
12.3
|
%
|
|
|
12.1
|
%
|
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 six months ended
June 30, 2010 and 2011 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 June 30, 2011, there was approximately
$22.4 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 1.9 years.
11
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
June 30, 2011, and changes during the six months then ended
are as follows (aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Fair Value/Share
|
|
|
Intrinsic Value
|
|
|
Unvested at December 31, 2010
|
|
|
|
|
|
|
707,604
|
|
|
$
|
37.15
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
204,970
|
|
|
|
36.35
|
|
|
|
|
|
Vested and issued
|
|
|
|
|
|
|
(97,075
|
)
|
|
|
32.99
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
(55,110
|
)
|
|
|
37.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at June 30, 2011
|
|
|
|
|
|
|
760,389
|
|
|
$
|
37.41
|
|
|
$
|
32,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Goodwill
and Intangible Assets
|
Goodwill and intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
Amortization
|
|
|
|
2010
|
|
|
2011
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
(In years)
|
|
|
Goodwill
|
|
$
|
478,728
|
|
|
$
|
481,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired technology
|
|
$
|
79,354
|
|
|
$
|
80,011
|
|
|
|
3.0
|
|
Accumulated amortization
|
|
|
(69,236
|
)
|
|
|
(71,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired technology, net
|
|
|
10,118
|
|
|
|
8,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts and customer lists
|
|
|
194,234
|
|
|
|
199,051
|
|
|
|
5.7
|
|
Accumulated amortization
|
|
|
(96,052
|
)
|
|
|
(109,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts and customer lists, net
|
|
|
98,182
|
|
|
|
89,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and domain names
|
|
|
6,232
|
|
|
|
6,263
|
|
|
|
2.8
|
|
Accumulated amortization
|
|
|
(2,609
|
)
|
|
|
(3,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and domain names, net
|
|
|
3,623
|
|
|
|
2,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and related costs
|
|
|
5,601
|
|
|
|
5,601
|
|
|
|
10.5
|
|
Accumulated amortization
|
|
|
(875
|
)
|
|
|
(1,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and related costs, net
|
|
|
4,726
|
|
|
|
4,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
116,649
|
|
|
$
|
105,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets from acquisitions are amortized over three to
ten years. Amortization expense related to intangible assets was
approximately $18.3 million and $16.8 million for the
six months ended June 30, 2010 and 2011, respectively.
Amortization expense for the years ending December 31,
2011, 2012, 2013, 2014 and 2015 is expected to be approximately
$31.8 million, $27.8 million, $18.2 million,
$11.6 million and $9.7 million, respectively.
|
|
6.
|
Credit
Facilities and Notes Payable
|
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 bore interest at a rate of 3.25% per year on the
12
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
principal amount, accruing from June 20, 2007. Interest was
payable semi-annually on January 1 and July 1. The Company
made interest payments of $2.7 million on each of
July 1, 2010 and July 1, 2011. The Notes were
scheduled to mature on July 1, 2027, subject to earlier
conversion, redemption or repurchase.
If a make-whole fundamental change, as defined in the Notes, had
occurred prior to July 1, 2011, the Company could have been
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 the
Companys common stock.
The Notes were not redeemable prior to July 1, 2011. On
July 1, 2011, the holders of the Notes required the Company
to repurchase substantially all of the Notes, in accordance with
their terms, at a redemption price, payable in cash, of 100% of
the principal amount of the Notes plus accrued and unpaid
interest. The Company redeemed, in whole, the remaining
outstanding Notes on August 1, 2011.
The liability and equity components of the Notes were separately
accounted for in a manner that reflected the Companys
nonconvertible debt borrowing rate because their terms included
partial cash settlement. The Company amortized the resulting
debt discount over the period the convertible debt was expected
to be outstanding as additional non-cash interest expense. The
Company 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 excess of
the proceeds received over the estimated fair value of the
liability component totaling $20.9 million was allocated to
the conversion (equity) component. The carrying amount of the
equity component of the Notes was $2.6 million at
December 31, 2010 and was fully amortized at June 30,
2011. The carrying amount of the equity component of the Notes
was recorded as a debt discount and was netted against the
remaining principal amount outstanding on the 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 $0.1 million at December 31, 2010 and was
fully amortized at June 30, 2011. The carrying amount of
the liability component of the debt issuance costs was recorded
as a debt discount and was netted against the remaining
principal amount outstanding on the unaudited consolidated
balance sheets.
The debt discount, which includes the equity component and the
liability component of the debt issuance costs, was 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 and $2.5 million for the three months
ended June 30, 2010 and 2011, respectively, which consisted
of $1.3 million in interest expense at a rate of 3.25% per
year for each of the three months ended June 30, 2010 and
2011 and $1.6 million and $1.2 million in amortization
of the debt discount for the three months ended June 30,
2010 and 2011, respectively. The Company recorded total interest
expense of approximately $5.8 million and $5.4 million
for the six months ended June 30, 2010 and 2011,
respectively, which consisted of $2.7 million in interest
expense at a rate of 3.25% per year for each of the six months
ended June 30, 2010 and 2011, and $3.1 million and
$2.7 million in amortization of the debt discount for the
six months ended June 30, 2010 and 2011, respectively.
The principal amount of the liability component of the Notes was
$165.0 million at December 31, 2010 and June 30,
2011. The unamortized debt discount was $2.7 million at
December 31, 2010 and was fully amortized at June 30,
2011. As the Notes were redeemed during the third quarter of
2011, the Company classified the net carrying amount of the
liability component of the Notes of $162.3 million and
$165.0 million as of December 31, 2010 and
June 30, 2011, respectively, as part of current liabilities
in the unaudited consolidated balance sheets.
The Company evaluated whether the Notes were considered to be
indexed to the Companys own stock using a two-step
approach to evaluate the Notes contingent exercise and
settlement provisions. The Company determined that the
Notes embedded conversion options were indexed to the
Companys own stock and, therefore, did not require
bifurcation and separate accounting.
13
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revolving
Credit Facility
On August 4, 2010, the Company entered into a five-year
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). The Credit Agreement
was amended on April 4, 2011 to increase the amount
available for borrowing from the original amount of
$175.0 million to an amount of up to $225.0 million.
Borrowings under the Credit Agreement may be used for working
capital needs and general corporate purposes, which may include
share repurchases, outstanding debt repayment and acquisitions.
Amounts outstanding 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. 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 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. In connection with amending the senior secured
credit facility, the Company incurred an additional
$0.3 million in debt issuance costs in April 2011, which is
amortized as interest expense over the remaining term of the
senior secured credit facility using the effective interest
method.
As of December 31, 2010, no amounts were outstanding under
the credit facility. As of June 30, 2011, the credit
facility had an outstanding principal balance of
$46.0 million. On July 1, 2011, the Company borrowed
an additional $150.0 million under the credit facility and
used the proceeds to repurchase the Notes.
