Blackbaud, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
Or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
.
Commission file number: 000-23265
BLACKBAUD, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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(State or other jurisdiction of
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11-2617163 |
incorporation or organization)
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(I.R.S. Employer Identification No.) |
2000 Daniel Island Drive
Charleston, South Carolina 29492
(Address of principal executive offices, including zip code)
(843) 216-6200
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).
YES o NO þ
The number of shares of the registrants Common Stock outstanding as of August 4, 2006 was
43,887,329.
BLACKBAUD, INC.
TABLE OF CONTENTS
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
Blackbaud, Inc.
Consolidated balance sheets
(Unaudited)
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June 30, |
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December 31, |
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2006 |
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2005 |
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|
as restated |
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|
as restated |
|
(in thousands, except share amounts) |
|
(see Note 2) |
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(see Note 2) |
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Assets |
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|
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Current assets: |
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|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
30,921 |
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|
$ |
22,683 |
|
Cash, restricted |
|
|
506 |
|
|
|
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|
Accounts receivable, net of allowance of $1,200 and $1,100
at June 30, 2006 and December 31, 2005, respectively |
|
|
34,722 |
|
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|
25,577 |
|
Prepaid expenses and other current assets |
|
|
7,550 |
|
|
|
8,741 |
|
Deferred tax asset, current portion |
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|
9,240 |
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|
|
8,565 |
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|
|
|
Total current assets |
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|
82,939 |
|
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|
65,566 |
|
Property and equipment, net |
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|
8,854 |
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|
8,700 |
|
Deferred tax asset |
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|
66,459 |
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|
71,487 |
|
Goodwill |
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2,367 |
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|
2,208 |
|
Intangible assets, net |
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8,287 |
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|
396 |
|
Other assets |
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|
70 |
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|
106 |
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|
|
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Total assets |
|
$ |
168,976 |
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|
$ |
148,463 |
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Liabilities and stockholders equity |
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Current liabilities: |
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Trade accounts payable |
|
$ |
3,230 |
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$ |
4,683 |
|
Accrued expenses and other current liabilities |
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|
14,169 |
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|
15,806 |
|
Deferred acquisition costs, current portion |
|
|
506 |
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|
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Deferred revenue |
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70,759 |
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61,943 |
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Total current liabilities |
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88,664 |
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|
82,432 |
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Deferred acquisition costs, long-term portion |
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265 |
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Capital lease obligations, long-term portion |
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Deferred revenue, long-term portion |
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1,883 |
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|
1,279 |
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|
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Total liabilities |
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90,812 |
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83,711 |
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Commitments
and contingencies (Note 9) |
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Stockholders equity: |
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Preferred stock; 20,000,000 shares authorized, none outstanding |
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Common stock, $.001 par value; 180,000,000
shares authorized, 48,473,773 and 47,529,836 shares issued
at June 30, 2006 and December 31, 2005, respectively |
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48 |
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48 |
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Additional paid-in capital |
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80,231 |
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73,583 |
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Deferred compensation |
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(6,497 |
) |
Treasury stock, at cost; 4,669,084 and 4,267,313 shares at
June 30, 2006 and December 31, 2005, respectively |
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|
(67,893 |
) |
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|
(60,902 |
) |
Accumulated other comprehensive income |
|
|
245 |
|
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|
92 |
|
Retained earnings |
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|
65,533 |
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|
58,428 |
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Total stockholders equity |
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78,164 |
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|
64,752 |
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Total liabilities and stockholders equity |
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$ |
168,976 |
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$ |
148,463 |
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The accompanying notes are an integral part of these consolidated financial statements.
1
Blackbaud, Inc.
Consolidated statements of operations
(Unaudited)
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Three months ended June 30, |
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Six months ended June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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as restated |
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as restated |
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as restated |
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as restated |
|
(in thousands, except share and per share amounts) |
|
(see Note 2) |
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(see Note 2) |
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(see Note 2) |
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(see Note 2) |
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Revenue |
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License fees |
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$ |
9,234 |
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$ |
8,304 |
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$ |
16,455 |
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$ |
14,772 |
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Services |
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15,695 |
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14,112 |
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29,409 |
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25,584 |
|
Maintenance |
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19,919 |
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17,476 |
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38,958 |
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|
34,591 |
|
Subscriptions |
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2,463 |
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|
1,655 |
|
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4,751 |
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|
2,976 |
|
Other revenue |
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1,328 |
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|
1,198 |
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|
2,618 |
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|
2,080 |
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Total revenue |
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48,639 |
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42,745 |
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|
92,191 |
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|
80,003 |
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Cost of revenue |
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Cost of license fees |
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510 |
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1,140 |
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|
1,180 |
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|
2,086 |
|
Cost of services (of which $140, $83, $280 and $174 in the three months ended June 30,
2006 and 2005 and in the six months ended June 30, 2006 and 2005, respectively, was
stock-based compensation expense) |
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|
8,147 |
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|
7,087 |
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|
16,258 |
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|
13,613 |
|
Cost of maintenance (of which $29, $11, $58 and $22 in the three months ended June 30,
2006 and 2005 and in the six months ended June 30, 2006 and 2005, respectively, was
stock-based compensation expense) |
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3,451 |
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|
2,664 |
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|
6,658 |
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|
5,304 |
|
Cost of subscriptions (of which $5, $0, $9 and $0 in the three months ended June 30,
2006 and 2005 and in the six months ended June 30, 2006 and 2005, respectively, was
stock-based compensation expense) |
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|
577 |
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|
418 |
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|
1,117 |
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|
834 |
|
Cost of other revenue |
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1,415 |
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|
1,165 |
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|
2,505 |
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|
1,935 |
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|
|
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|
Total cost of revenue |
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|
14,100 |
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|
12,474 |
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|
|
27,718 |
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|
23,772 |
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Gross profit |
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34,539 |
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|
30,271 |
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|
64,473 |
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56,231 |
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Operating expenses |
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Sales and marketing (of which $220, $70, $440 and $144 in the three months ended June 30,
2006 and 2005 and in the six months ended June 30, 2006 and 2005, respectively, was
stock-based compensation expense) |
|
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10,537 |
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|
8,882 |
|
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|
19,821 |
|
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|
16,638 |
|
Research and development (of which $188, $42, $379 and $97 in the three months ended
June 30, 2006 and 2005 and in the six months ended June 30, 2006 and 2005,
respectively, was stock-based compensation expense) |
|
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5,886 |
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|
5,325 |
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|
11,910 |
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|
10,427 |
|
General and administrative (of which $1,420, $3,114, $2,810 and $(4,757) in the three
months ended June 30, 2006 and 2005 and in the six months ended June 30, 2006 and
2005, respectively, was stock-based compensation expense (benefit)) |
|
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5,627 |
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|
7,120 |
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|
11,088 |
|
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|
3,084 |
|
Amortization |
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|
190 |
|
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|
0 |
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|
319 |
|
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|
0 |
|
|
|
|
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|
Total operating expenses |
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22,240 |
|
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|
21,327 |
|
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|
43,138 |
|
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|
30,149 |
|
|
|
|
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|
Income from operations |
|
|
12,299 |
|
|
|
8,944 |
|
|
|
21,335 |
|
|
|
26,082 |
|
Interest income |
|
|
224 |
|
|
|
327 |
|
|
|
373 |
|
|
|
580 |
|
Interest expense |
|
($ |
12 |
) |
|
($ |
12 |
) |
|
($ |
24 |
) |
|
($ |
25 |
) |
Other (expense), net |
|
($ |
103 |
) |
|
|
109 |
|
|
($ |
132 |
) |
|
($ |
2 |
) |
|
|
|
|
|
Income before provision for income taxes |
|
|
12,408 |
|
|
|
9,368 |
|
|
|
21,552 |
|
|
|
26,635 |
|
Income tax provision |
|
|
4,760 |
|
|
|
880 |
|
|
|
8,344 |
|
|
|
7,377 |
|
|
|
|
|
|
Net income |
|
$ |
7,648 |
|
|
$ |
8,488 |
|
|
$ |
13,208 |
|
|
$ |
19,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
Earnings per share |
|
|
|
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|
|
|
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Basic |
|
$ |
0.18 |
|
|
$ |
0.19 |
|
|
$ |
0.31 |
|
|
$ |
0.45 |
|
Diluted |
|
$ |
0.17 |
|
|
$ |
0.17 |
|
|
$ |
0.30 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares and equivalents outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares |
|
|
43,218,530 |
|
|
|
43,869,796 |
|
|
|
43,052,552 |
|
|
|
42,958,761 |
|
Diluted weighted average shares |
|
|
44,650,455 |
|
|
|
48,675,998 |
|
|
|
44,577,197 |
|
|
|
48,097,775 |
|
Dividends per share |
|
$ |
0.07 |
|
|
$ |
0.05 |
|
|
$ |
0.14 |
|
|
$ |
0.10 |
|
The accompanying notes are an integral part of these consolidated financial statements.
2
Blackbaud, Inc.
Consolidated statements of cash flows
(Unaudited)
|
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|
|
|
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|
Six months ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
as restated |
|
|
as restated |
|
(in thousands) |
|
(see Note 2) |
|
|
(see Note 2) |
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,208 |
|
|
$ |
19,258 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,745 |
|
|
|
1,359 |
|
Provision for doubtful accounts and sales returns |
|
|
572 |
|
|
|
694 |
|
Stock-based compensation expense |
|
|
3,976 |
|
|
|
(3,881 |
) |
Amortization of deferred financing fees |
|
|
24 |
|
|
|
24 |
|
Deferred taxes |
|
|
3,907 |
|
|
|
5,940 |
|
Excess tax benefit on exercise of options |
|
|
|
|
|
|
3,269 |
|
Changes in assets and liabilities, net of acquisition |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(9,276 |
) |
|
|
(8,846 |
) |
Prepaid expenses and other assets |
|
|
1,224 |
|
|
|
(2,723 |
) |
Trade accounts payable |
|
|
(1,467 |
) |
|
|
28 |
|
Accrued expenses and other current liabilities |
|
|
(1,772 |
) |
|
|
(2,367 |
) |
Deferred revenue |
|
|
7,494 |
|
|
|
6,573 |
|
|
|
|
Net cash provided by operating activities |
|
|
19,635 |
|
|
|
19,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(1,434 |
) |
|
|
(890 |
) |
Purchase of net assets of acquired companies |
|
|
(6,083 |
) |
|
|
(497 |
) |
|
|
|
Net cash used in investing activities |
|
|
(7,517 |
) |
|
|
(1,387 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
4,766 |
|
|
|
5,411 |
|
Excess tax benefit on exercise of stock options |
|
|
4,403 |
|
|
|
|
|
Payments on capital lease obligations |
|
|
|
|
|
|
(44 |
) |
Purchase of treasury stock |
|
|
(6,991 |
) |
|
|
(10,630 |
) |
Dividend payments to stockholders |
|
|
(6,103 |
) |
|
|
(4,297 |
) |
|
|
|
Net cash used in financing activities |
|
|
(3,925 |
) |
|
|
(9,560 |
) |
|
|
|
Effect of exchange rate on cash and cash equivalents |
|
|
45 |
|
|
|
(81 |
) |
|
|
|
Net decrease in cash and cash equivalents |
|
|
8,238 |
|
|
|
8,300 |
|
Cash and cash equivalents, beginning of period |
|
|
22,683 |
|
|
|
42,144 |
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
30,921 |
|
|
$ |
50,444 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
Blackbaud, Inc.
Consolidated statements of stockholders equity and comprehensive income
(Unaudited)
|
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
other |
|
|
|
|
|
|
Total |
|
|
|
Comprehensive |
|
|
|
Common stock |
|
|
paid-in |
|
|
Deferred |
|
|
Treasury |
|
|
comprehensive |
|
|
Retained |
|
|
stockholders |
|
(in thousands, except share amounts) |
|
income |
|
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
compensation |
|
|
stock |
|
|
income |
|
|
earnings |
|
|
equity |
|
Balance at December 31, 2004 as previously reported |
|
|
|
|
|
|
|
42,549,056 |
|
|
$ |
43 |
|
|
$ |
55,292 |
|
|
$ |
(1,064 |
) |
|
$ |
|
|
|
$ |
355 |
|
|
$ |
35,163 |
|
|
$ |
89,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of correction of an error (see Note 2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,305 |
) |
|
|
(1,305 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 as restated (see Note 2) |
|
|
|
|
|
|
|
42,549,056 |
|
|
$ |
43 |
|
|
$ |
55,292 |
|
|
$ |
(1,064 |
) |
|
$ |
|
|
|
$ |
355 |
|
|
$ |
33,858 |
|
|
$ |
88,484 |
|
|
|
|
|
|
|
|
Net income, as restated (see Note 2) |
|
$ |
33,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,087 |
|
|
|
33,087 |
|
Payment of dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,517 |
) |
|
|
(8,517 |
) |
Purchase of 4,267,313 treasury shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,902 |
) |
|
|
|
|
|
|
|
|
|
|
(60,902 |
) |
Exercise of stock options |
|
|
|
|
|
|
|
3,103,790 |
|
|
|
3 |
|
|
|
15,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,557 |
|
Net option exercises |
|
|
|
|
|
|
|
1,389,257 |
|
|
|
2 |
|
|
|
(11,909 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,907 |
) |
Tax impact of exercise of nonqualified stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,589 |
|
Restricted stock grants |
|
|
|
|
|
|
|
487,733 |
|
|
|
|
|
|
|
6,621 |
|
|
|
(6,621 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
315 |
|
Adjustment of deferred compensation related to options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subject to variable accounting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(509 |
) |
|
|
818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
309 |
|
Reversal of deferred compensation related to option cancellations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55 |
) |
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment, net of tax |
|
|
(263 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(263 |
) |
|
|
|
|
|
|
(263 |
) |
|
|
|
|
|
|
|
Comprehensive income, as restated (see Note 2) |
|
$ |
32,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 as restated (see Note 2) |
|
|
|
|
|
|
|
47,529,836 |
|
|
$ |
48 |
|
|
$ |
73,583 |
|
|
$ |
(6,497 |
) |
|
$ |
(60,902 |
) |
|
$ |
92 |
|
|
$ |
58,428 |
|
|
$ |
64,752 |
|
|
|
|
|
|
|
|
Net income, as restated (see Note 2) |
|
$ |
13,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,208 |
|
|
|
13,208 |
|
Payment of dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,103 |
) |
|
|
(6,103 |
) |
Purchase of treasury shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,982 |
) |
|
|
|
|
|
|
|
|
|
|
(6,982 |
) |
Exercise of stock options |
|
|
|
|
|
|
|
964,306 |
|
|
|
|
|
|
|
4,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,766 |
|
Tax impact of exercise of nonqualified stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,403 |
|
Reclassification due to adoption of new accounting pronouncement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,497 |
) |
|
|
6,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect adjustment to assume historical forfeitures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,996 |
|
Restricted stock grants |
|
|
|
|
|
|
|
14,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock cancellations |
|
|
|
|
|
|
|
(34,478 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
(9 |
) |
Translation adjustment, net of tax |
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153 |
|
|
|
|
|
|
|
153 |
|
|
|
|
|
|
|
|
Comprehensive income, as restated (see Note 2) |
|
$ |
13,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006 as restated (see Note 2) |
|
|
|
|
|
|
|
48,473,773 |
|
|
|
48 |
|
|
|
80,231 |
|
|
|
|
|
|
|
(67,893 |
) |
|
|
245 |
|
|
|
65,533 |
|
|
|
78,164 |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
Blackbaud, Inc.
Condensed notes to consolidated financial statements
June 30, 2006
(Unaudited)
1. Organization
Blackbaud, Inc. (the Company) is the leading global provider of software and related services
designed specifically for nonprofit organizations and provides products and services that enable
nonprofit organizations to increase donations, reduce fundraising costs, improve communications
with constituents, manage their finances and optimize internal operations. As of June 30, 2006 the
Company had more than 15,000 active customers distributed across multiple verticals within the
nonprofit market including religion, education, foundations, health and human services, arts and
cultural, public and societal benefits, environment and animal welfare, and international foreign
affairs.
2. Restatement of financial statements
During preparation of the Companys Form 10-Q as of and for the quarter ended March, 31, 2007, the
Company determined that SEC Staff Accounting Bulletin No. 108 (SAB 108) was misapplied in
connection with reporting its consolidated financial position and results of operations as of and
for the period ended December 31, 2006. The Company restated its financial statements for the years
ended December 31, 2006, 2005 and 2004 in a Form 10-K/A filed May 25, 2007 and is restating its
interim financial statements for the three and six months ended June 30, 2006 and 2005 in this Form
10-Q/A to reflect the impact of this error correction in accordance with FASB SFAS No. 154,
Accounting Changes and Error Corrections a replacement of APB No. 20 and FASB Statement No. 3.
There was no impact to total operating, investing or financing cash flows for the years ended
December 31, 2006, 2005 and 2004 and for the six months ended June 30, 2006 and 2005.
The Company previously recognized maintenance and subscription revenue using a monthly convention
rather than on an actual-days basis. The effect on the statements of operations of the difference
between these two methods has been evaluated in the past and it was concluded that the impact was
immaterial. However under SAB 108, the Company should have recorded a one-time adjustment to its
retained earnings to correct for the cumulative impact of using the actual-days method.
