Blackboard (BBBB)

 

BLACKBOARD INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

the purchase price allocation that are not yet finalized relate primarily to income and non-income based taxes. The preliminary estimated purchase price is allocated as follows (in thousands):

 

 

Definite-lived intangible assets of $60.3 million consist of the value assigned to NTI’s customer relationships of $42.1 million, developed and core technology of $17.4 million and trademarks of $0.8 million.

 

The value assigned to NTI’s customer relationships was determined by discounting the estimated cash flows associated with existing customers as of January 31, 2008, after taking into consideration expected attrition of the existing customer base. The estimated cash flows were based on revenues for those existing customers net of operating expenses and net of contributory asset charges associated with servicing those customers. The projected revenues were based on revenue growth rates and customer renewal rates. Operating expenses were estimated based on the supporting infrastructure expected to sustain the assumed revenue growth rates. Net contributory asset charges were based on the estimated fair value of those assets that contribute to the generation of the estimated cash flows. A discount rate of 19% was deemed appropriate for valuing the existing customer base. The Company amortizes the value of NTI’s customer relationships in proportion to the respective discounted cash flows over an estimated useful life of five years. Customer relationships are not deductible for tax purposes.

 

The value assigned to NTI’s developed and core technology was determined by discounting the estimated future cash flows associated with the existing developed and core technologies to their present value. Developed and core technology, which are comprised of products that have reached technological feasibility, includes products in NTI’s current product line. The revenue projections used to value the developed and core technology were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by NTI and its competitors. A discount rate of 19% was deemed appropriate for valuing developed and core technology and was based on the risks associated with the respective cash flows taking into consideration the Company’s weighted average cost of capital. The Company amortizes the developed and core technology on a straight-line basis over an estimated useful life of three years. Developed and core technology are not deductible for tax purposes.

 

The value assigned to NTI’s trademarks was determined by discounting the estimated royalty savings associated with an estimated royalty rate for the use of the trademarks to their present value. The trademarks are comprised of NTI’s trade name and various trademarks related to its existing product lines. The royalty rates used to value the trademarks were based on estimates of prevailing royalty rates paid for the use of similar trade names and trademarks in market transactions involving licensing arrangements of companies that operate in service-related industries. A discount rate of 19% was deemed appropriate for valuing NTI’s

 

BLACKBOARD INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

trademarks and was based on the risks associated with the respective royalty savings taking into consideration the Company’s weighted average cost of capital. The Company amortizes the trademarks on a straight-line basis over an estimated useful life of three years. Trademarks are not deductible for tax purposes.

 

Of the total estimated purchase price, approximately $143.1 million has been allocated to goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for tax purposes.

 

As a result of the NTI merger, the Company recorded net deferred tax liabilities of approximately $16.8 million in its preliminary purchase price allocation. This balance is comprised primarily of approximately $24.1 million in deferred tax liabilities resulting primarily from the related intangibles identified from the merger. The deferred tax liabilities are offset by approximately $7.3 million in deferred tax assets that relate primarily to federal and state net operating losses and certain amortization and depreciation expenses.

 

 

Under the purchase method of accounting, the total estimated
purchase price is allocated to NTI’s net tangible and
intangible assets based on their estimated fair values as of
January 31, 2008. The excess of the purchase price over the
net tangible and identifiable intangible assets was recorded as
goodwill. The preliminary allocation of the purchase price as
shown in the table below was based upon management’s
preliminary valuation, which was based on estimates and
assumptions that are subject to change. The areas of

 

BLACKBOARD
INC.

 

NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

the purchase price allocation that are not yet finalized relate
primarily to income and non-income based taxes. The preliminary
estimated purchase price is allocated as follows (in thousands):

 

 

Definite-lived intangible assets of $60.3 million consist
of the value assigned to NTI’s customer relationships of
$42.1 million, developed and core technology of
$17.4 million and trademarks of $0.8 million.

 

The value assigned to NTI’s customer relationships was
determined by discounting the estimated cash flows associated
with existing customers as of January 31, 2008, after
taking into consideration expected attrition of the existing
customer base. The estimated cash flows were based on revenues
for those existing customers net of operating expenses and net
of contributory asset charges associated with servicing those
customers. The projected revenues were based on revenue growth
rates and customer renewal rates. Operating expenses were
estimated based on the supporting infrastructure expected to
sustain the assumed revenue growth rates. Net contributory asset
charges were based on the estimated fair value of those assets
that contribute to the generation of the estimated cash flows. A
discount rate of 19% was deemed appropriate for valuing the
existing customer base. The Company amortizes the value of
NTI’s customer relationships in proportion to the
respective discounted cash flows over an estimated useful life
of five years. Customer relationships are not deductible for tax
purposes.