The Company recorded total interest expense related to the
Credit Agreement of approximately $0.4 million and
$0.7 million for the three and six months ended
June 30, 2011, respectively.
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.
|
|
7.
|
Commitments
and Contingencies
|
On July 7, 2011, a purported class action lawsuit relating
to the transactions contemplated by the merger agreement was
filed in the Delaware Chancery Court against the Company, the
Board, Providence, Parent and Acquisition Sub entitled
Astor
BK Realty v. Michael L. Chasen, et. al.
On July 8,
2011, a purported class action lawsuit relating to the
transactions contemplated by the merger agreement was filed in
the Superior Court for the District of Columbia against the
Company, the Board, Providence, Parent and Acquisition Sub
entitled
Leroy Pogodzinski v. Blackboard Inc. et. al.
On July 19, 2011, a purported class action lawsuit
relating to the transactions contemplated by the merger
agreement was filed in the Superior Court for the District of
Columbia against the Company, the Board, Providence, Parent and
Acquisition Sub entitled
Eve Wachsler v. Blackboard Inc.
et. al.
14
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The lawsuits generally allege that the Board breached its
fiduciary duties by, among other things, approving the
transactions contemplated by the merger agreement, which
allegedly were financially unfair to the Company and its
stockholders, and agreeing to provisions in the merger agreement
that will allegedly prevent the Board from considering other
offers. The lawsuits further allege that certain defendants
aided and abetted these breaches. The lawsuits seek unspecified
damages and equitable relief, including an injunction halting
the transaction or rescission of the transaction as applicable.
On July 27, 2011, plaintiffs in the
Pogodzinski
and
Wachsler
matters moved to consolidate the actions in
Superior Court for the District of Columbia and for appointment
of their respective counsel as co-lead counsel. On
August 2, 2011, the
Pogodzinski
and
Wachsler
plaintiffs jointly filed an amended complaint which, in
addition to the claims described above, asserts a claim for
breach of fiduciary duty based on alleged misrepresentations
and/or
omissions of material facts in the Companys preliminary
proxy statement filed with the Securities and Exchange
Commission on July 22, 2011, relating to, among other
things, the sale process conducted by the Board and the
retention of, and analyses conducted by, the Companys
financial advisor. The plaintiffs contemporaneously filed a
motion for limited expedited discovery in connection with their
anticipated motion for a preliminary injunction. The motion to
consolidate and the motion to expedite are both currently
pending before the Superior Court. The Company intends to
vigorously defend these matters.
On August 2, 2011, all defendants filed motions to dismiss
the Delaware action.
The Company, from time to time, is subject to other litigation
relating to matters in the ordinary course of business. The
Company believes that any ultimate liability resulting from any
such other litigation will not have a material adverse effect on
the Companys results of operations, financial position or
cash flows.
|
|
8.
|
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.
15
|
|
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 typically license our individual software applications either
on a stand-alone basis or bundled as part of one of our six
product lines:
Blackboard Learn
;
Blackboard
Transact
;
Blackboard Connect
;
Blackboard
Mobile
;
Blackboard Collaborate
; and
Blackboard
Analytics
. We also offer application hosting for clients who
prefer to outsource the management of their
Blackboard
Learn
systems, and the
Blackboard Student
Services
SM
offering, which includes student lifecycle management and IT
support services. In addition, we offer a variety of
professional services, including strategic consulting, project
management, custom application development and training.
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,
Blackboard Mobile
primarily to U.S. postsecondary
and K-12 clients,
Blackboard Collaborate
primarily to
U.S. and Canadian postsecondary and K-12 clients,
Blackboard Analytics
primarily to U.S. postsecondary
clients, and
Blackboard Student Services
primarily to
U.S. and Canadian postsecondary clients.
Proposed
Merger with an Affiliate of Providence Equity Partners
L.L.C.
On June 30, 2011, we entered into a merger agreement with
an affiliate of Providence Equity Partners L.L.C. pursuant to
which a merger subsidiary would merge with and into us, with us
surviving as a wholly owned subsidiary of the acquiror.
Upon the merger becoming effective, subject to the terms and
conditions set forth in the merger agreement, each share of our
common stock would be converted into the right to receive $45.00
in cash.
The completion of the merger is subject to customary closing
conditions, including the approval of the merger agreement by
our stockholders. We expect the merger to close during the
second half of 2011.
Redemption
of Convertible Promissory Notes
We previously issued $165.0 million aggregate principal
amount of 3.25% Convertible Senior Notes due 2027 (the
Notes) in a public offering. We made interest
payments of $2.7 million on each of July 1, 2010 and
July 1, 2011. The Notes were scheduled to mature on
July 1, 2027, subject to earlier conversion, redemption or
repurchase. The Notes were not redeemable prior to July 1,
2011, but in accordance with their terms, on July 1, 2011,
the holders of the Notes required that we repurchase
substantially all of the Notes at a redemption price, payable in
cash, equal to 100% of their principal amount plus accrued and
unpaid interest. We redeemed the remaining outstanding Notes on
August 1, 2011.
16
Financial
Operations Overview
We have grown through internal growth and a number of strategic
relationships and acquisitions. In 2008, we acquired The NTI
Group, Inc., or NTI; in March 2010, we acquired Saf-T-Net, Inc.,
or Saf-T-Net; and in January 2011, we acquired txttools Limited,
or txttools. The technology we acquired in these transactions
provides the foundation for our
Blackboard Connect
platform, including the
AlertNow
service. In 2009, we
acquired ANGEL Learning, Inc., or ANGEL, a leading developer of
e-learning
software to the U.S. education industry. Also in 2009, we
acquired the business assets of Terriblyclever Design, LLC, or
Terriblyclever, including the technology that is the foundation
for our
Blackboard Mobile
platform. In August 2010, we
acquired Elluminate Inc., or Elluminate, and Wimba Inc., or
Wimba, to create our
Blackboard Collaborate
platform, and
in December 2010, we acquired the business assets of iStrategy,
LLC to create our new
Blackboard Analytics
platform. Also
in December 2010, we acquired Presidium Inc., or Presidium, a
company for which we held a warrant exercisable for 9.9% of the
equity interest, to create our new
Blackboard Student
Services
offering. We believe these acquisitions support our
long-term strategic direction and the demands for innovative
technology in the education industry, have helped us create
stronger, more flexible technology in support of teaching,
learning and student engagement, and accelerate the pace of
innovation and interoperability in
e-learning.
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, student support services and application
hosting services. We typically sell our licenses, student
support services and hosting services under annually renewable
agreements, and our clients generally pay the annual fees at the
beginning of the contract term. 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. 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 and we generally recognize these
revenues upon shipment of the products to our clients.
In addition to our products, we offer a variety of professional
services, including training, implementation, installation and
other consulting services such as strategic consulting, project
management, and custom application development. We perform
substantially all of our professional services on a
time-and-materials
basis. We recognize these revenues as the services are performed.