Accordingly, the Companys financial statements for the three and six months ended June 30, 2006
and 2005 have been restated. Additionally, the footnotes impacted by these adjustments have been
restated as well.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported |
|
|
|
|
|
|
As restated |
|
|
|
for the three months |
|
|
|
|
|
|
for the three months |
|
|
|
ended June 30, |
|
|
|
|
|
|
ended June 30, |
|
(in thousands) |
|
2006 |
|
|
Adjustments |
|
|
2006 |
|
Statement of Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance revenue |
|
$ |
20,042 |
|
|
$ |
(123 |
) |
|
$ |
19,919 |
|
Subscriptions revenue |
|
|
2,478 |
|
|
|
(15 |
) |
|
|
2,463 |
|
Total revenue |
|
|
48,777 |
|
|
|
(138 |
) |
|
|
48,639 |
|
Gross profit |
|
|
34,677 |
|
|
|
(138 |
) |
|
|
34,539 |
|
Income from operations |
|
|
12,437 |
|
|
|
(138 |
) |
|
|
12,299 |
|
Income tax provision |
|
|
4,816 |
|
|
|
(56 |
) |
|
|
4,760 |
|
Net income |
|
|
7,730 |
|
|
|
(82 |
) |
|
|
7,648 |
|
Basic earnings per share |
|
|
0.18 |
|
|
|
|
|
|
|
0.18 |
|
Diluted earnings per share |
|
|
0.17 |
|
|
|
|
|
|
|
0.17 |
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported |
|
|
|
|
|
|
As restated |
|
|
|
for the six months |
|
|
|
|
|
|
for the six months |
|
|
|
ended June 30, |
|
|
|
|
|
|
ended June 30, |
|
(in thousands) |
|
2006 |
|
|
Adjustments |
|
|
2006 |
|
Statement of Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance revenue |
|
$ |
39,241 |
|
|
$ |
(283 |
) |
|
$ |
38,958 |
|
Subscriptions revenue |
|
|
4,786 |
|
|
|
(35 |
) |
|
|
4,751 |
|
Total revenue |
|
|
92,509 |
|
|
|
(318 |
) |
|
|
92,191 |
|
Gross profit |
|
|
64,791 |
|
|
|
(318 |
) |
|
|
64,473 |
|
Income from operations |
|
|
21,653 |
|
|
|
(318 |
) |
|
|
21,335 |
|
Income tax provision |
|
|
8,470 |
|
|
|
(126 |
) |
|
|
8,344 |
|
Net income |
|
|
13,400 |
|
|
|
(192 |
) |
|
|
13,208 |
|
Basic earnings per share |
|
|
0.31 |
|
|
|
|
|
|
|
0.31 |
|
Diluted earnings per share |
|
|
0.30 |
|
|
|
|
|
|
|
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported |
|
|
|
|
|
|
As restated |
|
|
|
June 30, |
|
|
|
|
|
|
June 30, |
|
(in thousands) |
|
2006 |
|
|
Adjustments |
|
|
2006 |
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, current portion |
|
$ |
8,149 |
|
|
$ |
1,091 |
|
|
$ |
9,240 |
|
Total current assets |
|
|
81,848 |
|
|
|
1,091 |
|
|
|
82,939 |
|
Total assets |
|
|
167,885 |
|
|
|
1,091 |
|
|
|
168,976 |
|
Deferred revenue |
|
|
67,957 |
|
|
|
2,802 |
|
|
|
70,759 |
|
Total current liabilities |
|
|
85,862 |
|
|
|
2,802 |
|
|
|
88,664 |
|
Total liabilities |
|
|
88,010 |
|
|
|
2,802 |
|
|
|
90,812 |
|
Retained earnings |
|
|
67,244 |
|
|
|
(1,711 |
) |
|
|
65,533 |
|
Total liabilities and stockholders equity |
|
|
167,885 |
|
|
|
1,091 |
|
|
|
168,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported |
|
|
|
|
|
|
As restated |
|
|
|
for the three months |
|
|
|
|
|
|
for the three months |
|
|
|
ended June 30, |
|
|
|
|
|
|
ended June 30, |
|
(in thousands) |
|
2005 |
|
|
Adjustments |
|
|
2005 |
|
Statement of Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance revenue |
|
$ |
17,527 |
|
|
$ |
(51 |
) |
|
$ |
17,476 |
|
Subscriptions revenue |
|
|
1,667 |
|
|
|
(12 |
) |
|
|
1,655 |
|
Total revenue |
|
|
42,808 |
|
|
|
(63 |
) |
|
|
42,745 |
|
Gross profit |
|
|
30,334 |
|
|
|
(63 |
) |
|
|
30,271 |
|
Income from operations |
|
|
9,007 |
|
|
|
(63 |
) |
|
|
8,944 |
|
Income tax provision |
|
|
896 |
|
|
|
(16 |
) |
|
|
880 |
|
Net income |
|
|
8,535 |
|
|
|
(47 |
) |
|
|
8,488 |
|
Basic earnings per share |
|
|
0.19 |
|
|
|
|
|
|
|
0.19 |
|
Diluted earnings per share |
|
|
0.18 |
|
|
|
(0.01 |
) |
|
|
0.17 |
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported |
|
|
|
|
|
|
As restated |
|
|
|
for the three months |
|
|
|
|
|
|
for the three months |
|
|
|
ended June 30, |
|
|
|
|
|
|
ended June 30, |
|
(in thousands) |
|
2005 |
|
|
Adjustments |
|
|
2005 |
|
Statement of Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance revenue |
|
$ |
17,527 |
|
|
$ |
(51 |
) |
|
$ |
17,476 |
|
Subscriptions revenue |
|
|
1,667 |
|
|
|
(12 |
) |
|
|
1,655 |
|
Total revenue |
|
|
42,808 |
|
|
|
(63 |
) |
|
|
42,745 |
|
Gross profit |
|
|
30,334 |
|
|
|
(63 |
) |
|
|
30,271 |
|
Income from operations |
|
|
9,007 |
|
|
|
(63 |
) |
|
|
8,944 |
|
Income tax provision |
|
|
896 |
|
|
|
(16 |
) |
|
|
880 |
|
Net income |
|
|
8,535 |
|
|
|
(47 |
) |
|
|
8,488 |
|
Basic earnings per share |
|
|
0.19 |
|
|
|
|
|
|
|
0.19 |
|
Diluted earnings per share |
|
|
0.18 |
|
|
|
(0.01 |
) |
|
|
0.17 |
|
The impact of the adjustments on the consolidated balance sheet as of December 31, 2005 was
included in the amended Form 10-K filed on May 25, 2007.
3. Summary of significant accounting policies
Unaudited interim financial statements
The interim consolidated financial statements as of June 30, 2006 and for the three and six months
ended June 30, 2006 and 2005, have been prepared by the Company pursuant to the rules and
regulations of the SEC for interim financial reporting. These consolidated statements are
unaudited and, in the opinion of management, include all adjustments (consisting of normal
recurring adjustments and accruals) necessary to state fairly the consolidated balance sheets,
consolidated statements of operations, consolidated statements of cash flows, and consolidated
statements of stockholders equity and comprehensive income for the periods presented in accordance
with accounting principles generally accepted in the United States of America. The consolidated
balance sheet at December 31, 2005 has been derived from the audited consolidated financial
statements at that date. Operating results for the three and six months ended June 30, 2006 are
not necessarily indicative of the results that may be expected for the fiscal year ending December
31, 2006 or any other future period. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted in accordance with the rules and
regulations for interim reporting of the SEC. These interim consolidated financial statements
should be read in conjunction with the consolidated financial statements and notes thereto included
in the Companys Annual Report on Form 10-K for the year ended December 31, 2005.
Basis of consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany balances and transactions have been eliminated in
consolidation.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting periods. Areas of the financial statements
where estimates may have the most significant effect include the allowance for sales returns and
doubtful accounts, lives of tangible and intangible assets, impairment of long-lived assets,
realization of deferred tax assets, stock-based compensation, revenue recognition, and provision
for income taxes. Changes in the facts or circumstances underlying these estimates could result in
material changes and actual results could differ from these estimates.
Reclassifications
Certain amounts in the prior year consolidated balance sheets, statements of operations, statements
of cash flows and notes to the consolidated financial statements have been reclassified to conform
to the 2006 presentation.
7
Revenue recognition
The Companys revenue is generated primarily by licensing its software products and providing
support, training, consulting, technical, hosting and other professional services for those
products. The Company recognizes revenue in accordance with the American Institute of Certified
Public Accountants Statement of Position (SOP) 97-2, Software Revenue Recognition, as modified by
SOPs 98-4 and 98-9, as well as Technical Practice Aids issued from time to time by the American
Institute of Certified Public Accountants, and in accordance with the SEC Staff Accounting Bulletin
No. 104, Revenue Recognition in Financial Statements.
Under these pronouncements, the Company recognizes revenue from the sale of software licenses when
persuasive evidence of an arrangement exists, the product has been delivered, title and risk of
loss have transferred to the customer, the fee is fixed or determinable and collection of the
resulting receivable is probable. The Company uses a signed agreement as evidence of an
arrangement. Delivery occurs when the product is delivered. The Companys typical license
agreement does not include customer acceptance provisions. If acceptance provisions are provided,
delivery is deemed to occur upon acceptance. The Company considers the fee to be fixed or
determinable unless the fee is subject to refund or adjustment or is not payable within the
Companys standard payment terms. The Company considers payment terms greater than 90 days to be
beyond its customary payment terms. The Company deems collection probable if the Company expects
that the customer will be able to pay amounts under the arrangement as they become due. If the
Company determines that collection is not probable, the Company postpones recognition of the
revenue until cash collection. The Company sells software licenses with maintenance and,
frequently, professional services. The Company allocates revenue to delivered components, normally
the license component of the arrangement, using the residual value method based on objective
evidence of the fair value of the undelivered elements, which is specific to the Company. Fair
value for the maintenance services associated with the Companys software licenses is based upon
renewal rates stated in the Companys agreements, which vary according to the level of the
maintenance program. Fair value of professional services and other products and services is based
on sales of these products and services to other customers when sold on a stand-alone basis.
The Company recognizes revenue from maintenance services ratably over the contract term, which is
principally one year. Maintenance revenue also includes the right to unspecified product upgrades
on an if-and-when available basis. Subscription revenue includes fees for hosted solutions, data
enrichment services and hosted online training programs. Subscription-based revenue and any
related set-up fees are recognized ratably over the twelve-month service period of the contracts,
as there is no discernible pattern of usage. Hosting revenues are recognized ratably over the
thirty-six month period of the hosting contracts.
The Companys services, which include consulting, installation and implementation services, are
generally billed based on hourly rates plus reimbursable travel and lodging related expenses. For
small service engagements, less than approximately $10,000, the Company frequently contracts for
and bills based on a fixed fee plus reimbursable travel and lodging expenses. The Company
recognizes this revenue upon completion of the work performed. When the Companys services include
software customization, these services are provided to support customer requests for assistance in
creating special reports and other minor enhancements that will assist with efforts to improve
operational efficiency and/or to support business process improvements. These services are not
essential to the functionality of the Companys software and rarely exceed three months in
duration. The Company recognizes revenue as these services are performed. When the Company sells
hosting separately from consulting, installation and implementation services, it recognizes that
revenue ratably over the service period.
The Company sells training at a fixed rate for each specific class, at a per attendee price, or at
a packaged price for several attendees, and revenue is recognized only upon the customer attending
and completing training. During the second quarter of 2005, the Company introduced the Blackbaud
Training Pass, which permits customers to attend unlimited training over a specified contract
period, typically one year, subject to certain restrictions. This revenue is recognized ratably
over the stated contract period. The Company recognizes revenue from donor prospect research and
data modeling service engagements upon delivery.
To the extent that the Companys customers pay for the above-described services in advance of
delivery, the amounts are recorded in deferred revenue.
Stock-based compensation
Effective January 1, 2006, the Company adopted the provisions of the Financial Accounting Standards
Boards (FASB) Statement of Financial Accounting Standards (SFAS) No. 123(R), Share Based
Payment (SFAS No.123(R)), using the modified prospective application method. SFAS No. 123(R)
replaced SFAS No. 123, Accounting for Stock-Based
8
Compensation (SFAS No. 123), and superseded Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25). Under the fair value recognition
provisions of this statement, stock-based compensation cost is measured at the grant date based on
the fair value of the award and is recognized as expense over the requisite service period, which
is the vesting period. Under the modified prospective application method, prior periods are not
revised for comparative purposes. The provisions of SFAS No. 123(R) apply to grants made after the
adoption date, awards modified, repurchased or cancelled after the adoption date, and existing
grants which were partially unvested at that date. Compensation expense for grants outstanding on
the date of adoption is recognized over the remaining service period using the grant date fair
values and amortization methods determined previously for the SFAS No. 123 pro forma disclosures.
Prior to January 1, 2006, the Company accounted for stock-based compensation under APB No. 25,
which provided that no compensation expense should be recorded for stock options or other
stock-based awards to employees that are granted with an exercise price that is equal to or greater
than the estimated fair value per share of the Companys common stock on the grant date of the
award. Certain of the Companys option grants were accounted for as variable awards under the
provisions of APB No. 25, which required the Company to record deferred compensation, and recognize
compensation expense over the requisite vesting period, for the difference between the exercise
price and the fair market value of the stock at each reporting date.
The adoption of SFAS No. 123(R) resulted in the reclassification of $6,497,000 of unamortized
deferred compensation that had previously been subject to variable accounting under APB No. 25, and
a nominal cumulative effect adjustment to apply an assumed forfeiture rate to expense previously
taken on options unvested as of the date of adoption, which was recorded in General and
Administrative expenses.
The adoption of SFAS No. 123(R) had a material impact on our consolidated balance sheets,
consolidated statements of operations and consolidated statements of cash flows. See Note 11 of
these financial statements and discussion in the Managements Discussion and Analysis of Financial
Condition and Results of Operations included in this report for further information regarding our
stock-based compensation assumptions and expenses, including pro forma disclosures for prior
periods under the provisions of SFAS No. 123. No new stock options were issued in the six months
ended June 30, 2006. The fair value of the Companys options issued in prior periods was
determined using the Black-Scholes option-pricing model. In 2005, the Company began issuing
restricted stock under the 2004 Stock Plan. The fair value of the Companys restricted stock
awards is determined by using the closing price of the Companys shares, as traded on the NASDAQ
exchange, on the date of grant.
Income taxes
Prior to October 13, 1999, the Company was organized as an S corporation under the Internal Revenue
Code and, therefore, was not subject to federal income taxes. The Company historically made
distributions to its stockholders to cover the stockholders anticipated tax liability. In
connection with a recapitalization agreement, the Company converted its U.S. taxable status from an
S corporation to a C corporation and, accordingly, since October 14, 1999 has been subject to
federal and state income taxes. Upon this conversion and as a result of the recapitalization, the
Company recorded a one-time benefit of $107,000,000 to establish a deferred tax asset. This amount
was recorded as a direct increase to equity in the statements of stockholders equity. The Company
has not recorded a valuation allowance against this item in its deferred tax asset as of June 30,
2006 or December 31, 2005, as the Company believes it will be able to utilize this benefit, which
is dependent upon the Companys ability to generate taxable income.
Significant judgment is required in determining the provision for income taxes. The Company
records its tax provision at the anticipated tax rates based on estimates of annual pretax income.
To the extent that the final results differ from these estimated amounts that were initially
recorded, such differences will impact the income tax provision in the period in which such
determination is made and could have an impact on the deferred tax asset. The Companys deferred
tax assets and liabilities are recorded at an amount based upon a blended U.S. federal income tax
rate of 34.9%. This U.S. federal income tax rate is based on the Companys expectation that the
Companys deductible and taxable temporary differences will reverse over a period of years during
which, except for 2006 due to stock option exercises and other reductions to taxable income, the
Company will have annual taxable income exceeding $10,000,000 per year. If the Companys results
of operations fall below that threshold in the future, the Company will adjust its deferred tax
assets and liabilities to an amount reflecting a reduced expected U.S. federal income tax rate,
consistent with the corresponding expectation of lower taxable income. If such change is
determined to be appropriate, it will affect the provision for income taxes during the period that
the determination is made.
9
New accounting pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109, Accounting for Income Taxes, (FIN No. 48),
effective for fiscal years beginning after December 15, 2006. The interpretation attempts to
clarify the accounting for uncertainty in income taxes recognized under current GAAP, and also
provides guidance on items such as derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN No. 48 requires evaluation of
uncertain tax positions against a more-likely-than-not recognition threshold, and requires
immediate recognition of positions that exceed that threshold, and immediate derecognition when
conditions change that move a previously recognized position below that threshold. The Company has
not completed the process of evaluating the impact in future periods of adopting FIN No. 48 and is
therefore unable to disclose the effect that adoption will have on the Companys financial
statements.
In June 2005, the FASB issued SFAS Statement No. 154, Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements (SFAS No. 154). SFAS No. 154 changes the requirements
for the accounting for, and reporting of, a change in accounting principle. Previously, most
voluntary changes in accounting principles were required to be recognized by way of a cumulative
effect adjustment within net income during the period of the change. SFAS No. 154 requires
retrospective application to prior periods financial statements, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154
is effective for accounting changes made in fiscal years beginning after December 15, 2005;
however, SFAS No. 154 does not change the transition provisions of any existing accounting
pronouncements. The Company adopted SFAS No. 154 on January 1, 2006.
