Attached files
file | filename |
---|---|
EX-31.1 - EX-31.1 - BLACKBOARD INC | w82121exv31w1.htm |
EX-32.1 - EX-32.1 - BLACKBOARD INC | w82121exv32w1.htm |
EX-32.2 - EX-32.2 - BLACKBOARD INC | w82121exv32w2.htm |
EX-31.2 - EX-31.2 - BLACKBOARD INC | w82121exv31w2.htm |
EXCEL - IDEA: XBRL DOCUMENT - BLACKBOARD INC | Financial_Report.xls |
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
For the quarterly period ended March 31, 2011 | ||
OR
|
||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
Commission file number
000-50784
Blackboard Inc.
(Exact Name of Registrant as
Specified in Its Charter)
Delaware
|
52-2081178 | |
(State or Other Jurisdiction
of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
|
650 Massachusetts Avenue, N.W. Washington D.C. (Address of Principal Executive Offices) |
20001 (Zip Code) |
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):
Large accelerated
filer þ
|
Accelerated filer o |
Non-accelerated
filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
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
Class | Outstanding at April 29, 2011 | |
Common Stock, $0.01 par value
|
35,029,168 |
Blackboard
Inc.
Quarterly
Report on
Form 10-Q
For the Quarter Ended March 31, 2011
INDEX
For the Quarter Ended March 31, 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
Table of Contents
PART I
FINANCIAL INFORMATION
Item 1. | Consolidated Financial Statements |
BLACKBOARD
INC.
UNAUDITED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(in thousands, except share and per share data)
December 31, |
March 31, |
|||||||
2010 | 2011 | |||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 70,314 | $ | 52,729 | ||||
Accounts receivable, net of allowance for doubtful accounts of
$994 and $799, respectively
|
89,914 | 82,906 | ||||||
Prepaid expenses and other current assets
|
16,961 | 17,358 | ||||||
Deferred tax asset, current portion
|
5,818 | 5,818 | ||||||
Deferred cost of revenues
|
3,256 | 3,107 | ||||||
Total current assets
|
186,263 | 161,918 | ||||||
Deferred tax asset, noncurrent portion
|
15,185 | 19,341 | ||||||
Restricted cash
|
5,741 | 5,741 | ||||||
Property and equipment, net
|
43,002 | 42,691 | ||||||
Other assets
|
1,582 | 961 | ||||||
Goodwill
|
478,728 | 481,811 | ||||||
Intangible assets, net
|
116,649 | 112,881 | ||||||
Total assets
|
$ | 847,150 | $ | 825,344 | ||||
Current liabilities:
|
||||||||
Accounts payable
|
$ | 1,818 | $ | 1,383 | ||||
Accrued expenses
|
41,018 | 44,827 | ||||||
Deferred rent, current portion
|
450 | 678 | ||||||
Deferred revenues, current portion
|
211,752 | 179,481 | ||||||
Convertible senior notes, net of debt discount of $2,674 and
$1,174, respectively
|
162,326 | 163,826 | ||||||
Total current liabilities
|
417,364 | 390,195 | ||||||
Deferred rent, noncurrent portion
|
11,978 | 11,805 | ||||||
Deferred tax liability, noncurrent portion
|
3,502 | 4,936 | ||||||
Deferred revenues, noncurrent portion
|
6,223 | 5,857 | ||||||
Total liabilities
|
439,067 | 412,793 | ||||||
Commitments and contingencies
|
||||||||
Stockholders equity:
|
||||||||
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; no shares issued or outstanding
|
| | ||||||
Common stock, $0.01 par value; 200,000,000 shares
authorized; 34,666,197 and 34,854,554 shares issued and
outstanding, respectively
|
347 | 347 | ||||||
Additional paid-in capital
|
465,908 | 472,651 | ||||||
Accumulated other comprehensive income, net
|
794 | 1,875 | ||||||
Accumulated deficit
|
(58,966 | ) | (62,322 | ) | ||||
Total stockholders equity
|
408,083 | 412,551 | ||||||
Total liabilities and stockholders equity
|
$ | 847,150 | $ | 825,344 | ||||
See notes to unaudited consolidated financial statements.
1
Table of Contents
BLACKBOARD
INC.
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(in thousands, except share and per share data)
Three Months Ended |
||||||||
March 31, | ||||||||
2010 | 2011 | |||||||
Revenues:
|
||||||||
Product
|
$ | 93,730 | $ | 109,385 | ||||
Professional services
|
7,336 | 9,371 | ||||||
Total revenues
|
101,066 | 118,756 | ||||||
Operating expenses:
|
||||||||
Cost of product revenues, excludes $2,508 and $1,560 for the
three months ended March 31, 2010 and 2011, respectively,
in amortization of acquired technology included in amortization
of intangibles resulting from acquisitions shown below(1)
|
24,534 | 34,410 | ||||||
Cost of professional services revenues(1)
|
4,479 | 6,679 | ||||||
Research and development(1)
|
12,205 | 16,571 | ||||||
Sales and marketing(1)
|
25,315 | 34,639 | ||||||
General and administrative(1)
|
14,705 | 18,670 | ||||||
Amortization of intangibles resulting from acquisitions
|
8,978 | 9,171 | ||||||
Total operating expenses
|
90,216 | 120,140 | ||||||
Income (loss) from operations
|
10,850 | (1,384 | ) | |||||
Other expense, net:
|
||||||||
Interest expense
|
(2,888 | ) | (3,162 | ) | ||||
Interest income
|
21 | 22 | ||||||
Other expense, net
|
(527 | ) | (432 | ) | ||||
Income (loss) before (provision for) benefit from income taxes
|
7,456 | (4,956 | ) | |||||
(Provision for) benefit from income taxes
|
(2,420 | ) | 1,600 | |||||
Net income (loss)
|
$ | 5,036 | $ | (3,356 | ) | |||
Net income (loss) per common share:
|
||||||||
Basic
|
$ | 0.15 | $ | (0.10 | ) | |||
Diluted
|
$ | 0.15 | $ | (0.10 | ) | |||
Weighted average number of common shares:
|
||||||||
Basic
|
33,432,192 | 34,756,370 | ||||||
Diluted
|
34,397,711 | 34,756,370 | ||||||
(1) Includes the following amounts related to stock-based
compensation:
|
||||||||
Cost of product revenues
|
$ | 337 | $ | 354 | ||||
Cost of professional services revenues
|
148 | 204 | ||||||
Research and development
|
268 | 336 | ||||||
Sales and marketing
|
1,868 | 2,088 | ||||||
General and administrative
|
2,335 | 2,389 |
See notes to unaudited consolidated financial statements.
