Index to Financial Statements



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year ended December 31, 2009

or

¨For the Fiscal Year ended December 31, 2012
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________.

For the transition period from                     to                    .

Commission file number: 000-50600

BLACKBAUD, INC.

(Exact name of registrant as specified in its charter)

Delaware11-2617163

(State or other jurisdiction of

(I.R.S. Employer Identification No.)
incorporation or organization)

 

(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

(Registrant’sRegistrant's telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange

on which Registered

Common Stock, $0.001 Par Value

The NASDAQ Stock Market LLC

(NASDAQ Global Select Market)

Securities Registered Pursuant to Section 12(g) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES x[ X ] NO ¨

[ ]


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES ¨[ ] NO x

[X ]


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 x[ X ] NO ¨

[ ]


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ¨[X] NO ¨

[ ]


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’sregistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

[ ]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerate filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

                Large accelerated filer  xAccelerated filer  ¨
                Non-accelerated filer  ¨Smaller reporting company  ¨

Large accelerated filer  [X]                       Accelerated filer [ ]              Non-accelerated filer  [ ]     Smaller reporting company  [ ]

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨[ ] NO [X]


x

The aggregate market value of the registrant’sregistrant's common stock held by non-affiliates of the registrant on June 30, 20092012 (based on the closing sale price of $15.55$25.67 on that date), was approximately $588,267,650.$870,484,845. Common stock held by each officer and director and by each person known to the registrant who owned 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of the registrant’s common stockCommon Stock outstanding at as of February 12, 20102013 was 44,551,083.

45,630,704.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’sregistrant's definitive Proxy Statement for the 20102013 Annual Meeting of Stockholders currently scheduled to be held June 23, 201019, 2013 are incorporated by reference into Part III hereof.


Index to Financial Statements



BLACKBAUD, INC.

ANNUAL REPORT ON FORM 10-K

Table of Contents

TABLE OF CONTENTS

   Page

PART I

 Page No.

Item 1.

PART I		 

Item 1.

Business

1

Item 1A.

Risk factors

15
12

Item 1B.

Unresolved staff comments

27
23

Item 2.

Properties

27
23

Item 3.

Legal proceedings

23
Item 4.
Mine Safety Disclosure
23
 
27PART II

Item 4.

Submission of matters to a vote of security holders

27

PART II

Item 5.

Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities

28
24

Item 6.

Selected consolidated financial data

33
28

Item 7.

Management’s discussion and analysis of financial condition and results of operations

35
31

Item 7A.

Quantitative and qualitative disclosures about market risk

58
53

Item 8.

Financial statements and supplementary data

58
53

Item 9.

Changes in and disagreements with accountants on accounting and financial disclosure

58
53

Item 9A.

Controls and procedures

58
53

Item 9B.

Other information

53
 
59PART III

PART III

Item 10.

Directors, executive officers and corporate governance

60
54

Item 11.

Executive compensation

60
54

Item 12.

Security ownership of certain beneficial owners and management and related stockholder matters

60
54

Item 13.

Certain relationships, related transactions and director independence

60
54

Item 14.

Principal accountant fees and services

54
 
60PART IV

PART IV

Item 15.

Exhibits and financial statement schedules

61
55










Index to Financial Statements



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain statements that may be deemed to be “forward-looking statements” that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements in this report not dealing with historical results or current facts are forward-looking and are based on estimates, assumptions and projections. Statements which include the words “believes,” “seeks,” “expects,” “may,” “might,” “should,” “intends,” “likely,” “targets,” “plans,” “anticipates,” “estimates” or the negative version of those words and similar statements of a future or forward-looking nature identify forward-looking statements.

Although we attempt to be accurate in making these forward-looking statements, it is possible that future circumstances might differ from the assumptions on which such statements are based. In addition, other important factors that could cause results to differ materially include those set forth under “Item 1A. Risk factors” and elsewhere in this report and in our other SEC filings. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

Item 1. BUSINESS

Business

Overview

We are the leading global provider of software and related services designed specifically for nonprofit organizations. Our missionstated company purpose is to makepower the world a better placebusiness of philanthropy from fundraising to outcomes. We strive to help our customers accomplish their missions and are guided by working with the nonprofit community to improve lives. We support our mission statement through the following corporate values:


Our people make us great.

Customers are at the heart of everything we do.

We must be good stewards of our resources.

Innovation drives success.

Our actions are guided by honesty and integrity.

Service to others makes the world a better place.

Our customers use our products and services to help increase donations, reduce fundraising costs, build online communities and improve communications with constituents, manage their finances and optimize operations. We have focused solely on the nonprofit market since our incorporation in 1982. At the end of 2009,2012, we had approximately 22,000more than 27,000 customers spread over 5561 countries. Our customers come from nearly every segment of the nonprofit sector, including education, foundations, health and human services, faith-based, arts and cultural, public and societal benefits, environment and animal welfare, andas well as international and foreign affairs.


Nonprofit Industry

The nonprofit industry is large and diverse

There were more than 1.7nearly 1.6 million U.S. nonprofit organizations registered with the Internal Revenue Service in 2008,2011, including 1.21.1 million charitable 501(c)(3) organizations, and we estimate there are approximately another 2.03 million nonprofit organizationscharities internationally. According to Giving USA 2009,2012, donations to nonprofit

Index to Financial Statements

organizations in the U.S.United States in 20082011 were $307.7$298.4 billion, amounting to 2.2%2.0% of U.S. GDP.GDP, which increased from donations in 2010 of $286.9 billion. The compound annual growth rate of donations over the 40 year40-year period from 19681971 to 20082011 was 7.2%6.6%, not adjusted for inflation. The compound annual growth rate of U.S. GDP over the same 40-year period was 6.7%, not adjusted for inflation. These nonprofit organizations also receive fees for services they provide, which are estimated at approximately $850 billionmore than $1 trillion annually.

Johns Hopkins University’s 2006 Nonprofit Employment Data Project, the most recent survey on nonprofit employment data, indicated that nonprofits employ nearly 10% of the work force in the United States and more if volunteers are included. Also according to this study, worldwide, nonprofit organizations accounted for $1.3 trillion in total annual expenditures.


Traditional methods of fundraising are often costly and inefficient

Many nonprofits use manual methods or stand-alone software applications not designed to manage fundraising. Such methods are often costly and inefficient because of the difficulties in effectively collecting, sharing, and using donation-related information. Furthermore, general purpose and Internet-related software applications frequently have limited functionality and do not efficiently integrate multiple databases. Based on our market research, nearly a quarter of every dollar donated is used

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for fundraising expenses alone. Some nonprofit organizations have developed proprietary software, but doing so is expensive, requiring on-site technical personnel for development, implementation and maintenance.

The nonprofit industry faces particular operational challenges

Nonprofit organizations must efficiently:


Solicit funds and build relationships with major donors;

Garner small cash contributions from numerous contributors;

Manage and develop complex relationships with large numbers of constituents;

Communicate their accomplishments and the importance of their mission online and offline;

Comply with complex accounting, tax and reporting issuesrequirements that differ from those for traditional businesses;

Solicit cash and in-kind contributions from businesses to help raise money or deliver products/products and services;

Provide a wide array of programs and services to individual constituents; and

Improve the data collection and information sharing capabilities of their employees, volunteers and donors by creating and providing distributed access to centralized databases.

In addition, as a result of the negative impact the recent challenging economic environment has had a negative impact on donations, and we believe the nonprofit industrysector has an even greater need for operational efficiencies to maximize the services they can deliver. Because of these challenges, we believe nonprofit organizations can benefit from software applications specifically designed to serve their particular needs.

The

Blackbaud Solutions

We offer a broad suite of products and services that address the fundraising needs and operational challenges facing nonprofit organizations by providing themorganizations. We provide our customers with software and services that help them increase donations, reduce the overall costs of managing their businesses and build a strong sense of community while effectively managing communications with their constituents. We provide our solutions to nonprofit organizations in several ways. Today, weWe offer our products principally on a perpetual license basis. However, an increasing number of our products are offered onbasis, a software-as-a-service (SaaS)(“SaaS”), or as a “hosted” software offering and we expect this trend to continue in the future.offerings. We also offer a suite of analytical tools and related services that enable nonprofit organizations to extract, aggregate and analyze vast quantities of data to make better-informed operational decisions. In addition, we help our customers increase the returns on their technology investments by providing a broad range of consulting, training and professional services, maintenance and technical support as well as maintenancepayment processing services.
Our Strategy
Our objective is to maintain and technical support.

Indexextend our position as the leading provider of software and related services designed specifically for nonprofit organizations, supporting their missions from fundraising to Financial Statements

Nonprofitoutcomes. Our key strategies for achieving this objective are to:

Achieve worldwide constituent relationship management (“CRM”) leadership for our Blackbaud CRM product
We intend to extend the penetration of our Blackbaud CRM product line to larger, more complex nonprofit organizations, leveraging our expertise with enterprise implementations to achieve worldwide leadership in CRM. We believe our Blackbaud CRM solution is a scalable solution designed specifically to meet the needs of mid- to-large-sized organizations, bringing together disparate information such as annual and capital giving, gift planning, major giving, and volunteer systems, both online and offline and across various chapters and programs within a given organization. With a single system of record that can be securely and efficiently shared, organizations can turn their data into timely, actionable information that increases the success of their fundraising efforts, better synchronizes campaigns across chapters and field offices, and strengthens relationships with constituents.
We believe that our existing proprietary software can form the foundation for a wider range of solutions for nonprofit organizations. Our current products share over half of our proprietary software code and were developed using common standards and practices. We believe this shared code allows us to more cost effectively expedite the development and rollout of product offerings and updates. In addition, we are building our future product offerings on this common platform, which we anticipate will improve our ability to create new offerings efficiently and expeditiously, while allowing our customers to seamlessly collect and analyze supporter information from a variety of sources. In the future, we plan to offer pre-packaged solutions designed to service an even larger group of nonprofit organizations.

2


Grow our worldwide customer base
We intend to expand our industry-leading customer base and enhance our market position. We have established a strong market presence with more than 27,000 customers. We believe that the fragmented nature of the industry presents an opportunity for us to continue to increase our market penetration. We plan to achieve this by making use of our next generation solutions to continue transforming our business to cloud-based applications, which should allow us to serve the entire mid-market customer segment. We also plan to streamline our sales efforts to the small market customer segment and intend to expand our direct sales efforts, especially with regard to national, enterprise and global account-focused sales teams.
We believe the United Kingdom, Canada, Australia and the Netherlands, as well as other international markets, represent growing market opportunities for our products and services. We believe the overall market of international nonprofit organizations is changing. Donations to international nonprofit organizations are becoming increasingly important in response to reductions in governmental funding. U.S.-based nonprofit organizations are growing their international activities and opening overseas locations. We believe the international marketplace is currently underserved, and we intend to increase our presence by expanding our sales and marketing efforts internationally. We plan to sell complementary products and services to our installed base of customers, and we plan to offer new products tailored to international markets, including leveraging our market leading domestic analytics solutions to develop offerings tailored specifically to meet the needs of foreign and multi-national nonprofits.
Revolutionize the customer experience
We intend to make our customers' experience with us effective, efficient and satisfying from their initial interest in our products and services, through their decision to increase donations

Managingpurchase, engage with customer support and utilized product enhancements. We continue to evolve the fundraising process is a critical business function for nonprofits. Our fundraisingmanner in which we package and constituent relationship management solutions allow nonprofit organizationssell our offerings to establish, maintain, and develop their relationshipsprovide higher value combined with currentflexibility to meet the different needs of our existing and prospective donorscustomers. For example, we are increasing the number of our offerings sold under a subscription pricing model, which can make it easier for customers to purchase our solutions. We will continue to focus on providing the highest level of product support while continuing to enhance our existing products and other constituents. Our fundraisingdeveloping new products and services enable themdesigned to use a centralized database,help allow our customers to more effectively achieve their missions.

Pursue strategic partnerships
We intend to continue to selectively pursue acquisitions, to expand existing partnerships and to develop new strategic partnerships to enter new markets and pursue significant untapped opportunities. We intend to develop these alliances with companies that provide us with complementary technology, customers and personnel with significant relevant experience, as well as to increase our access to additional geographic and vertical markets. We have completed significant acquisitions over the Internetpast five years both in the United States and internationally, including the acquisition of Convio, Inc. (Convio) in May 2012. The acquisition of Convio provided us with expanded subscription and online offerings and we expect it to accelerate our evolution to a subscription-based revenue model.
We are also currently involved in a number of strategic relationships which allow us to provide a wider variety of offerings and provide customers with integrated solutions, further enhancing the value of our proprietary technology. We believe that our size and history of leadership in the nonprofit sector make us an arrayattractive acquirer or partner for others in the industry.

Our Operating Structure
The nonprofit market is very diverse, with organizations that range from small, local charities to large, multinational relief organizations. The needs of analytical tools,nonprofits can vary greatly according to facilitatetheir size and expand their fundraising efforts. In addition,function. To better serve the wide variety of nonprofits in the market, we organize our operating structure into four operating units: the Enterprise Customer Business Unit, or ECBU, the General Markets Business Unit, or GMBU, the International Business Unit, or IBU, and Target Analytics.
Following is a description of each of our operating units:

The ECBU is focused on marketing, sales, delivery and support to large and/or strategic customers, specifically identified prospects and customers in North America.

The GMBU is focused on marketing, sales, delivery and support to all emerging and mid-sized prospects and customers in North America.

The IBU is focused on marketing, sales, delivery and support to all prospects and customers outside of North America. 

Target Analytics is primarily focused on marketing, sales and delivery of analytic services to all prospects and customers in North America.


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Each operating unit contains specialized sales, services, support, marketing, and finance functions. We believe this structure allows us to be more responsive to the needs of fundamentally different customer segments and to focus on developing solutions appropriate for these unique markets while leveraging the infrastructure of our broader organization and shared technology in a cost-effective manner. It also allows us to develop highly customized approaches to marketing and selling our products in the markets we serve.

Products and Services
We license software and provide various services help nonprofit organizations increase donations by enabling them to:

Solicit large numbersto our customers. During 2012, we generated revenue in four reportable segments and in four geographic regions, as described in more detail in Note 16 of potential donors;

Deliver personalized messages that drive constituent action;

Provide an easy-to-use system for sharing and using critical fundraising information;

Utilize our Internet-based offerings to receive online donations and support online volunteer and events management; and

consolidated financial statements.

Simplify and automate business processes.

Nonprofit organizations use Blackbaud software, services and tools to improve operational effectiveness

Our comprehensive suite of software, services and analytical tools help nonprofit organizations manage the key aspects of their operations. By automating business processes, our products streamline operations for our customers and help to reduce the overall costs of operating their organizations. We provide solutions that address many of the technological and business process needs of our customers, including:

Constituent relationship management;

Financial management and reporting;

Cost accounting information for projects and grants;

Integration of financial data and donor information in a centralized system;

Internet basedOnline fundraising;

Peer-to-peer fundraising;

Event, data and information management;

Student information systems for independent schools and small colleges;

Ticketing management;

Data analysisGeneral admissions management;

Analytics and reporting toolsprospect research;
Consulting and educational services;

and

Online interactive communities for social networking and relationship management;

Management of complex volunteer networks; and

Results tracking for multiple campaigns.

Our Strategy

Our objective is to maintain and extend our position as the leading provider of softwarePayment processing and related services designed specifically for nonprofit organizations. Key elements for achieving this objective are to:

Grow our customer base

We intend to expand our industry-leading customer base and enhance our market position. We have established a strong market presence with approximately 22,000 customers. However, in a 2007 nonprofit market survey by Addison Whitney, only 30% of respondents were familiar with Blackbaud. We believe that the fragmented nature

Index to Financial Statements

of the industry presents an opportunity for us to continue to increase our market penetration. We plan to achieve this by making use of our experience, the depth of our product capabilities, and our strong brand recognition. We also intend to expand our overall sales efforts, especially national accounts and enterprise-focused sales teams.

Maintain and expand existing customer relationships

We have historically had success selling maintenance renewals and additional products and services to existing customers. In each of the past five years, approximately 95% of our customers renewed their maintenance and support plans. We will continue to pursue opportunities to expand our existing customer base by increasing both the number of our products and services they use and the frequency with which they use them. To this end, we have dedicated sales teams that focus exclusively on selling products and services to existing customers.

Enable customers to effectively utilize the Internet as a comprehensive business tool

We will enhance our existing products and develop new products and services that will allow our customers to more fully utilize the Internet to effectively achieve their missions. Although online fundraising comprises a small percentage of all charitable contributions, our research indicates that online donations are growing as a percentage of total contributions. A study we conducted together with the ePhilanthropy Foundation found that online donations increased by 44% in 2008. We offer a variety of Internet applications and consulting services that allow nonprofits to use the Internet for online fundraising, e-marketing, alumni and membership directories, newsletters, event management and volunteer coordination.

Introduce additional products and services

We intend to use our expertise and experience in developing leading products for the nonprofit industry to introduce additional products and related services. We plan to build stronger relationships with existing customers and attract new customers. We believe that our existing proprietary software can form the foundation for an even wider range of products and services for nonprofit organizations. Our current products share over half of our proprietary software code and were developed using common standards and practices. We believe this shared code allows us to more cost effectively expedite the development and rollout of product offerings and updates. In addition, we are building our future product offerings on a common platform, which we anticipate will improve our ability to create new offerings efficiently and expeditiously.

Pursue strategic acquisitions and alliances

We intend to selectively pursue acquisitions and alliances in the future with companies that provide us with complementary technology, customers and personnel with significant relevant experience, as well as to increase our access to additional geographic and vertical markets. We have completed significant acquisitions over the past five years, including the acquisition of Target Software, Inc. and Target Analysis Group, Inc., or the Target Companies, in January 2007, eTapestry.com, or eTapestry, in August 2007, Kintera Inc., or Kintera, in July 2008 and RLC Customer Centric Technology B.V., or RLC, in April 2009. We are also currently involved in a number of strategic relationships. We believe that our size and our history of leadership in the nonprofit sector make us an attractive acquirer or partner for others in the industry.

Expand international presence

We believe the United Kingdom, Canada, and Australia as well as other international markets represent growing market opportunities for our products and services. As further discussed below, we recently established a separate business unit to serve the needs of our operations in international markets and expand our presence in these markets. The acquisition of RLC in April 2009 provided us a foundation to expand into the Netherlands and other Western European markets. We currently have offices in Almere, Netherlands; Glasgow, Scotland; London, England; Sydney, Australia; and Toronto, Canada. We believe the overall market of international nonprofit organizations is changing. Donations to nonprofit organizations are increasing in response to reductions

Index to Financial Statements

in governmental funding of certain activities. U.S.-based nonprofit organizations are growing their international activities and opening overseas locations. We believe the international marketplace is currently underserved and we intend to increase our international presence by expanding our sales and marketing efforts. We plan to make use of our installed base of customers to sell complementary products and services, and we plan to develop and offer new products tailored to international markets.

Products and Services

We license software and provide various services to our customers. During 2009, we generated revenue in six reportable segments and in four geographic regions, as described in more detail in Note 14 of our consolidated financial statements. These revenue segments are license fees, maintenance fees, and subscription fees for our software products, consulting and education services, analytic services and others. Effective January 1, 2010, we reorganized our business into three operating units, which we believe will better align our organization around key customer groups. The three operating units are the General Markets Business Unit, the Enterprise Customer Business Unit and the International Business Unit.

regulation compliance.


Software products

We offer nonprofit organizations a wide variety of software products, which can be used individually to help organizations with specific functions, such as fundraising, financial management, website management and prospect research, or combined into a fully-integrated suite of tools to help them manage multiple areas of their operations.


Fundraising and Constituent Relationship Management

The Raiser’sRaiser's Edge

The Raiser’sRaiser's Edge is the leading software application specificallysolution designed to manage a nonprofit organizations’organization's constituent relationship management and fundraising activity. It is used by more than 13,000 organizations worldwide and has won four consecutive Campbell Awards for User Satisfaction from 2009 through 2012. The Raiser’sRaiser's Edge enables nonprofit organizations to communicatecultivate lifelong relationships with their constituents, managesupporters, and diversify fundraising activities, expand their development effortsmethods. Constituent relationship management, online fundraising and make better informed decisions through powerful segmentation, analysisemail marketing are coupled with analytics, data enrichment tools and reporting capabilities. The Raiser’s Edge is highly configurable, allowingbest practices, in a nonprofit organization to create numerous custom views of constituent records and automate a variety of business processes. Among other things, The Raiser’s Edge allows an organization to access extensive biographical and demographic information about donors and prospects, process gifts, monitor solicitation activity, analyze data and publish reports. The Raiser’s Edge improves operational efficiency and effectiveness by reducing overall mailing costs, offering faster data entry and gift processing, supporting major donor cultivation and using the Internet to send email appeals and accept online donations. The Raiser’s Edge also integrates with Microsoft®single solution. Office® to enable users to take advantage of additional functionality.

In addition to the standard functionality of The Raiser’s Edge, we have built a number of extended applications to address the specific needs of various market segments.


Blackbaud Enterprise CRM

Blackbaud Enterprise CRM (Enterprise CRM) is a flexible, customizable, scalable and secure Constituent Relationship Management (CRM)web-based CRM solution that addresses the unique needs of largermid-size, large, federated and chapter based nonprofit organizations. EnterpriseBlackbaud CRM helps large institutionsorganizations build their brands, develop deeper and more personalized relationships with constituents, build their constituenciesbrand through online engagement and gain organizational efficiencies. Enterprise CRM brings together disparate information, such as annualmulti-channel communication tools, and capital giving, gift planning, major giving, and alumni and parent systems, across multiple locations and within the departments and programs of a large organization.become more efficient. With a single system of record that can be securely and efficiently shared, larger organizations are able to turn their data into timely, actionable information that maximizes their multi-channel fundraising

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efforts, synchronizes campaigns across departments and programs, and strengthens relationships and engagement with their constituents.

Index

Luminate CRM
Luminate CRM is targeted at large, enterprise nonprofits and can be sold as a single integrated solution encompassing both the Luminate Online suite and the Luminate CRM suite, or the Online and CRM suites can be sold separately. Luminate CRM is built on the SalesForce.com SaaS computing application platform and offers nonprofits an extensible suite for consolidating information and business processes into one system. The core components of Luminate CRM are campaign management, constituent relations, business intelligence and analytics. Luminate Online contains functionality to Financial Statements

help nonprofits with online fundraising, email marketing, advocacy, and events management. Luminate was one of the main products offered by Convio, which we acquired in May 2012.


eTapestry

eTapestry is a SaaS donor management and fundraising solution built specifically for smaller nonprofits. It tracks donors, prospects or alumni while managing gifts, pledges, and payments. eTapestry has been built to be operated in a hosted environment and be accessed via the Internet. This technology provides a system that is simple to maintain, costs little to operate and is intuitively easy to learn without extensive training. It offers nonprofit organizations a cost-effective way to manage donors, process gifts, create reports, accept online donations and communicate with constituents.

eTapestry was built to operate in a hosted environment and to be accessed via the Internet. This technology provides a system that is simple to maintain, efficient to operate and is intuitively easy to learn without extensive training.


Online Solutions

Luminate Online
Luminate Online, delivered as SaaS, helps our customers better understand their online supporters, make the right ask at the right time, and raise money online. It includes tools nonprofits need to build online fundraising campaigns as part of an organization's existing website or as a stand-alone fundraising site. Donation forms, gift processing, and tools for communicating through web pages and email give our customers the essentials for building sustainable donor relationships. Customers can also purchase additional modules including TeamRaiser, a leader within events management that allows nonprofits constituents to create personal or team fundraising web pages and send email donation appeals in support of events such as a walks, runs and rides.
Blackbaud NetCommunity

Blackbaud NetCommunity is an Internet marketing and communications tool that enables organizations that utilize the Raiser’sRaiser's Edge software to build interactive websites and manage email marketing campaigns. With Blackbaud NetCommunity, organizations can, among other things, establish online communities for social networking among constituents and also provide a platform for online giving, membership purchases and event registration, and more.registration. Because Blackbaud NetCommunity requires the Raiser’sRaiser's Edge database to operate, it can only be sold with Raiser’sRaiser's Edge or to existing Raiser’sRaiser's Edge customers. However, Blackbaud NetCommunity, in concert with The Raiser’sRaiser's Edge, does provides a single source of up-to-date constituent information across an entire organization, regardless of how individual constituents interact and communicate with the organization.


Sphere eMarketing

Sphere eMarketing, delivered as software-as-a-service,SaaS, provides organizations with an integrated system of applications to manage e-marketing, communications, programs, services and online fundraising. Sphere eMarketing enables an organization’sorganization's volunteers, members, donors and staff to share real-time data and information in an online community in order to better manage constituent relationships. Sphere eMarketing is designed to help organizations manage sophisticated and targeted e-mail campaigns with efficiency and control. Comprehensive real-time reports are available to help organizations make strategic data-driven decisions for future marketing campaigns.

Additionally, Sphere Connect,


Everyday Hero
Everyday Hero is an event-driven web-based fundraising solution in Asia-Pacific and the Sphere open platform technology, provides organizationsUK. The Everyday Hero solution is focused on meeting the peer-to-peer fundraising needs of nonprofits internationally. It is a developer-friendly interfaceleading donor acquisition tool, and helps nonprofits in Asia-Pacific and the UK connect with well documented and supported APIs, and a cost-effective approach to custom application development and integration to meet unique technology and business needs.

BlackbaudNow

BlackbaudNow offers small organizationsyounger, more online-focused generation of donors, a fast and simple way tofirst step in helping nonprofits develop an online presence and begin accepting online donations. It allows organizations,long-term relationships with no upfront cost, to publish a simple website, accept donations, manage constituent relationships, run reports and send emails totheir supporters. A PayPal® Donate button is built into the product.



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Financial Management

The Financial Edge

The Financial Edge is an accounting applicationsolution designed to address the specific accounting, analytical and financial reporting needs of nonprofit organizations. It integrates with The Raiser’sRaiser's Edge to simplify gift entry processing and relate information from both systems in an informative manner to eliminate redundant tasks. The Financial Edge improves the transparency and accountability of organizations by allowing them to track and report from multiple views, measure the effectiveness of programs and other initiatives, use budgets as monitoring and strategic planning tools and supervise cash flow. As a result, The Financial Edge provides

Index to Financial Statements

nonprofit organizations with the means to help manage fiscal and fiduciary responsibility, enabling them to be more accountable to their constituents. In addition, The Financial Edge is designed specifically to meet governmental accounting and financial reporting requirements prescribed by the Financial Accounting Standards Board, (FASB)or FASB, and Governmental Accounting Standards Board, (GASB).

As with The Raiser’s Edge, we have built extended applications to address the specific functional needs of our customers such as Purchase Orders, WebPurchasing, Electronic Funds Transfer, Cash Management, Cash Receipts, Payroll, Fixed Assets, Student Billing, School Store Manager and Accounting Forms.

FundWare

FundWare is a fund accounting solution designed to provide nonprofit and/or government organizations with improved operational efficiencies, reporting flexibility and the ability to manage sophisticated fund allocations. It uses a configurable set of modules designed to provide functionality that meets an organization’s specific needs. FundWare unites accounting, budgeting and reporting tools with a built-in audit trail and easy-to-prepare audit schedules. Users are able to easily produce GASB and FASB financial reports including indirect costs or complex revenue allocations. Further, users have the ability to conduct real-time budget monitoring, maintain budget modification histories, including comparisons between actual and revised budgets and prepare cross-fiscal year budgets. FundWare utilizes an Excel-based reporting tool that enables the use of current Excel spreadsheets and skills while linking to FundWare’s financial database, providing real-time information without the extra step of importing or exporting.

GASB.


School Management

The Education Edge

The Education Edge is a comprehensive student information management system designed principally to organize an independent school’sschool's admissions and registrar processes, including capturing detailed student information, creating class schedules, managing attendance records and performance/grades records, producing demographic, statistic, and analytical reports and printing report cards and transcripts. With The Education Edge an organization can keep biographical and address information for students, parents, and constituents consistent across all of its Blackbaud software products. This integrated system allows an independent school to reduce data-entry time and ensure that information is current and accurate throughout the school.

Blackbaud’s

Blackbaud's Student Information System

Blackbaud’s

Blackbaud's Student Information System is a complete software solution designed for small colleges and other institutions of higher education with a full-time enrollment of less than 5,000. The solution links student information across all campus offices and includes functionality designed specifically to organize the admissions and registrar’sregistrar's processes. In addition, Blackbaud’sBlackbaud's Student Information System can be combined with other applications to offer integration across back-office functions, providing one-time entry for biographical information, financial reliability, and audit trail functionality. This helps significantly reduce time spent on data maintenance and creation of class schedules and allows institutions to communicate efficiently with prospects, students and alumni.


Ticketing

The Patron Edge

The Patron Edge is a comprehensive ticketing management solution specifically designed to help large or small performing arts organizations, museums, zoos and aquariums boostincrease attendance and increase revenue. The Patron Edge can be integrated with The Raiser’sRaiser's Edge to allow for a complete profile view of patrons, donors or visitors. The Patron Edge offers a variety of ticketing methods and allows customers to save time and costs by streamlining ticketing, staffing, scheduling, event and membership management and other administrative tasks.

Index

General Admissions Management
Altru
Altru is an arts and cultural solution suite provided to Financial Statements

Direct Marketing

Blackbaud Direct Marketing

Blackbaud Direct Marketing allows nonprofitour customers as a SaaS offering. Altru helps general admissions arts and cultural organizations to achieve integrated campaign planning by managing direct marketing campaigns with multiple types of media and channels. It delivers campaign management capabilities including planning and budgeting, predictive analysis and list segmentation, campaign execution and performance measurement, and reporting. The result is that nonprofit organizations can more easily manage their marketing campaigns while maximizing the return on investmentgain a clear, 360-degree view of their directorganization, operate more efficiently, engage and cultivate patrons and supporters, streamline external and internal communication efforts, and reduce IT costs. It contains tools for constituent and membership management, program sales, retail sales and ticketing, volunteer management, and events management. It also has sophisticated reporting functionality and tools to manage marketing, efforts. Nonprofit organizations can integrate Blackbaud Direct Marketing with Blackbaud Enterprise CRM or The Raiser’s Edge to combine fundraising functions with direct marketing campaigns.

communications and fundraising.


Events Management

Sphere Events

The

Sphere Friends Asking Friends software product
Sphere Friends Asking Friends enables organizations to quickly and easily launch and manage online event fundraising websites. Sphere Friends Asking Friends facilitates growth in donations and participation levels by providing participants tools to become fundraisers and recruiters on behalf of nonprofit organizations. It also allows event participants to reach out to their Facebook® and Twitter® networks, expanding the fundraising and marketing potential of virtual events. It is used by organizations of all sizes and budgets to manage regional to national events.



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Consulting and education services

Our consultants provide conversion, implementation and implementationcustomization services for each of our software products. These services include:

System implementation, including all aspects of installation and configuration, to ensure a smooth transition from the customer’scustomer's legacy system and to create a more streamlined business workflow;

Management of the data conversion process to ensure data is a reliable and powerful source of information for an organization;

Business process analysis and application customization to ensure that the organization’sorganization's system is properly aligned with an organization’sorganization's processes and objectives;

Removal of duplicate records, database merging and enrichment, information cleansing and consolidation, and secure credit card transaction processing;

Database production activities, including direct marketing, business intelligence, cultivation and stewardship processes; and

Website design services, Internet strategy consulting and specialized services, such as email marketing and search engine optimization.


In addition, we apply our industry knowledge and experience, combined with expert knowledge of our products, to evaluate an organization’sorganization's needs and provideconsult on how to improve a business process improvement consulting.process. This work is performed by staff consultants who have extensive and relevant domain experience in all aspects of nonprofit management, accounting, project management and IT services. This experience and knowledge allows us to make recommendations and implement best practices to help our customers reach their goals. In addition, we offer software customization services to organizations that do not have the time or in-house resources to create customized solutions for our core products. We believe that no other software company provides asthis broad a range of consulting and technology services and solutions dedicated to the nonprofit industry.

We provide a variety of classroom, onsite, distance-learning and self-paced training services to our customers relating to the use of our software products and application of best practices. Our software instructors have extensive training in the use of our software and present course material that is designed to include hands-on lab exercises, as well as course materials with examples and problems to solve.

Index to Financial Statements

Blackbaud OnDemand

The Blackbaud OnDemand hosting solution provides our customers with a convenient, affordable alternative to setting up and managing Blackbaud applications on their own. Our technical team will set up and manage on an ongoing basis the hosting of one or more Blackbaud systems on our secure servers and ensure that they are accessible and current on a 24/7 basis. All that is needed to connect is a web browser. We manage everything from initial data setup through network security configuration.

Analytics services

Target Analytics

Target Analytics was formed in early 2008 by combining Blackbaud’sprovides comprehensive solutions for donor acquisition, prospect research, division with the then newly acquired Target Analysis Group. We addeddata enrichment, and performance management, enabling nonprofits to the offerings further in 2008 with the P!N wealth screening service which was added with the acquisition of Kintera.define effective campaign strategies and maximize fundraising results. Target Analytics offers a comprehensive range of productsservices, software, analytics, and services for nonprofit organizations’ analytics needs. These include donor acquisition and development tools, prospect segmentation, wealth identification and collaborative peer benchmarking.data within the following areas:

Donor Acquisition - Target Analytics offers software, solutions, and services such as:

Acquisition Lists—Target Analytics’leverages unique data assets to create acquisition mailing lists are built using a proprietary cooperative database designed exclusively for nonprofit mailing listsand predictive models that identify donor populations that meet the affinity, value, and response modeling. The database was developedcriteria of our nonprofit clients. Nonprofit organizations use our prospect lists to help locate the best prospects for each organizationsolicit gifts and make acquisition efforts more productive.other support.


WealthPoint—A database screening solution that delivers detailed wealth identification information on prospects. WealthPoint provides initialProspect Research - Nonprofit organizations use Target Analytics' prospect qualification, assists with prospectresearch solutions to develop major gift and personal fundraising cultivation and delivers information on financial capacity.

P!N Service—A wealth profiling and screening service that enables nonprofits to more efficiently identify, profile, monitor and rank the wealth of prospects in their databases. Additionally, this service enables nonprofits to edit, analyze, prioritize and combine external data collected from a wide range of sources with its internal donor database.

ProspectPoint—Astrategies. Prospect research solutions include: custom data modeling solution that delivers critical information on a prospect’s or donor’sprospect's likelihood to make a gift to an organization. It analyzes currentorganization; wealth screenings that deliver detailed wealth information and historicalgiving capacity data from external sourceson prospects; and behavioral trends to identify an organization’s best potential annual, planned and major giving prospects, as well as recommends appropriate “ask” amounts and gift types.

ResearchPoint—Combinesweb-based prospect management software that combines public data with donor information from a nonprofit’snonprofit's database of records to build a complete view of prospects enabling it to better targetfor targeting and securesecuring gifts. It also enables organizations to help uncover major and planned giving prospects within a nonprofit’s database.


donorCentrics—A set of strategic analytic and benchmarking tools designed to drive fundraising at nonprofit organizations. These reports uncover strengths and weaknesses in fundraising programs, highlight opportunities for growth and facilitate strategy-sharing across organizations.Data Enrichment

- Target Analytics Data Enrichment Services—Services that enrich enhance the quality of the data in our customers’customers' databases.  These include a service that findsServices include: identifying outdated address files in the database and makesmaking corrections based on the requirements and certifications of the United States Postal Service, and a service that usesas well as appending data by using known fields in an organization’sorganization's constituent records to search and find lost donorsidentify key demographic and prospects.contact information.

Index
Performance Management - Target Analytics creates relevant and insightful reports that benchmark performance and illustrate key industry trends based on performance attributes provided by our nonprofit clients. Nonprofit organizations use our performance and industry analysis reports to Financial Statements

assess marketing and operational effectiveness and also to influence operational planning.



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Maintenance
Maintenance

Most of our customers enroll in one of our maintenance and support programs. In each of the past five years, more than 95% of our customers have renewed their maintenance plans. Customers enrolled in the plansprograms enjoy fast, reliable customer support, receive regular software updates, stay up-to-date with support newsletters and have unlimited, around-the-clock access to support resources, including our extensive knowledgebase and forums. Customers who enroll in upgraded maintenance plans receive enhanced benefits.

benefits such as call support priority and dedicated support resources.


Payment Processing

Our products provide our customers payment processing capabilities that enable their donors to make donations and purchase goods and services using numerous payment options, including credit card and ACH checking transactions, through secure online transactions. ThroughBlackbaud Merchant Services is a value-added service integrated with our Sphere products, we provide paymentsolutions that makes credit card processing services in which we collect funds on behalf of oursimple and secure. Customers are charged one rate for transactions, with no extra fees, making Blackbaud Merchant Services a competitive option. The service also provides customers forwith a processing fee.

PCI compliant process and streamlined bank reconciliation.


Customers
Customers

We have customers in every principal vertical market within the nonprofit industry. At the end of 2009,2012, we had approximately 22,000more than 27,000 active customers that rangeranging from small, local charities, to healthcare and higher education organizations, to the largest national health and human services organizations. No onesingle customer accountsaccounted for more than 2% of our annual2012 revenue.


Sales and Marketing

The majority of our software and related services are sold through our direct sales forces.force. Our direct sales force is complemented by a team of account development representatives responsible for sales lead generation and qualification. These sales and marketing professionals are located in Charleston, South Carolina, Cambridge, Massachusetts, near Indianapolis, Indiana and in San Diego, California. We also employ remote sales staff in metropolitan areas throughout the United States, the United Kingdom, the Netherlands, Canada, Australia and Australia.New Zealand. As of December 31, 2009,2012, we had approximately 233250 direct sales employees. We plan to continue expanding our direct sales force in the Americas, Europe, Australia and Asia as our operations grow internationally and market demand recoverscontinues to recover from the current economic environment. During 2009, our sales force was divided into two main areas of responsibility:

Selling products and services to existing customers; and

Acquiring new customers.

In addition, a dedicated portion of our sales team is focused exclusively on large, enterprise-wide accounts. We have a group of sales engineers who support both new and existing customers in this market segment. In general, sales representatives are responsible for handling one product line in a designated geographic area. However, sales representatives for the K-12 independent schools market, small college market and the arts and cultural market are responsible for selling all of our software products.

We generally begin a customer relationship with the sale of one of our primary products or services, such as The Raiser’sRaiser's Edge, Blackbaud CRM or Blackbaud Enterprise CRM,Luminate, and then selloffer additional products and services to the customer as the organization’sorganization's needs increase.

We conduct marketing programs to create brand recognition and market awareness for our products and services. Our marketing efforts include participation at tradeshows, technical conferences and technology seminars, publication of technical and educational articles in industry journals and preparation of competitive analyses. Our customers and strategic partners provide references and recommendations that we often feature in our advertising and promotional activities.

Index to Financial Statements

We believe relationships with third parties can enhance our sales and marketing efforts. We have and will continue to establish additional relationships with companies that provide services to the nonprofit industry, such as consultants, educators, publishers, financial service providers, complementary technology providers and data providers. These companies promote or complement our nonprofit solutions and provide us access to new customers.


Corporate Philanthropy and Volunteerism

We believe that service to others makes the world a better place and champion this value through our global corporate philanthropy and employee-focusedemployee-volunteer programs. In addition to having employees select grant recipients for our endowment fund, we celebrate individual acts of service through a competitive grant program that honors excellent examples of volunteerism and benefits the organizations they serve.


Competition

The market for software and related services in the nonprofit sector is highly competitive although the competition is highlyand fragmented. For certain areas of the market, entry barriers are low. However, we believe our experience and product depth makes us a formidablestrong competitor. We expect to continue to see new competitors as the market matures and as nonprofit organizations become more aware of the advantages and efficiencies attainable through the use of specialized software. A number of diversified software enterprises have made acquisitions or developed products for the market, including Ellucian, Sage and SunGard.Campus Management. Other companies that compete with us, such as Microsoft, Salesforce.com and Oracle, have greater marketing resources, revenue and

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market recognition than we do. They offer fewsome products that are designed specifically for nonprofits, in addition to some of their products which have a degree of functionality for nonprofits that could be considered competitive. These larger companies could decide to enterfocus more on the marketnonprofit sector with new, directly competitive products or through acquisitions of our current competitors.

We mainly face competition from four sources:

Software developers offering specialized products designed to address specific needs of nonprofit organizations;

organizations, some of which are sold with subscription pricing;

Custom-developed solutions;

Providers of traditional, less automated fundraising services;services such as services that support traditional direct mail campaigns, special events fundraising, telemarketing and

personal solicitations;

Custom-developed products created either internally or outsourced to custom service providers; and

Software developers offering general products not designed to address specific needs of nonprofit organizations.

We compete with several software developers that provide specialized products, such as on-demand software specifically designed for nonprofit use. In addition, we compete with custom-developed solutions created either internally by the nonprofit organizationorganizations or outside by custom service providers. We believe that we compete successfully, against these companies, asbecause building aefficient, highly functional custom solutionsolutions equal to ours requires extensive financial and technical resources that mayare beyond the capabilities of custom solution providers or require resources that might not be available or cost-effective for thewithin nonprofit organization.organizations. In addition, the nonprofit organization’sorganization's legacy database and software system may not have been designed to support the increasingly complex and advanced needs of today’stoday's growing community of nonprofit organizations.

We also compete with providers of traditional, less automated fundraising services, including parties providing services in support of traditional direct mail campaigns, special events fundraising, telemarketing and personal solicitations. Although there are numerous general software developers marketing products that have some application in the nonprofit market, these competitors have generally neglected to focus specifically on this market and typically lack the domain expertise to cost effectively build or implement integrated solutions for the market’smarket's needs. We believe we compete successfully against these traditional fundraising services, primarily because our products and services are more automated, more robust, more tailored to the needs of non-profits and more efficient.

Index to Financial Statements


Research and Development

We have made substantial investments in research and development and expect to continue to do so as a part of our strategy to introduce additional products and services. As of December 31, 2009,2012, we had approximately 377484 employees working on research and development. Our research and development expenses for the years ending on December 31, 2009, 2008,2012, 2011 and 20072010 were $45.7$64.7 million $38.7, $47.7 million and $28.5$45.5 million, respectively.


Technology and Architecture

We have products, such as Blackbaud Enterprises CRM, and Blackbaud Direct Marketing that are built on the Microsoft® .Net™ .Net framework platform. These products are web-delivered applications utilizing a Service Oriented Architecture built on Internet standards and protocols such as HTTP, XML and SOAP. This architecture is designed to support flexible deployment scenarios including both on-premise, as well as hosted by Blackbaud in a SaaS model.applications, and SaaS. The applications expose web service application programming interfaces so that functionality and business logic can be accessed programmatically from outside the context of an interactive user application. This allows our customers to extend and modify the functionality
Each of our Luminate products, including Luminate Online, Luminate CRM and TeamRaiser, are SaaS applications withoutthat use a single code base and employ a multi-tenant architecture requiring them to make any source code or data modifications themselves. Thisonly a web browser for client access. The Luminate Online platform is important for customers who want to customize our applications by incorporating their own business logic into key areas ofopen and extensible and is built on the applications.Java runtime environment. The end resultLuminate CRM platform is a robust customization platform through whichbuilt on the application can be modified and extended without requiring source code alteration.

SalesForce.com environment.

Our version 7.x generation products (e.g. The Raiser's Edge and Blackbaud CRM) utilize a three-tier client server architecture built on the Microsoft® Component Object Model, (COM).or COM.
Regardless of product choice, the development strategies of our solutions are:
Flexible. Our component-based architecture is programmable and easily customized by our customers without requiring modification of the source code, ensuring that the technology can be extended to accommodate changing demands of our clients and the market.
Adaptable. The architecture of both our .Net and COM-based development models ensure our applications are:allows us to easily add features and functionality or to integrate with third-party applications in order to adapt to our customers' needs or market demands.

•

Flexible.Our component-based architecture is programmable and easily customized by our customers without requiring modification of the source code, ensuring that the technology can be extended to accommodate changing demands of our clients and the market.