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. We generally recognize these costs upon shipment of
the products to our clients. 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 consolidated statements of
operations as amortization of intangibles acquired in
acquisitions. Amortization expense related to acquired
technology was $5.3 million and $2.6 million for the
six months ended June 30, 2010 and 2011, 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.
17
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.
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. For
additional information that may bear on our result of
operations, please see the sections captioned Risk
Factors in our most recent annual and quarterly reports
filed with the Securities and Exchange Commission. 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, 2010.
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, student support 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.
18
We do not have vendor-specific objective evidence, known as
VSOE, of fair value for our support and maintenance and hosting
separate from our software for the majority of our products.
Accordingly, when licenses are sold in conjunction with our
support and maintenance and hosting, we recognize the license
revenue over the term of the service period. When licenses of
certain offerings are sold in conjunction with our support and
maintenance and hosting where we do have VSOE, we recognize the
license revenue upon delivery of the license and recognize the
support and maintenance and hosting revenues over the term of
the service period.
We recognize software and hosting
set-up
fees
ratably over the term of the agreements.
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.
Product revenues and cost of product revenues related to
hardware and software sales executed or significantly modified
after December 31, 2009 in the
Blackboard Transact
product line are generally 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. 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. For
hardware and software sales executed before December 31,
2009, in the absence of VSOE, all revenue from such sales was
recognized ratably over the term of the applicable maintenance
service period.
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.
Recent Accounting Pronouncements
In May 2011,
the Financial Accounting Standards Board (FASB)
amended the accounting standards related to fair value
measurements to provide a consistent definition of fair value
and ensure that the fair value measurement and disclosure
requirements are similar between U.S. GAAP and
International Financial Reporting Standards. The amended
guidance changes certain fair value measurement principles and
enhances the disclosure requirements particularly for
Level 3 fair value measurements. This guidance is effective
for fiscal years, and interim periods within those years,
beginning after December 15, 2011 and early adoption is not
permitted. We do not believe the adoption of this guidance will
have a material impact on our consolidated financial statements.
In June 2011, the FASB amended the accounting standards for the
presentation of comprehensive income. The amended guidance
requires an entity to present the total of comprehensive income,
the components of net income, and the components of other
comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive
statements. This guidance eliminates the option to present the
components of other comprehensive income as part of the
statement of equity. This guidance is effective for fiscal
years, and interim periods within those years, beginning after
December 15, 2011, and early adoption is
19
permitted. We do not believe the adoption of this guidance will
have a material impact on our consolidated financial statements.
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 sheets 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, we believe it is
important to look at both revenues and deferred revenues.
In evaluating our revenues, we analyze them in two categories:
recurring revenues and non-recurring revenues.
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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, student
support 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. Unlike recurring revenues, which benefit both
from new sales and from the renewal of previously existing
sales, non-recurring revenues primarily reflect one-time sales
that do not contractually renew.
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.
Seasonality
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.
20
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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Three Months Ended
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Six Months Ended
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|
June 30,
|
|
|
June 30,
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|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
90
|
%
|
|
|
92
|
%
|
|
|
92
|
%
|
|
|
92
|
%
|
Professional services
|
|
|
10
|
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
Operating expenses:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues, excludes amortization of acquired
technology included in amortization of intangibles resulting
from acquisitions shown below
|
|
|
25
|
|
|
|
26
|
|
|
|
25
|
|
|
|
28
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Cost of professional services revenues
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|
|
5
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|
|
|
5
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|
|
|
5
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|
|
|
5
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|
Research and development
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|
|
11
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|
|
|
14
|
|
|
|
12
|
|
|
|
14
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Sales and marketing
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|
|
26
|
|
|
|
33
|
|
|
|
26
|
|
|
|
31
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|
General and administrative
|
|
|
16
|
|
|
|
19
|
|
|
|
15
|
|
|
|
17
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Amortization of intangibles resulting from acquisitions
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|
|
9
|
|
|
|
6
|
|
|
|
8
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
92
|
|
|
|
103
|
|
|
|
91
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
8
|
%
|
|
|
(3
|
)%
|
|
|
9
|
%
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2011 Compared to Three Months Ended
June 30, 2010
Our total revenues for the three months ended June 30, 2011
were $124.2 million, representing an increase of
$16.4 million, or 15%, as compared to $107.7 million
for the three months ended June 30, 2010.
A detail of our total revenues by classification is as follows:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2010
|
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|
2011
|
|
|
|
|
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|
Professional
|
|
|
|
|
|
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|
|
Professional
|
|
|
|
|
|
|
Product
|
|
|
Services
|
|
|
|
|
|
Product
|
|
|
Services
|
|
|
|
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Total
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Total
|
|
|
|
(Unaudited)
|
|
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(In millions)
|
|
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Recurring revenues
|
|
$
|
83.9
|
|
|
$
|
1.9
|
|
|
$
|
85.8
|
|
|
$
|
103.2
|
|
|
$
|
2.5
|
|
|
$
|
105.7
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Non-recurring revenues
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13.6
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|
8.3
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|
|
|
21.9
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|
11.1
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|
|
|
7.4
|
|
|
|
18.5
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|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
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|
|
|
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|
Total revenues
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|
$
|
97.5
|
|
|
$
|
10.2
|
|
|
$
|
107.7
|
|
|
$
|
114.3
|
|
|
$
|
9.9
|
|
|
$
|
124.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Product revenues.
Our product revenues,
including domestic and international, for the three months ended
June 30, 2011 were $114.3 million, representing an
increase of $16.8 million, or 17%, as compared to
$97.5 million for the three months ended June 30,
2010. Recurring product revenues increased by
$19.3 million, or 23%, for the three months ended
June 30, 2011 as compared to the three months ended
June 30, 2010. This increase in recurring revenues was
primarily due to a $5.9 million increase due to the
Elluminate and Wimba acquisitions that closed in August 2010 and
the resulting launch of our
Blackboard Collaborate
platform and a $5.3 million increase resulting from the
Presidium acquisition that closed in December 2010 and the
resulting launch of our
Blackboard Student Services
offering. The remaining increase in recurring product
revenues primarily resulted from an increase in
Blackboard
Mobile
revenues of $4.6 million, a $3.0 million
increase in managed hosting revenues and a $1.7 million
increase in revenues for subscription fees from customers
accessing our on-demand application services primarily related
to
Blackboard Connect
.
21
The decrease in non-recurring product revenues primarily relates
to lower revenues from
Blackboard Transact
due to the
benefit recognized in the three months ended June 30, 2010
due to our early adoption on January 1, 2010 of the change
in revenue recognition guidance under which more revenue is
recognized upfront.