2
Table of Contents
BLACKBOARD
INC.
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(in thousands)
Three Months |
||||||||
Ended March 31, | ||||||||
2010 | 2011 | |||||||
Cash flows from operating activities
|
||||||||
Net income (loss)
|
$ | 5,036 | $ | (3,356 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
||||||||
Deferred tax benefit
|
(398 | ) | (3,849 | ) | ||||
Excess tax benefits from stock-based compensation
|
(2,800 | ) | (232 | ) | ||||
Amortization of debt discount and issuance costs
|
1,528 | 1,649 | ||||||
Depreciation and amortization
|
4,629 | 6,076 | ||||||
Amortization of intangibles resulting from acquisitions
|
8,978 | 9,171 | ||||||
Change in allowance for doubtful accounts
|
(316 | ) | (195 | ) | ||||
Stock-based compensation
|
4,956 | 5,371 | ||||||
Changes in operating assets and liabilities, net of effect of
acquisitions:
|
||||||||
Accounts receivable
|
18,488 | 7,583 | ||||||
Prepaid expenses and other current assets
|
1,807 | 122 | ||||||
Deferred cost of revenues
|
1,112 | 149 | ||||||
Accounts payable
|
(1,628 | ) | (469 | ) | ||||
Accrued expenses
|
(3,571 | ) | 3,814 | |||||
Deferred rent
|
(173 | ) | 55 | |||||
Deferred revenues
|
(38,877 | ) | (32,974 | ) | ||||
Net cash used in operating activities
|
(1,229 | ) | (7,085 | ) | ||||
Cash flows from investing activities
|
||||||||
Acquisitions, net of cash acquired
|
(34,912 | ) | (6,107 | ) | ||||
Purchases of property and equipment
|
(3,165 | ) | (5,765 | ) | ||||
Net cash used in investing activities
|
(38,077 | ) | (11,872 | ) | ||||
Cash flows from financing activities
|
||||||||
Releases of letters of credit
|
27 | | ||||||
Excess tax benefits from stock-based compensation
|
2,800 | 232 | ||||||
Proceeds from exercise of stock options
|
15,402 | 1,140 | ||||||
Net cash provided by financing activities
|
18,229 | 1,372 | ||||||
Net decrease in cash and cash equivalents
|
(21,077 | ) | (17,585 | ) | ||||
Cash and cash equivalents at beginning of period
|
167,353 | 70,314 | ||||||
Cash and cash equivalents at end of period
|
$ | 146,276 | $ | 52,729 | ||||
See notes to unaudited consolidated financial statements.
3
Table of Contents
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 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
Learntm;
Blackboard
Transacttm;
Blackboard
Connecttm;
Blackboard
Mobiletm;
Blackboard
Collaboratetm;
and Blackboard
Analyticstm.
The Company also offers application hosting for clients who
prefer to outsource the management of their Blackboard Learn
systems, and the Blackboard Student
ServicesSM
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.
2. | Significant Accounting Policies |
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 months
ended March 31, 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 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.
4
Table of Contents
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 liabilities that were
measured at fair value as of December 31, 2010 and
March 31, 2011, by level within the fair value hierarchy
(in thousands):
Quoted Prices in |
Significant |
|||||||||||||||
Active Markets for |
Significant Other |
Unobservable |
||||||||||||||
December 31, |
Identical Assets |
Observable Inputs |
Inputs |
|||||||||||||
2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets:
|
||||||||||||||||
Cash equivalents(1)
|
$ | 40,009 | $ | 40,009 | $ | | $ | | ||||||||
Liabilities:
|
||||||||||||||||
Convertible senior notes(2)
|
$ | 169,538 | $ | 169,538 | $ | | $ | | ||||||||
Quoted Prices in |
Significant |
|||||||||||||||
Active Markets for |
Significant Other |
Unobservable |
||||||||||||||
March 31, |
Identical Assets |
Observable Inputs |
Inputs |
|||||||||||||
2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets:
|
||||||||||||||||
Cash equivalents(1)
|
$ | 19 | $ | 19 | $ | | $ | | ||||||||
Liabilities:
|
||||||||||||||||
Convertible senior notes(2)
|
$ | 166,238 | $ | 166,238 | $ | | $ | | ||||||||
(1) | Cash equivalents consist of money market funds with original maturity dates of less than three months for which the fair value is based on quoted market prices. | |
(2) | The fair value of the Companys convertible senior notes is based on the quoted market price. |
Assets and liabilities that are measured at fair value on a
non-recurring basis include intangible assets and goodwill.
These items are recognized at fair value when they are
considered to be impaired. During the three months ended
March 31, 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
5
Table of Contents
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reported in the consolidated financial statements approximate
the fair value for accounts receivable, accounts payable and
accrued expenses.
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 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.
6
Table of Contents
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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
$2.5 million and $1.6 million for the three months
ended March 31, 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.
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:
Three Months Ended |
||||||||
March 31, | ||||||||
2010 | 2011 | |||||||
(In thousands, except share and per share amounts) | ||||||||
Net income (loss)
|
$ | 5,036 | $ | (3,356 | ) | |||
Weighted average shares outstanding, basic
|
33,432,192 | 34,756,370 | ||||||
Dilutive effect of:
|
||||||||
Stock options and restricted stock units related to the issuance
of common stock
|
965,519 | | ||||||
Weighted average shares outstanding, diluted
|
34,397,711 | 34,756,370 | ||||||
Basic net income (loss) per common share
|
$ | 0.15 | $ | (0.10 | ) | |||
Diluted net income (loss) per common share
|
$ | 0.15 | $ | (0.10 | ) | |||
The dilutive effect of restricted stock and options to purchase
an aggregate of 1,579,624 and 5,006,810 shares were not
included in the computations of diluted net income (loss) per
common share for the three months ended March 31, 2010 and
2011, respectively, 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 the three months ended March 31, 2010 and
2011, respectively, as their effect would be anti-dilutive.
