UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT of 1934
For the fiscal year ended December 31, 2008
Commission file
number: 000-50784
Blackboard
Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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52-2081178
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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650 Massachusetts Ave, N.W.
Washington D.C.
(Address of Principal
Executive Offices)
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20001
(Zip
Code)
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Registrants telephone number, including area code:
(202) 463-4860
Securities registered pursuant to Section 12(g) of the
Act:
None
Securities registered pursuant to Section 12(b) of the
Act:
Common Stock, $0.01 par value per share
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
þ
No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated
filer
o
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Smaller reporting
company
o
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(Do not check if a smaller reporting
company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
o
No
þ
The aggregate market value of outstanding voting stock held by
non-affiliates of the registrant as of June 30, 2008 was
approximately $1,182.0 million based on the last reported
sale price of the registrants common stock on The NASDAQ
Global Market as of the close of business on that day.
There were 31,362,817 shares of the registrants
common stock outstanding as of January 31, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for
its 2009 annual meeting of stockholders to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission
not later than 120 days after the registrants fiscal
year end of December 31, 2008, are incorporated by
reference into Part III of this
Form 10-K.
BLACKBOARD
INC.
Form 10-K
TABLE OF CONTENTS
ii
This report contains forward-looking statements that involve
risks and uncertainties that could cause our actual results to
differ materially from those expressed or implied by such
statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in
the section entitled Risk Factors under
Item 1A. When used in this report, the words
expects, anticipates,
intends, plans, believes,
seeks, estimates and similar expressions
are generally intended to identify forward-looking statements
within the meaning of The Private Securities Litigation Reform
Act of 1995. You should not place undue reliance on these
forward-looking statements, which reflect our opinions only as
of the date of this report. Blackboard assumes no obligation and
does not intend to update these forward-looking statements.
PART I
General
We are a leading provider of enterprise software applications
and related services to the education industry. Our 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. These 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 principal 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 product line consists of various software applications
delivered in three suites, the
Blackboard Academic
Suite
tm
,
the Blackboard Commerce
Suite
tm
,
and Blackboard
Connect
tm
.
Our suites of products include the following products described
in more detail below:
Blackboard Learning
System
tm
,
Blackboard Community
System
tm
,
Blackboard Content
System
tm
,
Blackboard Outcomes
System
tm
,
Blackboard Portfolio
System
tm
,
Blackboard Transaction
System
tm
,
Bb
One
tm
and
Blackboard
Connect
tm
.
We license these products on a renewable basis, typically for
annual terms.
We began operations in 1997 as a limited liability company
organized under the laws of the state of Delaware and served as
a primary contractor to an education industry technical
standards organization. In 1998, we incorporated under the laws
of the state of Delaware and acquired CourseInfo LLC, which had
developed an internal online learning system used by faculty at
Cornell University, and had begun marketing its technology to
universities and school districts in the United States and
Canada. Since the time of our acquisition of CourseInfo, we have
grown from approximately 26 licenses of one software application
as of December 31, 1998 to more than 6,700 licenses of our
software applications as of December 31, 2008.
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.
On January 31, 2008, we completed the acquisition of The
NTI Group, Inc. for a purchase price of $132.1 million in
cash and $52.7 million in our common stock, which equated
to approximately 1.5 million shares of our common stock,
and up to an additional 0.4 million shares of our common
stock remain payable depending on the achievement of certain
specified performance milestones. In connection with the
transaction, we paid a portion of the purchase price using
proceeds from the issuance of the Notes. This acquisition allows
us to offer clients the ability to send mass communications via
voice, email and text messages. We acquired the technology
underlying
Blackboard Connect
, which we began offering in
February 2008, through the acquisition of The NTI Group, Inc.
The NTI Group, Inc. has since been renamed Blackboard Connect
Inc.
Customer
Overview
Our customer base consists primarily of U.S. postsecondary
education clients, which accounted for approximately 55% of our
total revenues for 2008. We also sell to international
postsecondary clients, which accounted for approximately 17% of
our total revenues for 2008, U.S. K-12 education clients,
which accounted
1
for approximately 12% of our total revenues for 2008, and
others, including primarily education publishers, commercial
education providers, U.S. government organizations and
corporations, which accounted for approximately 16% of our total
revenues for 2008.
Products
and Services
Blackboard offers a complete line of enterprise software
applications focused on the education industry. Clients can
license our software applications individually or in one of
three suites:
Blackboard Academic
Suite
tm
;
Blackboard Commerce
Suite
tm
;
and
Blackboard
Connect
tm
.
Beginning in early 2009, Blackboard renamed its three product
suites:
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Blackboard
Learn
tm
;
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Blackboard
Transact
tm
; and
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Blackboard
Connect
tm
.
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The latest releases of these three platforms feature
advancements in technology, redesigned user interfaces, and
additional capabilities and functionality.
Blackboard
Learn
tm
,
our web-based teaching and learning platform, is the new version
of the widely deployed
Blackboard Academic
Suite
tm
.
We launched
Blackboard
Learn
tm
,
Release 9.0
, our latest software release, in January 2009
as part of our multi-year, multi-release effort to deliver the
next generation of Blackboard solutions, and it is available to
our existing clients under their current licenses with us.
Clients on the
Blackboard Learn
platform may license
packages featuring combinations of the following modules:
Course Delivery
,
Community Engagement
,
Content
Management
,
Portfolio Management
, and
Outcomes
Assessment.
The new modules correspond to the
products within the
Blackboard Academic Suite
as follows:
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Offered
in
Blackboard Academic
Suite
tm
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Offered in
Blackboard
Learn
tm
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The
Blackboard Learning
System
tm
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Course Delivery
module
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The
Blackboard Community
System
tm
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Community Engagement
module
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The
Blackboard Content
System
tm
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Content Management
module
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The
Blackboard Portfolio
System
tm
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Portfolio Management
module
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The
Blackboard Outcomes
System
tm
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Outcomes Assessment
module
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Similarly, the
Blackboard Commerce
Suite
tm
,
the platform for our commerce and security solutions, is now
offered as
Blackboard
Transact
tm
.
Blackboard
Connect
tm
is our alert and notification platform for our comprehensive
communications and notification system solutions.
We offer
Blackboard Learn
in all of our markets,
Blackboard Transact
primarily to U.S. and Canadian
postsecondary clients and
Blackboard Connect
to primarily
U.S. K-12, postsecondary and government clients. We also
offer application hosting for clients who prefer to outsource
the management of their
Blackboard Learn
systems. In
addition to our products, we offer a variety of professional
services, including consulting, project management, custom
application development and training.
Blackboard
Learn
Blackboard Learn
provides a scalable and
easy-to-use
technology platform for delivering education online, managing
digital content and aggregating access to tools, information and
content through an integrated Web portal environment. It enables
our client institutions to:
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Increase faculty adoption of technology for teaching,
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Drive student engagement through personalized experiences and
active learning tools,
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Securely share and collaborate around content across the
institution, and
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Meet diverse assessment needs of institutions.
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2
The
Blackboard Learn
platform offers capabilities for
course delivery, learning content, assessment, document
management, hosting, and community engagement. Clients may
license software applications in packages designed to provide a
variety of options and tailored to meet the diverse needs of our
client base. The
Blackboard Learn
platform packages
available as of January 2009 include enterprise and foundation
licenses for the following modules:
Course Delivery
,
Community Engagement
,
Content Management
,
Portfolio Management
, and
Outcomes Assessment.
Our
existing teaching and learning product suite, the
Blackboard
Academic Suite
, includes: the
Blackboard Learning
System
tm
;
the Blackboard Community
System
tm
;
the Blackboard Content
System
tm
;
the
Blackboard Portfolio
System
tm
;
and the
Blackboard Outcomes
System
tm
.
The
Blackboard Academic Suite
includes the products formerly
known as
WebCT Campus
Edition
tm
and WebCT
Vista
tm
,
which were acquired in our merger with WebCT, Inc
(WebCT) in 2006.
Blackboard
Learn Course Delivery Module
The
Course Delivery
module of the
Blackboard Learn
platform, formerly known as the
Blackboard Learning
System
, allows educational institutions to support an online
teaching and learning environment that can be used to augment a
classroom-based program or for distance learning. The major
capabilities of the
Course Delivery
module include:
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Teaching and Learning.
Instructors can post
syllabi and course materials, including documents, graphics,
audio, video and multimedia; create, deliver and automatically
score online assignments and tests; and report grades and
grading analysis along with other information to students.
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Advanced features.
The
Course Delivery
module also provides integrated email, discussion forums and
live virtual classrooms. It also provides tools to facilitate
group collaboration, communication, file-sharing,
self-evaluation and peer review. Additionally, we offer
Scholar
®
by Blackboard,
a service which allows users to build a
network of peers who share similar educational interests, and
SafeAssign
tm
,
a plagiarism prevention service.
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Extending the learning environment.
Our
products can be integrated with existing campus student
information systems and campus registrar systems to access user,
course and enrollment information stored throughout the
institution. Additional capabilities are available through the
integration of third-party
Blackboard Building
Blocks
®
or
Blackboard
PowerLinks
tm
tools developed by our clients or independent parties. These
extensions of the core software applications allow institutions
to download, install and manage third-party enhancements. These
third-party applications add functionality to our products, and
several client-managed online communities exist to foster open
source development of enhancements to our products as well.
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System administration.
Our products allow
clients to configure our applications to the specific needs of
their institutions. The appearance and configuration of our
products are customizable by each client for multiple
independent user populations within the institution on the same
system hardware and database. In addition, clients have the
ability to define multiple user roles and set access policies
for guest accounts and observers, such as parents, advisors,
mentors and supervisors.
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We offer the
Course Delivery
module of
Blackboard
Learn
through basic, foundation, or enterprise licenses to
appeal to all sizes and types of clients. Basic and foundation
licenses provide entry-level versions of the
Course Delivery
module suitable for small-scale implementations, while
enterprise licenses provide functionality to support larger or
more advanced implementations and various language
configurations, including English, Spanish, Italian, Dutch,
German, French, Japanese, Portuguese, Russian, Swedish, Finnish,
Arabic and Chinese.
Blackboard
Learn Community Engagement Module
The
Community Engagement
module of the
Blackboard
Learn
platform, formerly known as the
Blackboard
Community System
, is an enterprise information portal
application designed specifically for the education industry and
is licensed as an extension of the
Course Delivery
module. The
Community Engagement
module allows
institutions to extend their learning environments and to
further engage students
3
by connecting them with each other, with campus services, and
with faculty beyond the classroom. The
Community Engagement
module extends the
Blackboard Learn
platform to
include functionality for student organizations, faculty and
staff, departmental collaboration, information distribution and
single sign-on access to existing administrative systems. The
major academic capabilities of the
Community Engagement
module include:
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Configurable portal environment enabling one-stop access to
services.
Through a customizable Web portal, the
Community Engagement
module enables institutions to
provide their users access to multiple content sources, campus
services, administrative systems and personal information
management tools, such as email and calendar. The
Community
Engagement
module can provide single sign-on access to a
variety of campus systems, eliminating the need for multiple
access points and identification verifications. Institutions and
independent software vendors can create custom portal
applications that provide views into content and data from other
systems or integrate other applications.
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Facilitating academic and co-curricular collaboration using
community and communication tools.
The
Community Engagement
module facilitates the creation of
meaningful campus connections by allowing institutions to define
dedicated online environments for departments, clubs and other
groups. Members of organizations can manage their own
operations, as well as upload and share documents, and use their
own communication tools, conserving the resources of campus
information technology departments.
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Maintaining distinct campus identities.
An
institution can configure the
Community Engagement
module
to support multiple identities or brands within the institution,
such as multiple campuses, a law school, medical school or
continuing education program, and deliver content to targeted,
institution-defined roles. In addition, users can customize the
Community Enagement
interface according to their needs
and preferences.
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e-Commerce
capabilities.
This functionality enables campus
business units and student organizations to sell products, which
may be paid for with a students credit card or debit
account using the
Blackboard Transact
platform. Uses may
include campus bookstore online purchases, athletics and event
tickets, library fees and parking fees.
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Blackboard
Learn Learning Content Module
The
Learning Content
module of the
Blackboard Learn
platform, formerly known as the
Blackboard Content
System
, provides enterprise content management capabilities
and is licensed as an extension of the
Course Delivery
and
Community Engagement
modules. The
Learning
Content
module supports activities that require enterprise
management of electronic files, such as teaching, learning,
research, archival and library needs, and extracurricular and
departmental pursuits. All of these activities require the
central management, tagging, sharing and re-use of electronic
files, such as lecture notes for multiple sections of a course,
learning resources, test banks and library electronic reserve
materials. In addition, the
Learning Content
module
supports advanced workflow capabilities across the institution
and provides a secure way to share sensitive institutional
content. The major capabilities of the
Learning Content
module include:
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Storing and accessing learning
materials.
Institutions can make secure,
web-based,
drag-and-drop
file storage space available to all users, who can then use a
configurable permissions structure to share files with
individuals or groups, track versions, and add comments. To
assure appropriate usage of the file space, administrators can
manage disk space quotas and set bandwidth controls.
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Learning content management.
Instructors can
manage versions of documents and other course material and can
re-use content across courses. Institutions can create content
repositories administered at the departmental, school or
institutional levels to facilitate the sharing and searching of
digital content.
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Integrating library resources into the learning
environment.
Librarians can create and manage
collections of digital assets for use by specific courses,
disciplines or the entire institution.
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4
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Collecting and sharing materials within electronic
portfolios.
Users can collect and organize their
academic work as electronic portfolios to showcase their
accomplishments, which can be shared with other users on the
system, as well as published externally. These portfolios can be
used for personal reflection, academic assignments, program
completion, alignment with educational standards, or for
professional development, such as résumés and job
applications.
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The
Learning Content
family of products also includes the
Portfolio
Management module of
Blackboard Learn
and the Xythos Software, Inc. (Xythos)
enterprise document management applications we acquired in our
merger with Xythos in 2007. The
Portfolio Management
module is a personal portfolio application that enables
users to collect and organize their academic work and is
currently available to customers with a license for
Blackboard Learn
or the
Blackboard Learning
System
CE and Vista enterprise licenses. The
Xythos enterprise document management applications enable
clients to securely manage and share data across the entire
enterprise.
Blackboard
Learn Outcomes Assessment Module
The
Outcomes Assessment
module of the
Blackboard Learn
platform is licensed as an extension of the
Course
Delivery
,
Community Engagement
, and
Academic
Collaboration
modules. The first version of this
application, the
Blackboard Outcomes
System
tm
,
was released in December 2006 and is also currently
available to customers with the
Blackboard Learning System
enterprise license. Supplemented by strategic and technical
professional services, the
Outcomes Assessment
module
supports and coordinates the academic and administrative
assessment processes taking place across an institutions
many departments. The
Outcomes Assessment
module enables
the planning and measuring of student, teaching and
institutional outcomes and provides a comprehensive set of
instruments for student and program assessment. The major
capabilities of the
Outcomes Assessment
module include:
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Planning outcomes.
The Standards, Goals
and Student Learning Objectives feature enables
institutions to document intended outcomes of courses, programs,
departments, colleges, universities and standards bodies.
Rubrics, or standard evaluation criteria, facilitate shared and
consistent evaluation of outcomes, while curriculum maps
highlight the connection between program goals and courses and
co-curricular educational experiences.
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Measuring learning and administrative
outcomes.
Various assessment tools simplify the
collection of student work and its evaluation against shared
rubrics. Surveys and course evaluations enable users to collect
useful indirect assessment data, soliciting attitudes and
opinions from on-campus and off-campus constituents.
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Improving learning and institutional
effectiveness.
Operational and analytic reports
provide insight into assessment plans, activities, data,
follow-up
actions and correlations to all levels of an institution.
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Blackboard
Transact
Blackboard Transact
is the successor to the
Blackboard
Commerce Suite
, and can be used for on- and off-campus
commerce management, online
e-commerce
and payment management, meal plan administration, vending,
laundry services, copy and print management and student and
staff identification, as well as offering security management
capabilities such as access control and video surveillance
technology.
Blackboard
Transact, Release 3
Blackboard Transact, Release 3
is a centralized software
application providing in one platform all the campus commerce
and security management features that are licensed as separate
parts of the
Blackboard Transaction System.
We license
our campus commerce software, along with various hardware
devices, to allow clients to establish an integrated student
debit account program for charging incidental expenses such as
meals and academic materials, typically using the campus ID
card. The hardware that we sell as part of the
Blackboard
Transact
commerce management solution includes servers,
cards, card readers and
point-of-sale
5
devices.
Blackboard Transact, Release 3
also supports
activities such as facilities access and identity verification.
The principal features of
Blackboard Transact, Release 3
include:
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Commerce.
Transaction processing capabilities
of
Blackboard Transact, Release 3
support the creation
and management of student debit accounts, as well as the
processing of payments against those accounts using student ID
cards on campus, such as in dining facilities, vending machines,
copy machines and bookstores, off-campus and online. Our clients
use the
Blackboard Transact, Release 3
commerce
management solution to manage
point-of-sale
transactions, such as prepaid debit cards, meal plan
administration, cash equivalency, privilege verification and
discounts, and self-service or unattended transactions, such as
vending, laundry, printing, copying and parking.
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Activities management and security.
The
access-rights capabilities of the
Blackboard Transact
security management solution enable a variety of
applications using the clients investment in a single-card
environment for commerce. These include event admission, student
government voting, wireless verification on buses, library
authorization and computer lab access and tracking. In addition,
the system interfaces directly with door access points to manage
identification and secure access control to facilities using the
same student ID card.
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Community
Engagement
In addition to the functionalities it provides as part of the
Blackboard Learn
platform, the
Community
Engagement module enables additional transaction
capabilities when licensed as part of
Blackboard
Transact
, including:
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eMarketplace.
The
Community Engagement
module enables campus business units and student
organizations to sell products which may be paid for with the
student debit account. Users can activate template-driven tools
that allow them to describe, price, display and charge for an
item, all within the campus portal environment. Uses include
campus bookstore online purchases, athletics and event tickets,
library fees and parking fees.
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Web account management.
Through an online
account, end users can manage a variety of activities, including
online deposits, guest and parent deposits, balance inquiries,
transaction history statements and lost and stolen card reports.
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BbOne
Bb
One is the brand name of our off-campus commerce
management solution within the
Blackboard Transact
platform. It enables students and faculty to use their
university ID cards as a form of payment off-campus. We recruit
local merchants to accept student debit accounts as a form of
payment and facilitate the processing of transactions by
third-party merchants that use the
Blackboard Transact
software. By utilizing the existing
Blackboard Transact
debit account at the university,
Bb
One provides
students with a secure, cashless and convenient way to make
purchases while assuring parents that their funds will be spent
within a university-approved merchant network. We develop the
off-campus merchant network on behalf of each university and
manage the program, from merchant acquisition and funds
settlement to transaction terminal support. We also provide
customized marketing campaigns designed to build the card
program brand and increase deposits into the accounts.
Blackboard
Connect
Blackboard Connect
provides comprehensive communication
systems that enable rapid dissemination of critical information
via voice and text devices. The
Blackboard Connect
family
includes the
Connect-ED
®
,
Connect-CTY
®
,
Connect-GOV
®
and
Connect-MIL
®
offerings specifically designed for education, municipal,
government and military clients, respectively.
Blackboard
Connect
is a fully hosted, web-based application that
enables clients to record, schedule, send, and track
personalized voice messages,
e-mail,
SMS
or text messages to tens of thousands of constituents in
minutes.
Blackboard Connect
provides a bundled set of
mass
6
notification, survey, and community outreach tools through a
service that eliminates the need for clients to purchase or
deploy equipment, hardware, or software, or to incur long
distance phone charges.
Professional
Services
Our professional services support the implementation and
maintenance of our systems and software in the educational
environment in order to help clients maximize the value of our
various enterprise software applications. Our services group
offers:
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project management;
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integration of our applications with existing campus systems;
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user interface customization;
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installation and configuration;
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training and instructional design;
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course and content migration; and
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custom
Blackboard Building Blocks
and
Blackboard
PowerLinks
application development.
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Competition
The market for education enterprise software is highly
fragmented and rapidly evolving, and we expect competition in
this market to persist and intensify. Our primary competitors
for the
Blackboard Learn
platform are companies and open
source solutions that provide course management systems, such as
ANGEL Learning, Inc., Desire2Learn Inc., eCollege.com,
Microsoft, Moodle, Jenzabar, Inc., Pearson Education, The Sakai
Project, VCampus Educator, and WebTycho; learning content
management systems, such as HarvestRoad Ltd. and Concord USA,
Inc.; and education enterprise information portal technologies,
such as SunGard SCT 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 other open source
software applications. Our competitors for the
Blackboard
Transact
platform include companies that provide transaction
systems, security systems and off-campus merchant relationship
programs. We face a variety of competitors for our
Blackboard
Connect
offering that provide mass notification
technologies, including voice, email
and/or
text
messaging communications.
We may also face competition from potential competitors that are
substantially larger than we are and have significantly greater
financial, technical and marketing resources, and established,
extensive direct and indirect sales and distribution channels.
As a result, they 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.
We believe that the primary competitive factors in our markets
are:
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base of reference clients;
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functional breadth and depth of solution offered;
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ease of use;
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complexity of installation and upgrade;
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scalability of solution to meet growing needs;
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client service;
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availability of third-party application and content add-ons;
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total cost of ownership;
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financial stability; and
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company reputation.
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We believe that we compete favorably on the basis of these
factors.
Our
Growth Strategy
We seek to capitalize on our position as a leader in our primary
markets to grow our business by supporting several significant
aspects of education, including teaching, learning, commerce and
campus life. Key elements of our growth strategy include:
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Growing annual license revenues.
We intend to
increase annual license revenues with existing clients through
upgrades to current products, cross-selling of complementary
applications and increased total license value commensurate with
the value of our offerings.
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Increasing penetration with U.S. postsecondary and K-12
clients.
We intend to capitalize on our
experience in U.S. postsecondary and K-12 education to
further enhance our leadership position.
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Offering new products to our target
markets.
Using feedback gathered from our clients
and our sales and technical support groups, we intend to
continue to develop and offer new upgrades, applications and
application suites to increase our presence on campuses and
expand the value provided to our clients.
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Increasing sales in our emerging markets.
We
intend to continue to expand sales and marketing efforts to
increase sales of our various offerings within the less mature
domestic and international markets we serve.
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Pursuing strategic relationships and acquisition
opportunities.
We intend to continue to pursue
strategic relationships with, acquisitions of, and investments
in, companies that would enhance the technological features of
our products, offer complementary products, services and
technologies, or broaden the scope of our product offerings into
other areas.
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Research
and Development
Our software products are developed and maintained by a
dedicated team of software engineers, product managers and
documentation specialists. In addition, we organize our teams to
address specialized functional areas, such as: an engineering
services team, which focuses on highly technical product support
issues; a quality control team, which tests our applications to
identify and correct software errors and usability issues before
a new product or update is released; and a research and
development engineering team which works on special development
projects that involve third parties, including software tools
for integrating our products with other campus systems. Our
research and development group receives feedback on product
improvement suggestions and new products from clients, either
directly or through our sales and client support organizations.
We periodically release maintenance updates to and new versions
of our existing products. In addition, our research and
development group works on new product initiatives as
appropriate. Our products are primarily developed internally
and, in support of the development of our products, we have
acquired or licensed specialized products and technologies from
other software firms. Our research and development expenses were
$27.2 million, $28.3 million, and $40.6 million
in the years ended December 31, 2006, 2007, and 2008
respectively.
8
Marketing
and Sales
Marketing
We engage in a variety of traditional and online marketing
activities designed to provide sales lead generation, sales
support and increasing market awareness. Our specific marketing
activities include print advertising in trade publications,
direct mail campaigns, speaking engagements and industry
trade-shows and seminars, which help create awareness of our
brand and products and services. Examples of specific marketing
events include
BbWorld
®
,
our annual users conferences held around the world;
BbSummit
tm
,
which are smaller and more regionally-focused annual meetings of
educational and technology leaders from the United States
and abroad; and Blackboard Days, which provide information
sessions at current client sites for current and prospective
clients.
Sales
We sell our products through a direct sales force and, in some
emerging international markets, through re-sellers. Regional
sales managers are responsible for sales of our products in
their territories and supervise account managers who are
responsible for maintaining software and service renewal rates
among our clients. Client managers are typically compensated in
part based upon their achievement of renewal rate quotas, and
pursue a variety of client relations activities aimed at
maintaining and improving renewal rates. In addition, our sales
organization includes technical sales engineers, who are experts
in the technical aspects of our products and client
implementations.
In our experience, colleges, universities and schools frequently
rely on references from peer institutions when selecting a
vendor and often involve a variety of internal constituencies,
such as instructors and students, when evaluating a product. In
addition, most public education institutions and many private
institutions utilize request for proposal, or RFP, processes, by
which they announce their interest in purchasing an application
and detail their requirements so that vendors may bid
accordingly. As a result, we generate sales leads from sources
such as interacting with attendees at conferences, visiting
potential clients sites to provide briefings on the
industry and our products, responding to inbound calls based on
client recommendations and monitoring and responding to RFPs. We
often structure our licenses in a manner that anticipates
expansion from one product to multiple products on our
platforms, and we engage in state or regional agreements when
appropriate to provide umbrella pricing and contractual terms
for a group of institutions. We have U.S. sales offices in
Washington, D.C.; Phoenix, Arizona; Los Angeles, California
and San Francisco, California. We have international sales
offices in Amsterdam, Netherlands and Sydney, Australia.
Intellectual
Property
We rely on a combination of copyright, patent, trademark and
trade secret laws in the United States and other jurisdictions,
as well as confidentiality agreements and other contractual
arrangements, to establish and protect our proprietary and
intellectual property rights. We have a variety of patents and
pending patent applications in the United States and in various
international jurisdictions related to the products we offer.
Executive
Officers
The following table lists our executive officers and their ages
as of January 31, 2009.
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Name
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Age
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Position
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Michael L. Chasen
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37
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Chief executive officer, president, director
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Michael J. Beach
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38
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Chief financial officer and treasurer
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Matthew H. Small
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36
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Chief business officer, chief legal officer and secretary
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Jonathan R. Walsh
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36
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Vice president for finance and accounting
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Michael Chasen
has served as chief executive officer
since January 2001, as president since February 2004 and as a
director since our founding in 1997. From June 1997 to January
2001, Mr. Chasen served as
9
president. Before co-founding Blackboard, from May 1996 to June
1997, Mr. Chasen was a consultant with KPMG Consulting (now
BearingPoint, Inc.) serving colleges and universities.
Mr. Chasen received a B.S. degree from American University
and a M.B.A. degree from Georgetown University School of
Business.
Michael Beach
has served as chief financial officer since
September 2006 and treasurer since February 2004. From June 2001
to September 2006, Mr. Beach served as vice president for
finance. Prior to joining us, from February 1997 to June 2001,
Mr. Beach was an audit senior manager at the public
accounting firm of Ernst & Young LLP. Mr. Beach
received a B.B.A. degree from James Madison University.