The American Jobs Creation Act of 2004 (the AJCA) was enacted on October 22, 2004. The AJCA
repeals an export incentive, creates a new deduction for qualified domestic manufacturing
activities and includes a special one-time deduction of 85% of certain foreign earnings repatriated
to the U.S. In December 2004, the FASB issued FASB Staff Position No. 109-1, Application of FASB
Statement No. 109 (SFAS No. 109), Accounting for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004 (FSP 109-1). FSP 109-1
clarifies that the manufacturers deduction provided for under the AJCA should be accounted for as
a special deduction in accordance with SFAS No. 109 and not as a tax rate reduction. While the
Company expects to be able to qualify for the new tax deduction in future years, the Company does
not expect to qualify for the deduction in the current year, as the Company does not expect to have
any taxable income in 2006. The Company has not completed the process of evaluating the impact in
future years of adopting FSP 109-1 and is therefore unable to disclose the effect that adopting FSP
109-1 will have on its financial statements.
The FASB also issued FASB Staff Position No. 109-2, Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP
109-2). The AJCA introduces a special one-time dividends received deduction on the repatriation
of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria
are met. FSP 109-2 provides accounting and disclosure guidance for the repatriation provision.
The Company did not make any repatriation of foreign earnings that qualified for this special tax
treatment and adoption of FSP 109-2 will have no effect on the Companys financial statements.
4. Acquisition
In January 2006, the Company acquired Campagne Associates, Ltd., the New Hampshire-based provider
of GiftMaker Pro fundraising software, for approximately $6,100,000. Included in this amount is
$500,000 of purchase price that is contingent upon the seller satisfying certain conditions set
forth in the purchase agreement, which has been classified in the consolidated balance sheets as
restricted cash. The Company also agreed to pay additional contingent consideration of up to
$2,000,000 based upon performance of the acquired business over the next two years. The
transaction was accounted for in accordance with the FASBs Statement of Financial Accounting
Standards No. 141, Business Combinations (SFAS No. 141), which requires that all acquisitions be
accounted for under the purchase method. The purchase price has been allocated to the assets
acquired and the liabilities assumed based upon their estimated fair values at the date of the
acquisition. The net fair values of the identified assets acquired and liabilities assumed
exceeded the amount of the cash purchase price by $1,260,000 which, in accordance with SFAS No.
141, was recorded as a deferred acquisition cost. Simultaneously, the Company recognized a
deferred tax liability on the acquisition in connection with the difference between depreciable
book value and depreciable tax basis, for $489,000, which reduced the deferred acquisition costs by
that amount. Of the remaining $771,000 deferred acquisition costs, approximately $500,000 has been
classified as a current liability. Identifiable intangible assets consisting of various items,
including existing customer relationships, software, non-compete agreements and a trade name, with
a value aggregating $8,182,000 were recorded as part of the purchase price allocation. These
intangible assets will be amortized over their estimated useful lives, ranging from three to
fifteen years.
10
Amortization expense for the three and six months ended June 30, 2006 related to this acquisition
was $181,000 and $301,000, respectively. The aggregate amortization expense related to this
acquisition for 2006 through 2010 is estimated to be approximately $747,000 per year. In addition,
the Company recorded additional amortization expense, related to previous acquisitions, of $9,000
and $18,000 in the three and six months ended June 30, 2006, respectively. There was no
amortization expense recorded in the three and six months ended June 30, 2005.
5. Earnings per share
The Company computes earnings per common share in accordance with SFAS Statement No. 128, Earnings
per Share (SFAS No. 128). Under the provisions of SFAS No. 128, basic earnings per share is
computed by dividing net income available to common stockholders by the weighted average number of
common shares outstanding. Diluted earnings per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares and dilutive potential
common shares then outstanding. Diluted earnings per share reflect the assumed conversion of all
dilutive securities, using the treasury stock method. Dilutive potential common shares consist of
shares issuable upon the exercise of stock options and shares of non-vested restricted stock.
Diluted earnings per share for the three months ended June 30, 2006 and 2005 includes the effect of
1,284,683 and 4,806,202 potential common shares, respectively, as they are dilutive. Dilutive
earnings per share for the six months ended June 30, 2006 and 2005 includes the effect of 1,392,003
and 5,139,014 potential common shares, respectively, as they are dilutive. Diluted earnings per
share for the three months ended June 30, 2006 and 2005 does not include the effect of 800,000 and
25,000 potential common share equivalents, respectively, as they are anti-dilutive. Dilutive
earnings per share for the six months ended June 30, 2006 and 2005 does not include the effect of
800,000 and 25,000 potential common share equivalents, respectively, as they are anti-dilutive.
The following table sets forth the computation of basic and fully diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
as restated |
|
|
as restated |
|
|
as restated |
|
|
as restated |
|
(in thousands except share and per share amounts) |
|
(see Note 2) |
|
|
(see Note 2) |
|
|
(see Note 2) |
|
|
(see Note 2) |
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,648 |
|
|
$ |
8,488 |
|
|
$ |
13,208 |
|
|
$ |
19,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares |
|
|
43,218,530 |
|
|
|
43,869,796 |
|
|
|
43,052,552 |
|
|
|
42,958,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares from restricted stock issuance |
|
|
147,242 |
|
|
|
|
|
|
|
132,642 |
|
|
|
|
|
Add effect of dilutive securities
Employee stock-based compensation |
|
|
1,284,683 |
|
|
|
4,806,202 |
|
|
|
1,392,003 |
|
|
|
5,139,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares assuming dilution |
|
|
44,650,455 |
|
|
|
48,675,998 |
|
|
|
44,577,197 |
|
|
|
48,097,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.18 |
|
|
$ |
0.19 |
|
|
$ |
0.31 |
|
|
$ |
0.45 |
|
Diluted |
|
$ |
0.17 |
|
|
$ |
0.17 |
|
|
$ |
0.30 |
|
|
$ |
0.40 |
|
11
6. Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following as of June 30, 2006 and
December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
Prepaid rent |
|
$ |
481 |
|
|
$ |
469 |
|
Prepaid insurance |
|
|
173 |
|
|
|
382 |
|
Prepaid software maintenance and royalties |
|
|
734 |
|
|
|
639 |
|
Taxes, prepaid and receivable |
|
|
5,477 |
|
|
|
6,734 |
|
Other |
|
|
685 |
|
|
|
517 |
|
|
|
|
|
|
$ |
7,550 |
|
|
$ |
8,741 |
|
|
|
|
7. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following as of June 30, 2006 and
December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
Accrued bonuses |
|
$ |
3,560 |
|
|
$ |
4,801 |
|
Accrued commissions and salaries |
|
|
1,796 |
|
|
|
1,578 |
|
Customer credit balances |
|
|
815 |
|
|
|
824 |
|
Taxes payable |
|
|
4,014 |
|
|
|
3,699 |
|
Accrued accounting and legal costs |
|
|
1,492 |
|
|
|
1,523 |
|
Accrued health care costs |
|
|
691 |
|
|
|
839 |
|
Other |
|
|
1,801 |
|
|
|
2,542 |
|
|
|
|
|
|
$ |
14,169 |
|
|
$ |
15,806 |
|
|
|
|
8. Credit agreement
On September 3, 2004, the Company entered into a $30.0 million revolving credit facility. Amounts
borrowed under the $30.0 million revolving credit facility bear interest, at the Companys option,
at a variable rate based on either the prime rate, federal funds rate or LIBOR plus a margin of
between 0.5% and 2.0% based on the Companys consolidated leverage ratio as defined. Amounts
outstanding under the facility are not secured by a lien on the Companys assets, but are
guaranteed by the Companys operating subsidiaries and the facility is subject to covenants,
including a maximum leverage ratio, minimum interest coverage ratio and minimum net worth. There
were no principal or interest amounts outstanding under the facility as of June 30, 2006, and the
Company is currently in compliance with all covenants under the agreement. The termination date of
the facility is September 30, 2007.
9. Commitments and contingencies
Lease agreement
On October 13, 1999, the Company entered into a lease agreement for office space with Duck Pond
Creek, LLC, which is owned by certain current and former minority stockholders of the Company. The
term of the lease is for ten years with two five-year renewal options by the Company. The annual
base rent of the lease is $4,595,000 payable in equal monthly installments. The base rate
escalates annually at a rate equal to the change in the consumer price index, as defined in the
agreement.
The Company has subleased a portion of its headquarters facility under various agreements extending
through 2008. Under these agreements, rent expense was reduced by $121,000 and $118,000 for the
three months ended June 30, 2006 and 2005, respectively, and was reduced by $242,000 and $236,000
for the six months ended June 30, 2006 and 2005, respectively. The operating lease commitments
will be reduced by minimum aggregate sublease commitments of $484,000, $478,000, and $128,000 for
the years 2006, 2007, and 2008, respectively. The Company has also received and expects to receive
through 2015, quarterly South Carolina state incentive payments as a result of locating its
headquarters facility in Berkeley County, South Carolina. These amounts are recorded as a
reduction of rent expense and were $435,000 and $400,000 for the three months ended June 30, 2006
and 2005, respectively, and $862,000 and $680,000 for the six months ended June 30, 2006 and 2005,
respectively.
12
Other commitments
The Company has a commitment of $200,000 payable annually through 2009 for certain naming rights on
a stadium in Charleston, South Carolina. The Company incurred expense under this agreement of
$50,000 for each of the three-month periods ended June 30, 2006 and 2005, and $100,000 for each of
the six-month periods ended June 30, 2006 and 2005.
The Company utilizes third party relationships in conjunction with its products. The contractual
arrangements vary in length from one to three years. In certain cases, these arrangements require
a minimum annual purchase commitment. The total minimum purchase commitment under these
arrangements at June 30, 2006 is approximately $447,000 through 2008. The Company incurred expense
under these arrangements of $199,000 and $155,000 for the three-months ended June 30, 2006 and
2005, respectively, and $328,000 and $312,000 for the six-months ended June 30, 2006 and 2005,
respectively.
Legal contingencies
The Company is subject to legal proceedings and claims which have arisen in the ordinary course of
business. The Company does not believe the amount of potential liability with respect to these
actions will have a material adverse effect upon the Companys balance sheets or statements of
operations.
10. Income taxes
Income taxes for the three-month period ended June 30, 2006 were calculated using the projected
effective tax rate for fiscal 2006 in accordance with SFAS No. 109. The Company estimates that in
the fiscal year ending December 31, 2006, it will have an effective tax rate of approximately
39.3%, which was applied as the effective rate for the quarter ended June 30, 2006 and excludes
quarter-specific benefits or detriments. The Companys effective tax rate for the three-month
period ended June 30, 2006 was 38.4%. The Companys effective tax rate for the three-month period
ended June 30, 2005 was 9.4%, principally as a result of the reversal of a portion of its valuation
allowance against certain state tax credits. The Companys deferred tax asset at December 31,
2004, included state income tax credits, net of federal taxes at 34.8%, of approximately $4.0
million that begin to expire in 2015. The Company established a valuation allowance against these
credits when the assets were recorded because, based on information available at that time, it was
not deemed probable that the deferred tax assets would be realized. During 2005, as a result of
profitable results in 2004 and 2003, expectations of future profitability and utilization of
related state NOLs, the Company released $2.9 million of the valuation allowance on the deferred
tax asset related to these state income tax credits. This resulted in a credit to its income tax
expense of $2.9 million for the three and six months ended June 30, 2005. No changes to the
valuation allowance have occurred in 2006.
11. Stockholders equity
Preferred stock
The Company has authorized 20,000,000 shares of preferred stock. No shares were issued and
outstanding at June 30, 2006 and December 31, 2005. The Companys Board of Directors may fix the
relative rights and preferences of each series of preferred stock in a resolution of the Board of
Directors.
Dividends
On May 5, 2006, the Companys Board of Directors declared a second quarter dividend of $0.07 per
share, which was paid on June 15, 2006 to stockholders of record on May 28, 2006.
Stock repurchase program
On July 26, 2005, the Companys Board of Directors approved a stock repurchase program that
authorized the Company to buy back up to $35,000,000 of the Companys outstanding shares of common
stock. The shares may be purchased in conjunction with a public offering of the Companys stock,
from time to time on the open market or in privately negotiated transactions depending upon market
conditions and other factors, all in accordance with the requirements of applicable law. Under the
program, in the second quarter of 2006, the Company purchased 36,700 shares of its common stock at
an average price of $19.85 per share. In the first six months of 2006, the Company purchased
401,300 shares of its common stock at an average price of $17.40 per share. The Company accounts
for purchases of treasury stock under the cost method which resulted in an increase to the treasury
stock balance of approximately $728,500 and $6,982,000 in the three and six months ended June 30,
2006, respectively.
13
Employee stock-based compensation plans
The Company has adopted four stock-based compensation plans: the 1999 Stock Option Plan (the 1999
Plan), the 2000 Stock Option Plan (the 2000 Plan), the 2001 Stock Option Plan (the 2001 Plan)
and the 2004 Stock Plan (the 2004 Plan) on October 13, 1999, May 2, 2000, July 1, 2001, and March
23, 2004, respectively. The Companys Board of Directors administers the above plans and the
stock-based awards are granted under terms determined by them. The total number of authorized
stock-based awards under these plans is 12,069,269. The majority of the stock-based awards granted
under these plans have a 10-year contractual term. The lone current exception is the option to
purchase 800,000 shares of common stock granted to the current Chief Executive Officer (CEO),
which has a 7-year contractual term.
The option agreements under all of the plans, except the 2004 Plan, provide that all unvested
options vest upon a change in control of the Company, as defined. The options granted to the
current CEO under the 2004 Plan also vest upon a change in control of the Company, as provided in
the employment agreement and the agreement evidencing the stock option between the Company and the
CEO.
The Company granted options under the 1999 Plan to purchase shares of common stock at an exercise
price of $4.80 per share, of which 396,772 were outstanding at June 30, 2006. The options granted
under this plan have two vesting schedules. Options totaling 275,232 vested 37.5% after one and a
half years following the grant date and the remaining 62.5% vested ratably over two and a half
years at six-month intervals. The 121,540 remaining options vested ratably over four years at
six-month intervals. All options under the 1999 Plan were fully vested as of June 30, 2006.
The Company granted options under the 2000 Plan to purchase shares of common stock at an exercise
price of $4.80 per share, of which none were outstanding at June 30, 2006.
The Company has granted options under the 2001 Plan to purchase shares of common stock at an
exercise price of $4.80, $5.44, $7.20, $8.00 and $9.04 per share, of which 824,610, 485,095,
54,701, 27,157, and 13,274, respectively, were outstanding at June 30, 2006. The options vest in
equal annual installments over four years from the date of grant. The option grants under this
plan include a provision whereby the Company has the right to call shares exercised under the
grants at a discount from fair market value if the employee is terminated for cause, as defined.
This provision expired upon the Companys initial public offering (IPO). The inclusion of this
provision required the Company to account for all options issued under this plan after January 18,
2001 as variable awards and record compensation expense for the difference between the exercise
price and the fair market value of the stock at each reporting date. There were 462,817 options
under the 2001 Plan unvested at June 30, 2006.
The Company adopted the 2004 Plan on March 23, 2004. The Company has granted options under the
2004 Plan to purchase shares of common stock at an exercise price of $8.00, $8.60, $10.59, $13.05
and $16.10 per share, of which 30,000, 199,017, 81,250, 15,000 and 800,000, respectively, were
outstanding at June 30, 2006. The options vest in equal annual installments over four years from
the grant date, with the exception of 800,000 options which vest 25% on the first anniversary from
the date of grant and the remaining 75% in 12 equal quarterly installments. There were 1,071,840
options under the 2004 Plan unvested at June 30, 2006.
The Company has also granted shares of common stock subject to certain restrictions under the 2004
Plan. Restricted stock grants vest in equal annual installments over four years from the grant
date, except for 12,825 shares granted to non-employee directors which vest after one year. The
fair market value of the stock at the time of the grant is amortized on a straight-line basis to
expense over the period of vesting. Recipients of restricted stock have the right to vote such
shares and receive dividends. Income tax benefits resulting from the vesting of restricted stock,
including a deduction for the excess, if any, of the fair market value of restricted stock at the
time of the vesting over their fair market value at the time of the grants, are credited to
additional paid-in capital. There were 456,552 shares of restricted stock outstanding and unvested
at June 30, 2006.
The Company recognizes compensation expense associated with options over the vesting period on an
accelerated basis consistent with the method of amortizing used prior to adoption of SFAS 123(R).
The Company recognizes compensation expense associated with restricted stock over the vesting
period on a straight-line basis.
Stock-based compensation
Beginning on January 1, 2006, the Company adopted SFAS No. 123(R). See Note 3 for a description of
the Companys adoption. The adoption of SFAS No. 123(R) had a significant impact on the Companys
results of operations. The Companys consolidated statements of operations for the three months
ended June 30, 2006 and 2005 includes $2,002,000
14
and $3,320,000 of stock-based compensation expense, respectively, and includes $3,976,000 of
stock-based compensation expense and $4,320,000 of stock-based compensation benefit for the six
months ended June 30, 2006 and 2005, respectively.
Prior to the adoption of SFAS No. 123(R), the Company accounted for options under APB No. 25.
