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 September 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 November 3, 2006 was
43,959,744.
BLACKBAUD, INC.
TABLE OF CONTENTS
PART I- FINANCIAL INFORMATION
Item 1. Financial statements
Blackbaud, Inc.
Consolidated balance sheets
(Unaudited)
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September 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 |
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in thousands, except share amounts) |
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(see Note 2) |
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(see Note 2) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
54,261 |
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$ |
22,683 |
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Cash, restricted |
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513 |
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Accounts receivable, net of allowance of $1,291 and $1,100
at September 30, 2006 and December 31, 2005, respectively |
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29,816 |
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25,577 |
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Prepaid expenses and other current assets |
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8,608 |
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8,741 |
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Deferred tax asset, current portion |
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5,255 |
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8,565 |
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Total current assets |
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98,453 |
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65,566 |
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Property and equipment, net |
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8,964 |
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8,700 |
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Deferred tax asset |
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66,070 |
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71,487 |
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Goodwill |
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2,408 |
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2,208 |
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Intangible assets, net |
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8,102 |
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396 |
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Other assets |
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56 |
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106 |
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Total assets |
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$ |
184,053 |
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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 |
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$ |
4,105 |
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$ |
4,683 |
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Accrued expenses and other current liabilities |
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16,135 |
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15,806 |
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Deferred acquisition costs, current portion |
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513 |
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Capital lease obligations, current portion |
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Short-term debt |
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Deferred revenue |
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74,479 |
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61,943 |
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Total current liabilities |
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95,232 |
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82,432 |
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Deferred acquisition costs, long-term portion |
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270 |
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Capital lease obligations, long-term portion |
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Deferred revenue, long-term portion |
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1,564 |
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1,279 |
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Other liabilities, long-term |
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Total liabilities |
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97,066 |
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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, $.001 par value; 180,000,000
shares authorized, 48,687,310 and 47,529,836 shares issued
at September 30, 2006 and December 31, 2005, respectively |
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49 |
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48 |
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Additional paid-in capital |
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84,597 |
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73,583 |
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Deferred compensation |
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(6,497 |
) |
Treasury
stock, at cost; 4,711,144 and 4,267,313 shares at September 30, 2006 and December 31, 2005, respectively |
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(68,738 |
) |
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(60,902 |
) |
Accumulated other comprehensive income |
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181 |
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92 |
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Retained earnings |
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70,898 |
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58,428 |
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Total stockholders equity |
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86,987 |
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64,752 |
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Total liabilities and stockholders equity |
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$ |
184,053 |
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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 September 30, |
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Nine months ended September 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 |
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(in thousands, except share and per share amounts) |
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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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(see Note 2) |
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Revenue |
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License fees |
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$ |
7,826 |
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$ |
7,291 |
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$ |
24,281 |
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$ |
22,063 |
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Services |
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17,014 |
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14,486 |
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46,423 |
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40,070 |
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Maintenance |
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20,790 |
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18,058 |
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59,748 |
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52,649 |
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Subscriptions |
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2,783 |
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1,878 |
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7,534 |
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4,854 |
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Other revenue |
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1,373 |
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1,362 |
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3,991 |
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3,442 |
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Total revenue |
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49,786 |
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43,075 |
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141,977 |
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123,078 |
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Cost of revenue |
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Cost of license fees |
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514 |
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1,080 |
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1,694 |
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3,166 |
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Cost of services (of which $122, $55, $402 and $229 in the three months ended September 30,
2006 and 2005 and in the nine months ended September 30, 2006 and 2005, respectively, was
stock-based compensation expense) |
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8,641 |
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7,375 |
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24,899 |
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20,988 |
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Cost of maintenance (of which $26, $6, $84 and $28 in the three months ended September 30,
2006 and 2005 and in the nine months ended September 30, 2006 and 2005, respectively, was
stock-based compensation expense) |
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3,272 |
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2,643 |
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9,930 |
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7,947 |
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Cost of subscriptions (of which $4, $0, $13 and $0 in the three months ended September 30,
2006 and 2005 and in the nine months ended September 30, 2006 and 2005, respectively, was
stock-based compensation expense) |
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658 |
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292 |
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1,775 |
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1,126 |
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Cost of other revenue |
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1,246 |
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1,171 |
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3,751 |
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3,106 |
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Total cost of revenue |
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14,331 |
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12,561 |
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42,049 |
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36,333 |
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Gross profit |
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35,455 |
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30,514 |
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99,928 |
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86,745 |
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Operating expenses |
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Sales and marketing (of which $193, $38, $633 and $182 in the three months ended
September 30, 2006 and 2005 and in the nine months ended September 30, 2006
and 2005, respectively, was stock-based compensation expense) |
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10,251 |
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8,634 |
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30,072 |
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25,272 |
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Research and development (of which $183, $22, $562 and $119 in the three months ended
September 30, 2006 and 2005 and in the nine months ended September 30, 2006
and 2005, respectively, was stock-based compensation expense) |
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5,742 |
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5,331 |
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17,652 |
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15,758 |
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General and administrative (of which $1,396, $1,486, $4,206 and $(3,271) in the three
months ended September 30, 2006 and 2005 and in the nine months ended
September 30, 2006 and 2005, respectively, was stock-based compensation expense (benefit)) |
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5,716 |
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5,891 |
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16,804 |
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8,975 |
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Amortization |
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190 |
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10 |
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509 |
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10 |
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Total operating expenses |
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21,899 |
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19,866 |
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65,037 |
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50,015 |
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Income from operations |
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13,556 |
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10,648 |
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34,891 |
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36,730 |
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Interest income |
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492 |
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190 |
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865 |
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|
770 |
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Interest expense |
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(12 |
) |
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(12 |
) |
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(36 |
) |
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(37 |
) |
Other (expense), net |
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(64 |
) |
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(32 |
) |
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(196 |
) |
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(34 |
) |
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Income before provision for income taxes |
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13,972 |
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10,794 |
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|
35,524 |
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|
37,429 |
|
Income tax provision |
|
|
5,536 |
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3,116 |
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13,880 |
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10,493 |
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Net income |
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$ |
8,436 |
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$ |
7,678 |
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$ |
21,644 |
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$ |
26,936 |
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Earnings per share |
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Basic |
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$ |
0.19 |
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$ |
0.18 |
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$ |
0.50 |
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$ |
0.63 |
|
Diluted |
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$ |
0.19 |
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$ |
0.17 |
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$ |
0.49 |
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$ |
0.58 |
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Common shares and equivalents outstanding |
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Basic weighted average shares |
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43,438,730 |
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|
41,961,726 |
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|
43,182,585 |
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|
42,628,278 |
|
Diluted weighted average shares |
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|
44,679,274 |
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|
45,017,221 |
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44,589,575 |
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|
46,676,356 |
|
Dividends per share |
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$ |
0.07 |
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$ |
0.05 |
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$ |
0.21 |
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$ |
0.15 |
|
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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Nine months ended September 30, |
|
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2006 |
|
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2005 |
|
|
|
as restated |
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|
as restated |
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(in thousands) |
|
(see Note 2) |
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|
(see Note 2) |
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Cash flows from operating activities |
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Net income |
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$ |
21,644 |
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$ |
26,936 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
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Depreciation and amortization |
|
|
2,693 |
|
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|
2,026 |
|
Provision for doubtful accounts and sales returns |
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|
1,080 |
|
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|
711 |
|
Stock-based compensation expense |
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|
5,900 |
|
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|
(2,404 |
) |
Amortization of deferred financing fees |
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|
36 |
|
|
|
36 |
|
Deferred taxes |
|
|
8,282 |
|
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|
11,514 |
|
Excess tax benefit on exercise of options |
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|
|
|
|
|
6,033 |
|
Changes in assets and liabilities, net of acquisition |
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|
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Accounts receivable |
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|
(4,871 |
) |
|
|
(3,427 |
) |
Prepaid expenses and other assets |
|
|
161 |
|
|
|
(9,963 |
) |
Trade accounts payable |
|
|
(593 |
) |
|
|
96 |
|
Accrued expenses and other current liabilities |
|
|
178 |
|
|
|
(1,203 |
) |
Deferred revenue |
|
|
10,850 |
|
|
|
8,729 |
|
|
|
|
Net cash provided by operating activities |
|
|
45,360 |
|
|
|
39,084 |
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|
Cash flows from investing activities |
|
|
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|
|
|
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Purchase of property and equipment |
|
|
(2,294 |
) |
|
|
(2,223 |
) |
Purchase of net assets of acquired companies |
|
|
(6,095 |
) |
|
|
(938 |
) |
|
|
|
Net cash used in investing activities |
|
|
(8,389 |
) |
|
|
(3,161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Payments on capital lease obligations |
|
|
|
|
|
|
(44 |
) |
Proceeds from exercise of stock options |
|
|
6,044 |
|
|
|
5,475 |
|
Excess tax benefit on exercise of stock options |
|
|
5,568 |
|
|
|
|
|
Purchase of treasury stock |
|
|
(7,836 |
) |
|
|
(56,229 |
) |
Dividend payments to stockholders |
|
|
(9,174 |
) |
|
|
(6,380 |
) |
|
|
|
Net cash used in financing activities |
|
|
(5,398 |
) |
|
|
(57,134 |
) |
|
|
|
|
Effect of exchange rate on cash and cash equivalents |
|
|
5 |
|
|
|
(186 |
) |
|
|
|
Net decrease in cash and cash equivalents |
|
|
31,578 |
|
|
|
(21,397 |
) |
Cash and cash equivalents, beginning of period |
|
|
22,683 |
|
|
|
42,144 |
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
54,261 |
|
|
$ |
20,747 |
|
|
|
|
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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Accumulated |
|
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Additional |
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|
other |
|
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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 |
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
|
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|
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) |
|
$ |
21,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,644 |
|
|
|
21,644 |
|
Payment of dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,174 |
) |
|
|
(9,174 |
) |
Purchase of 443,831 treasury shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,797 |
) |
|
|
|
|
|
|
|
|
|
|
(7,797 |
) |
Exercise of stock options |
|
|
|
|
|
|
|
1,178,808 |
|
|
|
1 |
|
|
|
6,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,025 |
|
Tax impact of exercise of nonqualified stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,587 |
|
Reclassification due to adoption of new accounting pronouncement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,497 |
) |
|
|
6,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect adjustment to assume historical forfeitures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,920 |
|
Restricted stock grants |
|
|
|
|
|
|
|
32,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock cancellations |
|
|
|
|
|
|
|
(53,828 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
(39 |
) |
Translation adjustment, net of tax |
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89 |
|
|
|
|
|
|
|
89 |
|
|
|
|
|
|
|
|
Comprehensive income, as restated (see Note 2) |
|
$ |
21,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 as restated (see Note 2) |
|
|
|
|
|
|
|
48,687,310 |
|
|
$ |
49 |
|
|
$ |
84,597 |
|
|
$ |
|
|
|
$ |
(68,738 |
) |
|
$ |
181 |
|
|
$ |
70,898 |
|
|
$ |
86,987 |
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
4
Blackbaud, Inc.