Matthew Small
has served as chief business officer and
chief legal officer since May 2008 and secretary since February
2004. Mr. Small served as chief legal officer from January
2006 to May 2008, and as senior vice president for legal and
general counsel from January 2004 to January 2006, corporate
counsel from September 2002 to January 2004 and assistant
secretary from November 2002 to February 2004. Prior to joining
us, from September 1999 to September 2002, Mr. Small was an
associate at the law firm of Testa, Hurwitz &
Thibeault LLP. Mr. Small received a B.A. degree from the
University of Denver, a M.B.A. degree from the University of
Connecticut School of Business and a J.D. degree from the
University of Connecticut Law School.
Jonathan Walsh
has served as vice president for finance
and accounting since September 2006. From July 2001 to August
2006, he served as controller. Prior to joining us, from July
1998 to June 2001, Mr. Walsh held financial reporting and
financial planning positions at Sunrise Assisted Living, Inc.,
AppNet, Inc. and CommerceOne, Inc. and from January 1995 to July
1998 Mr. Walsh was an audit senior at the public accounting
firm of Ernst & Young LLP. Mr. Walsh received a
B.B.A. degree from James Madison University.
Employees
As of December 31, 2008, we had 1,087 employees,
including approximately 252 in sales; 90 in marketing and
business development; 200 in support, managed hosting and
production; 235 in research and development; 135 in professional
services; and 175 in general administration. None of our
employees are represented by a labor union. We have never
experienced a work stoppage and believe our relationship with
our employees is good.
International
Operations
We currently operate predominantly in the United States. Our
revenues derived from operations in foreign countries for fiscal
years 2006, 2007, and 2008 were $34.7 million,
$53.6 million, and $60.9 million, respectively, which
represented 19.0%, 22.4%, and 19.5% of our total revenues in
those years. Substantially all of our material identifiable
assets are located in the United States.
Website
Access to U.S. Securities and Exchange Commission
Reports
Our Internet address is
http://www.blackboard.com.
Through our website, we make available, free of charge, access
to all reports filed with the U.S. Securities and Exchange
Commission including our Annual Reports on
Form 10-K,
our Quarterly Reports on
Form 10-Q,
our Current Reports on
Form 8-K
and amendments to these reports, as filed with or furnished to
the SEC pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the Exchange
Act), as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC. Copies of any materials we file with, or furnish to, the
SEC can also be obtained free of charge through the SECs
website at
http://www.sec.gov
or at the SECs Public Reference Room at
100 F Street, N.W., Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference
Room by calling the SEC at
1-800-SEC-0330.
The information available on our website is not incorporated
into this report.
10
Item 1A.
Risk
Factors.
Challenging
economic conditions may adversely affect our
business.
The economic disruption experienced in the United States and
globally during the second half of 2008 and any continuing
unfavorable economic conditions may affect our sales and
renewals of our products and services, and could negatively
affect our revenues and our ability to maintain or grow our
business. In addition, the current global financial crisis
affecting the banking system and the possibility that financial
institutions may consolidate or go out of business has resulted
in a tightening of the credit markets, which could impair the
ability of our customers to obtain credit to finance purchases
of our products. Our client base is diverse and each client or
potential client faces a unique set of risks. These risks
include, for example, the availability of public funds and the
possibility of state and local budget cuts, reduced enrollment,
or lower revenues, which could lead to a reduction in overall
spending, including information technology spending, by our
current and potential clients. A prolonged economic downturn may
result in a reduction in overall demand for educational software
products and services, which could cause a decline in both new
sales and renewals of our existing products and difficulty in
establishing a market for our new products and services.
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 could 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 U.S. and
globally commencing in the second half of 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. Continuing unfavorable economic conditions may
result in budget cuts and lead to lower overall spending,
including information technology spending, by our current and
potential clients, which may cause our revenues to decrease. In
addition, our accounts receivable may increase and the relative
aging of our receivables may deteriorate if our clients delay or
are unable to make their payments due to the tightening of
credit markets and the lack of available funding. A prolonged
economic downturn may make it difficult for potential clients to
buy our products and might compromise the ability of existing
clients to renew their licenses. Also, because many of our
clients begin their fiscal year in July or later, the full
impact of the economic conditions may not yet have become
apparent and we may face decreases in our sales or renewal of
existing clients if their new budgets require cost reductions.
There
is no assurance that our investments in product development and
product acquisition will be successful; if our products do not
gain market acceptance, our revenues may decrease and we may not
realize a return on such investments.
We make substantial investments in improving our products and
acquiring products through mergers and acquisitions and we have
no assurance that our investments will be successful. Our
ability to grow our business will be compromised if we do not
develop products and services that achieve broad market
acceptance with our current and potential clients. We have
recently released a new version 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.
If our newest products, the
Blackboard Outcomes
System
and
Blackboard Connect,
do not gain widespread market
acceptance, our financial results could suffer. We introduced
our newest software
11
application, the
Blackboard Outcomes System,
in December
2006 and acquired the technology underlying
Blackboard
Connect
through our merger with The NTI Group, Inc. in
January 2008. 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, our
revenues may fall below our expectations.
We
face intense and growing competition, which could result in
price reductions, reduced operating margins and loss of market
share.
We operate in highly competitive markets and generally encounter
intense competition to win contracts. If we are unable to
successfully compete for new business and license renewals, our
revenue growth and operating margins may decline. The markets
for online education, transactional, portal, content management,
transaction systems and mass notification products are intensely
competitive and rapidly changing, and barriers to entry in these
markets are relatively low. With the introduction of new
technologies and market entrants, we expect competition to
intensify in the future. Some of our principal competitors offer
their products at a lower price, which has resulted in pricing
pressures. Such pricing pressures and increased competition
generally could result in reduced sales, reduced margins or the
failure of our product and service offerings to achieve or
maintain more widespread market acceptance.
Our primary competitors for the
Blackboard Learn
platform
are companies and open source solutions that provide course
management systems, such as ANGEL Learning, Inc., Desire2Learn
Inc., eCollege.com, Jenzabar, Inc., Microsoft, Moodle, Pearson
Education, The Sakai Project, VCampus Educator and WebTycho;
learning content management systems, such as HarvestRoad Ltd.
and Concord USA, Inc.; and education enterprise information
portal technologies, such as SunGard SCT Inc., an operating unit
of SunGard Data Systems Inc. We also face competition from
clients and potential clients who develop their own applications
internally, large diversified software vendors who offer
products in numerous markets including the education market and
open source software applications. Our competitors for the
Blackboard Transact
platform include companies that
provide transaction systems, security and access systems and
off-campus merchant relationship programs. Our competitors for
Blackboard Connect
include a variety of competitors which
provide mass notification technologies including voice, email
and/or
text
messaging communications.
We may also face competition from potential competitors that are
substantially larger than we are and have significantly greater
financial, technical and marketing resources, and established,
extensive direct and indirect sales and distribution channels.
Similarly, our competitors may also be acquired by larger and
more well-funded companies which have more resources than our
current competitors. These larger companies may be able to
respond more quickly to new or emerging technologies and changes
in client requirements, or to devote greater resources to the
development, promotion and sale of their products than we can.
In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or
prospective clients. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and
rapidly acquire significant market share to our detriment.
If
potential clients or competitors use open source software to
develop products that are competitive with our products and
services, we may face decreased demand and pressure to reduce
the prices for our products.
The growing acceptance and prevalence of open source software
may make it easier for competitors or potential competitors to
develop software applications that compete with our products, or
for clients and potential clients to internally develop software
applications that they would otherwise have licensed from us.
One of the aspects of open source software is that it can be
modified or used to develop new software that competes with
proprietary software applications, such as ours. Such
competition can develop without the degree of overhead and lead
time required by traditional proprietary software companies. As
open source offerings become more prevalent, customers may defer
or forego purchases of our products, which could reduce our
sales and lengthen the sales cycle for our products or result in
the loss of current clients to open source solutions. If we are
unable to differentiate our products from competitive products
based on open source software, demand for our products and
services may decline, and we may face pressure to reduce the
prices of our products, which would hurt our profitability.
12
Our
merger with The NTI Group, Inc. (NTI) presents many
risks, and we may not realize the financial and strategic goals
that were contemplated at the time of the
transaction.
We completed the merger with NTI on January 31, 2008. We
entered into this transaction with the expectation that it would
result in various long-term benefits including improved revenue
and profits, and enhancements to our product portfolio and
customer base. Risks that we may encounter in seeking to realize
these benefits include:
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we may not realize the anticipated financial benefits if we are
unable to sell the NTI products, which are now sold as
Blackboard Connect
, to our customer base, if a larger
than predicted number of customers decline to renew their
contracts, or if the acquired contracts do not allow us to
recognize revenues on a timely basis;
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we may have difficulty incorporating NTI technologies or
products with our existing product lines and maintaining uniform
standards, controls, procedures and policies;
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we may face contingencies related to product liability,
intellectual property, financial disclosures, and accounting
practices or internal controls;
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we may have higher than anticipated costs in supporting and
continuing development of the
Blackboard Connect
products
and in servicing new and existing
Blackboard Connect
clients;
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we may not be able to retain key employees from NTI;
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we may be unable to manage effectively the increased size and
complexity of the combined company, and our managements
attention may be diverted from our ongoing business by
transition or integration issues;
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we may lose anticipated tax benefits or have additional legal or
tax exposures; and
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we will not be able to determine whether all or any of the
0.4 million shares of stock consideration in the merger
that remains contingent on the achievement of certain
performance milestones will be issued until the completion of
the financial results for fiscal year 2009.
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Our
business strategy contemplates future business combinations and
acquisitions which may be difficult to integrate, disrupt our
business, dilute stockholder value or divert management
attention.
During the course of our history, we have acquired several
businesses, and 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 acquisitions that we may pursue in the
future, we would be required to reevaluate our growth strategy,
and we may have incurred substantial expenses and devoted
significant management time and resources in seeking to complete
and integrate the acquisitions.
Future business combinations could involve the acquisition of
significant tangible and intangible assets, which could require
us to record in our statements of operations ongoing
amortization of identified intangible assets acquired in
connection with acquisitions, which we currently do with respect
to our historic acquisitions, including the NTI Group merger. In
addition, we may need to record write-downs from future
impairments of identified tangible and intangible assets and
goodwill. These accounting charges would reduce any future
reported earnings, or increase a reported loss. In future
acquisitions, we could also incur debt to pay for acquisitions,
or issue additional equity securities as consideration, which
could cause our stockholders to suffer significant dilution.
13
Additionally, our ability to utilize, net operating loss
carryforwards, if any, acquired in any acquisitions may be
significantly limited or unusable by us under Section 382
or other sections of the Internal Revenue Code.
Our
existing indebtedness could adversely affect our financial
condition and we may not be able to fulfill our debt
obligations, including the 3.25% Convertible Senior Notes
due 2027 (the Notes).
The outstanding Notes in the principal amount of
$165.0 million pose the following risks to our overall
business:
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upon conversion or redemption of the Notes, we will be required
to repay the principal amount of $165.0 million in cash;
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we will use a significant portion of our cash flow to pay
interest on our outstanding debt, limiting the amount available
for working capital, capital expenditures and other general
corporate purposes;
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lenders may be unwilling to lend additional amounts to us for
future working capital needs, additional acquisitions or other
purposes or may only be willing to provide funding on terms we
would consider unacceptable;
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if our cash flow were inadequate to make interest and principal
payments on our debt, we might have to refinance our
indebtedness or issue additional equity or other securities and
may not be successful in those efforts or may not obtain terms
favorable to us; and
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our ability to finance working capital needs and general
corporate purposes for the public and private markets, as well
as the associated cost of funding, is dependent, in part, on our
credit ratings, which may be adversely affected if we experience
declining revenues.
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We may be more vulnerable to adverse economic conditions than
less leveraged competitors and thus less able to withstand
competitive pressures. Any of these events could reduce our
ability to generate cash available for investment or debt
repayment or to make improvements or respond to events that
would enhance profitability. We may incur significantly more
debt in the future, which will increase each of the foregoing
risks related to our indebtedness.
We may
not be able to repurchase the Notes when required by the
holders, including upon a defined fundamental change or other
specified dates at the option of the holder, or pay cash upon
conversion of the Notes.
Upon the occurrence of a fundamental change as defined in the
Notes, holders of the Notes would have the right to require us
to repurchase the Notes at a price in cash equal to 100% of the
principal amount of the Notes plus accrued and unpaid interest.
Any future credit agreement or other agreements relating to
indebtedness to which we become a party may contain similar
provisions. Holders will also have the right to require us to
repurchase the Notes for cash or a combination of cash and our
common stock on July 1, 2011, July 1, 2017 or
July 1, 2022. Moreover, upon conversion of the Notes, we
are required to settle a portion of the conversion obligation in
cash. In the event that we are required to repurchase the Notes
or upon conversion of the Notes, we may not have sufficient
financial resources to satisfy all of our obligations under the
Notes and our other debt instruments. Our failure to pay the
repurchase price when due, to pay cash upon conversion of Notes,
or similarly fail to meet our payment obligations, would result
in a default under the indenture governing the Notes. Any
default under our indebtedness could have a material adverse
effect on our business, results of operations and financial
condition.
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
14
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
accounting method for convertible debt securities with net share
settlement, like the Notes, has changed.
In May 2008, the FASB issued new guidance requiring certain
components of convertible debt instruments, like the Notes, to
be separately accounted for in a manner that reflects an
issuers nonconvertible debt borrowing rate. This will
result in additional non-cash interest expense over the period
the Notes are expected to be outstanding. The new guidance is
effective for us beginning January 1, 2009, but
retrospective application to all financial periods presented in
our financial statements is required. This change will have an
adverse impact on our previously reported financial results and
will contribute to volatility in future financial results. We
are currently finalizing the impact on our consolidated results
of operations and financial condition. We currently estimate
that the additional non-cash interest expense over the remaining
period the Notes are expected to be outstanding will be
approximately $13.4 million, of which approximately
$6.0 million will be recognized during 2009.
Because
most of our licenses are renewable on an annual basis, a
reduction in our license renewal rate could significantly reduce
our revenues.
Our clients have no obligation to renew their licenses for our
products after the expiration of the initial license period,
which is typically one year, and some clients have elected not
to do so. A decline in license renewal rates could cause our
revenues to decline. We have limited historical data with
respect to rates of renewals, so we cannot accurately predict
future renewal rates. Our license renewal rates may decline or
fluctuate as a result of a number of factors, including client
dissatisfaction with our products and services, our failure to
update our products to maintain their attractiveness in the
market or budgetary constraints or changes in budget priorities
faced by our clients.
We may experience difficulties that could delay or prevent the
successful development, introduction and sale of new products
under development. If introduced for sale, the new products may
not adequately meet the requirements of the marketplace and may
not achieve any significant degree of market acceptance, which
could cause our financial results to suffer. In addition, during
the development period for the new products, our customers may
defer or forego purchases of our products and services. We often
obtain renewable client contracts in acquisitions, such as the
WebCT and The NTI Group transactions, 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 will not
necessarily be fully reflected in the revenues in that quarter,
and will negatively affect our revenues and profitability in
future quarters. This ratable revenue recognition also makes it
difficult for us to rapidly
15
increase our revenues through additional sales in any period, as
revenues from new clients must be recognized over the applicable
agreement term.
Our
operating margins may suffer if our professional services
revenues increase in proportion to total revenues because our
professional services revenues have lower gross
margins.
Because our professional services revenues typically have lower
gross margins than our product revenues, an increase in the
percentage of total revenues represented by professional
services revenues could have a detrimental impact on our overall
gross margins, and could adversely affect our operating results.
In addition, we sometimes subcontract professional services to
third parties, which further reduces our gross margins on these
professional services. As a result, an increase in the
percentage of professional services provided by third-party
consultants could lower our overall gross margins.
If our
products contain errors, new product releases are delayed or our
services are disrupted, we could lose new sales and be subject
to significant liability claims.
Because our software products are complex, they may contain
undetected errors or defects, known as bugs. Bugs can be
detected at any point in a products life cycle, but are
more common when a new product is introduced or when new
versions are released. In the past, we have encountered product
development delays and defects in our products. We expect that,
despite our testing, errors will be found in new products and
product enhancements in the future. In addition, our service
offerings may be disrupted causing delays or interruptions in
the services provided to our clients. Significant errors in our
products or disruptions in the provision of our services could
lead to:
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delays in or loss of market acceptance of our products;
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diversion of our resources;
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a lower rate of license renewals or upgrades;
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injury to our reputation; and
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increased service expenses or payment of damages.
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Because our clients use our products to store, retrieve and
utilize critical information, we may be subject to significant
liability claims if our products do not work properly or if the
provision of our services is disrupted. Such an event could
result in significant expenses, disrupt sales and affect our
reputation and that of our products. We cannot be certain that
the limitations of liability set forth in our licenses and
agreements would be enforceable or would otherwise protect us
from liability for damages and our insurance may not cover all
or any of the claims. A material liability claim against us,
regardless of its merit or its outcome, could result in
substantial costs, significantly harm our business reputation
and divert managements attention from our operations.
The
length and unpredictability of the sales cycle for our software
could delay new sales and cause our revenues and cash flows for
any given quarter to fail to meet our projections or market
expectations.
The sales cycle between our initial contact with a potential
client and the signing of a license with that client typically
ranges from 6 to 18 months. As a result of this lengthy
sales cycle, we have only a limited ability to forecast the
timing of sales. A delay in or failure to complete license
transactions could harm our business and financial results, and
could cause our financial results to vary significantly from
quarter to quarter. Our sales cycle varies widely, reflecting
differences in our potential clients decision-making
processes, procurement requirements and budget cycles, and is
subject to significant risks over which we have little or no
control, including:
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clients budgetary constraints and priorities;
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the timing of our clients budget cycles;
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16
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the need by some clients for lengthy evaluations that often
include both their administrators and faculties; and
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the length and timing of clients approval processes.
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Potential clients typically conduct extensive and lengthy
evaluations before committing to our products and services and
generally require us to expend substantial time, effort and
money educating them as to the value of our offerings. In light
of the economic disruption experienced in the U.S. and globally
commencing in the second half of 2008, 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, which would negatively impact
our consolidated results of operations and financial condition.
Our
sales cycle with international postsecondary education providers
and U.S. K-12 schools may be longer than our historic
U.S. postsecondary sales cycle, which could cause us to
incur greater costs and could reduce our operating
margins.
As we target more of our sales efforts at international
postsecondary education providers and U.S. K-12 schools, we
could face greater costs, longer sales cycles and less
predictability in completing some of our sales, which may harm
our business. A potential clients decision to use our
products and services may be a decision involving multiple
institutions and, if so, these types of sales would require us
to provide greater levels of education to prospective clients
regarding the use and benefits of our products and services. In
addition, we expect that potential international postsecondary
and U.S. K-12 clients may demand more customization,
integration services and features. As a result of these factors,
these sales opportunities may require us to devote greater sales
support and professional services resources to individual sales,
thereby increasing the costs and time required to complete sales
and diverting sales and professional services resources to a
smaller number of international and U.S. K-12 transactions.
We may
have exposure to greater than anticipated tax
liabilities.
We are subject to income taxes and other taxes in a variety of
jurisdictions and are subject to review by both domestic and
foreign taxation authorities. The determination of our provision
for income taxes and other tax liabilities requires significant
judgment and the ultimate tax outcome may differ from the
amounts recorded in our consolidated financial statements, which
may materially affect our financial results in the period or
periods for which such determination is made.
Our
ability to utilize our net operating loss carryforwards may be
limited.
Our federal net operating loss carryforwards are subject to
limitations on how much may be utilized on an annual basis. The
use of the net operating loss carryforwards may have additional
limitations resulting from certain future ownership changes or
other factors under Section 382 of the Internal Revenue
Code.
If our net operating loss carryforwards are further limited, and
we have taxable income which exceeds the available net operating
loss carryforwards for that period, we would incur an income tax
liability even though net operating loss carryforwards may be
available in future years prior to their expiration Any such
income tax liability may adversely affect our future cash flow,
financial position and financial results.
The
investment of our cash balances are subject to risks which 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 fixed-income
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-
17
temporary, we will be required to further write down the value
of our investments, which could materially harm our results of
operations and financial condition. With the current 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
acquisitions of WebCT and NTI. Whether we are able to execute
effectively on our business strategy will depend in large part
on how well key management and other personnel perform in their
positions and are integrated within our company. Key personnel
have left our company over the years, and there may be
additional departures of key personnel from time to time. In
addition, as we seek to expand our global organization, the
hiring of qualified sales, technical and support personnel has
been difficult due to the limited number of qualified
professionals. Failure to attract, integrate and retain key
personnel would result in disruptions to our operations,
including adversely affecting the timeliness of product
releases, the successful implementation and completion of
company initiatives and the results of our operations.
If we
do not maintain the compatibility of our products with
third-party applications that our clients use in conjunction
with our products, demand for our products could
decline.
Our software applications can be used with a variety of
third-party applications used by our clients to extend the
functionality of our products, which we believe contributes to
the attractiveness of our products in the market. If we are not
able to maintain the compatibility of our products with
third-party applications, demand for our products could decline,
and we could lose sales. We may desire in the future to make our
products compatible with new or existing third-party
applications that achieve popularity within the education
marketplace, and these third-party applications may not be
compatible with our designs. Any failure on our part to modify
our applications to ensure compatibility with such third-party
applications would reduce demand for our products and services.
If we
are unable to protect our proprietary technology and other
rights, it will reduce our ability to compete for
business.
If we are unable to protect our intellectual property, our
competitors could use our intellectual property to market
products similar to our products, which could decrease demand
for our products. In addition, we may be unable to prevent the
use of our products by persons who have not paid the required
license fee, which could reduce our revenues. We rely on a
combination of copyright, patent, trademark and trade secret
laws, as well as licensing agreements, third-party nondisclosure
agreements and other contractual provisions and technical
measures, to protect our intellectual property rights. These
protections may not be adequate to prevent our competitors from
copying or reverse-engineering our products, and these
protections may be costly and difficult to enforce. Our
competitors may independently develop technologies that are
substantially equivalent or superior to our technology. To
protect our trade secrets and other proprietary information, we
require employees, consultants, advisors and collaborators to
enter into confidentiality agreements. These agreements may not
provide meaningful protection for our trade secrets, know-how or
other proprietary information in the event of any unauthorized
use, misappropriation or disclosure of such trade secrets,
know-how or other proprietary information. The protective
mechanisms we include in our products may not be sufficient to
prevent unauthorized copying. Existing copyright laws afford
only limited protection for our intellectual property rights and
may not protect such rights in the event competitors
independently develop products similar to ours. In addition, the
laws of some countries in which our products are or may be
licensed do not protect our products and intellectual property
rights to the same extent as do the laws of the
United States.
If we
are found to infringe the proprietary rights of others, we could
be required to redesign our products, pay significant royalties
or enter into license agreements with third
parties.
A third party may assert that our technology violates its
intellectual property rights. As the number of products in our
markets increases and the functionality of these products
further overlaps, we believe that
18
infringement claims may become more common. Any claims,
including the TechRadium action described under Item 3,
Legal Proceedings
below, regardless of their
merit, could:
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be expensive and time consuming to defend;
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force us to stop licensing our products that incorporate the
challenged intellectual property;
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require us to redesign our products and reimburse certain costs
to our clients;
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divert managements attention and other company
resources; and
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require us to enter into royalty or licensing agreements in
order to obtain the right to use necessary technologies, which
may not be available on terms acceptable to us, or at all.
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The
nature of our business and our reliance on intellectual property
and other proprietary information subjects us to the risks of
litigation.
We are in an industry where litigation is common, including
litigation related to copyright, patent, trademark and trade
secret rights, and other types of claims. Litigation can be
expensive and disruptive to normal business operations. The
results of litigation are inherently uncertain and may result in
adverse rulings or decisions. We may enter into settlements or
be subject to judgments that may, individually or in the
aggregate, have a material adverse effect on our business,
financial condition or operating results.
Expansion
of our business internationally will subject our business to
additional economic and operational risks that could increase
our costs and make it difficult for us to operate
profitably.
One of our key growth strategies is to pursue international
expansion. Expansion of our international operations may require
significant expenditure of financial and management resources
and result in increased administrative and compliance costs. As
a result of such expansion, we will be increasingly subject to
the risks inherent in conducting business internationally,
including:
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foreign currency fluctuations, which could result in reduced
revenues and increased operating expenses;
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potentially longer payment and sales cycles;
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difficulty in collecting accounts receivable;
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the effect of applicable foreign tax structures, including tax
rates that may be higher than tax rates in the United States or
taxes that may be duplicative of those imposed in the United
States;
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tariffs and trade barriers;
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general economic and political conditions in each country;
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inadequate intellectual property protection in foreign countries;
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uncertainty regarding liability for information retrieved and
replicated in foreign countries;
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the difficulties and increased expenses of complying with a
variety of foreign laws, regulations and trade
standards; and
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unexpected changes in regulatory requirements.
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Unauthorized
disclosure of data, whether through breach of our computer
systems or otherwise, could expose us to protracted and costly
litigation or cause us to lose clients.
Maintaining the security of our systems is of critical
importance for our clients because they may involve the storage
and transmission of proprietary and confidential client and
student information, including personal student information and
consumer financial data, such as credit card numbers. This area
is heavily regulated in many countries in which we operate,
including the United States. Individuals and groups may develop
and deploy viruses, worms and other malicious software programs
that attack or attempt to infiltrate our products. If our
security measures are breached as a result of third-party
action, employee error, malfeasance or otherwise, we could be
subject to liability or our business could be interrupted.
Penetration of our network security could have a negative impact
on our reputation, could lead our present and potential clients
to choose competing offerings, and could result in legal or
regulatory action against us. Even if we do not encounter a
security breach ourselves, a well-publicized breach of the
consumer data security of another company could
19
lead to a general public loss of confidence in the use of our
products, which could significantly diminish the attractiveness
of our products and services.
Operational
failures in our network infrastructure could disrupt our remote
hosting services, could cause us to lose clients and sales to
potential clients and could result in increased expenses and
reduced revenues.
Unanticipated problems affecting our network systems could cause
interruptions or delays in the delivery of the hosting services
we provide to some of our clients. We provide remote hosting
through computer hardware that is currently located in
third-party co-location facilities in various locations in the
United States, The Netherlands and Australia. We do not control
the operation of these co-location facilities. Lengthy
interruptions in our hosting service could be caused by the
occurrence of a natural disaster, power loss, vandalism or other
telecommunications problems at the co-location facilities or if
these co-location facilities were to close without adequate
notice. Although we have developed certain redundancies in our
systems, we have experienced problems of this nature from time
to time in the past, and we will continue to be exposed to the
risk of network failures in the future. We currently do not have
adequate computer hardware and systems to provide alternative
service for most of our hosted clients in the event of an
extended loss of service at the co-location facilities. Certain
of our co-location facilities are served by data backup
redundancy at other facilities. However, they are not equipped
to provide full disaster recovery to all of our hosted clients.
If there are operational failures in our network infrastructure
that cause interruptions, slower response times, loss of data or
extended loss of service for our remotely hosted clients, we may
be required to issue credits or pay penalties, current clients
may terminate their contracts or elect not to renew them, and we
may lose sales to potential clients. If we determine that we
need additional hardware and systems, we may be required to make
further investments in our network infrastructure.
U.S.
and foreign government regulation of our products and services
could cause us to incur significant expenses, and failure to
comply with applicable regulations could make our business less
efficient or even impossible.