7
Table of Contents
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 $1.1 million for the three months ended
March 31, 2011, representing the difference between net
loss and comprehensive net loss for the period. There was no
difference between net income and comprehensive net income for
the three months ended March 31, 2010.
3. | Mergers and Acquisitions |
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 months ended March 31, 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 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
8
Table of Contents
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
4. | Stock-Based Compensation |
Stock
Incentive Plans
As of March 31, 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 $5.0 million and
$5.4 million for the three months ended March 31, 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 three months ended March 31,
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 March 31, 2011, and changes
during the three months then ended are as follows (aggregate
intrinsic value in thousands):
Number of |
Weighted Average |
Aggregate |
||||||||||
Shares | Price/Share | Intrinsic Value | ||||||||||
Exercisable at December 31, 2010
|
1,970,085 | $ | 31.40 | |||||||||
Outstanding at December 31, 2010
|
4,147,810 | 33.23 | ||||||||||
Granted
|
885,150 | 35.69 | ||||||||||
Exercised
|
(40,762 | ) | 27.98 | $ | 464 | |||||||
Cancelled
|
(105,388 | ) | 35.98 | |||||||||
Outstanding at March 31, 2011
|
4,886,810 | 33.66 | 18,043 | |||||||||
Exercisable at March 31, 2011
|
2,302,511 | 32.12 | 11,671 | |||||||||
The weighted average remaining contractual lives for all options
outstanding under the Companys stock incentive plans at
March 31, 2010 and 2011 were 6.0 and 5.7 years,
respectively. The weighted average remaining contractual lives
for exercisable stock options at March 31, 2010 and 2011
were 5.0 and 4.6 years, respectively. As of March 31,
2011, there was approximately $33.1 million of total
unrecognized compensation cost related to outstanding but
unvested stock options. The cost is expected to be recognized
through March 2015 with a weighted average recognition period of
approximately 1.5 years.
The Company recognizes compensation expense for share-based
awards based on estimated fair values on the date of grant. The
weighted average fair value of the options at the date of grant
for the three months ended March 31, 2010 and 2011 was
$15.89 and $13.40, respectively. The fair value of options that
vested during the three months ended March 31, 2010 and
2011 was $5.3 million and $5.5 million, respectively.
The fair value of each
9
Table of Contents
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 months
ended March 31, 2010 and 2011:
Three Months Ended March 31, | ||||||||
2010 | 2011 | |||||||
Dividend yield
|
0 | % | 0 | % | ||||
Expected volatility
|
45.1 | % | 41.3 | % | ||||
Risk-free interest rate
|
2.3 | % | 2.2 | % | ||||
Expected life of options
|
4.7 years | 4.6 years | ||||||
Forfeiture rate
|
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 months ended
March 31, 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 March 31, 2011, there was approximately
$24.7 million of total unrecognized compensation cost
related to outstanding but unvested restricted stock and
restricted stock unit awards. The cost is expected to be
recognized through December 2015 with a weighted average
recognition period of approximately 2.1 years.
10
Table of Contents
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
March 31, 2011, and changes during the three 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
|
203,470 | 36.34 | ||||||||||
Vested and issued
|
(87,575 | ) | 32.96 | |||||||||
Cancelled
|
(51,250 | ) | 38.14 | |||||||||
Unvested at March 31, 2011
|
772,249 | $ | 37.35 | $ | 27,986 | |||||||
5. | Goodwill and Intangible Assets |
Goodwill and intangible assets consist of the following:
Weighted- |
||||||||||||
Average |
||||||||||||
December 31, |
March 31, |
Amortization |
||||||||||
2010 | 2011 | Period | ||||||||||
(In thousands) | (In years) | |||||||||||
Goodwill
|
$ | 478,728 | $ | 481,811 | ||||||||
Acquired technology
|
$ | 79,354 | $ | 80,011 | 3.0 | |||||||
Accumulated amortization
|
(69,236 | ) | (70,669 | ) | ||||||||
Acquired technology, net
|
10,118 | 9,342 | ||||||||||
Contracts and customer lists
|
194,234 | 198,996 | 5.7 | |||||||||
Accumulated amortization
|
(96,052 | ) | (103,330 | ) | ||||||||
Contracts and customer lists, net
|
98,182 | 95,666 | ||||||||||
Trademarks and domain names
|
6,232 | 6,263 | 2.8 | |||||||||
Accumulated amortization
|
(2,609 | ) | (2,988 | ) | ||||||||
Trademarks and domain names, net
|
3,623 | 3,275 | ||||||||||
Patents and related costs
|
5,601 | 5,601 | 10.5 | |||||||||
Accumulated amortization
|
(875 | ) | (1,003 | ) | ||||||||
Patents and related costs, net
|
4,726 | 4,598 | ||||||||||
Intangible assets, net
|
$ | 116,649 | $ | 112,881 | ||||||||
Intangible assets from acquisitions are amortized over three to
ten years. Amortization expense related to intangible assets was
approximately $9.0 million and $9.2 million for the
three months ended March 31, 2010 and 2011, respectively.
Amortization expense for the years ended December 31, 2011,
2012, 2013, 2014 and 2015 is expected to be approximately
$31.9 million, $27.8 million, $18.2 million,
$11.6 million and $9.7 million, respectively.
11
Table of Contents
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 bear interest at a rate of 3.25% per year on the principal
amount, accruing from June 20, 2007. Interest is payable
semi-annually on January 1 and July 1. The Notes will
mature on July 1, 2027, subject to earlier conversion,
redemption or repurchase.