Condensed notes to consolidated financial statements
September 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 September 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 nine months ended September 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 nine months
ended September 30, 2006 and 2005.
The Company has 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 nine months ended September 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 September 30, |
|
|
ended September 30, |
|
(in thousands) |
|
2006 |
|
|
Adjustments |
|
|
2006 |
|
|
|
|
|
|
|
|
Statement of Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance revenue |
|
$ |
20,838 |
|
|
$ |
(48 |
) |
|
$ |
20,790 |
|
Subscriptions revenue |
|
|
2,839 |
|
|
|
(56 |
) |
|
|
2,783 |
|
Total revenue |
|
|
49,890 |
|
|
|
(104 |
) |
|
|
49,786 |
|
Gross profit |
|
|
35,559 |
|
|
|
(104 |
) |
|
|
35,455 |
|
Income from operations |
|
|
13,660 |
|
|
|
(104 |
) |
|
|
13,556 |
|
Income tax provision |
|
|
5,573 |
|
|
|
(37 |
) |
|
|
5,536 |
|
Net income |
|
|
8,503 |
|
|
|
(67 |
) |
|
|
8,436 |
|
Basic earnings per share |
|
|
0.20 |
|
|
|
(0.01 |
) |
|
|
0.19 |
|
Diluted earnings per share |
|
|
0.19 |
|
|
|
|
|
|
|
0.19 |
|
5
Blackbaud, Inc.
Condensed notes to consolidated financial statements (continued)
September 30, 2006
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported |
|
|
As restated |
|
|
|
for the nine months |
|
|
for the nine months |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
(in thousands) |
|
2006 |
|
|
Adjustments |
|
|
2006 |
|
|
|
|
|
|
|
|
Statement of Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance revenue |
|
$ |
60,079 |
|
|
$ |
(331 |
) |
|
$ |
59,748 |
|
Subscriptions revenue |
|
|
7,625 |
|
|
|
(91 |
) |
|
|
7,534 |
|
Total revenue |
|
|
142,399 |
|
|
|
(422 |
) |
|
|
141,977 |
|
Gross profit |
|
|
100,350 |
|
|
|
(422 |
) |
|
|
99,928 |
|
Income from operations |
|
|
35,313 |
|
|
|
(422 |
) |
|
|
34,891 |
|
Income tax provision |
|
|
14,043 |
|
|
|
(163 |
) |
|
|
13,880 |
|
Net income |
|
|
21,903 |
|
|
|
(259 |
) |
|
|
21,644 |
|
Basic earnings per share |
|
|
0.51 |
|
|
|
(0.01 |
) |
|
|
0.50 |
|
Diluted earnings per share |
|
|
0.49 |
|
|
|
|
|
|
|
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported |
|
|
As restated |
|
|
|
September 30, |
|
|
September
30, |
|
(in thousands) |
|
2006 |
|
|
Adjustments |
|
|
2006 |
|
|
|
|
|
|
|
- |
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, current portion |
|
$ |
4,127 |
|
|
$ |
1,128 |
|
|
$ |
5,255 |
|
Total current assets |
|
|
97,325 |
|
|
|
1,128 |
|
|
|
98,453 |
|
Total assets |
|
|
182,925 |
|
|
|
1,128 |
|
|
|
184,053 |
|
Deferred revenue |
|
|
71,573 |
|
|
|
2,906 |
|
|
|
74,479 |
|
Total current liabilities |
|
|
92,326 |
|
|
|
2,906 |
|
|
|
95,232 |
|
Total liabilities |
|
|
94,160 |
|
|
|
2,906 |
|
|
|
97,066 |
|
Retained earnings |
|
|
72,676 |
|
|
|
(1,778 |
) |
|
|
70,898 |
|
Total liabilities and stockholders equity |
|
|
182,925 |
|
|
|
1,128 |
|
|
|
184,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported |
|
|
As restated |
|
|
|
for the three months |
|
|
for the three months |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
(in thousands) |
|
2005 |
|
|
Adjustments |
|
|
2005 |
|
|
|
|
|
|
|
|
Statement of Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance revenue |
|
$ |
18,110 |
|
|
$ |
(52 |
) |
|
$ |
18,058 |
|
Subscriptions revenue |
|
|
1,895 |
|
|
|
(17 |
) |
|
|
1,878 |
|
Total revenue |
|
|
43,144 |
|
|
|
(69 |
) |
|
|
43,075 |
|
Gross profit |
|
|
30,583 |
|
|
|
(69 |
) |
|
|
30,514 |
|
Income from operations |
|
|
10,717 |
|
|
|
(69 |
) |
|
|
10,648 |
|
Income tax provision |
|
|
3,143 |
|
|
|
(27 |
) |
|
|
3,116 |
|
Net income |
|
|
7,720 |
|
|
|
(42 |
) |
|
|
7,678 |
|
Basic earnings per share |
|
|
0.18 |
|
|
|
|
|
|
|
0.18 |
|
Diluted earnings per share |
|
|
0.17 |
|
|
|
|
|
|
|
0.17 |
|
6
Blackbaud, Inc.
Condensed notes to consolidated financial statements (continued)
September 30, 2006
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported |
|
|
As restated |
|
|
|
for the nine months |
|
|
for the nine months |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
(in thousands) |
|
2005 |
|
|
Adjustments |
|
|
2005 |
|
|
|
|
|
|
|
|
Statement of Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance revenue |
|
$ |
52,752 |
|
|
$ |
(103 |
) |
|
$ |
52,649 |
|
Subscriptions revenue |
|
|
5,028 |
|
|
|
(174 |
) |
|
|
4,854 |
|
Total revenue |
|
|
123,355 |
|
|
|
(277 |
) |
|
|
123,078 |
|
Gross profit |
|
|
87,022 |
|
|
|
(277 |
) |
|
|
86,745 |
|
Income from operations |
|
|
37,007 |
|
|
|
(277 |
) |
|
|
36,730 |
|
Income tax provision |
|
|
10,592 |
|
|
|
(99 |
) |
|
|
10,493 |
|
Net income |
|
|
27,114 |
|
|
|
(178 |
) |
|
|
26,936 |
|
Basic earnings per share |
|
|
0.64 |
|
|
|
(0.01 |
) |
|
|
0.63 |
|
Diluted earnings per share |
|
|
0.58 |
|
|
|
|
|
|
|
0.58 |
|
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 September 30, 2006 and for the three and nine
months ended September 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 (U.S. GAAP). 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 nine months ended September 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 U.S. GAAP 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, as revised in the Companys report on Form 8-K filed on November 6,
2006, and other forms filed with the SEC from time to time.
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 U.S. GAAP 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.
7
Blackbaud, Inc.
Condensed notes to consolidated financial statements (continued)
September 30, 2006
(Unaudited)
Reclassifications
Certain amounts in the prior year consolidated statement of operations and notes to the
consolidated financial statements have been reclassified to conform to the 2006 presentation. Under
the current presentation, stock-based compensation expense in the statement of operations is
allocated to individual components of operating expenses whereas it was shown as a single component
of operating expenses in previous years. See Note 11 of the consolidated financial statements.
Additionally, the presentation of segment information has been modified in 2006. See Note 13 to the
consolidated financial statements.
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 vendor-specific
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-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-related 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.
8
Blackbaud, Inc.