The application of existing laws and regulations potentially
applicable to our products and services, including regulations
relating to issues such as privacy, telecommunications,
defamation, pricing, advertising, taxation, consumer protection,
content regulation, quality of products and services and
intellectual property ownership and infringement, can be
unclear. It is possible that U.S., state, local and foreign
governments might attempt to regulate our products and services
or prosecute us for violations of their laws. In addition, these
laws may be modified and new laws may be enacted in the future,
which could increase the costs of regulatory compliance for us
or force us to change our business practices. Any existing or
new legislation applicable to us could expose us to substantial
liability, including significant expenses necessary to comply
with such laws and regulations, and dampen the growth in use of
our products and services.
We may
be subject to state and federal financial services regulation,
and any violation of any present or future regulation could
expose us to liability, force us to change our business
practices or force us to stop selling or modify our products and
services.
Our transaction processing product and service offering could be
subject to state and federal financial services regulation. The
Blackboard Transact
platform supports the creation and
management of student debit accounts and the processing of
payments against those accounts for both on-campus vendors and
off-campus merchants. For example, one or more federal or state
governmental agencies that regulate or monitor banks or other
types of providers of electronic commerce services may conclude
that we are engaged in banking or other financial services
activities that are regulated by the Federal Reserve under the
U.S. Federal Electronic Funds Transfer Act or
Regulation E thereunder or by state agencies under similar
state statutes or regulations. Regulatory requirements may
include, for example:
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disclosure of consumer rights and our business policies and
practices;
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restrictions on uses and disclosures of customer information;
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error resolution procedures;
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limitations on consumers liability for unauthorized
account activity;
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20
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data security requirements;
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government registration; and
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reporting and documentation requirements.
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A number of states have enacted legislation regulating check
sellers, money transmitters or transaction settlement service
providers as banks. If we were deemed to be in violation of any
current or future regulations, we could be exposed to financial
liability and adverse publicity or forced to change our business
practices or stop selling some of our products and services. As
a result, we could face significant legal fees, delays in
extending our product and services offerings, and damage to our
reputation that could harm our business and reduce demand for
our products and services. Even if we are not required to change
our business practices, we could be required to obtain licenses
or regulatory approvals that could cause us to incur substantial
costs.
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Item 1B.
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Unresolved
Staff Comments.
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None.
Our corporate headquarters office is located in
Washington, D.C. We relocated our corporate headquarters in
June 2008 to a building in Washington, D.C. where we lease
approximately 129,000 square feet of office space under a
lease expiring in June 2018. We also lease offices in Northern
Virginia; Phoenix, Arizona; Lynnfield, Massachusetts; Los
Angeles, California; San Francisco, California; Amsterdam,
Netherlands; Vancouver, Canada; and Sydney, Australia.
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Item 3.
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Legal
Proceedings.
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On July 26, 2006, we filed a complaint in the United States
District Court for the Eastern District of Texas alleging that
Desire2Learn Inc. (Desire 2 Learn) infringes on
U.S. Patent No. 6,988,138. On February 22, 2008,
the jury returned a verdict in our favor on infringement and
validity. On May 7, 2008, the court entered judgment for us
in the amount of $3.3 million plus post-judgment interest
accruing at 6% per annum. On June 11, 2008,
Desire2Learn paid us the sum of $3.3 million, which
consisted of the judgment amount plus accrued interest. This
amount is recorded as proceeds from patent judgment on our
consolidated statements of operations for the year ended
December 31, 2008. Both parties have pending appeals of the
final judgment at the United States Court of Appeals for the
Federal Circuit. In addition, the patent at issue is undergoing
a re-examination by the U.S. Patent and Trademark Office
following re-examination requests by Desire2Learn and a third
party.
On May 19, 2008, TechRadium, Inc. (TechRadium)
filed an action in the United States District Court for the
Eastern District of Texas against Blackboard Inc. and Blackboard
Connect Inc. (collectively Blackboard) alleging that
Blackboard infringes three United States patents owned by
TechRadium relating to notification technologies. Specifically,
TechRadium alleges that Blackboard infringes on
TechRadiums U.S. patents 7,130,389, 7,174,005, and
7,362,852. TechRadium seeks unspecified monetary damages,
injunctive relief and other damages to which TechRadium may be
entitled in law or in equity.
On January 28, 2009, we filed an action in the United
States District Court for the Eastern District of Texas against
TechRadium alleging that TechRadium infringes on
U.S. Patent No. 6,816,878 owned by Blackboard relating
to notification technologies. We are seeking unspecified
monetary damages, injunctive relief and other damages to which
we may be entitled in law or in equity.
In addition, we may be involved in various legal proceedings
from time to time incidental to the ordinary conduct of our
business.
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Item 4.
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Submission
of Matters to a Vote of Security Holders.
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No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
21
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
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Our common stock trades on the NASDAQ Global Market under the
symbol BBBB. The following table sets forth, for the
period indicated, the range of high and low closing sales prices
for our common stock by quarter.
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High
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Low
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Year Ended December 31, 2007:
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First Quarter
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35.52
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28.50
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Second Quarter
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42.94
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32.76
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Third Quarter
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46.45
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38.08
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Fourth Quarter
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49.90
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37.52
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Year Ended December 31, 2008:
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First Quarter
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39.16
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27.12
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Second Quarter
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39.69
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31.86
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Third Quarter
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43.62
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34.81
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Fourth Quarter
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39.60
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19.76
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As of January 31, 2009 there were 142 holders of record of
our outstanding common stock.
We have not paid or declared any cash dividends on our common
stock. We currently expect to retain all of our earnings for use
in developing our business and do not anticipate paying any cash
dividends in the foreseeable future.
We did not repurchase any of our equity securities in 2008.
The equity compensation plan information required under this
Item is incorporated by reference to the information provided
under the heading Equity Compensation Plan
Information in our proxy statement to be filed within
120 days after the fiscal year end of December 31,
2008.
22
STOCK
PERFORMANCE GRAPH
The following graph compares the yearly change in the cumulative
total stockholder return on our common stock during the period
from June 18, 2004 (the date of our initial public
offering) through December 31, 2008, with the cumulative
total return on a SIC Index that includes all organizations in
the Standard Industrial Classification (SIC) Code
7372-Prepackaged Software (the SIC Code Index) and a
NASDAQ Market Index. The comparison assumes that $100 was
invested on June 18, 2004 in our common stock and in each
of the foregoing indices and assumes reinvestment of dividends,
if any.
COMPARISON
OF CUMULATIVE TOTAL RETURN
AMONG BLACKBOARD INC.,
NASDAQ MARKET INDEX AND SIC CODE INDEX
Assumes $100 invested on June 18, 2004
Assumes dividend reinvested
Fiscal year ending Dec. 31, 2008
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6/18/2004
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12/31/2004
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12/31/2005
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12/31/2006
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12/31/2007
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12/31/2008
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Blackboard Inc.
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$
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100.00
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$
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74.01
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$
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144.83
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$
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150.12
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$
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201.15
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$
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131.08
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SIC Code Index
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100.00
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107.82
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106.14
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121.83
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143.09
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85.71
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NASDAQ Market Index
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100.00
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106.69
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109.04
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120.23
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132.17
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77.99
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(1)
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This graph is not soliciting material, is not deemed
filed with the SEC and is not to be incorporated by reference in
any filing by us under the Securities Act of 1933, as amended
(the Securities Act), or the Exchange Act, whether
made before or after the date hereof and irrespective of any
general incorporation language in any such filing.
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(2)
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The stock price performance shown on the graph is not
necessarily indicative of future price performance. Information
used in the graph was obtained from Morningstar Inc., a source
we believe to be reliable, but we do not assume responsibility
for any errors or omissions in such information.
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(3)
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The hypothetical investment in our common stock presented in the
stock performance graph above is based on an assumed initial
price of $20.01 per share, the closing price on
June 18, 2004, the date of our initial public offering. The
stock sold in our initial public offering was issued at a price
to the public of $14.00 per share.
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23
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Item 6.
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Selected
Financial Data.
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The following selected consolidated financial data should be
read in conjunction with our consolidated financial statements
and the related notes, and with Managements
Discussion and Analysis of Financial Condition and Results of
Operations, included elsewhere in this annual report. The
statement of operations data for the years ended
December 31, 2004, 2005, 2006, 2007 and 2008, and the
balance sheet data as of December 31, 2004, 2005, 2006,
2007 and 2008, are derived from, and are qualified by reference
to, our audited consolidated financial statements that have been
audited by Ernst & Young, LLP, our independent
registered public accounting firm.
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|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
98,632
|
|
|
$
|
120,389
|
|
|
$
|
160,392
|
|
|
$
|
213,631
|
|
|
$
|
283,258
|
|
Professional services
|
|
|
12,771
|
|
|
|
15,275
|
|
|
|
22,671
|
|
|
|
25,817
|
|
|
|
28,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
111,403
|
|
|
|
135,664
|
|
|
|
183,063
|
|
|
|
239,448
|
|
|
|
312,134
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues, excludes $1,567, $0, $9,333, $11,564
and $17,803, respectively, of amortization of acquired
technology included in amortization of intangibles resulting
from acquisitions shown below(1)
|
|
|
25,897
|
|
|
|
29,607
|
|
|
|
39,594
|
|
|
|
47,444
|
|
|
|
75,237
|
|
Cost of professional services revenues(1)
|
|
|
7,962
|
|
|
|
10,220
|
|
|
|
16,001
|
|
|
|
16,941
|
|
|
|
19,555
|
|
Research and development(1)
|
|
|
13,749
|
|
|
|
13,945
|
|
|
|
27,162
|
|
|
|
28,278
|
|
|
|
40,580
|
|
Sales and marketing(1)
|
|
|
35,176
|
|
|
|
37,873
|
|
|
|
58,340
|
|
|
|
66,033
|
|
|
|
91,076
|
|
General and administrative(1)
|
|
|
15,069
|
|
|
|
19,306
|
|
|
|
35,823
|
|
|
|
38,667
|
|
|
|
50,757
|
|
Proceeds from patent judgment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,313
|
)
|
Amortization of intangibles resulting from acquisitions
|
|
|
3,517
|
|
|
|
266
|
|
|
|
17,969
|
|
|
|
22,122
|
|
|
|
37,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
101,370
|
|
|
|
111,217
|
|
|
|
194,889
|
|
|
|
219,485
|
|
|
|
311,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
10,033
|
|
|
|
24,447
|
|
|
|
(11,826
|
)
|
|
|
19,963
|
|
|
|
376
|
|
Interest income (expense), net
|
|
|
315
|
|
|
|
3,097
|
|
|
|
(2,974
|
)
|
|
|
(93
|
)
|
|
|
(5,412
|
)
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
(519
|
)
|
|
|
575
|
|
|
|
4,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for income taxes
|
|
|
10,348
|
|
|
|
27,544
|
|
|
|
(15,319
|
)
|
|
|
20,445
|
|
|
|
(912
|
)
|
Provision (benefit) for income taxes
|
|
|
299
|
|
|
|
(14,309
|
)
|
|
|
(4,582
|
)
|
|
|
7,580
|
|
|
|
(3,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
10,049
|
|
|
|
41,853
|
|
|
|
(10,737
|
)
|
|
|
12,865
|
|
|
|
2,820
|
|
Dividends on and accretion of convertible preferred stock
|
|
|
(6,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
3,705
|
|
|
$
|
41,853
|
|
|
$
|
(10,737
|
)
|
|
$
|
12,865
|
|
|
$
|
2,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net income (loss) attributable to common stockholders per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
|
$
|
1.57
|
|
|
$
|
(0.39
|
)
|
|
$
|
0.45
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
1.47
|
|
|
$
|
(0.39
|
)
|
|
$
|
0.43
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,072
|
|
|
|
26,715
|
|
|
|
27,858
|
|
|
|
28,789
|
|
|
|
30,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
17,864
|
|
|
|
28,510
|
|
|
|
27,858
|
|
|
|
30,114
|
|
|
|
31,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes the following amounts related to stock-based
compensation:
|
Cost of product revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
386
|
|
|
$
|
672
|
|
|
$
|
949
|
|
Cost of professional services revenues
|
|
|
|
|
|
|
|
|
|
|
524
|
|
|
|
631
|
|
|
|
321
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
733
|
|
|
|
467
|
|
|
|
777
|
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
2,951
|
|
|
|
4,359
|
|
|
|
5,984
|
|
General and administrative
|
|
|
174
|
|
|
|
75
|
|
|
|
3,462
|
|
|
|
5,914
|
|
|
|
7,096
|
|
The following table sets forth a summary of our balance sheet
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
78,149
|
|
|
$
|
75,895
|
|
|
$
|
30,776
|
|
|
$
|
206,558
|
|
|
$
|
141,746
|
|
Short-term investments
|
|
|
20,000
|
|
|
|
62,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficit)
|
|
|
53,026
|
|
|
|
93,388
|
|
|
|
(36,976
|
)
|
|
|
125,215
|
|
|
|
43,457
|
|
Total assets
|
|
|
148,398
|
|
|
|
224,188
|
|
|
|
307,299
|
|
|
|
505,276
|
|
|
|
658,358
|
|
Deferred revenues, current portion
|
|
|
63,901
|
|
|
|
74,975
|
|
|
|
117,972
|
|
|
|
126,600
|
|
|
|
179,238
|
|
Total debt
|
|
|
762
|
|
|
|
|
|
|
|
23,623
|
|
|
|
161,519
|
|
|
|
163,172
|
|
Total stockholders equity
|
|
|
69,107
|
|
|
|
130,325
|
|
|
|
140,121
|
|
|
|
184,674
|
|
|
|
268,632
|
|
25
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
You should read the following discussion together with our
consolidated financial statements and the related notes included
elsewhere in this annual report. This discussion contains
forward-looking statements that are based on our current
expectations, estimates and projections about our business and
operations. Our actual results may differ materially from those
currently anticipated and expressed in such forward-looking
statements as a result of a number of factors, including those
we discuss under Item 1A Risk Factors and
elsewhere in this annual report.
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.
On January 31, 2008, we completed our merger with NTI
pursuant to the Agreement and Plan of Merger dated
January 11, 2008. Pursuant to the Agreement and Plan of
Merger, we acquired all the outstanding common stock of NTI in a
transaction for approximately $184.8 million, which
includes $132.1 million in cash and $52.7 million in
shares of our common stock. The effective cash purchase price of
NTI before transaction costs was approximately
$130.5 million, net of NTIs January 31, 2008
cash balance of approximately $1.6 million. We have
included the financial results of NTI in our consolidated
financial statements beginning February 1, 2008. Up to an
additional 0.4 million shares of our common stock may be
issued contingent on the achievement of certain performance
milestones.
On July 26, 2006, we filed a complaint in the United States
District Court for the Eastern District of Texas alleging that
Desire2Learn, Inc. (Desire2Learn) infringes on
U.S. Patent No. 6,988,138. On February 22, 2008,
the jury returned a verdict in favor of us on infringement and
validity. On May 7, 2008, the court entered judgment for us
in the amount of $3.3 million plus post-judgment interest
accruing at 6% per annum. On June 11, 2008,
Desire2Learn paid us the sum of $3.3 million, which
consisted of the judgment amount plus accrued interest. The
parties also entered into an agreement that we would repay the
full sum plus 6% interest within a prenegotiated time period in
the event of a final, non-appealable mandate of a court that
entirely disposes of our claims in the suit. Both parties have
pending appeals of the final judgment at the United States Court
of Appeals for the Federal Circuit.
We generate revenues from sales and licensing of products and
from professional services. Our product revenues consist
principally of revenues from annual software licenses,
subscription fees from customers accessing our on-demand
application services, client hosting engagements and the sale of
bundled software-hardware systems. We typically sell our
licenses and hosting services under annually renewable
agreements, and our clients generally pay the annual fees at the
beginning of the contract term. We recognize revenues from these
agreements, as well as revenues from bundled software-hardware
systems, which do not recur, ratably over the contractual term,
which is typically 12 months. Billings associated with
licenses and hosting services are recorded initially as deferred
revenues and then recognized ratably into revenues over the
contract term. We also generate product revenues from the sale
and licensing of third-party software and hardware that is not
bundled with our software. These revenues are generally
recognized upon shipment of the products to our clients.
We derive professional services revenues primarily from
training, implementation, installation and other consulting
services. Substantially all of our professional services are
performed on a
time-and-materials
basis. We recognize these revenues as the services are performed.
26
We typically license our individual applications either on a
stand-alone basis or bundled as part of one of our three product
suites: the
Blackboard Academic
Suite
tm,
the
Blackboard Commerce
Suite
tm
and
Blackboard
Connect
tm
.
Our suites of products include the following products:
Blackboard Learning
System
tm
,
Blackboard Community
System
tm
,
Blackboard Content
System
tm
,
Blackboard Outcomes
System
tm
,
Blackboard Portfolio
System
tm
,
Blackboard Transaction
System
tm
,
Bb
One
tm
,
and Blackboard
Connect
tm
.
Beginning in early 2009, Blackboard renamed its three product
suites:
|
|
|
|
|
Blackboard
Learn
tm
;
|
|
|
|
Blackboard
Transact
tm
; and
|
|
|
|
Blackboard
Connect
tm
.
|
The latest releases of these three platforms feature
advancements in technology, redesigned user interfaces, and
additional capabilities and functionality.
Blackboard
Learn
tm
,
our web-based teaching and learning platform, is the new version
of the widely deployed
Blackboard Academic
Suite
tm
.
We launched
Blackboard
Learn
tm
,
Release 9.0
, our latest software release, in January 2009
as part of our multi-year, multi-release effort to deliver the
next generation of Blackboard solutions, and it is available to
our existing clients under their current licenses with us.
Clients on the
Blackboard Learn
platform may license
packages featuring combinations of the following modules:
Course Delivery
,
Community Engagement
,
Content
Management
,
Portfolio Management
, and
Outcomes
Assessment.
The new modules correspond to the
products within the
Blackboard Academic Suite
as follows:
|
|
|
Offered
in
Blackboard Academic
Suite
tm
|
|
Offered in
Blackboard
Learn
tm
|
The
Blackboard Learning
System
tm
|
|
Course Delivery
module
|
The
Blackboard Community
System
tm
|
|
Community Engagement
module
|
The
Blackboard Content
System
tm
|
|
Content Management
module
|
The
Blackboard Portfolio
System
tm
|
|
Portfolio Management
module
|
The
Blackboard Outcomes
System
tm
|
|
Outcomes Assessment
module
|
Similarly, the
Blackboard Commerce
Suite
tm
,
the platform for our commerce and security solutions, is now
offered as
Blackboard
Transact
tm
.
Blackboard
Connect
tm
is our alert and notification platform for our comprehensive
communications and notification system solutions.
We generally price our software licenses on the basis of
full-time equivalent students or users. Accordingly, annual
license fees are generally greater for larger institutions.
Our operating expenses consist of cost of product revenues, cost
of professional services revenues, research and development
expenses, sales and marketing expenses, general and
administrative expenses and amortization of intangibles
resulting from acquisitions.
Major components of our cost of product revenues include license
and other fees that we owe to third parties upon licensing
software, and the cost of hardware that we bundle with our
software. We initially defer these costs and recognize them into
expense over the period in which the related revenue is
recognized. Cost of product revenues also includes amortization
of internally developed technology available for sale,
telecommunications costs related to the
Blackboard Connect
product, all direct materials and shipping and handling
costs, employee compensation, 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. All of
these costs are expensed as incurred. The costs of third-party
software and hardware that is not bundled with software are also
expensed when incurred, normally upon delivery to our client.
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 $11.7 million and $17.8 million for the
years ended December 31, 2007 and 2008, respectively.
27
Cost of professional services revenues primarily includes the
costs of compensation, 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. All of these costs are expensed as incurred.
Research and development expenses include the costs of
compensation, 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. All of
these costs are expensed 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. All of these costs are expensed
as incurred.
General and administrative expenses include the costs of
compensation, 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. All of these costs are expensed as
incurred.
Amortization of intangibles includes the amortization of costs
associated with products, acquired technology, customer lists,
non-compete agreements and other identifiable intangible assets.
These intangible assets were recorded at the time of our
acquisitions and relate to contractual agreements, technology
and products that we continue to utilize in our business.
We held a warrant to purchase common stock in an entity that
provides technology support services to educational
institutions, including our customers, that was exercisable for
19.9% of the shares of the entity. This common stock warrant
meets the definition of a derivative as defined by FASB
Statement No. 133,
Accounting for Derivative
Instruments and Hedging Activity.
Other income of
approximately $4.0 million was recorded in our consolidated
statements of operations in June 2008 related to the fair value
adjustment of the common stock warrant. On July 1, 2008, in
connection with an equity transaction between this entity and a
venture capital firm, we partially exercised the warrant for
approximately one-half of the shares originally exercisable
under the warrant and sold the shares acquired upon exercise to
the venture capital firm for approximately $2.0 million.
Concurrently, we entered into an amended common stock warrant
agreement under which we can purchase up to 9.9% of the shares
of the entity upon exercise. The fair value of the common stock
warrant of approximately $2.0 million is recorded as
investment in common stock warrant on our consolidated balance
sheet as of December 31, 2008. We will continue to evaluate
the fair value of this instrument in subsequent reporting
periods, and any changes in value will be recognized in the
consolidated statements of operations.
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.
28
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:
Revenue recognition.
Our revenues are derived
from two sources: product sales and professional services sales.
Product revenues include software license fees, subscription
fees from customers accessing our on-demand application
services, hardware, premium support and maintenance, and hosting
revenues. Professional services revenues include revenues from
training and consulting services. We recognize software license
and maintenance revenues in accordance with the American
Institute of Certified Public Accountants Statement of
Position (SOP)
97-2,
Software Revenue Recognition,
as modified by
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition, with Respect to Certain
Transactions.
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
(VSOE) of fair value for our support and maintenance
separate from our software for the majority of our products.
Accordingly, when licenses are sold in conjunction with our
support and maintenance, we recognize the license revenue over
the term of the maintenance service period. When licenses of
certain offerings are sold in conjunction with our support and
maintenance where we do have VSOE, we recognize the license
revenue upon delivery of the license and recognize the support
and maintenance revenue over the term of the maintenance service
period.
We sell hardware in two types of transactions: sales of hardware
in conjunction with our software licenses, which we refer to as
bundled hardware-software systems, and sales of hardware without
software, which generally involve the resale of third-party
hardware. After any necessary installation services are
performed, hardware revenues are recognized when all of the
following criteria are met: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the
fee is fixed and determinable; and (4) collectibility is
probable. We have not determined VSOE of the fair value for the
separate components of bundled hardware-software systems.
Accordingly, when a bundled hardware-software system is sold,
all revenue is recognized over the term of the maintenance
service period. Hardware sales without software are recognized
upon delivery of the hardware to our client.
Hosting revenues are recorded in accordance with Emerging Issues
Task Force (EITF)
00-3,
Application of AICPA
SOP 97-2
to Arrangements That Include the Right to Use Software Stored on
Another Entitys Hardware.
Accordingly, we
recognize hosting fees and
set-up
fees
ratably over the term of the hosting agreement.
Our 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,
as defined in
SOP 97-2.
The more significant factors considered 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. Professional
services that are sold separately from license revenue are
recognized as the professional services are performed on a
time-and-materials
basis.
We do 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 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. Any
29
contingencies, such as rights of return, conditions of
acceptance, warranties and price protection, are accounted for
under
SOP 97-2.
The effect of accounting for these contingencies included in
revenue arrangements has not been material.
Allowance for doubtful accounts.
We maintain
an allowance for doubtful accounts for estimated losses
resulting from the inability, failure or refusal of our clients
to make required payments. We analyze accounts receivable,
historical percentages of uncollectible accounts and changes in
payment history when evaluating the adequacy of the allowance
for doubtful accounts. We use an internal collection effort,
which may include our sales and services groups as we deem
appropriate. Although we believe that our reserves are adequate,
if the financial condition of our clients deteriorates,
resulting in an impairment of their ability to make payments, or
if we underestimate the allowances required, additional
allowances may be necessary, which will result in increased
expense in the period in which such determination is made.
Fair Value Measurements.
As of January 1,
2008, we adopted the SFAS No. 157,
Fair Value
Measurements
(FAS 157). FAS 157
defines fair value, establishes a fair value hierarchy for
assets and liabilities measured at fair value and expands
required disclosure about fair value measurements. The
FAS 157 hierarchy ranks the quality and reliability of
inputs, or assumptions, used in the determination of fair value
and requires financial assets and liabilities carried at fair
value to be classified and disclosed in one of the following
three categories:
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
We evaluate assets and liabilities subject to fair value
measurements on a recurring basis to determine the appropriate
level to classify them for each reporting period. This
determination requires significant judgments to be made by us.
Long-lived assets.
We record our long-lived
assets, such as property and equipment, at cost. We review the
carrying value of our long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable in accordance
with the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets.
We evaluate these assets by examining
estimated future cash flows to determine if their current
recorded value is impaired. We evaluate these cash flows by
using weighted probability techniques as well as comparisons of
past performance against projections. Assets may also be
evaluated by identifying independent market values. If we
determine that an assets carrying value is impaired, we
will record a write-down of the carrying value of the identified
asset and charge the impairment as an operating expense in the
period in which the determination is made. Although we believe
that the carrying values of our long-lived assets are
appropriately stated, changes in strategy or market conditions
or significant technological developments could significantly
impact these judgments and require adjustments to recorded asset
balances.
Goodwill and intangible assets.
As the result
of acquisitions, any excess of the purchase price over the fair
value of the net tangible and identifiable intangible assets
acquired is recorded as goodwill. A preliminary allocation of
the purchase price to tangible and intangible net assets
acquired is based upon a preliminary valuation and our estimates
and assumptions may be subject to change. We assess the
impairment of goodwill in accordance with
SFAS No. 142,
Goodwill and Other Intangible
Assets.
Accordingly, we test our goodwill for
impairment annually on October 1, or whenever events or
changes in circumstances indicate an impairment may have
occurred, by comparing its fair value to its carrying value.
Impairment may result from, among other things, deterioration in
the performance of the acquired business, adverse market
conditions, adverse changes in applicable laws or regulations,
including changes that restrict the activities of the acquired
business, and a variety of other circumstances. If we determine
that an impairment has occurred, we are required to record a
write-down of the carrying value and charge the impairment as an
operating expense in the period the determination is made.
Although we believe goodwill is appropriately stated in our
consolidated financial statements, changes in strategy or market
conditions could significantly impact these judgments and
require an adjustment to the recorded balance.
30
The costs of defending and protecting patents are capitalized.
All costs incurred prior to filing a patent application are
expensed as incurred.
Intangible assets are amortized using the straight-line method
over the following estimated useful lives of the assets:
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Acquired technology
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3 years
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Contracts and customer lists
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3 to 5 years
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Non-compete agreements
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Term of agreement
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Trademarks and domain names
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3 years
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Patents and related costs
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Life of patent
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As of December 31, 2007 and 2008, we had capitalized
$5.2 million and $8.2 million, respectively, in costs
of defending and protecting patents, due to expenses incurred in
a suit against Desire2Learn, Inc. in which we have alleged
infringement of one of our patents. Any change in our estimates
based on ongoing litigation could materially reduce the
valuation of these assets.