•

Adaptable.The architecture of our applications allows us to easily add features and functionality or to integrate with third-party applications in order to adapt to our customers’ needs or market demands.

•

Scalable.We combine a scalable architecture with the performance, capacity and load balancing of industry-standard web servers and databases used by our customers to ensure that the applications can scale to the needs of larger organizations.


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Scalable.We havecombine a scalable architecture with the performance, capacity and load balancing of industry-standard web servers and databases used by our customers to ensure that the applications can scale to the needs of larger organizations.
We do and intend to continue to license technologies from third parties that are integrated into our products. We believe that the loss of any third-party technologies currently integrated into our products would not have a material adverse effect on our business, but this assessment might change in the future. In addition, if we are unable to obtain licenses for third-party technology for future products, our product development could be delayed, which in turn could harm our business and operating results.

Intellectual Property and Other Proprietary Rights

To protect our intellectual property, we rely on a combination of patent, trademark, copyright, and trade secret laws in various jurisdictions, as well as employee and third-party nondisclosure agreements and confidentiality procedures. We have a number of registered trademarks, including “Blackbaud”“Blackbaud,” “The Raiser's Edge”, “The Raiser’s Edge”“Blackbaud CRM” and “Blackbaud Enterprise CRM”."Luminate." We have applied for additional trademarks. We currently have sixtwo active patents pending on our technology, including functionalityand have filed two provisional patent applications in The Financial Edge, The Information Edge, and ProspectPoint.

Index to Financial Statements

2012.


Employees
Employees

As of December 31, 2009,2012, we had 1,9562,705 employees, consisting of 436552 in sales and marketing, 377484 in research and development, 508740 in consulting and professional services, 249305 in customer support, 166328 in subscriptions and 220296 general and administrative personnel. None of our employees are represented by unions or are covered by collective bargaining agreements. We are not involved in any material disputes with any of our employees, and we believe that relations with our employees are satisfactory.


Available Information

Our website address iswww.blackbaud.com. We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as is reasonably practicable after such material is electronically filed with or furnished to the SEC.SEC, but other information on our website is not incorporated into this report. The SEC maintains an Internet site that contains these reports atwww.sec.gov.


Executive Officers

The following table sets forth certain information concerning our executive officers as of February 25, 2010:

December 31, 2012:

Name

 Age
  

Marc E. Chardon

(1)
 5457
 

President and Chief Executive Officer

Anthony W. Boor

50
Senior Vice President and Chief Financial Officer
Charles T. Cumbaa

 5760
 

Senior Vice President, New Business Development

Joseph D. Moye51
President, Enterprise Customer Business Unit

Kevin Mooney

 5154
 

President, General Markets Business Unit

Timothy V. Williams

Bradley J. Holman		 6051
 

Chief Financial Officer, President, International Business Unit

Jana B. Eggers44
Senior Vice President, TreasurerProducts and Assistant Secretary

Marketing

Louis J. Attanasi

Charles L. Longfield		 4856
 

Senior Vice President of Product Development

Lee W. Gartley

45

Senior Vice President, President of Target Analytics

Charles L. Longfield

53

Senior Vice President, Chief Scientist

John J. Mistretta

 5457
 

Senior Vice President of Human Resources

Heidi H. Strenck

(1)		40

Senior ViceIn January 2013, Mr. Chardon informed us that he is resigning as our President Controller, Assistant Treasurer and Assistant Secretary

Gerard J. Zink

46

Senior Vice PresidentChief Executive Officer and director at the end of General Markets Business Unit Customer Support

2013, or earlier if we appoint his successor. A search for Mr. Chardon's replacement is underway.


Marc E. Chardonjoined us as President and Chief Executive Officer in November 2005. Previously, Mr. Chardon served as Chief Financial Officer for the $11 billion Information Worker business group at Microsoft, where he was responsible for the core functions of long-term strategic financial planning and business performance management. He joined Microsoft in August 1998 as General Manager of Microsoft France. During his three-year leadership, the subsidiary remained one of the three most admired companies by French professionals and achieved increased customer satisfaction. Prior to joining Microsoft, Mr. Chardon was General Manager of Digital France. He joined Digital in 1984, and held a variety of international marketing and business roles within the company. In 1994, Mr. Chardon was named Director, Office of the President, with responsibility for Digital’sDigital's corporate strategy development. Mr. Chardon is an American/French dual national. He is an economics honors graduate from Harvard University.


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Anthony W. Boor joined us as Senior Vice President and Chief Financial Officer in November 2011. Prior to joining us, he served as an executive with Brightpoint, Inc. beginning in 1999, most recently as its Executive Vice President, Chief Financial Officer and Treasurer. He also served as the interim President of Europe, Middle East and Africa during Brightpoint's significant restructuring of that region. Mr. Boor served as Director of Business Operations for Brightpoint North America from August 1998 to July 1999. Prior to joining Brightpoint, Mr. Boor was employed in various financial positions with Macmillan Computer Publishing, Inc., Day Dream Publishing, Inc., Ernst & Young LLP, Expo New Mexico, KPMG LLP and Ernst & Whinney LLP. He holds a BS in Accounting from New Mexico State University.

Charles T. Cumbaa has served as our Senior Vice President of New Business Development since May 2012. He joined us in May 2001 and served as Senior Vice President of Products and Services until December 2009. He also served as our President, Enterprise Customer Business Unit sincefrom January 2010. From, May 20012010 to December 2009 he served as Senior Vice President of Products and Services.April 2012. Prior to joining us, Mr. Cumbaa was an Executive Vice President with Intertech Information Management from December 1998 until October 2000. From 1992 until 1998, he was President and Chief Executive Officer of Cognitech, Inc., a software company he founded. From 1984 to 1992 he was Executive Vice President of Sales and Services at Sales Technologies. Prior to that, he was employed by McKinsey & Company. Mr. Cumbaa holds a BA from Mississippi State University and an MBA from Harvard Business School.

Index

Joseph D. Moye has served as our President, Enterprise Customer Business Unit since October 2012. Before joining us, Mr. Moye was President and Chief Executive Officer for Capgemini Government Solutions from October 2009 to Financial Statements

October 2012 where he led the company's expansion in the U.S. public sector marketplace. From October 2006 to September 2009, he was Vice President of Capgemini Group. From January 2000 to September 2005, he was President and Chief Executive Officer of Gazelle Consulting, Inc., a branded leader in business intelligence professional services. Gazelle was acquired by Adjoined Consulting in 2005 and Mr. Moye integrated his team, led the combined business intelligence practice of Adjoined and, ultimately Kanbay's practice after its acquisition of Adjoined, prior to Capgemini acquiring Kanbay. Before founding Gazelle Consulting, Mr. Moye held multiple leadership positions with Sequent Computer Systems and Unisys where he was responsible for leading business units and channels both domestically and internationally. Mr. Moye holds a BS in Business Administration from Florida State University.


Kevin W. Mooney has served as our President, General Markets Business Unit since January 2010. He joined us in July 2008 as our Senior Vice President of Sales & Marketing and Chief Commercial Officer. Before joining Blackbaud, Mr. Mooney was a senior executive at Travelport GDS from August 2007 to May 2008. As Chief Commercial Officer of Travelport GDS, one of the world’sworld's largest providers of information services and transaction processing to the travel industry, Mr. Mooney was responsible for global sales, marketing, training, service and support activities. Prior to that he was Chief Financial Officer for Worldspan from March 2005 until it was acquired by Travelport in August 2007. Mr. Mooney has also held key executive positions in the telecommunications industry.industry and he is a member of the Board of Directors of tw telecom inc., a publicly traded company. Mr. Mooney graduated from Seton Hall University and holds an MBA in Finance from Georgia State University.


Timothy V. WilliamshasBradley J. Holman, President of the International Business Unit, joined us in November 2010. Prior to joining Blackbaud, Mr. Holman served as ourPartner and Chief FinancialCommercial Officer since January 2001. Mr. Williams is responsible for all of our financial reportingat ATI Business Group, a Jakarta-based company that provides outsourcing and controls, as well as human resources and legal. From January 1994 to January 2001 he served as Executive Vice President and CFO of Mynd, Inc. (now a subsidiary of Computer Sciences Corporation), a provider of software andtechnical services to the insurance industry.aviation and travel sectors, from February 2010 to October 2010. Prior to that, from June 2006 to February 2010, Mr. Williams worked at Holiday Inn Worldwide, most recently as Executive Vice President and Chief Financial Officer. Mr. Williams serves on the Board of Directors of PROS Holdings, Inc., a publicly traded software development company. Mr. Williams holds a BA from the University of Northern Iowa.

Louis J. AttanasihasHolman served as ourPresident of Travelport's Asia Pacific operations, which provides information services and transaction processing to the travel industry. From July 2001 to May 2006, Mr. Holman held various senior management roles at Travelport, including Senior Vice President of Product Development since January 2010. From January 2007 to January 2010, he served asairline services in Asia Pacific and Managing Director of operations in Europe, Middle East and Africa. Mr. Holman holds a BC from University of Western Australia.


Jana B. Eggers, our Senior Vice President of Products initially servingand Marketing, joined us in the capacity of Vice President of Products in 1996. From May 1986 to 1996, he served as a Software Engineer, Product Architect, and Product Development Manager.November 2010. Prior to joining us, he taught mathematicsBlackbaud, Ms. Eggers served as Chief Executive Officer of Germany-based Spreadshirt from October 2006 to November 2010. Prior to that, Ms. Eggers served as General Manager and Director for Intuit from April 2002 to October 2006, where she founded and led the company's corporate Innovation Lab, which researched and designed new offerings. From March 2003 to October 2006, Ms. Eggers also served as General Manager for Intuit's QuickBase business, serving the Fortune 100, where it became Intuit's fastest-growing business unit. Ms. Eggers has also held executive and technology leadership positions at the State University of New York at Stony Brookinternationalization firm Basis Technology, American Airline's Sabre, Los Alamos National Laboratory and worked as a Software Engineer at Environmental Energy Corporation. Mr. Attanasiseveral acquired start-ups. Ms. Eggers holds a BS in Mathematics and Computer Science from State University of New York at Stony Brook and an MS in Mathematics from the University of Charleston.Hendrix College.


Lee W. Gartleyjoined us in January 2007 as a Senior Vice President as part of our acquisition of the Target Companies. Mr. Gartley remains President of, and responsible for the day-to-day operations of, Target Analytics. Prior to joining the Target Companies in 1998, Mr. Gartley was a senior marketer with Art Technology Group from 1996 until 1998 where he helped to launch an online commerce platform. From 1992 to 1996 he was a management consultant with Boston Consulting Group working with clients in a variety of industries to develop and implement sound strategy. Mr. Gartley holds a BA in Physics from Bowdoin College and an MBA from the Kellogg Graduate School of Management.

Charles L. Longfieldhas served as our Senior Vice President, Chief Scientist since January 2010. He joined us in January 2007 as our Chief Scientist as part of our acquisition of the Target Companies, both of which he founded and then led as Chief Executive Officer since the early 1990s. Mr. Longfield has extensive experience designing and implementing national as well as international constituency databases that address the fundraising information needs at many of the world’sworld's largest nonprofit


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organizations. Mr. Longfield holds a BA in Mathematics and a M.Ed. from Harvard University and has over 30 years of experience helping nonprofits automate their fundraising operations.


John J. Mistretta, our Senior Vice President of Human Resources, joined us in August 2005. Prior to joining us, Mr. Mistretta was an Executive Vice President of Human Resources and Alternative Businesses at National Commerce Financial Corporation from 1998 to 2005. Earlier in his career, Mr. Mistretta held various senior Human Resources positions over a thirteen year period at Citicorp. Mr. Mistretta holds a Masters of ScienceMS in Counseling and a BA in Psychology from the State University of New York at Oswego.

Heidi H. Strenckhas served as our Senior Vice President and Controller since January 2007. From October 2002 until January 2007, Ms. Strenck served as our Vice President and Controller. Ms. Strenck joined us in September 1996 and held key management roles as Accounting Manager from 1996 until 1997 and as Controller until 2002. Prior to joining us, she served as a Senior Associate with Coopers & Lybrand and as Internal Auditor for The Raymond Corporation. Ms. Strenck holds a BA from Hartwick College.

Index to Financial Statements

Gerard J. Zinkhas served as our Senior Vice President of General Markets Business Unit Customer Support since January 2010. From January 2007 until January 2010, Mr. Zink served as our Senior Vice President of Customer Support. From June 1996 until January 2007 he served as our Vice President of Customer Support. Mr. Zink is responsible for overall customer satisfaction, information technology and administrative services. He joined us in November 1987 and served as a Customer Support Analyst and Manager of Customer Support before assuming his current position.

Item 1A. RISK FACTORS

Risk Factors


Our business operations face a number of risks. These risks should be read and considered with other information provided in this report.

General economic factors, both domestically and internationally, might adversely affect our financial performance.

General economic conditions, globally or in one or more of the markets we serve, might adversely affect our financial performance. Weakness in the financial and housing markets, inflation, higher levels of unemployment, unavailability of consumer credit, higher consumer debt levels, volatility in credit, equity and foreign exchange markets, higher tax rates and other changes in tax laws, overall economic slowdown and other economic factors could adversely affect donations to non-profits, reducing their revenue and therefore possibly their demand for the products and services we sell and lengthen our sales and payment cycles. During 2009, we experienced a decrease in demand for our products and services as difficult and uncertain economic conditions put pressure on the spending of many organizations in the nonprofit industry. Higher interest rates, inflation, higher costs of labor, insurance and healthcare, higher tax rates and other changes in tax laws, changes in other laws and regulations and other economic factors in the United States could increase our cost of sales and operating, selling, general and administrative expenses, and otherwise adversely affect our operations and operating results. These factors affect not only our operations, but also the operations of suppliers from whom we purchase or license products and services, a factor that could result in an increase in the cost to us of our products and services, reducing our margins.

We significantly increased our leverage in connection with our acquisition of Convio.
We amended and restated our credit agreement in February 2012 to increase our borrowing capacity to $325.0 million. We incurred a substantial amount of indebtedness in connection with our acquisition of Convio in May 2012. As a result of this indebtedness, our interest payment obligations have increased. The degree to which we are leveraged could have adverse effects on our business, including the following:
Requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, dividends and other general corporate purposes; 
Limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; 
Restricting us from making additional strategic acquisitions or exploiting business opportunities; 
Placing us at a competitive disadvantage compared to our competitors that have less debt; 
Limiting our ability to borrow additional funds; and 
Decreasing our ability to compete effectively or operate successfully under adverse economic and industry conditions.
If we incur additional debt, these risks will intensify. Our ability to meet our debt service obligations will depend upon our future performance, which will be subject to the financial, business and other factors affecting our operations, many of which are beyond our control.
A substantial portion of our revenue is currently derived from The Raiser’sRaiser's Edge, Luminate Online and Blackbaud Enterprise CRM, and a decline in sales or renewals of thisthese or similar products and related services could harm our business.

We derive a substantial portion of our revenue from the sale of The Raiser’sRaiser's Edge and Blackbaud Enterprise CRM, and other products that help customers manage constituent relationships and related services, and we expect revenue from these products and related services is expected to continue to account for a substantial portion of our total revenue for the foreseeable future. For example, revenue from the sale of The Raiser’sRaiser's Edge and related services represented approximately 38%30%, 45%,35% and 50%38% of our total revenue in 2009, 20082012, 2011 and 2007, respectively. Revenue from the sale of Blackbaud Enterprise CRM and related services represented approximately 4%2010, 2%, and 1% of our total revenue in 2009, 2008 and 2007, respectively. Because we generallyoften sell licenses to our products on a perpetual basis and deliver new versions and enhancements to customers who purchase annual maintenance and support, our future license, services and maintenance

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revenue are substantially dependent on sales to new customers. In addition, we frequently sell The Raiser’s Edgethese or similar products to new customers and then attempt to generate incremental revenue from the sale of additional products and services. If demand for The Raiser’sRaiser's Edge, Luminate Online, Blackbaud Enterprise CRM or similar products declines significantly, our business would suffer.

We encounter lengthy sales cycles which could have an adverse effect on the amount, timing and predictability of our revenue and sales.

Potential customers, particularly our larger enterprise-wideenterprise clients, generally commit significant resources to an evaluation of available software and require us to expend substantial time, effort and money educating them as to the value of our software and services. Sales of our software products to these larger customers often require an

Index to Financial Statements

extensive education and marketing effort. We could expend significant funds and management resources during the sales cycle and ultimately fail to close the sale. Historically, our software product sales cycle averages approximately two months for sales to existing customers and from six to nine months for sales to new customers and large enterprise-wide sales.customers. Recently, we have experienced longer sales cycle times, delays and postponements of purchasing decisions by our current and prospective customers as a result of challenges posed upon nonprofit organizations by the weakuncertain economic environment. Our sales cycle for all of our products and services is subject to significant risks and delays over which we have little or no control, including:

our customers’Our customers' budgetary constraints;

theThe timing of our clients’clients' budget cycles and approval processes;

theThe impact of the macro economicmacroeconomic environment on our customers;

our clients’Our clients' willingness to replace their current methods or software solutions;

ourOur need to educate potential customers about the uses and benefits of our products and services; and

theThe timing and expiration of our clients’clients' current license agreements or outsourcing agreements for similar services.

If we are unsuccessful in closing sales after expending significant funds and management resources or if we experience delays as discussed above, it could have a material adverse effect on the amount, timing and predictability of our revenue.

We encounter long and complex implementation cycles, particularly for our largest customers, which could have an adverse effect on our profitability and the timing and predictability of our revenue.

Our implementation cycle for large enterprise-wide sales can extend for a year or more, which can negatively impact the timing and predictability of our revenue.

The implementation of our products and services, particularly in our large Enterprise CRM engagements, involvefrequently involves complex configuration, business process reengineering and system interfaces.interfaces and can extend for a year or more. Our Enterpriseenterprise CRM product offering isofferings are relatively new, and we may not have historical experience with unanticipated implementation challenges or complexities that could arise in these engagements. Further, these projects typically are heavily dependent on customer participation, communication and timely responsiveness throughout the implementation cycle. As the complexity of these engagements increase,increases, our revenues and profitability could suffer from delays in project completion and having to perform unplanned incremental services at rates substantially below our normal hourly rates and from delaysor make investments in project completion.the form of non-billable service hours or other concessions. If we are unsuccessful in implementing our products or if we experience delays, it could have a material adverse effect on our profitability and the timing and predictability of our revenue.


If our customers do not renew their annual maintenance and support agreements or subscriptions for our products or if they do not renew them on terms that are favorable to us, our business might suffer.

Most of our maintenance agreements and subscriptions are for a one year term. As the end of the annual period approaches, we pursue the renewal of the agreement with the customer. Historically, maintenance and subscriptions renewals have represented a significant portion of our total revenue. Because of this characteristic of our business, if our customers choose not to renew their maintenance and support agreements or subscriptions with us on beneficial terms, our business, operating results and financial condition could be harmed.

Our customers' renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our products and services and their ability to continue their operations and spending levels.

We might not generate increased business from our current customers, which could limit our revenue in the future.

Our business model is highly dependent on the success of our efforts to increase salessell additional products and services to our existing customers. Many of our customers initially make a purchase of only one or a limited number of our products or only for a single department within their organization. These customers might choose not to expand their use of or make

Index to Financial Statements

additional purchases of our products and services. If we fail to generate additional business from our current customers, our revenue could


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grow at a slower rate or even decrease. In addition, as we deploy new applications and features for our existing products or introduce new products and services, our current customers could choose not to purchase these new offerings.

The Software-as-a-Service (SaaS) pricing modeloffering of our products on a subscription basis is evolving and demand by our customers for this modelthese offerings is increasing. Our failure to manage itsthis evolution and demand could lead to lower than expected revenues and profits.

In recent years, much of our revenue growth has beenwas derived from increased subscription offerings, including SaaS. This business model depends heavily on achieving economies of scale because the initial upfront investment is costly and the associated revenue is recognized on a ratable basis. If we fail to achieve appropriate economies of scale or if we fail to manage or anticipate the evolution and demand offor the subscription software pricing models, then our business and operating results could be adversely affected.

The additional investments required to meet customer demand will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term.

Defects, delays or interruptions in our SaaS and hosting services could diminish demand for these services and subject us to substantial liability.
We currently utilize data center hosting facilities to provide SaaS and hosting services to our customers. Any damage to, or failure of, our data center systems generally could result in interruptions in service to our customers, notwithstanding any disaster recovery arrangements that may currently be in place at these facilities. Because our SaaS, Internet-based and hosting service offerings are complex, and we have incorporated a variety of new computer hardware and software systems at the data centers, our services might have errors or defects that users identify after they begin using our services. This could result in unanticipated downtime for our customers and harm to our reputation and our business. Internet-based services frequently contain undetected errors when first introduced or when new versions or enhancements are released. We have from time to time found defects in our Internet-based services and new errors might again be detected in the future. In addition, our customers might use our Internet-based offerings in unanticipated ways that cause a disruption in service for other customers attempting to access their data.
Because our customers use these services for important aspects of their business, any defects, delays or disruptions in service or other performance problems with our services could hurt our reputation and damage our customers' businesses. If that occurs, customers could elect to cancel their service, or delay or withhold payment to us, we could lose future sales or customers might make claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense and risk of litigation. Any of these could harm our business and our reputation.
The market for software and services for nonprofit organizations might not grow and nonprofit organizations might not continue to adopt our products and services.

Many nonprofit organizations have not traditionally used integrated and comprehensive software and services for their nonprofit-specific needs. We cannot be certain that the market for such products and services will continue to develop and grow or that nonprofit organizations will elect to adopt our products and services rather than continue to use traditional, less automated methods, attempt to develop software internally, rely upon legacy software systems, or use generalized software solutions not specifically designed for the nonprofit market. Nonprofit organizations that have already invested substantial resources in other fundraising methods or other non-integrated software solutions might be reluctant to adopt our products and services to supplement or replace their existing systems or methods. In addition, the implementation of one or more of our core software products can involve significant time and capital commitments by our customers, which they may be unwilling or unable to make. If demand for and market acceptance of our products and services does not increase, we might not grow our business as we expect.

Because a significant portion of our revenue is recognized ratably over the terms of the contract, downturns in sales may not be immediately reflected in our revenue.

We recognize our maintenance and subscriptions revenue monthly over the term of the customer agreement. The termterms of the customer agreement isagreements typically 12 months, although, it can extend to threerange from 1-3 years. As a result, much of the revenue we report in each quarter is attributable to agreements entered into during previous quarters. Consequently, a decline in sales to new customers, renewals by existing customers or market acceptance of our products in any one quarter will not necessarily be fully reflected in the revenues in that quarter and will negatively affect our revenues and profitability in future quarters.

Our operations might be affected by the occurrence of a natural disaster or other catastrophic event.
We depend on our principal executive offices and other facilities for the continued operation of our business. Although we have contingency plans in effect for natural disasters or other catastrophic events, these events, including terrorist attacks and natural

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disasters such as hurricanes and earthquakes could disrupt one or more of these facilities and adversely affect our operations. In addition, our Charleston headquarters require a remediation effort to improve weather resistance. This remediation effort is the responsibility of the landlord, but delays in the remediation or disruption caused by the remediation effort could have an adverse effect on our operations. Even though we carry business interruption insurance policies and typically have provisions in our contracts that protect us in certain events, we might suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies or for which we do not have coverage. Any natural disaster or catastrophic event affecting us could have a significant negative impact on our operations.
If the security of our software is breached, we fail to securely collect, store and transmit customer information, or we fail to safeguard confidential donor data, our businessproducts and services might be perceived as not being secure and our reputation and business could suffer.

Fundamental to the use of our products is the secure collection, storage and transmission of confidential donor and end user information. Third partiesAlthough we have commercially available network and application security, internal control measures, and physical security procedures to safeguard our systems, there can be no assurance that a security breach, intrusion, loss or theft of personal information will not occur, which may attempt to breach our security or that of our customers and their databases. We might be liable to our customers for any breach in such security and any breach could harm our customers, our business, and our reputation. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could harm ourcustomer reputation and our businessfuture financial results and operating results. Also, computers, including those that utilize our software, are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. We might be requiredmay require us to expend significant capital and other resources to protect further against security breaches or to rectifyaddress these problems, caused by any security breach.

Index to Financial Statements

including notification under data privacy regulations.

A compromise of our software or other problemproblems that results in customer or donor personal information being obtained by unauthorized persons could adversely affect our reputation with our customers and others, as well as our operations, results of operations, financial condition and liquidity and could result in litigation against us or the imposition of penalties. In addition, a security breach could require that we expend significant additional resources related to our information security systems and could result in a disruption of our operations, particularly our online sales operations.

The existence of vulnerabilities, even if they do not result in a security breach, may harm customer confidence and require substantial resources to address, and we may not be able to discover or remedy such security vulnerabilities before they are exploited. Also, computers, including those that use our software, are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. We might be required to expend significant capital and other resources to protect further against security breaches or to rectify problems caused by any security breach.

Privacy and security concerns, including evolving government regulation in the area of consumer data privacy, could adversely affect our business and operating results.

The effectiveness of our software products relies on our customers’customers' storage and use of data concerning their customers, including financial, personally identifying and other sensitive data. Our customers’customers' collection and use of thesethis data for donor profiling might raise privacy and security concerns and negatively impact the demand for our products and services. For example, our custom modeling and analytical services, including ProspectPoint, WealthPoint and donorCentrics, rely heavily on securing and making use of data we gather from various sources and privacy laws could jeopardize our ability to market and profit from those services. If a breach of customer data security were to occur, our products may be perceived as less desirable, which would negatively affect our business and operating results.

In 2009, data security and privacy have remained material concerns for both our customers and state legislatures.

Governments in some jurisdictions have enacted or are considering enacting consumer data privacy legislation, including laws and regulations applying to the solicitation, collection, processing and use of consumer data. This legislation could reduce the demand for our software products if we fail to design or enhance our products to enable our customers to comply with the privacy and security measures required by the legislation. Moreover, we may be exposed to liability under existing or new consumer data privacy legislation. For example, we are subject to the privacy provisions of the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and might be subject to similar provisions of the Gramm-Leach-Bliley Act and related regulations. Even technical violations of these laws can result in penalties that are assessed for each non-compliant transaction. As part of the American Recovery and Reinvestment Act of 2009, Congress passed the Health Information Technology for Economic and Clinical Health Act, or HI-TECH Act. The HI-TECH Act expands the reach of data privacy and security requirements of HIPAA to service providers. HIPAA and associated United States Department of Health and Human Services regulations permit our customers in the healthcare industry to use certain demographic protected health information (such as name, email or physical address and dates of service) for fundraising purposes and to disclose that subset of protected health information to their service providers for fundraising. We may be included in this service provider group under the revised HIPAA regulations by virtue of our service provider relationship with our customers in the healthcare industry. In general, we seek to contractually prohibit our healthcare industry customers from using other types of health information of their clients for fundraising purposes that would be non compliant with HIPAA, but we believe monitoring our healthcare customers' compliance with such prohibitions is not legally required of service providers and would be cost prohibitive. The law and regulations under HI-TECH are new and still subject to change or interpretation by legal authorities who could cause additional compliance burdens. If we or our customers were found to be subject to and in violation of any of these laws or other data

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privacy laws or regulations, our business wouldcould suffer and we and/or our customers would likely have to change our business practices. In addition, these laws and regulations could impose significant costs on us and our customers and make it more difficult for donors to make online donations.

If we are unable, or customers believe we are unable, to detect and prevent unauthorized use of credit cards and safeguard confidential donor data, we could be subject to financial liability, our reputation could be harmed and customers may be reluctant to use our products and services.

Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in a compromise or breach of the technology we use to protect sensitive transaction data. If any such compromise of our security, or the security of our customers, were to occur, it could result in misappropriation of proprietary information or interruptions in operations and have an adverse impact on our reputation or the reputation of our customers. All of our products are currently certified as Payment Application Data Security Standard compliant. Currently some of our products are not fully compliant with Payment Card Industry Data Security Standard, or PCI DSS. This or other factors could make customers believe we are unable to detect and prevent unauthorized use of credit cards or confidential donor data, which could harm our business. Additionally, these factors could make issuing banks believe the transactions of our customers are compromised and refuse to process those transactions, which could harm the reputation of our products and our business.

Additional PCI DSS standards go into effect next year.

Conforming our products and services to PCI DSS is expensive and time-consuming. Our failure to maintain compliance with PCI DSS could make customers believe we are unable to detect and prevent unauthorized use of credit cards and bank account numbers or protect confidential donor data and our reputation and business might be harmed.

Index to Financial Statements

Our servicessubscriptions and subscriptionservices revenue produces substantially lower gross margins than our license revenue, and changes in the relative mix of these and other sources of revenue could negatively affect our overall gross margins.

Our services revenue, which includes fees for consulting, implementation, training, data and technical services and analytics, was approximately 28%, 33% and 36% of our revenue for 2009, 2008 and 2007, respectively. Our services revenue has substantially lower gross margins than our product license revenue. An increase in the percentage of total revenue represented by services revenue would adversely affect our overall gross margins.

Certain of our services are contracted under fixed fee arrangements, which we base on estimates. If our estimated fees are less than our actual costs, our operating results would be adversely affected. Services revenue as a percentage of total revenue has varied significantly from quarter to quarter due to fluctuations in licensing revenue, economic changes, changes in the average selling prices for our products and services, our customers’ acceptance of our products and our sales force execution. In addition, the volume and profitability of services can depend in large part upon:

competitive pricing pressure on the rates that we can charge for our services;

the complexity of the customers’ information technology environment and the existence of multiple non-integrated legacy databases;

the resources directed by customers to their implementation projects; and

the extent to which outside consulting organizations provide services directly to customers.

For example, revenue from our training services, which represented 17%, 22% and 23% of our total services revenue during 2009, 2008 and 2007, respectively, has recently experienced a decrease in demand because existing and prospective customers have been experiencing budgetary constraints resulting from the challenges posed by the overall economic environment. The training services revenue typically has a higher gross margin than other services revenue. A continued decrease in the demand for training services could adversely affect our profitability and operating results.

Our subscriptionsubscriptions revenue, which includes fees for providing access to hosted applications, application hosting services and access to certain data services and our online subscription training offerings, has experienced the largest percentage revenue growth over the last three years. SubscriptionSubscriptions revenue was approximately 24%36%, 16%28% and 10%26% of our revenue for 2009, 20082012, 2011 and 2007,2010, respectively. Our subscriptionsubscriptions revenue has substantially lower gross margins than our product license revenue. AnFor the years ended December 31, 2012, 2011 and 2010, our subscriptions margin was 58%, 59% and 63%. A continued increase in the percentage of total revenue represented by subscriptionsubscriptions revenue could adversely affect our overall gross margins. Ifmargins and operating results if we are unable to achieve economies of scale in our subscription based offerings. Additionally, if nonprofits in general, and specifically our customers and prospects, desire to adopt our subscription offerings much more rapidly than we currently anticipate and we are unable to respond in a timely fashion, we could encounter significant effects to our business, including substantial capital expenditures, reduction in profitability, decrease in revenue growth and/or we could become potentially less competitive, resulting in a loss of market share.

Any erosion


Our services revenue, which includes fees for consulting, customization, implementation, training, data and technical services and analytics, was approximately 27%, 29% and 27% of our revenue for 2012, 2011 and 2010, respectively. Our services revenue has substantially lower gross margins forthan our product license revenue. For the years ended December 31, 2012, 2011 and 2010, our services and/or subscription revenue or any adverse changesmargin was 19%, 27% and 24%, respectively. An increase in the mixpercentage of our license versus service and subscriptiontotal revenue represented by services revenue without an improvement in services margin could adversely affect our operating results.

Index
Certain of our services are contracted under fixed fee arrangements, which we base on estimates. If our estimated number of hours to Financial Statements

perform engagement implementation services are less than our actual hours, our operating results would be adversely affected. Services revenue as a percentage of total revenue has varied significantly from quarter to quarter due to fluctuations in licensing revenue, economic changes, varying accounting treatments, changes in the average selling prices for our products and services, our customers' acceptance of our products and our sales force execution. In addition, the volume and profitability of services can depend in large part upon:

Competitive pricing pressure on the rates that we can charge for our services;
The complexity of the customers' information technology environment and the existence of multiple non-integrated legacy databases;
The resources directed by customers to their implementation projects; 
The extent of software customization included in the implementation projects; and
The extent to which outside consulting organizations provide services directly to customers.
A decrease in the demand for services could adversely affect our profitability and operating results.

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Our quarterly financial results fluctuate and might be difficult to forecast and, if our future results are below either any guidance we might issue or the expectations of public market analysts and investors, the price of our common stock might decline.

Our quarterly revenue and results of operations are difficult to forecast. We have experienced, and expect to continue to experience, fluctuations in revenue and operating results from quarter to quarter. As a result, we believe that quarter-to-quarter comparisons of our revenue and operating results are not necessarily meaningful and that such comparisons might not be accurate indicators of future performance. The reasons for these fluctuations include but are not limited to:

theThe size and timing of sales of our software, including the relatively long sales cycles associated with many of our larger software sales;

budgetBudget and spending decisions by our customers;

marketThe degree of judgment required to estimate large consulting service engagements;

Scheduling considerations by our customers as they impact the delivery of purchased services;
Varying accounting treatments based upon the facts and circumstances of each arrangement;
Utilization of our professional services personnel;
Market acceptance of new products we release;

marketMarket acceptance of products we acquire;

theThe amount and timing of operating costs related to the expansion of our business, operations and infrastructure;

changesChanges in our pricing policies or our competitors’competitors' pricing policies;

seasonality in our revenue;

generalGeneral economic conditions;conditions and

effects of tax law changes; and

costsCosts related to acquisitions of technologies or businesses.

Our operating expenses, which include sales and marketing, research and development and general and administrative expenses, are based on our expectations of future revenue and are, to a large extent, fixed in the short term. If revenue falls below our expectations in a quarter and we are not able to quickly reduce our operating expenses in response, our operating results for that quarter could be adversely affected. It is possible that in some future quarter our operating results may be below either any guidance we might issue or the expectations of public market analysts and investors and, as a result, the price of our common stock might fall.

Our failure to compete successfully could cause our revenue or market share to decline.

Our market is fragmented, highly competitive and rapidly evolving and there are limited barriers to entry for some aspects of this market. We mainly face competition from four sources:

softwareSoftware developers offering integrated specialized products designed to address specific needs of nonprofit organizations;

organizations, some of which are sold with subscription pricing;

providersProviders of traditional, less automated fundraising services such as services that support traditional direct mail campaigns, special events fundraising, telemarketing and personal solicitations;

custom-developedCustom-developed products created either internally or outsourced to custom service providers; and

softwareSoftware developers offering general products not designed to address specific needs of nonprofit organizations.

The companies we compete with and other potential competitors may have greater financial, technical and marketing resources and generate greater revenue and better name recognition than we do. IfCompanies such as Microsoft, Salesforce.com and Oracle offer some products that are designed specifically for nonprofit organizations, in addition to some of their products which have a degree of functionality for nonprofit organizations that could be considered competitive. Also, if one or more of our competitors or potential competitors were to merge or partner with one of our other competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. For example, a large diversified software enterprise, such as Microsoft, Oracle or Salesforce.com, could decide to enter the market directly, including through acquisitions.

Index to Financial Statements

Competitive pressures can adversely impact our business by limiting the prices we can charge our customers and making the adoption and renewal of our solutions more difficult.


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Our competitors might also establish or strengthen cooperative relationships with resellers and third-party consulting firms or other parties with whom we have had relationships, thereby limiting our ability to promote our products. These competitive pressures could cause our revenue and market share to decline.

If we fail to respond to technological changes to be competitive, our business could suffer.

The software industry is characterized by technological change, evolving industry standards in hardware and software technology, changes in customer requirements and frequent new product introductions and enhancements. The introduction of products encompassing new technologies can render existing products obsolete and unmarketable. As a result, our future success will depend, in part, upon our ability to continue to enhance existing products and develop and introduce in a timely manner or acquire new products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements and achieve market acceptance. We cannot assure youThere is no assurance that we will successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner. Further, there can be no assurance that the products, capabilities or technologies developed by others will not render our products or technologies obsolete or noncompetitive. In addition, because our service is designed to operate on a variety of network hardware and software platforms using a standard browser, we will need to continuously modify and enhance our service to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies. We have made and continue to make significant working capital investments in accordance with evolving industry and customer requirements. These concentrations of working capital increase our risk of loss due to product or technology obsolescence. If we are unable to develop or acquire on a timely and cost-effective basis new software products or enhancements to existing products or if such new products or enhancements do not achieve market acceptance, our business, results of operations and financial condition may be materially adversely affected.

If we were found subject to or in violation of any laws or regulations governing privacy or electronic fund transfers, we could be subject to liability or forced to change our business practices.

It is possible that the payment processing component of our web-based software is subject to various governmental regulations. Any further legislation at the state and federal levels could also restrict further our information gathering and disclosure practices. Existing and potential future privacy laws might limit our ability to develop new products and services that make use of data we gather from various sources. For example, our custom modeling and analytical services, including ProspectPoint, WealthPoint, P!N and donorCentrics, rely heavily on securing and making use of data we gather from various sources and privacy laws could jeopardize our ability to market and profit from those services. The provisions of these laws and related regulations are complicated, and we do not have extensive experience with these laws and related regulations. Even technical violations of these laws can result in penalties that are assessed for each non-compliant transaction. In addition, we might be subject to the privacy provisions of the Health Insurance Portability and Accountability Act of 1996 and the Gramm-Leach-Bliley Act and related regulations. If we or our customers were found to be subject to and in violation of any of these laws or other privacy laws or regulations, our business would suffer and we and/or our customers would likely have to change our business practices. In addition, these laws and regulations could impose significant costs on us and our customers and make it more difficult for donors to make online donations.

Because competition for highly qualified personnel is intense, we might not be able to attract and retain the employeeskey personnel and personnel we need to support our planned growth.

To meet our objectives successfully, we must attract and retain highly qualified personnel, including a qualified chief executive officer, with specialized skill sets. If we are unable to hire a qualified chief executive officer or are unable to attract suitably qualified management, there could be a material adverse impact on our business. In addition, to execute our continuing growth plans, we need to increase the size and maintain the quality of our sales force, software development staff and our professional services organization. To meet our objectives successfully, we must attract and retain highly qualified personnel with specialized skill sets focused on the nonprofit industry. Competition for qualified personnel can be intense, and we might not be successful in attracting and retaining them. The pool of qualified personnel with experience working with or selling to nonprofit organizations is limited overall and specifically in Charleston, South Carolina, where our principal office is located. Our ability to maintain and expand our sales, product development and professional services teams will depend on our ability to recruit, train and retain top quality people with advanced skills who understand sales to, and the specific needs of, nonprofit organizations. For these reasons, we have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications for our business. In addition, it takes time for our new sales and services personnel to become productive, particularly with respect to obtaining and supporting major customer accounts. In particular,

Index to Financial Statements

we plan to continue to increase the number of services personnel to attempt to meet the needs of our customers and potential new customers. In addition to hiring services personnel to meet our needs, weWe might also engage additional third-party consultants as contractors, which could have a negative impact on our earnings. If we are unable to hire or retain qualified personnel, or if newly hired personnel fail to develop the necessary skills or reach productivity slower than anticipated, it would be more difficult for us to sell our products and services, we could experience a shortfall in revenue or earnings and not achieve our planned growth.

Further, in the past, we have used equity incentive programs as part of our overall employee compensation arrangements to both attract and retain personnel. A decline in our stock price could negatively impact the value of these equity incentive and related compensation programs as retention and recruiting tools. We may need to create new or additional equity incentive programs and/or compensation packages to remain competitive, which could be dilutive to our existing stockholders and/or adversely affect our results of operations.

If we do not successfully address the risks inherent in the expansion of our international operations, our business could suffer.
We currently have operations in Canada, United Kingdom, the Netherlands, Australia and Asia, and we intend to expand further into international markets. We have limited experience in international operations and might not be able to compete effectively in international markets. Our international offices generated revenues of approximately $61.0 million, $53.6 million and $44.1 million for the years ended December 31, 2012, 2011 and 2010, respectively. Accordingly, international revenue increased 13.8% and 21.5% in 2012 and 2011, respectively. Expansion of our international operations will require a significant amount of attention from our management and substantial financial resources and might require us to add qualified management in these markets. Our direct sales model requires us to attract, retain and manage qualified sales personnel capable of selling into

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markets outside the United States. In some cases, our costs of sales might increase if our customers require us to sell through local distributors.
If we are unable to grow our international operations in a cost effective and timely manner, our business and operating results could be harmed. Doing business internationally involves additional risks that could harm our operating results, including:
Difficulties associated with and costs of staffing and managing international operations;
Differing technology standards;
Difficulties in collecting accounts receivable and longer collection periods;
Political and economic instability;
Imposition of currency exchange controls;
Potentially adverse tax consequences;
Reduced protection for intellectual property rights in certain countries;
Dependence on local vendors;
Protectionist laws and business practices that favor local competition;
Compliance with multiple conflicting and changing governmental laws and regulations;
Seasonal reductions in business activity specific to certain markets;
Longer sales cycles;
Restrictions on repatriation of earnings or new taxation thereon;
Differing labor regulations;
Differing accounting rules and practices;
Restrictive privacy regulations in different countries, particularly in the European Union;
Restrictions on the export of technologies such as data security and encryption;
Compliance with U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to government officials; and
Import and export restrictions and tariffs.
We expect that an increasing portion of our international software license, consulting services and maintenance services revenues will be denominated in foreign currencies, subjecting us to fluctuations in foreign currency exchange rates. If we expand our international operations, exposures to gains and losses on foreign currency transactions may increase.
If our products fail to perform properly due to undetected errors or similar problems, our business could suffer.

Complex software such as ours often contains undetected errors or bugs. Such errors are frequently found after introduction of new software or enhancements to existing software. We continually introduce or acquire the rights to new products and release new versions of our products. If we detect any errors before we ship a product, we might have to delay product shipment for an extended period of time while we address the problem. We might not discover software errors that affect our new or current products or enhancements until after they are deployed, and we may need to provide enhancements to correct such errors. Therefore, it is possible that, despite testing by us, errors may occur in our software. These errors could result in:

harmHarm to our reputation;

lostLost sales;

delaysDelays in commercial release;

productProduct liability claims;

delays in or loss of market acceptance of our products;

licenseLicense terminations or renegotiations; and

unexpectedUnexpected expenses and diversion of resources to remedy errors.


19


Furthermore, our customers may use our software together with products from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our software does not cause these problems, the existence of these errors might cause us to incur significant costs, divert the attention of our technical personnel from our product development efforts, impact our reputation and cause significant customer relations problems.

Our failure to obtain licenses for third-party technologies could harm our business.

We expect to continue licensing technologies from third parties, including applications used in our research and development activities, technologies which are integrated into our products and products that we resell. Although we believe that the loss of any third-party technologies currently integrated into our products would not have a material adverse effect on our business, this might change in the future. Our inability in the future to obtain any third-party licenses on commercially reasonable terms, or at all, could delay future product development until equivalent technology can be identified, licensed or developed and integrated. This inability in turn would harm our business and operating results. Our use of third-party technologies exposes us to increased risks including, but not limited to, risks associated with the integration of new technology into our products, the diversion of our resources from development of our own proprietary technology and our inability to generate revenue from licensed technology sufficient to offset associated acquisition and maintenance costs.

Index to Financial Statements

We rely upon trademark, copyright, patent and trade secret laws to protect our proprietary rights, which might not provide us with adequate protection.