If a make-whole fundamental change, as defined in the Notes,
occurs prior to July 1, 2011, the Company may be required
in certain circumstances to increase the applicable conversion
rate for any Notes converted in connection with such fundamental
change by a specified number of shares of the Companys
common stock. The Notes may not be redeemed by the Company prior
to July 1, 2011, after which they may be redeemed by the
Company, in whole at any time, or in part from time to time, on
or after July 1, 2011 at a redemption price, payable in
cash, of 100% of the principal amount of the Notes plus accrued
and unpaid interest, if any. Holders of the Notes may require
the Company to repurchase some or all of the Notes on
July 1, 2011, July 1, 2017 and July 1, 2022, or
in the event of certain fundamental change transactions, at 100%
of the principal amount on the date of repurchase, plus accrued
and unpaid interest, if any, payable in cash. If such an event
occurs, the Company would be required to pay the entire
outstanding principal amount of $165.0 million in cash, in
addition to any other rights that the investors may have under
the Notes.
The liability and equity components of the Notes are separately
accounted for in a manner that reflects the Companys
nonconvertible debt borrowing rate because their terms include
partial cash settlement. The Company amortizes the resulting
debt discount over the period the convertible debt is expected
to be outstanding as additional non-cash interest expense. The
Company has determined that its nonconvertible borrowing rate at
the time the Notes were issued was 6.9%. Accordingly, the
Company estimated the fair value of the liability (debt)
component as $144.1 million upon issuance of the Notes. The
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 and $1.1 million at December 31,
2010 and March 31, 2011, respectively, and is recorded as a
debt discount and is 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 is $0.1 million at each of December 31, 2010 and
March 31, 2011, and is recorded as a debt discount and is
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, is being
amortized as interest expense using the effective interest
method through July 1, 2011, the first redemption date of
the Notes. The Company recorded total interest expense of
approximately $2.9 million and $2.8 million for the
three months ended March 31, 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
March 31, 2010 and 2011 and $1.6 million and
$1.5 million in amortization of the debt discount for the
three months ended March 31, 2010 and 2011, respectively.
The principal amount of the liability component of the Notes was
$165.0 million at December 31, 2010 and March 31,
2011. The unamortized debt discount was $2.7 million and
$1.2 million at December 31, 2010 and March 31,
2011, respectively. As the first redemption date of the Notes is
July 1, 2011, the Company classifies the net carrying
amount of the liability component of the Notes of
$162.3 million and $163.8 million as of
December 31, 2010 and March 31, 2011, respectively, as
part of current liabilities in the unaudited consolidated
balance sheets.
The Company has evaluated whether certain features of the Notes
cause the Notes to be considered to be indexed to the
Companys own stock using a two-step approach to evaluate
the Notes contingent exercise and
12
Table of Contents
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
settlement provisions. The Company has determined that the
Notes embedded conversion options are indexed to the
Companys own stock and, therefore, do not require
bifurcation and separate accounting.
Revolving
Credit Facility
On August 4, 2010, the Company entered into a five-year
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
will be amortized as interest expense over the remaining term of
the senior secured credit facility using the effective interest
method.
The Company recorded total interest expense related to the
Credit Agreement of approximately $0.3 million for the
three months ended March 31, 2011.
Under the terms of the Credit Agreement and related loan
documents, the loans and other obligations of the Company are
guaranteed by the material domestic subsidiaries of the Company,
and are secured by substantially all of the tangible and
intangible assets of the Company and each material domestic
subsidiary guarantor (including, without limitation,
intellectual property and the capital stock of certain
subsidiaries). In addition, the Credit Agreement contains
customary affirmative and negative covenants applicable to the
Company and its subsidiaries with respect to its operations and
financial conditions, including a leverage ratio, a senior
leverage ratio, an interest coverage ratio and a minimum
liquidity covenant. The Company continues to be in full
compliance with all covenants contained in the Credit Agreement.
As of March 31, 2011 and May 9, 2011, no amounts were
outstanding under the credit facility.
7. | Commitments and Contingencies |
The Company, from time to time, is subject to litigation
relating to matters in the ordinary course of business. The
Company believes that any ultimate liability resulting from any
such litigation will not have a material adverse effect on the
Companys results of operations, financial position or cash
flows.
13
Table of Contents
BLACKBOARD
INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
9. | Subsequent Event |
On April 19, 2011, the Company announced that its Board of
Directors has retained a financial advisor in response to
receiving unsolicited, non-binding proposals to acquire the
Company. The Board of Directors is evaluating the proposals as
well as strategic alternatives to enhance shareholder value.
14
Table of Contents
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
ServicesSM
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.
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.
On April 19, 2011, we announced that our Board of Directors
has retained a financial advisor in response to receiving
unsolicited, non-binding proposals to acquire the company. Our
Board of Directors is evaluating the proposals as well as
strategic alternatives to enhance shareholder value.
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
15
Table of Contents
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 $2.5 million and $1.6 million for the
three months ended March 31, 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.
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.
16
Table of Contents
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.
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
17
Table of Contents
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.
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.
| Recurring revenues include those product revenues that recur each year, assuming that clients renew their contracts. These revenues include revenues from the licensing of all of our software products, hosting arrangements, subscription fees from customers accessing our on-demand application services and enhanced support and maintenance contracts related to our software products, including certain professional services performed by our professional services groups. | |
| 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.
18
Table of Contents
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.
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.
Three Months Ended |
||||||||
March 31, | ||||||||
2010 | 2011 | |||||||
Revenues:
|
||||||||
Product
|
93 | % | 92 | % | ||||
Professional services
|
7 | 8 | ||||||
Total revenues
|
100 | 100 | ||||||
Operating expenses:
|
||||||||
Cost of product revenues, excludes amortization of acquired
technology included in amortization of intangibles resulting
from acquisitions shown below
|
24 | 29 | ||||||
Cost of professional services revenues
|
4 | 5 | ||||||
Research and development
|
12 | 14 | ||||||
Sales and marketing
|
25 | 29 | ||||||
General and administrative
|
15 | 16 | ||||||
Amortization of intangibles resulting from acquisitions
|
9 | 8 | ||||||
Total operating expenses
|
89 | 101 | ||||||
Income (loss) from operations
|
11 | % | (1 | )% | ||||
Three
Months Ended March 31, 2011 Compared to Three Months Ended
March 31, 2010
Our total revenues for the three months ended March 31,
2011 were $118.8 million, representing an increase of
$17.7 million, or 18%, as compared to $101.1 million
for the three months ended March 31, 2010.