On February 28, 2006, we completed our merger with WebCT
pursuant to the Agreement and Plan of Merger dated as of
October 12, 2005. Pursuant to the Agreement and Plan of
Merger, we acquired all the outstanding common stock of WebCT in
a cash transaction for approximately $178.3 million. The
effective cash purchase price of WebCT before transaction costs
was approximately $150.4 million, net of WebCTs
February 28, 2006 cash balance of approximately
$27.9 million. We have included the financial results of
WebCT in our consolidated financial statements beginning
February 28, 2006.
The merger was accounted for under the purchase method of
accounting in accordance with SFAS No. 141,
Business Combinations
(SFAS 141). Assets acquired and liabilities
assumed were recorded at their fair values as of
February 28, 2006. The total purchase price was
$187.5 million, including the acquisition-related
transaction costs of approximately $9.2 million.
Acquisition-related transaction costs include investment
banking, legal and accounting fees, and other external costs
directly related to the merger.
Of the total purchase price, $26.1 million has been
allocated to net tangible assets and $73.3 million has been
allocated to definite-lived intangible assets acquired.
Definite-lived intangible assets of $73.3 million consist
of the value assigned to WebCTs customer relationships of
$39.6 million and developed and core technology of
$33.7 million. We allocated the remaining
$88.1 million to goodwill, which is not deductible for tax
purposes.
During 2007, we reduced our goodwill from the WebCT acquisition
by approximately $6.4 million primarily related to the
recognition of deferred tax assets related to certain
acquisition-related transaction costs that were deductible for
income tax purposes by WebCT. Consequently, after this
adjustment, the net deferred tax asset acquired as a result of
the WebCT merger was $7.8 million.
During 2008, we reduced goodwill by $0.9 million related to
net operating loss carry forwards that were utilized during 2008
and that had previously been recognized as goodwill in
conjunction with the WebCT acquisition.
During 2007, we purchased technology for $1.5 million which
will provide future functionality in our products. The
technology is classified as acquired technology and recorded as
intangible assets on the consolidated balance sheets at
December 31, 2007.
On November 30, 2007, we completed our merger with Xythos
Software, Inc. (Xythos) pursuant to the Agreement
and Plan of Merger dated as of November 12, 2007. Xythos
owned the underlying technology embedded in the
Blackboard
Content System.
This merger allows us to further augment the
underlying technology of the
Blackboard Content System
and is a technology that we intend to incorporate into the
broader
Blackboard Academic Suite
and our new platform,
Blackboard Learn.
Pursuant to the Agreement and Plan of
Merger, we acquired all of the outstanding common stock of
Xythos in a cash transaction for approximately
$36.4 million, including acquisition-related transaction
costs and purchase accounting adjustments of $10.9 million,
which included a $5.0 million reduction of deferred cost of
revenues associated with
31
the remaining value of a preexisting agreement with Xythos. We
determined that there was no gain or loss on the settlement of
the preexisting agreement with Xythos as the preexisting
agreement was considered cancelable on its existing terms. The
$5.0 million adjustment was recorded as an increase to
goodwill. The effective cash purchase price of Xythos before
transaction costs was approximately $25.5 million, net of
Xythoss November 30, 2007 cash balance of
approximately $5.5 million. We have included the financial
results of Xythos in our consolidated financial statements
beginning November 30, 2007.
The merger was accounted for under the purchase method of
accounting in accordance with SFAS 141. Assets acquired and
liabilities assumed were recorded at their fair values as of
November 30, 2007. Of the total purchase price,
$4.1 million was allocated to net tangible assets and
$9.9 million was allocated to definite-lived intangible
assets acquired. Definite-lived intangible assets of
$9.9 million consist of the value assigned to Xythoss
customer relationships of $7.6 million and developed and
core technology of $2.3 million. We allocated the remaining
$22.4 million to goodwill, which is not deductible for tax
purposes.
On January 31, 2008, we completed our merger with NTI
pursuant to the Agreement and Plan of Merger dated
January 11, 2008. Pursuant to the Agreement and Plan of
Merger, we acquired all the outstanding common stock of NTI in a
transaction for approximately $184.8 million, which
includes $132.1 million in cash and $52.7 million in
shares of our common stock. The effective cash purchase price of
NTI before transaction costs was approximately
$130.5 million, net of NTIs January 31, 2008
cash balance of approximately $1.6 million. We have
included the financial results of NTI in our consolidated
financial statements beginning February 1, 2008. Up to an
additional 0.4 million shares of our common stock may be
issued contingent on the achievement of certain performance
milestones.
The merger was accounted for under the purchase method of
accounting in accordance with SFAS 141. Assets acquired and
liabilities assumed were recorded at their fair values as of
January 31, 2008. Of the total estimated purchase price,
$15.6 million has been allocated to net tangible
liabilities and $60.3 million has been allocated to
definite-lived intangible assets acquired. Definite-lived
intangible assets of $60.3 million consist of the value
assigned to NTIs customer relationships of
$42.1 million, developed and core technology of
$17.4 million and trademarks of $0.8 million. We
allocated the remaining $143.1 million to goodwill, which
is not deductible for tax purposes.
Income Taxes.
Deferred tax assets and
liabilities are determined based on temporary differences
between the financial reporting bases and the tax bases of
assets and liabilities. Deferred tax assets are also recognized
for tax net operating loss carryforwards. These deferred tax
assets and liabilities are measured using the enacted tax rates
and laws that will be in effect when such amounts are expected
to reverse or be utilized. The realization of total deferred tax
assets is contingent upon the generation of future taxable
income. Valuation allowances are provided to reduce such
deferred tax assets to amounts more likely than not to be
ultimately realized.
Income tax provision or benefit includes U.S. federal,
state and local and foreign income taxes and is based on pre-tax
income or loss. All tax years since 1998 are subject to
examination.
We follow the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
SFAS No. 109,
Accounting for Income
Taxes.
It prescribes that a company should use a
more-likely-than-not recognition threshold based on the
technical merits of the tax position taken. Tax positions that
meet the more-likely-than-not recognition threshold should be
measured as the largest amount of the tax benefits, determined
on a cumulative probability basis, which is more likely than not
to be realized upon ultimate settlement in the financial
statements. We recognize interest and penalties related to
income tax matters in income tax expense. As a result of the
implementation of FIN 48 on January 1, 2007, we
recognized an increase of $0.6 million in the unrecognized
tax benefit liability, which was accounted for as an increase to
the January 1, 2007 accumulated deficit balance. All of our
unrecognized tax benefit liability would affect our effective
tax rate if recognized. Prior to adoption of FIN 48,
accruals for tax contingencies were provided for in accordance
with the requirements of SFAS No. 5,
Accounting for Contingencies.
Although we
believe we had appropriate support for the positions taken on
our tax returns for those years, we had recorded a liability for
our best estimate of the
32
probable loss on certain of those positions. We do not expect
our unrecognized tax benefit liability to change significantly
over the next 12 months.
Stock-Based Compensation.
We account for
stock-based compensation expense in accordance with
SFAS No. 123 (revised 2005),
Share-Based
Payment
(SFAS 123R). SFAS 123R
requires the measurement and recognition of compensation expense
for share-based awards based on estimated fair values on the
date of grant. We estimate the fair value of each option-based
award on the date of grant using the Black-Scholes
option-pricing model. This model is affected by our stock price,
as well as estimates regarding a number of variables including
expected stock price volatility over the term of the award and
projected employee stock option exercise activity.
Recent Accounting Pronouncements.
In December
2007, the FASB issued SFAS No. 141(R), a revision of
SFAS No. 141,
Business
Combinations.
The revision is intended to simplify
existing guidance and converge rulemaking under
U.S. generally accepted accounting principles with
international accounting standards. SFAS No. 141(R)
applies prospectively to business combinations where the
acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008. Early adoption is prohibited. We are currently evaluating
the impact of the provisions of the revision on our consolidated
results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 requires all
entities to report noncontrolling (minority) interests in
subsidiaries as equity in the consolidated financial statements.
Its intention is to eliminate the diversity in practice
regarding the accounting for transactions between an entity and
noncontrolling interests. This statement is effective for fiscal
years, and interim periods within those fiscal years, beginning
on or after December 15, 2008. Earlier adoption is
prohibited. We do not believe that the provisions of
SFAS 160 will have a material impact on our consolidated
results of operations and financial condition.
In February 2008, the FASB issued Staff Position
No. 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2).
FSP 157-2
deferred the effective date of FAS 157 for all nonfinancial
assets and nonfinancial liabilities to fiscal years beginning
after November 15, 2008. We are currently evaluating the
impact of
FSP 157-2
for nonfinancial assets and nonfinancial liabilities on our
consolidated results of operations and financial condition.
In May 2008, the FASB issued Staff Position
No. APB 14-1,
Accounting for Convertible Debt Instruments that May be
Settled in Cash Upon Conversion.
(APB 14-1).
APB 14-1
requires that the liability and equity components of convertible
debt instruments that may be settled in cash upon conversion
(including partial cash settlement) be separately accounted for
in a manner that reflects an issuers nonconvertible debt
borrowing rate. The resulting debt discount is amortized over
the period the convertible debt is expected to be outstanding as
additional non-cash interest expense.
APB 14-1
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. Retrospective application to all
periods presented is required except for instruments that were
not outstanding during any of the periods that will be presented
in the annual financial statements for the period of adoption
but were outstanding during an earlier period. We are currently
finalizing the impact of the provisions of
APB 14-1
on our consolidated results of operations and financial
condition. We currently estimate that the additional non-cash
interest expense over the remaining period the Notes are
expected to be outstanding will be approximately
$13.4 million, of which approximately $6.0 million
will be recognized during 2009.
In June 2008, the EITF issued EITF
No. 07-5,
Determining Whether an Instrument (or Embedded Feature)
Is Indexed to an Entitys Own Stock
(EITF 07-5)
to clarify how to determine whether certain instruments or
features were indexed to an entitys own stock.
EITF 07-5
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. We are currently finalizing the
impact of
EITF 07-5
on our consolidated results of operations and financial
condition and do not believe it will have a material impact on
our consolidated results of operations and financial condition.
33
Important
Factors Considered by Management
We consider several factors in evaluating both our financial
position and our operating performance. These factors, while
primarily focused on relevant financial information, also
include other measures such as general market and economic
conditions, competitor information and the status of the
regulatory environment.
To understand our financial results, it is important to
understand our business model and its impact on our consolidated
financial statements. The accounting for the majority of our
contracts requires us to initially record deferred revenues on
our consolidated balance sheet upon invoicing the sale and then
to recognize revenue in subsequent periods ratably over the term
of the contract in our consolidated statements of operations.
Therefore, to better understand our operations, one must look at
both revenues and deferred revenues.
In evaluating our revenues, we analyze them in three categories:
recurring ratable revenues, non-recurring ratable revenues and
other revenues.
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Recurring ratable revenues include those product revenues that
are recognized ratably over the contract term, which is
typically one year, and that recur each year assuming clients
renew their contracts. These revenues include revenues from the
licensing of all of our software products, hosting arrangements,
subscription fees from customers accessing our on-demand
application services and enhanced support and maintenance
contracts related to our software products, including certain
professional services performed by our professional services
groups.
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Non-recurring ratable revenues include those product revenues
that are recognized ratably over the term of the contract, which
is typically one year, but that do not contractually recur.
These revenues include certain hardware components of our
Blackboard Transaction System
products and certain
third-party hardware and software sold to our clients in
conjunction with our software licenses.
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Other revenues include those revenues that are recognized as
earned and are not deferred to future periods. These revenues
include professional services, the sales of Bb
One
,
certain sales of licenses, as well as the supplies and
commissions we earn from publishers related to digital course
supplement downloads.
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In the case of both recurring ratable revenues and non-recurring
ratable revenues, an increase or decrease in the revenues in one
period would be attributable primarily to increases or decreases
in sales in prior periods. Unlike recurring ratable revenues,
which benefit both from new license sales and from the renewal
of previously existing licenses, non-recurring ratable 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.
During 2008, the global economy entered a period of severe
slowdown and the financial markets experienced significant
dislocation. While our subscription license model and our focus
on educational institution clients has partially insulated us
from the negative impact experienced by other technology
companies, we were not unaffected by these developments during
2008.
While our financial results for fiscal year 2008 were generally
within our expectations, we believe that our financial results
for 2008 would have been stronger had normal economic conditions
prevailed during 2008. We believe that the economic slowdown and
dislocation in the financial markets have caused some clients to
delay their purchases with us causing a general lengthening of
our sales cycles. Also, we believe that some clients may reduce
or eliminate their purchases with us due to budgetary concerns
and the uncertainty of operating in this environment. Budgetary
restrictions are a particular concern for clients which rely on
public funding as the budgets of many national, state or local
governments have been negatively impacted by the economic
slowdown and other factors. Though our products are often proven
to be mission-critical applications to our clients, the severity
of the economic crisis is expected to impact some of our
publicly-funded clients significantly which could result in the
loss of expected new sales or our failure to retain existing
clients.
34
In response to the changing economic climate, during 2008, we
managed our expenses more stringently. Similarly in 2009, we
expect to continue to manage our expenses in response to our
sales and financial performance through the year. In addition,
our treasury policies favor lower yielding investments such as
investments issued or backed by the U.S. Treasury in order
to mitigate investment risks. As the financial dislocation
occurred in 2008, the yields on our investments declined and
significantly reduced our interest income. We expect to continue
to earn yields on our cash and cash equivalents for the
foreseeable future at rates which are significantly below
historic rates which will negatively impact our profitability.
We believe that the full impact of the economic situation cannot
currently be assessed and as a result, we will be required to
make regular adjustments to our operating strategy in response
to changing economic conditions.
Results
of Operations
The following table sets forth selected statements of operations
data expressed as a percentage of total revenues for each of the
periods indicated.
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Year Ended December 31,
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2006
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2007
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2008
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Revenues:
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Product
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88
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%
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89
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%
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91
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%
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Professional services
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12
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11
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9
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|
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|
|
|
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Total revenues
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100
|
|
|
|
100
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|
100
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Operating expenses:
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Cost of product revenues
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22
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|
20
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24
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Cost of professional services revenues
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9
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7
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6
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Research and development
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15
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|
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|
12
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|
13
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Sales and marketing
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32
|
|
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28
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29
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General and administrative
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19
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16
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17
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Proceeds from patent judgment
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(1
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)
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Amortization of intangibles resulting from acquisitions
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9
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|
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9
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|
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12
|
|
|
|
|
|
|
|
|
|
|
|
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Total operating expenses
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|
|
106
|
|
|
|
92
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|
|
|
100
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Operating margin
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(6
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)%
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8
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%
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0
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%
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The following table sets forth, for each component of revenues,
the cost of these revenues expressed as a percentage of the
related revenues for each of the periods indicated.
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|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Cost of product revenues
|
|
|
25
|
%
|
|
|
22
|
%
|
|
|
27
|
%
|
Cost of professional services revenues
|
|
|
71
|
%
|
|
|
66
|
%
|
|
|
68
|
%
|
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Our total revenues for the year ended December 31, 2008
were $312.1 million, representing an increase of
$72.7 million, or 30.4%, as compared to $239.4 million
for the year ended December 31, 2007.
35
A detail of our total revenues by classification is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
|
Product
|
|
|
Professional
|
|
|
|
|
|
Product
|
|
|
Professional
|
|
|
|
|
|
|
Revenues
|
|
|
Services Revenues
|
|
|
Total
|
|
|
Revenues
|
|
|
Services Revenues
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
|
(Unaudited)
|
|
|
Recurring ratable revenues
|
|
$
|
179.6
|
|
|
$
|
3.3
|
|
|
$
|
182.9
|
|
|
$
|
244.5
|
|
|
$
|
3.7
|
|
|
$
|
248.2
|
|
Non-recurring ratable revenues
|
|
|
21.7
|
|
|
|
|
|
|
|
21.7
|
|
|
|
25.6
|
|
|
|
|
|
|
|
25.6
|
|
Other revenues
|
|
|
12.3
|
|
|
|
22.5
|
|
|
|
34.8
|
|
|
|
13.1
|
|
|
|
25.2
|
|
|
|
38.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
213.6
|
|
|
$
|
25.8
|
|
|
$
|
239.4
|
|
|
$
|
283.3
|
|
|
$
|
28.9
|
|
|
$
|
312.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues.
Product revenues, including
domestic and international, for the year ended December 31,
2008 were $283.3 million, representing an increase of
$69.6 million, or 32.6%, as compared to $213.6 million
for the year ended December 31, 2007. Recurring ratable
product revenues increased by $64.9 million, or 36.1%, for
the year ended December 31, 2008 as compared to the year
ended December 31, 2007. This increase was primarily due to
a $33.1 million increase in revenues recognized for
subscription fees from customers accessing our on-demand
application services primarily related to
Blackboard
Connect
, which we acquired from NTI in January 2008. The
increase was also due to a $21.0 million increase in
revenues from
Blackboard Learning System
enterprise
licenses which was attributable to current and prior period
sales to new and existing clients, the continued shift of our
existing clients from the
Blackboard Learning System
basic products to the
Blackboard Learning System
enterprise products and the cross-selling of other enterprise
products to existing clients. The
Blackboard Learning System
enterprise products have additional functionality that is
not available in the
Blackboard Learning System
basic
products and consequently some
Blackboard Learning System
basic product clients upgrade to the
Blackboard Learning
System
enterprise products. Licenses of the enterprise
version of the
Blackboard Learning System
products have
higher average pricing, which normally results in at least twice
the contractual value as compared to
Blackboard Learning
System
basic product licenses. The remaining increase in
recurring ratable product revenues primarily resulted from a
$10.8 million increase in hosting revenues.
The increase in non-recurring ratable product revenues was
primarily due to an increase in sales of annual publisher
licenses and sales of
Blackboard Commerce Suite
hardware
products.
The increase in other product revenues was primarily due to an
increase in sales related to certain of our content management
software products offset in part by a decrease in sales of
certain third-party software and hardware products.
Of our total revenues, our total international revenues for the
year ended December 31, 2008 were $60.9 million,
representing an increase of $7.3 million, or 13.6%, as
compared to $53.6 million for the year ended
December 31, 2007. International product revenues, which
consist primarily of recurring ratable product revenues, were
$56.2 million for the year ended December 31, 2008,
representing an increase of $8.1 million, or 16.8%, as
compared to $48.1 million for the year ended
December 31, 2007. The increase in international recurring
ratable product revenues was primarily due to an increase in
international revenues from
Blackboard Academic Suite
enterprise products resulting from prior period sales to new
and existing clients. The increase in international revenues
also reflects our investment in increasing the size of our
international sales force and international marketing efforts
during prior periods, which expanded our international presence
and enabled us to sell more of our products to new and existing
clients in our international markets.
Professional services revenues.
Professional
services revenues for the year ended December 31, 2008 were
$28.9 million, representing an increase of
$3.1 million, or 11.8%, as compared to $25.8 million
for the year ended December 31, 2007. The increase in
professional services revenues was primarily attributable to
increased sales of certain enhanced support and maintenance
services. As a percentage of total revenues, professional
services revenues for the year ended December 31, 2008 were
9.3% as compared to 10.8% for the
36
year ended December 31, 2007. This decrease in professional
service revenues as a percentage of total revenues is primarily
due to the increase in product revenues.
Cost of product revenues.
Our cost of product
revenues for the year ended December 31, 2008 was
$75.2 million, representing an increase of
$27.8 million, or 58.6%, as compared to $47.4 million
for the year ended December 31, 2007. The increase in cost
of product revenues was primarily due to $13.6 million in
expenses incurred related to our
Blackboard Connect
product, including related telecommunications costs, and a
$7.9 million increase in expenses related to hosting
services due to the increase in the number of clients
contracting for new hosting services or existing clients
expanding their existing hosting arrangements. The remaining
increase is primarily due to increases in our technical support
expenses associated with increased headcount and personnel costs
to support the increase in licenses held by new and existing
clients. Cost of product revenues as a percentage of product
revenues increased to 26.6% for the year ended December 31,
2008 from 22.2% for the year ended December 31, 2007. This
decrease in product revenues margin is due primarily to the fair
value adjustment to the acquired NTI deferred revenue balances.
Cost of product revenues excludes amortization of acquired
technology intangibles resulting from acquisitions, which is
included as amortization of intangibles resulting from
acquisitions. Amortization expense related to acquired
technology was $11.7 million and $17.8 million for the
years ended December 31, 2007 and 2008, respectively. Cost
of product revenues, including amortization of acquired
technology, as a percentage of product revenues was 32.8% for
the year ended December 31, 2008 as compared to 27.7% for
the year ended December 31, 2007. This increase relates to
the increase in amortization expense resulting from the NTI
merger and the fair value adjustment to the acquired NTI
deferred revenue balances.
Cost of professional services revenues.
Our
cost of professional services revenues for the year ended
December 31, 2008 was $19.6 million, representing an
increase of $2.6 million, or 15.4%, as compared to
$16.9 million for the year ended December 31, 2007.
The increase in cost of professional services revenues was
primarily attributable to an increase in personnel-related costs
due to higher average headcount during the year ended
December 31, 2008 as compared to the year ended
December 31, 2007. Cost of professional services revenues
as a percentage of professional services revenues increased to
67.7% for the year ended December 31, 2008 from 65.6% for
the year ended December 31, 2007. The decrease in
professional services revenues margin was primarily attributable
to the increase in cost of revenues and a decrease in new
professional service engagements in prior periods.
Research and development expenses.
Our
research and development expenses for the year ended
December 31, 2008 were $40.6 million, representing an
increase of $12.3 million, or 43.5%, as compared to
$28.3 million for the year ended December 31, 2007.
This increase was primarily attributable to increased
personnel-related costs due to higher average headcount during
the year ended December 31, 2008 as compared to the year
ended December 31, 2007 primarily due to the increased
headcount following the NTI merger.
Sales and marketing expenses.
Our sales and
marketing expenses for the year ended December 31, 2008
were $91.1 million, representing an increase of
$25.0 million, or 37.9%, as compared to $66.0 million
for the year ended December 31, 2007. This increase was
primarily attributable to increased personnel-related costs due
to higher average headcount during the year ended
December 31, 2008 as compared to the year ended
December 31, 2007 primarily due to the increased headcount
following the NTI merger.
General and administrative expenses.
Our
general and administrative expenses for the year ended
December 31, 2008 were $50.8 million, representing an
increase of $12.1 million, or 31.3%, as compared to
$38.7 million for the year ended December 31, 2007.
This increase was primarily attributable to increased
personnel-related costs due to higher average headcount during
the year ended December 31, 2008 as compared to the year
ended December 31, 2007 primarily due to the increased
headcount following the NTI merger.
Proceeds from patent judgment.
Our operating
expenses were reduced during the year ended December 31,
2008 due to the $3.3 million payment from Desire2Learn on
June 11, 2008 in satisfaction of the judgment amount plus
accrued interest arising from the patent litigation between us
and Desire2Learn.
37
Net interest expense.
Our net interest expense
for the year ended December 31, 2008 was $5.4 million,
representing an increase of $5.3 million, or 5,719.4%, as
compared to $0.1 million for the year ended
December 31, 2007. Interest expense recorded during the
year ended December 31, 2008 included one year of expense
on the 3.25% Convertible Senior Notes due 2027 (the
Notes) issued in June 2007 as compared to the year
ended December 31, 2007 which included approximately six
months of expense on the Notes. This increase was offset in part
by increased interest income earned on higher average cash and
cash equivalents balances during 2007 as compared to 2008
resulting from proceeds received in connection with the Notes, a
portion of which was used to fund the NTI merger during 2008.
Interest income also decreased due to lower interest yields on
our cash and cash equivalent balances during the year ended
December 31, 2008 as compared to the year ended
December 31, 2007 due to the economic disruption
experienced in the U.S. and globally.
Other income.
Our other income for the year
ended December 31, 2008 was $4.1 million, representing
an increase of $3.5 million, or 617.2%, as compared to
other income of $0.6 million for the year ended
December 31, 2007. As of December 31, 2008, we held a
warrant to purchase common stock of an entity that provides
technology support services to educational institutions,
including our customers. Other income of approximately
$4.0 million was recorded during the year ended
December 31, 2008 related to the fair value adjustment of
the common stock warrant. In connection with an equity
transaction between this entity and a venture capital firm, we
partially exercised our warrant for approximately one-half of
the shares originally exercisable under the warrant and sold the
shares acquired upon exercise to the venture capital firm for
approximately $2.0 million on July 1, 2008. The fair
value of the common stock warrant of approximately
$2.0 million is recorded as investment in common stock
warrant on our consolidated balance sheet as of
December 31, 2008. On July 1, 2008, we entered into an
amended common stock warrant agreement under which we can
purchase up to 9.9% of the shares of the entity upon exercise.
We will continue to evaluate the fair value of this instrument
in subsequent reporting periods and any changes in value will be
recognized in the consolidated statements of operations.
The remaining change in other income is related to the
remeasurement of our foreign subsidiaries ledgers, which are
maintained in the respective subsidiarys local foreign
currency, into the U.S. dollar. During the year ended
December 31, 2007, we recognized a translation gain
primarily related to our wholly-owned Canadian subsidiary as a
result of the favorable change in the exchange rate of the
Canadian dollar into the U.S. dollar.
(Provision) benefit for income taxes.
Our
benefit for income taxes for the year ended December 31,
2008 was $3.7 million as compared to our provision for
income taxes of $7.6 million for the year ended
December 31, 2007. The benefit for income taxes for 2008
was primarily due to the mix of domestic and international
earnings and losses generated by our subsidiaries and includes
certain credits available to us in Washington, D.C. for
which we applied for during the three months ended
December 31, 2008. The benefit for income taxes for the
year ended December 31, 2008 includes $6.0 million in
deferred income tax benefits, offset by $2.3 million of
current income tax expense, which primarily relates to state and
international tax expense, and excludes $0.9 million of net
operating loss carry forwards that were utilized during 2008
that had previously been treated as goodwill related to the
WebCT acquisition.
As of December 31, 2008, we had net operating loss
carryforwards for federal and international income tax purposes
of approximately $67.0 million. Approximately
$49.9 million of this amount is restricted under
Section 382 of the Internal Revenue Code. Section 382
of the Internal Revenue Code limits the utilization of net
operating losses when ownership changes, as defined by that
section, occur. We have performed an analysis of our
Section 382 ownership changes and have determined that the
utilization of certain of our net operating loss carryforwards
may be limited. We do not expect that Section 382 will
limit the utilization of the net operating loss carry forwards
in 2008. Net operating loss carryforwards will expire, if
unused, between 2009 and 2026.
Net income (loss).
As a result of the
foregoing, we reported net income of $2.8 million for the
year ended December 31, 2008 as compared to net income of
$12.9 million for the year ended December 31, 2007.
38
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Revenues.
Our total revenues for the year
ended December 31, 2007 were $239.4 million,
representing an increase of $56.4 million, or 30.8%, as
compared to total revenues of $183.1 million for the year
ended December 31, 2006.