Of our total revenues, our total international revenues for the
three months ended June 30, 2011 were $20.5 million,
representing an increase of $0.8 million, or 4%, as
compared to $19.7 million for the three months ended
June 30, 2010. International revenues as a percentage of
total revenues decreased to 17% for the three months ended
June 30, 2011 from 18% for the three months ended
June 30, 2010, primarily due to an increase in domestic
revenues. International product revenues, which consist
primarily of recurring product revenues, were $19.5 million
for the three months ended June 30, 2011, representing an
increase of $1.1 million, or 6%, as compared to
$18.4 million for the three months ended June 30,
2010. The increase in international recurring product revenues
was primarily due to an increase in international revenues from
the Elluminate and Wimba acquisitions that closed in August 2010
and led to the launch of our
Blackboard Collaborate
platform.
Professional services revenues.
Our
professional services revenues for the three months ended
June 30, 2011 were $9.9 million, representing a
decrease of $0.4 million, or 4%, as compared to
$10.2 million for the three months ended June 30,
2010. The decrease in professional services revenues was
primarily attributable to the timing of delivery and revenue
recognition for certain service engagements. As a percentage of
total revenues, professional services revenues were 10% and 8%
for the three months ended June 30, 2010 and 2011,
respectively.
Cost of product revenues.
Our cost of product
revenues for the three months ended June 30, 2011 was
$32.5 million, representing an increase of
$5.1 million, or 19%, as compared to $27.4 million for
the three months ended June 30, 2010. The increase in cost
of product revenues was primarily attributable to increased
personnel-related costs due to higher average headcount during
the three months ended June 30, 2011 as compared to the
three months ended June 30, 2010, due to the inclusion of
our 2010 and 2011 acquisitions. Cost of product revenues as a
percentage of product revenues was 28% for each of the three
months ended June 30, 2010 and 2011.
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 $2.8 million and $1.1 million for the three months
ended June 30, 2010 and 2011, respectively. This decrease
was attributable to the completion of the amortization of
acquired technology acquired in our acquisition of NTI in 2008
and ANGEL in 2009, offset, in part, by the increase in
amortization of acquired technology related to our 2010 and 2011
acquisitions. Cost of product revenues, including amortization
of acquired technology, as a percentage of product revenues was
29% for the three months ended June 30, 2011 as compared to
31% for the three months ended June 30, 2010.
Cost of professional services revenues.
Our
cost of professional services revenues for the three months
ended June 30, 2011 was $6.3 million, representing an
increase of $0.9 million, or 17%, as compared to
$5.4 million for the three months ended June 30, 2010.
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,
as well as increased costs associated with the inclusion of our
2010 and 2011 acquisitions. Cost of professional services
revenues as a percentage of professional services revenues
increased to 64% for the three months ended June 30, 2011
from 53% for the three months ended June 30, 2010 due to
the timing of delivery and revenue recognition for certain
service engagements.
Research and development expenses.
Our
research and development expenses for the three months ended
June 30, 2011 were $16.9 million, representing an
increase of $4.8 million, or 40%, as compared to
$12.0 million for the three months ended June 30,
2010. This increase was primarily attributable to increased
personnel-related costs due to higher average headcount during
the three months ended June 30, 2011 as compared to the
three months ended June 30, 2010, including increased
personnel-related costs associated with the inclusion of our
2010 and 2011 acquisitions.
Sales and marketing expenses.
Our sales and
marketing expenses for the three months ended June 30, 2011
were $40.4 million, representing an increase of
$12.5 million, or 45%, as compared to $27.9 million
for the three months ended June 30, 2010. This increase was
primarily attributable to increased personnel-related costs due
to higher average headcount during the three months ended
June 30, 2011 as compared to the three months ended
22
June 30, 2010, including increased personnel-related costs
associated with the inclusion of our 2010 and 2011 acquisitions.
General and administrative expenses.
Our
general and administrative expenses for the three months ended
June 30, 2011 were $24.3 million, representing an
increase of $7.4 million, or 44%, as compared to
$16.9 million for the three months ended June 30,
2010. This increase was primarily attributable to approximately
$6.7 million in transition, integration and
transaction-related costs incurred during the three months ended
June 30, 2011, which includes costs associated with our
proposed acquisition by Providence, as compared to approximately
$1.0 million related to the transition, integration and
transaction-related costs from our
Saf-T-Net,
Elluminate and Wimba acquisitions that were incurred during the
three months ended June 30, 2010. The increase in general
and administrative expenses was also attributable to increased
personnel-related costs due to higher average headcount during
the three months ended June 30, 2011 as compared to the
three months ended June 30, 2010, including increased
personnel-related costs associated with the inclusion of our
2010 and 2011 acquisitions.
Amortization of intangibles resulting from
acquisitions.
Our amortization of intangibles
resulting from acquisitions for the three months ended
June 30, 2011 were $7.6 million, representing a
decrease of $1.7 million, or 18%, as compared to
$9.4 million for the three months ended June 30, 2011.
This decrease was attributable to the completion of the
amortization of intangible assets acquired in connection with
our acquisition of WebCT in 2006 and the completion of
amortization of acquired technology acquired in our acquisition
of NTI in 2008 and ANGEL in 2009 offset, in part, by the
amortization of intangible assets acquired in our 2010 and 2011
acquisitions.
Net interest expense.
Our net interest expense
was $2.9 million for each of the three months ended
June 30, 2010 and 2011. The three months ended
June 30, 2011 includes $0.4 million in interest
expense associated with our revolving credit facility with no
comparable amount for the three months ended June 30, 2010.
The remainder of our net interest expense during the three
months ended June 30, 2010 and 2011 was primarily the
interest expense incurred on our convertible senior notes.
Other expense.
Our other expense for the three
months ended June 30, 2011 was $0.2 million,
representing a decrease of $0.2 million, as compared to
other expense of $0.4 million for the three months ended
June 30, 2010. This decrease 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) benefit from income taxes.
Our
benefit from income taxes for the three months ended
June 30, 2011 was $2.9 million, as compared to our
provision for income taxes of $1.1 million for the three
months ended June 30, 2010. This change was primarily due
to our loss before benefit from income taxes for the three
months ended June 30, 2011, as compared to income before
provision for income taxes for the three months ended
June 30, 2010.
Six
Months Ended June 30, 2011 Compared to Six Months Ended
June 30, 2010
Our total revenues for the six months ended June 30, 2011
were $242.9 million, representing an increase of
$34.1 million, or 16%, as compared to $208.8 million
for the six months ended June 30, 2010.
A detail of our total revenues by classification is as follows:
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Six Months Ended June 30,
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2010
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2011
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Professional
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Professional
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Product
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Services
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Product
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Services
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Revenues
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Revenues
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Total
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Revenues
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Revenues
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Total
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(In millions)
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Recurring revenues
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$
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163.9
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$
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3.8
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$
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167.7
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$
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203.6
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$
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4.8
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$
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208.4
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Non-recurring revenues
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27.3
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13.8
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41.1
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20.1
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14.4
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34.5
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Total revenues
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$
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191.2
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$
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17.6
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$
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208.8
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$
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223.7
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$
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19.2
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$
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242.9
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Product revenues.