 

The value assigned to NTI’s developed and core technology
was determined by discounting the estimated future cash flows
associated with the existing developed and core technologies to
their present value. Developed and core technology, which are
comprised of products that have reached technological
feasibility, includes products in NTI’s current product
line. The revenue projections used to value the developed and
core technology were based on estimates of relevant market sizes
and growth factors, expected trends in technology and the nature
and expected timing of new product introductions by NTI and its
competitors. A discount rate of 19% was deemed appropriate for
valuing developed and core technology and was based on the risks
associated with the respective cash flows taking into
consideration the Company’s weighted average cost of
capital. The Company amortizes the developed and core technology
on a straight-line basis over an estimated useful life of three
years. Developed and core technology are not deductible for tax
purposes.

 

The value assigned to NTI’s trademarks was determined by
discounting the estimated royalty savings associated with an
estimated royalty rate for the use of the trademarks to their
present value. The trademarks are comprised of NTI’s trade
name and various trademarks related to its existing product
lines. The royalty rates used to value the trademarks were based
on estimates of prevailing royalty rates paid for the use of
similar trade names and trademarks in market transactions
involving licensing arrangements of companies that operate in
service-related industries. A discount rate of 19% was deemed
appropriate for valuing NTI’s

 

BLACKBOARD
INC.

 

NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

trademarks and was based on the risks associated with the
respective royalty savings taking into consideration the
Company’s weighted average cost of capital. The Company
amortizes the trademarks on a straight-line basis over an
estimated useful life of three years. Trademarks are not
deductible for tax purposes.

 

Of the total estimated purchase price, approximately
$143.1 million has been allocated to goodwill. Goodwill
represents the excess of the purchase price of an acquired
business over the fair value of the net tangible and intangible
assets acquired. Goodwill is not deductible for tax purposes.

 

As a result of the NTI merger, the Company recorded net deferred
tax liabilities of approximately $16.8 million in its
preliminary purchase price allocation. This balance is comprised
primarily of approximately $24.1 million in deferred tax
liabilities resulting primarily from the related intangibles
identified from the merger. The deferred tax liabilities are
offset by approximately $7.3 million in deferred tax assets
that relate primarily to federal and state net operating losses
and certain amortization and depreciation expenses.

 

 

BLACKBOARD INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

core technology, which are comprised of products that have reached technological feasibility, includes products in NTI’s current product line. The revenue projections used to value the developed and core technology were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by NTI and its competitors. A discount rate of 19% was deemed appropriate for valuing developed and core technology and was based on the risks associated with the respective cash flows taking into consideration the Company’s weighted average cost of capital. Blackboard amortizes the developed and core technology on a straight-line basis over an estimated useful life of three years. Developed and core technology are not deductible for tax purposes.

 

The value assigned to NTI’s trademarks was determined by discounting the estimated royalty savings associated with an estimated royalty rate for the use of the trademarks to their present value. The trademarks are comprised of NTI’s trade name and various trademarks related to its existing product lines. The royalty rates used to value the trademarks were based on estimates of prevailing royalty rates paid for the use of similar trade names and trademarks in market transactions involving licensing arrangements of companies that operate in service-related industries. A discount rate of 19% was deemed appropriate for valuing NTI’s trademarks and was based on the risks associated with the respective royalty savings taking into consideration the Company’s weighted average cost of capital. Blackboard amortizes the trademarks on a straight-line basis over an estimated useful life of three years. Trademarks are not deductible for tax purposes.

 

Of the total estimated purchase price, approximately $143.1 million has been allocated to goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for tax purposes.

 

In accordance with FASB Statement No. 142, “Goodwill and Other Intangible Assets,” goodwill will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). In the event that management determines that the goodwill has become impaired, the Company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.

 

As a result of the NTI merger, the Company recorded net deferred tax liabilities of approximately $16.8 million in its preliminary purchase price allocation. This balance is comprised primarily of approximately $24.1 million in deferred tax liabilities resulting primarily from the related intangibles identified from the merger. The deferred tax liabilities are offset by approximately $7.3 million in deferred tax assets that relate primarily to federal and state net operating losses and certain amortization and depreciation expenses.

 

 

BLACKBOARD INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

technology on a straight-line basis over an estimated useful life of three years. Developed and core technology are not deductible for tax purposes.

 

The value assigned to NTI’s trademarks was determined by discounting the estimated royalty savings associated with an estimated royalty rate for the use of the trademarks to their present value. The trademarks are comprised of NTI’s trade name and various trademarks related to its existing product lines. The royalty rates used to value the trademarks were based on estimates of prevailing royalty rates paid for the use of similar trade names and trademarks in market transactions involving licensing arrangements of companies that operate in service-related industries. A discount rate of 19% was deemed appropriate for valuing NTI’s trademarks and was based on the risks associated with the respective royalty savings taking into consideration the Company’s weighted average cost of capital. Blackboard amortizes the trademarks on a straight-line basis over an estimated useful life of three years. Trademarks are not deductible for tax purposes.