Because of certain provisions in certain of the option agreements, the Company was required to
account for these options under variable accounting. Variable accounting requires marking these
options to the market price on the reporting date and recognizing a corresponding expense or
benefit in the financial statements. Amortization of deferred compensation resulted in the Company
recognizing stock option compensation benefit of $4,320,000 for the six months ended June 30, 2005,
which is detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
Three months |
|
|
|
|
|
|
ended March 31, |
|
|
ended June 30, |
|
|
Six months ended |
|
(in thousands) |
|
2005 |
|
|
2005 |
|
|
June 30, 2005 |
|
|
Charge (credit) to adjust deferred compensation associated with fully vested and
unexercised options of former CEO to period end closing stock price |
|
$ |
(7,908 |
) |
|
$ |
2,648 |
|
|
$ |
(5,260 |
) |
Charge to adjust deferred compensation associated with option exercises of former
CEO to stock price on date of transaction |
|
|
|
|
|
|
430 |
|
|
|
430 |
|
Amortization of deferred compensation associated with formerly variable
options which became fixed upon the Companys IPO |
|
|
268 |
|
|
|
242 |
|
|
|
510 |
|
|
|
|
Total |
|
$ |
(7,640 |
) |
|
$ |
3,320 |
|
|
$ |
(4,320 |
) |
|
|
|
The Company issues new common stock from its pool of authorized stock upon exercise of stock
options or upon granting of restricted stock.
The adoption of SFAS No. 123(R) resulted in the reclassification of $6,497,000 of unamortized
deferred compensation that had previously been subject to variable accounting under APB No. 25, and
a nominal cumulative effect adjustment to apply an assumed forfeiture rate to expense previously
taken on options unvested as of the date of adoption.
Unrecognized stock-based compensation expense expected to be recognized over an estimated
weighted-average amortization period of 1.37 years was $12,069,000 at June 30, 2006. The Company
expects to expense an additional $3,539,000 of that total in the remaining six months of 2006.
The modified prospective transition method of SFAS No. 123(R) requires the windfall benefits of tax
deductions in excess of recognized compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as previously required under EITF Issue No. 00-15,
Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon
Exercise of a Nonqualified Employee Stock Option. As a result, for the six months ended June 30,
2006 this requirement resulted in the classification of $4,403,000 of excess windfall tax benefits
as a net financing cash inflow which would have previously been reported as an operating cash
inflow. For the first six months of 2005 those amounts are reported as operating cash flows in the
statements of cash flows.
For the six months ended June 30, 2006, the effects of applying the provisions of SFAS 123(R), as
compared to as if reported under APB 25, on our operating results were as follows:
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, 2006, |
|
|
|
restated (see Note 2) |
|
(in thousands, except share and per share amounts) |
|
Effect of SFAS 123(R) |
|
|
Income from operations |
|
$ |
(2,873 |
) |
Income before income taxes |
|
|
(2,873 |
) |
Net income |
|
|
(1,919 |
) |
|
|
|
|
|
Cash flow from operating activities |
|
|
(4,403 |
) |
Cash flow from financing activities |
|
|
4,403 |
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
Basic |
|
$ |
(0.05 |
) |
Diluted |
|
$ |
(0.04 |
) |
15
The following table sets forth the summary of option activity under the Companys stock option
program for the three months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
average |
|
|
|
Shares |
|
|
exercise price |
|
|
|
|
Outstanding options at December 31, 2005 |
|
|
3,931,632 |
|
|
$ |
7.69 |
|
Exercised |
|
|
(964,306 |
) |
|
|
4.94 |
|
Forfeited |
|
|
(40,450 |
) |
|
|
8.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at June 30, 2006 |
|
|
2,926,876 |
|
|
$ |
8.58 |
|
|
|
|
The total intrinsic value of options exercised during the three months ended June 30, 2006
and 2005 was $4,743,000 and $12,074,000, respectively, and the total intrinsic value of options
exercised during the six months ended June 30, 2006 and 2005 was $13,404,000 and $19,209,000,
respectively. There were no options granted during either the three or six months ended June 30,
2006 and 2005. All outstanding options granted by the Company had a fair market value assigned at
grant date based on the use of the Black-Scholes option pricing model. Significant assumptions
used in that model will continue to be monitored and will be disclosed in periods when options are
granted.
Information regarding the stock options outstanding at June 30, 2006 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
|
|
|
|
|
|
|
|
Range of |
|
|
Outstanding as of |
|
|
remaining contractual life |
|
|
Weighted average |
|
|
Exercisable as of |
|
|
Weighted average |
|
exercise Prices |
|
|
6/30/2006 |
|
|
(in years) |
|
|
exercise price |
|
|
6/30/2006 |
|
|
exercise price |
|
|
|
|
|
|
|
|
|
|
$ |
4.80 |
|
|
|
1,221,382 |
|
|
|
4.2 |
|
|
$ |
4.80 |
|
|
|
1,183,881 |
|
|
$ |
4.80 |
|
|
|
$ |
5.44 |
|
|
|
485,095 |
|
|
|
6.7 |
|
|
$ |
5.44 |
|
|
|
134,518 |
|
|
$ |
5.44 |
|
|
|
$ |
7.20 |
|
|
|
54,701 |
|
|
|
7.2 |
|
|
$ |
7.20 |
|
|
|
7,825 |
|
|
$ |
7.20 |
|
|
|
$ |
8.00 |
|
|
|
57,157 |
|
|
|
7.5 |
|
|
$ |
8.00 |
|
|
|
13,094 |
|
|
$ |
8.00 |
|
|
|
$ |
8.60 |
|
|
|
199,017 |
|
|
|
8.1 |
|
|
$ |
8.60 |
|
|
|
26,552 |
|
|
$ |
8.60 |
|
|
|
$ |
9.04 |
|
|
|
13,274 |
|
|
|
7.6 |
|
|
$ |
9.04 |
|
|
|
8,849 |
|
|
$ |
9.04 |
|
|
|
$ |
10.59 |
|
|
|
81,250 |
|
|
|
8.2 |
|
|
$ |
10.59 |
|
|
|
13,750 |
|
|
$ |
10.59 |
|
|
|
$ |
13.05 |
|
|
|
15,000 |
|
|
|
8.5 |
|
|
$ |
13.05 |
|
|
|
3,750 |
|
|
$ |
13.05 |
|
|
|
$ |
16.10 |
|
|
|
800,000 |
|
|
|
6.4 |
|
|
$ |
16.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,926,876 |
|
|
|
5.8 |
|
|
$ |
8.58 |
|
|
|
1,392,219 |
|
|
$ |
5.08 |
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options outstanding and options exercisable as of June 30,
2006 was $41,320,000 and $24,525,000, respectively. The intrinsic value is calculated for
in-the-money options as the difference between the market value as of June 30, 2006 and the
exercise price of the shares.
A summary of unvested restricted stock as of June 30, 2006, and changes during the six months then
ended, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
average fair |
|
|
|
Shares |
|
|
value |
|
|
|
|
Unvested Restricted Stock at December 31, 2005 |
|
|
487,733 |
|
|
$ |
14.52 |
|
Granted |
|
|
14,109 |
|
|
$ |
17.84 |
|
Vested |
|
|
(10,812 |
) |
|
$ |
12.23 |
|
Forfeited |
|
|
(34,478 |
) |
|
$ |
14.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted Stock at June 30, 2006 |
|
|
456,552 |
|
|
$ |
14.70 |
|
|
|
|
16
For the three and six months ended June 30, 2005, had the Company accounted for all employee
stock-based compensation based on the fair value method as prescribed by SFAS No. 123, the
Companys net income and net income per share would have been the following pro forma amounts:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, 2005 |
|
|
June 30, 2005 |
|
|
|
as restated |
|
|
as restated |
|
(in thousands, except share and per share amounts) |
|
(see Note 2) |
|
|
(see Note 2) |
|
|
Net income, as reported |
|
$ |
8,488 |
|
|
$ |
19,258 |
|
Total stock option compensation expense (benefit), net of related tax
effects included in the determination of net income as reported |
|
|
2,437 |
|
|
|
(3,171 |
) |
Total stock option compensation (expense) benefit, net of related tax
effects that would have been included in the determination of net
income if the fair value method had been applied to all awards |
|
|
(2,556 |
) |
|
|
1,574 |
|
|
|
|
Pro forma net income |
|
$ |
8,369 |
|
|
$ |
17,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic, as reported
|
|
$ |
0.19 |
|
|
$ |
0.45 |
|
Basic, pro forma
|
|
$ |
0.19 |
|
|
$ |
0.41 |
|
Diluted, as reported
|
|
$ |
0.17 |
|
|
$ |
0.40 |
|
Diluted, pro forma
|
|
$ |
0.17 |
|
|
$ |
0.37 |
|
12. Segment information
The Company has adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS No. 131). SFAS No. 131 establishes standards for the reporting by business
enterprises of information about operating segments, products and services, geographic areas and
major customers. The method of determining what information is reported is based on the way that
management organizes the operating segments within the Company for making operational decisions and
assessments of financial performance. The Company has determined that its reportable segments are
those that are based upon internal financial reports that disaggregate operating information into
various reportable segments. The Companys chief operating decision maker, as defined in SFAS No.
131, is its CEO. The CEO uses the information contained in these reports to evaluate performance
and assist in making decisions about the allocation of resources.
In the first quarter of 2006, as part of the continued refinement of its business strategy, the
Company identified two modifications to its previous approach to segment reporting under SFAS No.
131. At the beginning of 2006, the Company combined its consulting and training businesses under
one managerial structure and began reporting the results of operations of these business units to
the CEO as a combined entity. Additionally, as a result of the increased significance of its
subscription revenue, the Company began to report the operating results from this segment
separately to the CEO. Accordingly, the Company has amended its segment disclosure from the prior
year to reflect these changes.
The CEO uses the information presented in these reports to make certain operating decisions. The
CEO does not review any report presenting segment balance sheet information. The segment revenues
and direct controllable costs, which include salaries, related benefits, third party contractors,
data expense and classroom rentals, for the three and six months ended June 30, 2006 and 2005 were
as follows:
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting |
|
|
|
|
|
|
Maintenance |
|
|
Subscriptions |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
and education |
|
|
Analytic |
|
|
as restated |
|
|
as restated |
|
|
|
|
|
|
as restated |
|
(in thousands) |
|
License fees |
|
|
services (1) |
|
|
services (2) |
|
|
(see Note 2) |
|
|
(see Note 2) |
|
|
Other |
|
|
(see Note 2) |
|
|
Three months ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
9,234 |
|
|
$ |
13,582 |
|
|
$ |
2,113 |
|
|
$ |
19,919 |
|
|
$ |
2,463 |
|
|
$ |
1,328 |
|
|
$ |
48,639 |
|
Direct controllable costs |
|
|
510 |
|
|
|
6,448 |
|
|
|
706 |
|
|
|
2,832 |
|
|
|
512 |
|
|
|
1,413 |
|
|
|
12,421 |
|
|
|
|
Segment income |
|
|
8,724 |
|
|
|
7,134 |
|
|
|
1,407 |
|
|
|
17,087 |
|
|
|
1,951 |
|
|
|
(85 |
) |
|
|
36,218 |
|
Corporate costs not allocated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,679 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,240 |
|
Interest (income) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(212 |
) |
Other expense (income), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
8,304 |
|
|
$ |
12,522 |
|
|
$ |
1,590 |
|
|
$ |
17,476 |
|
|
$ |
1,655 |
|
|
$ |
1,198 |
|
|
$ |
42,745 |
|
Direct controllable costs |
|
|
1,140 |
|
|
|
5,345 |
|
|
|
797 |
|
|
|
2,162 |
|
|
|
356 |
|
|
|
1,171 |
|
|
|
10,971 |
|
|
|
|
Segment income |
|
|
7,164 |
|
|
|
7,177 |
|
|
|
793 |
|
|
|
15,314 |
|
|
|
1,299 |
|
|
|
27 |
|
|
|
31,774 |
|
Corporate costs not allocated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,503 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,327 |
|
Interest (income) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(315 |
) |
Other expense (income), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting |
|
|
|
|
|
|
Maintenance |
|
|
Subscriptions |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
and education |
|
|
Analytic |
|
|
as restated |
|
|
as restated |
|
|
|
|
|
|
as restated |
|
(in thousands) |
|
License fees |
|
|
services (1) |
|
|
services (2) |
|
|
(see Note 2) |
|
|
(see Note 2) |
|
|
Other |
|
|
(see Note 2) |
|
|
Six months ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
16,455 |
|
|
$ |
26,130 |
|
|
$ |
3,279 |
|
|
$ |
38,958 |
|
|
$ |
4,751 |
|
|
$ |
2,618 |
|
|
$ |
92,191 |
|
Direct controllable costs |
|
|
1,180 |
|
|
|
12,762 |
|
|
|
1,525 |
|
|
|
5,441 |
|
|
|
990 |
|
|
|
2,499 |
|
|
|
24,397 |
|
|
|
|
Segment income |
|
|
15,275 |
|
|
|
13,368 |
|
|
|
1,754 |
|
|
|
33,517 |
|
|
|
3,761 |
|
|
|
119 |
|
|
|
67,794 |
|
Corporate costs not allocated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,321 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,138 |
|
Interest (income) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(349 |
) |
Other expense (income), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
14,772 |
|
|
$ |
22,699 |
|
|
$ |
2,885 |
|
|
$ |
34,591 |
|
|
$ |
2,976 |
|
|
$ |
2,080 |
|
|
$ |
80,003 |
|
Direct controllable costs |
|
|
2,086 |
|
|
|
10,032 |
|
|
|
1,623 |
|
|
|
4,277 |
|
|
|
712 |
|
|
|
1,934 |
|
|
|
20,664 |
|
|
|
|
Segment income |
|
|
12,686 |
|
|
|
12,667 |
|
|
|
1,262 |
|
|
|
30,314 |
|
|
|
2,264 |
|
|
|
146 |
|
|
|
59,339 |
|
Corporate costs not allocated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,108 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,148 |
|
Interest (income) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(555 |
) |
Other expense (income), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
26,635 |
|
|
|
|
(1) |
|
This segment consists of consulting, installation and implementation, document imaging,
customer training and other education services. |
|
(2) |
|
This segment consists of donor prospect research and data modeling services. |
13. Subsequent events
On August 7, 2006, the Company declared a third quarter dividend of $0.07 per share, payable
on September 15, 2006 to stockholders of record on August 28, 2006.
18
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and related notes included
elsewhere in this Quarterly Report on Form 10-Q. This report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements reflect our current view with respect to
future events and financial performance and are subject to risks and uncertainties, including those
set forth under Cautionary statement included in this Managements Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this report, that could cause
actual results to differ materially from historical or anticipated results.
Overview
We are the leading global provider of software and related services designed specifically for
nonprofit organizations. Our products and services enable nonprofit organizations to increase
donations, reduce fundraising costs, improve communications with constituents, manage finances and
optimize internal operations. We have focused solely on the nonprofit market since our
incorporation in 1982 and have developed our suite of products and services based upon our
extensive knowledge of the operating challenges facing nonprofit organizations. As of June 30,
2006 we had more than 15,000 customers. Our customers operate in multiple verticals within the
nonprofit market, including religion, education, foundations, health and human services, arts and
cultural, public and societal benefits, environment and animal welfare, and international foreign
affairs.
We derive revenue from licensing software products and providing a broad offering of services,
including consulting, training, installation, implementation, and donor prospect research and
modeling services, as well as ongoing customer support and maintenance. Consulting, training and
implementation are generally not essential to the functionality of our software products and are
sold separately. Accordingly, we recognize revenue from these services separately from license
fees.
Critical accounting policies and estimates
Our discussion and analysis of financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the reported amounts of revenue and expenses
during the reporting period and related disclosures of contingent assets and liabilities. The most
significant estimates and assumptions relate to our revenue recognition, our allowance for sales
returns and doubtful accounts, our valuation of long-lived and intangible assets and goodwill,
stock-based compensation, and our provision for income taxes and valuation of deferred tax assets.
We base our estimates on historical experience and on various other assumptions that we believe to
be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other
sources. On an ongoing basis, we reconsider and evaluate our estimates and assumptions. We are
not aware of any circumstances in the past that have caused these estimates and assumptions to be
materially wrong. Furthermore, we are not currently aware of any material changes in our business
that might cause these assumptions or estimates to differ significantly. In our discussion below
of deferred taxes, the most significant asset subject to such assumptions and estimates, we have
described the sensitivity of these assumptions or estimates to potential deviations in actual
results. Actual results could differ from any of our estimates under different assumptions or
conditions.
We believe the critical accounting policies listed below affect significant judgments and estimates
used in the preparation of our consolidated financial statements.
Revenue recognition
Our revenue is generated primarily by licensing its software products and providing support,
training, consulting, technical, hosting and other professional services for those products. We
recognize revenue in accordance with the American Institute of Certified Public Accountants
Statement of Position (SOP) 97-2, Software Revenue Recognition, as modified by SOPs 98-4 and
98-9, as well as Technical Practice Aids issued from time to time by the American Institute of
Certified Public Accountants, and in accordance with the SEC Staff Accounting Bulletin No. 104,
Revenue Recognition in Financial Statements.
19
We recognize revenue from the sale of software licenses when persuasive evidence of an arrangement
exists, the product has been delivered, title and risk of loss has transferred to the customer, the
fee is fixed or determinable and collection of the resulting receivable is probable. Delivery
occurs when the product is delivered. Our typical license agreement does not include customer
acceptance provisions. If acceptance provisions are provided, delivery is deemed to occur upon
acceptance. We consider the fee to be fixed or determinable unless the fee is subject to refund or
adjustment or is not payable with our standard payment terms. We consider payment terms greater
than 90 days to be beyond our customary payment terms. We deem collection probable if we expect
that the customer will be able to pay amounts under the arrangement as they become due. If we
determine that collection is not probable, we postpone recognition of the revenue until cash
collection. We sell software licenses with maintenance and, frequently, professional services. We
allocate revenue to delivered components, normally the license component of the arrangement, using
the residual value method based on objective evidence of the fair value of the undelivered
elements, which is specific to our company. Fair value for the maintenance services associated
with our software licenses is based upon renewal rates stated in our agreements, which vary
according to the level of the maintenance program. Fair value of professional services and other
products and services is based on sales of these products and services to other customers when sold
on a stand-alone basis.