A detail of our total revenues by classification is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
Product
|
|
|
Professional
|
|
|
|
|
|
Product
|
|
|
Professional
|
|
|
|
|
|
|
Revenues
|
|
|
Services Revenues
|
|
|
Total
|
|
|
Revenues
|
|
|
Services Revenues
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
|
(Unaudited)
|
|
|
Recurring ratable revenues
|
|
$
|
130.4
|
|
|
$
|
2.3
|
|
|
$
|
132.7
|
|
|
$
|
179.6
|
|
|
$
|
3.3
|
|
|
$
|
182.9
|
|
Non-recurring ratable revenues
|
|
|
20.0
|
|
|
|
|
|
|
|
20.0
|
|
|
|
21.7
|
|
|
|
|
|
|
|
21.7
|
|
Other revenues
|
|
|
10.0
|
|
|
|
20.4
|
|
|
|
30.4
|
|
|
|
12.3
|
|
|
|
22.5
|
|
|
|
34.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
160.4
|
|
|
$
|
22.7
|
|
|
$
|
183.1
|
|
|
$
|
213.6
|
|
|
$
|
25.8
|
|
|
$
|
239.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues.
Product revenues, including
domestic and international, for the year ended December 31,
2007 were $213.6 million, representing an increase of
$53.2 million, or 33.2%, as compared to $160.4 million
for the year ended December 31, 2006. Recurring ratable
product revenues increased by $49.2 million, or 37.7%, for
the year ended December 31, 2007 as compared to the year
ended December 31, 2006. This increase was primarily due to
a $35.9 million increase in revenues from
Blackboard
Academic Suite
enterprise products which was attributable to
current and prior period sales to new and existing clients, the
continued shift of our existing clients from the
Blackboard
Learning System
basic products to the
Blackboard Learning
System
enterprise products and the cross-selling of other
enterprise products to existing clients. The
Blackboard
Learning System
enterprise products have additional
functionality that is not available in the
Blackboard
Learning System
basic products and consequently some
Blackboard Learning System
basic product clients upgrade
to the
Blackboard Learning System
enterprise products.
Licenses of the enterprise version of the
Blackboard Learning
System
enterprise products have higher average pricing,
which normally results in at least twice the contractual value
as compared to
Blackboard Learning System
basic product
licenses. The further increase in recurring ratable product
revenues was due to a $9.0 million increase in hosting
revenues and a $1.8 million increase in revenues from the
Blackboard Commerce Suite
related to an increase in
revenues from
Blackboard Transaction System
licenses. The
remaining increase in recurring ratable product revenues
resulted from increases in revenues from our other software
products. The 2006 revenues were also reduced due to the fair
value adjustment to the acquired WebCT deferred revenue balances
in purchase accounting subsequent to the closing of the WebCT
merger.
The increase in non-recurring ratable product revenues was
primarily due to an increase in sales of
Blackboard Commerce
Suite
hardware products.
The increase in other product revenues was primarily due to a
$0.9 million increase in sales related to certain product
offerings of our content management software products, a
$0.6 million increase in third party hardware and software
revenues, a $0.3 million increase in
Bb
One revenues
due to an increase in current period sales. The remaining
increase in other product revenues resulted primarily from
increases in revenues from publisher relationships.
Of our total revenues, our total international revenues for the
year ended December 31, 2007 were $53.6 million,
representing an increase of $18.9 million, or 54.6%, as
compared to $34.7 million for the year ended
December 31, 2006. International product revenues, which
consist primarily of recurring ratable product revenues, were
$48.1 million for the year ended December 31, 2007,
representing an increase of $17.3 million, or 56.3%, as
compared to $30.8 million for the year ended
December 31, 2006. The increase in international recurring
ratable product revenues was primarily due to an increase in
international revenues from
Blackboard Academic Suite
enterprise products resulting from prior period sales to new
and existing clients. In addition,
39
the increase in international revenues also reflects our
investment in increasing the size of our international sales
force and international marketing efforts during prior periods,
which expanded our international presence and enabled us to sell
more of our products to new and existing clients in our
international markets.
Professional services revenues.
Professional
services revenues for the year ended December 31, 2007 were
$25.8 million, representing an increase of
$3.1 million, or 13.9%, as compared to $22.7 million
for the year ended December 31, 2006. The increase in
professional service revenues was primarily attributable to an
increase in the number and size of service engagements, which
was directly related to the increase in the number of enterprise
product licensees, which generally purchase greater volumes of
our service offerings. As a percentage of total revenues,
professional services revenues for the year ended
December 31, 2007 were 10.8% as compared to 12.4% for the
year ended December 31, 2006. This decrease was due
primarily to the impact of purchase accounting adjustments to
WebCTs beginning deferred revenue balances subsequent to
the closing of the WebCT merger during 2006.
Cost of product revenues.
Our cost of product
revenues for the year ended December 31, 2007 was
$47.4 million, representing an increase of
$7.8 million, or 19.8%, as compared to $39.6 million
for the year ended December 31, 2006. The increase in cost
of product revenues was primarily due to a $3.8 million
increase in expenses related to hosting services due to the
increase in the number of clients contracting for new hosting
services or existing clients expanding their existing hosting
arrangements. There was also a $2.4 million increase in our
technical support expenses primarily due to increased personnel
costs related to increased headcount related to new hires during
2007 and higher average salaries due to annual salary increases
in 2007. The results for the year ended December 31, 2007
included twelve months of expenses related to the acquired WebCT
operations as compared to the year ended December 31, 2006,
which only included ten months of expenses related to the
acquired WebCT operations following the completion of the merger
on February 28, 2006. The further increase in cost of
product revenues was due to a $1.1 million increase in
hardware and software costs primarily associated with third
party products sold with the
Blackboard Transaction
System.
Cost of product revenues as a percentage
of product revenues decreased to 22.2% for the year ended
December 31, 2007 from 24.7% for the year ended
December 31, 2006. This increase in product revenues margin
was due primarily to the impact of purchase accounting
adjustments to WebCTs beginning deferred revenue balances
subsequent to the closing of the WebCT merger during 2006.
Cost of product revenues excludes amortization of acquired
technology resulting from acquisitions, which is included as
amortization of intangibles resulting from acquisitions.
Amortization expense related to acquired technology was
$9.3 million and $11.7 million for the year ended
December 31, 2006 and 2007, respectively. Cost of product
revenues, including amortization of acquired technology, as a
percentage of product revenues was 27.7% for the year ended
December 31, 2007 as compared to 30.5% for the year ended
December 31, 2006. The results for the year ended
December 31, 2007 included twelve months of amortization
expense related to amortization of acquired technology resulting
from the WebCT merger as compared to the year ended
December 31, 2006, which only included ten months of
amortization expense following the completion of the merger on
February 28, 2006.
Cost of professional services revenues.
Our
cost of professional services revenues for the year ended
December 31, 2007 was $16.9 million, representing an
increase of $0.9 million, or 5.9%, from $16.0 million
for the year ended December 31, 2006. The results for the
year ended December 31, 2007 included twelve months of
expenses related to the acquired WebCT operations as compared to
the year ended December 31, 2006, which only included ten
months of expenses related to the acquired WebCT operations
following the completion of the merger on February 28,
2006. Cost of professional services revenues as a percentage of
professional services revenues decreased to 65.6% for the year
ended December 31, 2007 from 70.6% for the year ended
December 31, 2006. The increase in professional services
revenues margin was due to the increase in revenues from higher
margin service offerings during the year ended December 31,
2007.
Research and development expenses.
Our
research and development expenses for the year ended
December 31, 2007 were $28.3 million, representing an
increase of $1.1 million, or 4.1%, as compared to
$27.2 million for the year ended December 31, 2006.
This increase was primarily attributable to a $1.5 million
increase in professional services costs resulting from our
continued efforts to increase the functionality of our
40
products. This increase was partially offset by decreased
personnel-related costs of $0.4 million due to higher
average research and development headcount during the year ended
December 31, 2006 as compared to the year ended
December 31, 2007.
Sales and marketing expenses.
Our sales and
marketing expenses for the year ended December 31, 2007
were $66.0 million, representing an increase of
$7.7 million or 13.2%, as compared to sales and marketing
expense of $58.3 million for the year ended
December 31, 2006. This increase was primarily attributable
to increased personnel-related costs of $5.9 million due to
increased average headcount, increased average salaries and
increased stock-based compensation expense for sales and
marketing employees during 2007 as compared to 2006 and
increased general marketing activities of $1.3 million
primarily associated with an increasing number and size of our
marketing events domestically and abroad. The results for the
year ended December 31, 2007 included twelve months of
expenses related to the acquired WebCT operations as compared to
the year ended December 31, 2006, which only included ten
months of expenses related to the acquired WebCT operations
following the completion of the merger on February 28,
2006. Further, bad debt expense of $0.6 million was
recorded during the year ended December 31, 2007, an
increase of $0.4 million as compared to bad debt expense of
$0.2 million for the year ended December 31, 2006.
General and administrative expenses.
Our
general and administrative expenses for the year ended
December 31, 2007 were $38.7 million, representing an
increase of $2.8 million, or 7.9%, as compared to general
and administrative expenses of $35.8 million for the year
ended December 31, 2006. This increase was primarily
attributable to increased stock-based compensation expense of
$2.5 million for general and administrative function
employees during the year ended December 31, 2007.
Recruiting expense also increased $0.6 million during the
year ended December 31, 2007 due to the hiring of employees
across all functional areas to support our growth. These
increases were partially offset by a decrease of
$0.3 million in personnel-related costs due to
approximately $2.1 million in retention bonuses and
severance costs primarily for WebCT employees recognized during
the year ended December 31, 2006 offset, in part, by
increased personnel-related costs due to increased average
headcount and increased average salaries for general and
administrative employees during the year ended December 31,
2007.
Net interest expense.
Our net interest expense
for the year ended December 31, 2007 was $0.1 million,
representing a decrease of $2.9 million or 96.9%, as
compared to $3.0 million for the year ended
December 31, 2006. This decrease was primarily attributable
to interest income earned on higher average cash and cash
equivalents balances during 2007 as compared to 2006 resulting
from proceeds received in connection with the Notes issued
during 2007. Interest income was partially offset by interest
expense incurred in connection with the Notes and the credit
facilities agreement we entered into with Credit Suisse to fund
a portion of the acquisition of WebCT during 2006 (the
Credit Agreement). During the year ended
December 31, 2007, we recorded total debt discount
amortization expense, including amortization related to the
Notes and the Credit Agreement, of approximately
$1.8 million as interest expense.
Other (expense) income.
Our other income for
the year ended December 31, 2007 was $0.6 million and
pertains to the remeasurement of our foreign subsidiaries
ledgers, which are maintained in the respective
subsidiarys local foreign currency, into the United States
dollar. Specifically, we recognized a translation gain related
to the valuing of intercompany debt with our wholly-owned
Canadian subsidiary as a result of the change in the exchange
rate of the Canadian Dollar into the US Dollar during 2007.
(Benefit) provision for income taxes.
Our
provision for income taxes for the year ended December 31,
2007 was $7.6 million as compared to a benefit of
$4.6 million for the year ended December 31, 2006. The
increase in income taxes was due to our income before provision
for income taxes during the year ended December 31, 2007 as
compared to our loss before (benefit) for income taxes for the
year ended December 31, 2006. As of December 31, 2007,
we had net operating loss carryforwards for state, federal and
international income tax purposes of approximately
$112.1 million.
Net income (loss).
As a result of the
foregoing, we reported net income of $12.9 million for the
year ended December 31, 2007 as compared to a net loss of
$10.7 million for the year ended December 31, 2006.
41
Quarterly
Results
Our quarterly operating results and operating 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 vary
significantly with these changes and, as a result, such expenses
do not fluctuate significantly on a quarterly basis.
Historically, we have performed a disproportionate amount of our
professional services, the revenue from which is recognized as
performed, in our second and third quarters each year. We expect
quarterly fluctuations in operating results and operating cash
flows to continue as a result of the uneven seasonal demand for
our licenses and services offerings.
The following table sets forth selected statements of operations
and cash flow data for each of the quarters in the years ended
December 31, 2007 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Total revenues
|
|
$
|
55,280
|
|
|
$
|
59,404
|
|
|
$
|
61,562
|
|
|
$
|
63,202
|
|
Total operating expenses
|
|
|
51,676
|
|
|
|
53,751
|
|
|
|
57,413
|
|
|
|
56,645
|
|
Income from operations
|
|
|
3,604
|
|
|
|
5,653
|
|
|
|
4,149
|
|
|
|
6,557
|
|
Net income
|
|
|
1,944
|
|
|
|
3,439
|
|
|
|
3,279
|
|
|
|
4,203
|
|
Net cash provided by operating activities
|
|
|
891
|
|
|
|
484
|
|
|
|
38,415
|
|
|
|
29,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Total revenues
|
|
$
|
68,475
|
|
|
$
|
75,547
|
|
|
$
|
83,090
|
|
|
$
|
85,022
|
|
Total operating expenses
|
|
|
72,942
|
|
|
|
74,718
|
|
|
|
81,658
|
|
|
|
82,440
|
|
(Loss) income from operations
|
|
|
(4,467
|
)
|
|
|
829
|
|
|
|
1,432
|
|
|
|
2,582
|
|
Net (loss) income
|
|
|
(3,293
|
)
|
|
|
1,037
|
|
|
|
2,091
|
|
|
|
2,985
|
|
Net cash (used in) provided by operating activities
|
|
|
(6,055
|
)
|
|
|
1,209
|
|
|
|
60,264
|
|
|
|
24,417
|
|
Liquidity
and Capital Resources
Changes
in Cash and Cash Equivalents
Our cash and cash equivalents were $141.7 million at
December 31, 2008 as compared to $206.6 million at
December 31, 2007. The decrease in cash and cash
equivalents was primarily due to the payment of the cash portion
of the consideration in the NTI merger we completed on
January 31, 2008. Pursuant to the Agreement and Plan of
Merger, we acquired all the outstanding common stock of NTI in a
transaction for approximately $184.8 million, which
includes $132.1 million in cash and $52.7 million in
our common stock, or approximately 1.5 million shares of
our common stock. The effective cash portion of the purchase
price of NTI before transaction costs was approximately
$130.5 million, net of NTIs January 31, 2008
cash balance of approximately $1.6 million. We have
included the financial results of NTI in our consolidated
financial statements beginning February 1, 2008. Up to an
additional 0.4 million shares in our common stock may be
issued contingent on the achievement of certain performance
milestones.
Cash and cash equivalents consist of highly liquid investments,
which are readily convertible into cash, and have original
maturities of six months or less.
Net cash provided by operating activities was $79.8 million
during the year ended December 31, 2008 as compared to
$69.4 million during the year ended December 31, 2007.
This increase for the year ended December 31, 2008 compared
to the year ended December 31, 2007 was due in part to the
$3.3 million in proceeds from the patent judgment against
Desire2Learn. In addition, accounts receivable increased
42
$31.7 million during the year ended December 31, 2008,
net of the impact of acquired receivables related to the NTI
merger, due to an increase in invoicing associated with sales to
new and existing clients and an increased number of renewing
licenses during 2008 as compared to 2007. Amortization of
intangibles resulting from acquisitions increased to
$37.9 million during the year ended December 31, 2008
from $22.1 million during the year ended December 31,
2007, primarily due to the amortization of identified
intangibles resulting from the NTI merger. We recognize revenues
on annually renewable agreements, which results in deferred
revenues for cash received prior to recognizing revenue.
Deferred revenues increased by $45.2 million during the
year ended December 31, 2008, net of the impact of acquired
deferred revenues related to the NTI merger, due to the timing
of certain client renewal invoicing and sales to new and
existing clients during the current period.
Net cash used in investing activities was $158.6 million
during the year ended December 31, 2008 as compared to
$47.9 million during the year ended December 31, 2007.
During the year ended December 31, 2008, we paid
approximately $133.0 million for acquisitions which
primarily related to the NTI merger and excludes certain NTI
merger costs that were paid in 2007. During the year ended
December 31, 2008, cash expenditures for purchases of
property and equipment were $24.0 million, which represents
approximately 7.7% of total revenues, and we made
$3.6 million in payments related to patent enforcement
costs. Cash expenditures for purchases of property and equipment
include payments related to the build-out of our new global
corporate headquarters in Washington, D.C. which we
occupied at the end of June 2008. On July 1, 2008, we
received $2.0 million in proceeds related to our sale of
shares acquired upon exercise of a common stock warrant we held
in an entity.
Net cash provided by financing activities was $13.9 million
during the year ended December 31, 2008 as compared to
$154.3 million during the year ended December 31,
2007. The decrease was due primarily to the issuance of
$165.0 million of our 3.25% Convertible Senior Notes
during the year ended December 31, 2007, described below.
During the year ended December 31, 2008, we received
$11.2 million in proceeds from exercise of stock options as
compared to $13.4 million during the year ended
December 31, 2007.
Convertible
Promissory Notes
In June 2007, we issued and sold the 3.25% Convertible
Senior Notes due 2027 (the Notes) in a public
offering. We used a portion of the proceeds to terminate and
satisfy in full our indebtedness then outstanding of
$19.4 million under a senior secured credit facility, which
we entered into in connection with our acquisition of WebCT,
Inc. (WebCT) in 2006, and to pay all fees and
expenses incurred in connection with the termination.
In connection with the issuance of the Notes, we incurred
$4.5 million in debt issuance costs. These costs were
recorded as a debt discount and netted against the remaining
principal amount outstanding. The debt discount is being
amortized as interest expense using the effective interest
method through July 1, 2011, the first redemption date
under the Notes. During the year ended December 31, 2008,
we recorded total amortization expense of the debt discount of
approximately $1.7 million as interest expense.
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, commencing
on January 1, 2008. We made interest payments of
$2.7 million each on July 1, 2008 and
December 30, 2008. The Notes will mature on July 1,
2027, subject to earlier conversion, redemption or repurchase.
The Notes are convertible, under certain circumstances, into
cash or a combination of cash and our common stock at an initial
base conversion rate of 15.4202 shares of common stock per
$1,000 principal amount of Notes. The base conversion rate
represents an initial base conversion price of approximately
$64.85. If at the time of conversion the applicable price of our
common stock exceeds the base conversion price, the conversion
rate will be increased by up to an additional 9.5605 shares
of our common stock per $1,000 principal amount of Notes, as
determined pursuant to a specified formula. In general, upon
conversion of a Note, the holder of such Note will receive cash
equal to the principal amount of the Note and our common stock
for the Notes conversion value in excess of such principal
amount. In accordance with the earnings per share method
outlined in
EITF 04-8,
The Effect of Contingently Convertible Instruments on
Diluted Earnings per Share
, the diluted
43
earnings per share effect of the shares that would be issued
will be accounted for only if the average market price of our
common stock price during the period is greater than the
Notes conversion price.
Because the Notes contain an adjusting conversion rate provision
based on our common stock price and anti-dilution adjustment
provisions, at the end of each reporting period, we evaluate
whether any adjustments to the conversion price would alter the
effective conversion rate from the stated conversion rate and
result in an
in-the-money
conversion. Whenever an adjustment to the conversion rate
results in an increase in the number of shares of common stock
issuable upon conversion the Notes, we would recognize a
beneficial conversion feature in the period such a determination
is made and amortize it over the remaining life of the Notes. As
of December 31, 2008, a beneficial conversion feature under
the Notes did not exist.
Holders may surrender their Notes for conversion at any time
prior to the close of business on the business day immediately
preceding the maturity date for the Notes only under the
following circumstances: (1) prior to January 1, 2027,
with respect to any calendar quarter beginning after
June 30, 2007, if the closing price of our common stock for
at least 20 trading days in the 30 consecutive trading days
ending on the last trading day of the immediately preceding
calendar quarter is more than 130% of the base conversion price
per share of the Notes on such last trading day; (2) on or
after January 1, 2027, until the close of business on the
business day preceding maturity; (3) during the five
business days after any five consecutive trading day period in
which the trading price per $1,000 principal amount of Notes for
each day of that period was less than 95% of the product of the
closing price of our common stock and the then applicable
conversion rate of the Notes; or (4) upon the occurrence of
other events or circumstances as specifically defined in the
Notes.
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. The Notes may
not be redeemed by us prior to July 1, 2011, after which
they may be redeemed by us, 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 at 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 repay 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 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.
Working
Capital Needs
We believe that our existing cash and cash equivalents and
future cash expected to be provided by operating activities will
be sufficient to meet our working capital and capital
expenditure needs over the next 12 months. Our future
capital requirements will depend on many factors, including our
rate of revenue growth, the expansion of our marketing and sales
activities, the timing and extent of spending to support product
development efforts and expansion into new territories, the
timing of introductions of new products or services, the timing
of enhancements to existing products and services and the timing
of capital expenditures. Also, we may make investments in, or
acquisitions of, complementary businesses, services or
technologies, which could also require us to seek additional
equity or debt financing. In addition, if the overall tightening
of the credit market and a lack of available funding cause our
clients to delay or to be unable to make their payments, our
accounts receivable may increase and the relative aging of our
receivables may deteriorate. To the extent that available funds
are insufficient to fund our future activities, we may need to
raise additional funds through public or private equity or debt
financing. Additional funds may not be available on terms
favorable to us or at all. From time to time we may use our
existing cash to repurchase shares of our common stock,
outstanding indebtedness or other outstanding securities. Any
such repurchases would depend on market conditions, the market
price of our common stock, and managements assessment of
our liquidity and cash flow needs.
44
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 from unconsolidated entities.
Obligations
and Commitments
As of December 31, 2008, minimum future payments under
existing notes payable and noncancelable operating leases are as
follows for the years below:
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
Operating
|
|
|
|
Payable
|
|
|
Leases
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
|
|
|
$
|
10,079
|
|
2010
|
|
|
|
|
|
|
11,063
|
|
2011
|
|
|
165,000
|
|
|
|
8,526
|
|
2012
|
|
|
|
|
|
|
8,289
|
|
2013
|
|
|
|
|
|
|
8,438
|
|
2014 and beyond
|
|
|
|
|
|
|
36,505
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
165,000
|
|
|
$
|
82,900
|
|
|
|
|
|
|
|
|
|
|
We have categorized the Notes above assuming redemption on the
first possible redemption date by the Holders of the Notes on
July 1, 2011.
We relocated our corporate headquarters in June 2008 to a
building in Washington, D.C. where we lease approximately
129,000 square feet of space under a lease expiring in June
2018. We also lease offices in Northern Virginia; Phoenix,
Arizona; Lynnfield, Massachusetts; Los Angeles, California;
San Francisco, California; Amsterdam, Netherlands;
Vancouver, Canada; and Sydney, Australia.
Seasonality
Our operating results and operating 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 vary
significantly with these changes and, as a result, such expenses
do not fluctuate significantly on a quarterly basis.
Historically, we have performed a disproportionate amount of our
professional services, which are recognized as performed, in our
second and third quarters each year. In addition, deferred
revenues can vary on a seasonal basis for the same reasons. We
expect quarterly fluctuations in operating results and operating
cash flows to continue as a result of the uneven seasonal demand
for our licenses and services offerings. Historically, we have
generated more of our operating cash flow in the second half of
the calendar year. This pattern may change, however, as a result
of acquisitions, new market opportunities or new product
introductions.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest income on our cash and cash equivalents is subject to
interest rate fluctuations. For the year ended December 31,
2008, a one percentage point decrease in interest rates would
have reduced our interest income by approximately
$0.9 million.
We have accounts on our foreign subsidiaries ledgers which
are maintained in the respective subsidiarys local foreign
currency and remeasured into the U.S. dollar. As a result,
we are exposed to movements in the exchange rates of various
currencies against the U.S. dollar and against the
currencies of other countries in which we sell products and
services including the Canadian dollar, Euro, British pound,
Japanese yen, Australian dollar and others. Because of such
foreign currency exchange rate fluctuations, other expense of
$0.1 million was recorded during the year ended
December 31, 2008. For the year ended December 31,
2008, a one percentage point adverse change in these various
exchange rates into the U.S. dollar as of December 31,
2008 would have reduced our net other income by approximately
$0.3 million.
45
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
46
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Blackboard Inc.
We have audited the accompanying consolidated balance sheets of
Blackboard Inc. as of December 31, 2007 and 2008, and the
related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2008. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Blackboard Inc. at December 31, 2007
and 2008, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Blackboard Inc.s internal control over financial reporting
as of December 31, 2008, based on criteria established in
Internal Control-Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 23, 2009
expressed an unqualified opinion thereon.
As discussed in Note 2 to the consolidated financial
statements, in 2007, the Company adopted FASB Interpretation
No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of SFAS No. 109.
/s/ Ernst & Young LLP
McLean, VA
February 23, 2009
47
BLACKBOARD
INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
206,558
|
|
|
$
|
141,746
|
|
Accounts receivable, net of allowance for doubtful accounts of
$765 and $926, respectively
|
|
|
52,846
|
|
|
|
92,529
|
|
Inventories
|
|
|
2,089
|
|
|
|
1,783
|
|
Prepaid expenses and other current assets
|
|
|
5,069
|
|
|
|
8,518
|
|
Deferred tax asset, current portion
|
|
|
6,549
|
|
|
|
1,796
|
|
Deferred cost of revenues
|
|
|
6,793
|
|
|
|
7,126
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
279,904
|
|
|
|
253,498
|
|
Deferred tax asset, noncurrent portion
|
|
|
34,154
|
|
|
|
27,146
|
|
Investment in common stock warrant
|
|
|
|
|
|
|
1,990
|
|
Restricted cash
|
|
|
4,015
|
|
|
|
4,249
|
|
Property and equipment, net
|
|
|
18,584
|
|
|
|
31,950
|
|
Other assets
|
|
|
270
|
|
|
|
549
|
|
Goodwill
|
|
|
117,502
|
|
|
|
263,850
|
|
Intangible assets, net
|
|
|
50,847
|
|
|
|
75,126
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
505,276
|
|
|
$
|
658,358
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,747
|
|
|
$
|
2,579
|
|
Accrued expenses
|
|
|
24,182
|
|
|
|
27,879
|
|
Deferred rent, current portion
|
|
|
160
|
|
|
|
345
|
|
Deferred revenues, current portion
|
|
|
126,600
|
|
|
|
179,238
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
154,689
|
|
|
|
210,041
|
|
Convertible senior notes, net of debt discount of $3,481 and
$1,828, respectively
|
|
|
161,519
|
|
|
|
163,172
|
|
Deferred rent, noncurrent portion
|
|
|
1,469
|
|
|
|
10,959
|
|
Deferred revenues, noncurrent portion
|
|
|
2,925
|
|
|
|
5,554
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
320,602
|
|
|
|
389,726
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 5,000,000 shares
authorized, and no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 200,000,000 shares
authorized; 29,196,807 and 31,359,738 shares issued and
outstanding, respectively
|
|
|
292
|
|
|
|
314
|
|
Additional paid-in capital
|
|
|
263,582
|
|
|
|
344,698
|
|
Accumulated deficit
|
|
|
(79,200
|
)
|
|
|
(76,380
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
184,674
|
|
|
|
268,632
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
505,276
|
|
|
$
|
658,358
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
48
BLACKBOARD
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
160,392
|
|
|
$
|
213,631
|
|
|
$
|
283,258
|
|
Professional services
|
|
|
22,671
|
|
|
|
25,817
|
|
|
|
28,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
183,063
|
|
|
|
239,448
|
|
|
|
312,134
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues, excludes $9,333, $11,654 and $17,803,
respectively, in amortization of acquired technology included in
amortization of intangibles resulting from acquisitions shown
below(1)
|
|
|
39,594
|
|
|
|
47,444
|
|
|
|
75,237
|
|
Cost of professional services revenues(1)
|
|
|
16,001
|
|
|
|
16,941
|
|
|
|
19,555
|
|
Research and development(1)
|
|
|
27,162
|
|
|
|
28,278
|
|
|
|
40,580
|
|
Sales and marketing(1)
|
|
|
58,340
|
|
|
|
66,033
|
|
|
|
91,076
|
|
General and administrative(1)
|
|
|
35,823
|
|
|
|
38,667
|
|
|
|
50,757
|
|
Proceeds from patent judgment
|
|
|
|
|
|
|
|
|
|
|
(3,313
|
)
|
Amortization of intangibles resulting from acquisitions
|
|
|
17,969
|
|
|
|
22,122
|
|
|
|
37,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
194,889
|
|
|
|
219,485
|
|
|
|
311,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(11,826
|
)
|
|
|
19,963
|
|
|
|
376
|
|
Other (expense) income , net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(5,354
|
)
|
|
|
(5,766
|
)
|
|
|
(7,305
|
)
|
Interest income
|
|
|
2,380
|
|
|
|
5,673
|
|
|
|
1,893
|
|
Other (expense) income
|
|
|
(519
|
)
|
|
|
575
|
|
|
|
4,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before (benefit) provision for income taxes
|
|
|
(15,319
|
)
|
|
|
20,445
|
|
|
|
(912
|
)
|
(Benefit) provision for income taxes
|
|
|
(4,582
|
)
|
|
|
7,580
|
|
|
|
(3,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(10,737
|
)
|
|
$
|
12,865
|
|
|
$
|
2,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.39
|
)
|
|
$
|
0.45
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.39
|
)
|
|
$
|
0.43
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,857,576
|
|
|
|
28,789,083
|
|
|
|
30,885,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
27,857,576
|
|
|
|
30,113,621
|
|
|
|
31,809,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes the following amounts related to stock-based
compensation:
|
Cost of product revenues
|
|
$
|
386
|
|
|
$
|
672
|
|
|
$
|
949
|
|
Cost of professional services revenues
|
|
|
524
|
|
|
|
631
|
|
|
|
321
|
|
Research and development
|
|
|
733
|
|
|
|
467
|
|
|
|
777
|
|
Sales and marketing
|
|
|
2,951
|
|
|
|
4,359
|
|
|
|
5,984
|
|
General and administrative
|
|
|
3,462
|
|
|
|
5,914
|
|
|
|
7,096
|
|
See accompanying notes.