Condensed notes to consolidated financial statements (continued)
September 30, 2006
(Unaudited)
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 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 recorded in accordance with the provisions of APB
No. 25, and a nominal cumulative effect adjustment to apply an assumed forfeiture rate to expense
previously recorded 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 consolidated 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
nine months ended September 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
9
Blackbaud, Inc.
Condensed notes to consolidated financial statements (continued)
September 30, 2006
(Unaudited)
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 September 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.
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 U.S. 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 September 2006, the SEC issued Staff Accounting Bulletin No. 108 Considering the Effects of
Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB
108), which provides interpretive guidance on how registrants should quantify financial statement
misstatements. Under SAB 108, registrants are required to consider both a rollover method which
focuses primarily on the income statement impact of misstatements and the iron curtain method
which focuses primarily on the balance sheet impact of misstatements. The transition provisions of
SAB 108 permit a registrant to adjust retained earnings for the cumulative effect of immaterial
errors relating to prior years. The Company was required to apply SAB 108 in the fiscal year ended
December 31, 2006. Except as described in Note 2, the application of SAB 108 did not have a
significant impact on the Companys consolidated financial position, results of operations and cash
flows.
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 United States. In December 2004, the FASB issued FASB
10
Blackbaud, Inc.
Condensed notes to consolidated financial statements (continued)
September 30, 2006
(Unaudited)
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 does not
believe that the adoption of FSP 109-1 will materially impact 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 $783,000 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.
Amortization expense for the three and nine months ended September 30, 2006 related to this
acquisition was $181,000 and $481,000, respectively. The aggregate amortization expense related to
this acquisition for 2006 through 2010 is estimated to be approximately $710,000 per year. In
addition, the Company recorded additional amortization expense, related to previous acquisitions,
of $9,000 and $28,000 in the three and nine months ended September 30, 2006, respectively.
Amortization expense was $10,000 in the three and nine months ended September 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 September 30, 2006 and 2005 includes the
effect of 1,092,239 and 3,055,495 potential common shares, respectively, as they are dilutive.
Dilutive earnings per share for the nine months ended September 30, 2006 and 2005 includes the
effect of 1,260,035 and 4,048,078 potential common shares, respectively, as they are dilutive.
Diluted earnings per share for the three months ended September 30, 2006 does not
11
Blackbaud, Inc.
Condensed notes to consolidated financial statements (continued)
September 30, 2006
(Unaudited)
include the effect of 800,000 potential common share equivalents as they are anti-dilutive. There
were no anti-dilutive potential common shares outstanding for the three months ended September 30,
2005. Dilutive earnings per share for the nine months ended September 30, 2006 and 2005 does not
include the effect of 800,000 and 15,000 potential common share equivalents, respectively, as they
are anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 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 |
|
$ |
8,436 |
|
|
$ |
7,678 |
|
|
$ |
21,644 |
|
|
$ |
26,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares |
|
|
43,438,730 |
|
|
|
41,961,726 |
|
|
|
43,182,585 |
|
|
|
42,628,278 |
|
|
Weighted average common shares from restricted stock issuance |
|
|
148,305 |
|
|
|
|
|
|
|
146,955 |
|
|
|
|
|
Add effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock-based compensation |
|
|
1,092,239 |
|
|
|
3,055,495 |
|
|
|
1,260,035 |
|
|
|
4,048,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares assuming dilution |
|
|
44,679,274 |
|
|
|
45,017,221 |
|
|
|
44,589,575 |
|
|
|
46,676,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.19 |
|
|
$ |
0.18 |
|
|
$ |
0.50 |
|
|
$ |
0.63 |
|
Diluted |
|
$ |
0.19 |
|
|
$ |
0.17 |
|
|
$ |
0.49 |
|
|
$ |
0.58 |
|
6. Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following as of September 30, 2006 and
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
Prepaid rent |
|
$ |
556 |
|
|
$ |
469 |
|
Prepaid insurance |
|
|
676 |
|
|
|
382 |
|
Prepaid software maintenance and royalties |
|
|
1,087 |
|
|
|
639 |
|
Taxes, prepaid and receivable |
|
|
5,532 |
|
|
|
6,734 |
|
Other |
|
|
757 |
|
|
|
517 |
|
|
|
|
|
|
$ |
8,608 |
|
|
$ |
8,741 |
|
|
|
|
7. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following as of September 30, 2006
and December 31, 2005:
12
Blackbaud, Inc.
Condensed notes to consolidated financial statements (continued)
September 30, 2006
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
Accrued bonuses |
|
$ |
4,903 |
|
|
$ |
4,801 |
|
Accrued commissions and salaries |
|
|
1,726 |
|
|
|
1,578 |
|
Customer credit balances |
|
|
1,012 |
|
|
|
824 |
|
Taxes payable |
|
|
4,576 |
|
|
|
3,699 |
|
Accrued accounting and legal costs |
|
|
1,688 |
|
|
|
1,523 |
|
Accrued health care costs |
|
|
688 |
|
|
|
839 |
|
Other |
|
|
1,542 |
|
|
|
2,542 |
|
|
|
|
|
|
$ |
16,135 |
|
|
$ |
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 September 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 current
annual base rent of the lease is $4,809,000 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 $120,000 and $118,000 for the
three months ended September 30, 2006 and 2005, respectively, and was reduced by $362,000 and
$354,000 for the nine months ended September 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 $799,000 and $413,000 for the three months ended September
30, 2006 and 2005, respectively, and $1,661,000 and $1,093,000 for the nine months ended September
30, 2006 and 2005, respectively.
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 September 30, 2006 and 2005, and $150,000 for
each of the nine-month periods ended September 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 September 30, 2006 is
approximately $337,000 through 2008. The Company incurred expense under these arrangements of
$214,000 and $181,000 for the three months
13
Blackbaud, Inc.
Condensed notes to consolidated financial statements (continued)
September 30, 2006
(Unaudited)
ended September 30, 2006 and 2005, respectively, and $542,000 and $493,000 for the nine months
ended September 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 financial position or results of
operations.
10. Income taxes
Income taxes for the three-month period ended September 30, 2006 were calculated using the
projected effective tax rate for fiscal 2006 in accordance with SFAS No. 109. The 2006 estimated
annual effective tax rate of 38.7%, which excludes period-specific items, was applied as the
effective rate for the quarter ended September 30, 2006. The Companys effective tax rates for the
three-month periods ended September 30, 2006 and 2005 was 39.6% and 28.9%, respectively. 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 nine
months ended September 30, 2005. During the third quarter of 2006, the Company increased its
valuation allowance by $123,000, net of tax, to reflect changes in estimates regarding the
Companys ability to utilize certain state credits before expiration.
Additionally, certain state tax credits whose use was previously restricted to reducing state
franchise taxes became available to offset state income tax as a result of a clarification in
enacted tax law during the third quarter of 2005. Accordingly, a deferred tax asset of $2.2 million
was established during the third quarter of 2005, net of federal taxes at 34.8%, related to the
associated future reduction of state taxes. A valuation allowance was established for $1.3 million
of the $2.2 million representing the portion of the credits not deemed more likely than not to be
utilized.
11. Stock-based compensation
Employee stock-based compensation plans
The Company has three outstanding stock-based compensation plans. The Companys Compensation
Committee of the Board of Directors administers the 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 5,500,105. 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 on November 28, 2005, 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 Stock Plan, provide that all unvested
options vest upon a change in control of the Company, as defined in the plans. The options granted
to the current CEO under the 2004 Stock Plan also vest upon a change in control of the Company, as
provided in the employment agreement and the agreement evidencing the stock options between the
Company and the CEO.
The following table summarizes the options outstanding, vested and unvested under each of the
Companys stock-based compensation plans as of September 30, 2006.
14
Blackbaud, Inc.
Condensed notes to consolidated financial statements (continued)
September 30, 2006
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
Options |
|
|
Options |
|
|
Range of |
|
Plan |
|
Date of adoption |
|
|
outstanding |
|
|
vested |
|
|
unvested |
|
|
exercise prices |
|
|
1999 Stock Option Plan |
|
October 13, 1999 |
|
|
355,933 |
|
|
|
355,933 |
|
|
|
|
|
|
$ |
4.80 |
|
2001 Stock Option Plan |
|
July 1, 2001 |
|
|
1,237,922 |
|
|
|
960,134 |
|
|
|
277,788 |
|
|
$ |
4.80-$ 9.04 |
|
2004 Stock Plan |
|
March 23, 2004 |
|
|
1,041,540 |
|
|
|
104,393 |
|
|
|
937,147 |
|
|
$ |
8.00-$16.10 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
2,635,395 |
|
|
|
1,420,460 |
|
|
|
1,214,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The options granted under the 1999 Stock Option Plan have two vesting schedules. Options
totaling 234,393 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.
The options granted under the 2001 Stock Option Plan 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.
The options granted under the 2004 Stock Plan 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.
The Company has also granted shares of common stock subject to certain restrictions under the 2004
Stock 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
are recognized in the period the restrictions lapse to the extent expense has been recognized. Tax
benefits associated with stock-based compensation in excess of the related book expense recorded
are credited to additional paid-in capital within stockholders equity. There were 451,525 shares
of restricted stock outstanding and unvested at September 30, 2006.