We recognize revenue from maintenance services ratably over the contract term, which is usually one
year. Maintenance revenue also includes the right to unspecified product upgrades on an
if-and-when available basis. Subscription revenue includes fees for hosted solutions, data
enrichment services and hosted online training programs. Subscription-based revenue and any
related set-up fees are recognized ratably over the twelve-month service period of the contracts.
Hosting revenues are recognized ratably over the thirty-six month period of the hosting contracts.
Our services, which include consulting, installation and implementation services, are generally
billed based on hourly rates plus reimbursable travel and lodging related expenses. For small
service engagements, less than approximately $10,000, we frequently contract for and bill based on
a fixed fee plus reimbursable travel and lodging expenses. We recognize this revenue upon
completion of the work performed. When our services include software customization, these services
are provided to support customer requests for assistance in creating special reports and other
minor enhancements that will assist with efforts to improve operational efficiency and/or to
support business process improvements. These services are not essential to the functionality of
our software and rarely exceed three months in duration. We recognize revenue as these services
are performed. When we sell hosting separately from consulting, installation and implementation
services, we recognize that revenue ratably over the service period.
We sell training at a fixed rate for each specific class, at a per attendee price, or at a packaged
price for several attendees, and revenue is recognized only upon the customer attending and
completing training. During the second quarter of 2005, we introduced the Blackbaud Training Pass,
which permits customers to attend unlimited training over a specified contract period, typically
one year, subject to certain restrictions. This revenue is recognized ratably over the contract
period that is typically one year. We recognize revenue from donor prospect research and data
modeling service engagements upon delivery.
To the extent that our customers pay for the above-described services in advance of delivery, we
record those amounts in deferred revenue.
Sales returns and allowance for doubtful accounts
We provide customers a 30-day right of return and maintain a reserve for returns. We estimate the
amount of this reserve based on historical experience. Provisions for sales returns are charged
against the related revenue items.
We maintain an allowance for doubtful accounts at an amount we estimate to be sufficient to provide
adequate protection against losses resulting from extending credit to our customers. In judging
the adequacy of the allowance for doubtful accounts, we consider multiple factors including
historical bad debt experience, the general economic environment, the need for specific customer
reserves and the aging of our receivables. Any necessary provision is reflected in general and
administrative expense. A considerable amount of judgment is required in assessing these factors
and if any receivables were to deteriorate, an additional provision for doubtful accounts could be
required.
Valuation of long-lived and intangible assets and goodwill
We review identifiable intangible and other long-lived assets for impairment when events change or
circumstances indicate the carrying amount may not be recoverable. Events or changes in
circumstances that indicate the carrying amount may not be recoverable include, but are not limited
to, a significant decrease in the market value of the business or asset acquired, a significant
adverse change in the extent or manner in which the business or asset acquired is used or
significant adverse change in the business climate. If such events or changes in circumstances
occur, we use the
20
undiscounted cash flow method to determine whether the asset is impaired. Cash flows would include
the estimated terminal value of the asset and exclude any interest charges. To the extent that the
carrying value of the asset exceeds the undiscounted cash flows over the estimated remaining life
of the asset, we measure the impairment using discounted cash flows. The discount rate utilized
would be based on our best estimate of our risks and required investment returns at the time the
impairment assessment is made.
In accordance with the Financial Accounting Standards Boards (FASB) Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), we
test goodwill for impairment annually, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The impairment test compares the fair value of the
reporting unit with its carrying amount. If the carrying amount exceeds its fair value, impairment
is indicated. The impairment is measured as the excess of the recorded goodwill over its fair
value, which could materially adversely impact our financial position and results of operations.
All of the goodwill is assigned to a single reporting unit.
Stock-based compensation
Effective January 1, 2006, we adopted the provisions of the FASBs Statement No. 123 (revised
2004), Share-Based Payment (SFAS No. 123(R)), using the modified prospective application method.
SFAS No. 123(R) replaced SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) and
supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
(APB No. 25). Under the fair value recognition provisions of this statement, stock-based
compensation cost is measured at the grant date based on the fair value of the award and is
recognized as expense over the requisite service period, which is the vesting period. Under the
modified prospective application method, prior periods are not revised for comparative purposes.
The provisions of SFAS No. 123(R) apply to grants made after the adoption date, and existing grants
which were partially unvested at that date. Compensation expense for grants outstanding on the
date of adoption will be recognized over the remaining service period using the grant date fair
values and amortization methods determined previously for the SFAS No. 123 pro forma disclosures.
Prior to January 1, 2006, we accounted for stock-based compensation under APB No. 25, which
provided that no compensation expense should be recorded for stock options or other stock-based
awards to employees that are granted with an exercise price that is equal to or greater than the
estimated fair value per share of our common stock on the grant date of the award. Certain of our
option grants were accounted for as variable awards under the provisions of APB No. 25, which
required us to record deferred compensation, and recognize compensation expense over the requisite
vesting period, for the difference between the exercise price and the fair market value of the
stock at each reporting date.
The adoption of SFAS No. 123(R) resulted in the reclassification of approximately $6.5 million of
unamortized deferred compensation that had previously been subject to variable accounting under APB
No. 25, and a nominal cumulative effect adjustment to apply an assumed forfeiture rate to expense
previously taken on options unvested as of the date of adoption. The adoption of SFAS 123(R) did
not cause us to modify any existing awards, change any terms of existing awards, or otherwise
modify our share-based compensation plans.
The adoption of SFAS No. 123(R) had a material impact on our consolidated balance sheets,
consolidated statements of operations and consolidated statements of cash flows. See Note 11 of
our financial statements for further information regarding our stock-based compensation assumptions
and expenses, including pro forma disclosures for prior periods under the provisions of SFAS No.
123. No new stock options were issued in the six months ended June 30, 2006. The fair value of
options issued in prior periods was determined using the Black-Scholes option-pricing model. The
fair value of our outstanding restricted stock awards was determined by using the closing price of
the Companys shares, as traded on the NASDAQ exchange on the date of the grant.
We have separately disclosed stock-based compensation throughout this discussion and in our
financial statements because, in managing our operations, we believe such costs significantly
affect our ability to better understand and manage other operating expenses and cash needs.
Provision for income tax and valuation of deferred tax assets
We account for income taxes using the asset and liability approach as prescribed by SFAS Statement
No. 109, Accounting for Income Taxes. This approach requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been included in the
consolidated financial statements or income tax returns. Using the enacted tax rates in effect for
the year in which we expect the differences to reverse, we determine deferred tax assets and
liabilities based on the differences between the financial reporting and the tax basis of an asset
or liability. We record a valuation allowance when it is more likely than not that the deferred
tax asset will not be realized.
21
Significant judgment is required in determining our income taxes in each of the jurisdictions in
which we operate. This process involves estimating our actual current tax exposure together with
assessing temporary differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in a net deferred tax asset,
which is included on our consolidated balance sheets. The final tax outcome of these matters might
be different than that which is reflected in our historical income tax provisions, benefits and
accruals. Any difference could have a material effect on our income tax provision and net income
in the period in which such a determination is made.
Prior to October 13, 1999, we were organized as an S corporation under the Internal Revenue Code
and, therefore, were not subject to federal income taxes. In addition, we were not subject to
income tax in many of the states in which we operated as a result of our S corporation status. We
historically made distributions to our stockholders to cover the stockholders anticipated tax
liability. In connection with a recapitalization agreement (See Note 1 to the financial
statements), we converted our U.S. taxable status from an S corporation to a C corporation.
Accordingly, since October 14, 1999 we have been subject to federal and state income taxes. Upon
the conversion and in connection with the recapitalization, we recorded a one-time benefit of
$107.0 million to establish a deferred tax asset as a result of the recapitalization agreement.
We must assess the likelihood that the net deferred tax asset will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance, we must include an expense within the
tax provision in the statement of operations. Except with respect to certain state income tax
credits as discussed in the 2005 Form 10-K filing, we have not recorded a valuation allowance as of
June 30, 2006 and December 31, 2005, because we expect to be able to utilize our entire net
deferred tax asset. The ability to utilize our net deferred tax asset is solely dependent on our
ability to generate future taxable income. Based on current estimates of revenue and expenses, we
expect future taxable income will be more than sufficient to recover the annual amount of
additional tax deductions permitted. Even if actual results are significantly below our current
estimates, the recovery still remains likely and no valuation allowance would be necessary.
Significant judgment is required in determining the provision for income taxes. To the extent that
the final results differ from these estimated amounts that were initially recorded, such
differences will impact the income tax provision in the period in which such determination is made
and could have an impact on the deferred tax asset. Our deferred tax assets and liabilities are
recorded at an amount based upon a blended U.S. federal income tax rate of 34.9%. This U.S.
federal income tax rate is based on our expectation that our deductible and taxable temporary
differences will reverse over a period of years during which, except for 2006 due to stock option
exercises and other reductions to income, we will have annual taxable income exceeding $10.0
million per year. If our results of operations fall below that threshold in the future, we will
adjust our deferred tax assets and liabilities to an amount reflecting a reduced expected U.S.
federal income tax rate, consistent with the corresponding expectation of lower taxable income. If
such change is determined to be appropriate, it will affect the provision for income taxes during
the period that the determination is made.
Contingencies
We are subject to the possibility of various loss contingencies in the normal course of business.
We accrue for loss contingencies when a loss is estimable and probable.
22
Results of operations
The following table sets forth our consolidated statements of operations data expressed as a
percentage of total revenue for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
as restated |
|
|
as restated |
|
|
as restated |
|
|
as restated |
|
|
|
(see Note 2) |
|
|
(see Note 2) |
|
|
(see Note 2) |
|
|
(see Note 2) |
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License fees |
|
|
19.0 |
% |
|
|
19.4 |
% |
|
|
17.8 |
% |
|
|
18.5 |
% |
Services |
|
|
32.3 |
|
|
|
33.0 |
|
|
|
31.9 |
|
|
|
32.0 |
|
Maintenance |
|
|
41.0 |
|
|
|
40.9 |
|
|
|
42.3 |
|
|
|
43.2 |
|
Subscriptions |
|
|
5.0 |
|
|
|
3.9 |
|
|
|
5.2 |
|
|
|
3.7 |
|
Other revenue |
|
|
2.7 |
|
|
|
2.8 |
|
|
|
2.8 |
|
|
|
2.6 |
|
|
|
|
|
|
Total revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license fees |
|
|
1.0 |
|
|
|
2.7 |
|
|
|
1.3 |
|
|
|
2.6 |
|
Cost of services |
|
|
16.8 |
|
|
|
16.6 |
|
|
|
17.7 |
|
|
|
17.0 |
|
Cost of maintenance |
|
|
7.1 |
|
|
|
6.2 |
|
|
|
7.2 |
|
|
|
6.6 |
|
Cost of subscriptions |
|
|
1.2 |
|
|
|
1.0 |
|
|
|
1.2 |
|
|
|
1.0 |
|
Cost of other revenue |
|
|
2.9 |
|
|
|
2.7 |
|
|
|
2.7 |
|
|
|
2.5 |
|
|
|
|
|
|
Total cost of revenue |
|
|
29.0 |
|
|
|
29.2 |
|
|
|
30.1 |
|
|
|
29.7 |
|
|
|
|
|
|
Gross profit |
|
|
71.0 |
|
|
|
70.8 |
|
|
|
69.9 |
|
|
|
70.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
21.7 |
|
|
|
20.8 |
|
|
|
21.5 |
|
|
|
20.8 |
|
Research and development |
|
|
12.1 |
|
|
|
12.5 |
|
|
|
12.9 |
|
|
|
13.0 |
|
General and administrative |
|
|
11.6 |
|
|
|
16.7 |
|
|
|
12.0 |
|
|
|
3.9 |
|
Amortization |
|
|
0.4 |
|
|
|
0.0 |
|
|
|
0.3 |
|
|
|
0.0 |
|
|
|
|
|
|
Total operating expenses |
|
|
45.8 |
|
|
|
50.0 |
|
|
|
46.7 |
|
|
|
37.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
25.2 |
|
|
|
20.8 |
|
|
|
23.2 |
|
|
|
32.6 |
|
Interest income |
|
|
0.5 |
|
|
|
0.9 |
|
|
|
0.3 |
|
|
|
0.7 |
|
Interest expense |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Other (expense) income, net |
|
|
(0.2 |
) |
|
|
0.2 |
|
|
|
(0.1 |
) |
|
|
0.0 |
|
|
|
|
|
|
Income before provision
for income taxes |
|
|
25.5 |
|
|
|
21.9 |
|
|
|
23.4 |
|
|
|
33.3 |
|
Income tax provision |
|
|
9.8 |
|
|
|
2.0 |
|
|
|
9.1 |
|
|
|
9.2 |
|
|
|
|
|
|
Net income |
|
|
15.7 |
% |
|
|
19.9 |
% |
|
|
14.3 |
% |
|
|
24.1 |
% |
|
|
|
|
|
Comparison of the three months ended June 30, 2006 and 2005
Revenue
Second quarter of 2006 total revenue of $48.6 million increased by $5.9 million, or 13.8% compared
with $42.7 million in the comparable period in 2005. The increase is due in part to growth in
services and license fees to new and existing customers. Also contributing to the growth is
revenue from new maintenance contracts associated with the license agreements and revenue from our
subscription offerings.
License fees
We derive revenue from license fees by selling rights to use our software products, typically under
a perpetual license agreement. Revenue from license fees of $9.2 million in the second quarter of
2006 increased by $0.9 million, or 10.8%, compared with $8.3 million in the comparable period in
2005. These amounts represent 19.0% and 19.4% of total revenue for the second quarter of 2006 and
2005, respectively. The increase in license fees in the three months ended June 30, 2006 is
attributable to a $0.5 million increase in product sales to new customers, including those obtained
in the acquisition of Campagne Associates, Ltd., and a $0.4 million increase in product sales to
our installed customer base. The license fees charged for our software products have remained
relatively unchanged for this period. The overall increase in license fees came primarily from
sales of our core product families.
23
Services
Revenue from services includes fees received from customers for consulting, installation,
implementation, training, donor prospect research and data modeling services. Second quarter
revenue from services of $15.7 million in 2006 increased by $1.6 million, or 11.3% compared with
$14.1 million in the second quarter of 2005. These amounts represent 32.3% and 33.0% of total
revenue for the second quarter of 2006 and 2005, respectively. The revenue increase is principally
the result of increased volume of services provided and to a lesser extent the result of rate
increases in the second half of 2005. Consulting, installation, training and implementation
services involve converting data from a customers existing system, assistance in file set-up and
system configuration, requisite product training, and/or process re-engineering. These services
account for $13.6 million and $12.5 million in the second quarter of 2006 and 2005, respectively,
representing 86.6% and 88.7%, respectively, of total services revenue. Donor prospect research and
data modeling services involve the performance of assessments of customer donor (current and
prospective) information, which enables the customer to more effectively target its fundraising
activities. We perform these assessments using our proprietary analytical and data enrichment
tools. These services account for $2.1 million and $1.6 million in the second quarter of 2006 and
2005, respectively, and represent 13.4% and 11.3%, respectively, of total services revenue for the
second quarter.
Maintenance
Revenue from maintenance is comprised of annual fees derived from maintenance contracts associated
with new software licenses and annual renewals of existing maintenance contracts. These contracts
provide customers updates, enhancements, upgrades to our software products, and online, telephone
and email support. Maintenance revenue of $19.9 million in the second quarter of 2006 increased
$2.4 million, or 13.7%, compared with $17.5 million in the second quarter of 2005. These amounts
represent 41.0% and 40.9% of total revenue for the second quarter of 2006 and 2005, respectively.
The increase in maintenance revenue in the second quarter of 2006 over the second quarter of 2005
is comprised of $2.2 million from new maintenance contracts associated with new license agreements,
including new products, $0.7 million from maintenance contract inflationary rate adjustments, and
$0.4 million from maintenance agreements on customers acquired as part of the purchase of Campagne
Associates, Ltd., offset by $0.9 million of maintenance contracts that were not renewed.
Subscriptions
Revenue from subscriptions is principally comprised of revenue from hosted fundraising software
solutions, certain data services, our online subscription training offerings, and hosting of client
internet sites. Subscriptions revenue of $2.5 million in the second quarter of 2006 increased $0.8
million, or 47.1%, compared with $1.7 million in the second quarter of 2005. These amounts
represent 5.0% and 3.9% of our total revenue for the second quarter of 2006 and 2005, respectively.
The increase in subscriptions revenue in the second quarter of 2006 over the second quarter of
2005 is comprised primarily of a $0.2 million increase in revenue from our online analytics
products, a $0.2 million increase in revenue from our hosting activities, and a $0.1 million
increase in revenue from our address validation service.
Other revenue
Other revenue includes the sale of business forms that are used in conjunction with our software
products; reimbursement of travel and related expenses, primarily incurred during the performance
of services at customer locations; fees from user conferences; and sale of hardware in conjunction
with The Patron Edge. Other revenue of $1.3 million in the second quarter of 2006 increased $0.1
million, or 8.3%, compared with $1.2 million in the second quarter 2005. These amounts represent
2.7% and 2.8% of our total revenue for the second quarter of 2006 and 2005, respectively.