49
BLACKBOARD
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Stock
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands, except share amounts)
|
|
|
Balance at December 31, 2005
|
|
|
27,479,351
|
|
|
$
|
275
|
|
|
$
|
210,919
|
|
|
$
|
(114
|
)
|
|
$
|
(80,755
|
)
|
|
$
|
130,325
|
|
Issuance of common stock upon exercise of options
|
|
|
768,863
|
|
|
|
7
|
|
|
|
9,153
|
|
|
|
|
|
|
|
|
|
|
|
9,160
|
|
Reclassification of deferred stock compensation upon adoption of
SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
(114
|
)
|
|
|
114
|
|
|
|
|
|
|
|
|
|
Excess tax benefits from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
3,317
|
|
|
|
|
|
|
|
|
|
|
|
3,317
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
8,056
|
|
|
|
|
|
|
|
|
|
|
|
8,056
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,737
|
)
|
|
|
(10,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
28,248,214
|
|
|
$
|
282
|
|
|
$
|
231,331
|
|
|
$
|
|
|
|
$
|
(91,492
|
)
|
|
$
|
140,121
|
|
Impact of adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(573
|
)
|
|
|
(573
|
)
|
Issuance of common stock upon exercise of options
|
|
|
948,593
|
|
|
|
10
|
|
|
|
13,363
|
|
|
|
|
|
|
|
|
|
|
|
13,373
|
|
Excess tax benefits from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
6,845
|
|
|
|
|
|
|
|
|
|
|
|
6,845
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
12,043
|
|
|
|
|
|
|
|
|
|
|
|
12,043
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,865
|
|
|
|
12,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
29,196,807
|
|
|
$
|
292
|
|
|
$
|
263,582
|
|
|
$
|
|
|
|
$
|
(79,200
|
)
|
|
$
|
184,674
|
|
Issuance of common stock upon exercise of options
|
|
|
584,593
|
|
|
|
6
|
|
|
|
11,147
|
|
|
|
|
|
|
|
|
|
|
|
11,153
|
|
Issuance of common stock upon NTI merger
|
|
|
1,508,338
|
|
|
|
15
|
|
|
|
52,736
|
|
|
|
|
|
|
|
|
|
|
|
52,751
|
|
Issuance of restricted stock
|
|
|
70,000
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax benefits from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
2,107
|
|
|
|
|
|
|
|
|
|
|
|
2,107
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
15,127
|
|
|
|
|
|
|
|
|
|
|
|
15,127
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,820
|
|
|
|
2,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
31,359,738
|
|
|
$
|
314
|
|
|
$
|
344,698
|
|
|
$
|
|
|
|
$
|
(76,380
|
)
|
|
$
|
268,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
50
BLACKBOARD
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(10,737
|
)
|
|
$
|
12,865
|
|
|
$
|
2,820
|
|
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax benefit
|
|
|
(5,075
|
)
|
|
|
(2,830
|
)
|
|
|
(8,113
|
)
|
Excess tax benefits from exercise of stock options
|
|
|
(3,317
|
)
|
|
|
(6,845
|
)
|
|
|
(2,107
|
)
|
Amortization of debt discount
|
|
|
1,701
|
|
|
|
1,840
|
|
|
|
1,653
|
|
Depreciation and amortization
|
|
|
8,980
|
|
|
|
10,681
|
|
|
|
15,703
|
|
Amortization of intangibles resulting from acquisitions
|
|
|
17,969
|
|
|
|
22,122
|
|
|
|
37,866
|
|
Change in allowance for doubtful accounts
|
|
|
(109
|
)
|
|
|
(2
|
)
|
|
|
161
|
|
Stock-based compensation
|
|
|
8,056
|
|
|
|
12,043
|
|
|
|
15,127
|
|
Gain on investment in common stock warrant
|
|
|
|
|
|
|
|
|
|
|
(3,980
|
)
|
Changes in operating assets and liabilities, net of effect of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(21,780
|
)
|
|
|
(225
|
)
|
|
|
(31,721
|
)
|
Inventories
|
|
|
(571
|
)
|
|
|
288
|
|
|
|
306
|
|
Prepaid expenses and other current assets
|
|
|
(42
|
)
|
|
|
(1,233
|
)
|
|
|
(2,594
|
)
|
Deferred cost of revenues
|
|
|
(5,129
|
)
|
|
|
372
|
|
|
|
(394
|
)
|
Accounts payable
|
|
|
133
|
|
|
|
952
|
|
|
|
(4,018
|
)
|
Accrued expenses
|
|
|
(5,588
|
)
|
|
|
9,394
|
|
|
|
4,227
|
|
Deferred rent
|
|
|
(245
|
)
|
|
|
1,101
|
|
|
|
9,675
|
|
Deferred revenues
|
|
|
38,640
|
|
|
|
8,834
|
|
|
|
45,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
22,886
|
|
|
|
69,357
|
|
|
|
79,835
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(10,081
|
)
|
|
|
(16,023
|
)
|
|
|
(24,007
|
)
|
Payments for capitalized patent enforcement costs
|
|
|
(276
|
)
|
|
|
(4,186
|
)
|
|
|
(3,552
|
)
|
Proceeds from sale of investment in common stock warrant
|
|
|
|
|
|
|
|
|
|
|
1,990
|
|
Sales of
held-to-maturity
securities
|
|
|
23,546
|
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities
|
|
|
|
|
|
|
(94,250
|
)
|
|
|
|
|
Sales of available-for-sale securities
|
|
|
39,056
|
|
|
|
94,250
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(154,628
|
)
|
|
|
(27,664
|
)
|
|
|
(132,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(102,383
|
)
|
|
|
(47,873
|
)
|
|
|
(158,561
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
Payments on revolving credit facility
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
Proceeds from term loan
|
|
|
57,522
|
|
|
|
|
|
|
|
|
|
Payments on term loan
|
|
|
(35,600
|
)
|
|
|
(24,400
|
)
|
|
|
|
|
Proceeds from convertible senior notes
|
|
|
|
|
|
|
160,456
|
|
|
|
|
|
Releases of letters of credit
|
|
|
1,777
|
|
|
|
|
|
|
|
1,184
|
|
Payments on letters of credit
|
|
|
(1,798
|
)
|
|
|
(1,976
|
)
|
|
|
(530
|
)
|
Excess tax benefits from exercise of stock options
|
|
|
3,317
|
|
|
|
6,845
|
|
|
|
2,107
|
|
Proceeds from exercise of stock options
|
|
|
9,160
|
|
|
|
13,373
|
|
|
|
11,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
34,378
|
|
|
|
154,298
|
|
|
|
13,914
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(45,119
|
)
|
|
|
175,782
|
|
|
|
(64,812
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
75,895
|
|
|
|
30,776
|
|
|
|
206,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
30,776
|
|
|
$
|
206,558
|
|
|
$
|
141,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
3,539
|
|
|
$
|
3,824
|
|
|
$
|
5,652
|
|
Cash paid for income taxes
|
|
|
344
|
|
|
|
415
|
|
|
|
6,243
|
|
See accompanying notes.
51
BLACKBOARD
INC.
December 31, 2008
|
|
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.
|
|
2.
|
Significant
Accounting Policies
|
Basis
of Presentation and Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material
intercompany transactions and accounts have been eliminated in
consolidation. The Company consolidates investments where it has
a controlling financial interest as defined by Accounting
Research Bulletin (ARB) No. 51,
Consolidated Financial Statements,
as amended
by Statement of Financial Accounting Standards
(SFAS) No. 94,
Consolidation of all
Majority-Owned Subsidiaries.
The usual condition for
controlling financial interest is ownership of a majority of the
voting interest and therefore, as a general rule, ownership,
directly or indirectly, of more than fifty percent of the
outstanding voting shares is a condition pointing towards
consolidation. For investments in variable interest entities, as
defined by Financial Statement Accounting Board
(FASB) Interpretation No. 46,
Consolidation of Variable Interest Entities,
the Company would consolidate when it is determined to be
the primary beneficiary. For those investments in entities where
the Company has significant influence over operations, but where
the Company neither has a controlling financial interest nor is
the primary beneficiary of a variable interest entity, the
Company follows the equity method of accounting pursuant to
Accounting Principles Bulletin (APB) Opinion
No. 18,
The Equity Method of Accounting for
Investments in Common Stock.
The Company is not the
primary beneficiary of any variable interest entities nor does
the Company have any investments accounted for under the equity
method of accounting.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Fair
Value of Financial Instruments
SFAS No. 107,
Disclosures about Fair Value of
Financial Instruments,
requires disclosures of fair
value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to
estimate that value. Due to their short-term nature, the
carrying amounts reported in the consolidated financial
statements approximate the fair value for accounts receivable,
accounts payable and accrued expenses.
Fair
Value Measurements
As of January 1, 2008, the Company adopted
SFAS No. 157,
Fair Value
Measurements
(FAS 157). The adoption
of FAS 157 did not have a material impact on the
Companys consolidated results of operations and financial
condition. FAS 157 defines fair value, establishes a fair
value hierarchy for assets and liabilities measured at fair
value and expands required disclosure about fair value
measurements. The FAS 157 hierarchy ranks the quality and
reliability of inputs, or assumptions, used in the determination
of fair value and requires
52
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
financial assets and liabilities carried at fair value to be
classified and disclosed in one of the following three
categories:
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 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 table sets forth the Companys
financial assets and liabilities that were measured at fair
value on a recurring basis as of December 31, 2008, 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
|
|
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents(1)
|
|
$
|
96,705
|
|
|
$
|
96,705
|
|
|
$
|
|
|
|
$
|
|
|
Investment in common stock warrant
|
|
|
1,990
|
|
|
|
|
|
|
|
1,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
98,695
|
|
|
$
|
96,705
|
|
|
$
|
1,990
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible senior notes(2)
|
|
$
|
132,825
|
|
|
$
|
132,825
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
Short-term
Investments
All investments with original maturities of greater than
90 days are accounted for in accordance with
SFAS No. 115,
Accounting for Certain
Investments in Debt and Equity Securities.
The Company
determines the appropriate classification at the time of
purchase and reevaluates such designation as of each balance
sheet date.
Held-to-maturity
securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity
under the effective interest method. Such amortization is
recorded as interest income. Interest on
held-to-maturity
securities is recorded as interest income. Available-for-sale
securities are carried at fair value, with unrealized holding
gains and losses, if any, reported in other comprehensive
income. Realized gains and losses and declines in value judged
to be other-than-temporary on available-for-sale securities are
recorded as other income (expense) in the consolidated
statements of operations.
Restricted
Cash
As of December 31, 2007 and 2008, $4.0 million and
$4.2 million, respectively, of cash was pledged as
collateral on outstanding letters of credit related to office
space lease obligations. Generally, the restrictions lapse at
the termination of the respective lease obligation.
53
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investment
in Common Stock Warrant
The Company held a warrant to purchase common stock in an entity
that provides technology support services to educational
institutions, including the Companys customers, that was
exercisable for 19.9% of the shares of the entity. This common
stock warrant meets the definition of a derivative as defined by
SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activity.
Other income of
approximately $4.0 million was recorded in the
Companys consolidated statements of operations in June
2008 related to the fair value adjustment of the common stock
warrant. On July 1, 2008, in connection with an equity
transaction between this entity and a venture capital firm, the
Company partially exercised its warrant for approximately
one-half of the shares originally exercisable under the warrant
and sold the related shares to the venture capital firm for
approximately $2.0 million. Concurrently, the Company
entered into an amended common stock warrant agreement under
which the Company can purchase up to 9.9% of the shares of the
entity upon exercise. The fair value of the common stock warrant
of approximately $2.0 million is recorded as investment in
common stock warrant on the Companys consolidated balance
sheet as of December 31, 2008. The Company will continue to
evaluate the fair value of this instrument in subsequent
reporting periods and any changes in value will be recognized in
the consolidated statements of operations.
Foreign
Currency Translation
The functional currency of the Companys foreign
subsidiaries is the U.S. dollar. The Company remeasures the
monetary assets and liabilities of its foreign subsidiaries,
which are maintained in the local currency ledgers, at the rates
of exchange in effect at month end. Revenues and expenses
recorded in the local currency during the period are translated
using average exchange rates for each month. Non-monetary assets
and liabilities are translated using historical rates. Resulting
adjustments from the remeasurement process are included in other
income (expense) in the accompanying consolidated statements of
operations.
Concentration
of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash and cash equivalents and accounts receivable. The Company
deposits its cash with financial institutions that the Company
considers to be of high credit quality.
With respect to accounts receivable, the Company performs
ongoing evaluations of its customers, generally grants
uncollateralized credit terms to its customers, and maintains an
allowance for doubtful accounts based on historical experience
and managements expectations of future losses. As of and
for the years ended December 31, 2006, 2007 and 2008, there
were no significant concentrations with respect to the
Companys consolidated revenues or accounts receivable.
Allowance
for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability, failure or
refusal of its clients to make required payments. The Company
analyzes accounts receivable, historical percentages of
uncollectible accounts and changes in payment history when
evaluating the adequacy of the allowance for doubtful accounts.
The Company uses an internal collection effort, which may
include its sales and services groups as it deems appropriate.
Although the Company believes that its reserves are adequate, if
the financial condition of its clients deteriorates, resulting
in an impairment of their ability to make payments, or if it
underestimates the allowances required, additional allowances
may be necessary, which will result in increased expense in the
period in which such determination is made.
54
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following activity occurred in the allowance for doubtful
accounts during the years ended December 31, 2006, 2007 and
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Beginning Balance
|
|
$
|
701
|
|
|
$
|
767
|
|
|
$
|
765
|
|
Additions
|
|
|
198
|
|
|
|
554
|
|
|
|
531
|
|
Reductions
|
|
|
(132
|
)
|
|
|
(556
|
)
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
767
|
|
|
$
|
765
|
|
|
$
|
926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
Deferred tax assets and liabilities are determined based on
temporary differences between the financial reporting bases and
the tax bases of assets and liabilities. Deferred tax assets are
also recognized for tax net operating loss carryforwards. These
deferred tax assets and liabilities are measured using the
enacted tax rates and laws that will be in effect when such
amounts are expected to reverse or be utilized. The realization
of total deferred tax assets is contingent upon the generation
of future taxable income. Valuation allowances are provided to
reduce such deferred tax assets to amounts more likely than not
to be ultimately realized.
Income tax provision or benefit includes U.S. federal,
state and local and foreign income taxes and is based on pre-tax
income or loss. The Company has elected to utilize the
principles applicable under tax law in ordering of tax benefits
to determine whether an excess tax benefit was realized under
SFAS 123R.
The Company follows the provisions of FASB Interpretation
No. 48,
Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109
(FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
accordance with SFAS No. 109,
Accounting for
Income Taxes.
It prescribes that a company should use
a more-likely-than-not recognition threshold based on the
technical merits of the tax position taken. Tax positions that
meet the more-likely-than-not recognition threshold should be
measured as the largest amount of the tax benefits, determined
on a cumulative probability basis, which is more likely than not
to be realized upon ultimate settlement in the financial
statements. The Company recognizes interest and penalties
related to income tax matters in income tax expense. Prior to
adoption of FIN 48, accruals for tax contingencies were
provided for in accordance with the requirements of
SFAS No. 5,
Accounting for
Contingencies.
Inventories
Inventories are stated at the lower of cost or market using the
first-in,
first-out method.
Property
and Equipment
Property and equipment are recorded at cost. Depreciation and
amortization are calculated on the straight-line method over the
following estimated useful lives of the assets:
|
|
|
Computer and office equipment
|
|
3 years
|
Software
|
|
2 to 5 years
|
Furniture and fixtures
|
|
3 to 5 years
|
Leasehold improvements
|
|
Shorter of lease term or useful life
|
Goodwill
and Intangible Assets
The impairment of goodwill resulting from acquisitions is
assessed in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets.
Accordingly, the Company tests goodwill for impairment annually
on
55
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
October 1, or whenever events or changes in circumstances
indicate an impairment may have occurred, by comparing its fair
value to its carrying value. Impairment may result from, among
other things, deterioration in the performance of the acquired
business, adverse market conditions, adverse changes in
applicable laws or regulations, including changes that restrict
the activities of the acquired business, and a variety of other
circumstances. If it is determined that an impairment has
occurred, the Company records a write-down of the carrying value
and charges the impairment as an operating expense in the period
the determination is made. Although the Company believes
goodwill is appropriately stated in its consolidated financial
statements, changes in strategy or market conditions could
significantly impact these judgments and require an adjustment
to the recorded balance.
The costs of defending and protecting patents are capitalized.
All costs incurred to the point when a patent application is to
be filed are expensed as incurred.
Intangible assets are amortized using the straight-line method
over the following estimated useful lives of the assets:
|
|
|
Acquired technology
|
|
3 years
|
Contracts and customer lists
|
|
3 to 5 years
|
Non-compete agreements
|
|
Term of agreement
|
Trademarks and domain names
|
|
3 years
|
Patents and related costs
|
|
Life of patent
|
Impairment
of Long-Lived Assets
The Company evaluates the recoverability of its long-lived
assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets
may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of any
asset to future net undiscounted cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured as the
difference between the fair value of the asset compared to its
carrying amount.
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, hardware, premium
support and maintenance, and hosting revenues. Professional
services revenues include training and consulting services.
Revenue from software licenses and maintenance is recorded in
accordance with the American Institute of Certified Public
Accountants Statement of Position (SOP)
97-2,
Software Revenue Recognition,
as modified by
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition, with Respect to Certain
Transactions.
The Companys software does not
require significant modification and customization services.
Where services are not essential to the functionality of the
software, the Company begins to recognize software licensing
revenues when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists;
(2) delivery has occurred; (3) the fee is fixed and
determinable; and (4) collectibility is probable.
The Company does not have vendor-specific objective evidence
(VSOE) of fair value for support and maintenance
separate from software for the majority of its products.
Accordingly, when licenses are sold in conjunction with the
Companys support and maintenance, license revenue is
recognized over the term of the maintenance service period. When
licenses of certain offerings are sold in conjunction with
support and maintenance where the Company does have VSOE, the
Company recognizes the license revenue upon delivery of the
license and recognizes the support and maintenance revenue over
the term of the maintenance service period.
56
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys hardware revenues are derived from two types
of transactions: sales of hardware in conjunction with the
Companys software licenses, which are referred to as
bundled hardware-software systems, and sales of hardware without
software, which generally involve the resale of third-party
hardware. After any necessary installation services are
performed, hardware revenues are recognized when all of the
following criteria are met: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the
fee is fixed and determinable; and (4) collectibility is
probable. VSOE of the fair value for the separate components of
bundled hardware-software systems has not been determined.
Accordingly, when a bundled hardware-software system is sold,
all revenue is recognized over the term of the maintenance
service period. Hardware sales without software are recognized
upon delivery of the hardware to the Companys client.
Hosting revenues are recorded in accordance with Emerging Issues
Task Force (EITF)
00-3,
Application of AICPA
SOP 97-2
to Arrangements That Include the Right to Use Software Stored on
Another Entitys Hardware.
Accordingly, hosting
fees and
set-up
fees
are recognized ratably over the term of the hosting agreement.
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,
as defined in
SOP 97-2.
The more significant factors considered in determining whether
revenues should be accounted for separately include the nature
of the professional services, such as consideration of whether
the professional services are essential to the functionality of
the licensed product, degree of risk, availability of
professional services from other vendors and timing of payments.
Professional services that are sold separately from license
revenue are recognized as the professional services are
performed on a
time-and-materials
basis.
The Company does not offer specified upgrades or incrementally
significant discounts. Advance payments are recorded as deferred
revenues until the product is shipped, services are delivered or
obligations are met and the revenues can be recognized. Deferred
revenues represent the excess of amounts invoiced over amounts
recognized as revenues. Non-specified upgrades of the
Companys product are provided only on a
when-and-if-available
basis. Any contingencies, such as rights of return, conditions
of acceptance, warranties and price protection, are accounted
for under
SOP 97-2.
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
$9.3 million, $11.7 million and $17.8 million for
the years ended December 31, 2006, 2007 and 2008,
respectively. The Company does not have transactions in which
the deferred cost of revenues exceed deferred revenues.
Deferred cost of revenues represents the cost of hardware (if
sold as part of a complete system) and software that is
purchased and has been sold in conjunction with the
Companys products. These costs are recognized as cost of
revenues proportionally and over the same period that deferred
revenue is recognized as revenues in accordance with
SAB Topic 13.
Software
Development Costs
The Company accounts for software development costs in
accordance with SFAS No. 86,
Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed.
Software development costs are
57
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expensed as incurred until technological feasibility has been
established, at which time such costs are capitalized to the
extent that the capitalizable costs do not exceed the realizable
value of such costs, until the product is available for general
release to customers. The Company defines the establishment of
technological feasibility as the completion of all planning,
designing, coding and testing activities that are necessary to
establish products that meet design specifications including
functions, features and technical performance requirements.
Under the Companys definition, establishing technological
feasibility is considered complete only after the majority of
client testing and feedback has been incorporated into product
functionality. As of December 31, 2007 and 2008, the
Company has capitalized software of $3.3 million and
$4.6 million, respectively, which is amortized over two
years. The Company amortized software development costs of
$0.6 million, $0.4 million and $0.7 million for
the years ended December 31, 2006, 2007 and 2008,
respectively. Capitalized software is included in property and
equipment in the accompanying consolidated balance sheets.
Advertising
The Company expenses advertising as incurred. Advertising
expense was $1.2 million, $1.8 million and
$2.5 million for the years ended December 31, 2006,
2007 and 2008, respectively.
Stock
Options
The Company accounts for stock-based compensation expense in
accordance with SFAS No. 123 (revised 2005),
Share-Based Payment
(SFAS 123R). SFAS 123R requires the
measurement and recognition of 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 during 2006, 2007 and 2008 was $11.44, $15.97 and
$12.48, respectively. The fair value of options vested during
the years ended December 31, 2006, 2007 and 2008 was
approximately $6.0 million, $10.4 million and
$16.0 million, respectively. The fair value of each option
is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions for stock options granted during the years ended
December 31, 2006, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
42.4
|
%
|
|
|
44.0
|
%
|
|
|
40.0
|
%
|
Average risk-free interest rate
|
|
|
4.75
|
%
|
|
|
4.53
|
%
|
|
|
2.78
|
%
|
Expected term
|
|
|
4.9 years
|
|
|
|
5.1 years
|
|
|
|
4.9 years
|
|
Forfeiture rate
|
|
|
15.0
|
%
|
|
|
15.0
|
%
|
|
|
11.5
|
%
|
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. Given the
Companys limited historical stock data following its
initial public offering in June 2004, the Company used a blended
volatility to best estimate expected volatility for the years
ended December 31, 2006 and 2007. The blended volatility
included the average of the Companys preceding one-year
weekly historical volatility and the Companys peer group
preceding four-year weekly historical volatility. The
Companys peer group historical volatility includes the
historical volatility of companies that are similar in revenue
size, in the same industry or are competitors. Beginning
January 1, 2008, the Company used the Companys daily
historical volatility since January 1, 2006 to calculate
the expected volatility.
58
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Risk-free interest rate
This is the average
U.S. Treasury rate (having a term that most closely
approximates the expected life of the option) for the period in
which the option was granted.
Expected life of the options
This is the
period of time that the equity grants are expected to remain
outstanding. For the years ended December 31, 2006 and
2007, the Company used the short-cut method to determine the
expected life of the options as prescribed under the provisions
of Staff Accounting Bulletin (SAB) No. 107,
Share-Based Payment.
Beginning
January 1, 2008, as prescribed by SAB No. 107,
the Company gathered more detailed historical information about
specific exercise behavior of its grantees, which it used to
determine the expected term. For grants that have been
exercised, the Company uses actual exercise data to estimate
option exercise timing within the valuation model. 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 year ended December 31,
2008 have a maximum term of eight years.
Forfeiture rate
This is 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
instruments 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 instruments likely to vest
is recognized in compensation cost in the period of the change.
The compensation expense that has been recognized in the
consolidated statements of operations for the Companys
stock option plans for the years ended December 31, 2006,
2007 and 2008 was $8.1 million, $12.0 million and
$15.1 million, respectively. The related total income tax
benefits recognized in the consolidated statements of operations
for the years ended December 31, 2006, 2007 and 2008 were
$3.3 million, $6.8 million and $2.1 million,
respectively and are classified as a financing cash inflow with
a corresponding operating cash outflow. For stock subject to
graded vesting, the Company has utilized the
straight-line method for allocating compensation
expense by period.
The weighted average remaining contractual life for all options
outstanding under the Companys stock incentive plans at
December 31, 2008 was 5.8 years. The weighted average
remaining contractual life for exercisable stock options at
December 31, 2008 was 4.8 years. As of
December 31, 2008, there was approximately
$29.3 million of total unrecognized compensation cost
related to unvested stock options granted under the
Companys option plans. The cost is expected to be
recognized through February 2013 with a weighted average
recognition period of approximately 1.4 years.