The Company recognizes compensation expense associated with options on an accelerated basis
consistent with the method of amortizing used prior to adoption of SFAS 123(R) over the requisite
service period of the individual grantees, which generally equals the vesting period. The Company
recognizes compensation expense associated with restricted stock on a straight-line basis over the
requisite service period of the individual grantees, which generally equals the vesting period.
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 September 30, 2006 and 2005 includes $1,924,000 and $1,607,000 of stock-based compensation
expense, respectively, and includes $5,900,000 of stock-based compensation expense and $2,713,000
of stock-based compensation benefit for the nine months ended September 30, 2006 and 2005,
respectively.
Prior to the adoption of SFAS No. 123(R), the Company accounted for options and other stock-based
awards 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. The Company began recognizing the
expense on restricted stock in the third quarter of 2005 when restricted stock was first granted.
Expense related to restricted stock is equal to grant date value of the shares granted and is
recognized over the vesting period. Amortization of deferred compensation resulted in the Company
recognizing stock-based compensation benefit of $2,713,000 for the nine months ended September 30,
2005. The components of this benefit are detailed below:
15
Blackbaud, Inc.
Condensed notes to consolidated financial statements (continued)
September 30, 2006
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
Three months |
|
|
Three months |
|
|
Nine months ended |
|
|
|
ended March 31, |
|
|
ended June 30, |
|
|
ended September |
|
|
September 30, |
|
(in thousands) |
|
2005 |
|
|
2005 |
|
|
30, 2005 |
|
|
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 |
|
|
$ |
896 |
|
|
$ |
(4,364 |
) |
Charge to adjust deferred compensation associated with option exercises of former
CEO to stock price on date of transaction |
|
|
|
|
|
|
430 |
|
|
|
533 |
|
|
|
963 |
|
Amortization of deferred compensation associated with formerly variable
options which became fixed upon the Companys IPO |
|
|
268 |
|
|
|
242 |
|
|
|
140 |
|
|
|
650 |
|
Amortization of deferred compensation associated with restricted stock grants |
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
38 |
|
|
|
|
Total |
|
$ |
(7,640 |
) |
|
$ |
3,320 |
|
|
$ |
1,607 |
|
|
$ |
(2,713 |
) |
|
|
|
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 1.35 years was $10,537,000 at September 30, 2006. The
Company expects to expense an additional $1,661,000 of that total in the remaining three 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 nine months ended September
30, 2006 this requirement resulted in the classification of $5,568,000 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 nine months of 2005 those amounts are reported as operating cash flows
in the statements of cash flows.
For the nine months ended September 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:
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, 2006, |
|
|
|
restated (see Note 2) |
|
|
|
Effect of |
|
(in thousands, except share and per share amounts) |
|
SFAS 123(R) |
|
|
Income from operations |
|
$ |
(4,295 |
) |
Income before income taxes |
|
|
(4,295 |
) |
Net income |
|
|
(2,894 |
) |
|
|
|
|
|
Cash flow from operating activities |
|
|
(5,568 |
) |
Cash flow from financing activities |
|
|
5,568 |
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
Basic |
|
$ |
(0.06 |
) |
Diluted |
|
$ |
(0.07 |
) |
16
Blackbaud, Inc.
Condensed notes to consolidated financial statements (continued)
September 30, 2006
(Unaudited)
The following table sets forth the summary of option activity under the Companys stock option
plans for the nine months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
average |
|
|
|
Shares |
|
|
exercise price |
|
|
|
|
Outstanding options at December 31, 2005 |
|
|
3,931,632 |
|
|
$ |
7.69 |
|
Exercised |
|
|
(1,178,008 |
) |
|
|
5.11 |
|
Forfeited |
|
|
(118,229 |
) |
|
|
7.66 |
|
|
|
|
|
Outstanding options at September 30, 2006 |
|
|
2,635,395 |
|
|
$ |
8.84 |
|
|
|
|
The total intrinsic value of options exercised during the three months ended September 30, 2006 and
2005 was $3,375,000 and $20,037,000, respectively, and the total intrinsic value of options
exercised during the nine months ended September 30, 2006 and 2005 was $16,826,000 and $39,246,000,
respectively. There were no options granted during either the three or nine months ended September
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 September 30, 2006 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
Weighted average |
|
|
Exercisable as |
|
|
Weighted average |
|
Range of |
|
Outstanding as of |
|
|
remaining contractual |
|
|
exercise price of |
|
|
of September |
|
|
exercise price of |
|
exercise prices |
|
September 30, 2006 |
|
|
life (in years) |
|
|
outstanding options |
|
|
30,2006 |
|
|
exercisable options |
|
|
|
|
$ 4.80 |
|
|
1,120,731 |
|
|
|
3.9 |
|
|
$ |
4.80 |
|
|
|
1,120,731 |
|
|
$ |
4.80 |
|
$ 5.44 |
|
|
401,442 |
|
|
|
6.4 |
|
|
|
5.44 |
|
|
|
182,768 |
|
|
|
5.44 |
|
$ 7.20 |
|
|
31,251 |
|
|
|
7.0 |
|
|
|
7.20 |
|
|
|
|
|
|
|
7.20 |
|
$ 8.00 |
|
|
54,657 |
|
|
|
7.6 |
|
|
|
8.00 |
|
|
|
17,469 |
|
|
|
8.00 |
|
$ 8.60 |
|
|
117,790 |
|
|
|
7.8 |
|
|
|
8.60 |
|
|
|
50,643 |
|
|
|
8.60 |
|
$ 9.04 |
|
|
13,274 |
|
|
|
7.4 |
|
|
|
9.04 |
|
|
|
8,849 |
|
|
|
9.04 |
|
$10.59 |
|
|
81,250 |
|
|
|
8.0 |
|
|
|
10.59 |
|
|
|
36,250 |
|
|
|
10.59 |
|
$13.05 |
|
|
15,000 |
|
|
|
8.2 |
|
|
|
13.05 |
|
|
|
3,750 |
|
|
|
13.05 |
|
$16.10 |
|
|
800,000 |
|
|
|
6.2 |
|
|
|
16.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,635,395 |
|
|
|
5.4 |
|
|
$ |
8.84 |
|
|
|
1,420,460 |
|
|
$ |
5.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual life of options exercisable at September 30, 2006
was 4.5 years. The aggregate intrinsic value of options outstanding and options exercisable as of
September 30, 2006 was $34,658,000 and $23,774,000, respectively. The intrinsic value is
calculated for in-the-money options as the difference between the market value as of September 30,
2006 and the exercise price of the shares.
17
Blackbaud, Inc.
Condensed notes to consolidated financial statements (continued)
September 30, 2006
(Unaudited)
A summary of unvested restricted stock as of September 30, 2006, and changes during the nine months
then ended, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
average grant- |
|
|
|
Shares |
|
|
date fair value |
|
|
|
|
Unvested restricted stock at December 31, 2005 |
|
|
487,733 |
|
|
$ |
14.52 |
|
Granted |
|
|
32,494 |
|
|
|
20.56 |
|
Vested |
|
|
(14,874 |
) |
|
|
12.82 |
|
Forfeited |
|
|
(53,828 |
) |
|
|
14.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock at September 30, 2006 |
|
|
451,525 |
|
|
$ |
15.04 |
|
|
|
|
The total fair value of restricted stock that vested during the three and nine months ended
September 30, 2006, was $89,000 and $292,000, respectively.
For the three and nine months ended September 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 |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2005 |
|
|
|
as restated |
|
|
as restated |
|
(in thousands, except share and per share amounts) |
|
(see Note 2) |
|
|
(see Note 2) |
|
|
Net income, as reported |
|
$ |
7,678 |
|
|
$ |
26,936 |
|
Total stock-based compensation expense (benefit), net of related
tax
effects included in the determination of net income as reported |
|
|
1,151 |
|
|
|
(2,021 |
) |
Total stock-based compensation expense, 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 |
|
|
(1,382 |
) |
|
|
(184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
7,447 |
|
|
$ |
24,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic, as reported |
|
$ |
0.18 |
|
|
$ |
0.63 |
|
Basic, pro forma |
|
|
0.18 |
|
|
|
0.58 |
|
Diluted, as reported |
|
|
0.17 |
|
|
|
0.58 |
|
Diluted, pro forma |
|
|
0.17 |
|
|
|
0.53 |
|
12. Stockholders equity
Preferred stock
The Company has authorized 20,000,000 shares of preferred stock. No shares were issued and
outstanding at September 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.
18
Blackbaud, Inc.
Condensed notes to consolidated financial statements (continued)
September 30, 2006
(Unaudited)
Dividends
On February 16, 2006, the Companys Board of Directors approved an increase to the Companys annual
dividend from $0.20 per share to $0.28 per share and declared its first quarter dividend of $0.07
per share, which was paid on March 15, 2006 to stockholders of record on February 28, 2006.
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.
On August 7, 2006, the Companys Board of Directors declared a third quarter dividend of $0.07 per
share, which was paid on September 15, 2006 to stockholders of record on August 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 third quarter of 2006, the Company purchased 40,700 shares of its common stock at
an average cost of $20.02 per share, including commissions paid. In the first nine months of 2006,
the Company purchased 442,000 shares of its common stock at an average cost of $17.64 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 $815,000 and $7,797,000 in the three and
nine months ended September 30, 2006, respectively.