Cost of revenue
Cost of license fees
Cost of license fees includes third-party software royalties, variable reseller commissions and
costs of shipping software products to our customers. Cost of license fees of $0.5 million for the
second quarter of 2006 decreased by $0.6 million, or 54.5%, compared with $1.1 million in the
second quarter of 2005. These amounts represent 5.5% and 13.7% of license fee revenue in 2006 and
2005, respectively. The decrease in cost of license fees is attributable to reduced reseller
commissions which have declined by $0.4 million as a result of the discontinued use of those sales
channels, together with reduced third-party royalty expense of $0.2 million associated with Patron
Edge, our ticketing software.
24
Cost of services
Cost of services is principally comprised of human resource costs, including stock-based
compensation, third-party contractor expenses, data expenses and classroom rentals. Additionally,
cost of services includes an allocation of facilities and depreciation expense and other costs
incurred in providing consulting, installation, implementation, donor prospect research and data
modeling services and customer training. Cost of services of $8.1 million in the second quarter of
2006, including $0.1 million in stock-based compensation, increased $1.0 million, or 14.1%,
compared with $7.1 million in the second quarter of 2005, which included $0.1 million in
stock-based compensation. Excluding stock-based compensation, these amounts represent 51.0% and
49.6% of total services revenue for the second quarter of 2006 and 2005, respectively. Compared
with the second quarter of 2005, the increase is primarily related to salary, benefit, and bonus
expense, including allocated costs, which increased $0.7 million.
Further analysis of cost of services is provided below; however, the costs presented are before the
inclusion of various allocable corporate costs and stock-based compensation. For a tabular
presentation of the revenues and direct costs associated with our consulting and education services
and analytic services operating segments, see Note 12 of the Notes to the unaudited consolidated
financial statements.
Cost of revenue in providing consulting, installation, implementation, and customer training
(consulting and education services) was $7.2 million and $6.2 million in the second quarter of 2006
and 2005, respectively. These amounts represent 52.8% and 49.4% of the related revenue in the
second quarters of 2006 and 2005, respectively. The increased cost of consulting and education
services is primarily the result of a $0.7 million increase over the second quarter of 2005 for
salary, benefit and bonus expense, as we added headcount to meet increased customer demand for
these services.
Cost of revenue in providing donor prospect research and data modeling services (analytic services)
was $0.9 million in both the second quarters of 2006 and 2005. These amounts represent 46.5% and
56.7% of related revenues for the second quarter of 2006 and 2005, respectively. Margin on
analytic services improved versus the second quarter of 2005 as we were able to deliver more
services with relatively fixed costs.
Cost of maintenance
Cost of maintenance is primarily comprised of human resource costs, including stock-based
compensation, third-party contractor expenses, third-party royalty costs and data expenses, an
allocation of our facilities and depreciation expenses, and other costs incurred in providing
support and services to our customers. Cost of maintenance of $3.5 million in the second quarter
of 2006 increased $0.8 million, or 29.6%, compared with $2.7 million in the second quarter of 2005.
Excluding stock-based compensation, these amounts represent 17.2% and 15.2% of maintenance revenue
for the second quarter of 2006 and 2005, respectively. The increase in cost of maintenance is
principally the result of a $0.5 million increase compared with the second quarter of 2005 in
salary, benefit, and bonus expense due to increased headcount required to support the higher
volumes of these services, and a $0.2 million increase in royalty payments based on maintenance.
Cost of subscriptions
Cost of subscriptions is primarily comprised of human resource costs, including stock-based
compensation, third-party royalty and data expenses, hosting expenses, an allocation of our
facilities and depreciation expenses, and other costs incurred in providing support and services to
our customers. Cost of subscriptions of $0.6 million in the second quarter of 2006 increased $0.2
million, or 50.0%, compared with $0.4 million in the second quarter of 2005. Excluding stock-based
compensation, these amounts represent 23.2% and 25.3% of subscriptions revenue for the second
quarter of 2006 and 2005, respectively. The increase in cost of subscriptions is principally due
to a $0.1 million increase in salary, benefit, and bonus expense in the second quarter of 2006.
Cost of other revenue
Cost of other revenue includes human resource costs, costs of business forms, hardware costs,
reimbursable expenses relating to the performance of services at customer locations, and an
allocation of facilities and depreciation expenses. Cost of other revenue of $1.4 million in the
second quarter of 2006 increased $0.2 million, or 16.7%, compared with $1.2 million in the second
quarter of 2005. These amounts represent 106.6% and 97.2% of other revenue for the second quarter
of 2006 and 2005, respectively. The increase in cost of other revenue is due to a $0.2 million
increase in billable travel costs in the second quarter of 2006.
25
Operating expenses
Sales and marketing
Sales and marketing expenses include human resource costs sales and marketing organizations, travel
and entertainment expenses, sales commissions, advertising and marketing materials, public
relations, stock-based compensation, and an allocation of facilities and depreciation expenses.
Sales and marketing costs of $10.5 million in the second quarter of 2006, including $0.2 million of
stock-based compensation, increased $1.6 million or 18.0% over second quarter 2005 costs of $8.9
million, including $0.1 million in stock-based compensation. Excluding stock-based compensation
costs, sales and marketing expenses represent 21.2% and 20.6% of total revenue in the second
quarter of 2006 and 2005, respectively. The increase in sales and marketing costs is principally
due to payment of $0.8 million more in the second quarter of 2006 related to higher commissionable
sales. Additionally, salary, benefit, and bonus expense increased $0.4 million due to increases in
the size and skill set of our sales force, and we incurred $0.3 million additional travel expenses.
Research and development
Research and development expenses include human resource costs, third-party contractor expenses,
software development tools, stock-based compensation, an allocation of facilities and depreciation
expenses and other expenses in developing new products and upgrading and enhancing existing
products. Research and development costs of $5.9 million in the second quarter of 2006, including
$0.2 million of stock-based compensation, increased $0.6 million or 11.3% over second quarter 2005
costs of $5.3 million. Excluding stock-based compensation costs, research and development expenses
represented 11.7% and 12.4% of total revenue in the second quarter of 2006 and 2005, respectively.
The increase in research and development costs is principally due to a $0.3 million increase in
salary, benefit, and bonus expense as a result of headcount increases to support enhancements to
our existing products and development of new product offerings, and was coupled with $0.1 million
increase in offshore development and other costs. However, research and development continues to
fall as a percentage of revenue, in part because revenue continues to increase, but also because we
have changed our mix of new hires to include more recent college graduates than in prior periods.
General and administrative
General and administrative expenses consist primarily of human resource costs for general corporate
functions, including finance, accounting, legal, human resources, senior executives, and corporate
development; third-party professional fees; offering costs; bad debt expenses; insurance;
stock-based compensation; and other administrative expenses. General and administrative costs of
$5.6 million in the second quarter of 2006, including $1.4 million of stock-based compensation,
decreased $1.5 million or 21.1% over second quarter 2005 costs of $7.1 million, which included $3.1
million of stock-based compensation expense. Excluding stock-based compensation, our second
quarter 2006 general and administrative expenses of $4.2 million increased by $0.2 million, or
5.0%, over the second quarter of 2005 expense of $4.0 million, and represent 8.6% and 9.4% of total
revenue in the second quarter of 2006 and 2005, respectively. The increase in general and
administrative costs is principally due to $0.3 million in increased salary, benefit and bonus
expense as we increased headcount in support of our growth, offset by $0.2 million lower spending
on travel.
Stock-based compensation
Beginning on January 1, 2006, we adopted SFAS No. 123(R), using the modified prospective transition
method. The adoption of SFAS No. 123(R) had a significant impact on our results of operations.
Our consolidated statements of operations for the three months ended June 30, 2006 and 2005
includes $2.0 million and $3.3 million of stock-based compensation expense, respectively,
illustrated below:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Three months ended |
|
(in thousands) |
|
June 30, 2006 |
|
|
June 30, 2005 |
|
|
|
|
Cost of services |
|
$ |
140 |
|
|
$ |
83 |
|
Cost of maintenance |
|
|
29 |
|
|
|
11 |
|
Cost of subscriptions |
|
|
5 |
|
|
|
|
|
Sales and marketing |
|
|
220 |
|
|
|
70 |
|
Research and development |
|
|
188 |
|
|
|
42 |
|
General and administrative |
|
|
1,420 |
|
|
|
3,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense |
|
$ |
2,002 |
|
|
$ |
3,320 |
|
|
|
|
26
Prior to the adoption of SFAS No. 123(R), we accounted for options under APB No. 25. Because
of certain provisions in certain of the option agreements, we were required to account for these
options under variable accounting. Variable accounting requires marking these options
to the market price on the reporting date and recognizing a corresponding expense or benefit in the
financial statements.
We have separately disclosed stock-based compensation throughout this discussion and in our
financial statements and we have shown a reconciliation of stock-based compensation as it relates
to all affected categories of expenses above. We have discussed our segment costs on a basis
excluding stock-based compensation, because we believe this presentation allows investors better
understandability and comparability of our operating expenses. Had stock-based compensation been
included in each segment discussed above, the results as a percentage of segment revenue and as a
percentage of total revenue would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2006, restated (see Note 2) |
|
|
Three months ended June 30, 2005, restated (see Note 2) |
|
|
|
Without |
|
|
Impact of |
|
|
With |
|
|
Without |
|
|
Impact of |
|
|
With |
|
|
|
stock-based |
|
|
stock-based |
|
|
stock-based |
|
|
stock-based |
|
|
stock-based |
|
|
stock-based |
|
|
|
compensation |
|
|
compensation |
|
|
compensation |
|
|
compensation |
|
|
compensation |
|
|
compensation |
|
(as a percent of segment revenue) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license fees |
|
|
5.5 |
% |
|
|
|
% |
|
|
5.5 |
% |
|
|
13.7 |
% |
|
|
|
% |
|
|
13.7 |
% |
Cost of services |
|
|
51.0 |
|
|
|
0.9 |
|
|
|
51.9 |
|
|
|
49.6 |
|
|
|
0.6 |
|
|
|
50.2 |
|
Cost of maintenance |
|
|
17.2 |
|
|
|
0.1 |
|
|
|
17.3 |
|
|
|
15.2 |
|
|
|
|
|
|
|
15.2 |
|
Cost of subscriptions |
|
|
23.2 |
|
|
|
0.2 |
|
|
|
23.4 |
|
|
|
25.3 |
|
|
|
|
|
|
|
25.3 |
|
Cost of other revenue |
|
|
106.6 |
|
|
|
|
|
|
|
106.6 |
|
|
|
97.2 |
|
|
|
|
|
|
|
97.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(as a percent of total revenue) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
21.2 |
% |
|
|
0.5 |
% |
|
|
21.7 |
% |
|
|
20.6 |
% |
|
|
0.2 |
% |
|
|
20.8 |
% |
Research and development |
|
|
11.7 |
|
|
|
0.4 |
|
|
|
12.1 |
|
|
|
12.4 |
|
|
|
0.1 |
|
|
|
12.5 |
|
General and administrative |
|
|
8.6 |
|
|
|
3.0 |
|
|
|
11.6 |
|
|
|
9.4 |
|
|
|
7.3 |
|
|
|
16.7 |
|
Interest income
Interest income during the three months ended June 30, 2006 and 2005 was solely related to our
average cash balances for the respective periods. For the three months ended June 30, 2006 and
2005, we recorded interest income of $0.2 million and $0.3 million, respectively.
Interest expense
Our only interest expense during the three months ended June 30, 2006 and 2005 was solely related
to the amortization of deferred financing fees associated with our revolving credit facility which
we had not utilized as of June 30, 2006.
Other expense, net
Other expense consists of foreign exchange gains and losses and miscellaneous non-operating income
and expense items. Other expense, from foreign exchange activity, was $0.1 million in the second
quarter of 2006 compared to a gain of $0.1 million in the same period of 2005.
Income tax provision
We record income tax expense in our consolidated financial statements based on an estimated annual
effective income tax rate, prior to any quarter-specific benefits or detriments. Based on our
current assessment of our tax position, we expect an annual effective tax rate of 39.3% in 2006,
excluding period-specific items. Our actual effective tax rate for the three months ended June 30,
2006 was 38.4%. We had an annual effective tax rate of 28.5% in 2005, which differed from our 2005
quarterly rates due to the recording of estimated tax credits and offsetting valuation allowances
in certain quarters. The effective tax rate for the three-month period ended June 30, 2005 was
9.4%, a period in which we released $2.9 million of an existing valuation allowance against state
income tax credits, resulting in a credit to our income tax expense.
Our deferred tax assets and liabilities are recorded at an amount based upon a blended U.S. federal
income tax rate of 34.9%. This U.S. federal income tax rate is based on our expectation that our
deductible and taxable temporary differences will reverse over a period of years during which,
except for 2006 due to anticipated stock option exercises and other reductions in income, we will
have annual taxable income exceeding $10.0 million per year. If our results of operations fall
below that threshold in the future, we will adjust our deferred tax assets and liabilities to an
amount
27
reflecting a reduced expected U.S. federal income tax rate, consistent with the
corresponding expectation of lower taxable income. If such change is determined to be appropriate,
it will affect the provision for income taxes during the period that the determination is made.
Comparison of the six months ended June 30, 2006 and 2005
Revenue
Total revenue of $92.2 million for the six months ended June 30, 2006 increased by $12.2 million,
or 15.3%, compared with $80.0 million in the comparable period in 2005. The increase is due in
part to growth in services and license fees to new and existing customers. Also contributing to
the growth is revenue from new maintenance contracts associated with the license agreements and
revenue from our subscription offerings.
License fees
We derive revenue from license fees by selling rights to use our software products, typically under
a perpetual license agreement. Revenue from license fees of $16.5 million in the six months ended
June 30, 2006 increased by $1.7 million, or 11.5%, compared with $14.8 million in the comparable
period in 2005. These amounts represent 17.8% and 18.5% of total revenue for the first half of
2006 and 2005, respectively. The increase in license fees in the six months ended June 30, 2006 is
attributable to a $1.4 million increase in product sales to new customers, including those obtained
in the acquisition of Campagne Associates, Ltd., and a $0.3 million increase in product sales to
our installed customer base. The license fees charged for our software products have remained
relatively unchanged for this period. Of the overall $1.7 million increase in license fees, $1.4
million came from sales of our core software applications, and the remainder came from small
increases in sales of our internet and analytic solutions.
Services
Revenue from services includes fees received from customers for consulting, installation,
implementation, training, donor prospect research and data modeling services. Revenue from
services of $29.4 million for the six months ended June 30, 2006 increased by $3.8 million, or
14.8%, compared with $25.6 million in the comparable period of 2005. These amounts represent 31.9%
and 32.0% of total revenue for the first half of 2006 and 2005, respectively. The revenue increase
is principally the result of increased volume of services provided and to a lesser extent the
result of rate increases in the second half of 2005. Consulting, installation, training and
implementation services involve converting data from a customers existing system, assistance in
file set-up and system configuration, requisite product training, and/or process re-engineering.
These services account for $26.1 million and $22.7 million in the first half of 2006 and 2005,
respectively, representing 88.9% and 88.7%, respectively, of total services revenue. Donor
prospect research and data modeling services involve the performance of assessments of customer
donor (current and prospective) information, which enables the customer to more effectively target
its fundraising activities. We perform these assessments using our proprietary analytical and data
enrichment tools. These services account for $3.3 million and $2.9 million in the first half of
2006 and 2005, respectively, and represent 11.1% and 11.3%, respectively, of total services revenue
for that period.
Maintenance
Revenue from maintenance is comprised of annual fees derived from maintenance contracts associated
with new software licenses and annual renewals of existing maintenance contracts. These contracts
provide customers updates, enhancements, upgrades to our software products, and online, telephone
and email support. Maintenance revenue of $39.0 million in the six months ended June 30, 2006
increased $4.4 million, or 12.7%, compared with $34.6 million in the comparable period of 2005.
These amounts represent 42.3% and 43.2% of our total revenue for the first half of 2006 and 2005,
respectively. The increase in maintenance revenue in the first half of 2006 over the same period
in 2005 is comprised of $4.3 million from new maintenance contracts associated with new license
agreements, including new products, $1.4 million from maintenance contract inflationary rate
adjustments, and $0.4 million from maintenance agreements on customers acquired as part of the
purchase of Campagne Associates, Ltd., offset by $1.7 million of maintenance contracts that were
not renewed.
Subscriptions
Revenue from subscriptions is principally comprised of revenue from hosted fundraising software
solutions, certain data services, our online subscription training offerings, and hosting of client
internet sites. Subscriptions revenue of $4.8 million in the six months ended June 30, 2006
increased $1.8 million, or 60.0%, compared with $3.0 million in the comparable period of 2005.
These amounts represent 5.2% and 3.7% of our total revenue for the first half of 2006 and
28
2005,
respectively. The increase in subscriptions revenue in the first half of 2006 over the same period
in 2005 is comprised primarily of a $0.7 million increase in revenue from our online analytics
products, a $0.5 million increase in revenue from our hosting activities, and a $0.3 million
increase in revenue from all our other online solutions.
Other revenue
Other revenue includes the sale of business forms that are used in conjunction with our software
products; reimbursement of travel and related expenses, primarily incurred during the performance
of services at customer locations; fees from user conferences; and sale of hardware in conjunction
with The Patron Edge. Other revenue of $2.6 million in the six months ended June 30, 2006
increased $0.5 million, or 23.8%, compared with $2.1 million in the comparable period of 2005.