Restricted
Stock
Restricted stock is a stock award that entitles the holder to
receive shares of the Companys common stock as the award
vests over time. The fair value of each restricted stock award
is estimated using the intrinsic value method which is based on
the closing price on the date of grant. Compensation expense for
restricted stock awards is recognized ratably over the vesting
period on a straight-line basis.
As of December 31, 2008, there was approximately
$1.7 million of total unrecognized compensation cost
related to unvested restricted stock awards granted under the
Companys stock incentive plans. The cost is expected to be
recognized through July 2012 with a weighted average recognition
period of approximately 2.1 years.
Basic
and Diluted Net (Loss) Income per Common Share
Basic net (loss) income per common share excludes dilution for
potential common stock issuances and is computed by dividing net
(loss) income by the weighted-average number of common shares
outstanding for
59
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the period. Diluted net (loss) income per common share reflects
the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock.
The following table provides a reconciliation of the numerators
and denominators used in computing basic and diluted net (loss)
income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Basic net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(10,737
|
)
|
|
$
|
12,865
|
|
|
$
|
2,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
27,857,576
|
|
|
|
28,789,083
|
|
|
|
30,885,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per common share
|
|
$
|
(0.39
|
)
|
|
$
|
0.45
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(10,737
|
)
|
|
$
|
12,865
|
|
|
$
|
2,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
27,857,576
|
|
|
|
28,789,083
|
|
|
|
30,885,908
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options related to the purchase of common stock
|
|
|
|
|
|
|
1,324,538
|
|
|
|
923,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
27,857,576
|
|
|
|
30,113,621
|
|
|
|
31,809,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per common share
|
|
$
|
(0.39
|
)
|
|
$
|
0.43
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The dilutive effect of 1,131,263, 1,377,508 and 2,361,652
options were not included in the computation of diluted net
income (loss) per share for the years ended December 31,
2006, 2007 and 2008, respectively, as their effect would be
anti-dilutive.
Comprehensive
Net Income (loss)
Comprehensive net income (loss) includes net income (loss),
combined with unrealized gains and losses not included in
earnings and reflected as a separate component of
stockholders equity. There were no differences between net
income (loss) and comprehensive net income (loss) for the years
ended December 31, 2006, 2007 and 2008.
Segment
Information
The Company currently operates in one business segment, namely,
the development, commercialization and implementation of
software products and related services. The Company evaluates
its market opportunities by referring to the
U.S. postsecondary education market, U.S. elementary
and secondary market, or K-12, education market, and the
international postsecondary education market. The Company is not
organized by market and is managed and operated as one business.
A single management team that reports to the chief operating
decision maker comprehensively manages the entire business. The
Company does not operate any material separate lines of business
or separate business entities with respect to its products or
product development. Accordingly, the Company does not
accumulate discrete financial information with respect to
separate product lines and does not have separately reportable
segments as defined by SFAS No. 131,
Disclosure about Segments of an Enterprise and Related
Information.
Substantially all of the Companys material identifiable
assets are located in the United States. Revenues derived from
international sales were $34.7 million, $53.6 million
and $60.9 million for the years ended
60
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006, 2007 and 2008, respectively.
Substantially all international sales are denominated in
U.S. dollars.
Recent
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), a
revision of SFAS No. 141,
Business
Combinations.
The revision is intended to simplify
existing guidance and converge rulemaking under
U.S. generally accepted accounting principles with
international accounting standards. This statement applies
prospectively to business combinations where the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Early
adoption is prohibited. The Company is currently evaluating the
impact of the provisions of the revision on its consolidated
results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 requires all entities
to report noncontrolling (minority) interests in subsidiaries as
equity in the consolidated financial statements. Its intention
is to eliminate the diversity in practice regarding the
accounting for transactions between an entity and noncontrolling
interests. This statement is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. The
Company does not believe the provisions of SFAS 160 will
have a material impact on its consolidated results of operations
and financial condition.
In February 2008, the FASB issued Staff Position
No. 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2).
FSP 157-2
deferred the effective date of FAS 157 for all nonfinancial
assets and nonfinancial liabilities to fiscal years beginning
after November 15, 2008. The Company is currently
evaluating the impact of
FSP 157-2
for nonfinancial assets and nonfinancial liabilities on its
consolidated results of operations and financial condition.
In May 2008, the FASB issued Staff Position
No. APB 14-1,
Accounting for Convertible Debt Instruments that May be
Settled in Cash Upon Conversion.
(APB 14-1).
APB 14-1
requires that the liability and equity components of convertible
debt instruments that may be settled in cash upon conversion
(including partial cash settlement) be separately accounted for
in a manner that reflects an issuers nonconvertible debt
borrowing rate. The resulting debt discount is amortized over
the period the convertible debt is expected to be outstanding as
additional non-cash interest expense.
APB 14-1
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. Retrospective application to all
periods presented is required except for instruments that were
not outstanding during any of the periods that will be presented
in the annual financial statements for the period of adoption
but were outstanding during an earlier period. The Company is
currently finalizing the impact of the provisions of
APB 14-1
on its consolidated results of operations and financial
condition. The Company currently estimates that the additional
non-cash interest expense over the remaining period the Notes
are expected to be outstanding will be approximately
$13.4 million, of which approximately $6.0 million
will be recognized during 2009.
In June 2008, the EITF issued EITF
No. 07-5,
Determining Whether an Instrument (or Embedded Feature)
Is Indexed to an Entitys Own Stock
(EITF 07-5)
to clarify how to determine whether certain instruments or
features were indexed to an entitys own stock.
EITF 07-5
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. The Company is currently finalizing
the impact of
EITF 07-5
on its consolidated results of operations and financial
condition and does not believe it will have a material impact on
its consolidated results of operations and financial condition.
61
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Mergers
and Acquisitions
|
WebCT,
Inc. Merger
On February 28, 2006, the Company completed its merger with
WebCT, Inc. (WebCT) pursuant to the Agreement and
Plan of Merger dated as of October 12, 2005. Pursuant to
the Agreement and Plan of Merger, the Company acquired all the
outstanding common stock of WebCT in a cash transaction for
approximately $178.3 million. The effective cash purchase
price of WebCT before transaction costs was approximately
$150.4 million, net of WebCTs February 28, 2006
cash balance of approximately $27.9 million. The Company
has included the financial results of WebCT in its consolidated
financial statements beginning February 28, 2006.
The merger was accounted for under the purchase method of
accounting in accordance with SFAS No. 141,
Business Combinations
(SFAS 141). Assets acquired and liabilities
assumed were recorded at their fair values as of
February 28, 2006. The total purchase price was
$187.5 million, including the acquisition-related
transaction costs of approximately $9.2 million.
Acquisition-related transaction costs include investment
banking, legal and accounting fees, and other external costs
directly related to the merger.
Of the total purchase price, $26.1 million has been
allocated to net tangible assets and $73.3 million has been
allocated to definite-lived intangible assets acquired.
Definite-lived intangible assets of $73.3 million consist
of the value assigned to WebCTs customer relationships of
$39.6 million and developed and core technology of
$33.7 million. Goodwill represents the excess of the
purchase price of an acquired business over the fair value of
the net tangible and intangible assets acquired. The Company
allocated $88.1 million to goodwill which is not deductible
for tax purposes.
During 2007, the Company reduced goodwill by $6.4 million
primarily related to the recognition of deferred tax assets
related to certain acquisition-related transaction costs that
were deductible for income tax purposes by WebCT. Consequently,
after this adjustment, the net deferred tax asset acquired as a
result of the WebCT merger was $7.8 million.
During 2008, the Company reduced goodwill by $0.9 million
related to net operating loss carry forwards that were utilized
during 2008 that had previously been treated as goodwill.
Xythos
Software, Inc. Merger
On November 30, 2007, the Company completed its merger with
Xythos Software, Inc. (Xythos) pursuant to the
Agreement and Plan of Merger dated as of November 12, 2007.
Xythos owned the underlying technology embedded in the
Blackboard Content System.
This merger allows the Company
to further augment the underlying technology of the
Blackboard Content System
and is a technology that the
Company intends to incorporate into the broader
Blackboard
Academic Suite
and its successor platform,
Blackboard
Learn.
Pursuant to the Agreement and Plan of Merger, the
Company acquired all of the outstanding common stock of Xythos
in a cash transaction for approximately $36.4 million,
including acquisition-related transaction costs and purchase
accounting adjustments of $10.9 million, which included a
$5.0 million reduction of deferred cost of revenues
associated with the remaining value of the preexisting agreement
with Xythos. The Company determined that there was no gain or
loss on the settlement of a preexisting agreement with Xythos as
the preexisting agreement was considered cancelable on its
existing terms. The $5.0 million adjustment was recorded as
an increase to goodwill. The effective cash purchase price of
Xythos before transaction costs was approximately
$25.5 million, net of Xythoss November 30, 2007
cash balance of approximately $5.5 million. The Company has
included the financial results of Xythos in its consolidated
financial statements beginning November 30, 2007.
The merger was accounted for under the purchase method of
accounting in accordance with SFAS 141. Assets acquired and
liabilities assumed were recorded at their fair values as of
November 30, 2007. Of the
62
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
total purchase price, $4.1 million was allocated to net
tangible assets and $9.9 million was allocated to
definite-lived intangible assets acquired. Definite-lived
intangible assets of $9.9 million consist of the value
assigned to Xythoss customer relationships of
$7.6 million and developed and core technology of
$2.3 million. The Company allocated the remaining
$22.4 million to goodwill, which is not deductible for tax
purposes.
NTI
Group, Inc. Merger
On January 31, 2008, the Company completed its merger with
The NTI Group, Inc. (NTI) pursuant to the Agreement
and Plan of Merger dated January 11, 2008. Pursuant to the
Agreement and Plan of Merger, the Company paid merger
consideration of approximately $184.8 million, which
includes $132.1 million in cash and $52.7 million in
shares of the Companys common stock, or approximately
1.5 million shares of common stock. The effective cash
portion of the purchase price of NTI before transaction costs
was approximately $130.5 million, net of NTIs
January 31, 2008 cash balance of approximately
$1.6 million. The Company has included the financial
results of NTI in its consolidated financial statements
beginning February 1, 2008. Up to an additional
0.4 million shares of the Companys common stock may
be issued contingent on the achievement of certain performance
milestones. The NTI Group, Inc. has since been renamed
Blackboard Connect Inc.
NTI is a provider of mass messaging and notifications solutions
for educational and government organizations via voice, email,
short message service (SMS) and other text-receiving devices.
The Company believes the merger with NTI supports the
Companys long-term strategic direction and the demands for
innovative technology in the education industry. Management
believes that the merger with NTI will help the Company meet the
growing demands of its clients, including the ability to send
mass communications via various means.
The merger was accounted for under the purchase method of
accounting in accordance with SFAS 141. Assets acquired and
liabilities assumed were recorded at their fair values as of
January 31, 2008. The total preliminary purchase price was
$187.8 million, including the estimated acquisition related
transaction costs of approximately $3.0 million.
Acquisition-related transaction costs include investment
banking, legal and accounting fees, and other external costs
directly related to the merger.
Preliminary
Purchase Price Allocation
Under the purchase method of accounting, the total estimated
purchase price is allocated to NTIs net tangible and
intangible assets based on their estimated fair values as of
January 31, 2008. The excess of the purchase price over the
net tangible and identifiable intangible assets was recorded as
goodwill. The preliminary allocation of the purchase price as
shown in the table below was based upon managements
preliminary valuation, which was based on estimates and
assumptions that are subject to change. The areas of
63
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the purchase price allocation that are not yet finalized relate
primarily to income and non-income based taxes. The preliminary
estimated purchase price is allocated as follows (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,592
|
|
Accounts receivable
|
|
|
8,123
|
|
Prepaid expenses and other current assets
|
|
|
1,143
|
|
Restricted cash
|
|
|
888
|
|
Property and equipment
|
|
|
2,304
|
|
Accounts payable
|
|
|
(650
|
)
|
Other accrued liabilities
|
|
|
(2,142
|
)
|
Deferred tax liabilities, net
|
|
|
(16,806
|
)
|
Deferred revenue
|
|
|
(10,045
|
)
|
Net tangible liabilities to be acquired
|
|
|
(15,593
|
)
|
Definite-lived intangible assets acquired
|
|
|
60,325
|
|
Goodwill
|
|
|
143,089
|
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
187,821
|
|
|
|
|
|
|
Definite-lived intangible assets of $60.3 million consist
of the value assigned to NTIs customer relationships of
$42.1 million, developed and core technology of
$17.4 million and trademarks of $0.8 million.
The value assigned to NTIs customer relationships was
determined by discounting the estimated cash flows associated
with existing customers as of January 31, 2008, after
taking into consideration expected attrition of the existing
customer base. The estimated cash flows were based on revenues
for those existing customers net of operating expenses and net
of contributory asset charges associated with servicing those
customers. The projected revenues were based on revenue growth
rates and customer renewal rates. Operating expenses were
estimated based on the supporting infrastructure expected to
sustain the assumed revenue growth rates. Net contributory asset
charges were based on the estimated fair value of those assets
that contribute to the generation of the estimated cash flows. A
discount rate of 19% was deemed appropriate for valuing the
existing customer base. The Company amortizes the value of
NTIs customer relationships in proportion to the
respective discounted cash flows over an estimated useful life
of five years. Customer relationships are not deductible for tax
purposes.
The value assigned to NTIs developed and core technology
was determined by discounting the estimated future cash flows
associated with the existing developed and core technologies to
their present value. Developed and core technology, which are
comprised of products that have reached technological
feasibility, includes products in NTIs current product
line. The revenue projections used to value the developed and
core technology were based on estimates of relevant market sizes
and growth factors, expected trends in technology and the nature
and expected timing of new product introductions by NTI and its
competitors. A discount rate of 19% was deemed appropriate for
valuing developed and core technology and was based on the risks
associated with the respective cash flows taking into
consideration the Companys weighted average cost of
capital. The Company amortizes the developed and core technology
on a straight-line basis over an estimated useful life of three
years. Developed and core technology are not deductible for tax
purposes.
The value assigned to NTIs trademarks was determined by
discounting the estimated royalty savings associated with an
estimated royalty rate for the use of the trademarks to their
present value. The trademarks are comprised of NTIs trade
name and various trademarks related to its existing product
lines. The royalty rates used to value the trademarks were based
on estimates of prevailing royalty rates paid for the use of
similar trade names and trademarks in market transactions
involving licensing arrangements of companies that operate in
service-related industries. A discount rate of 19% was deemed
appropriate for valuing NTIs
64
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
trademarks and was based on the risks associated with the
respective royalty savings taking into consideration the
Companys weighted average cost of capital. The Company
amortizes the trademarks on a straight-line basis over an
estimated useful life of three years. Trademarks are not
deductible for tax purposes.
Of the total estimated purchase price, approximately
$143.1 million has been allocated to goodwill. Goodwill
represents the excess of the purchase price of an acquired
business over the fair value of the net tangible and intangible
assets acquired. Goodwill is not deductible for tax purposes.
As a result of the NTI merger, the Company recorded net deferred
tax liabilities of approximately $16.8 million in its
preliminary purchase price allocation. This balance is comprised
primarily of approximately $24.1 million in deferred tax
liabilities resulting primarily from the related intangibles
identified from the merger. The deferred tax liabilities are
offset by approximately $7.3 million in deferred tax assets
that relate primarily to federal and state net operating losses
and certain amortization and depreciation expenses.
Deferred
Revenue
In connection with the preliminary purchase price allocation,
the estimated fair value of the support obligation assumed from
NTI in connection with the merger was determined utilizing a
cost
build-up
approach. The cost
build-up
approach determines fair value by estimating the costs relating
to fulfilling the obligation plus a normal profit margin. The
sum of the costs and operating profit approximates the amount
that the Company would be required to pay a third party to
assume the support obligation. The estimated costs to fulfill
the support obligation were based on the historical direct costs
related to providing the support services and to correct any
errors in NTIs software products. These estimated costs
did not include any costs associated with selling efforts or
research and development or the related fulfillment margins on
these costs. Profit associated with selling efforts is excluded
because NTI had concluded the selling effort on the support
contracts prior to January 31, 2008. The estimated normal
profit margin was determined to be approximately 22%. As a
result, in allocating the purchase price, the Company recorded
an adjustment to reduce the carrying value of NTIs
January 31, 2008 deferred support revenue by approximately
$10.1 million to $10.0 million which represents the
Companys estimate of the fair value of the support
obligation assumed. As former NTI customers renew these support
contracts, the Company will recognize revenue for the full value
of the support contracts over the remaining term of the
contracts, the majority of which are one year.
Pro
Forma Financial Information
The unaudited financial information in the table below
summarizes the combined results of operations of Blackboard and
NTI on a pro forma basis, as though the companies had been
combined as of the beginning of each of the periods presented.
The pro forma financial information is presented for
informational purposes only and is not indicative of the results
of operations that would have been achieved if the acquisition
and the Companys public offering of $165.0 million
aggregate principal amount of 3.25% Convertible Senior
Notes due 2027 (see Note 7) had taken place at the
beginning of each of the periods presented. The pro forma
financial information for all periods presented also includes
amortization expense from acquired intangible assets,
adjustments to interest expense, interest income and related tax
effects.
65
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The unaudited pro forma financial information for the year ended
December 31, 2008 combines the historical results for
Blackboard for the year ended December 31, 2008 and the
historical results for NTI for the one month ended
January 31, 2008. The unaudited pro forma financial
information for the year ended December 31, 2007 combines
the historical results for Blackboard for the year ended
December 31, 2007 and the historical results for NTI for
the same period.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except per share amounts) (Unaudited)
|
|
|
Total revenues
|
|
$
|
269,913
|
|
|
$
|
315,577
|
|
Net (loss) income
|
|
$
|
(694
|
)
|
|
$
|
1,669
|
|
Basic net (loss) income per common share
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
Diluted net (loss) income per common share
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
Inventories
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
551
|
|
|
$
|
678
|
|
Work-in-process
|
|
|
602
|
|
|
|
547
|
|
Finished goods
|
|
|
936
|
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
2,089
|
|
|
$
|
1,783
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Property
and Equipment
|
Property
and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Computer and office equipment
|
|
$
|
41,511
|
|
|
$
|
53,052
|
|
Software
|
|
|
20,830
|
|
|
|
28,479
|
|
Furniture and fixtures
|
|
|
713
|
|
|
|
1,860
|
|
Leasehold improvements
|
|
|
3,252
|
|
|
|
11,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,306
|
|
|
|
94,816
|
|
Less accumulated depreciation and amortization
|
|
|
(47,722
|
)
|
|
|
(62,866
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
18,584
|
|
|
$
|
31,950
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended
December 31, 2006, 2007 and 2008 was $9.0 million,
$10.5 million and $15.1 million, respectively.
66
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Goodwill
and Intangible Assets
|
Goodwill and intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Weighted-Average
|
|
|
|
2007
|
|
|
2008
|
|
|
Amortization Period
|
|
|
|
(In thousands)
|
|
|
(In years)
|
|
|
Goodwill
|
|
$
|
117,502
|
|
|
$
|
263,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired technology
|
|
$
|
48,462
|
|
|
$
|
65,255
|
|
|
|
3.0
|
|
Accumulated amortization
|
|
|
(31,397
|
)
|
|
|
(49,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired technology, net
|
|
|
17,065
|
|
|
|
16,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts and customer lists
|
|
|
52,632
|
|
|
|
94,732
|
|
|
|
4.9
|
|
Accumulated amortization
|
|
|
(23,892
|
)
|
|
|
(43,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts and customer lists, net
|
|
|
28,740
|
|
|
|
51,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and domain names
|
|
|
191
|
|
|
|
1,016
|
|
|
|
3.0
|
|
Accumulated amortization
|
|
|
(191
|
)
|
|
|
(443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and domain names, net
|
|
|
|
|
|
|
573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and related costs
|
|
|
5,212
|
|
|
|
8,198
|
|
|
|
15.1
|
|
Accumulated amortization
|
|
|
(170
|
)
|
|
|
(729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and related costs, net
|
|
|
5,042
|
|
|
|
7,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
50,847
|
|
|
$
|
75,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets from acquisitions are amortized over three to
five years. Amortization expense related to intangible assets
was approximately $18.0 million, $22.3 million and
$38.4 million for the years ended December 31, 2006,
2007 and 2008, respectively. Amortization expense for the years
ended December 31, 2009, 2010, 2011, 2012 and 2013 is
expected to be approximately $28.3 million,
$23.1 million, $10.6 million, $7.5 million and
$1.1 million, respectively.
During 2007, the Company purchased technology for
$1.5 million which will provide future functionality in the
Companys products. The technology is classified as
acquired technology and recorded as intangible assets on the
consolidated balance sheets at December 31, 2007 and 2008.
As of December 31, 2007 and 2008, the Company had
capitalized $5.2 million and $8.2 million,
respectively, in costs of defending and protecting patents, due
to expenses incurred in a suit against Desire2Learn, Inc. in
which the Company has alleged infringement of one of its
patents. Any change in the Companys estimates based on
ongoing litigation could materially reduce the valuation of
these assets.
|
|
7.
|
Credit
Facilities and Notes Payable
|
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
Company used a portion of the proceeds to terminate and satisfy
in full the Companys indebtedness of $19.4 million
then outstanding pursuant to the borrowings under a
$70.0 million senior secured credit facility with Credit
Suisse (the Credit Agreement) and to pay all fees
and expenses incurred in connection with the termination. The
Company was not required to pay any prepayment premium or
penalties in connection with the early termination of the Credit
Agreement.
67
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the issuance of the Notes, the Company
incurred $4.5 million in debt issuance costs. These costs
were recorded as a debt discount and netted against the
remaining principal amount outstanding. The debt discount is
being amortized as interest expense using the effective interest
method through July 1, 2011, the first redemption date of
the Notes. During the year ended December 31, 2006, 2007
and 2008, the Company recorded total amortization expense of the
debt discount, including amortization of the debt discount
related to the Credit Agreement, of approximately
$1.7 million, $1.8 million and $1.7 million,
respectively as interest expense.
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, commencing
on January 1, 2008. The Company made interest payments of
$2.8 million, $2.7 million, and $2.7 million on
December 31, 2007, July 1, 2008, and December 30,
2008, respectively. The Notes will mature on July 1, 2027,
subject to earlier conversion, redemption or repurchase.
The Notes are convertible, under certain circumstances, into
cash or a combination of cash and the Companys common
stock at an initial base conversion rate of 15.4202 shares
of common stock per $1,000 principal amount of Notes. The base
conversion rate represents an initial base conversion price of
approximately $64.85. If at the time of conversion the
applicable price of the Companys common stock exceeds the
base conversion price, the conversion rate will be increased by
up to an additional 9.5605 shares of the Companys
common stock per $1,000 principal amount of Notes, as determined
pursuant to a specified formula. In general, upon conversion of
a Note, the holder of such Note will receive cash equal to the
principal amount of the Note and the Companys common stock
for the Notes conversion value in excess of such principal
amount. In accordance with the earnings per share method
outlined in
EITF 04-8,
The Effect of Contingently Convertible Instruments on
Diluted Earnings per Share
, the diluted earnings per
share effect of the shares that would be issued will be
accounted for only if the average market price of the
Companys common stock price during the period is greater
than the Notes conversion price.
Because the Notes contain an adjusting conversion rate provision
based on the Companys common stock price and anti-dilution
adjustment provisions, at the end of each reporting period, the
Company evaluates whether any adjustments to the conversion
price would alter the effective conversion rate from the stated
conversion rate and result in an
in-the-money
conversion. Whenever an adjustment to the conversion rate
results in an increase in the number of shares of common stock
issuable upon conversion of the Notes, the Company would
recognize a beneficial conversion feature in the period such a
determination is made and amortize it over the remaining life of
the Notes. As of December 31, 2008, a beneficial conversion
feature under the Notes did not exist.
Holders may surrender their Notes for conversion at any time
prior to the close of business on the business day immediately
preceding the maturity date for the Notes only under the
following circumstances: (1) prior to January 1, 2027,
with respect to any calendar quarter beginning after
June 30, 2007, if the closing price of the Companys
common stock for at least 20 trading days in the 30 consecutive
trading days ending on the last trading day of the immediately
preceding calendar quarter is more than 130% of the base
conversion price per share of the Notes on such last trading
day; (2) on or after January 1, 2027, until the close
of business on the business day preceding maturity;
(3) during the five business days after any five
consecutive trading day period in which the trading price per
$1,000 principal amount of Notes for each day of that period was
less than 95% of the product of the closing price of the
Companys common stock and the then applicable conversion
rate of the Notes; or (4) upon the occurrence of other
events or circumstances as specifically defined in the Notes.
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 at
68
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
100% of the principal amount plus accrued interest. 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 plus accrued
interest.
The Notes are unsecured senior obligations and are effectively
subordinated to all of the Companys existing and future
senior indebtedness to the extent of the assets securing such
debt, and are effectively subordinated to all indebtedness and
liabilities of the Companys subsidiaries, including trade
payables.
In January 1998, the Company adopted a stock option plan in
order to provide an incentive to eligible employees,
consultants, directors and officers of the Company. Shares of
common stock available for issuance pursuant to stock options
outstanding under the 1998 stock option plan were 738,156 as of
December 31, 2008. Stock options granted under the stock
option plan generally vest over a four-year period and have a
ten-year expiration period. As of December 31, 2008,
1,146,235 shares of common stock were reserved under the
1998 stock option plan, of which 408,079 shares remain
available for grant; however, no future grants will be made
under this plan.
In March 2004, the Company adopted the 2004 Stock Incentive Plan
under which the Companys officers, employees, directors,
outside consultants and advisors are eligible to receive grants.
The plan expires February 2014. In June 2008, the Companys
stockholders approved an amendment to the Companys Amended
and Restated 2004 Stock Incentive Plan to increase the number of
shares authorized for issuance under the 2004 Plan from
5,800,000 to 8,700,000. As of December 31, 2008,
7,779,998 shares of common stock were reserved under the
stock option plan, of which 3,583,894 shares remained
available for future grants and 4,196,104 shares have been
reserved for issuance pursuant to outstanding stock options and
restricted stock. Stock options granted under the stock option
plan generally vest over a four-year period and have an eight
year expiration period.