Our success and ability to compete dependdepends to a significant degree upon the protection of our software and other proprietary technology rights. We might not be successful in protecting our proprietary technology and our proprietary rights might not provide us with a meaningful competitive advantage. To protect our core proprietary technology, we rely on a combination of patent, trademark, copyright and trade secret laws, as well as nondisclosure agreements, each of which affords only limited protection. We currently do not have patents issued for any of our proprietary technology and we only recently filed patent applications relating to a number of such products. Moreover, we have no patent protection for The Raiser’sRaiser's Edge, which is one of our core products and responsible for a significant portion of our revenue. Any inability to protect our intellectual property rights could seriously harm our business, operating results and financial condition. It is possible that:

our pending patent applications may not result in the issuance of patents;

anyAny patents issued to us may not be timely or broad enough to protect our proprietary rights;

anyAny issued patent could be successfully challenged by one or more third parties, which could result in our loss of the right to prevent others from exploiting the inventions claimed in those patents; and

currentCurrent and future competitors may independently develop similar technologies, duplicate our products or design around any of our patents.

In addition, the laws of some foreign countries do not protect our proprietary rights in our products to the same extent as do the laws of the United States. Despite the measures taken by us, it may be possible for a third party to copy or otherwise obtain and use our proprietary technology and information without authorization. Policing unauthorized use of our products is difficult, and litigation could become necessary in the future to enforce our intellectual property rights. Any litigation could be time consuming and expensive to prosecute or resolve, and could result in substantial diversion of management attention and resources, and materially harm our business, financial condition and results of operations.

If we do not successfully address the risks inherent in the expansion of our international operations, our business could suffer.

We currently have operations in Canada, United Kingdom, Netherlands and Australia, and we intend to expand further into international markets. We have limited experience in international operations and may not be able to compete effectively in international markets. Our international offices generated revenues of approximately $39.7 million, $40.3 million and $36.2 million for the years ended December 31, 2009, 2008 and 2007, respectively. Accordingly, international revenue decreased 1.5% in 2009 and increased 11.3% in 2008. Expansion of our international operations will require a significant amount of attention from our management and substantial financial resources and may require us to add qualified management in these markets. Our direct sales model requires us to attract, retain and manage qualified sales personnel capable of selling into markets outside the United States. In some cases, our costs of sales might increase if our customers require us to sell through local distributors.

If we are unable to grow our international operations in a cost effective and timely manner, our business and operating results could be harmed. Doing business internationally involves additional risks that could harm our operating results, including:

difficulties associated with and costs of staffing and managing international operations;

differing technology standards;

difficulties in collecting accounts receivable and longer collection periods;

political and economic instability;

Index to Financial Statements

fluctuations in currency exchange rates;

imposition of currency exchange controls;

potentially adverse tax consequences;

reduced protection for intellectual property rights in certain countries;

dependence on local vendors;

protectionist laws and business practices that favor local competition;

compliance with multiple conflicting and changing governmental laws and regulations;

seasonal reductions in business activity specific to certain markets;

longer sales cycles;

restrictions on repatriation of earnings;

differing labor regulations;

restrictive privacy regulations in different countries, particularly in the European Union;

restrictions on the export of technologies such as data security and encryption; and

import and export restrictions and tariffs.

Restrictions in our revolving credit facility may limit our activities, including dividend payments, share repurchases and acquisitions.

At December 31, 2009 we had no borrowings under our revolving credit facility, however, we may draw on our revolving credit facility from time to time to help us meet our short-term financial needs.

Our revolving credit facility contains restrictions, including covenants limiting our ability to incur additional debt, grant liens, make acquisitions and other investments, prepay specified debt, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions, repurchase stock and enter into transactions with affiliates. There can be no assurance that we will be able to remain in compliance with the covenants to which we are subject in the future and, if we fail to do so, that we will be able to obtain waivers from our lenders or amend the covenants.

In the event of a default under our credit facility, we could be required to immediately repay all outstanding borrowings, which we might not be able to do. In addition, certain of our material domestic subsidiaries have guaranteedwill be required to guarantee amounts borrowed under the credit facility, and we have pledged the shares of certain of our subsidiaries as collateral for our obligations under the credit facility. Any such default could have a material adverse effect on our ability to operate, including allowing lenders under the credit facility to enforce the guarantees of our subsidiaries, if any, or exercise their rights with respect to the shares pledged as collateral.



20


Our business and financial performance could be negatively impacted by changes in tax laws or regulations.
We and our customers are subject to a wide variety of tax laws and regulations in jurisdictions around the world.  In response to recent economic challenges, we anticipate that many of the jurisdictions in which we and our customers do business will review tax and other revenue raising laws and regulations. New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us or our customers. Any changes to these existing tax laws could adversely affect our domestic and international business operations, and our business and financial performance. Additionally, these events could require us or our customers to pay additional tax amounts on a prospective or retroactive basis, as well as require us or our customers to pay fines and/or penalties and interest for past amounts deemed to be due. Additionally, new, changed, modified or newly interpreted or applied tax laws could increase our customers' and our compliance, operating and other costs, as well as the costs of our products. Further, these events could decrease the capital we have available to operate our business. Any or all of these events could adversely impact our business and financial performance.
We have recorded a significant deferred tax asset, and we might never realize the full value of our deferred tax asset, which would result in a charge against our earnings.

In connection with the initial acquisition of our common stock as part of our recapitalization in 1999, we recorded approximately $107.0 million as a deferred tax asset. OurAs of December 31, 2012, we have deferred tax asset balanceassets recognized of $61.3$87.8 million, of which $35.9$13.7 million relates to our 1999 recapitalization, was approximately 20% of our total assets as of December 31, 2009.

recapitalization.

Realization of our deferred tax asset is dependent upon our generating sufficient taxable income in future years to realize the tax benefit from that asset. Deferred tax assets are reviewed at least annually for realizability. A charge against our earnings would result if, based on the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. This could be caused by, among other things, deterioration

Index to Financial Statements

in performance, loss of key contracts, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the products sold by our business and a variety of other factors. If a deferred tax asset was determined to be not realizable in a future period, the charge to earnings would be recognized as an expense in our results of operations in the period the determination is made.

Additionally, if we are unable to utilize our deferred tax assets, our cash flow available to fund operations could be adversely effected.

Depending on future circumstances, it is possible that we might never realize the full value of our deferred tax asset. Any future determination of impairment of a significant portion of our deferred tax asset would have an adverse effect on our financial condition and results of operations.

Our ability to utilize our net operating loss carryforwards may be limited.

Included in our deferred tax asset balance is $17.3$26.9 million related to federal net operating loss carryforwards which is approximately 6% of our total assets at December 31, 2009.2012. Our federal net operating loss carryforwards are subject to limitations on how much may be utilized on an annual basis. The use of the net operating loss carryforwards may have additional limitations resulting from certain future ownership changes or other factors under Section 382 ofset forth in the Internal Revenue Code. If our net operating loss carryforwards are further limited, and we have taxable income which exceeds the available net operating loss carryforwards for that period, we would incur an income tax liability even though net operating loss carryforwards may be available in future years prior to their expiration, which would have an adverse affecteffect on our future cash flow, financial condition and results of operations.

We

Our acquisition of Convio might not be ableaccretive and might cause dilution to implementthe combined company's earnings per share, which could negatively impact the price of our common stock.
We currently anticipate that our acquisition of Convio will be accretive to the non-GAAP earnings per share (“EPS”) of the combined company during the first full calendar year after the acquisition is completed. This expectation is based on preliminary estimates of certain synergies expected to be realized by the combined company during such time, including the elimination of Convio's expenses related to operating unit reorganization successfully.

Effective January 1, 2010, we reorganizedas a publicly traded company and excluding the impact of merger-related expenses. Such estimates and assumptions could materially change due to the failure to realize any or all of the benefits expected in the acquisition or other factors beyond our business into three operating units to better align our organization around key customer groups. The three operating units arecontrol or the General Markets Business Unit, the Enterprise Customer Business Unit and the International Business Unit. The successful reorganizationcontrol of Convio. All of these operating units will require, among other things, coordination of direct revenue-generating activities, including sales, professional services and customer support within each unit. The diversion of management’s attention and any difficulties encountered in this process might negatively impact our ability to implementfactors could delay, decrease or eliminate the reorganization and our goal to better align our operating structure with the different needsexpected accretive effect of the diverse typesacquisition and sizescause resulting dilution to our non-GAAP EPS or to the price of organizations we serve and, ultimately, our ability to improve our competitive and financial performance in the future.

common stock.


21


We might face challenges in integrating our recentcompleted acquisitions and, as a result, might not realize the expected benefits of these acquisitions.

In April 2009, we acquired RLC. During 2008, we acquired Kintera and during 2007 we acquired

We have completed significant acquisitions over the Target Companies and eTapestry.past five years including, most recently, our acquisition of Convio. Managing and integrating the operations and personnel of an acquired company can be a complex process. The integration might not be completed rapidly or achieve the anticipated benefits of the acquisition. The successful integration of the acquired companies will require, among other things, coordination of various departments, including product development, engineering, sales and marketing and finance. Further, a successful integration of the acquired companies internal control structure will be required. The diversion of the attention of management and any difficulties encountered in this process could cause the disruption of, or a loss of momentum in, sales or product development. The inabilityIf we are unable to successfully integrate the operations and personnel of our recently acquired companies, or if there is any significant delay in achieving integration, could have a material adverse effect onwe will not realize the revenue growth, synergies and other anticipated benefits we expected and our business and on the market priceresults of operations could be adversely affected.
If we are unable to retain key personnel of our common stock.

Indexrecent acquisitions, our business may suffer.
The success of our recent acquisitions will depend in part on our ability to Financial Statements

retain their engineering, sales, marketing, development and other personnel. It is possible that these employees might decide to terminate their employment. If key employees terminate their employment, the sales, marketing or development activities of acquired companies might be adversely affected, our management's attention might be diverted from successfully integrating the acquired operations and to hiring suitable replacements and, as a result, our business might suffer.

Future acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and strain our resources.

As part of our business strategy, we have made acquisitions in the past, and, we might acquire additional companies, services and technologies that we feel could complement or expand our business, augment our market coverage, enhance our technical capabilities, provide us with important customer contacts or otherwise offer growth opportunities. Acquisitions and investments involve numerous risks, including:

difficultiesDifficulties in integrating operations, technologies, services, accounting and personnel;

difficultiesDifficulties in supporting and transitioning customers of our acquired companies;

diversionDiversion of financial and management resources from existing operations;

risksRisks of entering new sectors of the nonprofit industry;

potentialPotential loss of key employees; and

inabilityInability to generate sufficient revenue to offset acquisition or investment costs.

return on investment.

Acquisitions also frequently result in recording of goodwill and other intangible assets, which are subject to potential impairments in the future that could harm our operating results. In addition, if we finance acquisitions by issuing equity securities or securities convertible into equity securities, our existing stockholders would be diluted which, in turn, could affect the market price of our stock. Moreover, we could finance any acquisition with debt, resulting in higher leverage and interest costs. As a result, if we fail to evaluate and execute acquisitions or investments properly, we might not achieve the anticipated benefits of any such acquisition and we may incur costs in excess of what we anticipate.

Furthermore, if we incur additional debt to fund acquisitions and are unable to service our debt obligation we may have a greater risk of default under our credit facility.

If we are not able to manage our anticipated growth effectively, our operating costs may increase and our operating margins may decrease.
We will need to continue to grow our infrastructure to address our acquisition of Convio and other potential market opportunities. Our growth will continue to place, to the extent that we are able to sustain such growth, a strain on our management, administrative, operational and financial infrastructure. If we continue to grow our operations, by way of additional business combinations or otherwise, we may not be effective in enlarging our physical facilities and our systems and our procedures or controls may not be adequate to support such expansion or our business generally. If we are unable to manage our growth, our operating costs may increase and our operating margins may decrease.

22


Increasing government regulation could affect our business.

We are subject, not only to regulations applicable to businesses generally, but also to laws and regulations directly applicable to electronic commerce and other regulations. Although there are currently few such laws and regulations, state, federal and foreign governments may adopt laws and regulations applicable to our business. Any such legislation or regulation could dampen the growth of the Internet and decrease its acceptance. If such a decline occurs, companies may decide in the future not to use our products and services. Any new laws or regulations in the following areas could affect our business:

userUser privacy;

thePayment processing;

The pricing and taxation of goods and services offered over the Internet;

theTaxation of foreign earnings;

The content of websites;

copyrights;

Copyrights;

consumerConsumer protection, including the potential application of “do not call” registry requirements on our customers and consumer backlash in general to direct marketing efforts of our customers;

theThe online distribution of specific material or content over the Internet; and

theThe characteristics and quality of products and services offered over the Internet.

Pending and enacted legislation at the state and federal levels, including those related to fundraising activities, may also restrict further our information gathering and disclosure practices, for example, by requiring us to comply with extensive and costly registration, reporting or disclosure requirements.

Index to Financial Statements

Our operations might be affected by the occurrence of a natural disaster or other catastrophic event.

We depend on our principal executive offices and other facilities for the continued operation of our business. Although we have contingency plans in effect for natural disasters or other catastrophic events, these events, including terrorist attacks and natural disasters such as earthquakes and hurricanes, could disrupt our operations. Even though we carry business interruption insurance policies and typically have provisions in our contracts that protect us in certain events, we might suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies or for which we do not have coverage. Any natural disaster or catastrophic event affecting us could have a significant negative impact on our operations.

Item 1B. UNRESOLVED STAFF COMMENTS

Unresolved staff comments

None.

Item 2. PROPERTIES

Properties

We lease our headquarters in Charleston, South Carolina which consists of approximately 230,000 square feet. The lease on our Charleston headquarters expires in October 2024, and we have the option for two 5-year renewal periods. We also lease facilities near Indianapolis, Indiana and in San Diego, California; Austin, Texas; Cambridge, Massachusetts; Washington D.C.; Denver, Colorado; Alexandria, Virginia; Miami, Florida; Almere, the Netherlands; Glasgow, Scotland; London, England; East Brisbane, Australia; and Sydney, Australia. We believe that our properties are in good operating condition and adequately serve our current business operations for all of our business segments. We also anticipate that suitable additional or alternative space, including those under lease options, will be available at commercially reasonable terms for future expansion.

Item 3. LEGAL PROCEEDINGS

Legal proceedings

From time to time we may become involved in litigation relating to claims arising from our ordinary course of business. We do not believe that there are any claims or actions pending or threatened against us, the ultimate disposition of which would have a material adverse affecteffect on us.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of our stockholders during the fourth quarter of the year ended December 31, 2009.

Mine safety disclosures
Not applicable.

23
Index to Financial Statements



PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for registration's common equity, related stockholder matters and issuer purchases of equity securities

Our common stock began trading on the NASDAQ National Market under the symbol “BLKB” on July 26, 2004. On July 1, 2006, our common stock began trading on NASDAQ’s newest market tier, the NASDAQ Global Select Market. The following table sets forth the high and low prices for shares of our common stock, as reported by NASDAQ for the periods indicated. The prices are based on quotations between dealers, which do not reflect retail markup, mark-down or commissions.

Blackbaud quarterly high and low stock prices

    High  Low

Fiscal year ended December 31, 2009

    

First quarter

  $13.43  $9.15

Second quarter

   15.77   12.35

Third quarter

   24.40   13.52

Fourth quarter

   24.43   21.18
          

Fiscal year ended December 31, 2008

    

First quarter

  $27.75  $23.23

Second quarter

   25.72   20.68

Third quarter

   22.69   17.86

Fourth quarter

   18.70   10.77

 High
 Low
Fiscal year ended December 31, 2012   
First quarter$34.00
 $22.63
Second quarter$33.93
 $24.02
Third quarter$28.34
 $22.98
Fourth quarter$24.88
 $20.99
Fiscal year ended December 31, 2011   
First quarter$27.44
 $24.42
Second quarter$30.39
 $24.91
Third quarter$29.10
 $21.84
Fourth quarter$30.36
 $20.81
As of February 12, 2010,2013, there were 237179 stockholders of record and approximately 15,000 beneficial owners of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, this number is not representative of the total number of stockholders represented by these stockholders of record. On February 12, 2010,2013, the closing price of our common stock was $22.17.

Index to Financial Statements

$25.48.



24


Stock performance graph

The following performance graph compares the performance of our common stock to the Center for Research in Security Prices (CRSP) Total Market ReturnNASDAQ Composite Index forand the NASDAQ Stock MarketComputer and to a peer group industry index based on the standard industrial code for computer programming, data processing and other computer-related services.Data Processing Index. The graph covers the most recent five-year period ending December 31, 2009.2012. The graph assumes that the value of the investment in our common stock and each index was $100 at December 31, 2004,2007, and that all dividends are reinvested. We paid quarterly dividends at an annual rate of $0.40, $0.40, $0.34 and $0.28 per share for the years ending December 31, 2009, 2008, 2007 and 2006, respectively.

    12/31/2004  12/30/2005  12/29/2006  12/31/2007  12/31/2008  12/31/2009

Blackbaud Common Stock

  $100.00  $116.92  $177.93  $191.93  $92.42  $161.78

CRSP Total Market Return Index

  $100.00  $102.13  $112.20  $121.67  $58.68  $84.28

Peer Group

  $100.00  $103.39  $116.09  $141.85  $81.65  $133.45

Index to Financial Statements

 12/31/2007
 12/31/2008
 12/31/2009
 12/31/2010
 12/31/2011
 12/31/2012
Blackbaud, Inc.$100.00
 $49.18
 $88.34
 $98.68
 $107.54
 $90.30
NASDAQ Composite$100.00
 $59.03
 $82.25
 $97.32
 $98.63
 $110.78
NASDAQ Computer & Data Processing$100.00
 $57.50
 $90.39
 $98.29
 $95.15
 $106.83

25


Issuer purchases of issuer securities
The following table provides information about shares of common stock repurchased during the three months ended

Period  Total
number of
shares
purchased(1)		  Average
price paid
per share		  Total number
of shares
purchased as
part of publicly
announced
plans or
programs		  

Approximate
dollar value of
shares that may
yet be purchased
under the plan
or programs

(in thousands)

Beginning balance, October 1, 2009

            $30,770

October 1, 2009 through October 31, 2009

  26,197  $22.22  —    $30,770

November 1, 2009 through November 30, 2009

  114,697  $22.07  —    $30,770

December 1, 2009 through December 31, 2009

  110  $23.63  —    $30,770

Total

  141,004  $22.10  —    $30,770
(1)During the period, there were no shares repurchased. The shares in the table represent shares withheld by us to satisfy the tax obligations of employees due upon vesting of restricted stock and exercise of stock appreciation rights during the period.

December 31, 2012. All of these shares were common stock withheld by us to satisfy tax obligations of employees due upon vesting of restricted stock.

Period
Total
number
of shares
purchased

 
Average
price
paid
per
share

 
Total number
of shares
purchased as
part of
publicly
announced
plans or
programs

 
Approximate
dollar value
of shares
that may yet
be
purchased
under the
plan or
programs (in
thousands)

Beginning balance, October 1, 2012    —
 $50,000
October 1, 2012 through October 31, 2012401
 $23.95
 —
 $50,000
November 1, 2012 through November 30, 2012119,692
 $22.11
 —
 $50,000
December 1, 2012 through December 31, 2012168
 $22.83
 —
 $50,000
Total120,261
 $22.11
 —
 $50,000

Dividend policy and restrictions

Our Board of Directors has adopted a dividend policy which reflects an intention to distribute to our stockholders a portion of the cash generated by our business that exceeds our operating needs and capital expenditures as regular quarterly dividends. This policy reflects our judgment that we can provide greater value to our stockholders by distributing to them a portion of the cash generated by our business.

In accordance with this dividend policy, we paid quarterly dividends at an annual rate of $0.40$0.48 per share in 20092012 and 2008,2011, resulting in an aggregate dividend payment to stockholders of $17.7$21.7 million and $17.5$21.4 million in 20092012 and 2008,2011, respectively. In February 2010,2013, our Board of Directors approved an annual dividend rate of $0.44$0.48 per share for 2010.2013. We declared a first quarter dividend of $0.11$0.12 per share payable on March 15, 20102013, to stockholders of record on February 26, 2010,28, 2013, and currently intend to pay quarterly dividends at an annual rate of $0.44$0.48 per share of common stock for each of the remaining fiscal quarters in 2010.2013. Dividends at this rate would total approximately $19.4$22.1 million in the aggregate on the common stock in 20102013 (assuming 44.046.0 million shares of common stock are outstanding, net of treasury stock).

Dividends on our common stock will not be cumulative. Consequently, if dividends on our common stock are not declared and/or paid at the targeted level, our stockholders will not be entitled to receive such payments in the future. We are not obligated to pay dividends, and as described more fully below, our stockholders might not receive any dividends as a result of the following factors:

ourOur credit facility limits the amount of dividends we are permitted to pay;

ourOur Board of Directors could decide to reduce dividends or not to pay dividends at all, at any time and for any reason;

theThe amount of dividends distributed is subject to state law restrictions; and

weWe might not have enough cash to pay dividends due to changes to our operating earnings, working capital requirements and anticipated cash needs.

Assumptions and considerations

We estimate that the cash necessary to fund dividends on our common stock for 20102013 at an annual rate of $0.44$0.48 per share is approximately $19.4$22.1 million (assuming 44.046.0 million shares of common stock are outstanding, net of treasury stock).

Index to Financial Statements

In May 2008, our Board of Directors approved

We have a new stock repurchase program that authorizedauthorizes us to purchase up to $40$50.0 million of our outstanding shares of common stock. The prior program was terminated at that date and the remaining balance that was authorized but not used under the prior stock repurchase program was included in the amount authorized under the new program. The new program does not have an expiration date. The shares could be purchased in conjunction with a public offering offor our 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. As of February 12, 2010, we had purchased 520,423 shares of common stock for $9.2 million pursuant to this program. Any open market purchases under the repurchase program will be made in compliance with Rule 10b-18 of the Securities Exchange Act of 1934 and all other applicable securities regulations. We might not purchase any additional shares of common stock and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, to cancel the stock repurchase program.


26


We believe that our cash on hand and the cash flows we expect to generate from operations will be sufficient to meet our liquidity requirements through 2010,2013, including dividends and purchases under our stock repurchase program. See “Management’s discussion and analysis of financial conditions and results of operations—operations — Liquidity and capital resources” in this report.

If our assumptions as to operating expenses, working capital requirements and capital expenditures are too low or if unexpected cash needs arise that we are not able to fund with cash on hand or with borrowings under our credit facility, we would need to either reduce or eliminate dividends. If we were to use working capital or permanent borrowings to fund dividends, we would have less cash available for future dividends and other purposes, which could negatively impact our stock price, financial condition, results of operations and ability to maintain or expand our business.

We have estimated our dividend only for 2010,2013, and we cannot assure our stockholders that during or following such periods that we will pay dividends at the estimated levels, or at all. We are not required to pay dividends and our Board of Directors may modify or revoke our dividend policy at any time. Dividend payments are within the absolute discretion of our Board of Directors and will be dependent upon many factors and future developments that could differ materially from our current expectations. Indeed, over time our capital and other cash needs, including unexpected cash needs, will invariably change and remain subject to uncertainties, which could impact the level of any dividends we pay in the future.

We believe that our dividend policy could limit, but not preclude, our ability to pursue growth as we intend to retain sufficient cash after the distribution of dividends to permit the pursuit of growth opportunities that do not require material capital investments. In order to pay dividends at the level currently anticipated under our dividend policy and to fund any substantial portion of our stock repurchase program, we expect that we could require financing or borrowings to fund any significant acquisitions or to pursue growth opportunities requiring capital expenditures significantly beyond our anticipated capital expenditure levels. Management will evaluate potential growth opportunities as they arise and, if our Board of Directors determines that it is in our best interest to use cash that would otherwise be available for distribution as dividends to pursue an acquisition opportunity, to materially increase capital spending or for some other purpose, the Board would be free to depart from or change our dividend policy at any time.

Restrictions on payment of dividends

Under Delaware law, we can only pay dividends either out of “surplus” (which is defined as total assets at fair market value minus total liabilities, minus statutory capital) or out of current or the immediately preceding year’s earnings. As of December 31, 2009,2012, we had approximately $22.8$13.5 million in cash and cash equivalents. In addition, we anticipate that we will have sufficient earnings in 20102013 to pay dividends at the level described above. Although we believe we will have sufficient surplus and earnings to pay dividends at the anticipated levels for 2010,2013, our Board of Directors will seek periodically to assure itself of this sufficiency before actually declaring any dividends.

Index to Financial Statements

Our

We entered into an amended and restated credit facility with Wachovia Bank, N.A. dated July 25, 2007in February 2012. The amended credit facility restricts our ability to declare and pay dividends on our common stock as follows:

stock. In order to pay any cash dividends and/or repurchase shares of stock: (1) no default or event of default shall have occurred and be continuing under the credit facility;facility, and (2) we must be in compliance with a leverage ratio set forth in the credit agreement and (3) we must have cash on hand (which includes any unused amounts under the credit facility) of at least $10.0 million; each after giving effect to the payment of dividends and/or the repurchase of shares.

agreement.

Index to Financial Statements


27


Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

Selected financial data

The selected consolidated financial data set forth below should be read in conjunction with “Management’s discussion and analysis of financial condition and results of operations” and our financial statements and the related notes included elsewhere in this report.
The following data, insofar as it relates to each of the years ended December 31, 2009, 2008,2012, 2011 and 2007,2010, has been derived from the audited annual financial statements, including the consolidated balance sheets at December 31, 20092012 and 20082011, and the related consolidated statements of operations,comprehensive income, cash flows and stockholders’ equity and comprehensive income for the three years ended December 31, 2009, 20082012, 2011 and 20072010 and notes thereto appearing elsewhere herein. The following data, insofar as it relates to each of the years ended December 31, 20062009 and 20052008, and the consolidated balance sheet as of December 31, 2007, 20062010, 2009 and 20052008 are derived from audited financial statements not included in this report.


As described in Note 23 of the consolidated financial statements included in this annual report, we made business acquisitions in 2008, 2007 and 2006, which could affect the comparability of the information presented.

    Years ended December 31, 
(in thousands, except per share data)  2009  2008  2007  2006  2005 

Consolidated statements of operations data:

      

Revenue

      

License fees

  $25,392   $35,932   $37,569   $32,500   $29,978  

Services

   87,834    100,824    91,376    61,242    52,606  

Maintenance

   116,476    107,304    94,602    80,893    71,163  

Subscriptions

   72,898    49,705    25,389    10,605    6,965  

Other revenue

   6,738    8,730    8,102    6,140    5,237  
     

Total revenue

   309,338    302,495    257,038    191,380    165,949  
     

Cost of revenue

      

Cost of license fees

   3,582    3,316    2,870    2,260    4,380  

Cost of services(1)

   61,713    63,960    54,908    33,717    28,409  

Cost of maintenance(1)

   21,364    20,185    17,119    13,225    10,926  

Cost of subscriptions(1)

   28,183    20,587    10,306    2,360    1,472  

Cost of other revenue

   6,098    8,368    7,274    5,709    4,943  
     

Total cost of revenue

   120,940    116,416    92,477    57,271    50,130  
     

Gross profit

   188,398    186,079    164,561    134,109    115,819  

Operating expenses

      

Sales and marketing(1)

   62,796    65,185    56,994    41,405    33,491  

Research and development(1)

   45,662    38,708    28,525    23,118    21,138  

General and administrative(1)

   33,380    34,072    26,144    21,757    15,795  

Amortization

   768    713    491    699    18  
     

Total operating expenses

   142,606    138,678    112,154    86,979    70,442  
     

Income from operations

   45,792    47,401    52,407    47,130    45,377  

Interest income

   637    526    813    1,584    964  

Interest expense

   (962)   (1,526)   (1,164)   (48)   (49) 

Other income (expense), net

   220    (194)   (503)   (238)   6  
     

Income before provision for income taxes

   45,687    46,207    51,553    48,428    46,298  

Income tax provision

   17,240    16,329    19,829    18,275    13,211  
     

Net income

  $28,447   $29,878   $31,724   $30,153   $33,087  
     

Earnings per share

      

Basic

  $0.67   $0.70   $0.73   $0.70   $0.78  

Diluted

  $0.65   $0.68   $0.71   $0.68   $0.72  

Common shares and equivalents outstanding

      

Basic weighted average shares

   42,771    42,959    43,619    43,320    42,559  

Diluted weighted average shares

   43,600    43,959    44,595    44,668    46,210  

Dividends per share

  $0.40   $0.40   $0.34   $0.28   $0.20  



28
Index to Financial Statements
    Years ended December 31, 
(in thousands)  2009  2008  2007  2006  2005 

Summary of stock-based compensation (benefit):

          

Cost of services

  $1,433  $1,442  $627  $531  $269  

Cost of maintenance

   750   534   234   117   33  

Cost of subscriptions

   387   283   274   19   —    
     

Total included in cost of revenue

   2,570   2,259   1,135   667   302  
     

Sales and marketing

   1,605   1,607   831   813   217  

Research and development

   2,944   2,396   1,219   746   139  

General and administrative

   5,168   5,823   3,749   5,174   (343) 
     

Total included in operating expenses

   9,717   9,826   5,799   6,733   13  
     

Total stock-based compensation

  $12,287  $12,085  $6,934  $7,400  $315  
     



 Year ended December 31, 
(in thousands, except per share data)2012
 2011
 2010
 2009
 2008
Consolidated statements of comprehensive income data:         
Revenue         
License fees$20,551
 $19,475
 $23,719
 $25,656
 $35,484
Subscriptions162,102
 103,544
 83,912
 73,194
 49,773
Services119,626
 108,781
 87,663
 87,239
 101,015
Maintenance136,101
 130,604
 124,559
 116,413
 107,308
Other revenue9,039
 8,464
 6,712
 6,968
 8,730
Total revenue447,419
 370,868
 326,565
 309,470
 302,310
Cost of revenue         
Cost of license fees2,993
 3,345
 3,003
 3,697
 3,388
Cost of subscriptions(1)68,773
 42,536
 31,155
 28,158
 20,564
Cost of services(1)97,208
 79,086
 66,755
 61,585
 63,810
Cost of maintenance(1)26,001
 25,178
 24,123
 21,594
 20,175
Cost of other revenue7,485
 7,049
 7,103
 6,098
 8,368
Total cost of revenue202,460
 157,194
 132,139
 121,132
 116,305
Gross profit244,959
 213,674
 194,426
 188,338
 186,005
Operating expenses         
Sales and marketing(1)95,218
 75,361
 69,469
 63,495
 65,573
Research and development(1)64,692
 47,672
 45,499
 45,520
 38,497
General and administrative(1)63,308
 36,933
 32,636
 33,383
 33,904
Impairment of cost method investment200
 1,800
 —
 —
 —
Amortization2,106
 980
 798
 768
 713
Total operating expenses225,524
 162,746
 148,402
 143,166
 138,687
Income from operations19,435
 50,928
 46,024
 45,172
 47,318
Interest income146
 183
 84
 637
 526
Interest expense(5,864) (200) (74) (962) (1,526)
Other income (expense), net(392) 346
 (98) 220
 (194)
Income before provision for income taxes13,325
 51,257
 45,936
 45,067
 46,124
Income tax provision6,742
 18,037
 16,749
 17,547
 17,185
Net income$6,583
 $33,220
 $29,187
 $27,520
 $28,939
Earnings per share         
Basic$0.15
 $0.76
 $0.68
 $0.64
 $0.67
Diluted$0.15
 $0.75
 $0.67
 $0.63
 $0.66
Common shares and equivalents outstanding         
Basic weighted average shares44,146
 43,523
 43,145
 42,771
 42,959
Diluted weighted average shares44,692
 44,149
 43,876
 43,600
 43,959
Dividends per share$0.48
 $0.48
 $0.44
 $0.40
 $0.40
Summary of stock-based compensation:         
Cost of subscriptions$860
 $571
 $392
 $387
 $283
Cost of services2,786
 1,966
 1,742
 1,433
 1,442
Cost of maintenance538
 741
 814
 750
 534
Total included in cost of revenue4,184
 3,278
 2,948
 2,570
 2,259
Sales and marketing2,527
 1,325
 1,366
 1,605
 1,607
Research and development3,556
 3,039
 2,844
 2,944
 2,396
General and administrative8,973
 7,242
 5,901
 5,291
 5,700
Total included in operating expenses15,056
 11,606
 10,111
 9,840
 9,703
Total stock-based compensation$19,240
 $14,884
 $13,059
 $12,410
 $11,962
(1)Includes stock-based compensation as set forth in tabular summary of stock-based compensation (benefit) for all periods presented. We adopted SFAS 123(R) on January 1, 2006.

    December 31, 
(in thousands)  2009  2008  2007  2006  2005 

Consolidated balance sheet data:

       

Cash and cash equivalents

  $22,769   $16,361   $14,775   $67,783  $22,683  

Deferred tax asset, including current portion

   61,298    71,620    53,972    67,620   80,052  

Working capital (deficit)

   (70,485)   (109,962)   (46,977)   14,125   (16,866) 

Total assets

   304,229    313,886    237,694    195,009   148,463  

Deferred revenue

   135,584    119,640    96,100    76,952   63,222  

Total liabilities

   188,123    223,378    124,591    99,651   83,711  

Common stock

   52    51    50    49   48  

Additional paid-in capital

   134,726    116,846    105,687    88,409   73,583  

Total stockholders’ equity

  $116,106   $90,508   $113,103   $95,358  $64,752  


29
Index to Financial Statements


  December 31, 
(in thousands) 2012
 2011
 2010
 2009
 2008
Consolidated balance sheet data          
Cash and cash equivalents $13,491
 $52,520
 $28,004
 $22,769
 $16,361
Deferred tax asset, including current portion 15,799
 30,927
 47,478
 59,284
 70,100
Working (deficit) capital (97,947) (52,093) (57,056) (74,458) (113,464)
Total assets 705,747
 392,590
 323,806
 299,927
 311,087
Deferred revenue, including current portion 185,018
 163,437
 150,661
 137,950
 122,023
Total long-term liabilities 246,368
 12,547
 9,319
 7,891
 7,999
Common stock 55
 54
 53
 52
 51
Additional paid-in capital 203,638
 175,401
 158,372
 134,643
 116,688
Total stockholders’ equity $147,684
 $140,002
 $116,469
 $110,293
 $85,733


30
Table of Contents

Blackbaud, Inc.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s 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 Item 1.A Risk Factors and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This report contains forward-looking statements within the meaning of Section 21E27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934.1934, as amended. 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 “Management’s discussion and analysis of financial condition and results of operations”“Item 1.A. Risk Factors” and elsewhere in this report, that could cause actual results to differ materially from historical or anticipated results.

Except as required by law, we do not intend, and undertake no obligation to revise or update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Executive summary

We are the leading global provider ofprovide on-premise and cloud-based software solutions 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 their finances and optimize internal operations. We have focused solely on the nonprofit market since our incorporation in 1982 and have developed our suiteAs of products and services based upon our extensive knowledge of the operating challenges facing nonprofit organizations. At the end of 2009,December 31, 2012, we had approximately 22,000more than 27,000 active customers. Our customers operate indistributed across multiple verticals within the nonprofit market including education, foundations, health and human services, religion, arts and cultural, public and societal benefits, environment and animal welfare andas well as international foreign affairs.

We derive revenue from selling perpetual licenses or charging for the use of our software products in a hosted environment and providing a broad offering of services, including consulting, training, installation and implementation 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. Furthermore, we derive revenue from providing hosting services, performing donor prospect research engagements, selling lists of potential donors, and providing transaction processing services, benchmarking studies and data modeling services.

Revenue

We completed our acquisition of Convio in May 2012 for 2009$335.7 million in consideration. We funded the acquisition through both cash on hand and borrowings under our amended credit facility. During 2012, we remained focused on:
integrating the Convio operations and managing expenses to enable us to realize synergies while making investments for future growth of our combined operations;
making initial post-merger product roadmap decisions, which included the decision to sunset the Convio Common Ground solution and our move to a single event fundraising module; and
continuing the shift in our offerings towards subscription-based pricing to meet the needs and preferences of our customers.
Overall, revenue in 2012 increased 2%21% compared to 2008. The inclusion of Kintera, which we acquired in July 2008, resulted in an increase in revenue of $16.1 million for 2009. Excluding the impact of Kintera, revenue decreased by 3% for 2009 when compared to 2008.2011. When removing the impact of foreign currency translation,revenue from acquired companies, revenue increased by 4% when comparing 2009 to 2008. Further, when removing6% during 2012. This increase was principally the impactresult of foreign currency translation and the impact from Kintera,continued growth in our subscriptions revenue decreased by 2% when comparing 2009 to 2008.

Our selling environment remained challenging during 2009 as difficult and uncertain economic conditions continued to put pressure on the spending of many organizations in the nonprofit industry. Revenues associated with our perpetual license offerings and related services decreased compared to 2008 as a result of these economic conditions and reduced marketan increase in demand for these offerings. However, our recurring revenue, which is comprised of maintenance services and subscriptionsubscription-based offerings continued to experience growth during 2009. Revenue from maintenance services and subscription offerings, which represented approximately 61% of our revenue on a combined basis, grew 21% in 2009 compared to 2008. Approximately half of this revenue growth is attributable to Kintera and the remaining growth is principally the result ofas our business increasingly evolvingshifts towards product sales on a subscription basis. We believe this trend will continuehosted solutions as well as an increase in transaction fees associated with our payment processing services. Maintenance revenue also contributed to the future.

In 2009, we focused on closely managing our operating expensesincrease in revenue from maintaining high renewal rates, new maintenance contracts associated with new license arrangements and achieving our targeted level of profitability. existing client increases.

Income from operations for 20092012 decreased by $1.6$31.5 million when compared to 2008. During 2009,2011. The decrease was attributable to: (i) a $23.1 million increase in costs associated with our acquisition of Convio related to transaction costs, integration and restructuring costs, amortization of acquired intangibles from business combinations and stock-based compensation expense; (ii) a $4.3 million increase in costs related to strategic investments we have made in our business optimization efforts and the re-engineering of our accounting processes; and (iii) an increase of $8.3 million in hosting costs due to incremental investments to improve our hosting services and additional hosting capacity required as a result of the growth in demand for our hosted applications and other online services. Also contributing to the decrease in income from operations is primarily attributablewas our continued shift from a license-based model with upfront revenue recognition to a subscription-based model, which recognizes revenue ratably over the agreement term. These decreases were partially offset by an increase in stock based compensation expense, amortization expense associated with intangible assetsgross margin from our recent acquisitions and research and development expense to support our continuing product investment.

payment processing operations.

31
Index to Financial StatementsTable of Contents


Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

operations (continued)



We ended 20092012 with cash and cash equivalents totaling $22.8$13.5 million and no$215.5 million in outstanding borrowings on our credit facility. During 2009,2012, we used $20.8 million of cash on hand and net borrowings of $259.6 million towards acquiring Convio. Additionally, we generated $86.8$68.7 million in cash flow from operations, out of which we paid $59.0$21.7 million on our credit facility in dividends and $17.7used $20.6 million in dividends. Additionally, cash flow from operations allowed us to fund the purchase of $5.5 million of property andcomputer equipment and increasesoftware.
During 2012, we continued to experience growth in overall revenue primarily driven by the growing demand for our cashsubscription-based offerings. However, we continue to believe the pace and cash equivalentsimpact of economic recovery on the nonprofit market remains uncertain. Additionally, we continue to experience a greater level of caution by $6.4 million.

our existing and prospective customers in their expenditure decisions. We expect that our operating environment will remaincontinue to be challenging in 2010 as existing and prospective customers continue to exercise caution in expenditure decisions.the near term. Notwithstanding these conditions, we plan to continue tofurther increase our focus on expanding market share, selectively investing insubscription-based offerings as we execute on our key growth initiatives and strengtheningstrengthen our leadership position. As we have throughout 2009, we will also focus on controlling and, as necessary, reducing the costs and expenses of our operations to achieveposition, while achieving our targeted level of profitability.

Consolidated statements In the near term, we expect there will continue to be a dilutive impact on our profitability as we shift from a license-based model with upfront revenue recognition to a subscription-based model, which recognizes revenue ratably over the agreement term.

We also plan to continue to invest in our back-office processes, the infrastructure that supports our subscription-based offerings and certain product development initiatives to achieve optimal scalability of our operations percentas we execute on our key growth initiatives.

32
Table of revenue

    Years ended December 31,    
    2009  2008  2007    

Revenue

    

License fees

  8.2%  11.9%  14.6%  

Services

  28.4   33.3   35.5     

Maintenance

  37.7   35.5   36.8     

Subscriptions

  23.5   16.4   9.9     

Other revenue

  2.2   2.9   3.2     
    

Total revenue

  100.0%  100.0%  100.0%  
    

Cost of revenue

    

Cost of license fees

  1.1   1.1   1.1     

Cost of services

  20.0   21.1   21.4     

Cost of maintenance

  6.9   6.7   6.7     

Cost of subscriptions

  9.1   6.8   4.0     

Cost of other revenue

  2.0   2.8   2.8     
    

Total cost of revenue

  39.1   38.5   36.0     
    

Gross profit

  60.9   61.5   64.0     

Operating expenses

    

Sales and marketing

  20.3   21.5   22.2     

Research and development

  14.8   12.8   11.1     

General and administrative

  10.8   11.3   10.2     

Amortization

  0.2   0.2   0.2     
    

Total operating expenses

  46.1   45.8   43.6     
    

Income from operations

  14.8   15.7   20.4     

Interest income

  0.2   0.2   0.3     

Interest expense

  (0.3)  (0.5)  (0.5)       

Other income (expense), net

  0.1   (0.1)  (0.2)       
    

Income before provision for income taxes

  14.8   15.3   20.1     

Income tax provision

  5.6   5.4   7.7     
    

Net income

  9.2%  9.9%  12.3%  
  

Index to Financial StatementsContents


Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

operations (continued)



Results of operations
During

Comparison of the years ended December 31, 2009, 20082012, 2011 and 2007

On April 29, 2009, we acquired RLC Customer Centric Technology B.V. (RLC)2010, a privately held limited company based in the Netherlands. The acquisition of RLC provides us with a foundation to expand into the Netherlands and other Western European markets.

During 2008 and 2007, we acquired companies that provided us with a strategic opportunityopportunities to expand our share of the nonprofit market with SaaS and subscription offerings, and through the integration of complimentarycomplementary products and services to serve the changing needs of our customers. FollowingThe following are the companies we acquired during 2008 and 2007 and their respective acquisition date:

Target Software,NOZA, Inc. and Target Analysis Group, Inc. (together referred to as the Target Companies)—January 16, 2007;

eTapestry.com, Inc. (referred to as eTapestry)—August– October 1, 2007;2010;

Public Interest Data, LLC, or PIDI – February 1, 2011;
Everyday Hero Pty. Ltd., or EDH – October 6, 2011; and

Kintera,Convio, Inc. (referred to as Kintera)—July 8, 2008.

, or Convio – May 4, 2012.

The

We have included the results of operations of the acquired companies are included in our consolidated results of operations from the datesdate of their respective acquisition, as noted above, which impacts the comparability of our results of operations when comparing 20092012 to 20082011 and 20082011 to 2007.2010. We have noted in the discussion below, to the extent meaningful, the impact on the comparability of our consolidated results of operations due to the inclusion of the acquired companies for only a partial year in the year of acquisition.
From the date of acquisition through December 31, 2012, Convio's total revenue was $50.7 million. Because we have integrated a substantial amount of the Convio operations, it is impracticable to determine the operating costs attributable solely to the acquired business.
Comparison of the years ended December 31, 2012 and a full year in the subsequent year.

2011

Revenue
Revenue

The table below compares revenue from our statementconsolidated statements of operationscomprehensive income for the years ended December 31, 2009, 2008,2012 and 2007.

   Years ended December 31,    2009 versus 2008     2008 versus 2007 
(in millions)  2009  2008  2007    Change  % Change     Change  % Change 
             

License fees

  $25.4  $35.9  $37.5   $(10.5)  (29)%    $(1.6)  (4)% 

Services

   87.8   100.8   91.4    (13.0)  (13)%     9.4   10% 

Maintenance

   116.5   107.3   94.6    9.2   9%     12.7   13% 

Subscriptions

   72.9   49.7   25.4    23.2   47%     24.3   96% 

Other

   6.7   8.8   8.1    (2.1)  (24)%     0.7   9% 
                

Total revenue

  $309.3  $302.5  $257.0   $6.8   2%    $45.5   18% 
                

Total2011.