In addition to the Companys stock repurchase plan, 1,831 shares were purchased from restricted
stock holders to satisfy their tax obligations due upon vesting of restricted stock during the nine
months ended September 30, 2006.
13. 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 method of operating and evaluating its business units,
and as a result, the Company modified its 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 separately the results of this business unit, previously
included with the software maintenance segment. Accordingly, the Company has amended its segment
disclosure from the prior year to reflect these changes. Additionally, as a result of the change in
segment reporting, the Company has modified the consolidated statements of operations to reflect
the reclassification of subscription revenue and cost of revenue to be shown separately.
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 nine months ended September 30, 2006 and 2005
were as follows:
19
Blackbaud, Inc.
Condensed notes to consolidated financial statements (continued)
September 30, 2006
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting and |
|
|
|
|
|
|
Maintenance |
|
|
Subscriptions |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
education |
|
|
Analytic |
|
|
as restated |
|
|
as restated (see |
|
|
|
|
|
|
as restated |
|
(in thousands) |
|
License fees |
|
|
services (1) |
|
|
services (2) |
|
|
(see Note 2) |
|
|
Note 2) |
|
|
Other |
|
|
(see Note 2) |
|
|
Three months ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
7,826 |
|
|
$ |
14,941 |
|
|
$ |
2,073 |
|
|
$ |
20,790 |
|
|
$ |
2,783 |
|
|
$ |
1,373 |
|
|
$ |
49,786 |
|
Direct controllable costs |
|
|
514 |
|
|
|
6,504 |
|
|
|
1,156 |
|
|
|
2,693 |
|
|
|
597 |
|
|
|
1,243 |
|
|
|
12,707 |
|
|
|
|
Segment income |
|
|
7,312 |
|
|
|
8,437 |
|
|
|
917 |
|
|
|
18,097 |
|
|
|
2,186 |
|
|
|
130 |
|
|
|
37,079 |
|
Corporate costs not allocated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,624 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,899 |
|
Interest income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(480 |
) |
Other expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
7,291 |
|
|
$ |
13,119 |
|
|
$ |
1,367 |
|
|
$ |
18,058 |
|
|
$ |
1,878 |
|
|
$ |
1,362 |
|
|
$ |
43,075 |
|
Direct controllable costs |
|
|
1,080 |
|
|
|
5,514 |
|
|
|
976 |
|
|
|
2,057 |
|
|
|
268 |
|
|
|
1,160 |
|
|
|
11,055 |
|
|
|
|
Segment income |
|
|
6,211 |
|
|
|
7,605 |
|
|
|
391 |
|
|
|
16,001 |
|
|
|
1,610 |
|
|
|
202 |
|
|
|
32,020 |
|
Corporate costs not allocated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,506 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,866 |
|
Interest income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(178 |
) |
Other expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting and |
|
|
|
|
|
|
Maintenance |
|
|
Subscriptions |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
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) |
|
|
Nine months ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
24,281 |
|
|
$ |
41,071 |
|
|
$ |
5,352 |
|
|
$ |
59,748 |
|
|
$ |
7,534 |
|
|
$ |
3,991 |
|
|
$ |
141,977 |
|
Direct controllable costs |
|
|
1,694 |
|
|
|
19,266 |
|
|
|
2,681 |
|
|
|
8,134 |
|
|
|
1,587 |
|
|
|
3,742 |
|
|
|
37,104 |
|
|
|
|
Segment income |
|
|
22,587 |
|
|
|
21,805 |
|
|
|
2,671 |
|
|
|
51,614 |
|
|
|
5,947 |
|
|
|
249 |
|
|
|
104,873 |
|
Corporate costs not allocated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,945 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,037 |
|
Interest income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(829 |
) |
Other expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
22,063 |
|
|
$ |
35,818 |
|
|
$ |
4,252 |
|
|
$ |
52,649 |
|
|
$ |
4,854 |
|
|
$ |
3,442 |
|
|
$ |
123,078 |
|
Direct controllable costs |
|
|
3,166 |
|
|
|
15,546 |
|
|
|
2,599 |
|
|
|
6,334 |
|
|
|
980 |
|
|
|
3,094 |
|
|
|
31,719 |
|
|
|
|
Segment income |
|
|
18,897 |
|
|
|
20,272 |
|
|
|
1,653 |
|
|
|
46,315 |
|
|
|
3,874 |
|
|
|
348 |
|
|
|
91,359 |
|
Corporate costs not allocated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,614 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,015 |
|
Interest income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(733 |
) |
Other expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,429 |
|
|
|
|
(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. |
The Company derives a portion of its revenue from its foreign operations. The following table
presents long-lived assets by geographic region based on the location of the assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Domestic |
|
|
Canada |
|
|
Europe |
|
|
Pacific |
|
|
Total |
|
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
$ |
8,401 |
|
|
$ |
|
|
|
$ |
539 |
|
|
$ |
24 |
|
|
$ |
8,964 |
|
December 31, 2005 |
|
|
8,308 |
|
|
|
|
|
|
|
368 |
|
|
|
24 |
|
|
|
8,700 |
|
20
Blackbaud, Inc.
Condensed notes to consolidated financial statements (continued)
September 30, 2006
(Unaudited)
14. Subsequent events
On October 27, 2006, the Companys Board of Directors declared a fourth quarter dividend of
$0.07 per share payable on December 15, 2006 to stockholders of record on November 28, 2006.
21
Blackbaud, Inc.
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 September
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 (U.S.GAAP). 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 our 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.
22
Blackbaud, Inc.
Item 2.
Managements discussion and analysis of financial condition and
results of operations (continued)
The application of SOP 97-2 requires judgment, including whether a software arrangement includes
multiple elements, and if so, whether vendor-specific objective evidence (VSOE) of fair value
exists for those elements. As we develop new products, we may experience difficulty in determining
VSOE regarding the fair value of those new products. This would result in the deferral of revenue
on those transactions until all elements of the arrangement have been delivered or until VSOE is
established.
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 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,
23
Blackbaud, Inc.
Item 2. Managements discussion and analysis of financial condition and results of operations (continued)
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, which was recorded in general and
administrative expenses. 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 consolidated 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 nine months ended September
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
consolidated 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.
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 consolidated
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
September 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.
24
Blackbaud, Inc.
Item 2. Managements discussion and analysis of financial condition and results of operations (continued)
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.
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.
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 September 30, |
|
|
Nine months ended September 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 |
|
|
15.7 |
% |
|
|
16.9 |
% |
|
|
17.1 |
% |
|
|
17.9 |
% |
Services |
|
|
34.2 |
|
|
|
33.6 |
|
|
|
32.7 |
|
|
|
32.6 |
|
Maintenance |
|
|
41.8 |
|
|
|
41.9 |
|
|
|
42.1 |
|
|
|
42.8 |
|
Subscriptions |
|
|
5.6 |
|
|
|
4.4 |
|
|
|
5.3 |
|
|
|
3.9 |
|
Other revenue |
|
|
2.7 |
|
|
|
3.2 |
|
|
|
2.8 |
|
|
|
2.8 |
|
|
|
|
|
|
Total revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license fees |
|
|
1.0 |
|
|
|
2.5 |
|
|
|
1.2 |
|
|
|
2.6 |
|
Cost of services |
|
|
17.4 |
|
|
|
17.1 |
|
|
|
17.5 |
|
|
|
17.0 |
|
Cost of maintenance |
|
|
6.6 |
|
|
|
6.2 |
|
|
|
7.0 |
|
|
|
6.5 |
|
Cost of subscriptions |
|
|
1.3 |
|
|
|
0.7 |
|
|
|
1.3 |
|
|
|
0.9 |
|
Cost of other revenue |
|
|
2.5 |
|
|
|
2.7 |
|
|
|
2.6 |
|
|
|
2.5 |
|
|
|
|
|
|
Total cost of revenue |
|
|
28.8 |
|
|
|
29.2 |
|
|
|
29.6 |
|
|
|
29.5 |
|
|
|
|
|
|
Gross profit |
|
|
71.2 |
|
|
|
70.8 |
|
|
|
70.4 |
|
|
|
70.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
20.6 |
|
|
|
20.0 |
|
|
|
21.2 |
|
|
|
20.5 |
|
Research and development |
|
|
11.5 |
|
|
|
12.4 |
|
|
|
12.4 |
|
|
|
12.8 |
|
General and administrative |
|
|
11.5 |
|
|
|
13.7 |
|
|
|
11.8 |
|
|
|
7.3 |
|
Amortization |
|
|
0.4 |
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
44.0 |
|
|
|
46.1 |
|
|
|
45.8 |
|
|
|
40.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
27.2 |
|
|
|
24.7 |
|
|
|
24.6 |
|
|
|
29.9 |
|
Interest income |
|
|
1.0 |
|
|
|
0.4 |
|
|
|
0.6 |
|
|
|
0.6 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income, net |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
Income before provision for income taxes |
|
|
28.1 |
|
|
|
25.0 |
|
|
|
25.0 |
|
|
|
30.4 |
|
Income tax provision |
|
|
11.2 |
|
|
|
7.2 |
|
|
|
9.8 |
|
|
|
8.5 |
|
|
|
|
|
|
Net income |
|
|
16.9 |
% |
|
|
17.8 |
% |
|
|
15.2 |
% |
|
|
21.9 |
% |
|
|
|
|
|
25
Blackbaud, Inc.