These amounts represent 2.8% and 2.6% of our total revenue for the first half of 2006 and 2005,
respectively. The increase in revenue is primarily from a $0.3 million increase in reimbursable
travel costs related to our services business and a $0.1 million increase in our business forms
sales.
Cost of revenue
Cost of license fees
Cost of license fees includes third-party software royalties, variable reseller commissions and
costs of shipping software products to our customers. Cost of license fees of $1.2 million for the
six months ended June 30, 2006 decreased by $0.9 million, or 42.9%, compared with $2.1 million in
the comparable period of 2005. These amounts represent 7.2% and 14.1% of license fee revenue in
the first half of 2006 and 2005, respectively. The decreased cost of license fees compared to the
first half of 2006 is primarily due to the fact that reseller commissions have declined by $0.8
million as a result of the discontinued use of those sales channels.
Cost of services
Cost of services is principally comprised of human resource costs, including stock-based
compensation charges, third-party contractor expenses, data expenses and classroom rentals.
Additionally, cost of services includes an allocation of facilities and depreciation expense and
other costs incurred in providing consulting, installation, implementation, donor prospect research
and data modeling services and customer training. Cost of services of $16.3 million in the six
months ended June 30, 2006, including $0.3 million in stock-based compensation, increased $2.7
million, or 19.9%, compared with $13.6 million in the comparable period of 2005, which included
$0.2 million in stock-based compensation. Excluding stock-based compensation, these amounts
represent 54.3% and 52.5% of total services revenue for the first half of 2006 and 2005,
respectively. The increase in cost of services compared with the first half of 2005 is primarily
the result of a $1.9 million increase in salary, benefit, and bonus expense, including allocated
costs. In addition, travel expense in the first half of 2006 increased by $0.3 million compared
with the same period in the prior year, and recruiting and relocation costs increased by $0.2
million.
Further analysis of cost of services is provided below; however, the costs presented are before the
inclusion of various allocable corporate costs and stock-based compensation. For a tabular
presentation of the revenues and direct costs associated with our consulting and education services
and analytic services operating segments, see Note 12 of the Notes to the unaudited consolidated
financial statements.
Cost of revenue in providing consulting, installation, implementation, and customer training
(consulting and education services) was $14.4 million and $11.7 million in the first half of 2006
and 2005, respectively. These amounts represent 55.0% and 51.5% of the related revenue in the
first half of 2006 and 2005, respectively. The increased cost of consulting and education services
is primarily the result of a $2.0 million increase over the comparable period of 2005 for salary,
benefits and bonus expense, as we added headcount to meet increased customer demand for these
services, and $0.1 million increases in each of recruiting, travel, use of outside consultants, and
training supplies.
Cost of revenue in providing donor prospect research and data modeling services (analytic services)
was $1.9 million in the first half of both 2006 and 2005. These amounts represent 57.4% and 66.5%
of related revenues for the first half of 2006 and 2005, respectively. The improved margin for
analytic services compared to the same period in 2006 is the result of delivering a higher volume
while maintaining relatively fixed costs.
Cost of maintenance
Cost of maintenance is primarily comprised of human resource costs, including stock-based
compensation, third-party contractor expenses, third-party royalty costs and data expenses, an
allocation of our facilities and depreciation expenses,
29
and other costs incurred in providing
support and services to our customers. Cost of maintenance of $6.7 million in the six months ended
June 30, 2006, including $0.1 million in stock-based compensation, increased $1.4 million, or
26.4%, compared with $5.3 million in the comparable period of 2005. Excluding stock-based
compensation, these amounts represent 16.9% and 15.3% of maintenance revenue for the first half of
2006 and 2005, respectively. The increased cost of maintenance compared with the first half of
2005 is primarily the result of a $0.9 million increase in salary, benefit, and bonus expense due
to increased headcount required to support the higher volumes of these services. In addition,
third-party software royalty expenses increased $0.5 million related to renewal of maintenance
contracts related to our ticketing solution.
Cost of subscriptions
Cost of subscriptions is primarily comprised of human resource costs, including stock-based
compensation, third-party royalty and data expenses, hosting expenses, an allocation of our
facilities and depreciation expenses, and other costs incurred in providing support and services to
our customers. Cost of subscriptions of $1.1 million in the six months ended June 30, 2006
increased $0.3 million, or 37.5%, compared with $0.8 million in the comparable period of 2005.
Excluding stock-based compensation, these amounts represent 23.3% and 28.0% of subscriptions
revenue for the first half of 2006 and 2005, respectively. The increased cost of subscriptions
compared with the first half of 2005 is the result of a $0.3 million increase in salary, benefits,
and bonus expense as a result of higher headcount to support the growth rate of revenue from
subscriptions.
Cost of other revenue
Cost of other revenue includes human resource costs, costs of business forms, hardware costs,
reimbursable expenses relating to the performance of services at customer locations, and an
allocation of facilities and depreciation expenses. Cost of other revenue of $2.5 million in the
six months ended June 30, 2006 increased $0.6 million, or 31.6%, compared with $1.9 million in the
comparable period of 2005. These amounts represent 95.7% and 93.0% of other revenue for the first
half of 2006 and 2005, respectively. The increased cost of other revenue compared with the first
half of 2005 is primarily the result of a $0.5 million increase in billable travel costs and a
increase of $0.1 million for costs of hardware and data cleansing.
Operating expenses
Sales and marketing
Sales and marketing expenses include human resource costs of our sales and marketing organizations,
travel and entertainment expenses, sales commissions, advertising and marketing materials, public
relations, stock-based compensation, and an allocation of facilities and depreciation expenses.
Sales and marketing costs of $19.8 million in the six months ended June 30, 2006, including $0.4
million of stock-based compensation, increased $3.2 million or 19.3% over first half 2005 costs of
$16.6 million, including $0.1 million in stock-based compensation. Excluding stock-based
compensation costs, sales and marketing expenses represent 21.0% and 20.6% of total revenue in the
first half of 2006 and 2005, respectively. The increase in sales in marketing costs compared with
the first half of 2005 is the result of a $1.0 million increase in salary, benefits, and bonus
expense due to increases in the size and skill set of our sales force, combined with $1.0 million
higher expense related to higher commissionable sales, and a increase of $0.4 million for travel
expenses.
Research and development
Research and development expenses include human resource costs, third-party contractor expenses,
software development tools, stock-based compensation, an allocation of facilities and depreciation
expenses and other expenses in developing new products and upgrading and enhancing existing
products. Research and development costs of $11.9 million in the six months ended June 30, 2006,
including $0.4 million of stock-based compensation, increased $1.5 million or 14.4% over first half
2005 costs of $10.4 million, including $0.1 million in stock-based compensation. Excluding
stock-based compensation costs, research and development expenses represented 12.5% and 12.9% of
total revenue in the first half of 2006 and 2005, respectively. The increase in research and
development costs compared with the first half of 2005 is primarily due to a $0.9 million increase
in salary, benefits, and bonus expense as a result of headcount increases to support
enhancements to our existing products and development of new product offerings, and is coupled with
$0.2 million increase in offshore development and other costs.
30
General and administrative
General and administrative expenses consist primarily of human resource costs for general corporate
functions, including finance, accounting, legal, human resources, senior executives, and corporate
development; third-party professional fees; offering costs; bad debt expense; insurance;
stock-based compensation; and other administrative expenses. General and administrative expenses
of $11.1 million in the six months ended June 30, 2006, including $2.8 million of stock-based
compensation, increased $8.0 million over first half 2005 costs of $3.1 million, which included a
net benefit of $4.8 million in stock-based compensation. Excluding stock-based compensation, our
first half 2006 general and administrative expenses of $8.3 million increased by $0.5 million, or
6.4%, over the first half of 2005 expense of $7.8 million, and represent 9.0% and 9.8% of total
revenue in the first half of 2006 and 2005, respectively. The increase in general and
administrative costs compared with the first half of 2006 is principally due to $0.7 million in
increased salary, benefits and bonus expense as we increased headcount in support of our growth,
coupled with $0.2 million increased spending on expenses associated with operating as a public
company and higher recruiting and other costs, offset by $0.3 million less spending on other
administrative costs and $0.2 million less spending on outside services.
Stock-based compensation
Beginning on January 1, 2006, we adopted SFAS No. 123(R), using the modified prospective transition
method. The adoption of SFAS No. 123(R) had a significant impact on our results of operations.
Our consolidated statements of operations for the six months ended June 30, 2006 and 2005 includes
$4.0 million of stock-based compensation expense and $4.3 million of stock-based compensation
benefit, respectively, illustrated below:
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
Six months ended |
|
(in thousands) |
|
June 30, 2006 |
|
|
June 30, 2005 |
|
|
|
|
Cost of services |
|
$ |
280 |
|
|
$ |
174 |
|
Cost of maintenance |
|
|
58 |
|
|
|
22 |
|
Cost of subscriptions |
|
|
9 |
|
|
|
|
|
Sales and marketing |
|
|
440 |
|
|
|
144 |
|
Research and development |
|
|
379 |
|
|
|
97 |
|
General and administrative |
|
|
2,810 |
|
|
|
(4,757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total expense (benefit) |
|
$ |
3,976 |
|
|
$ |
(4,320 |
) |
|
|
|
Prior to the adoption of SFAS No. 123(R), we accounted for options under APB No. 25. Because
of certain provisions in certain of the option agreements, we were required to account for these
options under variable accounting. Variable accounting requires marking these options to the
market price on the reporting date and recognizing a corresponding expense or benefit in the
financial statements.
We have separately disclosed stock-based compensation throughout this discussion and in our
financial statements and we have shown a reconciliation of stock-based compensation as it relates
to all affected categories of expenses above. We have discussed our segment costs on a basis
excluding stock-based compensation, because we believe this presentation allows investors better
understandability and comparability of our operating expenses. Had stock-based compensation been
included in each segment discussed above, the results as a percentage of segment revenue and as a
percentage of total revenue would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2006, restated (see Note 2) |
|
|
Six months ended June 30, 2005, restated (see Note 2) |
|
|
|
Without |
|
|
Impact of |
|
|
With |
|
|
Without |
|
|
Impact of |
|
|
With |
|
|
|
stock-based |
|
|
stock-based |
|
|
stock-based |
|
|
stock-based |
|
|
stock-based |
|
|
stock-based |
|
|
|
compensation |
|
|
compensation |
|
|
compensation |
|
|
compensation |
|
|
compensation |
|
|
compensation |
|
(as a percent of
segment revenue) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license fees |
|
|
7.2 |
% |
|
|
|
% |
|
|
7.2 |
% |
|
|
14.1 |
% |
|
|
|
% |
|
|
14.1 |
% |
Cost of services |
|
|
54.3 |
|
|
|
1.0 |
|
|
|
55.3 |
|
|
|
52.5 |
|
|
|
0.7 |
|
|
|
53.2 |
|
Cost of maintenance |
|
|
16.9 |
|
|
|
0.2 |
|
|
|
17.1 |
|
|
|
15.3 |
|
|
|
|
|
|
|
15.3 |
|
Cost of subscriptions |
|
|
23.3 |
|
|
|
0.2 |
|
|
|
23.5 |
|
|
|
28.0 |
|
|
|
|
|
|
|
28.0 |
|
Cost of other revenue |
|
|
95.7 |
|
|
|
|
|
|
|
95.7 |
|
|
|
93.0 |
|
|
|
|
|
|
|
93.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(as a percent of total revenue) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
21.0 |
% |
|
|
0.5 |
% |
|
|
21.5 |
% |
|
|
20.6 |
% |
|
|
0.2 |
% |
|
|
20.8 |
% |
Research and development |
|
|
12.5 |
|
|
|
0.4 |
|
|
|
12.9 |
|
|
|
12.9 |
|
|
|
0.1 |
|
|
|
13.0 |
|
General and administrative |
|
|
9.0 |
|
|
|
3.0 |
|
|
|
12.0 |
|
|
|
9.8 |
|
|
|
(5.9 |
) |
|
|
3.9 |
|
31
Interest income
Interest income during the six months ended June 30, 2006 and 2005 was solely related to our
average cash balances in the respective periods. For the six months ended June 30, 2006 and 2005,
we recorded interest income of $0.4 million and $0.6 million, respectively.
Interest expense
Our only interest expense during the six months ended June 30, 2006 and 2005 was solely related to
the amortization of deferred financing fees associated with our revolving credit facility which we
had not utilized as of June 30, 2006.
Other expense, net
Other expense consists of foreign exchange gains and losses and miscellaneous non-operating income
and expense items. Other expense, from foreign exchange activity, was $0.1 million in the six
months ended June 30, 2006 compared with a nominal loss in the same period of 2005.
Income tax provision
We record income tax expense in our consolidated financial statements based on an estimated annual
effective income tax rate, prior to any quarter-specific benefits or detriments. Our actual
effective tax rate for the six months ended June 30, 2006 was 38.7%. We had an annual effective
tax rate of 28.5% in 2005, which differed from our quarterly rates due to the recording of
estimated tax credits and offsetting valuation allowances in certain quarters. The effective tax
rate for the six months ended June 30, 2005 was 27.7%, a period in which we released $2.9 million
of an existing valuation allowance against state income tax credits, resulting in a credit to our
income tax expense.
Our deferred tax assets and liabilities are recorded at an amount based upon a blended U.S. federal
income tax rate of 34.9%. This U.S. federal income tax rate is based on our expectation that our
deductible and taxable temporary differences will reverse over a period of years during which,
except for 2006 due to actual stock option exercises and other reductions in income, we will have
annual taxable income exceeding $10.0 million per year. If our results of operations fall below
that threshold in the future, we will adjust our deferred tax assets and liabilities to an amount
reflecting a reduced expected U.S. federal income tax rate, consistent with the corresponding
expectation of lower taxable income. If such change is determined to be appropriate, it will
affect the provision for income taxes during the period that the determination is made.
Liquidity and capital resources
At June 30, 2006, cash and cash equivalents totaled $30.9 million, compared to $22.7 million at
December 31, 2005. The $8.2 million increase in cash and cash equivalents during the first six
months of 2006 is the result of $19.6 million of cash generated from operations and $9.2 million in
proceeds and tax benefits from the exercise of stock options, partially offset by $7.0 million used
to purchase our stock, $6.1 million used in the acquisition of Campagne Associates, Ltd., $6.1
million in dividends paid to stockholders, and $1.4 million used to purchase fixed assets.
On September 30, 2004, we entered into a $30.0 million revolving credit facility. Amounts borrowed
under this facility are available for working capital and general corporate purposes. No amounts
were drawn under the facility at closing and there is no outstanding balance as of the date of this
filing. Amounts borrowed under the new $30.0 million revolving credit facility bear interest, at
our option, at a variable rate based on the prime rate, federal funds rate or LIBOR plus a margin
of between 0.5% and 2.0% based on our consolidated leverage ratio. Amounts outstanding under the
new facility are guaranteed by our operating subsidiaries and the facility is subject to
restrictions on certain types of transactions and other covenants, including a maximum leverage
ratio, minimum interest coverage ratio and minimum net worth. Additionally, the credit facility
restricts our ability to declare and pay dividends and repurchase our common stock. When there are
no outstanding amounts under the credit facility, we may pay dividends to stockholders and/or
repurchase our common stock in an aggregate amount of up to 100% of cash on hand as of the most
recent fiscal quarter-end. When there are outstanding amounts under the credit facility, we may
pay dividends and/or repurchase our common stock in an
aggregate amount of up to (1) 35% of cash on hand as of the most recent fiscal quarter-end, if the
ratio of total indebtedness to EBITDA (as calculated under the credit facility) as of the most
recent quarter end is less than 1.00 to 1.00, or (2) 25% of cash on hand as of the most recent
fiscal quarter end, if such ratio is equal to or greater than 1.00 to 1.00. Additionally, in order
to pay dividends and/or repurchase our common stock, we must be in compliance with the credit
32
facility, including each of the financial covenants and we must have cash on hand of at least
$3,000,000, each after giving effect to the payment of dividends and/or the repurchase of our
common stock. The credit facility has a three-year term expiring September 30, 2007.
Our principal source of liquidity is our operating cash flow, which depends on continued customer
renewal of our maintenance and support agreements and market acceptance of our products and
services. Based on current estimates of revenue and expenses, we believe that the currently
available sources of funds and anticipated cash flows from operations will be adequate to finance
our operations and anticipated capital expenditures for the foreseeable future. Dividend payments
are not guaranteed and our board of directors may decide, in its absolute discretion, at any time
and for any reason, not to declare or pay further dividends and/or repurchase our common stock.
Operating cash flow
Net cash provided by operating activities of $19.6 million in the six-month period ended June 30,
2006 was essentially flat compared with $19.3 million reported in the six-month period ended June
30, 2005, after giving effect to the impact of applying the modified prospective transition method
for adoption of SFAS 123(R) as noted below. Throughout both periods, our cash flows from
operations were derived principally from: (i) our earnings from on-going operations prior to
non-cash (benefits) expenses such as depreciation and amortization; (ii) the tax benefit associated
with our deferred tax asset, which reduces our cash outlay for income tax expense; (iii)
adjustments to our provision for sales returns and allowances; and (iv) changes in our working
capital, which are primarily composed of net collections of accounts receivable and increases in
deferred revenue (collectively representing an increase in working capital of $1.8 million and $2.3
million in the six month periods ended June 30, 2006 and 2005, respectively), together with changes
in our balances of accounts payable, accrued expenses, accrued liabilities and other current assets
(collectively representing an increase in working capital of $2.0 million and $5.1 million in the
six-month periods ended June 30, 2006 and 2005, respectively) due to timing of payments. In
addition, under the modified prospective method of implementing SFAS 123(R), which we adopted in
the first quarter of 2006, the excess windfall tax benefits on the exercise of stock options are
shown as a financing inflow rather than as an operating inflow in the current year period.