A detail of our total revenues by classification is as follows:
Three Months Ended March 31, | ||||||||||||||||||||||||
2010 | 2011 | |||||||||||||||||||||||
Professional |
Professional |
|||||||||||||||||||||||
Product |
Services |
Product |
Services |
|||||||||||||||||||||
Revenues | Revenues | Total | Revenues | Revenues | Total | |||||||||||||||||||
(Unaudited) |
||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Recurring revenues
|
$ | 80.0 | $ | 1.9 | $ | 81.9 | $ | 100.5 | $ | 2.3 | $ | 102.8 | ||||||||||||
Non-recurring revenues
|
13.7 | 5.5 | 19.2 | 8.9 | 7.1 | 16.0 | ||||||||||||||||||
Total revenues
|
$ | 93.7 | $ | 7.4 | $ | 101.1 | $ | 109.4 | $ | 9.4 | $ | 118.8 | ||||||||||||
Product revenues. Our product revenues,
including domestic and international, for the three months ended
March 31, 2011 were $109.4 million, representing an
increase of $15.7 million, or 17%, as compared to
19
Table of Contents
$93.7 million for the three months ended March 31,
2010. Recurring product revenues increased by
$20.5 million, or 26%, for the three months ended
March 31, 2011 as compared to the three months ended
March 31, 2010. This increase in recurring revenues was
primarily due to a $5.2 million increase resulting from the
Presidium acquisition that closed in December 2010 and the
resulting launch of our Blackboard Student Services
offering and a $5.1 million increase due to the
Elluminate and Wimba acquisitions that closed in August 2010 and
the resulting launch of our Blackboard Collaborate
platform. The remaining increase in recurring product
revenues primarily resulted from an increase in Blackboard
Mobile revenues of $4.3 million, a $2.9 million
increase in revenues for subscription fees from customers
accessing our on-demand application services primarily related
to Blackboard Connect and a $2.8 million increase in
managed hosting revenues.
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 March 31, 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 March 31, 2011 were $19.8 million,
representing an increase of $1.9 million, or 11%, as
compared to $17.9 million for the three months ended
March 31, 2010. International revenues as a percentage of
total revenues decreased to 17% for the three months ended
March 31, 2011 from 18% for the three months ended
March 31, 2010, primarily due to an increase in domestic
revenues. International product revenues, which consist
primarily of recurring product revenues, were $18.7 million
for the three months ended March 31, 2011, representing an
increase of $1.8 million, or 11%, as compared to
$16.9 million for the three months ended March 31,
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
March 31, 2011 were $9.4 million, representing an
increase of $2.0 million, or 28%, as compared to
$7.4 million for the three months ended March 31,
2010. The increase in professional services revenues was
primarily attributable to the timing of delivery of service
engagements, as well as new professional services engagements
resulting from our 2010 acquisitions. As a percentage of total
revenues, professional services revenues for the three months
ended March 31, 2010 and 2011 were 7% and 8%, respectively.
Cost of product revenues. Our cost of product
revenues for the three months ended March 31, 2011 was
$34.4 million, representing an increase of
$9.9 million, or 40%, as compared to $24.5 million for
the three months ended March 31, 2010. The increase in cost
of product revenues was primarily attributable to increased
product costs and personnel-related costs during the three
months ended March 31, 2011 as compared to the three months
ended March 31, 2010, due to the inclusion of our 2010 and
2011 acquisitions. Cost of product revenues as a percentage of
product revenues increased to 31% for the three months ended
March 31, 2011 from 26% for the three months ended
March 31, 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 $2.5 million and $1.6 million for the three months
ended March 31, 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
33% for the three months ended March 31, 2011 as compared
to 29% for the three months ended March 31, 2010.
Cost of professional services revenues. Our
cost of professional services revenues for the three months
ended March 31, 2011 was $6.7 million, representing an
increase of $2.2 million, or 49%, as compared to
$4.5 million for the three months ended March 31,
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,
including professional services engagements resulting from
opportunities presented by our 2010 acquisitions. Cost of
professional services revenues as a percentage of professional
services revenues increased to 71% for the three months ended
March 31, 2011 from 61% for the three months ended
March 31, 2010.
20
Table of Contents
Research and development expenses. Our
research and development expenses for the three months ended
March 31, 2011 were $16.6 million, representing an
increase of $4.4 million, or 36%, as compared to
$12.2 million for the three months ended March 31,
2010. This increase was primarily attributable to increased
personnel-related costs due to higher average headcount during
the three months ended March 31, 2011 as compared to the
three months ended March 31, 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 March 31,
2011 were $34.6 million, representing an increase of
$9.3 million, or 37%, as compared to $25.3 million for
the three months ended March 31, 2010. This increase was
primarily attributable to increased personnel-related costs due
to higher average headcount during the three months ended
March 31, 2011 as compared to the three months ended
March 31, 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
March 31, 2011 were $18.7 million, representing an
increase of $4.0 million, or 27%, as compared to
$14.7 million for the three months ended March 31,
2010. This increase was primarily attributable to increased
personnel-related costs due to higher average headcount during
the three months ended March 31, 2011 as compared to the
three months ended March 31, 2010, including increased
personnel-related costs associated with the inclusion of our
2010 and 2011 acquisitions. The increase in general and
administrative expenses was also attributable to approximately
$1.1 million in transition, integration and
transaction-related costs incurred during the three months ended
March 31, 2011 for the acquisitions of iStrategy, Presidium
and txttools, as compared to approximately $0.5 million
incurred during the three months ended March 31, 2010 for
the Saf-T-Net acquisition.
Amortization of intangibles resulting from
acquisitions. Our amortization of intangibles
resulting from acquisitions for the three months ended
March 31, 2011 were $9.2 million, representing an
increase of $0.2 million, or 2%, as compared to
$9.0 million for the three months ended March 31,
2011. This increase was attributable to amortization of certain
intangible assets acquired in our 2010 and 2011 acquisitions
offset, in part, by 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.