Our product revenues,
including domestic and international, for the six months ended
June 30, 2011 were $223.7 million, representing an
increase of $32.5 million, or 17%, as compared to
$191.2 million for the six months ended June 30, 2010.
Recurring product revenues increased by $39.7 million, or
24%, for the six
23
months ended June 30, 2011 as compared to the six months
ended June 30, 2010. This increase in recurring revenues
was primarily due to an $11.0 million increase due to the
Elluminate and Wimba acquisitions that closed in August 2010 and
the resulting launch of our
Blackboard Collaborate
platform and a $10.4 million increase resulting from
the Presidium acquisition that closed in December 2010 and the
resulting launch of our
Blackboard Student Services
offering. The remaining increase in recurring product
revenues primarily resulted from an increase in
Blackboard
Mobile
revenues of $8.9 million, a $5.9 million
increase in managed hosting revenues and a $4.6 million
increase in revenues for subscription fees from customers
accessing our on-demand application services primarily related
to
Blackboard Connect
.
The decrease in non-recurring product revenues primarily relates
to lower revenues from
Blackboard Transact
due to the
benefit recognized in the three months ended June 30, 2010
due to our early adoption on January 1, 2010 of the change
in revenue recognition guidance under which more revenue is
recognized upfront.
Of our total revenues, our total international revenues for the
six months ended June 30, 2011 were $40.4 million,
representing an increase of $2.7 million, or 7%, as
compared to $37.6 million for the six months ended
June 30, 2010. International revenues as a percentage of
total revenues decreased to 17% for the six months ended
June 30, 2011 from 18% for the six months ended
June 30, 2010, primarily due to an increase in domestic
revenues. International product revenues, which consist
primarily of recurring product revenues, were $38.2 million
for the six months ended June 30, 2011, representing an
increase of $2.9 million, or 8%, as compared to
$35.3 million for the six months ended June 30, 2010.
The increase in international recurring product revenues was
primarily due to an increase in international revenues from the
Elluminate and Wimba acquisitions that closed in August 2010 and
led to the launch of our
Blackboard Collaborate
platform.
Professional services revenues.
Our
professional services revenues for the six months ended
June 30, 2011 were $19.2 million, representing an
increase of $1.6 million, or 9%, as compared to
$17.6 million for the six months ended June 30, 2010.
The increase in professional services revenues was primarily
attributable to the timing of delivery and revenue recognition
for certain service engagements, as well as new professional
services engagements resulting from our 2010 acquisitions. As a
percentage of total revenues, professional services revenues was
8% for each of the six months ended June 30, 2010 and 2011.
Cost of product revenues.
Our cost of product
revenues for the six months ended June 30, 2011 was
$67.0 million, representing an increase of
$15.0 million, or 29%, as compared to $51.9 million
for the six months ended June 30, 2010. The increase in
cost of product revenues was primarily attributable to increased
personnel-related costs due to higher average head count during
the six months ended June 30, 2011 as compared to the six
months ended June 30, 2010, due to the inclusion of our
2010 and 2011 acquisitions. Cost of product revenues as a
percentage of product revenues increased to 30% for the six
months ended June 30, 2011 from 27% for the six months
ended June 30, 2010.
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 $5.3 million and $2.6 million for the six months
ended June 30, 2010 and 2011, respectively. This decrease
was attributable to the completion of the amortization of
acquired technology acquired in our acquisition of NTI in 2008
and ANGEL in 2009, offset, in part, by the increase in
amortization of acquired technology related to our 2010 and 2011
acquisitions. Cost of product revenues, including amortization
of acquired technology, as a percentage of product revenues was
31% for the six months ended June 30, 2011 as compared to
30% for the six months ended June 30, 2010.
Cost of professional services revenues.
Our
cost of professional services revenues for the six months ended
June 30, 2011 was $13.0 million, representing an
increase of $3.1 million, or 31%, as compared to
$9.9 million for the six months ended June 30, 2010.
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,
as well as increased costs associated with the inclusion of our
2010 and 2011 acquisitions. Cost of professional services
revenues as a percentage of professional services revenues
increased to 67% for the six months ended June 30, 2011
from 56% for the six months ended June 30, 2010 due to the
timing of delivery and revenue recognition for certain service
engagements.
24
Research and development expenses.
Our
research and development expenses for the six months ended
June 30, 2011 were $33.4 million, representing an
increase of $9.2 million, or 38%, as compared to
$24.3 million for the six months ended June 30, 2010.
This increase was primarily attributable to increased
personnel-related costs due to higher average headcount during
the six months ended June 30, 2011 as compared to the six
months ended June 30, 2010, including increased
personnel-related costs associated with the inclusion of our
2010 and 2011 acquisitions.
Sales and marketing expenses.
Our sales and
marketing expenses for the six months ended June 30, 2011
were $75.0 million, representing an increase of
$21.8 million, or 41%, as compared to $53.2 million
for the six months ended June 30, 2010. This increase was
primarily attributable to increased personnel-related costs due
to higher average headcount during the six months ended
June 30, 2011 as compared to the six months ended
June 30, 2010, including increased personnel-related costs
associated with the inclusion of our 2010 and 2011 acquisitions.
General and administrative expenses.
Our
general and administrative expenses for the six months ended
June 30, 2011 were $43.0 million, representing an
increase of $11.4 million, or 36%, as compared to
$31.6 million for the six months ended June 30, 2010.
This increase was primarily attributable to approximately
$7.7 million in transition, integration and
transaction-related costs incurred during the six months ended
June 30, 2011, which includes costs associated with our
proposed acquisition by Providence, as compared to approximately
$1.5 million related to the transition, integration and
transaction-related costs from our Saf-T-Net, Elluminate and
Wimba acquisitions that were incurred during the six months
ended June 30, 2010. The increase in general and
administrative expenses was also attributable to increased
personnel-related costs due to higher average headcount during
the six months ended June 30, 2011 as compared to the six
months ended June 30, 2010, including increased
personnel-related costs associated with the inclusion of our
2010 and 2011 acquisitions.
Amortization of intangibles resulting from
acquisitions.
Our amortization of intangibles
resulting from acquisitions for the six months ended
June 30, 2011 were $16.8 million, representing a
decrease of $1.5 million, or 8%, as compared to
$18.3 million for the six months ended June 30, 2010.
This decrease was attributable to the completion of the
amortization of intangible assets acquired in connection with
our acquisition of WebCT in 2006 and the completion of
amortization of acquired technology acquired in our acquisition
of NTI in 2008 and ANGEL in 2009 offset, in part, by the
amortization of intangible assets acquired in our 2010 and 2011
acquisitions.
Net interest expense.
Our net interest expense
for the six months ended June 30, 2011 was
$6.1 million, representing an increase of
$0.3 million, or 6%, as compared to $5.7 million for
the six months ended June 30, 2010. The six months ended
June 30, 2011 includes $0.7 million in interest
expense associated with our revolving credit facility with no
comparable amount for the six months ended June 30, 2010.