 Year ended December 31,     
(in millions)2012
 2011
 Change
 % Change
License fees$20.6
 $19.5
 $1.1
 6%
Subscriptions162.1
 103.5
 58.6
 57%
Services119.6
 108.8
 10.8
 10%
Maintenance136.1
 130.6
 5.5
 4%
Other9.0
 8.5
 0.5
 6%
Total revenue$447.4
 $370.9
 $76.5
 21%
When removing the impact of revenue from acquired companies, revenue increased $6.8by $21.9 million, or 2%,6% in 2009 compared to 2008. The2012. This increase in revenue iswas primarily dueattributable to growth in subscriptionour subscriptions revenue as a result of the acquisition of Kintera andboth an increase in demand for an our hosting services and online datafundraising offerings as well as an increase in transaction fees associated with our payment processing services. The growthincrease in revenue fromdemand for our subscription offerings is also a result ofwas primarily driven by the ongoing evolution of our product offerings from a license-based to subscription-based offerings. Maintenancemodel. Although we continue to experience a shift in our emerging (first-time users) and mid-sized customers’ buying preference away from perpetual licenses towards hosted solutions, license revenue also increased duein 2012 when compared to additional2011 as a result of an increase in sales of our Blackbaud CRM offering to large and/or strategic customers. The increase in maintenance revenue fromis attributable to maintaining high renewal rates, new maintenance contracts associated with new license agreements and increases in contracts with existing client increases. The increasecustomers during 2012 when compared to 2011. Services revenue grew in subscriptions and maintenance revenue was partially offset by decreases in license fees and services revenue. The decreases in license fees and services revenue are2012 principally attributable to the delays and postponementsas a result of purchasing decisions byincreased demand for our existing and prospective customers resulting from the weak economic environment.

education services.

33
Index to Financial Statements

Table of Contents

Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)operations (continued)


Operating results
License fees

Total revenue increased $45.5 million, or 18%, in 2008 compared to 2007. Approximately half, or $22.0 million, of the increase in total revenue was attributable to the inclusion of eTapestry and Kintera in our consolidated results of operations. The remaining increase in revenue for 2008, totaling $23.5 million and representing a 9% increase over 2007, was primarily attributable to growth in

 Year ended December 31,     
(in millions)2012
 2011
 Change
 % Change
License fees revenue$20.6
 $19.5
 $1.1
 6 %
Cost of license fees3.0
 3.3
 (0.3) (9)%
License fees gross profit$17.6
 $16.2
 $1.4
 9 %
License fees gross margin85% 83%    

We derive revenue from subscriptions and maintenance services. The increase in maintenance revenue is principally from new maintenance contracts with associated with new license agreements and existing client increases. Subscription revenue increased 35%, excluding the impact of our acquisitions, due to an increase in demand for our hosting and other online data services.

Segment results

Through December 31, 2009, we analyzed our business according to our six operating segments as identified in Note 14 of our consolidated financial statements, which are license fees consulting and education services, analytic services, maintenance, subscriptions and other. The analyses provided below are presented on a non-GAAP basis before the inclusion of various allocable corporate costs such as depreciation, facilities and information technology (IT) support costs, stock-based compensation and amortization of intangibles arising from business combinations because, in managing our operations, we believe that the exclusion of these costs allows us to better understand and manage our operating expenses and cash needs. These excluded costs are analyzed separately following the segment results analysis.

License fees

   Years ended December 31,     2009 versus 2008     2008 versus 2007 
(in millions)      2009  2008  2007     Change  % Change     Change  % Change 
              

License fee revenue

  $25.4   $35.9   $37.5     $(10.5)  (29)%    $(1.6)  (4)% 

Direct controllable cost of license fees

   3.2    3.1    2.7      0.1   3%     0.4   15% 
                 

Segment income

  $22.2   $32.8   $34.8     $(10.6)  (32)%    $(2.0)  (6)% 
                 

Segment margin %

   87%   91%   93%         

Revenue from license fees is derived from the sale of our software products, under a perpetual license agreement. The decrease in license fee revenue during 2009 when compared to 2008 and during 2008 when compared to 2007 is principally attributable to longer sales cycle times, delays and postponement of purchasing decisions and overall caution exercised by existing and prospective customers as a result of continued challenges posed by the weak economic environment. In addition, weWe are increasingly experiencing a shift in our customers’emerging and mid-sized customers' buying preference away from solutions offered under perpetual license agreementsarrangements towards subscription-based hosted applications.

During 2009,applications, while our large and/or strategic customers continue to be an area of growth, particularly as it relates to our Blackbaud CRM offering. Our larger perpetual license feetransactions have long sales cycles, and their timing can result in significant period-to-period variations. Revenue from license fees increased in 2012 primarily due to a greater contribution of revenue decreased by $10.5 millionfrom larger Blackbaud CRM arrangements when compared to 2008. Sales from license fees to new customers decreased $4.2 million and sales to existing clients decreased by $6.3 million. Additionally, during 2009, revenue related to our Enterprise CRM offering grew by $3.7 million, which was offset by decreases in our other perpetual license product offerings of $14.2 million.

During 2008, sales from license fees to new customers decreased by $2.9 million when compared to 2007, offset by an increase to existing customers of $1.3 million.

Direct controllable cost2011.

Cost of license fees is principally comprised of third-party software royalties, and variable reseller commissions.commissions, amortization of software development costs and amortization of intangibles from business combinations. The increasedecrease in cost of license fees for 2009in 2012 when compared to 2008 and 2008 when compared to 20072011 is primarilyprincipally attributable to a decrease in third-party software royalties. Third-party software royalties associated with our license-based products have decreased as the demand for our perpetual license arrangements has decreased and subscription-based offerings has increased.
The increase in license fees gross margin during 2012 is the result of fewer sales of products that have third party software royalty costs associated with them. Additionally, the increase in revenue from Blackbaud CRM arrangements contributed to the increase in license fees gross margin during 2012.
Subscriptions
 Year ended December 31,     
(in millions)2012
 2011
 Change
 % Change
Subscriptions revenue$162.1
 $103.5
 $58.6
 57%
Cost of subscriptions68.8
 42.5
 26.3
 62%
Subscriptions gross profit$93.3
 $61.0
 $32.3
 53%
Subscriptions gross margin58% 59%    

Revenue from subscriptions is principally comprised of revenue from providing access to hosted applications and hosting services, access to certain data services and our online subscription training offerings, as well as variable transaction fees associated with the use of our products to fundraise online. We continue to experience growth in our hosted applications business and are increasingly experiencing a shift in our emerging and mid-sized customers’ buying preference away from perpetual licenses towards subscription-based offerings. There will continue to be a dilutive impact on our profitability as we shift from a license-based model with upfront revenue recognition to a subscription-based model, which recognizes revenue ratably over the mixagreement term.

Included in subscriptions revenue for 2012 and 2011 is $45.6 million and $0.7 million of license fee revenue toward productsattributable to acquired companies, respectively. Excluding the revenue from acquired companies, the increase in subscriptions revenue of $13.7 million, or 13%, is principally attributable to an increase in demand for our online fundraising and data management offerings as well as an increase in transaction fees associated with higherour payment processing services.
Cost of subscriptions is primarily comprised of human resource costs, stock-based compensation expense, third-party software royalty costs.

and data expenses, hosting expenses, allocated depreciation, facilities and IT support costs, amortization of intangibles from

34
Index to Financial Statements

Table of Contents

Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

Consultingoperations (continued)



business combinations and educationother costs incurred in providing support and services

   Years ended December 31,     2009 versus 2008     2008 versus 2007 
(in millions)        2009  2008  2007     Change  % Change     Change  % Change 
              

Consulting and education services revenue

  $65.3   $77.7   $73.2     $(12.4)  (16)%    $4.5   6% 

Direct controllable cost of consulting and education services

   41.8    44.4    38.8      (2.6)  (6)%     5.6   14% 
                 

Segment income

  $23.5   $33.3   $34.4     $(9.8)  (29)%    $(1.1)  (3)% 
                 

Segment margin %

   36%   43%   47%         

Consulting to our customers. The increase in cost of subscriptions in 2012 is principally attributable to increases in hosting costs, human resource costs and educationamortization of intangibles from business combinations.

Hosting costs increased by $8.3 million during 2012 as a result of incremental costs due to the inclusion of acquired companies. Additionally, hosting costs increased due to incremental investments to improve our hosting services and additional hosting capacity required as a result of the growth in demand for our hosted applications and other online services. Human resource costs increased $6.6 million during 2012. The increase in human resource costs is attributable to additional headcount due to the inclusion of acquired companies and additional resources needed to support the growth in demand for our subscription-based offerings.
Amortization of intangibles from business combinations increased $8.6 million in 2012 primarily due to the amortization expense for the acquired Convio intangible assets.
The decrease in subscriptions gross margin during 2012 compared to 2011 is primarily due to investments we are making in our infrastructure, including additional headcount, expanded facilities, improved operational processes and computer equipment to support the growth in our subscription offerings.
Services
 Year ended December 31,     
(in millions)2012
 2011
 Change
 % Change
Services revenue$119.6
 $108.8
 $10.8
 10 %
Cost of services97.2
 79.1
 18.1
 23 %
Services gross profit$22.4
 $29.7
 $(7.3) (25)%
Services gross margin19% 27%    

We derive services revenue consists offrom consulting, installation, implementation, education and educationanalytic services. Consulting, installation and implementation services involve converting data from a customer’s existing system, assistance in file set up and system configuration, and/or process re-engineering. Education services involve customer training activities.

During 2009, consulting and education services revenue decreased $12.4 million when compared to 2008. The inclusion of Kintera for a full year in 2009 compared to a partial year in 2008 accounted for $0.6 million of an increase in consulting and education services revenue. Included in consulting and education services revenue in 2009 is $0.7 million of revenue attributable to RLC. The decrease in revenue is principally the result of decreased volume of consulting, installation and implementation services delivered for our core software products and decreased demand for training services as existing and prospective customers continue to experience budgetary constraints associated with the challenges posed by the overall economic environment. To a lesser extent, the decrease in revenue is attributable to a reduction in the rates we charge as a result of a higher level of discounts offered on our service offerings during 2009 compared to 2008. During 2009, these decreases of $17.0 million were partially offset by an increase of $4.6 million in consulting services associated with our Enterprise CRM product offering and our internet-based products.

During 2008, consulting and education services revenue increased by $4.5 million when compared to 2007, of which $1.9 million is attributable to Kintera and eTapestry. The rates charged for our service offerings remained relatively constant year over year and, as such, the increase in revenue in 2008 is principally the result of increased volume of services provided. The increase in volume of services provided is principally due to an increase in the demand in consulting services associated with our new Enterprise CRM product offerings and our internet based products.

Cost of consulting and education services is principally comprised of human resource costs, third-party contractor expenses, classroom rentals and other costs incurred in providing consulting, installation and implementation services and customer training.

During 2009, cost of consulting and education services decreased by $2.6 million. Human resource costs related to additional headcount attributable to Kintera and RLC increased cost of consulting and education services by $2.4 million. Excluding the impact of acquisitions, the remaining decrease in cost of consulting and education services of $5.0 million during 2009 is primarily due to a reduction in travel-related expenses, recruiting and other costs.

During 2008, cost of consulting and education services increased by $5.6 million, of which $2.2 million is attributable to the inclusion of human resource costs associated with Kintera and eTapestry. Excluding the impact of acquisitions, the remaining increase of $3.4 million is primarily attributable to human resource cost increases as a result of increased skills and competencies in our service professionals.

Index to Financial Statements

Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

The decrease in segment margin from 2008 to 2009 is principally due to the decrease in demand for consulting and education services while the cost of consulting and education services decreased to a lesser extent. Cost of consulting and education services decreased at a lower rate than the associated revenue principally due to maintaining resource capacity for the increase in services associated with our Enterprise CRM product offerings and the expected increase in services when the economic environment improves.

The decrease in segment margin from 2007 to 2008 is primarily attributable to average billing rates for our consultants remaining relatively constant while consultant’s salaries and related human resource costs increased, and a change in the mix of the consulting and education services provided.

Analytic services

   Years ended December 31,     2009 versus 2008     2008 versus 2007 
(in millions)        2009  2008  2007     Change  % Change     Change  % Change 
              

Analytic services revenue

  $22.5   $23.1   $18.2     $(0.6)  (3)%    $4.9  27% 

Direct controllable cost of analytic services

   10.0    9.8    8.0      0.2   2%     1.8  23% 
                 

Segment income

  $12.5   $13.3   $10.2     $(0.8)  (6)%    $3.1  30% 
                 

Segment margin %

   56%   58%   56%          

Analytic services are comprised of donor prospect research, selling lists of potential donors, benchmarking studies and data modeling services. These services involve the assessment of current and prospective donor information of nonprofit organizationsthe customer and are performed using our proprietary analytical tools. The end product enables organizations to more effectively target itstheir fundraising activities.

During 2009, analytic We recognize services revenue decreased by $0.6attributable to consulting services for implementation of our hosted applications and subscription offerings ratably over the period the customer benefits from those services. We also recognize the direct and incremental costs associated with consulting services revenue ratably over the same period. However, we continue to expense indirect costs in the period the implementation services are provided.

Included in services revenue in 2012 and 2011 is $9.8 million when comparedand $0.1 million of revenue attributable to 2008. The inclusionacquired companies, respectively. Excluding the revenue from acquired companies, the increase in services revenue of Kintera for a full year in 2009 compared$1.1 million, or 1%, is principally due to a partial year in 2008 accounted for $0.8 million of an increase in analytic services revenue. Excluding the impact of the acquisition of Kintera, analyticeducation services revenue decreasedof $1.4 million, in 2009 when compared to 2008. The rates charged for our analytic services have remained relatively constant year over year and, as such, the remainingpartially offset by a decrease in analytic services revenue is principally the result of the decreased volume of services provided.

Revenue from analytic services increased $4.9 million in 2008 when compared to 2007.$0.6 million. The rates chargedwe charge for our analytic serviceseducation service offerings have remained relatively constant year over year and, as such, the increase in revenue is principally the result of increased volumea change in volume. The increase in revenue from education services is the result of higher demand for subscription-based training. Consulting services revenue remained relatively unchanged in 2012 compared to 2011 primarily due to a greater portion of our service engagements being with larger enterprise customers as our mid-market moves to subscription-based offerings. These larger enterprise engagements can experience volatility in utilization due to the complex nature of these engagements.

Cost of services provided.

Cost of analytic services is primarilyprincipally comprised of human resource costs, andstock-based compensation expense, third-party contractor expenses, classroom rentals, costs incurred in providing customer training, data expense incurred to perform analytic services.services, allocated depreciation, facilities and IT support costs and amortization of intangibles from business combinations. The increase in cost of analytic services for 2009 when compared to 2008in 2012 is primarily attributable to $0.8 million ofan increase in human resource and othercosts. Human resource costs increased $12.7 million in 2012 as a result of an increase in headcount. The increase in headcount was attributable to the inclusion of Kintera for a full year in 2009 compared to a partial year in 2008. Excluding the impactadditional resources from acquired companies.


35
Table of the acquisition of Kintera, cost of analytic services for 2009 decreased by $0.6 million primarily due to a decrease in data expense.

During 2008, cost of analytic services increased when compared to 2007. The increase is attributable to additional human resources costs due to an increase in headcount. Headcount increased when comparing 2008 to 2007 to meet the increase in customer demand for our analytic services.

The decrease in analytic services margin in 2009 when compared to 2008 is primarily due to additional costs associated with the acquisition of Kintera.

Index to Financial StatementsContents


Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

The analytic services marginoperations (continued)



An increase in 2008allocated depreciation, facilities and IT support costs also contributed to the increase in cost of services in 2012 when compared to 2007 is attributable2011 due to including and integrating the analyticinclusion of allocable costs from the Convio operations.
The services segmentgross margin decreased in 2012 primarily as a result of the Target Companies, which has a different cost structureincreases in headcount and a higher margin than the historical Blackbaud-only analytic services segment.

allocated costs discussed above.

Maintenance
 Year ended December 31,     
(in millions)2012
 2011
 Change
 % Change
Maintenance revenue$136.1
 $130.6
 $5.5
 4%
Cost of maintenance26.0
 25.2
 0.8
 3%
Maintenance gross profit$110.1
 $105.4
 $4.7
 4%
Maintenance gross margin81% 81%    

Maintenance

   Years ended December 31,     2009 versus 2008     2008 versus 2007 
(in millions)  2009  2008  2007     Change  % Change     Change  % Change 
              

Maintenance revenue

  $116.5   $107.3   $94.6     $9.2  9%    $12.7  13% 

Direct controllable cost of maintenance

   15.8    15.3    13.4      0.5  3%     1.9  14% 
                 

Segment income

  $100.7   $92.0   $81.2     $8.7  9%    $10.8  13% 
                 

Segment margin %

   86%   86%   86%           

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 with updates, enhancements and upgrades to our software products and online, telephone and email support.

During 2009, maintenance revenue increased $9.2 million when compared to 2008. The inclusion of Kintera for a full year in 2009 compared to a partial year in 2008 accounted for $2.8 million of the increase in maintenance revenue. Included in maintenance revenue in 2009 is $0.6 million of revenue attributable to RLC. Excluding the impact of the acquisitions of Kintera and RLC, maintenance revenue increased $5.8 million in 2009 when2012 compared to 2008. The increase2011 is principally comprised of $7.3(i) $12.7 million of maintenance withfrom new customers associated with new license agreements and increases in contracts with existing customers and $4.0(ii) $4.1 million from maintenance contract inflationary rate adjustments, partially offset by $5.5(iii) $11.3 million from maintenance contracts that were not renewed.

During 2008, the increase in maintenance revenue includes $2.8 million of revenue attributable to Kintera. Excluding the impact of the acquisition of Kintera, maintenance revenue increased $9.9 million in 2008 when compared to 2007. The remaining increase is principally comprised of $11.0 million of maintenance with new customers associated with new license agreementsrenewed and increasesreductions in contracts with existing customers and $2.8 million from maintenance contract inflationary rate adjustments, offset by $3.9 million of maintenance contracts that were not renewed.

Direct controllable costcustomers.

Cost of maintenance is primarily comprised of human resource costs, stock-based compensation expense, third-party contractor expenses, third-party royalty costs, allocated depreciation, facilities and data expenses,IT support costs, amortization of intangibles from business combinations and other costs incurred in providing support and services to our customers. The increase in costCost of maintenance in 2009increased during 2012 when compared to 2008 is the result of an increase in human resources costs2011 primarily attributable to headcount associated with Kintera.

During 2008, the increase in cost of maintenance is principally theas a result of increases in human resourcesallocated costs and proprietary software costs. The increase in proprietary software costs is attributable to increases in maintenance contracts with existing customers for software products which include third-party royalty costs associated with the maintenance revenue. Maintenance gross margin in 2012 remained relatively unchanged when compared to 2011.

Other revenue
 Year ended December 31,     
(in millions)2012
 2011
 Change
 % Change
Other revenue$9.0
 $8.5
 $0.5
 6%
Cost of other revenue7.5
 7.0
 0.5
 7%
Other gross profit$1.5
 $1.5
 $—
 —%
Other gross margin17% 18%    

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 third-party software referral fees. Other revenue increased in 2012 when compared to 2011 primarily due to an increase in fees from user conferences. Additionally, an increase in revenue from reimbursement of travel-related expenses associated with services revenue contributed to the increase in other revenue during 2012.
Cost of other revenue includes human resource costs, includes $0.2 millioncosts of business forms, costs attributableof user conferences, reimbursable expenses relating to Kintera. Additionally, third-party royaltythe performance of services at customer locations, allocated depreciation, facilities and IT support costs and amortization of intangibles from business combinations. Cost of other revenue increased by $0.4 million,in 2012 primarily due to increases in reimbursable expenses related to our ticketing solution The Patron’s Edge.

The maintenance segmentservices provided at customer locations. Other gross margin in 2012remained relatively unchanged during 2009, 2008 and 2007.

Indexwhen compared to Financial Statements2011.

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Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)operations (continued)


Operating expenses
Sales and marketing
 Year ended December 31,     
(in millions)2012
 2011
 Change
 % Change
Sales and marketing expense$95.2
 $75.4
 $19.8
 26%
% of revenue21% 20%    

Sales and marketing expense includes salaries and related human resource costs, stock-based compensation expense, travel-related expenses, sales commissions, advertising and marketing materials, public relations costs and allocated depreciation, facilities and IT support costs.

Sales and marketing expense increased in 2012 primarily due to increases in human resource costs and commission expense. Human resource costs increased primarily due to the inclusion of additional headcount from acquired companies as well as incremental headcount to support the increase in sales and marketing efforts of our growing operations. The increase in commission expense is principally due to an increased amount of commissionable revenue in

2012.

Research and development
 Year ended December 31,     
(in millions)2012
 2011
 Change
 % Change
Research and development expense$64.7
 $47.7
 $17.0
 36%
% of revenue14% 13%    

Research and development expense includes human resource costs, stock-based compensation expense, third-party contractor expenses, software development tools and other expenses related to developing new products, upgrading and enhancing existing products, and allocated depreciation, facilities and IT support costs.

Research and development expense increased during 2012 primarily due to increased human resource and third-party contractor costs. Human resource and third-party contractor costs increased primarily due to the inclusion of additional headcount from acquired companies as well as investments we continue to make in our product development efforts, including our direct marketing offerings. Additionally, research and development costs increased during 2012 due to an increase in allocated business costs.
General and administrative
 Year ended December 31,     
(in millions)2012
 2011
 Change
 % Change
General and administrative expense$63.3
 $36.9
 $26.4
 72%
% of revenue14% 10%    

General and administrative expense consists primarily of human resource costs for general corporate functions, including senior management, finance, accounting, legal, human resources, corporate development, stock-based compensation expense, third-party professional fees, insurance, allocated depreciation, facilities and IT support costs, acquisition-related expense and other administrative expenses.

General and administrative expense increased during 2012 primarily due to increases in acquisition transaction costs, acquisition integration and restructuring costs, acquisition-related stock-based compensation, professional fees and human resource costs. The increase in costs associated with our acquisition of Convio including transaction costs, acquisition integration and restructuring costs and stock-based compensation expense was $13.2 million during 2012. Professional fees increased $4.3 million during 2012 compared to 2011, primarily due to strategic investments we are making in our business optimization efforts and the re-engineering of our accounting processes. The remaining increase was primarily attributable to an

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Blackbaud, Inc.
Item 7. Management’s discussion and analysis of financial condition and results of operations (continued)


increase in human resource costs from additional headcount to support our growing operations and increased skills and competencies of our support resources.
Non-GAAP income from operations
The operating results analyzed below are presented on a non-GAAP basis in that the results exclude the impact of (i) the writedown of Convio's deferred revenue balance, (ii) stock-based compensation expense, (iii) amortization expense, (iv) acquisition-related expenses, (v) acquisition integration and restructuring costs, (vi) a write-off of prepaid proprietary software licenses, (vii) an impairment of cost method investment, and (viii) a gain on sale of assets. We believe that the exclusion of these amounts allows us and investors to better understand our operating expenses and cash needs, particularly when evaluating current performance against prior periods.
 Year ended December 31,     
(in millions)2012
 2011
 Change
 % Change
GAAP income from operations$19.4
 $50.9
 $(31.5) (62)%
        
Non-GAAP adjustments:       
Add: Convio deferred revenue writedown5.6
 —
 5.6
 100 %
Add: Stock-based compensation expense19.2
 14.9
 4.3
 29 %
Add: Amortization of intangibles from business combinations17.4
 7.6
 9.8
 129 %
Add: Acquisition-related expenses6.4
 1.8
 4.6
 256 %
Add: Acquisition integration and restructuring costs6.9
 —
 6.9
 100 %
Add: Write-off of prepaid proprietary software licenses0.4
 —
 0.4
 100 %
Add: Impairment of cost method investment0.2
 1.8
 (1.6) (89)%
Less: Gain on sale of assets—
 (0.5) 0.5
 (100)%
Total Non-GAAP adjustments56.1
 25.6
 30.5
 119 %
Non-GAAP income from operations$75.5
 $76.5
 $(1.0) (1)%
Non-GAAP operating margin17% 21%    

The decrease in non-GAAP income from operations and non-GAAP operating margin during 2012 was principally due to: (i) the continued shift from a license-based model with upfront revenue recognition to a subscription-based model, which recognizes revenue ratably over the agreement term; (ii) incremental investments we are making in our product development efforts and as well as investments to improve the performance of our hosting services; and (iii) strategic investments we are making in our business optimization efforts and the re-engineering of our accounting processes. Contributing to the decrease in 2012 is the growth of cost of services exceeding the growth of our services revenue.

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Blackbaud, Inc.
Item 7. Management’s discussion and analysis of financial condition and results of operations (continued)


Comparison of the years ended December 31, 2011 and 2010
Revenue
The table below compares revenue from our consolidated statements of comprehensive income for the years ended December 31, 2011, with the same period in 2010.
 Year ended December 31,     
(in millions)2011
 2010
 Change
 % Change
License fees$19.5
 $23.7
 $(4.2) (18)%
Subscriptions103.5
 83.9
 19.6
 23 %
Services108.8
 87.7
 21.1
 24 %
Maintenance130.6
 124.6
 6.0
 5 %
Other8.5
 6.7
 1.8
 27 %
Total revenue$370.9
 $326.6
 $44.3
 14 %
Total revenue increased $44.3 million, or 14%, in 2011 compared to 2010. This increase in revenue was primarily attributable to growth in our subscriptions and services revenue. The increase in subscriptions revenue was primarily attributable to an increase in demand for our hosted offerings, hosting services, online fundraising and data management offerings. This increase was driven by the ongoing evolution of our product offerings from a license-based to subscription-based business model. Services revenue growth was primarily due to an increase in demand for consulting services associated with our Blackbaud CRM offering and online fundraising offerings.

The increase in maintenance revenue was attributable to new maintenance contracts associated with new license agreements sold over the last twelve months and increases in contracts with existing customers. These increases were offset by a decrease in license fees which was principally attributable to a smaller contribution in 2011 from Blackbaud CRM perpetual license arrangements with upfront revenue recognition than in 2010. Additionally, we continued to experience a shift in our customers’ buying preference away from perpetual licenses towards hosted solutions.
Operating results
License fees
 Year ended December 31,     
(in millions)2011
 2010
 Change
 % Change
License fees revenue$19.5
 $23.7
 $(4.2) (18)%
Cost of license fees3.3
 3.0
 0.3
 10 %
License fees gross profit$16.2
 $20.7
 $(4.5) (22)%
License fees gross margin83% 87%    
Revenue from license fees during 2011 and 2010 was derived from the sale of our software products, under a perpetual license agreement. During 2011, we increasingly experienced a shift in our customers’ buying preference away from solutions offered under perpetual license arrangements towards subscription-based hosted applications. In addition, we continued to experience longer sales cycle times, delays and postponements of purchasing decisions and overall caution exercised by existing and prospective customers as a result of continued challenges posed by the weak economic environment. During 2011, revenue from license fees to existing customers decreased by $0.9 million and sales to new customers decreased by $3.3 million. The decrease in license fees was largely the result of a smaller contribution in 2011 from Blackbaud CRM sales with upfront revenue recognition when compared to 2010 due to credits provided to certain Blackbaud CRM early adopters.
Cost of license fees was principally comprised of third-party software royalties, variable reseller commissions, amortization of software development costs and amortization of intangibles from business combinations. The increase in cost of license fees in 2011 compared to 2010 was principally attributable to an increase in reseller commissions. A greater portion of our software license sales in 2011 were completed through our reseller channels when compared to 2010.

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Blackbaud, Inc.
Item 7. Management’s discussion and analysis of financial condition and results of operations (continued)


The decrease in license fees gross margin in 2011 compared to 2010 was the result of an increase in the sale of products that are sold through our reseller channels.
Subscriptions

   Years ended December 31,     2009 versus 2008     2008 versus 2007 
(in millions)        2009  2008  2007     Change  % Change     Change  % Change 
              

Subscriptions revenue

  $72.9   $49.7   $25.4     $23.2  47%    $24.3  96% 

Direct controllable cost of subscriptions

   22.3    15.7    7.8      6.6  42%     7.9  101% 
                 

Segment income

  $50.6   $34.0   $17.6     $16.6  49%    $16.4  93% 
                 

Segment margin %

   69%   68%   69%           

 Year ended December 31,     
(in millions)2011
 2010
 Change
 % Change
Subscriptions revenue$103.5
 $83.9
 $19.6
 23%
Cost of subscriptions42.5
 31.2
 11.3
 36%
Subscriptions gross profit$61.0
 $52.7
 $8.3
 16%
Subscriptions gross margin59% 63%    
Revenue from subscriptions isfor 2011 and 2010 was principally comprised of revenue from providing access to hosted applications and hosting services, access to certain data services and our online subscription training offerings. In general, we are experiencingofferings, and variable transaction fees associated with the use of our products to fundraise online. Revenue from acquired companies contributed $6.2 million to the growth in subscriptions revenue during 2011. The remaining increase in subscriptions revenue during 2011 was principally attributable to the increase in demand for online fundraising offerings, data management offerings and hosting services. Additionally, revenue from our hosting services continued to increase as the demand for these services continued to grow from both our existing and new perpetual license customers. We continued to experience growth in our hosted applications business as a result of the eTapestry and Kintera acquisitions, which added experience in on-demand solutions and expanded our set of subscription services. Additionally, the growth in revenue in our subscription offerings is the result of the ongoing evolution of our product offerings from license-based to subscription-based offerings.

Subscriptions revenue increased $23.2 million during 2009 when compared to 2008. The inclusion of Kintera for a full year in 2009 compared to a partial year in 2008 accounted for $11.7 million of the increase in subscriptions revenue. Excluding the impact of the acquisition of Kintera, growth in subscriptions revenue is primarily due to the continued increase in demand for hosted applications, hosting services and other online data services and we are experiencingincreasingly experienced a shift in our customers’ buying preference away from perpetual license agreementslicenses towards subscription-based hosted applications.

Subscriptions revenue increased $24.3 million during 2008 when compared to 2007. During 2008, included in subscription revenue is $11.3 million of revenue attributable to Kintera. The inclusion of eTapestry for a full year in 2008 compared to a partial year in 2007 accounted for $5.1 million of the increase in subscriptions revenue. The remaining $7.9 million increase is attributable to organic growth from increased demand for hosting services and other online data services.

Direct controllable costbased-offerings.

Cost of subscriptions isfor 2011 and 2010 was primarily comprised of human resource costs, stock-based compensation expense, third-party royalty and data expenses, hosting expenses, an allocation of depreciation, facilities and IT support costs, amortization of intangibles from business combinations and other costs incurred in providing support and services to our customers. During 2009,The increase in cost of subscriptions increased by $6.6 millionin 2011 when compared to 2008. Additional headcount and increases in data expense, hosting and other costs2010 was principally attributable to Kintera represented $4.0an increase in headcount. The increase in headcount was due to both the inclusion of acquired companies and the investments we were making in our infrastructure to support the growth in our subscription offerings. Human resource costs increased $6.9 million as a result of an increase in headcount, of which $3.6 million related to our acquisition of PIDI in February 2011. Hosting costs also increased by $2.8 million due to the increase in required hosting capacity as a result of the increase in cost of subscriptions. Excluding the impact of the acquisition of Kintera, cost ofdemand for hosting and other online services.
The decrease in subscriptions increased by $2.6 million in 2009 whengross margin 2011 compared to 2008. The remaining increase is principally2010 was due to an increase in data expense, hosting and human resource costs.

The increasethe investments we made in the costinfrastructure to support the growth in our subscription offerings.

Services
 Year ended December 31,     
(in millions)2011
 2010
 Change
 % Change
Services revenue$108.8
 $87.7
 $21.1
 24%
Cost of services79.1
 66.8
 12.3
 18%
Services gross profit$29.7
 $20.9
 $8.8
 42%
Services gross margin27% 24%    
Services revenue for 2011 and 2010 consisted of subscriptionsconsulting, installation, implementation, education and analytic services. Consulting, installation and implementation services involve converting data from a customer’s existing system, assistance in 2008 when comparedfile set up and system configuration, and/or process re-engineering. Education services involve customer training activities. Analytic services are comprised of donor prospect research, selling lists of potential donors, benchmarking studies and data modeling services. These services involve the assessment of current and prospective donor information of the customer and are performed using our proprietary analytical tools. The end product enables organizations to 2007 is principally due to an increase in data expense, hosting and other costs of $5.1 million, of which $2.1 million ismore effectively target their fundraising activities. We recognize services revenue attributable to Kintera. Additionally, human resource costs increased $2.8 million,consulting services for implementation of which $1.5 million is attributable to Kinteraour hosted applications and eTapestry.

The subscriptions segment margin remained substantially unchanged during 2009, 2008 and 2007.

subscription offerings ratably over the period the customer benefits from those services. We also recognize the

40
Index to Financial Statements

Table of Contents

Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

operations (continued)



direct and incremental costs associated with consulting services revenue ratably over the same period. However, we continue to expense indirect costs in the period the implementation services are provided.
The increase in services revenue during 2011 when compared to 2010 was principally attributable to an increase in consulting services revenue of $14.4 million, analytic services of $3.8 million and education services of $2.9 million. Revenue from acquired companies represented $0.8 million of consulting services and $1.9 million of analytic services revenue growth during 2011 compared to 2010. The increase in consulting services revenue was primarily due to an increase in the demand for consulting, installation and implementation services associated with our Blackbaud CRM offering and our internet based fundraising offerings. This increase in consulting services revenue resulting from an increase in volume was partially offset by an increase in our investment, in the form of non-billable implementation hours, in early adopters of our Blackbaud CRM offering and a reduction in the rates we charged as a result of a higher level of discounts on the consulting services provided during 2011 compared to 2010. The rates we charged for our education and analytic service offerings have remained relatively constant year over year and, as such, the change in revenue was principally the result of an increase in the volume of services provided.
Cost of services was principally comprised of human resource costs, stock-based compensation expense, third-party contractor expenses, classroom rentals, other costs incurred in providing consulting, installation and implementation services and customer training, data expense incurred to perform analytic services, an allocation of depreciation, facilities and IT support costs and amortization of intangibles from business combinations.
The increase in cost of services in 2011 when compared to 2010 was primarily attributable to an increase in human resource costs and third-party contractor costs. The increase in human resource costs and third-party contractor costs was principally attributable to the need for additional resource capacity to meet the increasing consulting services demands of our customers and the additional headcount from acquired companies.
The services gross margin increased in 2011 compared to 2010 primarily as a result of an increase in demand for consulting services associated with our Blackbaud CRM offering and a shift in the mix of consulting engagements to higher margin projects.
Maintenance
 Year ended December 31,     
(in millions)2011
 2010
 Change
 % Change
Maintenance revenue$130.6
 $124.6
 $6.0
 5%
Cost of maintenance25.2
 24.1
 1.1
 5%
Maintenance gross profit$105.4
 $100.5
 $4.9
 5%
Maintenance gross margin81% 81%    
Revenue from maintenance for 2011 and 2010 was comprised of annual fees derived from maintenance contracts associated with new software licenses and annual renewals of existing maintenance contracts. These contracts provide customers with updates, enhancements and upgrades to our software products and online, telephone and email support. During 2011, the increase in maintenance revenue was principally comprised of $11.3 million of maintenance from new customers associated with new license agreements and increases in contracts with existing customers and $3.8 million from maintenance contract inflationary rate adjustments, offset by $9.1 million from maintenance contracts that were not renewed.
Cost of maintenance for 2011 and 2010 was primarily comprised of human resource costs, stock-based compensation expense, third-party contractor expenses, third-party royalty costs, an allocation of depreciation, facilities and IT support costs, amortization of intangibles from business combinations and other costs incurred in providing support and services to our customers. The increase in cost of maintenance in 2011 when compared to 2010 was principally attributable to an increase in human resource costs of $1.5 million partially offset by a $0.2 million decrease in third-party royalty costs and $0.2 million decrease in amortization of intangibles from business combinations. Human resource costs increased due to salary merit increases and an increase in headcount associated with the continued growth in our customer support function commensurate with maintenance revenue growth. Additionally, we continued to experience a shift to higher skilled support resources that carry a higher cost to meet the needs of our enterprise customers.

41
Table of Contents

Blackbaud, Inc.
Item 7. Management’s discussion and analysis of financial condition and results of operations (continued)


Other revenue

   Years ended December 31,     2009 versus 2008     2008 versus 2007 
(in millions)            2009  2008  2007     Change  % Change     Change  % Change 
              

Other revenue

  $6.7   $8.8   $8.1     $(2.1)  (24)%    $0.7   9% 

Direct controllable cost of other revenue

   6.0    8.3    7.2      (2.3)  (28)%     1.1   15% 
                 

Segment income

  $0.7   $0.5   $0.9     $0.2   40%    $(0.4)  (44)% 
                 

Segment margin %

   10%   6%   11%         

 Year ended December 31,     
(in millions)2011
 2010
 Change
 % Change
Other revenue$8.5
 $6.7
 $1.8
 27 %
Cost of other revenue7.0
 7.1
 (0.1) (1)%
Other gross profit$1.5
 $(0.4) $1.9
 (475)%
Other gross margin18% (6)%    
Other revenue includesfor 2011 and 2010 included the sale of business forms that are used in conjunction with our software products;products, reimbursement of travel-related expenses, primarily incurred in connection withduring the performance of services at customer locations; fees from user conferences; and sale of hardware in conjunction with The Patron Edge.

Other revenue decreased in 2009 when compared to 2008 primarily due to (i) a decrease in reimbursable travel-related costs from our services businesses as a result of reduced service engagements and (ii) a decrease inlocations, fees from user conferences as a result of fewer participants, both of which are attributable to the challenging economic environment. The increaseand third-party software referral fees. Other revenue increased in other revenue in 20082011 when compared to 2007 is2010 primarily due to attributable increasesan increase in reimbursable travelrevenue from third-party software referral fees and related expenses.

Direct controllable costin reimbursement of travel-related expenses associated with the growth in services revenue.

Cost of other revenue includesfor 2011 and 2010 included human resource costs, costs of business forms, costs of user conferences, and reimbursable expenses relating to the performance of services at customer locations.

The decrease in the cost of other revenue in 2009 when compared to 2008 is due to a decrease in reimbursable expenses related to providing services at customer locations, and a decrease in the costs of user conferences. The increase in the cost of other revenue in 2008 when compared to 2007 is due to an increase in reimbursable travel expenses related to providing services at customer locations and costs associated with user conferences. Reimbursable expenses related to providing services at customer locations increased in 2008 compared to 2007 by $0.5 million and conference costs increased $0.6 million.

Index to Financial Statements

Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

U.S. GAAP gross profit

Segment income does not include an allocation of corporate costs, stock-based compensation expense and amortization expense. The following schedule reconciles total segment income to gross profit as stated on the statement of operations:

   Years ended December 31,     2009 versus 2008     2008 versus 2007 
(in millions)  2009  2008  2007     Change  % Change     Change  % Change 
              

License fees

  $22.2   $32.8   $34.8     $(10.6)  (32)%    $(2.0)  (6)% 

Consulting and education services

   23.5    33.3    34.4      (9.8)  (29)%     (1.1)  (3)% 

Analytic services

   12.5    13.3    10.2      (0.8)  (6)%     3.1   30 % 

Maintenance

   100.7    92.0    81.2      8.7   9 %     10.8   13 % 

Subscriptions

   50.6    34.0    17.6      16.6   49 %     16.4   93 % 

Other

   0.7    0.5    0.9      0.2   40 %     (0.4)  (44)% 
                 

Total segment income

  $210.2   $205.9   $179.1     $4.3   2 %    $26.8   15 % 
                 

Less corporate costs not allocated to segment expenses:

            

Stock-based compensation

   2.6    2.3    1.1      0.3   13 %     1.2   109 % 

Amortization of intangible assets acquired in business combinations

   6.3    5.3    2.9      1.0   19 %     2.4   83 % 

Corporate overhead costs

   12.9    12.2    10.5      0.7   6 %     1.7   16 % 
                 

Gross profit as stated in statements of operations

  $188.4   $186.1   $164.6     $2.3   1 %    $21.5   13 % 
                 

Gross margin %

   61%   62%   64%         

Stock-based compensation expense and amortization expense are analyzed separately following the operating expenses section.

Corporate overhead costs

Allocated corporate overhead costs are comprised of depreciation, facilities and IT support costs. Corporate overhead costs included in gross profit were $12.9 million, $12.2 million and $10.5 million for 2009, 2008 and 2007, respectively. The increase in corporate overhead costs allocated toamortization of intangibles from business combinations. In total, cost of other revenue in 20092011 when compared to 2008 is primarily attributable2010 decreased by $0.1 million due to thea reduction in user conference expenses offset by an increase in depreciation expense of $0.3 million as a result of property and equipment purchases and $0.4 million ofreimbursable expenses.

Other gross margin increased IT support costs.

The increase in corporate overhead costs in 20082011 when compared to 2007 is primarily the result of2010 due to an increase in depreciation of $0.7 million asrevenue from third-party software referral fees and a result of property and equipment purchases. Additionally, facilities expense increased $1.7 million primarily as a result of locations added in connection with the Kintera and eTapestry acquisitions and additional office space leased. IT support costs decreased $0.7 million due to reduced maintenance cost on internally used software.

Operating expenses

The operating expenses analyzed below are presented on a non-U.S. GAAP basis as they exclude stock-based compensation expense. We believe that the exclusion of these costs allows us to better understand and manage other operating expenses and cash needs. Stock-based compensation expense is analyzed, in total,reduction in the section following the operating expense analysis.

Index to Financial Statements

Blackbaud, Inc.

Item 7. Management’s discussion and analysiscost of financial condition and results of operations—(Continued)

user conferences.

Operating expenses
Sales and marketing

   Years ended December 31,    2009 versus 2008    2008 versus 2007
(in millions)  2009  2008  2007    Change  % Change    Change  % Change
           

Sales and marketing expense excluding stock-based compensation

  $61.2  $63.6  $56.2   $(2.4)  (4)%   $7.4  13%

Add: Stock-based compensation expense

   1.6   1.6   0.8    —    0 %    0.8  100%
              

Sales and marketing expense

  $62.8  $65.2  $57.0   $(2.4)  (4)%   $8.2  14%
              

% of revenue (excluding stock-based compensation)

   20%   21%   22%          

 Year ended December 31,     
(in millions)2011
 2010
 Change
 % Change
Sales and marketing expense$75.4
 $69.5
 $5.9
 8%
% of revenue20% 21%    
Sales and marketing expense includesfor 2011 and 2010 included salaries and related human resource costs, stock-based compensation expense, travel-related expenses, sales commissions, advertising and marketing materials, public relations and an allocation of depreciation, facilities and IT support costs.

During 2009,2011, sales and marketing expense decreased $2.4increased by $5.9 million when compared to 2008. The inclusion2010 primarily due to an increase of $3.6 million in human resource costs and other$2.0 million in commission expense. The increase in human resource costs was a result of additional headcount to support the increase in selling and marketing efforts of our growing operations. The increase in commission expense was principally attributable to Kintera for a full year in 2009 compared to a partial year in 2008 accounted for $2.8 million of an increase in sales and marketing expense. Excluding the sales and marketing expense increase attributable to Kintera, sales and marketing expense decreased $5.2 million. The decrease is primarily attributable to a reduction in travel-related expenses, corporate allocated costs and other sales and marketing related costs of $2.1 million. Additionally, commission expense decreased by $2.4 million due to lower commissionable revenue in 2011. Additionally, marketing programs increased by $0.3 million relating to the launch of our new corporate branding and human resource costs decreased by $0.7 million due to a reduction in headcount.

Thean increase in sales and marketing expense in 2008 compared to 2007 is principally due to increases in our sales force and the inclusion of sales and marketing costs of acquired companies. During 2008, human resource costs increased $5.9 million, of which $3.2 million is due to the inclusion of human resources associated with Kintera and eTapestry. Other increases include higher travel costs, allocated costs and other marketing related costs of $1.5 million.

our new packaged offerings.