Net interest expense. Our net interest expense
for the three months ended March 31, 2011 was
$3.1 million, representing an increase of
$0.3 million, or 10%, as compared to $2.9 million for
the three months ended March 31, 2010. The three months
ended March 31, 2011 includes $0.3 million in interest
expense associated with our revolving credit facility with no
comparable amount for the three months ended March 31,
2010. The remainder of our net interest expense during the three
months ended March 31, 2010 and 2011 was primarily the
result of the interest expense incurred on our convertible
senior notes, which does not vary significantly from period to
period.
Other expense, net. Our other expense for the
three months ended March 31, 2011 was $0.4 million,
representing a decrease of $0.1 million, as compared to
other expense of $0.5 million for the three months ended
March 31, 2010. This change was the result of the
remeasurement of our foreign subsidiaries ledgers, which
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
March 31, 2011 was $1.6 million, as compared to our
provision for income taxes of $2.4 million for the three
months ended March 31, 2010. This change was primarily due
to our loss before benefit from income taxes for the three
months ended March 31, 2011, as compared to income before
provision for income taxes for the three months ended
March 31, 2010.
Liquidity
and Capital Resources
Changes
in Cash and Cash Equivalents
Our cash and cash equivalents were $52.7 million at
March 31, 2011 as compared to $70.3 million at
December 31, 2010. The decrease in cash and cash
equivalents was primarily due to the cash used in investing
activities during the three months ended March 31, 2011, as
well as our net loss during the three months ended
21
Table of Contents
March 31, 2011. Our cash and cash equivalents consist of
highly liquid investments, which are readily convertible into
cash and have original maturities of three months or less.
Net cash used in operating activities. Net
cash used in operating activities was $7.1 million during
the three months ended March 31, 2011 as compared to
$1.2 million during the three months ended March 31,
2010. This decrease was primarily attributable to our net loss
of $3.4 million for the three months ended March 31,
2011, as compared to net income of $5.0 million for the
three months ended March 31, 2010. Further, we recognize
revenues on annually renewable agreements, which results in
deferred revenues. Deferred revenues decreased by
$32.9 million during the three months ended March 31,
2011, net of the impact of acquired deferred revenues, due to
the timing of certain client renewal invoicing and sales to new
and existing clients during the current period. In addition,
accounts receivable decreased $7.6 million during the three
months ended March 31, 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 $11.9 million during
the three months ended March 31, 2011 as compared to
$38.1 million during the three months ended March 31,
2010. This decrease was primarily due to a $28.8 million
decrease in cash expenditures for acquisitions during the three
months ended March 31, 2011 as compared to the three months
ended March 31, 2010. This decrease in cash used for
acquisitions was slightly offset by an increase of
$2.6 million in purchases of property and equipment during
the three months ended March 31, 2011, as compared to the
three months ended March 31, 2010. Purchases of property
and equipment represented approximately 3% and 5% of total
revenues for the three months ended March 31, 2010 and
2011, respectively.
Net cash provided by financing activities. Net
cash provided by financing activities was $1.4 million
during the three months ended March 31, 2011 as compared to
$18.2 million during the three months ended March 31,
2010. During the three months ended March 31, 2011, we
received $1.1 million in proceeds from the exercise of
stock options, representing a decrease of $14.3 million, as
compared to $15.4 million during the three months ended
March 31, 2010. The decrease was also attributable to a
$2.6 million decrease in excess tax benefits from
stock-based compensation.
Notes
Payable
In June 2007, we issued and sold $165.0 million aggregate
principal amount of 3.25% Convertible Senior Notes due 2027
(the Notes) in a public offering. The Notes bear
interest at a rate of 3.25% per year on the principal amount.
Interest is payable semi-annually on January 1 and July 1.
The Notes will mature on July 1, 2027, subject to earlier
conversion, redemption or repurchase.
If a make-whole fundamental change, as defined in the Notes,
occurs prior to July 1, 2011, we may be required in certain
circumstances to increase the applicable conversion rate for any
Notes converted in connection with such fundamental change by a
specified number of shares of our common stock. We may not
redeem the Notes prior to July 1, 2011. On or after
July 1, 2011, we may redeem the Notes, in whole at any
time, or in part from time to time, at a redemption price,
payable in cash, up to 100% of the principal amount of the Notes
plus accrued and unpaid interest, if any. Holders of the Notes
may require us to repurchase some or all of the Notes on
July 1, 2011, July 1, 2017 and July 1, 2022, or
in the event of certain fundamental change transactions, at 100%
of the principal amount on the date of repurchase, plus accrued
and unpaid interest, if any, payable in cash. If such an event
occurs, we would be required to pay the entire outstanding
principal amount of $165.0 million in cash, in addition to
any other rights that the investors may have under the Notes. As
the first redemption date of the Notes is July 1, 2011, we
classify the net carrying amount of the liability component of
the Notes of $162.3 million and $163.8 million as of
December 31, 2010 and March 31, 2011, respectively, as
part of current liabilities in our unaudited consolidated
balance sheets.
The Notes are unsecured senior obligations and are effectively
subordinated to all of our existing and future senior
indebtedness to the extent of the assets securing such debt, and
are effectively subordinated to all indebtedness and liabilities
of our subsidiaries, including trade payables.
22
Table of Contents
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 $0.3 million in debt
issuance costs in April 2011, which will be amortized as
interest expense over the remaining term of the senior secured
credit facility using the effective interest method
Under the terms of the Credit Agreement and related loan
documents, our obligations have been guaranteed by our material
domestic subsidiaries, and are secured by substantially all of
our tangible and intangible assets and those of each of our
material domestic subsidiaries. In addition, the Credit
Agreement contains customary affirmative and negative covenants
applicable to us and our subsidiaries with respect to our
operations and financial conditions, including maximum
permissible debt ratios and a minimum liquidity covenant. We
continue to be in full compliance with all covenants contained
in the Credit Agreement.
As of March 31, 2011 and May 9, 2011, no amounts were
outstanding under the credit facility.