The remainder of our net interest expense during the six months
ended June 30, 2010 and 2011 was primarily the interest
expense incurred on our convertible senior notes, which does not
vary significantly from period to period.
Other expense.
Our other expense for the six
months ended June 30, 2011 was $0.6 million,
representing a decrease of $0.3 million, as compared to
other expense of $0.9 million for the six months ended
June 30, 2010. This decrease 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) benefit from income taxes.
Our
benefit from income taxes for the six months ended June 30,
2011 was $4.5 million, as compared to our provision for
income taxes of $3.6 million for the six months ended
June 30, 2010. This change was primarily due to our loss
before benefit from income taxes for the six months ended
June 30, 2011, as compared to income before provision for
income taxes for the six months ended June 30, 2010.
Liquidity
and Capital Resources
Changes
in Cash and Cash Equivalents
Our cash and cash equivalents were $84.7 million at
June 30, 2011 as compared to $70.3 million at
December 31, 2010. The increase in cash and cash
equivalents was primarily due to amounts borrowed under the
revolving credit facility, partially offset by cash used in
operating and investing activities. 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.
25
Net cash used in operating activities.
Net
cash used in operating activities was $20.3 million during
the six months ended June 30, 2011 as compared to
$3.6 million during the six months ended June 30,
2010. This decrease was primarily attributable to our net loss
of $7.4 million for the six months ended June 30,
2011, as compared to net income of $9.4 million for the six
months ended June 30, 2010. In addition, accounts
receivable increased $65.2 million during the six months
ended June 30, 2011, net of the impact of acquired
receivables, due to the timing of certain client renewal
invoicing and sales to new and existing clients during the
current period, as well as timing of collections.
Net cash used in investing activities.
Net
cash used in investing activities was $20.7 million during
the six months ended June 30, 2011 as compared to
$52.9 million during the six months ended June 30,
2010. This decrease was primarily due to a $34.1 million
decrease in cash expenditures for acquisitions during the six
months ended June 30, 2011 as compared to the six months
ended June 30, 2010. This decrease in cash used for
acquisitions was slightly offset by an increase of
$1.8 million in purchases of property and equipment during
the six months ended June 30, 2011, as compared to the six
months ended June 30, 2010. Purchases of property and
equipment represented approximately 6% of total revenues for
each of the six months ended June 30, 2010 and 2011.
Net cash provided by financing activities.
Net
cash provided by financing activities was $55.4 million
during the six months ended June 30, 2011 as compared to
$26.4 million during the six months ended June 30,
2010. This increase was primarily due to $46.0 million
borrowed under the revolving credit facility during 2011. This
increase was partially offset by a decrease of
$14.1 million in proceeds from the exercise of stock
options as well as a decrease of $2.6 million in excess tax
benefits from stock-based compensation during the six months
ended June 30, 2011, as compared to the six months ended
June 30, 2010.
Notes
Payable
In June 2007, we issued and sold $165.0 million aggregate
principal amount of 3.25% Convertible Senior Notes due 2027
in a public offering. The Notes bore 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 July 1, 2010 and
July 1, 2011.
Holders of the Notes required us to repurchase substantially all
of the Notes on July 1, 2011 and we redeemed, in whole, the
remaining outstanding Notes on August 1, 2011. As of the
date of this report, none of the Notes are outstanding.
Revolving
Credit Facility
On August 4, 2010, we entered into a five-year 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). The Credit Agreement was amended on
April 4, 2011 to increase the amount available for
borrowing from the original amount of $175.0 million to an
amount of up to $225.0 million. Borrowings under the Credit
Agreement may be used for working capital needs and general
corporate purposes, which may include share repurchases,
outstanding debt repayment and acquisitions. Amounts outstanding
under the Credit Agreement 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. In connection with amending the senior secured credit
facility, we incurred an additional
26
$0.3 million in debt issuance costs in April 2011, which is
amortized as interest expense over the remaining term of the
senior secured credit facility using the effective interest
method.
As of December 31, 2010, no amounts were outstanding under
the credit facility. As of June 30, 2011, the credit
facility had an outstanding principal balance of
$46.0 million. On July 1, 2011, we borrowed an
additional $150.0 million under the credit facility and
used the proceeds to repurchase the Notes.
We recorded total interest expense related to the Credit
Agreement of approximately $0.4 million and
$0.7 million for the three and six months ended
June 30, 2011, respectively.
Under the terms of the Credit Agreement and related loan
documents, our loans and other obligations are 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 subsidiary guarantors. 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 a leverage
ratio, a senior leverage ratio, an interest coverage ratio and a
minimum liquidity covenant. We are in full compliance with all
covenants contained in the Credit Agreement.
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 revolving credit
facility, will be sufficient to meet our working capital and
capital expenditure needs over at least the next 12 months.
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.
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.
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Item 3.
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Quantitative
and Qualitative Disclosures about Market Risk.
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Interest income on our cash and cash equivalents is subject to
interest rate fluctuations. For the three and six months ended
June 30 2011, a ten percent change 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 expense
of $0.4 million and $0.2 million during the three
months ended June 30, 2010 and 2011, respectively, and we
recognized other expense of $0.9 million and
$0.6 million during the six months ended June 30, 2010
and 2011, respectively. For the three and six months ended
June 30, 2011, a ten percent adverse change in the
prevailing exchange rates as of June 30, 2011 would not
have had a material effect on our consolidated results of
operations or financial condition.
27
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Item 4.
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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 June 30,
2011. 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 June 30, 2011, 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
June 30, 2011 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
28
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Item 1.
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Legal
Proceedings
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The description of the legal proceedings contained in
Note 7 Commitments and Contingencies
in the Notes to the Unaudited Consolidated Financial
Statements is incorporated by reference herein.
In addition, we may be involved in various other legal
proceedings from time to time incidental to the ordinary conduct
of our business. We believe that any ultimate liability
resulting from any such other litigation will not have a
material adverse effect on our results of operations, financial
position or cash flows.
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 II,
Item 1A of our Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2011.
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A.
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RISKS
RELATED TO OUR PROPOSED MERGER WITH AN AFFILIATE OF PROVIDENCE
EQUITY PARTNERS L.L.C.
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There
are risks and uncertainties associated with our proposed merger
with an affiliate of Providence Equity Partners
L.L.C.
On June 30, 2011, we entered into a merger agreement with
an affiliate of Providence Equity Partners L.L.C. pursuant to
which a merger subsidiary will merge with and into Blackboard,
with Blackboard surviving the merger as a wholly owned
subsidiary of the acquiror.