As a percentage of revenue, sales and marketing expense in 2009 decreased2011 when compared to 20082010 decreased principally dueas a result of our ability to the decrease in commission expense resulting from lower commissionable revenue during 2009. As a percentage of revenue,leverage our sales support and marketing costs in 2008 decreased by one percentage point compared with 2007, principally due to a decrease in commission expense associated with the decline in license feesresources as we standardized and simplified our services.

Research and development

   Years ended December 31,     2009 versus 2008    2008 versus 2007
(in millions)  2009  2008  2007     Change  % Change    Change  % Change
            

Research and development expense excluding stock-based compensation

  $42.7   $36.3   $27.3     $6.4  18%   $9.0  33%

Add: Stock-based compensation expense

   2.9    2.4    1.2      0.5  21%    1.2  100%
               

Research and development expense

  $45.6   $38.7   $28.5     $6.9  18%   $10.2  36%
               

% of revenue (excluding stock-based compensation)

   14%   12%   11%           

packaged offerings.

42
Index to Financial Statements

Table of Contents

Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

operations (continued)



Research and development
 Year ended December 31,     
(in millions)2011
 2010
 Change
 % Change
Research and development expense$47.7
 $45.5
 $2.2
 5%
% of revenue13% 14%    
Research and development expenses includeexpense for 2011 and 2010 included human resource costs, stock-based compensation expense, third-party contractor expenses, software development tools and other expenses related to developing new products, upgrading and enhancing existing products, and an allocation of depreciation, facilities and IT support costs.

During 2011, human resource and third-party costs increased by $3.0 million partially offset by an increase in the amount of software development costs that were capitalized of $0.8 million. Human resource and third-party contractor costs increased as we continued to invest in our product development efforts. The increase in amount of costs that are capitalized was primarily due to development efforts with our events management solution.

Research and development costs increased in 2009 when compared to 2008 principally due to an increase in headcount associated with increased investment in our products. During 2009, the increase in research and development costs is principally the result of an increase in human resource costs of $5.8 million, $3.2 million of which is attributable to inclusion of Kintera for a full year in 2009 compared to a partial year in 2008. Further increases of $0.6 million are attributable to higher allocated costs, partially offset by decreased travel and recruiting costs.

During 2008 when compared to 2007, the increase in research and development costs is primarily due to a $7.6 million increase in human resource costs resulting from an increase in headcount and increased investment in our products, of which $3.4 million is due to the inclusion of Kintera and eTapestry. Further increases of $1.1 million are attributable to higher allocated costs and $0.3 million higher travel and other costs.

Research and development expense as a percentage of revenue increaseddecreased in 20092011 when compared to 2008 and 2008 when2010 principally due to the increase in the amount of development costs that were capitalized in 2011 as compared to 2007 primarily due to an increased investment in our product initiatives.

2010.

General and administrative

   Years ended December 31,     2009 versus 2008    2008 versus 2007
(in millions)        2009  2008  2007     Change  % Change    Change  % Change
            

General and administrative expense excluding stock-based compensation

  $28.2   $28.3   $22.4     $(0.1)  (0)%   $5.9  26%

Add: Stock-based compensation expense

   5.2    5.8    3.8      (0.6)  (10)%    2.0  53%
               

General and administrative expense

  $33.4   $34.1   $26.2     $(0.7)  (2)%   $7.9  30%
               

% of revenue (excluding stock-based compensation)

   9%   9%   9%           

 Year ended December 31,     
(in millions)2011
 2010
 Change
 % Change
General and administrative expense$36.9
 $32.6
 $4.3
 13%
% of revenue10% 10%    
General and administrative expense consistsfor 2011 and 2010 consisted primarily of human resource costs for general corporate functions, including senior management, finance, accounting, legal, human resources, corporate development, stock-based compensation expense, third-party professional fees, insurance, an allocation of depreciation, facilities and IT support costs, acquisition related expense and other administrative expenses.

During 2009, the decrease in2011, general and administrative expense when comparedincreased primarily due to 2008 was primarily the result of closely managing our operating costs during 2009. Included$1.3 million and $1.1 million increases in generalstock-based compensation expense and administrative expense during 2009 is an increase of $1.8 million in human resource costs, respectively, a $0.8 million increase in acquisition-related expenses, $0.5 million in third-party professional consulting fees and $0.3 million of otherin recruiting costs attributableassociated with hiring key executives in 2011. Acquisition-related costs related primarily to the inclusionacquisition of Kintera for a full year in 2009 comparedPIDI, EDH and the pending acquisition of Convio. Stock-based compensation increased due to a partial yearchange in 2008. Excluding these costs attributablethe type of equity awards granted to Kintera, general and administrativecertain executives to be performance-based, for which expense decreased by $2.2 million in 2009 when compared to 2008 primarily due to decreased travel-related costs, bad debt expense and professional fees.

During 2008, the increase in general and administrative expenses when compared to 2007 includes $3.7 millionis recognized on an accelerated basis.


43
Table of additional human resource and other costs attributed to the inclusion of Kintera and eTapestry. The remaining increase was primarily driven by an increase in human resource costs of $1.2 million due to an increase in headcount and $1.0 million increase in bad debt expense and allocated costs.

As a percentage of revenue, general and administrative costs remained unchanged during 2009, 2008 and 2007.

Index to Financial StatementsContents


Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

Stock-based compensation

We recognize compensation expense related to stock-based awards granted to employees. We measure stock-based compensation cost atoperations (continued)



Non-GAAP income from operations
The operating results analyzed below are presented on a non-GAAP basis in that the grant date based onresults exclude the fair value of the award and recognize it as expense over the requisite service period, which is the vesting period.

Our consolidated statements of operations for 2009, 2008, and 2007 include the amountsimpact of stock-based compensation illustrated below:

   Years ended December 31,    2009 versus 2008    2008 versus 2007
(in millions)          2009  2008  2007    Change  % Change    Change  % Change
           

Included in cost of revenue:

                

Cost of services

  $1.4  $1.4  $0.6   $—    0%   $0.8  133%

Cost of maintenance

   0.8   0.6   0.2    0.2  33%    0.4  200%

Cost of subscriptions

   0.4   0.3   0.3    0.1  33%    —    0%
              

Total included in cost of revenue

   2.6   2.3   1.1    0.3  13%    1.2  109%

Included in operating expenses:

                

Sales and marketing

   1.6   1.6   0.8    —    0%    0.8  100%

Research and development

   2.9   2.4   1.2    0.5  21%    1.2  100%

General and administrative

   5.2   5.8   3.8    (0.6)  (10)%    2.0  53%
              

Total included in operating expenses

   9.7   9.8   5.8    (0.1)  (1)%    4.0  69%
              

Total

  $12.3  $12.1  $6.9   $0.2  2%   $5.2  75%
              

Stock-based compensationexpense, amortization expense, acquisition-related expenses, impairment of cost method investment and gain on sale of assets. We believe that the exclusion of these costs allows us and investors to better understand our operating expenses and cash needs, particularly when evaluating current performance against prior periods.

 Year ended December 31,     
(in millions)2011
 2010
 Change
 % Change
GAAP income from operations$50.9
 $46.0
 $4.9
 11%
        
Non-GAAP adjustments:       
Add: Stock-based compensation expense14.9
 13.1
 1.8
 14%
Add: Amortization of intangibles from business combinations7.6
 7.1
 0.5
 7%
Add: Acquisition-related expenses1.8
 1.0
 0.8
 80%
Add: Impairment of cost method investment1.8
 —
 1.8
 100%
Less: Gain on sale of assets(0.5) —
 (0.5) 100%
Total Non-GAAP adjustments25.6
 21.2
 4.4
 21%
Non-GAAP income from operations$76.5
 $67.2
 $9.3
 14%
Non-GAAP operating margin21% 21%    
The increase in non-GAAP income from operations was consistent with the overall increase in revenue of 14% and was principally attributable to the growth in gross profit in our subscriptions and services operations as discussed above, partially offset by investments, in the form of non-billable implementation hours, we made during 2011 in early adopters of our Blackbaud CRM offering.
Interest expense
Interest expense increased $5.7 million during 2012 when compared to 2011. This increase in interest expense is comprised of expense from common stock awards, stock options, restricted stock awards and stock appreciation rights. The table below summarizes the stock-based compensation by award type for 2009, 2008 and 2007.

   Years ended December 31,    2009 versus 2008     2008 versus 2007 
(in millions)        2009  2008  2007    Change  % Change     Change  % Change 
             

Stock-based compensation from:

              

Common stock

  $0.8  $1.4  $—     $(0.6)  (43)%    $1.4   —  % 

Stock options

   0.3   1.5   2.4    (1.2)  (80)%    $(0.9)  (38)% 

Restricted stock awards

   8.8   7.2   3.8    1.6   22%    $3.4   89% 

Stock appreciation rights

   2.4   2.0   0.7    0.4   20%    $1.3   186% 
                

Total stock-based compensation

  $12.3  $12.1  $6.9   $0.2   2%    $5.2   75% 
                

During 2009 and 2008, we expensed $0.8 million and $1.4 million, respectively,directly related to compensation and incentive arrangements payablethe borrowings we incurred to fund our acquisition of Convio in common stock and associated with business acquisitions completed in 2008 and 2007. There were no similar arrangements payable in common stock in 2007. May 2012.

Income tax provision
The decrease in compensation expense from stock options in 2009 compared to 2008 and 2008 compared to 2007following is the result of using the accelerated method for recognizing stock-based compensation expense associated with stock options, which results in the recognition of more expense in the earlier periods of vesting when compared with the straight-line method. We have not granted stock options since 2005 and all historical awards will be fully vested in 2010.

Stock-based compensation expense from restricted stock awards and stock appreciation rights increased in 2009 compared to 2008 and 2008 compared to 2007 due to the issuance of additional grants and rights in 2009 and 2008, offset by the partial vesting of grants issued in prior years.

Index to Financial Statements

Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

The total amount of compensation costs related to non-vested awards not yet recognized was $29.3 million as of December 31, 2009. The compensation cost for unvested awards at December 31, 2009 will be recognized over a weighted average period of 1.9 years.

Amortization

We allocate amortization expense to cost of revenue based on the nature of the respective identifiable intangible asset and whether the asset is directly associated with a specific component of revenue. Amortization expense included in our consolidated statements of operationseffective tax rate for the years ended December 31, 2009, 2008 and 2007 is illustrated below:

   Years ended December 31,    2009 versus 2008     2008 versus 2007 
(in millions)            2009  2008  2007    Change  % Change     Change  % Change 
             

Included in cost of revenue:

               

Cost of license fees

  $0.4  $0.2  $0.1   $0.2   100%    $0.1  100% 

Cost of services

   1.3   1.4   1.2    (0.1)  (7)%     0.2  17% 

Cost of maintenance

   1.3   0.9   0.4    0.4   44%     0.5  125% 

Cost of subscriptions

   3.2   2.7   1.1    0.5   19%     1.6  145% 

Cost of other revenue

   0.1   0.1   0.1    —     0%     —    —  % 
                

Total included in cost of revenue

   6.3   5.3   2.9    1.0   19%     2.4  83% 

Included in operating expenses

   0.8   0.7   0.5    0.1   14%     0.2  40% 
                

Total

  $7.1  $6.0  $3.4   $1.1   18%    $2.6  76% 
                

31:

 2012
 2011
 2010
Effective tax rate50.6% 35.2% 36.5%
The increaseseffective rate in amortization expense for 2009 compared to 2008 and 2008 compared to 2007 are directly attributable to the acquisitions of the Target Companies, eTapestry and Kintera. Identifiable intangible assets of $16.9 million and $32.8 million were recorded during 2008 and 2007, respectively, related to the acquisition of these companies.

Interest expense

Interest expense decreased $0.6 million in 20092012 increased when compared to 2008. The decrease is2011 primarily relateddue to the timing of payments and the duration of borrowings under our credit facility. Additionally, a decrease in our effective interest rate contributedpre-tax income, reduction in federal research and development credits and nondeductible transaction costs associated with the Convio acquisition. In January 2013, the federal research and development credit was reinstated with retrospective application to the decrease2012 tax year. Our estimated 2012 tax credit will be recorded as a discrete benefit in interest expense.

Interest expense increased $0.4 million in 2008 when compared to 2007. The increase is primarily related to the timing and amountfirst quarter of borrowings under our credit facility, offset by a decrease in our effective interest rate. During 2008 and 2007, we utilized borrowings under our credit facility for short-term financial needs such as funding business acquisitions and share repurchases. However, in 2008 we carried outstanding debt for a longer period, as compared to 2007.

Income tax provision

We record income tax expense in our consolidated financial statements based on an estimated annual effective income tax rate. We had an effective tax rate of 37.7%, 35.3%, and 38.5% in 2009, 2008 and 2007, respectively.2013. The effective tax rate in 2008 was lower2011 decreased when compared to 2009 because2010 due to the change in our valuation allowances. In 2011, we generated a greater amountreversed $1.0 million of federal andvaluation allowance for certain state incomenet operating loss carryforwards in connection with the completion of certain state tax credits in 2008 that served to lower our effective tax rate for 2008. While we generated federal and state income tax credits in 2009, the amounts realized in 2008 were significantly higher.

Index to Financial Statements

Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

planning strategies.

We record our deferred tax assets and liabilities at an amount based upon a U.S. federal income tax rate of 35.0% and appropriate statutory tax rates of various foreign, state and local jurisdictions in which we operate. If our tax rates change in the future, we maywould adjust our deferred tax assets and liabilities to an amount reflecting those income tax rates. Any change will affect the provision for income taxes during the period that the determination is made.

The following table reconciles the amounts


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Table of unrecognizedContents

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Item 7. Management’s discussion and analysis of financial condition and results of operations (continued)


We file income tax benefits for the years ended December 31:

     
(in thousands)  2009  2008  2007 

Balance at beginning of year

  $346   $629  $642 

Increases from prior period positions

   427    —      13 

Decreases from prior period positions

   —      —      (12) 

Increases from current period positions

   485    23    8 

Lapse of statute of limitations

   (27)   (306)   —    

Decreases relating to settlements with taxing authorities

   —      —      (22) 
     

Balance at end of year

  $1,231  $346  $629 

The amount of unrecognized tax benefits that, if recognized, would favorably affect our effective tax rate was $1.1 million at December 31, 2009. Tax expense for 2009 increased by $0.9 million for changes in liabilities, penalties and accrued interest related to uncertain tax positions. The total amount of interest and penalties includedreturns in the consolidated balance sheetU.S. for federal and various state jurisdictions as well as in foreign jurisdictions including Canada, United Kingdom, Australia and the Netherlands. We are generally subject to U.S. federal income tax examination for calendar tax years ending 2009 through 2011 as well as state and foreign income tax examinations for various years depending on statute of December 31, 2009 and 2008 was $0.2 million. The total amountlimitations of interest and penalties included in the consolidated statement of operations for 2008 was $0.1 million; interest and penalties were immaterial in 2009.

those jurisdictions.

We have taken federal tax positions in certain taxing jurisdictions related for which it is reasonably possible that the total amountsamount of unrecognized tax benefits may significantly decrease within the next twelve months. The possible decrease could result from the finalization of state income tax reviews and the expiration of statutes of limitations. The reasonably possible decrease is $0.3 million.

We file income tax returns in the U.S. federal and various state jurisdictions and foreign jurisdictions including Canada, United Kingdom, Australia and Netherlands. We are subject to U.S. federal income tax examination for calendar tax years ending 2005 through 2008.

approximates $0.9 million at December 31, 2012.

Liquidity and capital resources

At December 31, 2009,2012, cash and cash equivalents totaled $22.8$13.5 million, compared to $16.4$52.5 million at December 31, 2008. The $6.42011. During 2012, we generated $68.7 million increase in of cash flow from operations and borrowed $315.0 million under our credit facility. We used our cash flow from operations, borrowings under the credit facility and cash equivalentson hand to fund the $280.4 million acquisition of Convio, pay dividends of $21.7 million and purchase $20.6 million of computer software and equipment. Additionally, we repaid $99.5 million of borrowings during 2009 is principally the result of generating $86.8 million of cash from operations reduced by $59.0 million in debt repayments on our credit facility, $17.7 million in dividends paid to stockholders and $7.8 million used to purchase property, equipment and RLC.

2012.

Our principal source of liquidity is our operating cash flow, which depends on continued customer renewal of our maintenance, support and subscription 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 for at least the next twelve12 months to finance our operations, fund anticipated capital expenditures, meet our debt obligations and pay dividends. 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.

Index to Financial Statements

Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

At December 31, 2009 we had no outstanding borrowings under our credit facility. We have drawn on our credit facility from time to time to help us meet short-term financial needs, such as business acquisitions and purchasepurchases of common stock under our repurchase program. Under this five-yearIn February 2012, we amended and restated our credit facility which matures in July 2012, we may elect not more than twice over the term of the agreement to increase the aggregate amount available of $75.0 million by upborrowing capacity to $50.0$325.0 million. We exercised one of these options for an additional $15.0 millionThe amended credit facility matures in June 2008.February 2017. We believe our $90.0 million credit facility provideswill provide us with sufficient flexibility to meet our future financial needs.

At December 31, 2012, we had $215.5 million of outstanding borrowings under our credit facility. Our average daily borrowings were $244.9 million during the period we had debt outstanding during 2012.

Following is a summary of the financial covenants as defined by credit facility:
Financial CovenantRequirementRatio as of December 31, 2012
Leverage Ratio< 3.00 to 1.002.31 to 1.00
Interest Coverage Ratio> 3.50 to 1.0016.61 to 1.00
Maximum Capital Expenditures$40.0 million for the fiscal year ended December 31, 2012$22.6 million
Under our credit facility, we also have restrictions on our ability to declare and pay dividends and our ability to repurchase shares of our common stock. In order to pay any cash dividends and/or repurchase shares of stock: (1) no default or event of default shall have occurred and be continuing under the credit facility, and (2) we must be in compliance with the leverage ratio set forth in the credit agreement. At December 31, 2012, we were in compliance with all debt covenants under our credit facility.
At December 31, 2012, our total cash and cash equivalents balance includes approximately $4.7 million of cash that was held by operations outside the U.S. While these funds may not be needed to fund our U.S. operations for at least the next 12 months, if we need these funds, we would be required to accrue and pay taxes to repatriate the funds. Our current plans anticipate repatriating undistributed earnings in Canada. We currently do not anticipate a need to repatriate our other cash held outside the U.S.
Operating cash flow

Net cash provided by operating activities of $86.8$68.7 million increased $26.5 decreased by $16.8 million when compared to 2008 primarily due to a decrease in income tax payments of $13.6 million principally attributable to fluctuations in the timing of payments. during 2012. Throughout both years,2012 and 2011, our cash flows from operations were derived principally from: (i) our earnings from on-going operations prior to non-cash expenses such as depreciation, amortization and stock-based compensation and adjustments to our provision for sales

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Item 7. Management’s discussion and analysis of financial condition and results of operations (continued)


returns and allowances; (ii) the tax benefit associated with our deferred tax asset, which reduces our cash outlay for income tax expense; and (iii) changes in our working capital.

Working capital changes as they impact the statement of cash flows are composed of changes in accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses accruedand other liabilities and deferred revenue. Net collections of accounts receivable and increases in deferred revenue represent a net increase in cashCash flow from operations associated with working capital changes of $14.6decreased $8.9 million and $9.2 million in 2009 and 2008, respectively. The year-over-year increase2012 when compared to 2011. This net decrease is principally due to the reduced billings related to slower sales growth when comparing 2009 to 2008. Changes in our balances of accounts payable, prepaid expenses, accrued liabilities and other current assets represent a net increase in cash associated with working capital changes of $2.4 million in 2009, compared to a net decrease of $12.9 million in 2008. The primary driver of this change is (i) a reduction in prepaid expenses principally attributable to the receipt of $4.5 million in income tax refunds and (ii) an increase in the amount of cash paid for income taxes, payable and other accrued liabilities principally attributable to fluctuations in the timing of payments.

vendor payments, partially offset by a decrease in the amount of deferred commissions and other deferred costs.

Investing cash flow

Net cash used in 20092012 for investing activities was $7.8$302.5 million compared to $56.0$41.7 million of net cash used in 2008. The decrease in cash used in investing activities is principally due to a decrease in net cash used for acquisitions. We invested $5.5 million in property and equipment in 2009 compared to $7.7 million in 2008. Vendor payments for $3.7 million of property and equipment purchases received in 2009 had not been made as of December 31, 2009 and, accordingly, have been reflected as non-cash activity in our consolidated statement of cash flow for 2009.

Financing cash flow

Net cash used in financing activities for 2009 was $73.2 million compared to $1.0 million in 2008.2011. The increase in cash used in financing activities is primarily due to the largeracquisition of Convio in May 2012. Additionally, we increased the amount spent on computer equipment and software associated with the infrastructure that supports our subscription-based offerings from $18.2 million in 2011 to $20.6 million in in 2012.

Financing cash flow
During 2012, we received proceeds from borrowings of repayment of borrowings$315.0 million under our credit facility to fund the acquisition of Convio and made debt repayments of $99.5 million. We paid dividends of $21.7 million which was relatively consistent with the amount paid in 2009 compared to 2008. Additionally, in 2008, we borrowed funds, principally to acquire Kintera and repurchase our stock. We did not borrow any funds nor repurchase stock in 2009 and amounts used for acquisition was substantially less in 2009 compared to 2008.

Index to Financial Statements

Blackbaud, Inc.2011.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

Commitments and contingencies

As of December 31, 2009,2012, we had $1.3 million of outstanding debt and future minimum lease commitments of $66.6 million as follows:

   Payments due by period
(in millions)  Total  Less than 1
year		  1-2 years  3-5 years  More than 5
years

Operating leases

  $66.4  $7.0  $12.3  $8.8  $38.3

Capital leases

   0.2   0.2   —     —     —  

Debt and interest

   1.3   1.3   —     —     —  

Total

  $67.9  $8.5  $12.3  $8.8  $38.3

 Payments due by period
(in millions)Total
 Less than 1 year
 1-2 years
 3-5 years
 More than 5 years
Operating leases$83.8
 $10.3
 $17.9
 $14.7
 $40.9
Debt and interest(1)
237.2
 16.0
 39.4
 181.8
 —
    Total$321.0
 $26.3
 $57.3
 $196.5
 $40.9
(1)Included in the table above is $21.7 million of interest. The actual interest expense recognized in our consolidated statements of comprehensive income will depend on the amount of debt, the length of time the debt is outstanding and the interest rate, which could be different from our assumptions used in the above table.
The term loans under our credit facility require periodic principal payments. The balance of the term loans and any amounts drawn on the revolving credit loans are due upon maturity of the credit facility in February 2017. Our commitments related to operating leases have not been reduced by the future minimum lease commitments under sublease agreements, that expire in 2010 and 2011, incentive payments from the state of South Carolina resulting from the relocation of our headquarters, and reimbursement of leasehold improvements totaling $4.7 million.

Included in the table above is interest expense of $0.1 million. The actual interest expense recognized in our consolidated statements of operations will depend on the amount of debt and length of time the debt is outstanding, which could be different from our assumptions used in the table above.

As of December 31, 2009, we had accrued an estimate of $0.2 million related to contingent consideration in connection with the acquisition of RLC. Please refer to Note 2 in our notes to the consolidated financial statements for further information. We are unable to determine the actual amount, if any, for which this liability will be settled, and accordingly, we have not included this amount in the table above.

As of December 31, 2009, we have accrued $0.9 million of federal taxes, $0.3 million of state taxes and $0.2 million of interest and penalties related to uncertain tax positions taken in current and prior years. Please refer to Note 10 in our notes to the consolidated financial statements for further information. We are unable to determine the period in which these liabilities will be settled, and accordingly, we have not included these amounts in the table above.

improvements.

We utilize third-party relationships in conjunction with our products. The contractual arrangements vary in length from one to three years. In certain cases, these arrangements require a minimum annual purchase commitment. The total remaining minimum annual purchase commitments under these arrangements at December 31, 2009 are2012, were approximately $3.4$4.5 million through 2012, which is not included in the table above.2015. We incurred expense under these arrangements of $2.4$1.3 million $1.6, $3.2 million and $0.8$1.7 million for the years ended December 31, 2009, 20082012, 2011 and 2007,2010, respectively.

In February 2010,2013, our Board of Directors approved our annual dividend rate of $0.44$0.48 per share for 2010 and declared a first quarter dividend of $0.11 per share payable on March 15, 2010 to stockholders of record on February 26, 2010.2013. Dividends at the annual rate would aggregate to $19.4$22.1 million assuming 44.046.0 million shares of common stock are outstanding, net of treasury stock.outstanding. Our ability to continue to declare and pay dividends mayquarterly this year and beyond might be restricted by, among other things, the terms of our credit facility, general economic conditions and our ability to generate adequate operating cash flow.

Index to Financial Statements

Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)



46


Off-balance sheet arrangements

We do not believe we currently have any off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons.

Foreign currency exchange rates

Approximately 12.8%14% of our total net revenue for the year ended December 31, 20092012 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 within other comprehensive loss as a separate component of stockholders’ equity, was $0.7a loss of $1.2 million and $1.0$1.1 million at December 31, 20092012 and 2008,December 31, 2011, respectively.

The vast majority of our contracts are entered into by our U.S., Canadian or U.K. entities. The contracts entered into by the U.S. entity are almost always denominated in U.S. dollars, contracts entered into by our Canadian subsidiary are generally denominated in Canadian dollars, and contracts entered into by our U.K., Australian and the Netherlands subsidiaries are generally denominated in pounds sterling, Australian dollars and euros,Euros, respectively. Historically, as the U.S. dollar weakened, foreign currency translation resulted in an increase in our revenues and expenses denominated in non-U.S. currencies. During 2009, the2012, foreign currency translation has resulted in a decrease in our reported revenues and expenses denominated in non-U.S. currencies when compared to 2008.currencies. Though we do not believe our increased exposure to currency exchange rates has had a material impact on our consolidated results of operations or financial position, we intend to continue to monitor our foreign currency exchange ratesuch exposure and take action as appropriate.

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 of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities revenue and expenses and related disclosuresdisclosure of contingent assets and liabilities.liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we reconsider and evaluate our estimates and assumptions, including those that impact revenue recognition, long-lived and intangible assets and goodwill, stock-based compensation, the provision for income taxes, capitalization of software development costs, our allowance for sales returns and doubtful accounts, valuation of long-liveddeferred sales commissions, accounting for business combinations and intangible assets and goodwill, stock-based compensation and provision for income taxes, valuation of deferred tax assets and liabilities andloss contingencies.

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. 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 primarily generated from the following sources: (1) selling perpetual licenses of our software products; (2) providing professional services including implementation, training, consulting, hosting and other services; (3) providing software maintenance and support services; and (4)(i) charging for the use of our software products in a hosted environment.

environment; (ii) selling perpetual licenses of our software products; (iii) providing professional services including implementation, training, consulting, analytic, hosting and other services; and (iv) providing software maintenance and support services.
We recognize revenue when all of the following conditions are met:
•Persuasive evidence of an arrangement exists;
•The product or services has been delivered;
•The fee is fixed or determinable; and
•Collection of the resulting receivable is probable.

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Index to Financial StatementsTable of Contents


Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

operations (continued)



License fees

We recognize revenue from the sale of perpetual software license rightsDetermining whether and when all of the following conditions are met:

persuasive evidence of an arrangement exists;

the product hasthese criteria have been delivered;

the fee is fixed or determinable;met can require significant judgment and

collection of the resulting receivable is probable.

estimates. We deem acceptance of an agreement to be evidence of an arrangement. Delivery for our products occurs when the product is shipped or transmitted, and title and risk of loss have transferred to the customers. Our typical license agreement doesagreements do not include customer acceptance provisions; however, if acceptance provisions are provided, delivery is deemed to occur upon acceptance. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within our standard payment terms. Payment terms greater than 90 days are considered to be beyond our customary payment terms. Collection is deemed probable if we expect that the customer will be able to pay amounts under the arrangement as they become due. If we determine that collection is not probable, we defer revenue recognition until collection.

Revenue is recognized net of sales returns and allowances.

Subscriptions
We provide hosting services to customers who have purchased perpetual rights to certain of our software products (hosting services). Revenue from hosting services, as well as data enrichment services, data management services and online training programs is recognized ratably beginning on the activation date over the term of the agreement, which generally ranges from one to three years. Any related set-up fees are recognized ratably over the estimated period that the customer benefits from the related hosting service.
We make certain of our software products available for use in hosted application arrangements without licensing perpetual rights to the software (hosted applications). Revenue from hosted applications is recognized ratably beginning on the activation date over the term of the agreement, which generally ranges from one to three years. Any revenue related to upfront activation, set-up or implementation fees is recognized ratably over the estimated period that the customer benefits from the related hosted application. Direct and incremental costs relating to activation, set-up and implementation for hosted applications are capitalized until the hosted application is deployed and in use, and then expensed over the estimated period that the customer benefits from the related hosted application.
For arrangements that have multiple elements and do not include software licenses, we allocate arrangement consideration at the inception of the arrangement to those elements that qualify as separate units of accounting. The arrangement consideration is allocated to the separate units of accounting based on relative selling price method in accordance with the selling price hierarchy, which includes: (i) vendor specific objective evidence (VSOE) if available; (ii) third-party evidence (TPE) if VSOE is not available; and (iii) best estimate of selling price if neither VSOE nor TPE is available. In general, we use VSOE to allocate the selling price to subscription and service deliverables.
Revenue from transaction processing fees is recognized when the amounts are determined, reported and billed. Credit card fees directly associated with processing donations for customers are included in subscriptions revenue, net of related transaction costs.
License fees
We sell software licenses with maintenance, varying levels of professional services and, in certain instances, with hosting services. We allocate revenue to delivered components, normally the license componenteach of the arrangement,elements in these arrangements using the residual value method under which we first allocate revenue to the undelivered elements, typically the non-software license components, based on objective evidence of the fair value of the undeliveredvarious elements. We determine the fair value of the various elements which is specific to us.using different methods. Fair value for maintenance services associated with software licenses is based upon renewal rates stated in the agreements with customers, which vary according to the level of support service provided under 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. Any remaining revenue is allocated to the delivered elements which is normally the software license in the arrangement.
When a software license is sold with software customization services, generally the services are to provide customer support for assistance in creating special reports and other 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 software. However, when software customization services are considered essential to the functionality of the software, we recognize revenue for both the software license and the services on a percent-complete basis.

using the percentage-of-completion method.


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Item 7. Management’s discussion and analysis of financial condition and results of operations (continued)


Services

We generally bill consulting, installation and implementation services based on hourly rates plus reimbursable travel-related expenses. Revenue is recognized for these services over the period the services are performed. For service engagements of less than $10,000, we frequently contract for and bill based on a fixed fee plus reimbursable travel-related expenses. We recognize this revenue upon completion of the work performed.

We recognize analytic services revenue from donor prospect research engagements, the sale of lists of potential donors, benchmarking studies and data modeling service engagements upon delivery.

In arrangements where we provide customers the right to updates to the lists during the contract period, revenue is recognized ratably over the contract period.

We sell training at a fixed rate for each specific class at a per attendee price or at a packaged price for several attendees, and recognize the related revenue is recognized only upon the customer attending and completing training. Additionally, we sell a fixed-rate program,programs, which permitspermit customers to attend unlimited training over a specified contract period, typically one year, subject to certain restrictions, and revenue is recognized ratably over this contract period.

Index to Financial Statements

Maintenance
Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

Maintenance

We recognize revenue from maintenance services ratably over the contract term, which is typically one year. Maintenance contracts are at rates that vary according to the level of the maintenance program and are generally renewable annually. Maintenance contracts also include the right to unspecified product upgrades on an if-and-when available basis. Certain support services are sold in prepaid units of time and recognized as revenue upon their usage.

Subscriptions

We provide hosting services to customers who have purchased perpetual rights to certain of our software products (hosting services). Revenue from hosting services, as well as data enrichment services, data management services and online training programs is recognized ratably over the service period of the contract. Any related set-up fees are also recognized ratably over the service period of the contract.

We are increasingly making certain of our software products available for use in hosted application arrangements without licensing perpetual rights to the software (hosted applications). Revenue from hosted applications is recognized over the subscription agreement, which generally ranges from one to three years. For contractual arrangements covering the use of hosted applications the stand alone value of the delivered items or the fair value of undelivered items in the arrangement have not been established. Such items include upfront activation, implementation and hosting of the solution. For these arrangements we treat the transaction as a single element and the revenue is deferred until the hosted application is deployed and in use, at which time revenue is recognized over the remaining term of the arrangement. Direct and incremental costs relating to activation and implementation are capitalized until the hosted application is deployed and in use, and then expensed over the remaining term of the arrangement.

Revenue from transaction processing fees is recognized when received. Credit card fees directly associated with processing donations for customers are included in subscription revenue, net of related transaction costs.

Deferred revenue

To the extent that our customers are billed or pay for the above described services in advance of delivery, we record such amounts are recorded in deferred revenue.

Sales returns and allowance for doubtful accounts

We provide customers a 30-day right of return and maintain a reserve for returns. We estimate the amount of this reserve based on historical experience. Provisions for sales returns are charged against the related revenue items.

We maintain an allowance for doubtful accounts at an amount we estimate to be sufficient to provide adequate protection against losses resulting from extending credit to our customers. In judging the adequacy of the allowance for doubtful accounts, we consider multiple factors including historical bad debt experience, the general economic environment, the need for specific customer reserves and the aging of our receivables. Any necessary provision is reflected in general and administrative expense. A considerable amount of judgment is required in assessing these factors and if any receivables were to deteriorate, an additional provision for doubtful accounts could be required.

Index to Financial Statements

Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

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.

Goodwill is assigned to our five reporting units, which are defined as the License Fees, Consultingour four operating segments (see Note 16 to our consolidated financial statements), and Education Services, Analytic Services, Maintenance and Subscriptions operating segments.Blackbaud Payment Services. 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 comparesWe first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Significant judgment is required in the assessment of qualitative factors. To the extent the qualitative factors indicate that the fair value is likely less than the carrying amount, we compare the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, impairment is indicated. If an impairment is indicated, the impairment is measured as the excess of the recorded goodwill over its fair value, which could materially adversely impact our consolidated financial position and results of operations.

We estimate fair value for each reporting unit based on projected future cash flows discounted using our weighted average cost of capital. A number of significant assumptions and estimates are involved in estimating the fair value of each reporting unit, including revenue growth rates, operating margins, capital spending, discount rate, and working capital changes. Additionally, we make certain judgments and assumptions in allocating assets and liabilities to determine the carrying values for each of our reporting units. We believe the assumptions we use in estimating fair value of our reporting units are reasonable, but are also unpredictable and inherently uncertain. Even if our estimated fair value of the reporting units significantly declined, no impairment would be indicated. Actual future results may differ from those estimates.

If the carrying amount exceeds its fair value, impairment is indicated. If an impairment is indicated, the impairment is measured as the excess of the recorded goodwill over its fair value, which could materially adversely impact our consolidated financial position and results of operations. The 2012 annual impairment test of our goodwill indicated there was no impairment.

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Blackbaud, Inc.
Item 7. Management’s discussion and analysis of financial condition and results of operations (continued)


Stock-based compensation

Stock-based

We measure stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognizedrecognize it as expense over the requisite service period, which is the vesting period. We determine the fair value of the stock options and stock appreciation rights using ana Black-Scholes option pricing model, which requires us to use significant judgment to make estimates regarding the life of the award, volatility of our stock price, the risk-free interest rate and the dividend yield of our stock over the life of the award. We determine the fair value of awards that contain market conditions using a Monte Carlo simulation model. Changes to these estimates would result in different fair values of awards.

We estimate the number of awards that will be forfeited and recognize expense only for those awards that ultimately vest. Significant judgment is required in determining the adjustment to compensation expense for estimated forfeitures. Compensation expense in a period could be impacted, favorably or unfavorably, by differences between forfeitureestimated and actual forfeitures.

Income taxes
We make estimates and actual forfeitures.

Provisionjudgments in accounting for income tax and valuationtaxes. The calculation of deferred tax assets

We account for income taxes using the asset and liability approach to recognize 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

Index to Financial Statements

Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

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 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 or liability that is included in our consolidated balance sheets. The final outcome of these matters for tax reporting purposes 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 requires estimates due to transactions, credits and net income incalculations where the period in which such aultimate tax determination is made.

Prior to October 13, 1999, we were organizeduncertain. Uncertainties arise 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 manya consequence of the states in which we operated as a resultactual source of our S corporation status. We historically made distributions to our stockholders to covertaxable income between domestic and foreign locations, the stockholders’ anticipatedoutcome of tax liability. In connection with our 1999 recapitalization, 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 federalaudits and state income taxes. Upon the conversion and in connection with the recapitalization, we recorded a one-time benefitultimate utilization of $107.0 million to establish a deferred tax asset.

We assess the likelihood that our deferred tax assets will be recovered from future taxable income.credits. To the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance, we include an expense within the income tax provision in the consolidated statement of operations. Our valuation allowance of $8.0 million at December 31, 2009 is primarily associated with deferred tax assets for certain state income tax credits and net operating loss carryforwards that we have determined are not more-likely-than-not to be realized. The ability to utilize our net deferred tax asset is dependent on our ability to generate future taxable income. Based on current estimates of revenue and expenses, we expect future taxable income will be sufficient to realize the remaining deferred tax assets. Even if actual results are significantly below our current estimates, the recovery still remains likely and, except for the state tax credits and net operating loss carryforwards discussed above, no valuation allowance would be necessary.

Significant judgment is required in determining the provision for income taxes. To the extent that final results differ from estimated amounts that were initially recorded, such differences will impact the income tax provision in the period in which suchthe determination is made and could have an impact on the deferred tax asset. Our deferredmade.

We make estimates in determining tax assets and liabilities, are recorded at an amount based upon a U.S. federal incomewhich arise from differences in the timing of recognition of revenue and expense for tax rate of 35.0% and appropriate statutory rates of various foreign, state and local jurisdictions in which we operate. If our tax rates change, we will adjustfinancial statement purposes. We record valuation allowances to reduce our deferred tax assets to the amount expected to be realized. In assessing the adequacy of a recorded valuation allowance significant judgment is required. We consider all positive and negative evidence and a variety of factors including the scheduled reversal of deferred tax liabilities, historical and projected future taxable income, and prudent and feasible tax planning strategies. If we determine there is less than a 50% likelihood that we will be able to use a deferred tax asset in the future in excess of its net carrying value, then an amount reflecting thoseadjustment to the deferred tax asset valuation allowance is made to reduce income tax rates. If such change is determined to be appropriate, it will affect the provision forexpense, thereby increasing net income taxes duringin the period that thesuch determination iswas made.

We measure and recognize the tax impact from an uncertain tax position onlypositions. To recognize such positions we must first determine if it is more-likely-than-notmore likely than not that the tax position will be sustained on examination by taxing authorities, based onaudit. We must then measure the technical merits of the position. Such tax impact recognized in the consolidated financial statements from such a position is measured based onbenefit as the largest benefitamount that has a greateris more than 50% likelihoodlikely of being realized upon ultimate resolution.settlement. Significant judgment is required in the identification and measurement of uncertain tax positions.

Index

Software Development Costs
The costs incurred in the preliminary stages of internal use software development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Judgment is required in determining when the development stage of a product has been reached.  Capitalization ceases upon completion of all substantial testing. We also capitalize costs related to Financial Statementsspecific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Capitalized costs are recorded as part of computer software costs. Internal use software is amortized on a straight line basis over its estimated useful life, generally three years.
Costs for the development of software to be sold are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. Technological feasibility is considered to be achieved when a working model of the software product has been completed. Capitalized software development costs include direct labor costs and fringe benefit costs attributed to programmers, software engineers and quality control teams working on products after they reach technological feasibility but before they are generally available to customers for sale. Capitalized software development costs are typically amortized over the estimated product life of generally three years, on a straight-line basis.

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Blackbaud, Inc.

Item 7. Management’s discussion and analysis of financial condition and results of operations—(Continued)

operations (continued)



Sales returns and allowance for doubtful accounts
We provide customers a 30-day right of return and under certain circumstances we provide service related credits to our customers. We maintain a reserve for returns and credits which is estimated based on several factors including historical experience, known credits yet to be issued, the aging of customer accounts and the nature of service level commitments. A considerable amount of judgment is required in assessing these factors. 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. 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. Any necessary provision is reflected in general and administrative expense.
Deferred sales commissions
We pay sales commissions at the time contracts with customers are signed or shortly thereafter, depending on the size and duration of the sales contract. To the extent that these commissions relate to revenue not yet recognized, the amounts are recorded as deferred sales commission costs. Subsequently, the commissions are recognized as expense as the revenue is recognized.

Business combinations
We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed at the acquisition date based upon their estimated fair values. Goodwill as of the acquisition date represents the excess of the purchase consideration of an acquired business over the fair value of the underlying net tangible and intangible assets acquired and liabilities assumed. This allocation and valuation require management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets.
Critical estimates in valuing intangible assets include but are not limited to estimates about: future expected cash flows from customer contracts, proprietary technology and non-compete agreements; the acquired company's brand awareness and market position, assumptions about the period of time the brand will continue to be; as well as expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed, and discount rates. Our estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.

Contingencies

We are subject to the possibility of various loss contingencies in the normal course of business. We record an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Often these issues are subject to substantial uncertainties and, therefore, the probability of loss and the estimation of damages are difficult to ascertain. These assessments can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions that have been deemed reasonable by us. Although we believe we have substantial defenses in these matters, we could incur judgments or enter into settlements of claims that could have a material adverse effect on our consolidated financial position, results of operations or cash flows in any particular period.

Recently issuedadopted accounting pronouncements
Effective January 1, 2012, we adopted ASU 2011-05,

In October 2009,Presentation of Comprehensive Income, which (i) eliminates the FASB released Accounting Standards Update (ASU) 2009-13, which amendsoption to present components of other comprehensive income, or OCI, as part of the existing criteria for separating considerationstatement of changes in multiple-deliverable arrangements. Arrangement that include perpetual software licenses are excluded from the scope of this ASU. ASU 2009-13 establishes a hierarchy for determining the selling price of a deliverablestockholders’ equity and (ii) requires the usepresentation of best estimateeach component of the selling price when VSOEnet income and each component of OCI either in a single continuous statement or third party evidence (TPE) of the selling price cannot be determined. As a result of the requirement to use the best estimate of the selling price when VSOE or TPE of the selling price cannot be determined, the residual method will no longer be permitted. ASU 2009-13 is applicable prospectively for revenue arrangements entered into or materially modified after thein two separate but consecutive statements. The adoption date or retrospectively for all periods presented. We are required to adopt ASU 2009-13 on January 1, 2011. Early adoption is permitted. We are currently evaluating the impact of ASU 2009-132011-05 did not have a material impact on our consolidated financial statements.

Cautionary statement

We operatehave presented each component of net income and OCI in a highly competitive environment that involvessingle continuous statement.

Effective January 1, 2012, we adopted ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards, which amends ASC 820, Fair Value

51
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Blackbaud, Inc.
Item 7. Management’s discussion and analysis of financial condition and results of operations (continued)


Measurement. ASU 2011-04 provides common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) and improves the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. ASU 2011-04 is effective for entities prospectively for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 did not have a numbermaterial impact on our consolidated financial statements.
Recently issued accounting pronouncements
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220) Reporting of risks, someAmounts Reclassified Out of Accumulated Other Comprehensive Income, which are beyond our control. The followingrequires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement highlights somewhere net income is presented or in the notes, significant amounts reclassified out of these risks.

Statements containedaccumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in this Form 10-Kits entirety in the same reporting period. For other amounts that are not historical facts, are or might constitute forward-looking statementsrequired under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. We do not anticipate any material impact from the safe harbor provisionsadoption of ASU 2013-02.