Working
Capital Needs
We believe that our existing cash and cash equivalents, together
with future cash expected to be provided by operating activities
and amounts that may be borrowed under our revolving credit
facility, will be sufficient to meet our working capital and
capital expenditure needs over at least the next 12 months,
as well as sufficient to repurchase some or all of the Notes, if
required by the holders of the Notes on the first possible
redemption date on July 1, 2011, or, at our discretion, to
redeem the Notes on or after July 1, 2011.
In March 2011, we announced a share repurchase program under
which we are authorized to purchase up to an aggregate of
$100.0 million of our common stock in open market purchases
or in privately negotiated transactions in accordance with
federal securities laws. Any such repurchases would depend on
market conditions, the market price of our common stock, and
managements assessment of our liquidity and cash flow
needs.
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.
23
Table of Contents
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.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
Interest income on our cash and cash equivalents is subject to
interest rate fluctuations. For the three months ended
March 31, 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 $0.5 million and $0.4 million during the three
months ended March 31, 2010 and 2011, respectively. For the
three months ended March 31, 2011, a ten percent adverse
change in the prevailing exchange rates as of March 31,
2011 would not have had a material effect on our consolidated
results of operations or financial condition.
Item 4. | Controls and Procedures. |
(a) | Evaluation of Disclosure Controls and Procedures. |
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 March 31,
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 March 31, 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.
(b) | Changes in Internal Control over Financial Reporting. |
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
March 31, 2011 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
24
Table of Contents
PART II.
OTHER INFORMATION
Item 1. | Legal Proceedings. |
We may be involved in various legal proceedings from time to
time incidental to the ordinary conduct of our business. We
believe that any ultimate liability resulting from any such
litigation will not have a material adverse effect on our
results of operations, financial position or cash flows.
Item 1A. | Risk Factors. |
We describe our business risk factors below. This description
includes any material changes to and supersedes the description
of the risk factors previously disclosed in Part I,
Item 1A of our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2010.
A. | RISKS RELATED TO OUR EVALUATION OF STRATEGIC ALTERNATIVES |
The
impact and results of our announcement that we are evaluating
strategic alternatives are uncertain and cannot be
determined.
On April 19, 2011, we announced that our Board of Directors
has retained Barclays Capital as our financial advisor in
response to receiving unsolicited, non-binding proposals to
acquire our company. The Board of Directors is evaluating the
proposals as well as strategic alternatives to enhance
shareholder value, including whether other third parties would
have an interest in acquiring us at a price and on terms that
would represent a better value for our shareholders than our
continued execution on our business plan on a stand-alone basis.
There can be no assurance that this process will result in an
agreement or transaction, or that if an agreement is executed,
that a transaction will be consummated. We undertake no
obligation to provide further updates with respect to the
evaluation.
In connection with our Board of Directors evaluation of
strategic alternatives, we expect to incur expenses, including
expenses in connection with the retention of advisors and
consultants. The process of evaluating strategic alternatives
may be disruptive to our business. Activities relating to the
evaluation and related uncertainties could divert the attention
of our management and employees from our
day-to-day
business. Our business partners and customers may choose to
delay purchases or renewals pending the resolution of the
evaluation process. In addition, our ability to attract and
retain key personnel may be impaired. If we are unable to
effectively manage these risks, our business, financial
condition or results of operations may be adversely affected.
B. | RISKS RELATED TO ECONOMIC CONDITIONS |
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.
25
Table of Contents
We
could lose revenues if there are changes in the spending
policies or budget priorities for government funding of
colleges, universities, schools and other education
providers.
Most of our clients and potential clients are colleges,
universities, schools and other education providers who depend
substantially on government funding. Accordingly, any general
decrease, delay or change in federal, state or local funding for
colleges, universities, schools and other education providers
could cause our current and potential clients to reduce their
purchases of our products and services, to exercise their right
to terminate licenses, or to decide not to renew licenses, any
of which would cause us to lose revenues. In addition, a
specific reduction in governmental funding support for products
such as ours would also cause us to lose revenues. In light of
the severe economic downturn experienced in the United States
and globally since 2008, many of our clients have experienced
and may continue to experience budgetary pressures, which may
have a negative impact on sales of our products.
C. | RISKS RELATED TO OUR PRODUCTS AND SERVICES |
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:
| delays in or loss of market acceptance of our products; | |
| diversion of our resources; | |
| a lower rate of license renewals or upgrades; | |
| injury to our reputation; and | |
| increased service expenses or payment of damages. |
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
26
Table of Contents
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.
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.
27
Table of Contents
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
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
28
Table of Contents
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 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:
| clients budgetary constraints and priorities; | |
| the timing of our clients budget cycles; | |
| the need by some clients for lengthy evaluations that often include both their administrators and faculties; and | |
| the length and timing of clients approval processes. |
29
Table of Contents
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 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.
D. | RISKS RELATED TO BUSINESS OPERATIONS AND FINANCING |
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:
| 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; | |
| we may have difficulty incorporating the acquired technologies, products or services with our existing product lines and maintaining uniform standards, controls, procedures and policies; | |
| we may face contingencies related to product liability, intellectual property, financial disclosures, accounting practices or internal controls; | |
| 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; | |
| we may not be able to retain key employees from the companies we acquire; | |
| we may experience operational challenges due to the increased size and complexity of the combined company after our acquisitions; and | |
| we may lose anticipated tax benefits or have additional legal or tax exposures. |
30
Table of Contents
Our
business strategy contemplates future business combinations and
acquisitions which may be difficult to integrate, disrupt our
business, dilute stockholder value or divert management
attention.
A key element of our growth strategy is to pursue additional
acquisitions in the future. Any acquisition could be expensive,
disrupt our ongoing business and distract our management and
employees. We may not be able to identify suitable acquisition
candidates, and if we do identify suitable candidates, we may
not be able to make these acquisitions on acceptable terms or at
all. If we make an acquisition, we could have difficulty
integrating the acquired technology, employees or operations. In
addition, the key personnel of the acquired company may decide
not to work for us. Acquisitions also involve the risk of
potential unknown liabilities associated with the acquired
business.