 

Of the total estimated purchase price, approximately $143.1 million has been allocated to goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for tax purposes.

 

In accordance with FASB Statement No. 142, “Goodwill and Other Intangible Assets,” goodwill will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). In the event that management determines that the goodwill has become impaired, the Company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.

 

As a result of the NTI merger, the Company recorded net deferred tax liabilities of approximately $16.8 million in its preliminary purchase price allocation. This balance is comprised primarily of approximately $24.1 million in deferred tax liabilities resulting primarily from the related intangibles identified from the merger. The deferred tax liabilities are offset by approximately $7.3 million in deferred tax assets that relate primarily to federal and state net operating losses and certain amortization and depreciation expenses.

 

 

BLACKBOARD INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL — (Continued)

 

technology on a straight-line basis over an estimated useful life of three years. Developed and core technology are not deductible for tax purposes.

 

The value assigned to NTI’s trademarks was determined by discounting the estimated royalty savings associated with an estimated royalty rate for the use of the trademarks to their present value. The trademarks are comprised of NTI’s trade name and various trademarks related to its existing product lines. The royalty rates used to value the trademarks were based on estimates of prevailing royalty rates paid for the use of similar trade names and trademarks in market transactions involving licensing arrangements of companies that operate in service-related industries. A discount rate of 19% was deemed appropriate for valuing NTI’s trademarks and was based on the risks associated with the respective royalty savings taking into consideration the Company’s weighted average cost of capital. Blackboard amortizes the trademarks on a straight-line basis over an estimated useful life of three years. Trademarks are not deductible for tax purposes.

 

Of the total estimated purchase price, approximately $143.0 million has been allocated to goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for tax purposes.

 

In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” goodwill will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). In the event that management determines that the goodwill has become impaired, the Company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.

 

As a result of the NTI merger, the Company recorded net deferred tax liabilities of approximately $16.8 million in its preliminary purchase price allocation. This balance is comprised primarily of approximately $24.1 million in deferred tax liabilities resulting primarily from the related intangibles identified from the merger. The deferred tax liabilities are offset by approximately $7.3 million in deferred tax assets that relate primarily to federal and state net operating losses and certain amortization and depreciation expenses.

 

BLACKBOARD INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Of the total estimated purchase price, a preliminary estimate of $21.7 million has been allocated to net tangible assets and $73.3 million has been allocated to definite-lived intangible assets acquired. Definite-lived intangible assets of $73.3 million consist of the value assigned to WebCT’s customer relationships of $39.6 million and developed and core technology of $33.7 million.

 

The value assigned to WebCT’s customer relationships was determined by discounting the estimated cash flows associated with the existing customers as of the acquisition date taking into consideration expected attrition of the existing customer base. The estimated cash flows were based on revenues for those existing customers net of operating expenses and net contributory asset charges associated with servicing those customers. The estimated revenues were based on revenue growth rates and customer renewal rates. Operating expenses were estimated based on the supporting infrastructure expected to sustain the assumed revenue growth rates. Net contributory asset charges were based on the estimated fair value of those assets that contribute to the generation of the estimated cash flows. A discount rate of 16% was deemed appropriate for valuing the existing customer base. The Company is amortizing the value of customer relationships proportionally to the respective discounted cash flows over an estimated useful life of five years. Customer relationships are not deductible for tax purposes.

 

Developed and core technology, which is comprised of products that have reached technological feasibility, includes products in WebCT’s product line. The value assigned to WebCT’s developed and core technology was determined by discounting the estimated future cash flows associated with the existing and core technologies to their present value. The revenue estimates used to value the developed and core technology were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the Company and its competitors. The rates utilized to discount the net cash flows of developed and core technology to their present value were based on the risks associated with the respective cash flows taking into consideration the Company’s weighted average cost of capital. A discount rate of 16% was deemed appropriate for valuing developed and core technology. The Company is amortizing the developed and core technology on a straight-line basis over an estimated useful life of three years. Developed and core technology are not deductible for tax purposes.

 

Of the total estimated purchase price, approximately $92.5 million has been allocated to goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for tax purposes.

 

BLACKBOARD INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As a result of the WebCT acquisition, the Company recorded net deferred tax assets of approximately $486,000 in purchase accounting. This balance is comprised primarily of $36.0 million of deferred tax assets related to federal net operating losses, capitalized research and development, and certain amortization and depreciation expenses. The deferred tax assets are offset by $35.5 million in deferred tax liabilities resulting primarily from the related intangibles identified from the acquisition and the reduction in WebCT deferred revenues resulting from purchase accounting.