In July 2012, the Private Securities Litigation Reform ActFASB issued ASU 2012-02, Intangibles - Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment, which simplifies how entities test indefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test currently required by ASC Topic 350-30 on general intangibles other than goodwill. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, provided that the entity has not yet issued its financial statements. We do not anticipate any material impact from the adoption 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: general economic risk; uncertainty regarding increased business and renewals from existing customers; continued success in sales growth; lengthy sales and implementation cycles, particularly in larger organizations; risk associated with successful implementation of multiple integrated software products; technological changes that make our products and services less competitive; the ability to attract and retain key personnel; risks related to our dividend policy and stock repurchase program, including potential limitations on our ability to grow and the possibility that we might discontinue payment of dividends; risks relating to restrictions imposed by the credit facility; management of integration of recently acquired companies and other risks associated with acquisitions; risks associated with management of growth; and the other risk factors set forth from time to time in our SEC filings.

ASU 2012-02.

52
Index to Financial Statements

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative disclosures about market risk

We have market rate sensitivity for interest rates and foreign currency exchange rates. Our variable rate debt is our primary financial instrument with market risk exposure for changing interest rates. We manage interest rate risk through a combination of short-term and long-term borrowings and the use of derivative instruments. Due to the nature of our short-term investments and the lack of material debt, we have concluded at December 31, 2009 that we currently do not face no material market risk exposure. Therefore, no quantitative tabular disclosures are required.exposure as of December 31, 2012. For a discussion of our exposure to foreign currency exchange rate fluctuations, see the “Foreign currency exchange rates” section of Management’s"Management’s discussion and analysis of financial condition and results of operationsoperations" in this report.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial statements and supplementary data

The information required by this Item is set forth in the consolidated financial statements and notes thereto beginning at page F-1 of this report.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Changes in and disagreements with accountants on accounting and financial disclosure

None.

Item 9A. CONTROLS AND PROCEDURES

Controls and procedures

Evaluation of disclosure controls and procedures

Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-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-15.13a-15(b). 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.

Changes in internal control over financial reporting

In connection with the acquisition of Convio, we performed certain due diligence procedures related to Convio's financial reporting and disclosure controls. As part of the ongoing integration, we will continue to assess the overall control environment of this business. No change in internal control over financial reporting occurred during the most recent fiscal quarter with respect to our operations, which has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

Management’s report on internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009, based on the framework inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2009.

reporting.
Index to Financial Statements

The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by our independent registered public accounting firm, as stated in their attestation report, which is included herein.

Item 9B. OTHER INFORMATION

Other information

None.


53
Index to Financial Statements



PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors, executive officers and corporate governance

The information required by Item 10 with respect to Directors and Executive Officers is incorporated by reference from the information under the captions “Election of Directors,” “Information Regarding Matters of the Board and Committees,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Code of Business Conduct and Ethics and Code of Ethics,” contained in Blackbaud’s Proxy Statement for the 20102013 Annual Meeting of Stockholders expected to be held on June 23, 2010,19, 2013, except for the identification of executive officers of the Registrant which is set forth in Part I of this report.

Item 11. EXECUTIVE COMPENSATION

Executive compensation

The information required by Item 11 is incorporated by reference from the information under the caption “Executive Compensation and Other Matters,” “Compensation Discussion and Analysis” and “Summary Compensation Table” contained in Blackbaud’s Proxy Statement for the 20102013 Annual Meeting of Stockholders expected to be held on June 23, 2010.

19, 2013.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Security ownership of certain beneficial owners and management and related stockholder matters

The information required by Item 12 is incorporated by reference from information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” contained in Blackbaud’s Proxy Statement for the 20102013 Annual Meeting of Stockholders expected to be held on June 23, 2010.

19, 2013.

Item 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Certain relationships, related transactions and director independence

The information required by Item 13 is incorporated by reference from the information under the caption “Transactions with Related Persons,” and “Independence of Directors” contained in Blackbaud’s Proxy Statement for the 20102013 Annual Meeting of Stockholders expected to be held on June 23, 2010.

19, 2013.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Principal accountant fees and services

The information required by Item 14 is incorporated by reference from the information under the caption “Audit Committee Report,” contained in Blackbaud’s Proxy Statement for the 20102013 Annual Meeting of Stockholders expected to be held on June 23, 2010.

19, 2013.

54
Index to Financial Statements



PART IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Exhibits and financial statement schedules

(a)Financial statements

The following statements are filed as part of this report:

 

Page

No.

Report of independent registered public accounting firm

F-2
 F-2

Consolidated balance sheets as of December 31, 20092012 and 20082011

F-3
 F-3

Consolidated statements of operationscomprehensive income for the years ended December 31, 2009, 20082012, 2011 and 20072010

F-4
 F-4

Consolidated statements of cash flows for the years ended December 31, 2009, 20082012, 2011 and 20072010

F-5
 F-5

Consolidated statements of stockholders’ equity and comprehensive income for the years ended December 31, 2009, 20082012, 2011 and 20072010

F-6
 F-6

Notes to consolidated financial statements

F-7

Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements thereto.

(b)Exhibits

      Filed In
Exhibit number  Description of Document  Registrant’s
Form		  Dated  Exhibit
Number		  Filed
Herewith

  2.1      

  

Agreement and Plan of Merger and Reincorporation dated April 6, 2004

  S-1  04/06/04  2.1  

  2.2      

  

Stock Purchase Agreement among Target Software, Inc., Target Analysis Group, Inc., all of the Stockholders of Target Software Inc. and Target Analysis Group, Inc. and Blackbaud, Inc.

  8-K  01/18/07  2.2  

  3.1      

  

Certificate of Incorporation of Blackbaud, Inc.

  S-1  04/06/04  3.1  

  3.3      

  

Amended and Restated By-laws of Blackbaud, Inc.

  8-K  12/23/08  3.3  

10.5      

  

Trademark License and Promotional Agreement dated as of October 13, 1999 between Blackbaud, Inc. and Charleston Battery, Inc.

  S-1  02/20/04  10.5  

10.6      

  

Blackbaud, Inc. 1999 Stock Option Plan, as amended

  S-1  04/06/04  10.6  

10.8      

  

Blackbaud, Inc. 2001 Stock Option Plan, as amended

  S-1  04/06/04  10.8  

10.20      

  

Blackbaud, Inc. 2004 Stock Plan, as amended, together with Form of Notice of Stock Option Grant and Stock Option Agreement

  8-K  06/20/06  10.20  

10.26      

  

Form of Notice of Restricted Stock Grant and Restricted Stock Agreement under the Blackbaud, Inc. 2004 Stock Plan

  10-K  02/28/07  10.26  

10.27      

  

Form of Notice of Stock Appreciation Rights Grant and Stock Appreciation Rights Agreement under the Blackbaud, Inc. 2004 Stock Plan

  10-K  02/28/07  10.27  

Index to Financial Statements
      Filed In
Exhibit number  Description of Document  Registrant’s
Form		 Dated  Exhibit
Number		  Filed
Herewith
10.28  

Amended and Restated Credit Agreement dated as of July 25, 2007 by and among Blackbaud, as Borrower, the Lenders, and Wachovia Bank, National Association, as Administrative Agent, Swingline Lender and Issuing Lender, and Wachovia Capital Markets, LLC as Sole Lead Arranger and Sole Book Manager.

  8-K 07/31/07  10.28  
10.29  

Amended and Restated Guaranty Agreement dated as of July 25, 2007 by and among certain subsidiaries of Blackbaud, as Guarantors, in favor of Wachovia Bank, National Association, as Administrative Agent.

  8-K 07/31/07  10.29  
10.30  

Pledge Agreement dated as of July 25, 2007 by and among Blackbaud, its subsidiaries in favor of Wachovia Bank, National Association, as Administrative Agent for the ratable benefit of itself and the Lenders.

  8-K 07/31/07  10.30  
10.31  

Form of Tender and Support Agreement by and between Blackbaud, Inc. and certain stockholders of Kintera, Inc.

  8-K 05/30/08  10.31  
10.32  

First Amendment to Credit Agreement and Lender Addition and Acknowledgement Agreement dated as of June 23, 2008

  8-K 06/26/08  10.32  
10.33  

Blackbaud, Inc. 2008 Equity Incentive Plan

  DEF 14A 04/29/08    
10.34  

Form of Notice of Grant and Stock Option Agreement under Blackbaud, Inc. 2008 Equity Incentive Plan

  S-8 08/04/08  10.34  
10.35  

Form of Notice of Grant and Restricted Stock Agreement under Blackbaud, Inc. 2008 Equity Incentive Plan

  S-8 08/04/08  10.35  
10.36  

Form of Notice of Grant and Stock Appreciation Rights Agreement under Blackbaud, Inc. 2008 Equity Incentive Plan

  S-8 08/04/08  10.36  
10.37  

Kintera, Inc. 2000 Stock Option Plan, as amended, and form of Stock Option Agreement thereunder

  10-K/A* 03/26/08  10.2  
10.38  

Kintera, Inc. Amended and Restated 2003 Equity Incentive Plan, as amended, and form of Stock Option Agreement thereunder

  10-K/A* 03/26/08  10.3  
10.39  

Form of Retention Agreement

  10-Q 11/05/08  10.37  
10.40  

Triple Net Lease Agreement dated as of October 1, 2008 between Blackbaud, Inc. and Duck Pond Creek-SPE, LLC

  8-K 12/11/08  10.37  

Index to Financial Statements
      Filed In
Exhibit number  Description of Document  Registrant’s
Form		 Dated  Exhibit
Number		  Filed
Herewith
10.41  

Blackbaud, Inc. 2009 Equity Compensation Plan for Employees from Acquired Companies

  S-8 07/02/09  10.41  
10.42  

Share Purchase Agreement between RLC Group B.V., as the Seller, and Blackbaud, Inc., as the Purchaser

  10-Q 08/07/09  10.42  
10.43  

Amended and Restated Employment and Noncompetition Agreement dated January 28, 2010 between Blackbaud, Inc. and Marc Chardon

  8-K** 02/01/10  10.43  
21.1  

Subsidiaries of Blackbaud, Inc

       X
23.1  

Consent of Independent Registered Public Accounting Firm

       X
31.1  

Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

       X
31.2  

Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

       X
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

       X
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

       X


    Filed In
Exhibit  Number
 Description of Document 
Registrant’s
Form
 Dated 
Exhibit
Number
 
Filed
Herewith
           
2.1
 Agreement and Plan of Merger and Reincorporation dated April 6, 2004 S-1/A 4/6/2004 2.1
  
           
2.2
 Stock Purchase Agreement dated January 16, 2007 by and among Target Software, Inc., Target Analysis Group, Inc., all of the stockholders of Target Software, Inc. and Target Analysis Group, Inc., Charles Longfield, as stockholder representative, and Blackbaud, Inc. 8-K 1/18/2007 2.2
  
           
2.3
 Agreement and Plan of Merger dated as of May 29, 2008 by and among Blackbaud, Inc., Eucalyptus Acquisition Corporation and Kintera, Inc. 8-K 5/30/2008 2.3
  
2.4
 Share Purchase Agreement dated as of April 29, 2009 between RLC Group B.V., as the Seller, and Blackbaud, Inc., as the Purchaser 10-Q 8/7/2009 10.42
  
           
2.5
*Stock Purchase Agreement dated as of February 1, 2011 by and among Public Interest Data, Inc., all for the stockholders of Public Interest Data, Inc., Stephen W. Zautke, as stockholder representative and Blackbaud, Inc. 10-Q 5/10/2011 2.3
  
           
2.6
 Agreement and Plan of Merger dated as of January 16, 2012 by and among Blackbaud, Inc., Caribou Acquisition Corporation and Convio, Inc. 8-K 1/17/2012 2.4
  
           
2.7
 Stock Purchase Agreement dated as of October 6, 2011 by and among Everyday Hero Pty. Ltd., all of the stockholders of Everyday Hero Pty. Ltd., Nathan Betteridge as stockholder representative and Blackbaud Pacific Pty. Ltd. 10-K 2/29/2012 2.7
  
           
3.4
 Amended and Restated Certificate of Incorporation of Blackbaud, Inc. DEF 14A 4/30/2009    
           
3.5
  Amended and Restated Bylaws of Blackbaud, Inc. 8-K 3/22/2011 3.4
  

55


    Filed In
Exhibit  Number
 Description of Document 
Registrant’s
Form
 Dated 
Exhibit
Number
 
Filed
Herewith
           
10.5
  Trademark License and Promotional Agreement dated as of October 13, 1999 between Blackbaud, Inc. and Charleston Battery, Inc. S-1 2/20/2004 10.5
  
           
10.6
  Blackbaud, Inc. 1999 Stock Option Plan, as amended S-1/A 4/6/2004 10.6
  
           
10.8
  Blackbaud, Inc. 2001 Stock Option Plan, as amended S-1/A 4/6/2004 10.8
  
           
10.20
  Blackbaud, Inc. 2004 Stock Plan, as amended, together with Form of Notice of Stock Option Grant and Stock Option Agreement 8-K 6/20/2006 10.20
  
           
10.26
  Form of Notice of Restricted Stock Grant and Restricted Stock Agreement under the Blackbaud, Inc. 2004 Stock Plan 10-K 2/28/2007 10.26
  
           
10.27
  Form of Notice of Stock Appreciation Rights Grant and Stock Appreciation Rights Agreement under the Blackbaud, Inc. 2004 Stock Plan 10-K 2/28/2007 10.27
  
           
10.33
  Blackbaud, Inc. 2008 Equity Incentive Plan DEF 14A 4/29/2008    
           
10.34
  Form of Notice of Grant and Stock Option Agreement under Blackbaud, Inc. 2008 Equity Incentive Plan S-8 8/4/2008 10.34
  
           
10.35
  Form of Notice of Grant and Restricted Stock Agreement under Blackbaud, Inc. 2008 Equity Incentive Plan S-8 8/4/2008 10.35
  
           
10.36
  Form of Notice of Grant and Stock Appreciation Rights Agreement under Blackbaud, Inc. 2008 Equity Incentive Plan S-8 8/4/2008 10.36
  
           
10.37
** Kintera, Inc. 2000 Stock Option Plan, as amended, and form of Stock Option Agreement thereunder 10-K/A 3/26/2008 10.2
  
           
10.38
** Kintera, Inc. Amended and Restated 2003 Equity Incentive Plan, as amended, and form of Stock Option Agreement thereunder 10-K/A 3/26/2008 10.3
  
           
10.39
  Form of Retention Agreement 10-Q 11/10/2008 10.37
  
           
10.40
  Triple Net Lease Agreement dated as of October 1, 2008 between Blackbaud, Inc. and Duck Pond Creek-SPE, LLC 8-K 12/11/2008 10.37
  
           
10.41
  Blackbaud, Inc. 2009 Equity Compensation Plan for Employees from Acquired Companies S-8 7/2/2009 10.41
  
           
10.43
  Amended and Restated Employment and Noncompetition Agreement dated January 28, 2010 between Blackbaud, Inc. and Marc Chardon 8-K 2/1/2010 10.43
  
           
10.44
  Credit Agreement dated as of June 17, 2011 by and among Blackbaud, Inc., as Borrower, the lenders referred to therein, and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender and Issuing Lender, with Wells Fargo Securities, LLC, J.P. Morgan Securities LLC, and SunTrust Robinson Humphrey, Inc. as Joint Lead Arrangers and Joint Book Managers 8-K 6/23/2011 10.44
  
           
10.45
 Guaranty Agreement dated as of June 17, 2011, by certain subsidiaries of Blackbaud, Inc., as Guarantors, in favor of Wells Fargo Bank, National Association, as Administrative Agent 8-K 6/23/2011 10.45
  



56


    Filed In
Exhibit  Number
 Description of Document 
Registrant’s
Form
 Dated 
Exhibit
Number
 
Filed
Herewith
 ��         
10.46
 Pledge Agreement dated as of June 17, 2011 by Blackbaud, Inc. and certain subsidiaries of Blackbaud, Inc. in favor of Wells Fargo Bank, National Association, as Administrative Agent for the ratable benefit of itself and the lenders referred to therein 8-K 6/23/2011 10.46  
           
10.47
 Employment Agreement dated November 7, 2008 between Blackbaud, Inc. and Tim Williams 10-Q 11/8/2011 10.47  
           
10.48
 Employment Agreement dated November 7, 2008 between Blackbaud, Inc. and Louis Attanasi 10-Q 11/8/2011 10.48  
           
10.49
 Employment Agreement dated November 7, 2008 between Blackbaud, Inc. and Charlie Cumbaa 10-Q 11/8/2011 10.49  
           
10.50
 Employment Agreement dated June 25, 2008 between Blackbaud, Inc. and Kevin Mooney 10-Q 11/8/2011 10.50  
           
10.51
 Amendment No. 1 to the Amended and Restated Employment and Noncompetition Agreement dated December 13, 2011 between Blackbaud, Inc. and Marc Chardon 8-K 12/16/2011 10.51  
           
10.52
 Form of Tender and Support Agreement by and among Blackbaud, Inc. and certain stockholders of Convio, Inc. 8-K 1/17/2012 10.52  
           
10.53
 Amended and Restated Credit Agreement dated as of February 9, 2012 by and among Blackbaud, Inc., as Borrower, the lenders referred to therein, JPMorgan Chase Bank, N.A., as Administrative Agent, Swingline Lender and an Issuing Lender, SunTrust Bank, as Syndication Agent, and Bank of America, N.A. and Regions Bank, as Co-Documentation Agents, with J.P. Morgan Securities LLC and SunTrust Robinson Humphrey, Inc., as Joint Lead Arrangers and Joint Bookrunners 8-K 2/15/2012 10.53  
           
10.54
 Amended and Restated Pledge Agreement dated as of February 9, 2012 by Blackbaud, Inc. in favor of JPMorgan Chase Bank, N.A., as Administrative Agent for the ratable benefit of itself and the lenders referred to therein 8-K 2/15/2012 10.54  
           
10.55
 Employment Agreement dated November 14, 2011 between Blackbaud, Inc. and Anthony W. Boor 10-K 2/29/2012 10.55  
           
10.56
 Services Agreement dated November 11, 2011 between Blackbaud, Inc. and Timothy V. Williams 10-K 2/29/2012 10.56  
           
10.57
 Employment Agreement dated November 16, 2010 between Blackbaud, Inc. and Jana B. Eggers 10-K 2/29/2012 10.57  
           
10.58
 
Guaranty Agreement dated as of May 4, 2012, by certain subsidiaries of Blackbaud, Inc., as Guarantors, in favor of JP Morgan Chase Bank, N.A., as Administrative Agent

 8-K 5/7/2012 10.58  
           
10.59
***
Convio, Inc. 2009 Amended and Restated Stock Incentive Plan, as amended, and forms of stock option agreements

 S-1/A 3/19/2010 10.1  
           
10.60
***
Convio, Inc. Form of Nonstatutory Stock Option Notice (Double Trigger)

 8-K 2/28/2011 10.1  
           
10.61
***Convio, Inc. Form of Restricted Stock Unit Notice (Double Trigger) and Agreement 8-K 2/28/2011 10.2  
           
10.62
***Convio, Inc. 1999 Stock Option/Stock Issuance Plan, as amended, and forms of stock option agreements S-1 1/22/2010 10.2  

57


    Filed In
Exhibit  Number
 Description of Document 
Registrant’s
Form
 Dated 
Exhibit
Number
 
Filed
Herewith
           
10.63
 Blackbaud, Inc. 2008 Equity Incentive Plan, as amended 8-K 6/26/2012 10.59  
           
10.64
 Amendment to the Blackbaud, Inc. 2008 Equity Incentive Plan 8-K 6/26/2012 10.60  
           
10.65
 
Form of Employment Agreement between Blackbaud, Inc. and each of Anthony W. Boor, Charles T. Cumbaa, Jana B. Eggers, Kevin W. Mooney and Joseph D. Moye

 10-K 2/26/2013 10.65 X
           
21.1
 Subsidiaries of Blackbaud, Inc       X
           
23.1
 Consent of Independent Registered Public Accounting Firm       X
           
31.1
  Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002       X
          
31.2
  Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002       X
          
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       X
          
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       X
          
101.INS
**** XBRL Instance Document       X
          
101.SCH
**** XBRL Taxonomy Extension Schema Document       X
          
101.CAL
**** XBRL Taxonomy Extension Calculation Linkbase Document       X
          
101.DEF
**** XBRL Taxonomy Extension Definition Linkbase Document       X
           
101.LAB
**** XBRL Taxonomy Extension Label Linkbase Document       X
          
101.PRE
**** XBRL Taxonomy Extension Presentation Linkbase Document       X
*The registrant has applied for an extension of the confidential treatment it was previously granted with respect to portions of this exhibit. Those portions have been omitted from the exhibit and filed separately with the U.S. Securities and Exchange Commission.
**The Kintera, Inc. 2000 Stock Option Plan, as amended, and form of Stock Option Agreement thereunder (Kintera(“Kintera 2000 Plan Documents)Documents”) and the Kintera, Inc. Amended and Restated 2003 Equity Incentive Plan, as amended, and form of Stock Option Agreement thereunder (Kintera(“Kintera 2003 Plan Documents)Documents”) were filed by Kintera in its Form 10-K/A on March 26, 2008 as Exhibits 10.2 and 10.3, respectively. We assumed the Kintera 2000 Plan Documents and Kintera 2003 Plan Documents when we acquired Kintera in July 2008. We filed the Kintera 2000 Plan Documents and Kintera 2003 Plan Documents by incorporation by reference as exhibits 10.37 and 10.38, respectively, in our Form S-8 on August 4, 2008.


58


***The registrant has received confidential treatment with respect to portionsConvio, Inc. 2009 Amended and Restated Stock Incentive Plan, as amended, and forms of this exhibit. Those portions have been omitted fromstock option agreements thereunder (“Convio 2009 Original Plan Documents”) and the exhibitConvio, Inc. 1999 Stock Option/Stock Issuance Plan, as amended, and forms of stock option agreements thereunder (“Convio 1999 Plan Documents”) were filed separatelyby Convio in its Forms S-1/A and S-1, filed March 19, 2010 and January 22, 2010 as exhibits 10.1 and 10.2, respectively. The Convio, Inc. Form of Nonstatutory Stock Option Notice (Double Trigger) and Convio, Inc. Form of Restricted Stock Unit Notice (Double Trigger) and Agreement were filed by Convio in its Form 8-K on February 28, 2011 as exhibits 10.1 and 10.2 (together with the U.S.Convio 2009 Original Plan Documents, the “Convio 2009 Plan Documents”). We assumed the Convio 2009 Plan Documents and Convio 1999 Plan Documents when we acquired Convio in May 2012. We filed the Convio 2009 Plan Documents and Convio 1999 Plan Documents by incorporation by reference as exhibits 10.59, 10.60, 10.61 and 10.62 in our Form S-8 on May 7, 2012.
****Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability of that Section, and shall not be part of any registration statement or other document filed under the Securities Act of the Exchange Commission.Act, except as shall be expressly set forth by specific reference in such filing.


59
Index to Financial Statements



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

BLACKBAUD, INC
Signed: February 26, 2010 
 

/S/    MARC E. CHARDON        

BLACKBAUD, INC
 
Signed:February 27, 2013
/S/    MARC E. CHARDON        
 President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below by the following persons on behalf of the Registrant and on the dates indicated.

/S/    MARC E. CHARDON        

Marc E. Chardon

 

/S/    MARC E. CHARDON        
President, Chief Executive Officer
and Director (Principal Executive Officer)

 Date:February 26, 201027, 2013

/S/    TIMOTHY V. WILLIAMS        

Timothy V. Williams

          Marc E. Chardon		 

/S/    ANTHONY W. BOOR        
Senior Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)

 Date:February 26, 201027, 2013

/S/    ANDREW M. LEITCH        

Andrew M. Leitch

          Anthony W. Boor		 

/S/    ANDREW M. LEITCH        
Chairman of the Board

 Date:February 26, 201027, 2013

/S/    TIMOTHY CHOU        

Timothy Chou

          Andrew M. Leitch		 

/S/    TIMOTHY CHOU        
Director

 Date:February 26, 201027, 2013

/S/    GEORGE H. ELLIS        

George H. Ellis

          Timothy Chou		 

/S/��   GEORGE H. ELLIS        
Director

 Date:February 26, 201027, 2013

/S/    JOHN P. MCCONNELL        

John P. McConnell

          George H. Ellis		 

/S/    DAVID G. GOLDEN        
Director

 Date:February 26, 201027, 2013

/S/    CAROLYN MILES        

Carolyn Miles

          David G. Golden		 

/S/    SARAH E. NASH        
Director

 Date:February 26, 201027, 2013
          Sarah E. Nash
/S/    JOYCE M. NELSON 
DirectorDate:February 27, 2013
         Joyce M. Nelson




60
Index to Financial Statements



BLACKBAUD, INC.

Index to consolidated financial statements

  
Page No.

Report of independent registered public accounting firm

F-2
 F-2

Consolidated balance sheets as of December 31, 20092012 and 20082011

F-3
 F-3

Consolidated statements of operationscomprehensive income for the years ended December 31, 2009, 20082012, 2011 and 20072010

F-4
 F-4

Consolidated statements of cash flows for the years ended December 31, 2009, 20082012, 2011 and 20072010

F-5
 F-5

Consolidated statements of stockholders’ equity and comprehensive income for the years ended December 31, 2009, 20082012, 2011 and 20072010

F-6
 F-6

Notes to consolidated financial statements

F-7

Index to Financial Statements



F-1



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of

Blackbaud, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations,comprehensive income, of cash flows and of stockholders’stockholders' equity and comprehensive income present fairly, in all material respects, the financial position of Blackbaud, Inc. and its subsidiaries at December 31, 20092012 and 2008,2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20092012 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009,2012, based on criteria established inInternal Control—Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’sCompany's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’sManagement's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’sCompany's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2007.

A company’scompany's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’scompany's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/S/ PRICEWATERHOUSECOOPERS LLP

Raleigh,

Charlotte, North Carolina

February 25, 2010

Index to Financial Statements

27, 2013




F-2

Blackbaud, Inc.

Consolidated balance sheets

   December 31, 
(in thousands, except share amounts)  2009  2008 

Assets

   

Current assets:

   

Cash and cash equivalents

  $22,769   $16,361  

Donor restricted cash

   12,874    12,363  

Accounts receivable, net of allowance of $3,559 and $2,777 at December 31, 2009 and December 31, 2008, respectively

   50,220    52,554  

Prepaid expenses and other current assets

   18,155    17,281  

Deferred tax asset, current portion

   5,728    6,858  
     

Total current assets

   109,746    105,417  

Property and equipment, net

   22,507    21,384  

Deferred tax asset

   55,570    64,762  

Goodwill

   73,919    73,615  

Intangible assets, net

   42,019    48,171  

Other assets

   468    537  
     

Total assets

  $304,229   $313,886  
     

Liabilities and stockholders’ equity

   

Current liabilities:

   

Trade accounts payable

  $10,683   $7,023  

Accrued expenses and other current liabilities

   25,974    22,142  

Donations payable

   12,874    12,363  

Debt, current portion

   1,288    60,049  

Deferred revenue

   129,412    113,802  
     

Total current liabilities

   180,231    215,379  

Long-term debt, net of current portion

   —      1,288  

Deferred revenue, noncurrent

   6,172    5,838  

Other noncurrent liabilities

   1,720    873  
     

Total liabilities

   188,123    223,378  
     

Commitments and contingencies (see Note 9)

   

Stockholders’ equity:

   

Preferred stock; 20,000,000 shares authorized, none outstanding

   —      —    

Common stock, $0.001 par value; 180,000,000 shares authorized, 52,214,606 and 51,269,081 shares issued at December 31, 2009 and December 31, 2008, respectively

   52    51  

Additional paid-in capital

   134,726    116,846  

Treasury stock, at cost; 7,677,341 and 7,494,466 shares at December 31, 2009 and December 31, 2008, respectively

   (134,382)   (130,594) 

Accumulated other comprehensive loss

   (201)   (899) 

Retained earnings

   115,911    105,104  
     

Total stockholders’ equity

   116,106    90,508  
     

Total liabilities and stockholders’ equity

  $304,229   $313,886  
     


(in thousands, except share amounts)December 31, 2012
 December 31, 2011
Assets   
Current assets:   
Cash and cash equivalents$13,491
 $52,520
Donor restricted cash68,177
 40,205
Accounts receivable, net of allowance of $8,546 and $3,913 at December 31, 2012 and 2011, respectively75,692
 62,656
Prepaid expenses and other current assets40,589
 31,016
Deferred tax asset, current portion15,799
 1,551
Total current assets213,748
 187,948
Property and equipment, net49,063
 34,397
Deferred tax asset—
 29,376
Goodwill265,055
 90,122
Intangible assets, net168,037
 44,660
Other assets9,844
 6,087
Total assets$705,747
 $392,590
Liabilities and stockholders’ equity   
Current liabilities:   
Trade accounts payable$13,623
 $13,464
Accrued expenses and other current liabilities45,996
 32,707
Donations payable68,177
 40,205
Debt, current portion10,000
 —
Deferred revenue, current portion173,899
 153,665
Total current liabilities311,695
 240,041
Debt, net of current portion205,500
 —
Deferred tax liability24,468
 —
Deferred revenue, net of current portion11,119
 9,772
Other liabilities5,281
 2,775
Total liabilities558,063
 252,588
Commitments and contingencies (see Note 11)
 
Stockholders’ equity:   
Preferred stock; 20,000,000 shares authorized, none outstanding—
 —
Common stock, $0.001 par value; 180,000,000 shares authorized, 54,859,604 and 53,959,532 shares issued at December 31, 2012 and 2011, respectively55
 54
Additional paid-in capital203,638
 175,401
Treasury stock, at cost; 9,209,371 and 9,019,824 shares at December 31, 2012 and 2011, respectively(170,898) (166,226)
Accumulated other comprehensive loss(1,973) (1,148)
Retained earnings116,862
 131,921
Total stockholders’ equity147,684
 140,002
Total liabilities and stockholders’ equity$705,747
 $392,590






The accompanying notes are an integral part of these consolidated financial statements.

Index to Financial Statements


F-3

Blackbaud, Inc.

Consolidated statements of operations

   Years ended December 31, 
(in thousands, except share and per share amounts)  2009  2008  2007 

Revenue

    

License fees

  $25,392   $35,932   $37,569  

Services

   87,834    100,824    91,376  

Maintenance

   116,476    107,304    94,602  

Subscriptions

   72,898    49,705    25,389  

Other revenue

   6,738    8,730    8,102  
     

Total revenue

   309,338    302,495    257,038  
     

Cost of revenue

    

Cost of license fees

   3,582    3,316    2,870  

Cost of services

   61,713    63,960    54,908  

Cost of maintenance

   21,364    20,185    17,119  

Cost of subscriptions

   28,183    20,587    10,306  

Cost of other revenue

   6,098    8,368    7,274  
     

Total cost of revenue

   120,940    116,416    92,477  
     

Gross profit

   188,398    186,079    164,561  
     

Operating expenses

    

Sales and marketing

   62,796    65,185    56,994  

Research and development

   45,662    38,708    28,525  

General and administrative

   33,380    34,072    26,144  

Amortization

   768    713    491  
     

Total operating expenses

   142,606    138,678    112,154  
     

Income from operations

   45,792    47,401    52,407  

Interest income

   637    526    813  

Interest expense

   (962)   (1,526)   (1,164) 

Other income (expense), net

   220    (194)   (503) 
     

Income before provision for income taxes

   45,687    46,207    51,553  

Income tax provision

   17,240    16,329    19,829  
     

Net income

  $28,447   $29,878   $31,724  
     

Earnings per share

    

Basic

  $0.67   $0.70   $0.73  

Diluted

  $0.65   $0.68   $0.71  

Common shares and equivalents outstanding

    

Basic weighted average shares

   42,771,173    42,958,947    43,619,158  

Diluted weighted average shares

   43,600,048    43,958,557    44,595,483  

Dividends per share

  $0.40   $0.40   $0.34  

comprehensive income




(in thousands, except share and per share amounts)Year ended December 31, 
2012
 2011
 2010
Revenue     
License fees$20,551
 $19,475
 $23,719
Subscriptions162,102
 103,544
 83,912
Services119,626
 108,781
 87,663
Maintenance136,101
 130,604
 124,559
Other revenue9,039
 8,464
 6,712
Total revenue447,419
 370,868
 326,565
Cost of revenue     
Cost of license fees2,993
 3,345
 3,003
Cost of subscriptions68,773
 42,536
 31,155
Cost of services97,208
 79,086
 66,755
Cost of maintenance26,001
 25,178
 24,123
Cost of other revenue7,485
 7,049
 7,103
Total cost of revenue202,460
 157,194
 132,139
Gross profit244,959
 213,674
 194,426
Operating expenses     
Sales and marketing95,218
 75,361
 69,469
Research and development64,692
 47,672
 45,499
General and administrative63,308
 36,933
 32,636
Impairment of cost method investment200
 1,800
 —
Amortization2,106
 980
 798
Total operating expenses225,524
 162,746
 148,402
Income from operations19,435
 50,928
 46,024
Interest income146
 183
 84
Interest expense(5,864) (200) (74)
Other income (expense), net(392) 346
 (98)
Income before provision for income taxes13,325
 51,257
 45,936
Income tax provision6,742
 18,037
 16,749
Net income$6,583
 $33,220
 $29,187
Earnings per share     
Basic$0.15
 $0.76
 $0.68
Diluted$0.15
 $0.75
 $0.67
Common shares and equivalents outstanding     
Basic weighted average shares44,145,535
 43,522,563
 43,145,189
Diluted weighted average shares44,691,845
 44,149,054
 43,876,155
Dividends per share$0.48
 $0.48
 $0.44
      
Other comprehensive loss     
Foreign currency translation adjustment(34) (336) (506)
Unrealized loss on derivative instruments, net of tax(791) —
 —
Total other comprehensive loss(825) (336) (506)
Comprehensive income$5,758
 $32,884
 $28,681



The accompanying notes are an integral part of these consolidated financial statements.

Index to Financial Statements



F-4

Blackbaud, Inc.

Consolidated statements of cash flows

   Years ended December 31, 
(in thousands)  2009  2008  2007 

Cash flows from operating activities

    

Net income

  $28,447   $29,878   $31,724  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

   15,509    12,865    8,149  

Provision for doubtful accounts and sales returns

   3,458    4,179    2,661  

Stock-based compensation expense

   12,287    12,085    6,934  

Excess tax benefit on exercise of stock options

   (2,405)   (1,497)   (4,931) 

Deferred taxes

   12,351    6,407    12,491  

Other non-cash adjustments

   116    110    65  

Changes in assets and liabilities, net of acquisition of businesses:

    

Accounts receivable

   1,375    (10,193)   (10,367) 

Prepaid expenses and other assets

   2,122    (5,635)   (2,005) 

Trade accounts payable

   (312)   614    (830) 

Accrued expenses and other current liabilities

   612    (7,907)   6,079  

Donor restricted cash

   (511)   (3,763)   —    

Donations payable

   511    3,763    —    

Deferred revenue

   13,237    19,404    12,897  
     

Net cash provided by operating activities

   86,797    60,310    62,867  
     

Cash flows from investing activities

    

Purchase of property and equipment

   (5,534)   (7,692)   (8,123) 

Purchase of net assets of acquired companies, net of cash acquired

   (2,258)   (49,916)   (84,405) 

Proceeds from sale and maturity of marketable securities

   —      1,575    —    
     

Net cash used in investing activities

   (7,792)   (56,033)   (92,528) 
     

Cash flows from financing activities

    

Proceeds from issuance of debt

   —      86,000    48,000  

Proceeds from exercise of stock options

   2,509    883    5,451  

Excess tax benefit on exercise of stock options

   2,405    1,497    4,931  

Payments on debt

   (60,049)   (27,527)   (49,934) 

Payments of deferred financing fees

   —      (47)   (418) 

Payments on capital lease obligations

   (384)   (540)   (477) 

Purchase of treasury stock

   —      (43,727)   (15,857) 

Dividend payments to stockholders

   (17,673)   (17,497)   (15,074) 
     

Net cash used in financing activities

   (73,192)   (958)   (23,378) 
     

Effect of exchange rate on cash and cash equivalents

   595    (1,733)   31  
     

Net increase (decrease) in cash and cash equivalents

   6,408    1,586    (53,008) 

Cash and cash equivalents, beginning of year

   16,361    14,775    67,783  
     

Cash and cash equivalents, end of year

  $22,769   $16,361   $14,775  
     

Supplemental disclosure of cash flow information

    

Cash paid during the year for:

    

Interest

  $615   $1,375   $1,126  

Taxes, net of refunds

  $(2,584)  $11,041   $5,607  

Purchase of equipment included in accounts payable

  $3,699   $—     $—    



 Year ended December 31, 
(in thousands)2012
 2011
 2010
Cash flows from operating activities     
Net income$6,583
 $33,220
 $29,187
Adjustments to reconcile net income to net cash provided by operating activities:     
Depreciation and amortization31,879
 16,995
 16,189
Provision for doubtful accounts and sales returns9,591
 5,646
 2,773
Stock-based compensation expense19,240
 14,884
 13,059
Excess tax benefits from stock-based compensation(81) (932) (2,665)
Deferred taxes7,585
 13,533
 11,313
Impairment of cost method investment200
 1,800
 —
Gain on sale of assets—
 (549) —
Other non-cash adjustments747
 (878) (22)
Changes in operating assets and liabilities, net of acquisition of businesses:     
Accounts receivable(9,397) (8,692) (12,778)
Prepaid expenses and other assets(8,817) (2,915) (10,109)
Trade accounts payable(1,363) 1,714
 228
Accrued expenses and other liabilities(388) (1,056) (4,248)
Donor restricted cash(27,990) (22,862) (3,446)
Donations payable27,990
 22,862
 3,446
Deferred revenue12,912
 12,757
 13,121
Net cash provided by operating activities68,691
 85,527
 56,048
Cash flows from investing activities     
Purchase of property and equipment(20,557) (18,215) (10,760)
Purchase of net assets of acquired companies, net of cash acquired(280,687) (23,385) (5,334)
Purchase of investment—
 —
 (2,000)
Capitalized software development costs(1,245) (1,012) (175)
Purchase of intangible assets—
 —
 (130)
Proceeds from sale of assets—
 874
 —
Net cash used in investing activities(302,489) (41,738) (18,399)
Cash flows from financing activities     
Proceeds from issuance of debt315,000
 —
 4,000
Payments on debt(99,500) —
 (5,175)
Payments of deferred financing costs(2,440) (767) —
Proceeds from exercise of stock options3,146
 2,041
 8,065
Excess tax benefits from stock-based compensation81
 932
 2,665
Purchase of treasury stock—
 —
 (22,613)
Dividend payments to stockholders(21,731) (21,429) (19,490)
Payments on capital lease obligations—
 (40) (164)
Net cash provided by (used in) financing activities194,556
 (19,263) (32,712)
Effect of exchange rate on cash and cash equivalents213
 (10) 298
Net increase (decrease) in cash and cash equivalents(39,029) 24,516
 5,235
Cash and cash equivalents, beginning of year52,520
 28,004
 22,769
Cash and cash equivalents, end of year$13,491
 $52,520
 $28,004
      
Supplemental disclosure of cash flow information     
Cash paid during the year for:     
Interest$(5,098) $2
 $87
Taxes, net of refunds$(3,456) $(4,601) $9,527
Purchase of equipment included in accounts payable$4,641
 $4,760
 $2,630
The accompanying notes are an integral part of these consolidated financial statements.

Index to Financial Statements


F-5

Blackbaud, Inc.

Consolidated statements of stockholders’stockholders' equity and comprehensive income

   Comprehensive  
income  		   Common stock  

Additional
paid-in

capital

  

Treasury

stock

  

Accumulated
other
comprehensive

income (loss)

  

Retained

earnings

  

Total
stockholders’

equity

 
(in thousands, except share amounts)    Shares  Amount      

Balance at December 31, 2006

     49,205,522   $49  $88,409   $(69,630)  $232   $76,298   $95,358  
     

Net income

  $            31,724    —      —     —      —      —      31,724    31,724  

Payment of dividends

   —      —      —     —      —      —      (15,074)   (15,074) 

Purchase of 633,878 treasury shares under stock repurchase program and surrender of 54,079 shares upon restricted stock vesting

   —      —      —     —      (15,857)   —      —      (15,857) 

Exercise of stock options

   —      776,125    1   5,450    —      —      —      5,451  

Tax impact of exercise of nonqualified stock options

   —      —      —     4,931    —      —      —      4,931  

Cumulative effect of the adoption of a new income tax standard

   —      —      —     —      —      —      (269)   (269) 

Stock-based compensation

   —        —     6,897    —      —      37    6,934  

Restricted stock grants

   —      549,320    —     —      —      —      —      —    

Restricted stock cancellations

   —      (80,292)   —     —      —      —      —      —    

Translation adjustment, net of tax

   (95)   —      —     —      —      (95)   —      (95) 
     

Comprehensive income

  $31,629           

Balance at December 31, 2007

       50,450,675   $50  $105,687   $(85,487)  $137   $92,716   $113,103  

Net income

  $29,878    —      —     —      —      —      29,878    29,878  

Payment of dividends

   —      —      —     —      —      —      (17,497)   (17,497) 

Purchase of 1,956,168 treasury shares under stock repurchase program and surrender of 106,446 shares upon restricted stock vesting

   —      —      —     —      (45,107)   —      —      (45,107) 

Exercise of stock options

   —      126,206    1   882    —      —      —      883  

Tax impact of exercise of nonqualified stock options and restricted stock vesting

   —      —      —     (1,126)   —      —      —      (1,126) 

Stock options assumed in acquisition

   —      —      —     172    —      —      —      172  

Stock-based compensation

   —        —     11,231    —      —      7    11,238  

Restricted stock grants

   —      727,237    —     —      —      —      —      —    

Restricted stock cancellations

   —      (35,037)   —     —      —      —      —      —    

Translation adjustment, net of tax

   (1,036)   —      —     —      —      (1,036)   —      (1,036) 
     

Comprehensive income

  $28,842           

Balance at December 31, 2008

       51,269,081   $51  $116,846   $(130,594)  $(899)  $105,104   $90,508  

Net income

  $28,447    —      —     —      —      —      28,447    28,447  

Payment of dividends

   —      —      —     —      —      —      (17,673)   (17,673) 

Surrender of 182,875 shares upon restricted stock vesting and stock appreciation right exercise

   —      —      —     —      (3,788)   —      —      (3,788) 

Issuance of common stock

   —      55,661    —     1,215    —      —      —      1,215  

Exercise of stock options and stock appreciation rights

   —      451,580    1   2,509    —      —      —      2,510  

Tax impact of exercise of nonqualified stock options and restricted stock vesting

   —      —      —     2,290    —      —      —      2,290  

Stock-based compensation

   —      —      —     11,417    —      —      33    11,450  

Restricted stock grants

   —      492,964    —     449    —      —      —      449  

Restricted stock cancellations

   —      (54,680)   —     —      —      —      —      —    

Translation adjustment, net of tax

   698    —      —     —      —      698    —      698  
     

Comprehensive income

  $29,145           

Balance at December 31, 2009

       52,214,606   $52  $134,726   $(134,382)  $(201)  $115,911   $116,106  



(in thousands, except share amounts)Common stock  
Additional
paid-in
capital

 
Treasury
stock

 
Accumulated
other
comprehensive
loss

 
Retained
earnings

 Total stockholders' equity
Shares
 Amount
 
Balance at December 31, 200952,214,606
 $52
 $134,643
 $(134,382) $(306) $110,286
 $110,293
Net income—
 —
 —
 —
 —
 29,187
 29,187
Payment of dividends—
 —
 —
 —
 —
 (19,490) (19,490)
Purchase of 1,007,082 treasury shares under stock repurchase program—
 —
 —
 (22,613) —
 —
 (22,613)
Exercise of stock options and stock appreciation rights729,295
 1
 8,064
 —
 —
 —
 8,065
Surrender of 158,459 shares upon restricted stock vesting and exercise of stock appreciation rights—
 —
 —
 (4,191) —
 —
 (4,191)
Tax impact of exercise of equity-based compensation—
 —
 2,665
 —
 —
 —
 2,665
Stock-based compensation—
 —
 13,000
 —
 —
 59
 13,059
Restricted stock grants460,659
 —
 —
 —
 —
 —
 —
Restricted stock cancellations(88,280) —
   —
 —
 —
 —
Comprehensive income—
 —
 —
 —
 (506) —
 (506)
Balance at December 31, 201053,316,280
 $53
 $158,372
 $(161,186) $(812) $120,042
 $116,469
Net income—
 —
 —
 —
 —
 33,220
 33,220
Payment of dividends—
 —
 —
 —
 —
 (21,429) (21,429)
Exercise of stock options, stock appreciation rights and restricted stock units262,428
 1
 2,040
 —
 —
 —
 2,041
Surrender of 176,942 shares upon restricted stock vesting and exercise of stock appreciation rights—
 —
 —
 (5,040) —
 —
 (5,040)
Tax impact of exercise of equity-based compensation—
 —
 193
 —
 —
 —
 193
Stock-based compensation—
 —
 14,796
 —
 —
 88
 14,884
Restricted stock grants502,426
 —
 —
 —
 —
 —
 —
Restricted stock cancellations(121,602) —
 —
 —
 —
 —
 —
Other comprehensive loss—
 —
 —
 —
 (336) —
 (336)
Balance at December 31, 201153,959,532
 $54
 $175,401
 $(166,226) $(1,148) $131,921
 $140,002
Net income—
 —
 —
 —
 —
 6,583
 6,583
Payment of dividends—
 —
 —
 —
 —
 (21,731) (21,731)
Exercise of stock options, stock appreciation rights and restricted stock units355,180
 —
 3,146
 —
 —
 —
 3,146
Surrender of 189,547 shares upon restricted stock vesting and exercise of stock appreciation rights—
 —
 —
 (4,672) —
 —
 (4,672)
Tax impact of exercise of equity-based compensation—
 —
 81
 —
 —
 —
 81
Stock-based compensation—
 —
 19,151
 —
 —
 89
 19,240
Equity-based awards assumed in business combination—
 —
 5,859
 —
 —
 . 5,859
Restricted stock grants687,652
 1
 —
 —
 —
 —
 1
Restricted stock cancellations(142,760) —
 —
 —
 —
 —
 —
Other comprehensive loss—
 —
 —
 —
 (825) —
 (825)
Balance at December 31, 201254,859,604
 $55
 $203,638
 $(170,898) $(1,973) $116,862
 $147,684
The accompanying notes are an integral part of these consolidated financial statements.