As a result of these risks, we may not be able to achieve the
expected benefits of any acquisition. If we are unsuccessful in
completing or integrating 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:
| foreign currency fluctuations, which could result in reduced revenues and increased operating expenses; | |
| longer or less predictable payment and sales cycles; | |
| difficulty in collecting accounts receivable; | |
| 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; | |
| tariffs and trade barriers; | |
| general economic and political conditions in each country; | |
| inadequate intellectual property protection in foreign countries; | |
| uncertainty regarding liability for information retrieved and replicated in foreign countries; | |
| the difficulties and increased expenses of complying with a variety of foreign laws, regulations and trade standards; and | |
| unexpected changes in regulatory requirements. |
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.
31
Table of Contents
The
restrictive covenants contained in, and any indebtedness
incurred under, 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.
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. As of March 31, 2011 and May 9,
2011, no amounts were outstanding under the revolving credit
facility.
Our
existing indebtedness could adversely affect our financial
condition and we may not be able to fulfill our debt
obligations.
The outstanding Notes in the principal amount of
$165.0 million pose the following risks to our overall
business:
| upon conversion or redemption of the Notes, the first possible redemption date for which occurs on July 1, 2011, we will be required to repay the principal amount of $165.0 million in cash; | |
| we will use a significant portion of our cash flow to pay interest on our outstanding debt, limiting the amount available for working capital, capital expenditures and other general corporate purposes; | |
| 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 make interest and principal payments on our debt, we might have to refinance our indebtedness or issue additional equity or other securities and may not be successful in those efforts or may not obtain terms favorable to us; and | |
| our ability to finance working capital needs and general corporate purposes for the public and private markets, as well as the associated cost of funding, is dependent, in part, on our credit ratings, which may be adversely affected if we experience declining revenues. |
We may be more vulnerable to adverse economic conditions than
less leveraged competitors and thus less able to withstand
competitive pressures. Any of these events could reduce our
ability to generate cash available for investment or debt
repayment or to make improvements or respond to events that
would enhance profitability. We may incur significantly more
debt in the future, which will increase each of the foregoing
risks related to our indebtedness.
We may
not be able to repurchase the Notes when required by the
holders, including upon a defined fundamental change or other
specified dates at the option of the holder, or pay cash upon
conversion of the Notes.
Upon the occurrence of a fundamental change, as defined in the
Notes, holders of the Notes would have the right to require us
to repurchase the Notes at a price in cash equal to 100% of the
principal amount of the Notes plus accrued and unpaid interest.
Any future credit agreement or other agreements relating to
indebtedness to which we become a party may contain similar
provisions. Holders will also have the right to require us to
repurchase the Notes
32
Table of Contents
for cash or a combination of cash and our common stock on
July 1, 2011, July 1, 2017 or July 1, 2022.
Moreover, upon conversion of the Notes, we are required to
settle a portion of the conversion obligation in cash. In the
event that we are required to repurchase the Notes, or upon
conversion of the Notes, we may not have sufficient financial
resources to satisfy all of our obligations under the Notes and
our other debt instruments. Our failure to pay the repurchase
price when due, to pay cash upon conversion of the Notes or to
meet other payment obligations would result in a default under
the indenture governing the Notes.
Conversion
of the Notes may affect the market price of our common stock and
may dilute the ownership of existing stockholders.
The conversion of some or all of the Notes and any sales in the
public market of our common stock issued upon such conversion
could adversely affect the market price of our common stock. The
existence of the Notes may encourage short selling by market
participants because the conversion of the Notes could depress
our common stock price. In addition, the conversion of some or
all of the Notes could dilute the ownership interests of
existing stockholders to the extent that shares of our common
stock are issued upon conversion.
Our
reported earnings per share may be more volatile because of the
contingent conversion provision of the Notes.
The Notes may have a dilutive effect on earnings per share in
any period in which the market price of our common stock exceeds
the conversion price for the Notes as a result of the inclusion
of the underlying shares in the fully diluted earnings per share
calculation. Volatility in our stock price could cause this
condition or other conversion conditions to be met in one
quarter and not in a subsequent quarter, increasing the
volatility of fully diluted earnings per share.
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.
33
Table of Contents
E. | RISKS RELATED TO INTELLECTUAL PROPERTY AND GOVERNMENT REGULATION |
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:
| be expensive and time consuming to defend; | |
| force us to stop offering our products or services that incorporate the challenged intellectual property; | |
| require us to redesign our products or services and reimburse certain costs to our clients; | |
| divert managements attention and other company resources; and | |
| 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. |
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
34
Table of Contents
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:
| disclosure of consumer rights and our business policies and practices; | |
| restrictions on uses and disclosures of customer information; | |
| error resolution procedures; | |
| limitations on consumers liability for unauthorized account activity; | |
| data security requirements; | |
| government registration; and | |
| reporting and documentation requirements. |
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.
35
Table of Contents
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.
Item 6. | Exhibits. |
(a) Exhibits:
Exhibit No. | Description | |||
10 | .1 | Amendment No. 1 to Credit Agreement dated as of April 4, 2011* | ||
31 | .1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31 | .2 | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32 | .1 | Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32 | .2 | Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
101 | The following financial information from the Registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, filed with the Securities and Exchange Commission on May 9, 2011, formatted in eXtensible Business Reporting Language:(i) Unaudited Consolidated Balance Sheets at March 31, 2011 and December 31, 2010, (ii) Unaudited Consolidated Statement of Operations for the Three months ended March 31, 2011 and 2010, (iii) Unaudited Consolidated Statements of Cash Flows for the Three months ended March 31, 2011 and 2010 and (iv) Notes to Unaudited Consolidated Financial Statements (tagged as blocks of text).** |
* | Previously filed on April 6, 2011 as an exhibit to the Registrants Report on Form 8-K and incorporated by reference herein. | |
** | This exhibit will not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Registrant specifically incorporates it by reference. |
36
Table of Contents
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.
By: |
/s/ John
E. Kinzer
|
John E. Kinzer
Chief Financial Officer
(On behalf of the registrant and as Principal
Financial Officer)
Dated: May 9, 2011
37