Item 2. Managements discussion and analysis of financial condition and results of operations (continued)
Comparison of the three months ended September 30, 2006 and 2005
Revenue
Third quarter of 2006 total revenue of $49.8 million increased by $6.7 million, or 15.6% compared
with $43.1 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 $7.8 million in the third quarter of
2006 increased by $0.5 million, or 6.8%, compared with $7.3 million in the comparable period in
2005. These amounts represent 15.7% and 16.9% of total revenue for the third quarter of 2006 and
2005, respectively. The increase in license fees, which is primarily volume driven, in the
three months ended September 30, 2006 is attributable to a $0.7 million increase in product sales
to new customers, including those obtained in the acquisition of Campagne Associates, Ltd. and a
$0.2 million decrease in product sales to our installed customer base.
Services
Revenue from services includes fees received from customers for consulting, installation,
implementation, training, donor prospect research and data modeling services. Third quarter
revenue from services of $17.0 million in 2006 increased by $2.5 million, or 17.2% compared with
$14.5 million in the third quarter of 2005. These amounts represent 34.2% and 33.6% of total
revenue for the third quarter of 2006 and 2005, respectively. The revenue increase is principally
the result of increased volume of services provided. 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 $14.9 million and $13.1 million in the third quarter of 2006 and 2005,
respectively, representing 87.8% and 90.6%, 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 $1.4 million in the third quarter of
2006 and 2005, respectively, and represent 12.2% and 9.4%, respectively, of total services revenue
for the third 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 $20.8 million in the third quarter of 2006 increased
$2.7 million, or 14.9%, compared with $18.1 million in the third quarter of 2005. These amounts
represent 41.8% and 41.9% of total revenue for the third quarter of 2006 and 2005, respectively.
The increase in maintenance revenue in the third quarter of 2006 over the third quarter of 2005 is
comprised of $2.3 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 $0.8 million of maintenance contracts that were not renewed.
Subscriptions
Revenue from subscriptions is principally comprised of revenue from hosting our software
applications for customers, certain data services, our online subscription training offerings and
our hosted internet fundraising application. Subscriptions revenue of $2.8 million in the third
quarter of 2006 increased $0.9 million, or 47.4%, compared with $1.9 million in the third quarter
of 2005. These amounts represent 5.6% and 4.4% of our total revenue for the third quarter of 2006
and 2005, respectively. The increase in subscriptions revenue in the third quarter of 2006 over
the third quarter of 2005 is comprised primarily of a $0.3 million increase in revenue from our
software hosting activities, a $0.3 million
26
Blackbaud, Inc.
Item 2. Managements discussion and analysis of financial condition and results of operations (continued)
increase in revenue from our hosted internet
fundraising application and a $0.1 million increase in revenue from our online analytics products.
Other revenue
Other revenue includes the sale of business forms that are used in conjunction with our software
products; reimbursement of travel-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 $1.4 million in the third quarter of 2006 was essentially
unchanged with the third quarter 2005. These amounts represent 2.7% and 3.2% of our total revenue
for the third quarter of 2006 and 2005, respectively.
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.
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.
Our consolidated statements of operations for the three months ended September 30, 2006 and 2005
includes $1.9 million and $1.6 million of stock-based compensation expense, respectively,
illustrated below:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Three months ended |
|
(in thousands) |
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
|
|
Cost of services |
|
$ |
122 |
|
|
$ |
55 |
|
Cost of maintenance |
|
|
26 |
|
|
|
6 |
|
Cost of subscriptions |
|
|
4 |
|
|
|
|
|
Sales and marketing |
|
|
193 |
|
|
|
38 |
|
Research and development |
|
|
183 |
|
|
|
22 |
|
General and administrative |
|
|
1,396 |
|
|
|
1,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense |
|
$ |
1,924 |
|
|
$ |
1,607 |
|
|
|
|
We have separately disclosed stock-based compensation throughout this discussion and in our
consolidated 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 below, the results as a percentage of segment revenue and
as a percentage of total revenue would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2006, restated (see Note 2) |
|
|
Three months ended September 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 |
|
|
6.6 |
% |
|
|
|
% |
|
|
6.6 |
% |
|
|
14.8 |
% |
|
|
|
% |
|
|
14.8 |
% |
Cost of services |
|
|
50.1 |
|
|
|
0.7 |
|
|
|
50.8 |
|
|
|
50.5 |
|
|
|
0.4 |
|
|
|
50.9 |
|
Cost of maintenance |
|
|
15.6 |
|
|
|
0.1 |
|
|
|
15.7 |
|
|
|
14.6 |
|
|
|
|
|
|
|
14.6 |
|
Cost of subscriptions |
|
|
23.5 |
|
|
|
0.1 |
|
|
|
23.6 |
|
|
|
15.5 |
|
|
|
|
|
|
|
15.5 |
|
Cost of other revenue |
|
|
90.8 |
|
|
|
|
|
|
|
90.8 |
|
|
|
86.0 |
|
|
|
|
|
|
|
86.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(as a
percent of total revenue) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
20.2 |
% |
|
|
0.4 |
% |
|
|
20.6 |
% |
|
|
20.0 |
% |
|
|
|
% |
|
|
20.0 |
% |
Research and development |
|
|
11.2 |
|
|
|
0.3 |
|
|
|
11.5 |
|
|
|
12.3 |
|
|
|
0.1 |
|
|
|
12.4 |
|
General and administrative |
|
|
8.7 |
|
|
|
2.8 |
|
|
|
11.5 |
|
|
|
10.2 |
|
|
|
3.5 |
|
|
|
13.7 |
|
27
Blackbaud, Inc.
Item 2. Managements discussion and analysis of financial condition and results of operations (continued)
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
third quarter of 2006 decreased by $0.6 million, or 54.5%, compared with $1.1 million in the third
quarter of 2005. These amounts represent 6.6% and 14.8% of license fee revenue in 2006 and 2005,
respectively. The decrease in cost of license fees is principally attributable to reduced reseller
commissions which have declined by $0.4 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, 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 $8.6 million in the third quarter of
2006, including $0.1 million in stock-based compensation, increased $1.2 million, or 16.2%,
compared with $7.4 million in the third quarter of 2005, which included $0.1 million in stock-based
compensation. Excluding stock-based compensation, these amounts represent 50.1% and 50.5% of total
services revenue for the third quarter of 2006 and 2005, respectively. Compared with the third
quarter of 2005, the increase is primarily related to salary, benefit and bonus expense, including
allocated costs, which increased $0.9 million. Other increases include increased travel-related
expense and services from contractors, totaling $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 13 of the consolidated financial statements.
Cost of revenue in providing consulting, installation, implementation, and customer training
(consulting and education services) was $6.5 million and $5.5 million in the third quarter of 2006
and 2005, respectively. These amounts represent 43.5% and 42.0% of the related revenue in the
third quarters of 2006 and 2005, respectively. The increased cost of consulting and education
services is primarily the result of a $0.9 million increase over the third 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 $1.2 million and $0.1 million in the third quarter of 2006 and 2005, respectively. These
amounts represent 55.8% and 71.4% of related revenues for the third quarter of 2006 and 2005,
respectively. Margin on analytic services improved versus the third 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 $3.3 million in the third quarter of
2006 increased $0.7 million, or 26.9%, compared with $2.6 million in the third quarter of 2005.
Excluding stock-based compensation, these amounts represent 15.6% and 14.6% of maintenance revenue
for the third quarter of 2006 and 2005, respectively. The increase in cost of maintenance is
principally the result of a $0.4 million increase compared with the third 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 to third parties based on
maintenance revenue.
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 $0.7 million in the third quarter of 2006 increased $0.4
million, or 133.3%, compared with $0.3 million in the third quarter of 2005. Excluding stock-based
28
Blackbaud, Inc.
Item 2. Managements discussion and analysis of financial condition and results of operations (continued)
compensation, these amounts represent 23.5% and 15.5% of subscriptions revenue for the third
quarter of 2006 and 2005, respectively. The increase in cost of subscriptions is principally due
to a $0.2 million increase in salary, benefit and bonus expense in the third quarter of 2006 and a
$0.1 million increase in data expense.
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 $1.2 million was
essentially unchanged from the comparable number in the third quarter of 2005. These amounts
represent 90.8% and 86.0% of other revenue for the third quarter of 2006 and 2005, respectively.
Decreases in conference costs of $0.1 million were offset by increases in billable travel-related
cost of $0.1 million in the third quarter of 2006.
Operating expenses
Sales and marketing
Sales and marketing expenses include human resource costs, sales and marketing organizations,
travel-related 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 $10.3 million in the third quarter of 2006, including $0.2
million of stock-based compensation, increased $1.7 million or 19.8% over third quarter 2005 costs
of $8.6 million, including less than $0.1 million in stock-based compensation. Excluding
stock-based compensation costs, sales and marketing expenses represent 20.2% and 20.0% of total
revenue in the third quarter of 2006 and 2005, respectively. Sales and marketing costs increased
$0.7 million primarily related to salary, benefit and bonus expense from increases in the size and
skill set of our sales force. Further increases are due from the payment of $0.3 million more in
the third quarter of 2006 related to higher commissionable sales and additional travel-related
expenses and marketing expenses of $0.3 million.