There are a number of risks and uncertainties relating to the
merger. The merger may not be consummated or may not be
consummated in the timeframe or manner currently anticipated, as
a result of a variety of factors, including but not limited to
the failure to satisfy one or more of the closing conditions set
forth in the merger agreement or the acquirors failure to
obtain sufficient financing to complete the merger. In addition,
lawsuits have been filed, and additional lawsuits may be filed,
against us and our directors in connection with the merger that,
among other things, seek to enjoin the consummation of the
merger. If the plaintiffs in any such lawsuit are successful in
obtaining injunctive or other relief restraining, enjoining or
otherwise prohibiting the consummation of the merger, such
injunctive or other relief could prevent the merger from being
consummated. In addition, there can be no assurance that the
requisite stockholder or regulatory approvals required by the
merger agreement will be obtained, that the other conditions to
closing of the merger will be satisfied or waived or that other
events will not intervene to delay or result in the termination
of the merger agreement.
If the merger is not completed for any reason, our stockholders
will not receive any payment for their shares pursuant to the
merger agreement, and the price of our common stock may change
to the extent that the current market price of our common stock
reflects an assumption that the merger will be consummated. In
addition, if the merger is not completed, we expect that our
management will operate our business in a manner similar to that
in which it is being operated today and that our stockholders
will continue to be subject to the same risks and opportunities
to which they currently are subject, including, among other
things, the nature of the industry on which our business largely
depends, and general industry, economic, regulatory and market
conditions. Pending the closing of the merger, the merger
agreement also restricts us from engaging in certain actions
without the acquirors consent, which could prevent us from
pursuing business opportunities that may arise prior to the
closing of the merger. Any delay in closing or failure to close
the merger could have an adverse effect on our operating results
and business generally, our business relationships, including
with our customers and employees, and our ability to pursue
alternative strategic transactions or implement alternative
business plans. If the merger agreement is not adopted by our
stockholders, or if the merger is not consummated for any other
reason, there can be no assurance that any other transaction
acceptable to us will be offered or that our business, prospects
or results of operations will not be adversely affected.
29
Our
business could be adversely affected as a result of uncertainty
related to the merger.
The announcement and pendency of the merger may be disruptive to
our business relationships and business generally, which could
have an adverse impact on our financial condition and results of
operations. For example:
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the attention of our management may be directed to
transaction-related considerations and may be diverted from the
day-to-day
operations of our business;
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our employees may experience uncertainty about their future
roles with us, which might impair our ability to attract and
retain key personnel and other employees; and
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customers or other business partners may experience uncertainty
about our future and may choose to delay purchases or renewals
with us, seek alternative relationships with third parties or
seek to alter their business relationships with us.
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In addition, we have incurred, and will continue to incur,
substantial costs, expenses and fees related to the merger,
including expenses in connection with the retention of legal,
accounting and financial advisors and consultants and the costs
of defending against lawsuits filed against us and our directors
in connection with the merger, and many of these costs, expenses
and fees must be paid regardless of whether the merger is
completed. In addition, upon termination of the merger agreement
under specified circumstances, we may be required to pay the
acquiror a termination fee of up to $49.1 million. If the
merger is not consummated due to a breach of the merger
agreement by the acquiror, our remedy may be limited to receipt
of a termination fee of approximately $106.4 million, and
under some circumstances, we would not be entitled to receive
any termination fee.
If we are unable to effectively manage these risks, our
business, financial condition or results of operations may be
adversely affected.
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B.
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RISKS
RELATED TO ECONOMIC CONDITIONS
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Current
challenging economic conditions may adversely affect our
business.
Challenging economic conditions related to the protracted
worldwide economic downturn that began in 2008 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, instability in the financial
markets associated with the economic downturn has resulted in a
tightening of credit markets, which could impair the ability of
our customers to obtain credit to finance purchases of our
products or impair our ability to obtain credit to finance
investments in our business. 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, any of 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 disruption 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, we have
experienced some lengthening of sales cycles and, depending on
the future economic climate, may see a continuation of this
trend. Furthermore, 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
30
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.
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C.
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RISKS
RELATED TO OUR PRODUCTS AND SERVICES
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If the
products we develop and acquire do not gain market acceptance,
our revenues may decrease and we may not realize a return on
such investments.
We make substantial investments to develop and improve our
products and acquire 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 and acquire 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 not become widely adopted by clients, we may
not be able to justify the investments we have made and our
financial results will suffer.
We acquired the technology underlying our newest products and
services, including the
Blackboard Mobile
product line,
Blackboard Collaborate
,
Blackboard Student
Services
, and
Blackboard Analytics
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.
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. We have frequent new product and
functionality releases, and those releases may be delayed from
their scheduled date due to a wide range of factors. Finally,
our service offerings may be disrupted causing delays or
interruptions in the services provided to our clients. In the
past, we have encountered defects in our product releases,
product development delays and interruptions in our service
offerings. Despite our product testing, planning and other
quality control efforts, we anticipate that our products and
services may encounter undetected defects, release delays and
service interruptions in the future. Significant errors in our
products, delays in product releases 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 claims 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, 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.
31
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 our products are rapidly changing, and barriers to entry 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 in general 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 Corporation, International Business Machines
Corporation, Oracle Corporation, Google Inc., Datatel, Inc., the
Moodle open source project and associated authorized services
firms, Pearson Education, Inc., the Sakai Foundation open source
project and associated authorized services firms, and
Instructure Inc.; learning content management systems, such as
Giunti Labs S.r.I.; 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
such as CBORD and CardSmith. Our competitors for the
Blackboard Connect
service include a variety of companies
or products such as SchoolMessenger that provide mass
notification technologies including voice, email and text
messaging communications. Our competitors for the
Blackboard
Mobile
products include in-house IT departments that
customize their own mobile presence and companies such as
Datatel that provide customized mobile websites and
applications. Our competitors for the
Blackboard Collaborate
platform include a variety of companies that provide
software applications for synchronous learning and similar
technology, including Cisco Systems and Adobe. Our competitors
for the
Blackboard Student Services
offering include
clients and potential clients who handle student support calls
in-house and various companies, including PerceptIS, that
provide IT help desk support and student management services to
institutions of higher learning. Our competitors for the
Blackboard Analytics
platform include clients and
potential clients who have in-house analytic capability and
various companies, including several major ERP providers, that
offer analytic and business intelligence reporting services to
institutions of higher learning.
Many of our current and potential competitors 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 be acquired by larger and better-funded
companies which have more resources than our competitors
currently have. 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.
Open source software 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. 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
32
otherwise have licensed from us. As open source offerings become
more prevalent, customers may defer or forego purchases of our
products, which could reduce our sales to new clients, 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.
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 that we sell to our clients. Such companies
include manufacturers of third-party software 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, reduce our operating margins and harm our
financial performance.
Operational
failures in our network infrastructure could disrupt our remote
hosting and application 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
and other application services we provide to some of our
clients. We provide remote hosting and other application
services through computer hardware that is currently located in
third-party co-location facilities in various locations in the
United States, Canada, the Netherlands, Australia, the United
Kingdom, and Norway. We do not control the operation of these
co-location facilities. Lengthy interruptions in our hosting
service or other application services 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 hosting or application service clients
in the event of an extended loss of service at the co-location
facilities. Though some of our co-location facilities are served
by data backup redundancy at other facilities, they are not
equipped to provide full disaster recovery to all of our hosting
and application services 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 hosting and application services 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, reducing our
operating margins and diverting capital from other efforts.