69
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options
A summary of stock option activity under the Companys
stock incentive plans for the years ended December 31,
2006, 2007 and 2008, and changes during the years then ended are
as follows (aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Price/Share
|
|
|
Intrinsic Value
|
|
|
Remaining Life
|
|
|
|
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
Outstanding at December 31, 2005
|
|
|
3,343,312
|
|
|
$
|
13.06
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,858,250
|
|
|
|
27.65
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(768,863
|
)
|
|
|
11.99
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(510,654
|
)
|
|
|
24.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
3,922,045
|
|
|
|
18.76
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,527,750
|
|
|
|
35.02
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(948,593
|
)
|
|
|
14.07
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(255,465
|
)
|
|
|
26.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
4,245,737
|
|
|
|
25.21
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,545,250
|
|
|
|
32.25
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(576,593
|
)
|
|
|
19.11
|
|
|
$
|
10,276
|
|
|
|
|
|
Canceled
|
|
|
(350,134
|
)
|
|
|
30.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
4,864,260
|
|
|
|
27.80
|
|
|
|
14,963
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
2,416,333
|
|
|
|
22.91
|
|
|
|
14,431
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2008
|
|
|
2,440,852
|
|
|
|
32.63
|
|
|
|
532
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2008
|
|
|
4,607,014
|
|
|
|
27.49
|
|
|
|
14,894
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For various price ranges, weighted average characteristics of
outstanding and exercisable options as of December 31, 2008
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
Exercisable Options
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining Life
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
(Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
$ 0.02-$ 9.66
|
|
|
601,038
|
|
|
|
3.02
|
|
|
$
|
9.34
|
|
|
|
601,038
|
|
|
$
|
9.34
|
|
$ 9.67-$16.99
|
|
|
168,452
|
|
|
|
5.49
|
|
|
|
14.03
|
|
|
|
147,774
|
|
|
|
13.83
|
|
$17.00-$26.84
|
|
|
613,795
|
|
|
|
5.20
|
|
|
|
21.92
|
|
|
|
454,798
|
|
|
|
21.03
|
|
$26.85-$28.41
|
|
|
790,322
|
|
|
|
5.33
|
|
|
|
28.00
|
|
|
|
435,872
|
|
|
|
28.03
|
|
$28.42-$46.89
|
|
|
2,690,653
|
|
|
|
6.72
|
|
|
|
34.07
|
|
|
|
776,851
|
|
|
|
33.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,864,260
|
|
|
|
5.80
|
|
|
|
27.80
|
|
|
|
2,416,333
|
|
|
|
22.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted
Stock
A summary of restricted stock activity under the Companys
stock incentive plans as of December 31, 2008, and changes
during the year then ended are as follows (aggregate intrinsic
value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Price/Share
|
|
|
Intrinsic Value
|
|
|
Remaining Life
|
|
|
|
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
Unvested at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
80,000
|
|
|
$
|
29.19
|
|
|
|
|
|
|
|
|
|
Vested and issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(10,000
|
)
|
|
|
28.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2008
|
|
|
70,000
|
|
|
|
29.25
|
|
|
$
|
1,836
|
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at December 31, 2008
|
|
|
54,790
|
|
|
|
29.19
|
|
|
|
1,437
|
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008, the Company
recognized income tax benefit totaling $3.7 million and an
increase in additional
paid-in-capital
of $2.1 million related to tax deductions resulting from
the exercise of stock options. For the year ended
December 31, 2008, income before provision for income taxes
included approximately $2.3 million of foreign income. Of
the total income tax benefit recognized, approximately
$4.2 million related to U.S. federal and state income
tax benefit and approximately $0.5 million related to
international income tax expense.
The (benefit) provision for income taxes is comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Current expense
|
|
$
|
493
|
|
|
$
|
2,660
|
|
|
$
|
2,273
|
|
Deferred (benefit) expense
|
|
|
(5,075
|
)
|
|
|
4,920
|
|
|
|
(6,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes
|
|
$
|
(4,582
|
)
|
|
$
|
7,580
|
|
|
$
|
(3,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets (liabilities) reflect the net tax effects of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys net deferred tax assets (liabilities) are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
4,958
|
|
|
$
|
10,091
|
|
Domestic net operating loss carry forwards
|
|
|
40,919
|
|
|
|
24,107
|
|
International net operating loss carry forwards
|
|
|
714
|
|
|
|
684
|
|
Alternative minimum tax and other federal tax credits
|
|
|
4,083
|
|
|
|
5,370
|
|
State tax credits
|
|
|
640
|
|
|
|
5,241
|
|
Depreciation
|
|
|
2,876
|
|
|
|
680
|
|
Amortization
|
|
|
(10,909
|
)
|
|
|
(16,519
|
)
|
Bad debts
|
|
|
305
|
|
|
|
289
|
|
Deferred rent
|
|
|
596
|
|
|
|
4,488
|
|
Deferred revenues
|
|
|
1,441
|
|
|
|
618
|
|
Deferred cost of revenues
|
|
|
(2,669
|
)
|
|
|
(2,937
|
)
|
Prepaids
|
|
|
(554
|
)
|
|
|
(770
|
)
|
Accruals and other
|
|
|
47
|
|
|
|
(727
|
)
|
Valuation allowance
|
|
|
(1,744
|
)
|
|
|
(1,673
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
40,703
|
|
|
$
|
28,942
|
|
|
|
|
|
|
|
|
|
|
The following activity occurred in the valuation allowance
during the years ended December 31, 2006, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Beginning Balance
|
|
$
|
2,856
|
|
|
$
|
5,147
|
|
|
$
|
1,744
|
|
Additions
|
|
|
4,682
|
|
|
|
67
|
|
|
|
1,592
|
|
Reductions
|
|
|
(2,391
|
)
|
|
|
(3,470
|
)
|
|
|
(1,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
5,147
|
|
|
$
|
1,744
|
|
|
$
|
1,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the Company reserved
$1.6 million of the $5.2 million of state tax credits
(net of the federal benefit) because it determined that it is
not more likely than not that it would be able to generate
sufficient taxable income to utilize those credits before they
expire.
As of December 31, 2008, the Company had net operating loss
carry forwards for federal and international income tax purposes
of approximately $67.0 million. Approximately
$49.9 million of this amount is restricted under
Section 382 of the Internal Revenue Code. Section 382
of the Internal Revenue Code limits the utilization of net
operating losses when ownership changes, as defined by that
section, occur. The Company has performed an analysis of its
Section 382 ownership changes and has determined that the
utilization of certain of its net operating loss carry forwards
may be limited. The Company does not expect that
Section 382 will limit the utilization of the net operating
loss carry forwards in 2008. Net operating loss carry forwards
will expire, if unused, between 2009 and 2028.
The Company has not recorded approximately $13.4 million in
net operating loss carry forward assets because it believes it
is more likely than not that these assets will not be realized
due to the length of time
72
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
available to fully utilize the net operating loss carry forwards
and the likelihood of having sufficient taxable income in those
periods. Of that amount, $12.2 million relates to net
operating loss carry forwards of WebCT at the time of its
acquisition by the Company, which has been treated as additional
goodwill related to that acquisition. The net tax benefit
excludes $0.9 million of net operating loss carry forwards
that were utilized during 2008 that had previously been treated
as goodwill related to that acquisition.
The (benefit) provision for income taxes differs from the amount
of taxes determined by applying the U.S. federal statutory
rate to (loss) income before (benefit) provision for income
taxes as a result of the following for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Federal tax at statutory rates
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
State taxes, net of federal benefit
|
|
|
(4.5
|
)
|
|
|
4.8
|
|
|
|
(4.5
|
)
|
Change in valuation allowance
|
|
|
(4.6
|
)
|
|
|
(1.2
|
)
|
|
|
174.6
|
|
Permanent differences
|
|
|
9.1
|
|
|
|
3.6
|
|
|
|
52.2
|
|
Difference in tax rates
|
|
|
1.3
|
|
|
|
(8.0
|
)
|
|
|
17.1
|
|
Credits not offset by current liability
|
|
|
3.8
|
|
|
|
(1.6
|
)
|
|
|
(649.7
|
)
|
Other
|
|
|
|
|
|
|
4.5
|
|
|
|
36.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes
|
|
|
(29.9
|
)%
|
|
|
37.1
|
%
|
|
|
(409.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is subject to income taxes in the United States and
numerous foreign jurisdictions. Significant judgment is required
in determining the Companys worldwide provision for income
taxes and recording the related assets and liabilities. In the
ordinary course of the Companys business, there are
transactions and calculations where the ultimate tax
determination is uncertain.
The Company believes that its accruals for tax liabilities,
which result primarily from intercompany transfer pricing and
the amount of research and experimentation tax credits claimed,
are adequate, based on its assessment of many factors including
past experience and interpretations of tax law applied to the
facts of each matter. Although the Company believes its recorded
assets and liabilities are reasonable, tax regulations are
subject to interpretation and tax litigation is inherently
uncertain; therefore, the Companys assessments can involve
both a series of complex judgments about future events and rely
heavily on estimates and assumptions. Although the Company
believes that the estimates and assumptions supporting its
assessments are reasonable, the final determination of tax
audits and any related litigation could be materially different
than that which is reflected in historical income tax provisions
and recorded assets and liabilities. Based on the results of an
audit or litigation, there could be a material effect on the
Companys income tax provision, net income (loss) or cash
flows in the period or periods for which that determination is
made.
As a result of the adoption of FIN 48 on January 1,
2007, the Company recognized an increase of $0.6 million in
the unrecognized tax benefit liability, which was accounted for
as an increase to the January 1, 2007 accumulated deficit
balance. Also, upon adoption of FIN 48, the Company
reclassified $1.0 million of previously accrued tax
contingencies which were included in accrued expenses and
recorded an offsetting valuation allowance against certain
deferred tax assets that were recorded on the consolidated
balance sheets at December 31, 2006.
73
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the activity related to the
Companys unrecognized tax benefit liability (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
573
|
|
|
$
|
573
|
|
Increases related to current year tax positions
|
|
|
|
|
|
|
|
|
Expiration of the statute of limitations for the assessment of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
573
|
|
|
$
|
573
|
|
|
|
|
|
|
|
|
|
|
All of the Companys unrecognized tax benefit liability
would affect the Companys effective tax rate if
recognized. Because of the existence of net operating loss carry
forwards, the resultant unfavorable resolution of any of the
Companys uncertain tax positions would not result in the
imposition of interest or penalties. Accordingly, the Company
did not record any interest or penalties related to the
unrecognized tax benefit liability for the years ended
December 31, 2007 and 2008. The Company does not expect its
unrecognized tax benefit liability to change significantly over
the next 12 months.
All tax years since 1998 are subject to examination.
|
|
10.
|
Commitments
and Contingencies
|
Total rent expense recorded for the years ended
December 31, 2006, 2007 and 2008 was $4.7 million,
$5.4 million and $10.8 million, respectively. Total
sublease income recorded for the years ended December 31,
2006, 2007 and 2008 was $0.3 million, $0.1 million and
$11,000, respectively.
As of December 31, 2008, minimum future payments under
existing notes payable and noncancelable operating leases are as
follows for the years below:
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
Operating
|
|
|
|
Payable
|
|
|
Leases
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
|
|
|
$
|
10,079
|
|
2010
|
|
|
|
|
|
|
11,063
|
|
2011
|
|
|
165,000
|
|
|
|
8,526
|
|
2012
|
|
|
|
|
|
|
8,289
|
|
2013
|
|
|
|
|
|
|
8,438
|
|
2014 and beyond
|
|
|
|
|
|
|
36,505
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
165,000
|
|
|
$
|
82,900
|
|
|
|
|
|
|
|
|
|
|
The Company has categorized the Notes above assuming redemption
on the first possible redemption date by the Holders of the
Notes on July 1, 2011.
The Company relocated its corporate headquarters in June 2008 to
a building in Washington, D.C. where it leases
approximately 129,000 square feet of space under a lease
expiring in June 2018. The Company also leases offices in
Northern Virginia; Phoenix, Arizona; Lynnfield, Massachusetts;
Los Angeles, California; San Francisco, California;
Amsterdam, Netherlands; Vancouver, Canada; and Sydney, Australia.
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
these contingencies will not have a material adverse effect on
the Companys results of operations, financial position or
cash flows.
74
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On July 26, 2006, the Company filed a complaint in the
United States District Court for the Eastern District of Texas
alleging that Desire2Learn Inc. (Desire 2 Learn)
infringes on U.S. Patent No. 6,988,138. On
February 22, 2008, the jury returned a verdict in favor of
the Company on infringement and validity. On May 7, 2008,
the court entered judgment for the Company in the amount of
$3.3 million plus post-judgment interest accruing at 6% per
annum. On June 11, 2008, Desire2Learn paid the Company the
sum of $3.3 million, which consisted of the judgment amount
plus accrued interest. This amount is recorded as proceeds from
patent judgment on the Companys consolidated statements of
operations for the year ended December 31, 2008. Both
parties have pending appeals of the final judgment at the United
States Court of Appeals for the Federal Circuit. In addition,
the patent at issue is undergoing a re-examination by the
U.S. Patent and Trademark Office following re-examination
requests by Desire2Learn and a third party.
On May 19, 2008, TechRadium, Inc. (TechRadium)
filed an action in the United States District Court for the
Eastern District of Texas against Blackboard Inc. and Blackboard
Connect Inc. (collectively Blackboard) alleging that
Blackboard infringes three United States patents owned by
TechRadium relating to notification technologies. Specifically,
TechRadium alleges that Blackboard infringes on
TechRadiums U.S. patents 7,130,389, 7,174,005, and
7,362,852. TechRadium seeks unspecified monetary damages,
injunctive relief and other damages to which TechRadium may be
entitled in law or in equity.
On January 28, 2009, the Company filed an action in the
United States District Court for the Eastern District of Texas
against TechRadium alleging that TechRadium infringes on
U.S. Patent No. 6,816,878 owned by the Company
relating to notification technologies. The Company is seeking
unspecified monetary damages, injunctive relief and other
damages to which it may be entitled in law or in equity.
|
|
11.
|
Employee
Benefit Plans
|
In 1999, the Company adopted a 401(k) plan covering all
employees of the Company who have met certain eligibility
requirements. Under the terms of the 401(k) plan, the employees
may elect to make tax-deferred contributions to the 401(k) plan.
In addition, the Company may match employee contributions, as
determined by the Board of Directors and may make discretionary
contributions to the 401(k) plan. No matching or discretionary
contributions were made to the 401(k) plan prior to 2007.
In February 2007, the Board of Directors approved a matching
contribution to the 401(k) plan to be paid in a lump-sum to
those participating employee accounts for the 2006 and 2007 plan
years. The 2006 matching contribution of approximately
$0.8 million was paid in March 2007 and the 2007 matching
contribution of approximately $0.8 million was paid in
March 2008. In February 2008, the Board of Directors approved a
matching contribution to the 401(k) plan to be paid in a
lump-sum to those participating employee accounts for the 2008
plan year. The 2008 matching contribution of approximately
$1.1 million will be paid in March 2009. The matching
contributions are equal to 33% of a participants plan year
contributions, up to 6% of the participants salary and IRS
limits. Only those participants that have one year of service
and are employed by the Company as of December 31 of the
plan year are eligible for the matching contribution. The
matching contributions will vest over a three year graded
vesting schedule. All contributions made by employees under the
401(k) plan vest immediately in the participants account.
|
|
12.
|
Quarterly
Financial Information (Unaudited)
|
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, which are
recognized as performed, in its second and
75
BLACKBOARD
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Summary consolidated statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
55,280
|
|
|
$
|
59,404
|
|
|
$
|
61,562
|
|
|
$
|
63,202
|
|
Costs of revenues
|
|
|
15,461
|
|
|
|
16,097
|
|
|
|
16,392
|
|
|
|
16,435
|
|
Net income
|
|
|
1,944
|
|
|
|
3,439
|
|
|
|
3,279
|
|
|
|
4,203
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.14
|
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Summary consolidated statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
68,475
|
|
|
$
|
75,547
|
|
|
$
|
83,090
|
|
|
$
|
85,022
|
|
Costs of revenues
|
|
|
20,918
|
|
|
|
23,134
|
|
|
|
24,620
|
|
|
|
26,120
|
|
Net (loss) income
|
|
|
(3,293
|
)
|
|
|
1,037
|
|
|
|
2,091
|
|
|
|
2,985
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.11
|
)
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
|
$
|
0.10
|
|
Diluted
|
|
$
|
(0.11
|
)
|
|
$
|
0.03
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
76
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A.
|
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
December 31, 2008. 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 December 31, 2008, 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 change 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
December 31, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
77
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Securities Exchange Act
Rule 13a-15(f).
There are inherent limitations in the effectiveness of any
internal control over financial reporting, including the
possibility of human error and the circumvention or overriding
of controls. Accordingly, even effective internal control over
financial reporting can provide only reasonable assurance with
respect to financial statement preparation. Our internal control
system was designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in
Internal Control
Integrated Framewor
k issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our
evaluation under the framework in
Internal
Control Integrated Framework
, our management
concluded that our internal control over financial reporting was
effective as of our year end of December 31, 2008 to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally
accepted accounting principles.
Our managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2008 has been audited by Ernst &
Young LLP, independent registered public accounting firm, as
stated in their report which is included herein.
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|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Michael
L. Chasen
Michael
L. Chasen
|
|
Chief Executive Officer and Director (Principal Executive
Officer)
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Michael
J. Beach
Michael
J. Beach
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|
Chief Financial Officer
(Principal Financial Officer)
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|
February 26, 2009
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78
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Blackboard Inc.
We have audited Blackboard Inc.s internal control over
financial reporting as of December 31, 2008, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Blackboard
Inc.s management is responsible for maintaining effective
internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Blackboard Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Blackboard Inc. as of
December 31, 2007 and 2008, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2008, and our report dated February 23,
2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, VA
February 23, 2009
79
|
|
Item 9B.
|
Other
Information.
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
The information regarding our executive officers required by
this Item is set forth under Item 1 to this annual report.
The following information will be included in our Proxy
Statement to be filed within 120 days after the fiscal year
end of December 31, 2008, and is incorporated herein by
reference:
|
|
|
|
|
Information regarding our directors required by this Item is set
forth under the heading Election of Directors
|
|
|
|
Information regarding our audit committee and designated
audit committee financial experts is set forth under
the heading Corporate Governance The Board of
Directors and Its Committees Audit Committee
|
|
|
|
Information regarding Section 16(a) beneficial ownership
reporting compliance is set forth under the heading
Section 16(a) Beneficial Ownership Reporting
Compliance
|
Information regarding procedures by which security holders may
recommend nominees to our board of directors set forth under the
heading Corporate Governance The Board of
Directors and Its Committees Nominating and
Corporate Governance Committee
Code of
Ethics
We have adopted a code of ethics and business conduct that
applies to our employees including our principal executive
officer, principal financial officer, principal accounting
officer, and persons performing similar functions. Our code of
ethics and business conduct can be found posted in the investor
relations section on our website at
http://investor.blackboard.com.
|
|
Item 11.
|
Executive
Compensation.
|
The information required by this Item is incorporated by
reference to the information to be provided under the heading
Executive Compensation of the Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this Item is incorporated by
reference to the information to be provided under the heading
Security Ownership of Certain Beneficial Owners and
Management and Equity Compensation Plan
Information of the Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this Item is incorporated by
reference to the information to be provided under the heading
Certain Relationships and Related Transactions of
the Proxy Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The information required by this Item is incorporated by
reference to the information to be provided under the heading
Principal Accounting Fees and Services of the Proxy
Statement.
80
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
(a) 1. Financial Statements. The consolidated
financial statements are listed under Item 8 of this report.
|
|
|
|
2.
|
Financial Statement Schedules.
|
Financial statement schedules as of December 31, 2007 and
2008, and for each of the three years in the period ended
December 31, 2008 have been omitted since they are either
not required, not applicable or the information is otherwise
included in the consolidated financial statements or the notes
to consolidated financial statements.
|
|
|
|
3.
|
Exhibits. The Exhibits filed as part of this Annual Report on
Form 10-K
are listed on the Exhibit Index immediately preceding such
Exhibits, which Exhibit Index is incorporated herein by
reference.
|
|
|
|
|
(b)
|
Exhibits see Item 15(a)(3) above.
|
|
|
|
|
(c)
|
Financial Statement Schedules see Item 15(a)(2)
above.
|
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 26th day of
February 2009.
BLACKBOARD INC.
Michael J. Beach
Chief Financial Officer
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Matthew H.
Small and Michael J. Beach, and each of them, his or her true
and lawful
attorneys-in-fact
and agents, with full power of substitution and resubstitution,
to sign any and all amendments to this Annual Report on
Form 10-K
and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and
Exchange Commission, granting unto each of said
attorneys-in-fact
and agents, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and
confirming all that each of said
attorneys-in-facts
and agents, or his substitute or substitutes, or any of them,
shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Michael
L. Chasen
Michael
L. Chasen
|
|
Chief Executive Officer and Director (Principal Executive
Officer)
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Michael
J. Beach
Michael
J. Beach
|
|
Chief Financial Officer
(Principal Financial Officer)
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Jonathan
R. Walsh
Jonathan
R. Walsh
|
|
Vice President, Finance and Accounting (Principal Accounting
Officer)
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Matthew
Pittinsky
Matthew
Pittinsky
|
|
Chairman of the Board of Directors
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Joseph
L. Cowan
Joseph
L. Cowan
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Frank
R. Gatti
Frank
R. Gatti
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Beth
Kaplan
Beth
Kaplan
|
|
Director
|
|
February 26, 2009
|
82
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Thomas
Kalinske
Thomas
Kalinske
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ E.
Rogers Novak, Jr.
E.
Rogers Novak, Jr.
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ William
Raduchel
William
Raduchel
|
|
Director
|
|
February 26, 2009
|
83
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger, dated as of January 11, 2008,
by and among Blackboard Inc., Bookstore Merger Sub, Inc., The
NTI Group, Inc. and Pace Holdings, LLC(8)
|
|
3
|
.1
|
|
Fourth Restated Certificate of Incorporation of the Registrant(3)
|
|
3
|
.2
|
|
Amended and Restated By-Laws of the Registrant(3)
|
|
4
|
.1
|
|
Form of certificate representing the shares of the
Registrants common stock(2)
|
|
4
|
.2
|
|
Indenture, dated as of June 20, 2007, between Blackboard
Inc. and U.S. Bank National Association, as trustee(14)
|
|
4
|
.3
|
|
Registration Rights Agreement dated as of January 31, 2008
by and among Blackboard Inc., Pace Holdings LLC and The NTI
Group Inc. stockholders listed therein(16)
|
|
10
|
.1
|
|
Amended and Restated Stock Incentive Plan, as amended(1)
|
|
10
|
.2
|
|
Amended and Restated 2004 Stock Incentive Plan(10)
|
|
10
|
.3*
|
|
Employment Agreement between the Registrant and Michael Chasen
dated November 14, 2005(9)
|
|
10
|
.4*
|
|
Employment Agreement between the Registrant and Michael Beach,
dated September 1, 2006(11)
|
|
10
|
.5*
|
|
Employment Agreement between the Registrant and Matthew H.
Small, dated January 26, 2004(6)
|
|
10
|
.6*
|
|
Amendment to Employment Agreement Michael L.
Chasen(17)
|
|
10
|
.7*
|
|
Amendment to Employment Agreement Michael J.
Beach(17)
|
|
10
|
.8*
|
|
Amendment to Employment Agreement Matthew H.
Small(17)
|
|
10
|
.9*
|
|
Outside Director Compensation Plan(12)
|
|
10
|
.10
|
|
Office Lease Agreement between the Registrant and Washington
Television Center, dated December 15, 2006(15)
|
|
10
|
.11
|
|
First Amendment to Office Lease Agreement between the Registrant
and Washington Television Center, dated June 5, 2007
|
|
10
|
.12
|
|
Second Amendment to Office Lease Agreement between the
Registrant and Washington Television Center, dated
December 2, 2008
|
|
10
|
.13
|
|
Form of Incentive Stock Option Agreement(4)
|
|
10
|
.14
|
|
Form of Nonstatutory Stock Option Agreement(4)
|
|
10
|
.15
|
|
Form of Restricted Stock Agreement(4)
|
|
10
|
.16
|
|
Form of Executive Incentive Stock Option Agreement(5)
|
|
10
|
.17
|
|
Form of Executive Nonstatutory Stock Option Agreement(5)
|
|
10
|
.18
|
|
Form of Executive Nonstatutory Stock Option Agreement(12)
|
|
10
|
.19
|
|
Form of Executive Nonstatutory Stock Option Agreement(12)
|
|
10
|
.20*
|
|
Summary of Approved 2008 and 2009 Compensation(18)
|
|
21
|
.1
|
|
Subsidiaries of the Company
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP, independent registered
public accounting firm
|
|
24
|
.1
|
|
Power of Attorney (included on signature page)
|
|
31
|
.1
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
31
|
.2
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32
|
.1
|
|
Section 906 Principal Executive Officer Certification
|
|
32
|
.2
|
|
Section 906 Principal Financial Officer Certification
|
|
|
|
|
|
Filed herewith.
|
|
|
|
Furnished herewith.
|
|
*
|
|
Indicates a management contract or compensatory plan or
arrangement.
|
|
(1)
|
|
Previously filed on March 5, 2004 as an exhibit to the
Registrants Registration Statement on
Form S-1
(File
No. 333-113332),
and incorporated by reference herein.
|
|
|
|
(2)
|
|
Previously filed on May 4, 2004 as an exhibit to Amendment
No. 2 to the Registrants Registration Statement on
Form S-1
(File
No. 333-113332),
and incorporated by reference herein.
|
|
(3)
|
|
Previously filed on August 8, 2004 as an exhibit to the
Registrants Report on
Form 10-Q,
and incorporated by reference herein.
|
|
(4)
|
|
Previously filed on December 3, 2004 as an exhibit to the
Registrants Report on
Form 8-K,
and incorporated by reference herein.
|
|
(5)
|
|
Previously filed on March 1, 2005 as an exhibit to the
Registrants Report on
Form 10-K,
and incorporated by reference herein.
|
|
(6)
|
|
Previously filed on May 13, 2005 as an exhibit to the
Registrants Report on
Form 10-Q,
and incorporated by reference herein.
|
|
(7)
|
|
Previously filed on May 25, 2005 as an exhibit to the
Registrants Report on
Form 8-K,
and incorporated by reference herein.
|
|
(8)
|
|
Previously filed on January 14, 2008 as an exhibit to the
Registrants Report on
Form 8-K,
and incorporated by reference herein.
|
|
(9)
|
|
Previously filed on November 18, 2005 as an exhibit to the
Registrants Report on
Form 8-K,
and incorporated by reference herein.
|
|
(10)
|
|
Previously filed on August 7, 2008 as an exhibit to the
Registrants Report on
Form 10-Q,
and incorporated by reference herein.
|
|
(11)
|
|
Previously filed on November 9, 2006 as an exhibit to the
Registrants Report on
Form 10-Q,
and incorporated by reference herein.
|
|
(12)
|
|
Previously filed on February 6, 2007 as an exhibit to the
Registrants Report on
Form 8-K,
and incorporated by reference herein.
|
|
(13)
|
|
Previously filed on June 20, 2007 as an exhibit to the
Registrants Report on
Form 8-K,
and incorporated by reference herein.
|
|
(14)
|
|
Previously filed on June 15, 2007 as an exhibit to the
Registrants Report on
Form 8-K,
and incorporated by reference herein.
|
|
(15)
|
|
Previously filed on February 23, 2007 as an exhibit to the
Registrants Report on
Form 10-K,
and incorporated by reference herein.
|
|
(16)
|
|
Previously filed on January 31, 2008 as an exhibit to the
Registrants Report on
Form 8-K,
and incorporated by reference herein.
|
|
(17)
|
|
Previously filed on November 6, 2008 as an exhibit to the
Registrants Report on
Form 10-Q,
and incorporated by reference herein.
|
|
(18)
|
|
Previously filed on February 12, 2009 as an exhibit to the
Registrants Report on
Form 8-K,
and incorporated by reference herein.
|
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