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 $5.7 million in the third quarter of 2006, including
$0.2 million of stock-based compensation, increased $0.4 million or 7.5% over third quarter 2005
costs of $5.3 million. Excluding stock-based compensation costs, research and development expenses
represented 11.2% and 12.3% of total revenue in the third 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 offset with $0.1 million
decrease 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 entry-level roles 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
$5.7 million in the third quarter of 2006, including $1.4 million of stock-based compensation,
decreased $0.2 million or 3.4% over third quarter 2005 costs of $5.9 million, which included $1.5
million of stock-based compensation expense. Excluding stock-based compensation, our third quarter
2006 general and administrative expenses represent 8.7% and 10.2% of total revenue in the third
quarter of 2006 and 2005, respectively. The decrease in general and administrative costs is
principally due to a reduction in costs related to Sarbanes-Oxley Act of 2002 compliance
activities.
29
Blackbaud, Inc.
Item 2. Managements discussion and analysis of financial condition and results of operations (continued)
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 items. To determine our tax provision, we
applied our full-year estimated effective tax rate of 38.7% to year-to-date net income. Our actual
effective tax rate for the three months ended September 30, 2006 was 39.6%. We had an annual
effective tax rate of 28.5% for the year ended 2005. The effective tax rate for the three-month
period ended September 30, 2005 was 28.9%, a period in which a change in state tax law resulted in
establishing a deferred tax asset related to certain state tax credits.
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 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 nine months ended September 30, 2006 and 2005
Revenue
Total revenue of $142.0 million for the nine months ended September 30, 2006 increased by $18.9
million, or 15.4%, compared with $123.1 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 $24.3 million in the nine months ended
September 30, 2006 increased by $2.2 million, or 10.0%, compared with $22.1 million in the
comparable period in 2005. These amounts represent 17.1% and 17.9% of total revenue for the first
nine months of 2006 and 2005, respectively. The increase in license fees, which is primarily
volume driven, in the nine months ended September 30, 2006 is attributable to a $2.1 million
increase in product sales to new customers, including those obtained in the acquisition of Campagne
Associates, Ltd., and a $0.1 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 $2.2 million increase in license fees, $2.0 million came from sales of our core
software applications, including $1.0 million sold to new customers obtained in the acquisition of
Campagne Associates, Ltd., $0.2 million came from internet-based products and $0.1 million came
from ticketing 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 $46.4 million for the nine months ended September 30, 2006 increased by $6.3 million,
or 15.7%, compared with $40.1 million in the comparable period of 2005. These amounts represent
32.7% and 32.6% of total revenue for the first nine months 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 $41.0 million and $35.8 million in the first nine months of 2006 and
2005, respectively, representing 88.5% and 89.4%, 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
$5.4 million and $4.3 million in the first nine months of 2006 and 2005, respectively, and
represent 11.5% and 10.6%, respectively, of total services revenue for that period.
30
Blackbaud, Inc.
Item 2. Managements discussion and analysis of financial condition and results of operations (continued)
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 $59.7 million in the nine months ended September 30,
2006 increased $7.1 million, or 13.5%, compared with $52.6 million in the comparable period of
2005. These amounts represent 42.1% and 42.8% of our total revenue for the first nine months of
2006 and 2005, respectively. The increase in maintenance revenue in the first nine months of 2006
over the same period in 2005 is comprised of $6.2 million from new maintenance contracts associated
with new license agreements, including new products, $2.0 million from maintenance contract
inflationary rate adjustments, and $1.2 million from maintenance agreements on customers acquired
as part of the purchase of Campagne Associates, Ltd., offset by $2.3 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 $7.5 million in the nine months ended September 30, 2006
increased $2.6 million, or 53.0%, compared with $4.9 million in the comparable period of 2005.
These amounts represent 5.3% and 3.9% of our total revenue for the first nine months of 2006 and
2005, respectively. The increase in subscriptions revenue in the first nine months of 2006 over
the same period in 2005 is comprised primarily of a $0.8 million increase in revenue from our
online analytics products, a $0.6 million increase in revenue from our hosting activities and a
$0.8 million increase in revenue from all our internet solutions.
Other revenue
Other revenue includes the sale of business forms that are used in conjunction with our software
products; reimbursement of travel-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 $4.0 million in the nine months ended September 30, 2006
increased $0.6 million, or 17.6%, compared with $3.4 million in the comparable period of 2005.
These amounts represent 2.8% of our total revenue for the first nine months of 2006 and 2005. The
increase in revenue is primarily from a $0.3 million increase in reimbursable travel-related costs
related to our services business, a $0.1 million increase in our business forms sales and a $0.1
million increase in sales of hardware related to ticketing solution.
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.
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.
Our consolidated statements of operations for the nine months ended September 30, 2006 and 2005
includes $5.9 million of stock-based compensation expense and $2.7 million of stock-based
compensation benefit, respectively, illustrated below:
31
Blackbaud, Inc.
Item 2. Managements discussion and analysis of financial condition and results of operations (continued)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
Nine months ended |
|
(in thousands) |
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
|
|
Cost of services |
|
$ |
402 |
|
|
$ |
229 |
|
Cost of maintenance |
|
|
84 |
|
|
|
28 |
|
Cost of subscriptions |
|
|
13 |
|
|
|
|
|
Sales and marketing |
|
|
633 |
|
|
|
182 |
|
Research and development |
|
|
562 |
|
|
|
119 |
|
General and administrative |
|
|
4,206 |
|
|
|
(3,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total expense (benefit) |
|
$ |
5,900 |
|
|
$ |
(2,713 |
) |
|
|
|
We have separately disclosed stock-based compensation throughout this discussion and in our
consolidated 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 below, the results as a percentage
of segment revenue and as a percentage of total revenue would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006, restated (see Note 2) |
|
|
Nine months ended September 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 |
|
|
7.0 |
% |
|
|
|
% |
|
|
7.0 |
% |
|
|
14.3 |
% |
|
|
|
% |
|
|
14.3 |
% |
Cost of services |
|
|
52.8 |
|
|
|
0.8 |
|
|
|
53.6 |
|
|
|
51.8 |
|
|
|
0.6 |
|
|
|
52.4 |
|
Cost of maintenance |
|
|
16.5 |
|
|
|
0.1 |
|
|
|
16.6 |
|
|
|
15.0 |
|
|
|
0.1 |
|
|
|
15.1 |
|
Cost of subscriptions |
|
|
23.4 |
|
|
|
0.2 |
|
|
|
23.6 |
|
|
|
23.2 |
|
|
|
|
|
|
|
23.2 |
|
Cost of other revenue |
|
|
94.0 |
|
|
|
|
|
|
|
94.0 |
|
|
|
90.2 |
|
|
|
|
|
|
|
90.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(as a percent
of total revenue) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
20.7 |
% |
|
|
0.5 |
% |
|
|
21.2 |
% |
|
|
20.4 |
% |
|
|
0.1 |
% |
|
|
20.5 |
% |
Research and development |
|
|
12.0 |
|
|
|
0.4 |
|
|
|
12.4 |
|
|
|
12.7 |
|
|
|
0.1 |
|
|
|
12.8 |
|
General and administrative |
|
|
8.9 |
|
|
|
2.9 |
|
|
|
11.8 |
|
|
|
9.9 |
|
|
|
(2.6 |
) |
|
|
7.3 |
|
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 $1.7 million for the
nine months ended September 30, 2006 decreased by $1.5 million, or 46.9%, compared with $3.2
million in the comparable period of 2005. These amounts represent 7.0% and 14.3% of license fee
revenue in the first nine months of 2006 and 2005, respectively. The decreased cost of license
fees compared to the first nine months of 2006 is primarily due to the fact that reseller
commissions have declined by $1.2 million as a result of the discontinued use of those sales
channels. A further decrease of $0.3 million is due to decreased third-party license expenses.
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 $24.9 million in the nine
months ended September 30, 2006, including $0.4 million in stock-based compensation, increased $3.9
million, or 18.6%, compared with $21.0 million in the comparable period of 2005, which included
$0.2 million in stock-based compensation. Excluding stock-based compensation, these amounts
represent 52.8% and 51.8% of total services revenue for the first nine
32
Blackbaud, Inc.
Item 2. Managements discussion and analysis of financial condition and results of operations (continued)
months of 2006 and 2005,
respectively. The increase in cost of services compared with the first nine months of 2005 is
primarily the result of a $2.8 million increase in salary, benefit and bonus expense, including
allocated costs. In addition, travel-related expense in the first nine months of 2006 increased by
$0.4 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 13 of the consolidated financial statements.
Cost of revenue in providing consulting, installation, implementation and customer training
(consulting and education services) was $19.3 million and $15.5 million in the first nine months of
2006 and 2005, respectively. These amounts represent 46.9% and 43.4% of the related revenue in the
first nine months of 2006 and 2005, respectively. The increased cost of consulting and education
services is primarily the result of a $2.9 million increase over the comparable period of 2005 for
salary, benefits and bonus expense, as headcount was added to meet increased customer demand for
these services and $0.1 million increases in each of travel-related expenses, recruiting and
training supplies and a $0.2 million increase in the use of outside consultants.
Cost of revenue in providing donor prospect research and data modeling services (analytic services)
was $2.7 million in the first nine months of 2006 compared with $2.6 in the same period of 2005.