However, as required under that transition method, prior year periods are not restated to conform
to the current presentation.
Investing cash flow
Net cash used in the six-month period ended June 30, 2006 for investing activities was $7.5 million
compared to $1.4 million of net cash used in investing activities during the six-month period ended
June 30, 2005. The increase is principally due to the acquisition of Campagne Associates, Ltd., a
New Hampshire-based provider of fundraising software in January 2006.
Financing cash flow
Net cash used in financing activities for the six-month period ended June 30, 2006 was $3.9
million, comprised of $7.0 million used for repurchases of our stock and dividend payments of $6.1
million to stockholders, offset by proceeds of $4.8 million from the exercise of stock options and
$4.4 million of excess windfall tax benefits on those exercises. Comparatively, net cash used in
financing activities for the six-month period ended June 30, 2005 was $9.6 million, comprised of
$10.6 million for purchases of our stock and dividend payments of $4.3 million to stockholders,
offset by proceeds of $5.4 million from the exercise of stock options. As noted above, under the
modified prospective method of implementing SFAS 123(R), we are showing current year, but not prior
year, excess windfall tax benefits on the exercise of stock options in the financing section of the
consolidated statement of cash flows.
Commitments and contingencies
As of June 30, 2006, we had no outstanding debt.
At June 30, 2006 we had future minimum lease commitments of $21.5 million as follows (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
2006 |
|
2007 |
|
2008-2009 |
|
2010 and after |
|
Totals |
Operating leases |
|
$ |
2,547 |
|
|
$ |
5,028 |
|
|
$ |
10,607 |
|
|
$ |
3,332 |
|
|
$ |
21,514 |
|
These commitments have not been reduced by the future minimum lease commitments under various
sublease agreements extended through 2008.
33
In addition, we have a commitment of $0.2 million payable annually through 2009 for certain naming
rights on a stadium in Charleston, South Carolina. We incurred expense under this agreement of
$0.1 million for each of the six-month periods ended June 30, 2006 and 2005.
We utilize third-party relationships in conjunction with our products. The contractual
arrangements vary in length from one to three years. In certain cases, these arrangements require
a minimum annual purchase commitment. The total minimum purchase commitment under these
arrangements is approximately $0.4 million through 2008. We incurred expense under these
arrangements of $0.3 million in both the six months ended June 30, 2006 and 2005, respectively.
Foreign currency exchange rates
Approximately 11.2% of our total net revenue for the six-month period ended June 30, 2006 was
derived from operations outside the United States. We do not have significant operations in
countries in which the economy is considered to be highly inflationary. Our financial statements
are denominated in U.S. dollars and, accordingly, changes in the exchange rate between foreign
currencies and the U.S. dollar will affect the translation of our subsidiaries financial results
into U.S. dollars for purposes of reporting our consolidated financial results. The accumulated
currency translation adjustment, recorded as a separate component of stockholders equity, was $0.2
million at June 30, 2006 and $0.1 million at December 31, 2005.
The vast majority of our contracts are entered into by our U.S. or U.K. entities. The contracts
entered into by the U.S. entity are almost always denominated in U.S. dollars and contracts entered
into by our U.K. subsidiary are generally denominated in pounds sterling. In recent years, the
U.S. dollar has weakened against many non-U.S. currencies, including the pound. During this
period, our revenues generated in the United Kingdom have increased. Though we do not believe our
increased exposure to currency exchange rates has had a material impact on our results of
operations or financial position, we intend to continue to monitor such exposure and take action as
appropriate.
Cautionary statement
We operate in a highly competitive environment that involves a number of risks, some of which are
beyond our control. The following statement highlights some of these risks.
Statements contained in this Form 10-Q, which are not historical facts, are or might constitute
forward-looking statements under the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Although we believe the expectations reflected in such forward-looking
statements are based on reasonable assumptions, we can give no assurance that our expectations will
be attained. Forward-looking statements involve known and unknown risks that could cause actual
results to differ materially from expected results. Factors that could cause actual results to
differ materially from our expectations expressed in the report include, among others: the ability
to attract and retain key personnel; risks associated with our dividend policy and stock repurchase
programs; continued success in sales growth; adoption of our products and services by nonprofits;
uncertainty regarding increased business and renewals from existing customers; risk associated with
product concentration; lengthy sales and implementation cycles; economic conditions and
seasonality; competition; risks associated with management of growth; risks associated with
acquisitions; technological changes that make our products and services less competitive; and the
other risk factors set forth from time to time in our SEC filings.
New accounting pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109, Accounting for Income Taxes, (FIN No. 48),
effective for fiscal years beginning after December 15, 2006. The interpretation attempts to
clarify the accounting for uncertainty in income taxes recognized under current GAAP, and also
provides guidance on items such as derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN No. 48 requires evaluation of
uncertain tax positions against a more-likely-than-not recognition threshold, and requires
immediate recognition of positions that exceed that threshold, and immediate derecognition when
conditions change that move a previously recognized position below that threshold. We have not
completed the process of evaluating the impact in future periods of adopting FIN No. 48 and are
therefore unable to disclose the effect that adoption will have on our financial statements.
In June 2005, the FASB issued SFAS Statement No. 154, Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements (SFAS No. 154). SFAS No. 154 changes the requirements
for the accounting for, and reporting of, a change in accounting principle. Previously, most
voluntary changes in accounting principles were required to be recognized by
34
way of a cumulative
effect adjustment within net income during the period of the change. SFAS No. 154 requires
retrospective application to prior periods financial statements, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154
is effective for accounting changes made in fiscal years beginning after December 15, 2005;
however, the Statement does not change the transition provisions of any existing accounting
pronouncements. We do not believe the adoption of SFAS No. 154 will have a material effect on our
financial statements.
The American Jobs Creation Act of 2004 (the AJCA) was enacted on October 22, 2004. The AJCA
repeals an export incentive, creates a new deduction for qualified domestic manufacturing
activities and includes a special one-time deduction of 85% of certain foreign earnings repatriated
to the U.S. In December 2004, the FASB issued FASB Staff Position No. 109-1, Application of FASB
Statement No. 109 (SFAS 109), Accounting for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004 (FSP 109-1). FSP 109-1
clarifies that the manufacturers deduction provided for under the AJCA should be accounted for as
a special deduction in accordance with SFAS 109 and not as a tax rate reduction. While the Company
expects to be able to qualify for the new tax deduction in future years, the Company does not
expect to qualify for the deduction in the current year, as the Company does not expect to have any
taxable income in 2006. We have not completed the process of evaluating the impact in future years
of adopting FAS 109-1 and are therefore unable to disclose the effect that adopting FSP 109-1 will
have on our financial statements.
The FASB also issued FASB Staff Position No. 109-2, Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP
109-2). The AJCA introduces a special one-time dividends received deduction on the repatriation
of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria
are met. FSP 109-2 provides accounting and disclosure guidance for the repatriation provision. We
did not make any repatriation of foreign earnings that qualified for this special tax treatment and
the adoption of FSP 109-2 will have no effect on our financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Due to the nature of our short-term investments and our lack of material debt, we have concluded
that we currently face no material interest risk exposure. Therefore, no quantitative tabular
disclosures are required. For further discussion, see the Foreign currency exchange rates
section beginning on page 32.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed only to
provide reasonable assurance that they will meet their objectives. As of the end of the period
covered by this report, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e))
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and procedures are effective to
provide the reasonable assurance discussed above.
In coming to the conclusion our disclosure controls
and procedures were effective as of the end of the period covered by this Quarterly Report, we
considered, among other things, the estimated impact of the restatement to the financial statements
for the three and six months ended June 30, 2006 and 2005. We have concluded that the accounting
misapplication discussed below and more fully described in Note 2 Restatement of financial
statements in the condensed Notes to the consolidated financial statements, did not constitute a
material weakness in disclosure controls and procedures, or internal controls and procedures over
financial reporting, as of June 30, 2006.
During the preparation of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007,
we determined that SEC Staff Accounting Bulletin 108 (SAB 108) was misapplied in connection with
reporting our consolidated financial position and results of operations as of and for the period
ended December 31, 2006. We have historically recognized maintenance and subscription revenue using
a monthly convention rather than on an actual-days basis. The effect on the statements of
operations of the difference between these two methods has been evaluated in the past and it was
concluded
that the impact was immaterial. However under SAB 108, we should have recorded a one-time
adjustment to our retained earnings to correct for the cumulative impact of using the actual-days
method.
35
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during our last fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
36
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information about shares of common stock repurchased during the three months ended June 30, 2006
under our stock repurchase program announced on July 26, 2005 appears in the table below.
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate |
|
|
|
|
|
|
|
|
|
|
|
Total number |
|
|
dollar value |
|
|
|
|
|
|
|
|
|
|
|
of shares |
|
|
of shares |
|
|
|
|
|
|
|
|
|
|
|
purchased as |
|
|
that may yet |
|
|
|
Total |
|
|
|
|
|
|
part of |
|
|
be |
|
|
|
number of |
|
|
Average |
|
|
publicly |
|
|
purchased |
|
|
|
shares |
|
|
price |
|
|
announced |
|
|
under the |
|
|
|
purchased |
|
|
paid per |
|
|
plans or |
|
|
plan or |
|
Period |
|
(1) |
|
|
share |
|
|
programs |
|
|
programs (2) |
|
Beginning balance, April 1, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,779,841 |
|
April 1, 2006 through April 30, 2006 |
|
|
149 |
|
|
$ |
21.06 |
|
|
|
|
|
|
$ |
21,779,841 |
|
May 1, 2006 through May 31, 2006 |
|
|
36,700 |
|
|
|
19.85 |
|
|
|
36,700 |
|
|
$ |
21,051,346 |
|
June 1, 2006 through June 30, 2006 |
|
|
322 |
|
|
|
19.21 |
|
|
|
|
|
|
$ |
21,051,346 |
|
Total |
|
|
37,171 |
|
|
$ |
19.85 |
|
|
|
36,700 |
|
|
$ |
21,051,346 |
|
|
|
|
(1) |
|
Includes shares withheld by us to satisfy the tax obligations of employees due upon vesting of
restricted stock during the period. |
|
(2) |
|
On July 26, 2005, our Board of Directors approved a stock repurchase program that authorizes
us to repurchase up to $35.0 million of our outstanding shares of common stock. The shares may be
purchased in conjunction with a public offering of our common stock, from time to time on the open
market or in privately negotiated transactions depending upon market condition and other factors,
all in accordance with the requirements of applicable law. There is no set termination date for
this repurchase program. |
Item 4. Submission of Matters to a Vote of Security Holders
The stockholders of the Company voted on three items at the 2006 Annual Meeting of Stockholders
held on June 14, 2006:
|
1. |
|
The election of two directors to terms ending in 2009; |
|
|
2. |
|
Approval of an amendment to Blackbauds 2004 Stock Plan to increase the number
of shares of common stock reserved for issuance thereunder from 1,906,250 to 3,906,250;
and |
|
|
3. |
|
Ratification of PricewaterhouseCoopers LLP as Blackbauds independent
registered public accounting firm. |
The nominees for directors were elected based upon the following votes:
|
|
|
|
|
|
|
|
|
Nominee |
|
Votes for |
|
|
Votes withheld |
|
George H. Ellis |
|
|
40,801,826 |
|
|
|
259,776 |
|
Andrew M. Leitch |
|
|
40,621,814 |
|
|
|
439,788 |
|
Marco W. Hellman continued his term as a director, with a term expiring in 2008, and Marc E.
Chardon and John P. McConnell continued their terms as directors, with terms expiring in 2007.
Blackbauds amendment to the 2004 Stock Plan was approved as follows:
|
|
|
25,083,567
|
|
Votes for approval |
11,327,477
|
|
Votes against |
7,171
|
|
Abstentions |
Ratification of PricewaterhouseCoopers LLP as Blackbauds independent registered public accounting
firm was approved as follows:
|
|
|
40,944,086
|
|
Votes for approval |
111,969
|
|
Votes against |
5,547
|
|
Abstentions |
37
Item 6. Exhibits
Exhibits:
|
31.1 |
|
Certification by the Chief Executive Officer pursuant to Section 240.13a-14 or
section 240.15d-14 of the Securities and Exchange Act of 1934, as amended. |
|
|
31.2 |
|
Certification by the Chief Financial Officer pursuant to Section 240.13a-14 or
section 240.15d-14 of the Securities and Exchange Act of 1934, as amended. |
|
|
32.1 |
|
Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
32.2 |
|
Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly authorized. |
|
|
|
|
|
|
|
BLACKBAUD, INC.
|
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Date:
July 6, 2007
|
|
By:
|
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/s/ Marc E. Chardon |
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|
|
|
Marc E. Chardon |
|
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President and Chief Executive Officer |
|
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|
|
Date:
July 6, 2007
|
|
By:
|
|
/s/ Timothy V. Williams |
|
|
|
|
|
|
|
|
|
Timothy V. Williams |
|
|
|
|
Senior Vice President and Chief Financial Officer |
39
Exhibit 31.1
EXHIBIT 31.1
CERTIFICATION
I, Marc E. Chardon, certify that:
|
1. |
|
I have reviewed this quarterly report on Form 10-Q of Blackbaud, Inc.; |
|
|
2. |
|
Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit
to state a material fact necessary to make the
statements made, in light of the circumstances under
which such statements were made, not misleading with
respect to the period covered by this quarterly report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and
other financial information included in this quarterly
report, fairly present in all material respects the
financial condition, results of operations and cash
flows of the registrant as of, and for, the periods
presented in this quarterly report; |
|
|
4. |
|
The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e) and internal control over
financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a. |
|
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this quarterly report is being prepared; |
|
|
b. |
|
designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, 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; |
|
|
c. |
|
evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and |
|
|
d. |
|
disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and |
|
5. |
|
The registrants other certifying officer and I have disclosed, based on our most
recent evaluation, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent functions): |
|
a. |
|
all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to record,
process, summarize and report financial information; and |
|
|
b. |
|
any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
control over financial reporting. |
|
|
|
|
|
Date:
July 6, 2007
|
|
By:
|
|
/s/ Marc E. Chardon |
|
|
|
|
|
|
|
|
|
Marc E. Chardon |
|
|
|
|
President and Chief Executive Officer |
40
Exhibit 31.2
EXHIBIT 31.2
CERTIFICATION
I, Timothy V. Williams, certify that:
|
1. |
|
I have reviewed this quarterly report on Form 10-Q of Blackbaud, Inc.; |
|
|
2. |
|
Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit
to state a material fact necessary to make the
statements made, in light of the circumstances under
which such statements were made, not misleading with
respect to the period covered by this quarterly report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and
other financial information included in this quarterly
report, fairly present in all material respects the
financial condition, results of operations and cash
flows of the registrant as of, and for, the periods
presented in this quarterly report; |
|
|
4. |
|
The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e) and internal control over
financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a. |
|
designed such disclosure
controls and procedures, or
caused such disclosure
controls and procedures to be
designed under our
supervision, to ensure that
material information relating
to the registrant, including
its consolidated
subsidiaries, is made known
to us by others within those
entities, particularly during
the period in which this
quarterly report is being
prepared; |
|
|
b. |
|
designed such internal
control over financial
reporting, or caused such
internal control over
financial reporting to be
designed under our
supervision, 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; |
|
|
c. |
|
evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and |
|
|
d. |
|
disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most recent
fiscal quarter (the registrants fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect,
the registrants internal control over financial reporting; and |
|
5. |
|
The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit committee
of the registrants board of directors (or persons performing the equivalent
functions): |
|
a. |
|
all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrants ability to record, process, summarize and
report financial information; and |
|
|
b. |
|
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting. |
|
|
|
|
|
Date:
July 6, 2007
|
|
By:
|
|
/s/ Timothy V. Williams |
|
|
|
|
|
|
|
|
|
Timothy V. Williams |
|
|
|
|
Senior Vice President and Chief Financial Officer |
41
Exhibit 32.1
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Blackbaud, Inc. (the Company) for
the period ended June 30, 2006 as filed with the Securities and Exchange Commission on or about the
date hereof (the Report), I, Marc E. Chardon, President and Chief Executive Officer, hereby
certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that, to my knowledge:
|
(1) |
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
|
|
(2) |
|
The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company as of, and for, the periods
presented in the Report. |
|
|
|
|
|
Date:
July 6, 2007
|
|
By:
|
|
/s/ Marc E. Chardon |
|
|
|
|
|
|
|
|
|
Marc E. Chardon |
|
|
|
|
President and Chief Executive Officer |
42
Exhibit 32.2
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Blackbaud, Inc. (the Company) for
the period ended June 30, 2006 as filed with the Securities and Exchange Commission on or about the
date hereof (the Report), I, Timothy V. Williams, Senior Vice President and Chief Financial
Officer, hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:
|
(1) |
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
|
|
(2) |
|
The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company as of, and for, the periods
presented in the Report. |
|
|
|
|
|
Date:
July 6, 2007
|
|
By:
|
|
/s/ Timothy V. Williams |
|
|
|
|
|
|
|
|
|
Timothy V. Williams |
|
|
|
|
Senior Vice President and Chief Financial Officer |
43