Index to Financial Statements


F-6
Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements

1.Organization and significant accounting policies

Blackbaud, Inc. (the Company) is the leading global provider of



1. Organization
We provide on-premise and cloud-based software solutions and related services designed specifically for nonprofit organizations, and providesorganizations. Our 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 the end of 2009, the CompanyDecember 31, 2012, we had approximately 22,000more than 27,000 active customers distributed across multiple verticals within the nonprofit market including religion, education, foundations, health and human services, religion, arts and cultural, public and societal benefits, environment and animal welfare andas well as international foreign affairs.

2. Summary of significant accounting policies
Basis of presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).

Basis of consolidation

The consolidated financial statements include the accounts of the CompanyBlackbaud, Inc. and its wholly ownedwholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company evaluates subsequent events through the date the financial statements are issued.

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 revenue recognition, the allowance for sales returns and doubtful accounts, deferred sales commissions and professional services costs, valuation of derivative instruments, long-lived and intangible assets and goodwill, stock-based compensation and the provision for income taxes and valuation of deferred tax assets.taxes. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could materially differ from these estimates.

Revenue recognition

The Company’s

Our revenue is primarily generated from the following sources: (1)(i) charging for the use of our software products in a hosted environment; (ii) selling perpetual licenses of itsour software products; (2)(iii) providing professional services including implementation, training, consulting, analytic, hosting and other services; (3)and (iv) providing software maintenance and support services; and (4) charging for the use of its software products in a hosted environment.

License fees

The Company recognizesservices.

We recognize revenue from the sale of perpetual software license rights when all of the following conditions are met:

persuasive•Persuasive evidence of an arrangement exists;

the•The product or service has been delivered;

the•The fee is fixed or determinable; and

collection•Collection of the resulting receivable is probable.

Index to Financial Statements

Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

The Company deemsDetermining whether and when these criteria have been met can require significant judgment and estimates. We deem acceptance of an agreement to be evidence of an arrangement. Delivery occurs when the product is shipped or transmitted, and title and risk of loss have transferred to the customers. The Company’sOur typical license agreement doesagreements do not include customer acceptance provisions; however, if acceptance provisions are provided, delivery is deemed to occur upon acceptance. The Company considersWe consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within the Company’sour standard payment terms. Payment terms greater than 90 days are considered to be beyond the Company’sour customary payment terms. Collection is deemed probable if the Company expectswe expect that the customer will be able to pay amounts under the arrangement as they become due. If the Company determineswe determine that collection is not probable, it deferswe defer revenue recognition until collection.

Revenue is recognized net of sales returns and allowances.


F-7
Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements (continued)

Subscriptions
We provide hosting services to customers who have purchased perpetual rights to certain of our software products (hosting services). Revenue from hosting services, as well as data enrichment services, data management services and online training programs is recognized ratably beginning on the activation date over the term of the agreement, which generally ranges from one to three years. Any related set-up fees are recognized ratably over the estimated period that the customer benefits from the related hosting service.
We make certain of our software products available for use in hosted application arrangements without licensing perpetual rights to the software (hosted applications). Revenue from hosted applications is recognized ratably beginning on the activation date over the term of the agreement, which generally ranges from one to three years. Any revenue related to upfront activation, set-up or implementation fees is recognized ratably over the estimated period that the customer benefits from the related hosted application. Direct and incremental costs relating to activation, set-up and implementation for hosted applications are capitalized until the hosted application is deployed and in use, and then expensed over the estimated period that the customer benefits from the related hosted application.
For arrangements that have multiple elements and do not include software licenses, we allocate arrangement consideration at the inception of the arrangement to those elements that qualify as separate units of accounting. The Company sellsarrangement consideration is allocated to the separate units of accounting based on relative selling price method in accordance with the selling price hierarchy, which includes: (i) vendor specific objective evidence (VSOE) if available; (ii) third-party evidence (TPE) if VSOE is not available; and (iii) best estimate of selling price if neither VSOE nor TPE is available. In general, we use VSOE to allocate the selling price to subscription and service deliverables.
Revenue from transaction processing fees is recognized when the service is provided and the amounts are determinable. Credit card fees directly associated with processing donations for customers are included in subscriptions revenue, net of related transaction costs.
License fees
We sell software licenses with maintenance, varying levels of professional services and, in certain instances, with hosting services. The Company allocatesWe allocate revenue to delivered components, normally the license componenteach of the arrangement,elements in these arrangements using the residual value method under which we first allocate revenue to the undelivered elements, typically the non-software license components, based on objective evidence of the fair value of the undeliveredvarious elements. We determine the fair value of the various elements which is specific to the Company.using different methods. Fair value for maintenance services associated with software licenses is based upon renewal rates stated in the agreements with customers, which vary according to the level of support service provided under 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. Any remaining revenue is allocated to the delivered elements which is normally the software license in the arrangement.
When a software license is sold with software customization services, generally the services are to provide customer support for assistance in creating special reports and other 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 software. However, when software customization services are considered essential to the functionality of the software, the Company recognizeswe recognize revenue for both the software license and the services on a percent-complete basis.

using the percentage-of-completion method.

Services

The Company

We generally billsbill consulting, installation and implementation services based on hourly rates plus reimbursable travel-related expenses. Revenue is recognized for these services over the period the services are performed. For service engagements of less than $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.

The Company recognizes

We recognize analytic services revenue from donor prospect research engagements, the sale of lists of potential donors, benchmarking studies and data modeling service engagements upon delivery.

The Company sells In arrangements where we provide customers the right to updates to the lists during the contract period, revenue is recognized ratably over the contract period.

We sell training at a fixed rate for each specific class at a per attendee price or at a packaged price for several attendees, and recognize the related revenue is recognized only upon the customer attending and completing training. Additionally, the Company sells awe sell fixed-rate program,programs, which permitspermit customers to attend unlimited training over a specified contract period, typically one year, subject to certain restrictions, and revenue is recognized ratably over this contract period.


F-8
Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements (continued)

Maintenance
Maintenance

The Company recognizesWe recognize revenue from maintenance services ratably over the contract term, which is typically one year. Maintenance contracts are at rates that vary according to the level of the maintenance program and are generally renewable annually. Maintenance contracts also include the right to unspecified product upgrades on an if-and-when available basis. Certain support services are sold in prepaid units of time and recognized as revenue upon their usage.

Index to Financial Statements

Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

Subscriptions

The Company provides hosting services to customers who have purchased perpetual rights to certain of its software products (hosting services). Revenue from hosting services, as well as data enrichment services, data management services and online training programs is recognized ratably over the service period of the contract. Any related set-up fees are also recognized ratably over the service period of the contract.

The Company is increasingly making certain of its software products available for use in hosted application arrangements without licensing perpetual rights to the software (hosted applications). Revenue from hosted applications is recognized over the subscription agreement, which generally ranges from one to three years. For contractual arrangements covering the use of hosted applications the stand alone value of the delivered items or the fair value of undelivered items in the arrangement have not been established. Such items include upfront activation, implementation and hosting of the solution. For these arrangements the Company treats the transaction as a single element and the revenue is deferred until the hosted application is deployed and in use, at which time revenue is recognized over the remaining term of the arrangement. Direct and incremental costs relating to activation and implementation are capitalized until the hosted application is deployed and in use, and then expensed over the remaining term of the arrangement.

Revenue from transaction processing fees is recognized when received. Credit card fees directly associated with processing donations for customers are included in subscription revenue, net of related transaction costs.

Deferred revenue

To the extent that the Company’sour customers are billed or pay for the above described services in advance of delivery, the Company recordswe record such amounts in deferred revenue.

Fair value measurements
We measure certain financial assets and liabilities at fair value on a recurring basis, including derivative instruments. Fair value is defined as the exchange price that would be received upon purchase of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 - Quoted prices for identical assets or liabilities in active markets;
Level 2 - Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
Our financial assets and liabilities are classified in their entirety within the hierarchy based on the lowest level of input that is significant to fair value measurement. Changes to a financial assets' or liabilities' level within the fair value hierarchy are determined as of the end of a reporting period.
Derivative instruments
We use derivative instruments to manage interest rate risk. We view derivative instruments as risk management tools and do not use them for trading or speculative purposes. Our policy requires that derivatives used for hedging purposes be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in fair value of the derivative contract must be highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.
We record all derivative instruments on our consolidated balance sheets at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized currently in earnings. If the derivative is designated as a cash flow hedge, the effective portions of the changes in fair value of the derivative are recorded in other comprehensive income and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions. Ineffective portions of the changes in the fair value of cash flow hedges are recognized currently in earnings.

Reimbursable travel expense
We expense reimbursable travel costs as incurred and include them in cost of other revenue. The reimbursement of these costs by our customers is included in other revenue.
Sales taxes

The Company presents

We present sales taxes and other taxes collected from customers and remitted to governmental authorities on a net basis and, as such, excludesexclude them from revenues.


F-9
Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements (continued)

Shipping and handling
We expense shipping and handling costs as incurred and include them in cost of other revenue. The reimbursement of these costs by our customers is included in other revenue.
Cash and cash equivalents

The Company considers

We consider all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.

Donor restricted cash and donations payable

Restricted cash consists of donations collected by the Companyus and payable to itsour customers, net of the associated transaction fees earned. Monies associated with donations payable are segregated in a separate bank account and used exclusively for the payment of donations payable. This usage restriction is either legally or internally imposed and reflects the Company’sour intention with regard to such deposits.

Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents, donor restricted cash and accounts receivable. Our cash and cash equivalents and donor restricted cash are placed with high credit-quality financial institutions. Our accounts receivable are derived from sales to customers who primarily operate in the nonprofit sector. With respect to accounts receivable, we perform ongoing evaluations of our customers and maintain an allowance for doubtful accounts based on historical experience and our expectations of future losses. As of and for the years ended December 31, 2012, 2011 and 2010, there were no significant concentrations with respect to our consolidated revenues or accounts receivable.
Property and equipment

The Company records

We record property and equipment at cost and depreciatesdepreciate them over their estimated useful lives using the straight-line method. Property and equipment subject to capital leases are depreciated over the lesser of the term of the lease or the estimated useful life of the asset. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Repair and maintenance costs are expensed as incurred.

Index to Financial Statements

Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

Construction-in-progress represents purchases of computer software and hardware associated with new internal system implementation projects which had not been placed in service at the respective balance sheet dates. TheseWe transferred these assets are transferred to the applicable property category on the date they are placed in service. There was no capitalized interest applicable to construction-in-progress for the years ended December 31, 20092012 and 2008.

The Company capitalizes certain costs related to the development or purchase of software for use in the Company’s internal operations. Any amounts capitalized are included in computer software costs and amortized over the expected useful life. Costs incurred for upgrades and enhancements, which will not result in additional functionality, are expensed as incurred.

2011.

Goodwill

Goodwill represents the purchase price in excess of the net amount assigned to assets acquired and liabilities assumed by the Company primarily asus in a result of the acquisition of Target Software, Inc. and Target Analysis Group, Inc. (together referred to as the Target Companies), eTapestry.com (referred to as eTapestry) and Kintera, Inc. (referred to as Kintera).business combination. Goodwill is allocated to reporting units which are defined as the Company’s operating segments, and tested annually for impairment. The CompanyOur reporting units are our four reportable segments and our payment processing operations. We will also test goodwill for impairment between annual impairment tests if indicators of potential impairment exist. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. To the extent the qualitative factors indicate that there is more than 50% likelihood that the fair value is less than the carrying amount, we compare the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, impairment is indicated. The 2012 annual impairment test indicated the estimated fair value of the reporting units significantly exceeded the carrying value. There was no impairment of goodwill during 2009, 20082012, 2011 or 2007.

2010.


F-10
Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements (continued)

Intangible assets

The Company amortizes

We amortize finite-lived intangible assets over their estimated useful lives as follows.

  Basis of amortization 
Amortization
period
(in years)

Customer relationships

 Straight-line and accelerated(1)accelerated (1) 4-15

Marketing assets

 Straight-line 5-81-8

Acquired software

and technology		 Straight-line 4-101-10

Non-compete agreements

 Straight-line 1-5

Database

 Straight-line 8
(1)Certain of the customer relationships acquired as part of the Kintera acquisition are amortized on an accelerated basis.

The Company evaluates

Indefinite-lived intangible assets consist of tradenames. We evaluate the recoverabilitypotential for impairment of finite and indefinite-lived intangible assets periodically and takestake into account events or circumstances that warrantindicate revised estimates of useful lives or that indicate an impairmentthe carrying amount may exist. A substantial portionnot be recoverable. If the carrying amount is no longer recoverable based upon the undiscounted cash flows of the Company’sasset, the amount of impairment is the difference between the carrying amount and the fair value of the asset. Substantially all of our intangible assets waswere acquired in business combinations. There was no impairment of intangible assets during 2009, 20082012, 2011 or 2007.

Fair value2010.

Cost method investments
Cost method investments included in other assets consist of financial instrumentsinvestments in privately held companies where we do not have the ability to exercise significant influence or have control over the investee. We record these investments at cost and periodically test them for other-than-temporary impairment. During the years ended

TheDecember 31, 2012 and 2011, we determined that our cost method investment had other-than-temporary impairment based on the projected liquidity of the investment. We used the income approach to determine the fair value of a financial instrument is the investment in determining the impairment. An impairment loss of $0.2 million and $1.8 million was recorded in income from operations for the years ended December 31, 2012 and 2011, respectively. The aggregate carrying amount of our cost method investment at which the instrument could be exchanged between willing parties other than in a forced sale or liquidation. The financial instruments of the Company consist primarily of cash and cash equivalents, accounts receivable, accounts payable and debtDecember 31, 2011 was $0.2 million. There were no remaining cost method investments at December 31, 2009 and 2008. The Company believes that the carrying amounts of these financial instruments approximate their fair values at December 31, 2009 and 2008, due to the immediate or short-term maturity of these financial instruments.

Index to Financial Statements

Blackbaud, Inc.2012.

Notes to consolidated financial statements—(Continued)

Deferred financing costs

Deferred financing costs included in other assets represent the direct costs of entering into the Company’sboth our revolving credit facility in July 2007June 2011 and increasing the available funds under theour amended and restated credit facility in June 2008.February 2012. These costs are amortized as interest expense using the effective interest method. The deferred financing fees are being amortized over the term of the credit facility.

Stock-based compensation

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 generally the vesting period. Stock-based compensation cost arising from stock option grants isand awards with performance or market conditions are recognized using the accelerated method. Costs arising from restricted stock and stock appreciation right grants are recognized on a straight-line basis.

Income taxes

Prior to October 13, 1999, the Company was organized as an S corporation under the Internal Revenue Code

We make estimates 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 its 1999 recapitalization, the Company converted its U.S. taxable status from an S corporation to a C corporation and, accordingly, since October 14, 1999 has been subject to federal and state income taxes. Upon this conversion and as a result of the recapitalization, the Company recorded a one-time benefit of $107.0 million to establish a deferred tax asset. This amount was recorded as a direct increase to equityjudgments in the statements of stockholders’ equity. The Company has not recorded a valuation allowance against this deferred tax asset as of December 31, 2009 or 2008, as the Company believes it is more-likely-than-not that it will be able to utilize this benefit, which is dependent upon the Company’s ability to generate future taxable income. The amount of deferred tax asset related to this matter at December 31, 2009 was $35.9 million.

The Company adopted a new income tax standard for uncertain tax positions on January 1, 2007 under which a tax benefit from an uncertain tax position is recognized only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Penalties and interest accrued related to unrecognized tax benefits are recognized in the provision for income taxes.

Significant judgment is required in determining the provisionaccounting for income taxes. The Company records itscalculation of income tax provision atrequires estimates due to transactions, credits and calculations where the anticipatedultimate tax rates based on estimatesdetermination is uncertain. Uncertainties arise as a consequence of annual pretax income.the actual source of taxable income between domestic and foreign locations, the outcome of tax audits and the ultimate utilization of tax credits. To the extent that the finalactual results differ from these estimated amounts that were initially recorded, such differences will impact the income tax provision in the period in which suchthe determination is made and could have an impact on the deferred tax asset. The Company’s deferredmade.

We make estimates in determining tax assets and liabilities, are recorded at an amount based upon a U.S. federal incomewhich arise from differences in the timing of recognition of revenue and expense for tax rate of 35.0% and appropriate statutory rates of various foreign, state and local jurisdictions in which the Company operates. If the Company’s tax rates change, thefinancial statement purposes. We record valuation allowances to reduce our deferred tax assets and liabilities will be adjusted to anthe amount reflecting those income tax rates. If such change is determinedexpected to be appropriate, it will affectrealized. In assessing the provision for income taxes duringadequacy of a recorded valuation allowance significant judgment is required. We consider all positive and negative evidence and a variety of factors including the period that the determination is made.

The Company assesses the likelihood that itsscheduled reversal of deferred tax assets will be recovered fromliabilities, historical and projected future taxable income. To the extent recovery is not likely, a valuation allowance is established. To the extent a valuation allowance is established, the Company includes an expense within the income, and prudent and feasible tax provision. The Company’s valuation allowanceplanning strategies. If we determine there


F-11
Table of $8.0 million at December 31, 2009 was primarily associated with deferred tax assets for certain

Index to Financial StatementsContents


Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

state income tax credits and net operating loss carryforwardsstatements (continued)


is less than a 50% likelihood that it has determined are not more-likely-than-notwe will be able to be realized. The Company will continue to evaluate the realizability of the remaininguse a deferred tax assets, and any furtherasset in the future in excess of its net carrying value, then an adjustment to the deferred tax asset valuation allowance will beis made to reduce income tax expense, thereby increasing net income in the period the Company determinessuch determination was made.
We measure and recognize uncertain tax positions. To recognize such positions we must first determine if it is more-likely-than-notmore likely than not that anythe position will be sustained on audit. We must then measure the benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Significant judgment is required in the remaining amounts will not be utilized.

identification and measurement of uncertain tax positions.

Foreign currency

Net assets recorded in a foreign currency are translated at the exchange rate on the balance sheet date. Revenue and expense items are translated at the average exchange rate for the year. The resulting translation adjustments are recorded in accumulated other comprehensive income net of tax.

income.

Gains and losses resulting from foreign currency transactions denominated in currency other than the functional currency are recorded at the approximate rate of exchange at the transaction date.date in other expense, net. For the year ended December 31, 2012, we recorded net foreign currency loss of $0.4 million. For the years ended December 31, 2009, 20082011 and 2007, the Company2010, we recorded net foreign currency gain of $0.2$0.3 million loss of $0.2 and $0.1 million and loss of $0.5 million, respectively, and these amounts are included in other expense, net.

, respectively.

Research and development

Research and development costs are expensed as incurred. These costs include salaries and related human resource costs, third-party contractor expenses, software development tools, an allocation of facilities and depreciation expenses and other expenses in developing new products and upgrading and enhancing existing products.

Software development costs

The costs incurred in the preliminary stages of internal use software development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Capitalized costs are recorded as part of computer software costs. Internal use software is amortized on a straight line basis over its estimated useful life, generally three years.
Costs for the development of software to be sold are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. Capitalized software development costs begins upon the establishment ofinclude direct labor costs and fringe benefit costs attributed to programmers, software engineers and quality control teams working on products after they reach technological feasibility subjectbut before they are generally available to net realizable value considerations. To date, the point in time of achieving technological feasibility and the general availability of such software has substantially coincided; therefore,customers for sale. Capitalized software development costs qualifyingare typically amortized over the estimated product life of generally three years, on a straight-line basis.
Management evaluates the useful lives of these assets on an annual basis and tests for capitalization have been immaterial. Accordingly,impairment whenever events or changes in circumstances occur that could impact the Company has not capitalized anyrecoverability of these assets. There were no impairments during the years ended December 31, 2012, 2011 or 2010. At December 31, 2012 and 2011, software development costs, net of accumulated amortization, were $2.0 millionand has charged all such$1.1 million, respectively, and are included in other assets on the consolidated balance sheet. Amortization expense related to software development costs to researchwas $0.4 million, $0.1 million, $0.1 million for the years ended December 31, 2012, 2011 and development expense.

2010, respectively, and is included in both cost of license fees and cost of subscriptions.

Sales returns and allowance for doubtful accounts

The Company provides

We provide customers a 30-day30-day right of return and maintainsunder certain circumstances provide service related credits to our customers. We maintain a reserve for returns and credits which is estimated based on several factors including historical experience, known credits yet to be issued, the aging of customer accounts and existing economic conditions.the nature of service level commitments. Provisions for sales returns and credits are charged against the related revenue items.

In addition, the Company recordswe record an allowance for doubtful accounts that reflects estimates of probable credit losses. This assessment is based on several factors including aging of customer accounts, known customer specific risks, historical experience and

F-12
Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements (continued)

existing economic conditions. Accounts are charged against the allowance after all means of collection are exhausted and recovery is considered remote. Provisions for doubtful accounts are recorded in general and administrative expense.

Index to Financial Statements

Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

Below is a summary of the changes in the Company’sour allowance for doubtful accounts.

Years ended December 31,

(in thousands)

  Balance at
beginning of
year		  Acquired
through
business
combinations		  Provision/
adjustment		  Write-off  Balance
at end
of year

2009

  $1,013  $—    $(47)  $(206)  $760

2008

   308   268   560    (123)   1,013

2007

   335   57   (14)   (70)   308

Years ended December 31,
(in thousands)
 
Balance at
beginning of
year

 
Provision/
adjustment

 Write-off
 
Balance at
end of
year

2012 $261
 $976
 $(421) $816
2011 424
 27
 (190) 261
2010 760
 (227) (109) 424
Below is a summary of the changes in the Company’sour allowance for sales returns.

Years ended December 31,

(in thousands)

  Balance at
beginning of
year		  Acquired
through
business
combinations		  Provision/
adjustment		  Write-off  Balance
at end
of year

2009

  $1,764  $—    $3,505  $(2,470)  $2,799

2008

   1,627   61   3,619   (3,543)   1,764

2007

   933   95   2,675   (2,076)   1,627

Years ended December 31,
(in thousands)
 
Balance at
beginning of
year

 
Provision/
adjustment

 Write-off
 
Balance at
end of
year

2012 $3,652
 $8,914
 $(4,836) $7,730
2011 2,263
 5,619
 (4,230) 3,652
2010 2,799
 3,000
 (3,536) 2,263
Sales commissions

The Company pays

We pay sales commissions at the time contracts with customers are signed or shortly thereafter, depending on the size and duration of the sales contract. To the extent that these commissions relate to revenue not yet recognized, the amounts are recorded as deferred sales commission costs. Subsequently, the commissions are recognized as expense as the revenue is recognized.

Below is a summary of the changes in the Company’sour deferred sales commission costs included in prepaid expenses and other current assets.

Years ended December 31,

(in thousands)

  Balance at
beginning of
year		  Additions  Expense  Balance
at end
of year

2009

  $3,047  $6,994  $(4,028)  $6,013

2008

   1,903   5,699   (4,555)   3,047

2007

   588   5,335   (4,020)   1,903

Years ended December 31,
(in thousands)
 
Balance at
beginning of
year

 Additions
 Expense
 
Balance at
end of
year

2012 $16,452
 $19,693
 $(18,003) $18,142
2011 11,548
 18,415
 (13,511) 16,452
2010 5,108
 12,985
 (6,545) 11,548
Advertising costs

The Company expenses

We expense advertising costs as incurred, which were $1.1was $1.2 million $1.3 for the year ended December 31, 2012, and $1.1 million and $0.7 million for both the years ended December 31, 2009, 20082011 and 2007, respectively.

2010.

Restructuring Costs
Restructuring costs include charges for the costs of exit or disposal activities. The liability for costs associated with exit or disposal activities is measured initially at fair value and only recognized when the liability is incurred. Restructuring costs are not directly identified with a particular segment and as a result, management does not consider these charges in the evaluation of the operating income from segments.


F-13
Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements (continued)

Impairment of long-lived assets

The Company reviews

We review long-lived assets for impairment when events change or circumstances indicate the carrying amount may not be recoverable. If such events or changes in circumstances are present, the undiscounted cash flow method is used to determine whether the asset is impaired. No impairment of long-lived assets resulted in 2009, 20082012, 2011 or 2007.

Index to Financial Statements

Blackbaud, Inc.2010

Notes to consolidated financial statements—(Continued).

Shipping and handling

The Company expenses shipping and handling costs as incurred and includes them in cost of other revenue. The reimbursement of these costs by the Company’s customers is included in other revenue.

Earnings per share

The Company computes

We compute basic earnings per share 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, shares of non-vested restricted stock and settlement of stock appreciation rights and certain contingent liabilities that will be paid in sharesvesting of common stock.

Diluted earnings per share for the years ended December 31, 2009restricted stock awards and 2008 do not include the effect of 488,282 and 496,945 potential common share equivalents, respectively, as they are anti-dilutive. There were no anti-dilutive common share equivalents for the year ended December 31, 2007.

units.

The following table sets forth the computation of basic and diluted earnings per share:

    Years ended December 31,
(in thousands, except share and per share amounts)  2009  2008  2007

Numerator:

      

Net income

  $28,447  $29,878  $31,724

Denominator:

      

Weighted average common shares

   42,771,173   42,958,947   43,619,158

Add effect of dilutive securities:

      

Employee stock-based compensation

   828,875   999,610   976,325
    

Weighted average common shares assuming dilution

   43,600,048   43,958,557   44,595,483
    

Earnings per share:

      

Basic

  $0.67  $0.70  $0.73

Diluted

  $0.65  $0.68  $0.71

   Year ended December 31, 
(in thousands, except share and per share amounts) 2012
 2011
 2010
Numerator:      
Net income $6,583
 $33,220
 $29,187
Denominator:      
Weighted average common shares 44,145,535
 43,522,563
 43,145,189
Add effect of dilutive securities:      
Employee stock-based compensation 546,310
 626,491
 730,966
Weighted average common shares assuming dilution 44,691,845
 44,149,054
 43,876,155
Earnings per share:      
Basic $0.15
 $0.76
 $0.68
Diluted $0.15
 $0.75
 $0.67
The following shares underlying stock-based awards were not included in diluted earnings per share because their inclusion would have been anti-dilutive:
   Year ended December 31, 
   2012
 2011
 2010
Shares excluded from calculations of diluted EPS 434,050
 422,418
 221,742
Recently adopted accounting pronouncements
Effective January 1, 2012, we adopted ASU 2011-05,

In June 2009,Presentation of Comprehensive Income, which (i) eliminates the FASB issuedoption to present components of other comprehensive income, or OCI, as part of theFASB Accounting Standards CodificationTM statement of changes in stockholders’ equity and (ii) requires the Hierarchypresentation of Generally Accepted Accounting Principles, which establishes the FASB Accounting Standards Codification (ASC) as the sourceeach component of authoritative accounting principles recognized by the FASB to be appliednet income and each component of OCI either in the preparation of financial statementsa single continuous statement or in conformity with generally accepted accounting principles. The ASC is not intended to change U.S. GAAP,two separate but significantly changes the way in which the accounting literature is organized and the way U.S. GAAP is referenced by companies in their financial statements and accounting policies. The ASC became effective in the third quarter of 2009.consecutive statements. The adoption of the ASC did not have an impact on the Company’s consolidated financial statements.

Effective January 1, 2009, the Company adopted ASC 805 (formerly SFAS No. 141 (revised 2007)), “Business Combinations” (ASC 805). ASC 805 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling

Index to Financial Statements

Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

interest in the acquiree and the goodwill acquired. ASC 805 also established disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. ASC 805 applies to business combinations for which the acquisition date is on or after January 1, 2009. The extent of the impact of ASC 805 on future acquisitions depends on the size and nature of the acquisitions. At the time of adoption on January 1, 2009, ASC 805ASU 2011-05 did not have a material impact on the Company’sour consolidated financial statements. DuringWe have presented each component of net income and OCI in a single continuous statement.

Effective January 1, 2012, we adopted ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards, which amends ASC 820, Fair Value Measurement. ASU 2011-04 provides common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) and improves the year endedcomparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. ASU 2011-04 is effective for entities prospectively for interim and annual periods beginning after December 31, 2009,15, 2011. The adoption of ASU 2011-04 did not have a material impact on our consolidated financial statements.

F-14
Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements (continued)

Recently issued accounting pronouncements
In February 2013, the Company expensed acquisition related costsFASB issued ASU 2013-02, Comprehensive Income (Topic 220) Reporting of $0.2 millionAmounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that priorare not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. We do not anticipate any material impact from the adoption of ASC 805 would have been included in the cost of the acquisition.

ASU 2013-02.

Recently issued accounting pronouncements

In October 2009,July 2012, the FASB released Accounting Standards Update (ASU) 2009-13,issued ASU 2012-02, Intangibles - Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment, which amendssimplifies how entities test indefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the existing criteriaquantitative impairment test currently required by ASC Topic 350-30 on general intangibles other than goodwill. ASU 2012-02 is effective for separating consideration in multiple-deliverable arrangements. Arrangementsannual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, provided that include perpetual software licenses are excludedthe entity has not yet issued its financial statements. We do not anticipate any material impact from the scopeadoption of this ASU. ASU 2009-13 establishes2012-02.

3. Business combinations
Convio
In May 2012, we completed our acquisition of Convio, Inc. (Convio), for approximately $329.8 million in cash consideration and the assumption of unvested equity awards valued at approximately $5.9 million, for a hierarchytotal of $335.7 million. Convio was a leading provider of on-demand constituent engagement solutions that enabled nonprofit organizations to more effectively raise funds, advocate for determining the selling pricechange and cultivate relationships. The acquisition of Convio expands our subscription and online offerings and accelerates our evolution to a deliverable and requires the use of best estimate of the selling price when VSOE or third party evidence (TPE) of the selling price cannot be determined.subscription-based revenue model. As a result of the requirement to use the best estimateacquisition, Convio has become a wholly-owned subsidiary of the selling price when vendor specific objective evidence or third party evidence of the selling price cannot be determined, the residual method will no longer be permitted. ASU 2009-13 is applicable prospectively for revenue arrangements entered into or materially modified after the adoption date or retrospectively for all periods presented. The Company is required to adopt ASU 2009-13 on January 1, 2011. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2009-13 on its consolidated financial statements.

2.Business combinations

RLC

On April 29, 2009, the Company acquired all of the outstanding stock of RLC Customer Centric Technology B.V. (RLC), a privately held limited liability company based in the Netherlands, for €1.8 million in cash, or the equivalent of $2.4 million based on the foreign exchange rate at the time of the acquisition. The Company will also pay a maximum of €400,000, or the equivalent of $0.5 million based on the foreign exchange rate at the time of the acquisition, in earn-out payments if RLC meets revenue and EBITDA margin targets, as defined in the agreement, over the two years subsequent to the acquisition. RLC is a leading provider of software and services to nonprofits in the Netherlands. The acquisition of RLC provides the Company with a foundation to expand into the Netherlands and other Western European markets.ours. The results of operations of RLCConvio are included in theour consolidated financial statements of the Company from the date of acquisition. During 2009,Since the date of acquisition through December 31, 2012, total revenue from Convio was $50.7 million. Because we have integrated a substantial amount of the RLCConvio operations, was $1.7it is impracticable to determine the operating costs attributable solely to the acquired business. During the year ended December 31, 2012, we incurred $6.4 million of acquisition-related costs associated with the acquisition of Convio, which were recorded in general and costadministrative expense.

We financed the acquisition of revenue was $0.9 million.

Convio through cash on hand and borrowings of $312.0 million under our amended credit facility. In connection with closing the Convio acquisition, we designated Convio as a material domestic subsidiary under our credit facility. As a material domestic subsidiary, Convio guarantees amounts outstanding under the credit facility and pledges certain stock of its subsidiaries.

F-15
Index to Financial StatementsTable of Contents


Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

statements (continued)


The Companyfollowing table summarizes the allocation of the purchase price based on the estimated fair value of the assets acquired and the liabilities assumed:
(in thousands) 
Net working capital, excluding deferred revenue$54,912
Property and equipment6,591
Other long term assets75
Deferred revenue(7,917)
Deferred tax liability(31,648)
Intangible assets and liabilities139,650
Goodwill174,011
 $335,674

The estimated fair value of accounts receivable acquired approximates the contractual value of $12.8 million. The goodwill recognized is attributable primarily to the assembled workforce of Convio and the opportunities for expected synergies. None of the goodwill arising in the acquisition is deductible for income tax purposes. The estimated amount of goodwill assigned to the Enterprise Customer Business Unit, or ECBU, and the General Markets Business Unit, or GMBU, reporting segments was $125.3 million, and $48.7 million, respectively.

The acquisition resulted in the identification of the following identifiable intangible assets:
 Intangible assets acquired
 Weighted average amortization period
  (in thousands)
 (in years)
Customer relationships$53,000
 15
Marketing assets7,800
 7
Acquired technology69,000
 8
In-process research and development9,100
 7
Non-compete agreements1,440
 2
Unfavorable leasehold interests(690) 7
 $139,650
  

The fair value of the intangible assets was based on the income approach, cost approach, relief of royalty rate method and excess earnings methods. Customer relationships are amortized on an accelerated basis. Marketing assets, acquired technology and non-compete agreements are amortized on a straight-line basis. In-process research and development was placed into service subsequent to the time of acquisition and is amortized on a straight-line basis since the time of being placed into service over a weighted average amortization period of seven years.


F-16
Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements (continued)

The following unaudited pro forma condensed consolidated results of operations assume that the acquisition of Convio occurred on January 1, 2011. This unaudited pro forma financial information does not reflect any adjustments for anticipated synergies resulting from the acquisition and should not be relied upon as being indicative of the historical results that would have been attained had the transaction been consummated as of January 1, 2011, or of the results that may occur in the future.
 Year ended December 31, 
(in thousands, except per share amounts)2012
 2011
Revenue$476,887
 $451,221
Net income (loss)$116
 $27,697
Basic earnings (loss) per share$—
 $0.64
Diluted earnings (loss) per share$—
 $0.63
2011 Acquisitions
During the year ended December 31, 2011, we acquired two entities for total consideration of $24.2 million, all of which was paid in cash. The results of operations of acquired entities have been included in our consolidated financial statements from the date of acquisition. Pro forma results of operations have not been presented because the effects of these business combinations, individually and in the aggregate, were not material to our consolidated results of operations. We recorded the purchase price allocation based on the estimated fair value of the assets acquired and liabilities assumed. The following table summarizes the allocation of the purchase price:

(in thousands)     

Cash and cash equivalents

  $110  

Accounts receivable

   374  

Other assets, current and noncurrent

   165  

Property and equipment

   188  

Intangibles

   840  

Goodwill

   1,610  

Trade accounts payable

   (118) 

Accrued expenses and other current liabilities

   (179) 

Deferred revenue, current and noncurrent

   (200) 

Deferred tax liability, current and noncurrent

   (214) 

Contingent consideration liability

   (208) 
     
   $2,368  

None of the goodwill arising from the acquisitions completed in the acquisition2011 is deductible for income tax purposes. Goodwill was assigned to

2010 Acquisitions
During the license fees, consulting and education services, subscriptions and maintenance reportable segments. The recognitionyear ended December 31, 2010, we acquired two entities for total consideration of goodwill was principally attributable to a trained workforce and the integration of the Company’s technology and products with RLC’s operations which were considered in the purchase price. The acquisition resulted in the identification of $0.8$5.3 million of intangible assets,, all of which are subject to amortization on a straight-line basis. A liability of $0.2 million was recognized for contingent consideration based on a probability-weighted discounted cash flow valuation technique. Any changepaid in the fair value, or any change upon final settlement, of the contingent consideration liability will be recognized in income from operations.

Kintera

On July 8, 2008, the Company acquired Kintera, a publicly-traded company based in San Diego, California. Kintera is a leader in providing web-based, software-as-a-service solutions to the nonprofit market. The acquisition of Kintera provides the Company with additional expertise in developing and delivering on-demand solutions and expands the Company’s online offerings. The Company acquired all of the outstanding capital stock of Kintera through a tender offer, paying $1.12 per share for a total of $45.7 million. The Company financed this acquisition with cash on hand and borrowings under the Company’s revolving credit facility. The total purchase price of $50.2 million includes $2.4 million in payments to Kintera management under change of control provisions, $1.9 million of direct acquisition-related costs and $0.2 million related to Kintera employee stock options assumed.cash. The results of operations of Kintera areacquired entities have been included in theour consolidated financial statements of the Company from the date of acquisition.

Index Pro forma results of operations have not been presented because the effects of these business combinations, individually and in the aggregate, were not material to Financial Statements

Blackbaud, Inc.

Notes toour consolidated financial statements—(Continued)

Theresults of operations. We recorded the purchase price allocation is based on a valuation of the fair value of assets acquired and liabilities assumed in the acquisition of Kintera. The following table summarizes the final allocation of the purchase price:

(in thousands)     

Cash and cash equivalents

  $2,980  

Accounts receivable

   4,479  

Marketable securities

   1,575  

Other assets, current and noncurrent

   9,428  

Deferred tax assets, current and noncurrent

   26,420  

Property and equipment

   3,834  

Intangible assets

   16,950  

Goodwill

   11,506  

Trade accounts payable

   (1,061) 

Accrued expenses and other current liabilities

   (15,095) 

Deferred revenue, current and noncurrent

   (7,871) 

Debt, current and noncurrent

   (2,973) 
     

Total purchase price

  $50,172  

None of the goodwill arising in the acquisition is deductible for income tax purposes. All segments were allocated a portion of the goodwill. The acquisition resulted in the identification of $16.9 million of intangible assets, all of which are subject to amortization. The following table presents the amounts assigned to each intangible asset class:

    

Intangible

assets
acquired

(in thousands)

  

Weighted

average

amortization

period

(in years)

Marketing assets

  $740  8.0

Customer relationships

   12,100  10.8

Software

   4,110  7.4
    

Total

  $16,950  9.8

Customer relationships are amortized on an accelerated basis. Marketing assets and software are amortized on a straight-line basis.

In connection with the acquisition, the Company entered into employment agreements with certain members of Kintera’s management team that provided for the payment of bonuses totaling $449,000, payable in shares of the Company’s common stock based on continued employment. In February 2009, the Company issued 39,140 shares of common stock at a fair market value of $11.47 per share in connection with these employment agreements. In addition, the Company entered into an employment agreement with the former CEO of Kintera that included a targeted bonus payable in shares of the Company’s common stock conditioned upon his continued employment and achievement of certain performance targets. In August 2009, the Company issued 10,898 shares of common stock at a fair market value of $19.73 per share in connection with this bonus arrangement.

Index to Financial Statements

Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

eTapestry

On August 1, 2007, the Company acquired eTapestry, a privately-owned company based near Indianapolis, Indiana. eTapestry is a provider of an on-demand donor management and fundraising solution. The acquisition of eTapestry allows the Company to address a broader market opportunity by providing an on-demand solution that is suited for smaller organizations interested in a relatively low-cost offering and mid-sized nonprofits interested in a stand-alone fundraising solution deployed in an on-demand model. The Company acquired all of the outstanding capital stock of eTapestry for approximately $25.4 million in a cash transaction financed by a combination of cash on hand and borrowings under the Company’s revolving credit facility. The results of operations of eTapestry are included in the consolidated financial statements of the Company from the date of acquisition.

The allocation of the purchase price is based on a valuation of theestimated fair value of the assets acquired and liabilities assumed in the acquisition of eTapestry. The following table summarizes the allocation of the purchase price:

(in thousands)     

Cash and cash equivalents

  $308  

Accounts receivable

   1,095  

Other current assets

   21  

Property and equipment

   720  

Intangible assets

   10,450  

Goodwill

   18,428  

Trade accounts payable

   (137) 

Accrued expenses and other current liabilities

   (304) 

Deferred revenue, current and noncurrent

   (3,087) 

Other liabilities, noncurrent

   (39) 

Net deferred tax liabilities, noncurrent

   (2,026) 
     

Total purchase price

   $25,429  

assumed. None of the goodwill arising from the acquisitions completed in the acquisition2010 is deductible for income tax purposes. The goodwill was principally allocated to the subscriptions and consulting and education services reportable segments. The acquisition resulted in the identification of $10.5 million of intangible assets, all of which are subject to amortization. The following table presents the amounts assigned to each intangible asset class:

    Intangible
assets
acquired
(in thousands)		  Weighted
average
amortization
period
(in years)

Customer relationships

  $6,100  10.0

Acquired software

   2,790  7.0

Marketing assets

   560  7.0

Non-compete agreements

   1,000  5.0
    

Total

  $10,450  8.6

In connection with the acquisition, the Company entered into employment agreements with certain members of eTapestry’s management team. Under these arrangements, an additional amount of up to $1.5 million was payable based upon performance of the acquired business for the two twelve-month periods ending September 30, 2009. Based on actual performance, the Company issued 44,763 shares of common stock at a fair

Index to Financial Statements

Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

market value of $22.34 and 42,262 shares of common stock at a fair market value of $11.83 during 2009 and 2008, respectively, under these employment agreements.

Target Companies

On January 16, 2007, the Company acquired the Target Companies, privately-owned affiliated companies based in Cambridge, Massachusetts. The acquired companies provide solutions that help organizations analyze, plan, forecast, execute, and manage high-volume fundraising campaigns while simultaneously helping them maintain long-term constituent relationships. The acquisition of the Target Companies significantly advances the Company’s strategic goal of providing a more complete set of solutions that meet both the fundraising and direct marketing needs of the nonprofit market. The Company acquired all of the outstanding capital stock of the Target Companies for approximately $58.7 million, including direct acquisition-related costs, in an all cash transaction that was financed by a combination of cash on hand and borrowings under the Company’s revolving credit facility. The results of operations of the Target Companies are included in the consolidated financial statements of the Company from the date of acquisition.