These amounts represent 50.0% and 61.1% of related revenues for the first nine months 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 and other costs incurred in providing
support and services to our customers. Cost of maintenance of $9.9 million in the nine months
ended September 30, 2006, increased $2.0 million, or 25.3%, compared with $7.9 million in the
comparable period of 2005. Excluding stock-based compensation, these amounts represent 16.5% and
15.0% of maintenance revenue for the first nine months of 2006 and 2005, respectively. The
increased cost of maintenance compared with the first nine months of 2005 is primarily the result
of a $1.3 million increase in salary, benefit and bonus expense due to increased headcount required
to provide support activities and a $0.6 million increase in third-party software royalty expenses
in connection with 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 $1.8 million in the nine months ended September 30, 2006
increased $0.7 million, or 63.6%, compared with $1.1 million in the comparable period of 2005.
Excluding stock-based compensation, these amounts represent 23.4% and 23.2% of subscriptions
revenue for the first nine months of 2006 and 2005, respectively. The increased cost of
subscriptions compared with the first nine months of 2005 is the result of a $0.5 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 $3.8 million in the
nine months ended September 30, 2006 increased $0.7 million, or 22.6%, compared with $3.1 million
in the comparable period of 2005. These amounts represent 94.0% and 90.2% of other revenue for the
first nine months of 2006 and 2005, respectively. The increased cost of other revenue compared
with the first nine months of 2005 is primarily the result of a $0.6 million increase in billable
travel-related costs and an increase of $0.2 million for costs of forms and hardware. These
increases were offset by decreases in conference costs and salary, benefits and bonus expense of
$0.2 million.
33
Blackbaud, Inc.
Item 2. Managements discussion and analysis of financial condition and results of operations (continued)
Operating expenses
Sales and marketing
Sales and marketing expenses include human resource costs of our sales and marketing organizations,
travel-related 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 $30.1 million in the nine months ended September 30, 2006,
including $0.6 million of stock-based compensation, increased $4.8 million or 19.0% over the first
nine months of 2005 costs of $25.3 million, including $0.2 million in stock-based compensation.
Excluding stock-based compensation costs, sales and marketing expenses represent 20.7% and 20.4% of
total revenue in the first nine months of 2006 and 2005, respectively. The increase in sales and
marketing costs compared with the first nine months of 2005 is the result of a $1.7 million
increase in salary, benefits and bonus expense due to increases in the size and skill set of our
sales force, combined with $1.3 million higher expense related to higher commissionable sales and a
increase of $0.5 million for travel-related expenses. Marketing costs contributed an additional
increase of $0.3 million and relocation costs and costs of outside contractors each increased $0.1
million.
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 $17.7 million in the nine months ended September 30,
2006, including $0.6 million of stock-based compensation, increased $1.9 million or 12.0% over the
first nine months of 2005 costs of $15.8 million, including $0.1 million in stock-based
compensation. Excluding stock-based compensation costs, research and development expenses
represented 12.0% and 12.7% of total revenue in the first nine months of 2006 and 2005,
respectively. The increase in research and development costs compared with the first nine months
of 2005 is primarily due to a $1.3 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 $0.1 million increase in offshore development and other
costs.
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 $16.8 million in the nine months ended September 30, 2006, including $4.2 million of stock-
based compensation, increased $7.8 million over costs of first nine months of 2005 of $9.0 million,
which included a net benefit of $3.3 million in stock-based compensation. Excluding stock-based
compensation, our first nine months of 2006 general and administrative expenses of $12.6 million
increased by $0.4 million, or 3.3%, over the first nine months of 2005 expense of $12.2 million and
represent 8.9% and 9.9% of total revenue in the first nine months of 2006 and 2005, respectively.
The increase in general and administrative costs compared with the first nine months of 2006 is
principally due to $0.9 million in increased salary, benefits and bonus expense as we increased
headcount, offset by $0.4 million less spending on costs associated with operating a public company
as compliance costs related to the Sarbanes-Oxley Act of 2002 decreased after completing the first
year of compliance. Other decreases of $0.1 million were experienced in both travel-related
expenses and the use of outside services.
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 items. Our actual effective tax rate for
the nine months ended September 30, 2006 was 39.1%. 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 nine months
ended September 30, 2005 was 28.0%, 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
34
Blackbaud, Inc.
Item 2. Managements discussion and analysis of financial condition and results of operations (continued)
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 September 30, 2006, cash and cash equivalents totaled $54.3 million, compared to $22.7 million
at December 31, 2005. The $31.6 million increase in cash and cash equivalents during the first
nine months of 2006 is the result of $45.4 million of cash generated from operations and $11.6
million in proceeds and tax benefits from the exercise of stock options, partially offset by $7.8
million used to purchase our stock, $6.1 million used in the acquisition of Campagne Associates,
Ltd., $9.2 million in dividends paid to stockholders and $2.3 million used to purchase fixed
assets.
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 increased $6.3 million to $45.4 million in the nine-month
period ended September 30, 2006 compared to $39.1 million as reported for the nine months ended
September 30, 2005. Net cash provided by operating activities in the nine-month period ended
September 30, 2006 gives effect to the impact of applying the modified prospective transition
method for adoption of SFAS 123(R) as noted below, which resulted in the classification of $5.6
million of tax benefit on exercise of stock options in cash flows from financing activities,
whereas the comparable period in 2005 includes $6.0 million of tax benefit on exercise of stock
options in cash flows from operating activities.
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 $6.0 million and $5.3 million in the nine-month periods ended September 30, 2006
and 2005, respectively), together with changes in our balances of accounts payable, accrued
expenses, accrued liabilities and other current assets (collectively representing a decrease in
working capital of $0.3 million and $11.1 million in the nine-month periods ended September 30,
2006 and 2005, respectively) due to timing of payments. As noted in the previous paragraph, 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 nine-month period ended September 30, 2006 for investing activities was $8.4
million compared to $3.2 million of net cash used in investing activities during the nine-month
period ended September 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 nine-month period ended September 30, 2006 was $5.4
million, comprised of $7.8 million used for repurchases of our stock and dividend payments of $9.2
million to stockholders, offset by proceeds of $6.0 million from the exercise of stock options and
$5.6 million of excess windfall tax benefits on those exercises.
35
Blackbaud, Inc.
Item 2. Managements discussion and analysis of financial condition and results of operations (continued)
Comparatively, net cash used in
financing activities for the nine-month period ended September 30, 2005 was $57.2 million,
comprised of $56.2 million for purchases of our stock and dividend payments of $6.4 million to
stockholders, offset by proceeds of $5.5 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 September 30, 2006, we had no outstanding debt.
At September 30, 2006 we had future minimum lease commitments of $21.6 million as follows (amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
2006 |
|
|
2007 |
|
|
2008-2009 |
|
|
2010 and after |
|
|
Totals |
|
|
|
|
Operating leases |
|
$ |
1,347 |
|
|
$ |
5,347 |
|
|
$ |
11,175 |
|
|
$ |
3,764 |
|
|
$ |
21,633 |
|
These commitments have not been reduced by the future minimum lease commitments under various
sublease agreements extended through 2008.
Foreign currency exchange rates
Approximately 11.0% of our total net revenue for the nine-month period ended September 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 consolidated 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 September 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
36
Blackbaud, Inc.
Item 2. Managements discussion and analysis of financial condition and results of operations (continued)
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 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 United States. 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 we expect to be able to qualify for the new tax deduction in future years, we do
not expect to qualify for the deduction in the current year, as we do not expect to have any
taxable income in 2006. We do not believe that the adoption of FSP 109-1 will materially impact
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 33.
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 nine months ended September 30, 2006 and 2005.
37
Blackbaud, Inc.
Item 2. Managements discussion and analysis of financial condition and results of operations (continued)
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 September 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.
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.
38
Blackbaud, Inc.
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 September 30,
2006 under our stock repurchase program announced on July 26, 2005 appears in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, July 1, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,051,346 |
|
July 1, 2006 through July 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,051,346 |
|
August 1, 2006 through August 31, 2006 |
|
|
42,060 |
|
|
$ |
21.04 |
|
|
|
40,700 |
|
|
$ |
20,238,160 |
|
September 1, 2006 through September
30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,238,160 |
|
Total |
|
|
42,060 |
|
|
$ |
21.04 |
|
|
|
40,700 |
|
|
$ |
20,238,160 |
|
|
|
|
(1) |
|
Includes 1,360 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 6. Exhibits
Exhibits:
|
31.1 |
|
Certification by the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
|
Certification by the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
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. |
39
Blackbaud, Inc.
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.
|
|
Date: July 6, 2007 |
By: |
/s/ Marc E. Chardon
|
|
|
|
Marc E. Chardon |
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
Date: July 6, 2007 |
By: |
/s/ Timothy V. Williams
|
|
|
|
Timothy V. Williams |
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
40
Exhibit 31.1
Blackbaud, Inc.
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 of internal control over financial reporting, 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 |
|
|
Exhibit 31.2
Blackbaud, Inc.
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 of internal control over financial reporting, 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 |
|
|
Exhibit 32.1
Blackbaud, Inc.
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 September 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 |
|
|
Exhibit 32.2
Blackbaud, Inc.
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 September 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 |
|
|