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
33
could cause our revenues to decline. We cannot accurately
predict future renewal rates. Our license renewal rates may
fluctuate as a result of a number of factors, including changes
in client satisfaction with our products and services, our
ability to update our products to maintain their attractiveness
in the market or budgetary constraints or changes in budget
priorities faced by our clients. In addition, 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 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
generally are recognized over the applicable agreement term.
Our
operating margins may suffer if our lower margin revenues
increase in proportion to total revenues as our products and
services have different gross margins.
Because the revenues derived from each of our products and
services typically have different levels of gross margins, an
increase in the percentage of total revenues represented by
lower margin products and services could have a detrimental
impact on our overall gross margins, and could adversely affect
our operating results. In addition, we sometimes subcontract
professional services and hardware to third parties, which
further reduces our gross margins on these revenue items. As a
result, an increase in the percentage of these revenue items
provided by third parties could lower our overall gross margins.
The
length and unpredictability of the sales cycle for our products
and services could delay new sales and cause our revenues and
cash flows for any given quarter to fall short of our
projections or market expectations.
The sales cycle between our initial contact with a potential
client and the signing of a contract with that client typically
ranges from 6 to 18 months. Potential clients often conduct
extensive and lengthy evaluations before committing to our
products and services and may require us to expend substantial
time, effort and money educating them as to the value of our
offerings. In addition, 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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As a result of the length and variability of our sales cycle, we
have only a limited ability to forecast the timing of sales. An
increase in the length of our sales cycles, or an increase in
the variability of the sales cycle across our products or our
client base, could harm our business and financial results, and
could cause our financial results to vary significantly from
quarter to quarter. 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
34
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 increase costs and 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 international postsecondary or U.S. K-12
potential clients decision to use our products and
services is more likely to 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,
which would reduce our revenue opportunities and operating
margins associated with these potential clients.
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D.
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RISKS
RELATED TO BUSINESS OPERATIONS AND FINANCING
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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
txttools in January 2011 and of Saf-T-Net, Elluminate, Wimba,
Presidium, and the business assets of iStrategy 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. We may encounter risks in seeking to realize the
benefits of these and other potential acquisition transactions,
including:
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we may not realize the anticipated financial benefits if we are
unable to sell the acquired products or services 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,
products or services 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, 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
services 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
35
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 past or 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.
As has been the case with our historical acquisition
transactions, future business combinations could involve the
acquisition of significant tangible and intangible assets, which
could require us to record ongoing amortization expense with
respect to identified intangible assets acquired. In addition,
we may need to record write-downs from future impairments of
identified tangible and intangible assets and goodwill. These
and other similar accounting charges would reduce any future
earnings or increase any losses. In future acquisitions, we
could also incur debt to pay for acquisitions or issue
additional equity securities as consideration, either of 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.
International
expansion will subject our business to additional economic and
operational risks that could increase our costs and make it
difficult 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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longer or less predictable payment and sales cycles;
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difficulty in collecting accounts receivable;
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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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As a result of these risks, we may not be able to achieve the
expected benefits of our international strategy. If we are
unsuccessful in this international expansion, we would be
required to reevaluate our growth strategy, and we may have
incurred substantial expenses and devoted significant management
time and resources in pursuing international growth.
Our
revolving credit facility could constrict our liquidity and
adversely affect our ability to operate our business
successfully and to obtain financing in the
future.
We entered into a five-year senior secured revolving credit
facility in August 2010, and in April 2011 we entered into an
amendment to the Credit Agreement to increase the amount we are
able to borrow under the facility from the original amount of
$175.0 million to an amount of up to $225.0 million.
As of the date of this report, there is $196.0 million
outstanding under the credit facility.
36
The restrictive covenants contained in the Credit Agreement
limit 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, increasing our vulnerability
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 other
financial obligations.
In addition, we will use a significant portion of our cash flow
to pay interest and principal on our outstanding debt limiting
the amount available for working capital, capital expenditures
and other general corporate purposes. 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. If our cash flow were inadequate to allow us to
repay 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. Finally, our ability to finance working capital needs and
general corporate purposes from 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.
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.
The
investment of our cash balances is 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 write down the value of our investments,
which would be reflected in our statement of operations for that
period. With a continued unstable credit environment, we might
incur significant realized, unrealized or impairment losses
associated with these investments.
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. Departure of key officers
and senior managers could hinder our future success. Our
executive management team is critical to Blackboards
management, strategy, culture, and technology. 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.
37
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E.
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RISKS
RELATED TO INTELLECTUAL PROPERTY AND GOVERNMENT
REGULATION
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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 and offerings by persons who have not paid
the required fees, 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 services, 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 and offerings 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 or services 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.
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 and
services in our markets increases and the functionality of these
products and services 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 offering our products or services that
incorporate the challenged intellectual property;
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require us to redesign our products or services 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.
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 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
38
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.
Government
regulation of our products and services in the U.S. and abroad
could cause us to incur significant compliance expenses or face
legal action, which could make our business less efficient or
even impossible.
The impact 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
could be subject to current or future state and federal
financial services regulation that 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 financial transaction processing products and financial
service offerings 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 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.
39
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.
(a) Exhibits:
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Exhibit No.
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Description
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2
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.1(1)
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Agreement and Plan of Merger dated as of June 30, 2011,
among Bulldog Holdings, LLC, Bulldog Acquisition Sub, Inc. and
Blackboard Inc.
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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 June 30, 2011, filed with the
Securities and Exchange Commission on August 4, 2011,
formatted in eXtensible Business Reporting Language:
(i) Unaudited Consolidated Balance Sheets at June 30,
2011 and December 31, 2010, (ii) Unaudited
Consolidated Statements of Operations for the Three and Six
months ended June 30, 2011 and 2010, (iii) Unaudited
Consolidated Statements of Cash Flows for the Six months ended
June 30, 2011 and 2010 and (iv) Notes to Unaudited
Consolidated Financial Statements.**
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(1)
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Incorporated herein by reference to Registrants Current
Report on
Form 8-K
filed on July 1, 2011.
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*
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These certifications are being furnished solely to accompany
this quarterly report pursuant to 18 U.S.C.
Section 1350, and are not being filed for
purposes of Section 18 of the Securities Exchange Act of
1934, as amended, and are not to be incorporated by reference
into any filing of the Registrant, whether made before or after
the date hereof, regardless of any general incorporation
language in such filing.
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**
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As provided in Rule 406T of
Regulation S-T,
this exhibit shall not be deemed filed or a part of
a registration statement or prospectus for purposes of
Sections 11 or 12 of the Securities Act of 1933, as
amended, and shall not be deemed filed for purposes
of Section 18 of the Securities Exchange Act of 1934 or
otherwise subject to the liability under those sections.
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40
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: August 4, 2011
41
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