At the acquisition date, an additional amount of up to $2.4 million was contingently payable to the sellers under an earn-out arrangement based upon performance of the acquired businesses over the year subsequent to the acquisition. In 2008, the Company paid $2.3 million of contingent consideration in cash, which was recorded as an additional acquisition cost and increased the balance of goodwill. There is no further obligation in connection with the Target acquisition.

The allocation of the purchase price is based on a valuation of the fair value of the assets acquired and liabilities assumed in the acquisition of the Target Companies. The following table summarizes the allocation of the purchase price:

(in thousands)     

Cash and cash equivalents

  $507  

Accounts receivable

   5,067  

Other current assets

   278  

Property and equipment

   2,291  

Deferred tax assets

   738  

Intangible assets

   22,323  

Goodwill

   36,453  

Trade accounts payable

   (445) 

Accrued expenses and other current liabilities

   (3,243) 

Deferred revenue, current and noncurrent

   (1,807) 

Loans from shareholders, current

   (1,919) 

Capital lease obligations, current and noncurrent

   (1,510) 
     

Total purchase price

  $58,733  

Index to Financial Statements

Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

Of the total amount of goodwill arising in the acquisition, $35.8 million is expected to be deductible for income tax purposes. All reportable segments were allocated a portion of the goodwill. The acquisition resulted in the identification of $22.3 million of intangible assets, all of which are subject to amortization. The following table presents the amounts assigned to each intangible asset class:

    Intangible
assets
acquired
(in thousands)		  Weighted
average
amortization
period
(in years)

Customer relationships

  $13,627  12.7

Acquired software

   3,655  10.0

Database

   3,441  8.0

Marketing assets

   800  5.0

Non-compete agreements

   800  5.0
    

Total

  $22,323  11.0

Pro forma information (unaudited)

The following unaudited pro forma information presents the consolidated results of operations of the Company as if the acquisition of Kintera, eTapestry and the Target Companies had taken place at January 1, 2007. The pro forma information includes the historical operating results of the acquired companies and adjustments for the business combination effect of the amortization charges from acquired intangible assets, interest expense, interest income and related tax effects. The pro forma information does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of future results of operations. The results of operations of RLC were not material to the Company’s consolidated results of operations, and thus pro-forma financial information is not presented.

        Years ended December 31,
(in thousands, except per share amounts)    2008  2007

Revenue

  $322,073  $307,902

Net income

  $22,728  $18,942

Earnings per share, basic

  $0.55  $0.43

Earnings per share, diluted

  $0.53  $0.42

3.

4. Property and equipment

Property and equipment as of December 31, 20092012 and 20082011 consisted of the following:

    Estimated
useful life
(years)		  December 31, 
(in thousands)    2009  2008 

Equipment

  3 - 5  $5,323  $5,824 

Computer hardware

  3 - 5   25,850   29,448 

Computer software

  3 - 5   11,166   11,903 

Construction in progress

  —     5,960   357 

Furniture and fixtures

  5 - 7   4,891   5,229 

Leasehold improvements

  term of lease   2,641   2,419 
           

Total property and equipment

     55,831   55,180 

Less: accumulated depreciation

     (33,324)   (33,796) 
           

Property and equipment, net of depreciation

     $22,507  $21,384 

  
Estimated
useful life
(years)

 December 31, 
(in thousands)2012
 2011
Equipment3 - 5
 $2,430
 $2,809
Computer hardware3 - 5
 56,969
 39,665
Computer software3 - 5
 17,540
 9,660
Construction in progress—
 1,854
 3,836
Furniture and fixtures5 - 7
 5,486
 5,028
Leasehold improvementsterm of lease
 5,104
 3,394
Total property and equipment  89,383
 64,392
Less: accumulated depreciation  (40,320) (29,995)
Property and equipment, net of depreciation  $49,063
 $34,397
Depreciation expense was $14.5 million, $9.4 million and $9.1 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Property and equipment, net of depreciation, under capital leases at December 31, 2012 and 2011 was not material.
Index to Financial Statements



F-17
Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

Depreciation expense was $8.4 million, $6.9 millionstatements (continued)


5. Goodwill and $4.7 million for December 31, 2009, 2008 and 2007, respectively.

Property and equipment at December 31, 2009 and 2008 included the following amounts forother intangible assets under capital leases:

    December 31, 
(in thousands)  2009  2008 

Equipment

  $50  $50 

Computer hardware

   1,185   1,185 

Computer software

   255   255 
     

Total property and equipment under capital leases

   1,490   1,490 

Less: accumulated depreciation

   (1,407)   (1,054) 
     

Property and equipment under capital leases, net of depreciation

  $83  $436  

4.
Goodwill and other intangible assets

The change in goodwill for each reportable segment during the yearsyear ended December 31, 2009 and 20082012, consisted of the following:

(in thousands)  License
fees		  Consulting
and education
services		  Analytic
services		  Maintenance  Subscriptions  Total 

Balance at December 31, 2007

  $1,350   $13,405   $13,721   $6,009   $23,790   $58,275  

Additions related to business combinations

   86    567    182    2,497    9,816    13,148  

Payment of contingent consideration

   137    634    879    511    734    2,895  

Effect of foreign currency translation

   (144)   (174)   (16)   (363)   (6)   (703) 
     

Balance at December 31, 2008

   1,429    14,432    14,766    8,654    34,334    73,615  

Additions related to business combinations

   23    627    —      587    373    1,610  

Adjustments related to prior year businsess combinations

   3    10    11    42    182    248  

Subsequent recognition of deferred tax assets

   (20)   (78)   (87)   (323)   (1,382)   (1,890) 

Effect of foreign currency translation

   32    138    4    125    37    336  
     

Balance at December 31, 2009

  $1,467   $15,129   $14,694   $9,085   $33,544   $73,919  

The Company has

(in thousands)ECBU GMBU IBU Target Analytics Other Total
Balance at December 31, 2011$23,023
 $26,437
 $5,389
 $33,177
 $2,096
 $90,122
Additions related to business combinations125,299
 48,712
 —
 —
 —
 174,011
Additions related to prior year business combinations—
 —
 793
 —
 —
 793
Effect of foreign currency translation—
 —
 129
 —
 —
 129
Balance at December 31, 2012$148,322
 $75,149
 $6,311
 $33,177
 $2,096
 $265,055
We have no accumulated impairment losses as of December 31, 20092012 and 2008.2011. Additions to goodwill during the year ended December 31, 20092012, related primarily to the acquisition of RLCacquisitions as described in Note 23 of these consolidated financial statements. The Company finalizedremaining additions were the result of an adjustment to the allocation of the purchase price allocation for Kinteraone the entities we acquired during 2009, which resulted in a net decrease to goodwill of $1.6 million. The adjustments to the purchase price allocation primarily related to (i) the recognition of $1.9 million of additional deferred tax assets, (ii) the recognition of a current tax benefit of $0.8 million and (iii) an increase in contingent tax liabilities, royalties and other preacquisition accruals of $1.1 million.

Index to Financial Statements

year ended December 31, 2011.

Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

The Company hasWe have recorded intangible assets acquired in various business combinations based on their fair values at the date of acquisition. The table below sets forth the balances of each class of intangible asset all of which are subject toand related amortization, as of December 31, 20092012 and 2008.

    December 31, 
(in thousands)  2009  2008 

Gross carrying amount

   

Customer relationships

  $39,975   $39,607  

Marketing assets

   2,232    2,124  

Acquired software

   11,489    11,045  

Non-compete agreements

   2,111    2,100  

Database

   3,441    3,441  
     

Total gross carrying amount

   59,248    58,317  
     

Accumulated amortization

   

Customer relationships

   (10,465)   (5,984) 

Marketing assets

   (843)   (496) 

Acquired software

   (3,454)   (2,052) 

Non-compete agreements

   (1,195)   (772) 

Database

   (1,272)   (842) 
     

Total accumulated amortization

   (17,229)   (10,146) 
     

Total intangible assets, net

  $42,019   $48,171  

2011.

   December 31, 
(in thousands) 2012
 2011
Finite-lived gross carrying amount    
Customer relationships $101,878
 $48,725
Marketing assets 10,296
 2,502
Acquired software and technology 94,378
 16,087
Non-compete agreements 3,979
 2,539
Database 4,275
 4,275
Total finite-lived gross carrying amount 214,806
 74,128
Accumulated amortization    
Customer relationships (24,994) (18,891)
Marketing assets (2,852) (1,627)
Acquired software and technology (14,787) (6,171)
Non-compete agreements (2,727) (1,856)
Database (2,798) (2,263)
Total accumulated amortization (48,158) (30,808)
Indefinite-lived gross carrying amount    
Marketing assets 1,389
 1,340
Total intangible assets, net $168,037
 $44,660

Additions to intangible assets subject to amortization during 20092012 are related to the acquisition of RLC asacquisitions described in Note 23 of these consolidated financial statements.



F-18
Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements (continued)

Amortization expense
Amortization expense related to finite-lived intangible assets acquired in business combinations is allocated to cost of revenue and operating expenses on the consolidated statements of operationscomprehensive income based on the revenue stream to which the asset contributes.contributes and the nature of the intangible asset. The following table summarizes amortization expense for the years ended December 31, 2009, 20082012, 2011 and 2007.

    Years ended December 31,
(in thousands)  2009  2008  2007

Included in cost of revenue:

      

Cost of license fees

  $362  $246  $153

Cost of services

   1,344   1,338   1,178

Cost of maintenance

   1,302   895   406

Cost of subscriptions

   3,239   2,694   1,112

Cost of other revenue

   75   75   96
    

Total included in cost of revenue

   6,322   5,248   2,945

Included in operating expenses

   768   713   491
    

Total

  $7,090  $5,961  $3,436

Index to Financial Statements

Blackbaud, Inc.2010

Notes to consolidated financial statements—(Continued).

 Year ended December 31, 
(in thousands)2012
 2011
 2010
Included in cost of revenue:     
Cost of license fees$485
 $635
 $588
Cost of subscriptions11,969
 3,341
 3,058
Cost of services1,992
 1,572
 1,390
Cost of maintenance722
 975
 1,223
Cost of other revenue75
 75
 75
Total included in cost of revenue15,243
 6,598
 6,334
Included in operating expenses2,106
 980
 798
Total$17,349
 $7,578
 $7,132

The following table outlines the estimated future amortization expense for each of the next five years for acquisition-relatedour finite-lived intangible assets as of December 31, 2009:

    

Amortization

expense

Years ended December 31,  (in thousands)

2010

  $6,787

2011

   6,348

2012

   5,477

2013

   4,883

2014

   4,572
    

Total

  $28,067

2012:
Years ending December 31,
Amortization expense
(in thousands)

2013$24,373
201422,569
201522,186
201621,765
201719,439
Total$110,332
6. Prepaid expenses and other current assets
5.
Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following as of December 31, 20092012 and 2008:

    December 31,
(in thousands)  2009  2008

Deferred sales commissions

  $6,013  $3,047

Prepaid software maintenance and royalties

   4,694   3,904

Taxes, prepaid and receivable

   3,736   6,385

Other

   3,712   3,945
    

Total prepaid expenses and other current assets

  $18,155  $17,281

2011:
(in thousands)December 31, 2012
 December 31, 2011
Deferred sales commissions$18,142
 $16,452
Prepaid software maintenance5,530
 4,676
Taxes, prepaid and receivable7,398
 343
Deferred professional services costs3,233
 3,098
Prepaid royalties2,813
 2,331
Other3,473
 4,116
Total prepaid expenses and other current assets$40,589
 $31,016


F-19


7. Accrued expenses and other current liabilities
6.
Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consisted of the following as of December 31, 20092012 and 2008:

    December 31,
(in thousands)  2009  2008

Accrued bonuses

  $8,699  $6,905

Accrued commissions and salaries

   3,800   3,703

Customer credit balances

   3,536   3,028

Taxes payable

   3,196   2,033

Accrued health care costs

   1,394   758

Accrued accounting and legal fees

   1,124   1,283

Other

   4,225   4,432
    

Total accrued expenses and other current liabilities

  $25,974  $22,142

2011:
(in thousands)December 31, 2012
 December 31, 2011
Taxes payable$7,607
 $3,355
Accrued commissions and salaries5,905
 6,475
Accrued bonuses11,966
 9,832
Customer credit balances4,577
 3,762
Accrued software and maintenance3,831
 174
Accrued royalties1,750
 1,418
Other10,360
 7,691
Total accrued expenses and other current liabilities$45,996
 $32,707
Index to Financial Statements

8. Deferred revenue
Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

7.Deferred revenue

Deferred revenue consisted of the following as of December 31, 20092012 and 2008:

    December 31, 
(in thousands)  2009  2008 

Maintenance

  $76,651  $70,616 

Subscriptions

   31,130   23,588 

Services

   26,019   24,291 

License fees and other

   1,784   1,145 
     

Total deferred revenue

   135,584   119,640 

Less: Long-term portion of deferred revenue

   (6,172)   (5,838) 
     

Current portion of deferred revenue

  $129,412  $113,802 

8.Debt

Revolving2011:

(in thousands)December 31, 2012
 December 31, 2011
Maintenance$81,741
 $81,913
Subscriptions65,850
 50,849
Services36,904
 29,675
License fees and other523
 1,000
Total deferred revenue185,018
 163,437
Less: Deferred revenue, net of current portion(11,119) (9,772)
Deferred revenue, current portion$173,899
 $153,665
9. Debt
Credit facility
In February 2012, we amended and restated our credit facility to a

$325.0 million five-year credit facility. The Company hascredit facility includes the following facilities: (i) a five-year $75.0 milliondollar and a designated currency revolving credit facility which expires July 2012. Underwith sublimits for letters of credit and swingline loans, and (ii) a delayed draw term loan. The credit facility is secured by the termsstock and limited liability company interests of certain subsidiaries that were pledged as part of the credit agreement, the Company may elect not more than twice over the term of the agreement to increase the amount availableclosing. Amounts outstanding under the facility for an aggregate amount of up to $50.0 million, subject to certain terms and conditions. In June 2008, the Company exercised one of its options and increased the credit facility by $15.0 million to an aggregate available amount of $90.0 million. The revolving credit facility iswill be guaranteed by theour material domestic subsidiaries, and is collateralizedif any. In connection with closing the stock of all of the Company’s subsidiaries. At December 31, 2009, there were no outstanding borrowingsConvio acquisition, we designated Convio as a material domestic subsidiary under the credit facility.

As a material domestic subsidiary, Convio guarantees amounts outstanding under the credit facility and pledges certain stock of its subsidiaries.

Amounts borrowed under the dollar tranche revolving credit loans and delayed draw term loans under the credit facility bear interest at a rate per annum equal to, at our option, (a) a base rate equal to the Company’s option, at a variable rate based on (a) the higherhighest of (i) the prime rate, (ii) federal funds rate plus 0.50% and (iii) one month LIBOR plus 1% (Base Rate), in addition to a margin of 0.25% to 1.25% (Base Rate Loans), or (b) the LIBOR rate plus a margin of up1.25% to 0.5%2.25% (LIBOR Loans). Swingline loans bear interest at a rate per annum equal to the Base Rate plus a margin of 0.25% to 1.25% or federal fundssuch other rate agreed to between the Swingline lender and us. Designated currency tranche revolving credit loans bear interest at a rate per annum equal to the LIBOR rate plus a margin of 0.5%1.25% to 1.0% (Base Rate Loans) or (b) LIBOR plus a margin of 1.0% to 1.5% (LIBOR Loans)2.25%. The exact amount of any margin depends on the nature of the loan and theour leverage ratio at the time of the borrowing. The Companyratio.
We also payspay a quarterly commitment fee on the unused portion of the revolving credit facility equalfrom 0.20% to 0.2%, 0.25% or 0.3%0.35% per annum, depending on the Company’sour leverage ratio.

At December 31, 2012, the commitment fee was 0.35%.


F-20
Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements (continued)

Under the credit facility, the Company haswe have the ability to choose either Base Rate Loans or LIBOR Loans. Base rateRate borrowings mature in July 2012.February 2017. LIBOR Loans can be one, two, three or six month maturities (or, if agreed to by the applicable lenders, nine or twelve months), and the Company has the ability to extend the maturity of these loans by rolling them at their maturityrollover automatically, if we take no other action, into new loans with the same or longer maturities. The Company evaluatesBase Rate Loans. We evaluate the classification of itsour debt based on the maturityrequired annual maturities of individual borrowings and any roll-over of borrowings subsequent to the balance sheet date, but prior to issuance of theour credit facility.
The credit facility includes financial statements.

Deferred financing costs

Amortization expense for deferred financing costs was $0.1 million for each of the years ended December 31, 2009, 2008 and 2007. A portion of the deferred financing costs amortized in 2007 was associated with the previous credit facility. The amortization of deferred financing cost recognized in 2009, 2008 and 2007 includes the amortization of costcovenants related to the revolvingconsolidated leverage ratio and consolidated interest coverage ratio, as well as restrictions on the maximum amount of annual capital expenditures, our ability to declare and pay dividends and our ability to repurchase shares of our common stock. At December 31, 2012, we were in compliance with all debt covenants under the credit facility.

The following table summarizes our debt as of December 31, 2012. We had no borrowings outstanding as of December 31, 2011. The effective interest rate includes our interest cost incurred and the effect of interest rate swap agreements.
 Debt balance at
 Effective interest rate at
(in thousands, except percentages)December 31, 2012
 December 31, 2012
Credit facility:   
Revolving credit loans$123,000
 2.68%
Term loans92,500
 3.14%
Total debt215,500
 2.88%
Less: Debt, current portion10,000
 3.14%
Debt, net of current portion$205,500
 2.86%
We believe the carrying amount of our credit facility approximates its fair value at December 31, 2012, due to the variable rate nature of the debt. As LIBOR rates are observable at commonly quoted intervals, it is classified within Level 2 of the fair value hierarchy.
As of December 31, 2012, the required annual maturities related to our credit facility were as follows:
Year ending December 31,
(in thousands)
Annual maturities
2013$10,000
201413,750
201515,000
201615,000
2017161,750
Thereafter—
Total required maturities$215,500
Deferred financing costs
In connection with our credit facility entered into in 2007 and additional feesFebruary 2012, we paid in June 2008 to exercise$2.4 million of financing costs, which is being amortized over the Company’s option to increaseterm of the available borrowings under the creditnew facility. As of December 31, 20092012 and 2008,December 31, 2011, deferred financing costs totaling $0.2$2.5 million and $0.3$0.8 million, respectively, are included in other assets on the consolidated balance sheet.

Index
10. Derivative instruments
We use derivative instruments to Financial Statementsmanage interest rate risk. In May 2012, we entered into two interest rate swap agreements which effectively convert portions of our variable rate debt under our credit facility to a fixed rate for the terms of the swap agreements. The aggregate notional value of the swap agreements was $150.0 million with effective dates beginning in May 2012 through January 2017. We designated the swap agreements as cash flow hedges at the inception of the contracts.

F-21
Table of Contents


Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

statements (continued)


Note payable

As a resultThe fair values of the acquisitionour derivative instruments as of Kintera, the Company assumed a note payable that Kintera had executed on December 1, 2007 in the amount31, 2012, were as follows:

 December 31, 2012 
 Liabilities 
(in thousands)Balance Sheet Location Fair Value
Derivative instruments designated as hedging instruments:   
Interest rate swapsOther liabilities $1,296
Total derivative instruments designated as hedging instruments  $1,296
We did not have derivative instruments as of $3.2 million for the purchase of computer equipment.December 31, 2011. The note is collateralized by the underlying computer equipment, bears interest at a rate of 11.34% and has a maturity date of November 30, 2010. The Company recorded the note at its fair value as of the acquisition date,our interest rate swaps was based on model-driven valuations using LIBOR rates, which resulted in an increaseare observable at commonly quoted intervals. Accordingly, our interest rate swaps are classified within Level 2 of $113,000 in the carrying value. Payments of principal and interest totaling $1.2 million are due in 2010. As of December 31, 2009, the note payable balance is classified as current. Based on the short-term nature of the note payable at December 31, 2009, the Company has determined that the fair value hierarchy.
The effects of this note payable approximates its carrying value.

9.derivative instruments in cash flow hedging relationships for the year ended December 31, 2012, were as follows:
 Loss recognized in accumulated other comprehensive loss
 Location of loss reclassified from accumulated other comprehensive loss into income Loss reclassified from accumulated other comprehensive loss into income
 December 31,
  Year ended December 31,
(in thousands)2012
  2012
Interest rate swaps$(1,296) Interest expense $(466)
The tax benefit allocated to the loss recognized in accumulated other comprehensive loss was $0.5 million for the year ended December 31, 2012. There was no ineffective portion of our interest swaps during the year ended December 31, 2012.
11. Commitments and contingencies

Leases and related party transactions

The Company leases itscontingencies

Leases
We lease our headquarters facility from Duck Pond Creek, LLC. Two current executive officers of the Company each haveunder a 4% ownership interest in Duck Pond Creek, LLC. The15-year lease agreement which was entered into in October 2008, and has a term of 15 years with two five-year renewal options by the Company.options. The current annual base rent of the lease is $3.6$3.9 million payable in equal monthly installments. The base rent escalates annually at a rate equal to the change in the consumer price index, as defined in the agreement, but not to exceed 5.5% in any year. In addition, under the terms of the lease, the lessor will reimburse the Companyus an aggregate amount of $4.0$4.0 million for leasehold improvements, which will be recorded as a reduction to rent expense ratably over the term of the lease. During each of the years ended December 31, 20092012, 2011, and 2008,2010, rent expense was reduced by $0.3$0.3 million and $0.1 million, respectively, related to this lease provision. There were no such amounts recorded during the year ended December 31, 2007 since this lease provision became effective under renegotiated lease terms in October 2008. The $4.0$4.0 million leasehold improvement allowance has been included in the table of operating lease commitments below as a reduction in the Company’sour lease commitments ratably over the then remaining life of the lease from October 2008. The timing of the reimbursements for the actual leasehold improvements may vary from the amount reflected in the table below.

In our acquisition of Convio, we assumed a lease for office space in Austin, Texas which terminates on September 30, 2023, and has twofive-year renewal options. Under the terms of the lease, we will increase our leased space by approximately 20,000 square feet on July 31, 2016. The current annual base rent of the lease is $2.1 million. The terms of the agreement include a rent holiday during the first year and base rent that escalates annually thereafter between 2% and 4%. The related rent expense is recorded on a straight-line basis over the length of the lease term. In addition, we are entitled to an allowance of approximately $3.3 million from the lessor for leasehold improvements, allocated among the existing and new expansion premises. We have a standby letter of credit for a security deposit for this lease of $2.0 million.
Additionally, the Company haswe have subleased a portion of its headquarters facilityour facilities under various agreements extending through 2011.2014. Under these agreements, rent expense was reduced by $0.2$0.3 million $0.4 in the year ended December 31, 2012 and by $0.4 million and $0.4 million for in each the years ended December 31, 2009, 20082011 and 2007,2010, respectively. The operating lease commitments in the table belowWe have been reduced by minimum aggregate sublease commitments of $0.2 million and $0.1 million during 2010 and 2011, respectively. No minimum aggregate sublease commitments exist after 2011. The Company has also received, and expectsexpect to receive through 2012,2023, quarterly South Carolina state incentive payments as a result of locating itsour headquarters facility in Berkeley County, South Carolina. These amounts are recorded as a reduction of rent expense and were $1.7$2.2 million $1.8, $2.3 million and $1.9$2.0 million for the years

F-22
Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements (continued)

ended December 31, 2012, 2011 and 2010, respectively. Total rent expense was $7.6 million, $4.7 million and $5.4 million for the years ended December 31, 2009, 20082012, 2011 and 2007,2010, respectively.

Additionally, the Company leaseswe lease various office space and equipment under operating leases. The CompanyWe also hashave various non-cancelable capital leases for computer equipment and furniture.

Index to Financial Statements

furniture that are not significant.

Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

As of December 31, 2009,2012, the future minimum lease commitments related to lease agreements, net of related sublease commitments and lease incentives, were as follows:

Years ending December 31,

(in thousands)

  Operating
leases		  Capital
leases

2010

  $6,278  $174

2011

   5,860   40

2012

   5,337   2

2013

   4,309   —  

2014 and thereafter

   39,931   —  
    

Total minimum lease payments

  $61,715   216

Less: portion representing interest

     13
      

Present value of net minimum lease payments

     203

Less: current maturities

     163
      

Long-term maturities

      $40

Year ended December 31,Operating
(in thousands)leases
2013$10,278
20149,518
20158,339
20167,322
20177,336
Thereafter40,925
Total minimum lease payments$83,718
Other commitments

The Company utilizes

We utilize third-party relationships in conjunction with itsour products and services, with contractual arrangements varying in length from one to three years. In somecertain cases, these arrangements require a minimum annual purchase commitment. TheAs of December 31, 2012, the remaining aggregate minimum purchase commitment under these arrangements is approximately $3.4$4.5 million through 2012. The Company2015. We incurred expense under these arrangements of $2.4$1.3 million $1.6, $3.2 million and $0.8$1.7 million for the years ended December 31, 2009, 20082012, 2011 and 2007,2010, respectively.

Legal contingencies

The Company is

We are subject to legal proceedings and claims that arise in the ordinary course of business. The Company recordsWe record an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company doesWe do not believe the amount of potential liability with respect to these actions will have a material adverse effect upon the Company’sour consolidated financial position, results of operations or cash flows.

Guarantees and indemnification obligations

The Company enters

We enter into agreements in the ordinary course of business with, among others, customers, vendors and service providers. Pursuant to certain of these agreements the Company haswe have agreed to indemnify the other party for certain matters, such as property damage, personal injury, acts or omissions of the Company,ours, or itsour employees, agents or representatives, or third-party claims alleging that the activities of its contractual partner pursuant to the contract infringe a patent, trademark or copyright of such third party.

The Company assesses

We assess the fair value of itsour liability on the above indemnities to be immaterial based on historical experience and information known at December 31, 2009.

10.Income taxes

The Company files2012.

12. Income taxes
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. We historically made distributions to our stockholders to cover the stockholders' anticipated tax liability. In connection with our 1999 recapitalization, we converted our U.S. taxable status from an S corporation to a C corporation and, accordingly, since October 14, 1999, have been subject to federal and state income taxes. We file income tax returns in the U.S. for federal and various state jurisdictions andas well as in foreign jurisdictions including Canada, United Kingdom, Australia and the Netherlands. The Company isWe are generally subject to U.S. federal income tax examination for calendar tax years 20052009 through 2008 and2011 as well as state and foreign income tax examinationexaminations for various years depending on statutes of limitations of those jurisdictions.


F-23
Index to Financial StatementsTable of Contents


Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

statements (continued)


The following summarizes the components of income tax expense:

    Years ended December 31,
(in thousands)  2009  2008  2007

Current taxes:

      

U.S. Federal

  $3,139  $6,862  $5,517

U.S. State and local

   1,359   1,758   525

International

   391   359   448
    

Total current taxes

   4,889   8,979   6,490

Deferred taxes:

      

U.S. Federal

   11,167   6,391   11,120

U.S. State and local

   1,184   959   2,219
    

Total deferred taxes

   12,351   7,350   13,339
    

Total income tax provision

  $17,240  $16,329  $19,829


  Year ended December 31, 
(in thousands)2012
 2011
 2010
Current taxes:     
U.S. Federal$(1,764) $3,434
 $4,130
U.S. State and local410
 1,030
 1,228
International511
 40
 78
Total current taxes(843) 4,504
 5,436
Deferred taxes:     
U.S. Federal8,943
 11,943
 10,077
U.S. State and local(796) 1,536
 1,262
International(562) 54
 (26)
Total deferred taxes7,585
 13,533
 11,313
Total income tax provision$6,742
 $18,037
 $16,749

The following summarizes the components of income before provision for income taxes:

    Years ended December 31,
(in thousands)  2009  2008  2007

U.S.

  $43,991  $44,828  $50,169

International

   1,696   1,379   1,384
    

Income before provision for income taxes

  $45,687  $46,207  $51,553


  Year ended December 31, 
(in thousands)2012
 2011
 2010
U.S.$16,793
 $50,946
 $45,700
International(3,468) 311
 236
Income before provision for income taxes$13,325
 $51,257
 $45,936

A reconciliation between the effect of applying the federal statutory rate and the effective income tax rate used to calculate the Company’sour income tax provision is as follows:

    Years ended December 31, 
    2009  2008  2007 

Federal statutory rate

  35.0%  35.0%  35.0% 

Effect of:

    

State income taxes, net of federal benefit

  4.2   4.2   3.9  

Change in state income tax rate applied to deferred tax asset

  —     (0.8)  —    

Disqualifying dispositions of incentive stock options

  (0.2)  (0.8)  (0.3) 

State credits, net of federal benefit

  (2.1)  (2.8)  (1.4) 

Change in valuation reserve

  3.4   2.7   1.6  

Federal credits generated

  (3.0)  (0.9)  —    

Other

  0.4   (1.3)  (0.3) 
    

Income tax provision effective rate

  37.7%  35.3%  38.5% 

Income


  Year ended December 31, 
  2012
 2011
 2010
Federal statutory rate35.0 % 35.0 % 35.0 %
Effect of:     
State income taxes, net of federal benefit8.3
 4.2
 4.3
Change in state income tax rate applied to deferred tax asset(2.2) 0.6
 —
Fixed assets(7.6) —
 —
Unrecognized tax benefit2.9
 (0.3) 0.4
State credits, net of federal benefit(1.7) (2.2) (2.4)
Change in valuation reserve4.1
 0.7
 2.4
Federal credits generated—
 (2.7) (3.2)
Foreign tax rate2.3
 —
 —
Acquisition costs10.8
 0.6
 1.0
Foreign tax credits(3.0) —
 —
Other1.7
 (0.7) (1.0)
Income tax provision effective rate50.6 % 35.2 % 36.5 %


F-24
Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements (continued)

We recorded net excess tax benefit of $2.3 million, expense of $1.1 million and benefit of $4.9 million that werebenefits attributable to employee stock option transactionsand stock appreciation right exercises and restricted stock vesting were recordedof $0.1 million, $0.2 million and $2.7 million in stockholders’ equity in 2009, 2008 and 2007, respectively.

The amount of tax allocated to the translation adjustment recorded in accumulated other comprehensive income was a benefit of $0.4 million, an expense of $0.2 million and a benefit of $0.1 million forduring the years ended December 31, 2009, 20082012, 2011 and 2007,2010, respectively.

Index We were unable to Financial Statements

Blackbaud, Inc.

Notesrecognize additional excess tax benefits of stock-based compensation deductions generated during 2012 because the deductions did not reduce income tax payable after considering our net operating loss carryforwards. Although not recognized for financial reporting purposes, this unrecognized tax benefit is available to consolidated financial statements—(Continued)reduce future taxable income.


The significant components of the Company’sour deferred tax assetassets and liabilities were as follows:

    December 31, 
(in thousands)  2009  2008 

Deferred tax assets relating to:

   

Research and other tax credits

  $10,391   $9,859  

Federal and state net operating loss carryforwards

   19,804    23,007  

Allowance for doubtful accounts

   1,294    1,080  

Deferred revenue

   5,911    5,892  

Intangible assets

   35,985    42,596  

Effect of expensing nonqualified stock options and restricted stock

   8,113    7,474  

Other

   2,594    2,092  
     

Total deferred tax assets

   84,092    92,000  

Deferred tax liabilities relating to:

   

Intangible assets

   (8,345)   (8,608) 

Fixed assets

   (3,090)   (2,000) 

Other

   (3,365)   (1,907) 
     

Total deferred tax liabilities

   (14,800)   (12,515) 

Valuation allowance

   (7,994)   (7,865) 
     

Net deferred tax asset

  $61,298   $71,620  


  December 31, 
(in thousands)2012
 2011
Deferred tax assets relating to:   
Federal and state net operating loss carryforwards$30,839
 $16,842
State and foreign tax credits15,438
 11,148
Intangible assets13,706
 20,969
Effect of expensing nonqualified stock options and restricted stock7,634
 8,142
Accrued bonuses4,361
 3,084
Deferred revenue4,342
 3,343
Allowance for doubtful accounts3,161
 1,456
Other8,321
 2,511
Total deferred tax assets87,802
 67,495
Deferred tax liabilities relating to:   
Intangible assets(65,882) (8,407)
Fixed assets(12,643) (9,132)
Other(7,318) (8,950)
Total deferred tax liabilities(85,843) (26,489)
Valuation allowance(10,651) (10,079)
Net deferred tax asset (liabilities)$(8,692) $30,927

As of December 31, 2009, the Company had a2012, our federal, foreign and state net operating loss carryforwards for income tax purposes were approximately $77.3 million, $3.6 million and $57.1 million, respectively. The federal and state net operating loss carryforwards are subject to various Internal Revenue Code limitations and applicable state tax laws. If not utilized, the federal net operating loss carryforwards will begin to expire in 2033 and the state net operating loss carryforwards will expire over various periods beginning in 2017. A portion of the foreign and state net operating loss carryforwards have a valuation reserve due to management's uncertainty regarding the future ability to use such carryforwards. Our federal and state tax credit carryover ofcarryforwards for income tax purposes were approximately $1.6$3.6 million which will expire between 2014 and 2018. As of December 31, 2009 the Company had state tax credits of approximately $8.8$11.6 million, net of federal tax, whichrespectively. If not utilized, the federal tax credit carryforwards will begin to expire between 2010in 2033 and 2024, if unused. Thesethe state tax credit carryforwards will begin to expire in 2013. The state tax credits had a valuation reserve of approximately $6.4$8.5 million, net of federal tax, as of December 31, 2009.

The Company acquired all of its federal and state net operating loss carryforwards in business acquisitions. At December 31, 2009, the Company had deferred tax assets of $17.3 million for federal net operating loss carryforwards and $2.5 million for state net operating loss carryforwards. These deferred assets pertain to net operating loss carryforwards of approximately $49.6 million and $47.9 million for federal and state purposes, respectively, at December 31, 2009. These net operating losses carryforwards expire during various tax years through 2029. As a result of the Kintera acquisition, Kintera underwent a change in ownership under Section 382 of the Internal Revenue Code (IRC Sec. 382) on July 8, 2008. On August 1, 2007, as a result of the eTapestry acquisition, eTapestry also underwent a change in ownership under IRC Sec. 382. In general, IRC Sec. 382 places annual limitations on the use of certain tax attributes such net operating losses and tax credit carryovers in existence at the ownership change date. These limitations restrict the amount of the aforementioned net operating loss carryforwards that are available to offset taxable income each year. A portion of the state net operating loss carryforward has a valuation reserve due to management’s uncertainty regarding the future ability to use such carryforwards.

Index to Financial Statements

2012.

Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

The following table illustrates the change in the Company’sour deferred tax asset valuation allowance.

(in thousands)  Balance at
beginning
of year		  Acquisition
related
change		  

Charges to

expense

  Balance at
end of
year

Years ended December 31,

       

2009

  $7,865  $(1,378)  $1,507  $7,994

2008

   3,891   2,741    1,233   7,865

2007

   3,147   —      744   3,891

allowance:


(in thousands)
Balance
at beginning
of year

 
Acquisition
related
change

 
Charges to
expense

 
Balance at
end of
year

Years ended December 31,   
2012$10,079
 $286
 $286
 $10,651
20119,614
 —
 465
 10,079
20107,994
 75
 1,545
 9,614


F-25
Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements (continued)

The following table sets forth the change to the Company’sour unrecognized tax benefit for the year ended December 31, 2009, 20082012, 2011 and 2007:

    December 31, 
(in thousands)  2009  2008  2007 

Balance at beginning of year

  $346   $629  $642 

Increases from prior period positions

   427    —      13 

Decreases from prior period positions

   —      —      (12) 

Increases from current period positions

   485    23    8 

Lapse of statute of limitations

   (27)   (306)   —    

Decreases relating to settlements with taxing authorities

   —      —      (22) 
     

Balance at end of year

  $1,231  $346  $629 

2010:

  December 31, 
(in thousands)2012
 2011
 2010
Balance at beginning of year$1,777
 $1,414
 $1,231
Increases from prior period positions2,766
 87
 126
Decreases in prior year position(93) (9) —
Increases from current period positions—
 285
 297
Lapse of statute of limitations(604) —
 (240)
Balance at end of year$3,846
 $1,777
 $1,414

The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective tax rate was $1.1$3.8 million at December 31, 2009. The Company recognizes2012. We recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. Tax expense for 2009 was increased by $0.9 million for changes in liabilities, penalties and accrued interest related to uncertain tax positions. Tax expense for 2008 was decreased by $0.3 million and for 2007 was increased by $25,000, for changes in liabilities, penalties and accrued interest related to uncertain tax positions. The total amount of accrued interest and penalties included in the consolidated balance sheet as of December 31, 20092012 and 20082011 was $0.2 million.$0.7 million and $0.2 million, respectively. The total amount of interest and penalties included in the consolidated statementstatements of operationscomprehensive income as a decrease in income tax expense for 20082012 and 2010 was $0.1 million;$0.3 million and $0.2 million, respectively. The total amount of interest and penalties were immaterialincluded in 2009.

The Company hasthe consolidated statements of comprehensive income as an increase in income tax expense for 2011 was $0.1 million.

We have taken federal tax positions in certain taxing jurisdictions for which it is reasonably possible that the total amounts of unrecognized tax benefits might significantly decrease within the next twelve months. TheThis possible decrease could result from the finalization of state income tax reviews and the expiration of statutes of limitations. These positions relate to state nexus issues. The reasonably possible decrease is $0.3 million.

It continuesapproximates $1.0 million at December 31, 2012.

We concluded that a portion of the undistributed earnings of our foreign subsidiaries, as related solely to beCanada, are not permanently reinvested and as a result we recorded a tax liability and applicable foreign tax credits for the Company’s intention to indefinitely reinvest undistributedeffect of repatriating those foreign earnings. For the remaining undistributed earnings, we concluded that these earnings would be permanently reinvested in the local jurisdictions and not repatriated to the United States. Accordingly, no deferred tax liability has been recorded in connection with thewe have not provided for U.S. federal and foreign withholding taxes on those undistributed earnings of our foreign earnings.subsidiaries. It is not practicable for the Company to determineestimate the amount that might be payable if some or all of the unrecognized deferred tax liability for temporary differences relatedsuch earnings were to investments in foreign subsidiaries.

be remitted.
Index to Financial Statements

Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

11.Stock-based compensation

13. Stock-based compensation
Employee stock-based compensation plans

Under the Blackbaud, Inc. 2008 Equity Incentive Plan (2008 Equity Plan), the Companywe may grant incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards and other stock awards to eligible employees, directors and consultants. The Company maintainsWe maintain other stock based compensation plans including the 2004 Stock Plan and the 2001 Stock Option Plan, under which no additional grants may be made, and the 2009 Equity Compensation Plan for Employees from Acquired Companies, under which the Companywe may grant shares of its common stock to employees pursuant to employment contracts or other arrangements entered into in connection with past and future acquisitions.
In connection with the acquisition of Kintera onin July 8, 2008, the Company also maintainswe maintain the Kintera, Inc. 2000 Stock Option Plan, as amended (Kintera 2000 Plan) and Kintera, Inc. Amended and Restated 2003 Equity Incentive Plan, as amended (Kintera 2003 Plan), that itwhich we assumed upon the acquisition of Kintera. The Company’sIn connection with the acquisition of Convio in May 2012, we maintain the Convio, Inc. 1999 Stock Option/Stock Issuance Plan, as amended (Convio 1999 Plan) and Convio, Inc. 2009 Stock Incentive Plan, as amended (Convio 2009 Plan), which we assumed upon the acquisition of Convio. Our Compensation Committee of the Board of Directors administers theall of these plans and the stock-based awards are granted under terms determined by them.
The total number of authorized stock-based awards available under the Company’sour plans was 3,888,8815,993,220 as of December 31, 2009. The Company issues2012. We issue common stock from itsour pool of authorized stock upon exercise of stock options, settlement of stock appreciation rights and performance-based restricted stock units or upon granting of restricted stock.

The Company has


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Blackbaud, Inc.
Notes to consolidated financial statements (continued)

Historically, we have issued threefour types of awards under these plans: stock options, restricted stock awards, performance-based restricted stock units and stock appreciation rights. The following table sets forth the number of awards outstanding for each award type as of December 31, 20092012 and 2008.

    Outstanding at
December 31,
Award type  2009  2008

Stock options

  1,091,241  1,526,855

Restricted stock

  1,206,371  1,259,909

Stock appreciation rights

  1,764,603  1,285,626

2011.

  
Outstanding at December 31, 
Award type2012
 2011
Stock options60,775
 216,848
Restricted stock awards1,203,186
 1,079,930
Restricted stock units389,913
 159,462
Stock appreciation rights2,786,828
 2,305,049
The majority of the stock-based awards granted under these plans have a 10-year contractual term. The option to purchase 800,000 shares of common stock granted on November 28, 2005, to the current Chief Executive Officer (CEO), has a 7-year7-year contractual term. Additionally, stock appreciation rights (SARs), have contractual lives of 5 or 7 years.

Index Awards granted to Financial Statements

Blackbaud, Inc.

Notesour executive officers and certain members of management are subject to consolidated financial statements—(Continued)accelerated vesting upon a change in control as defined in the employees’ retention agreement.

The Company recognizes

We recognize compensation expense associated with stock options and awards with performance or market based vesting conditions on an accelerated basis over the requisite service period of the individual grantees, which generally equals the vesting period. The Company recognizesWe recognize compensation expense associated with restricted stock awards and SARs on a straight-line basis over the requisite service period of the individual grantees, which generally equals the vesting period.

Stock-based compensation expense is allocated to expense categories on the consolidated statements of operationscomprehensive income based on where the employees’ departmental cost center.associated employee’s compensation is recorded. The following table summarizes stock-based compensation expense for the yearyears ended December 31, 2009, 20082012, 2011 and 2007.

    Years ended December 31,
(in thousands)  2009  2008  2007

Included in cost of revenue:

      

Cost of services

  $1,433  $1,442  $627

Cost of maintenance

   750   534   234

Cost of subscriptions

   387   283   274
    

Total included in cost of revenue

   2,570   2,259   1,135

Included in operating expenses:

      

Sales and marketing

   1,605   1,607   831

Research and development

   2,944   2,396   1,219

General and administrative

   5,168   5,823   3,749
    

Total included in operating expenses

   9,717   9,826   5,799
    

Total

  $12,287  $12,085  $6,934

2010.

  Year ended December 31, 
(in thousands)2012
 2011
 2010
Included in cost of revenue:     
Cost of subscriptions$860
 $571
 $392
Cost of services2,786
 1,966
 1,742
Cost of maintenance538
 741
 814
Total included in cost of revenue4,184
 3,278
 2,948
Included in operating expenses:     
Sales and marketing2,527
 1,325
 1,366
Research and development3,556
 3,039
 2,844
General and administrative8,973
 7,242
 5,901
Total included in operating expenses15,056
 11,606
 10,111
Total$19,240
 $14,884
 $13,059

The total amount of compensation cost related to non-vested awards not recognized was $29.3$43.0 million at December 31, 2009.2012. This amount will be recognized over a weighted average period of 1.9 years.

years .


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Blackbaud, Inc.
Notes to consolidated financial statements (continued)

Stock options

The following table summarizes the options outstanding vested and unvested under each of the Company’sour stock-based compensation plans as of December 31, 2009.

Plan  Date of adoption  Options
outstanding		  Options
vested		  Options
unvested		  Range of
exercise prices

2001 Stock Option Plan

  July 1, 2001   303,081  303,081  —    $5.40-$9.04

2004 Stock Plan

  March 23, 2004   758,289  758,289  —    $8.00-$16.10

Kintera 2000 Plan

  July 8, 2008(1)  6,820  6,820  —    $1.16-$19.26

Kintera 2003 Plan

  July 8, 2008(1)  23,051  18,209  4,842  $10.59-$21.38
    

Total

     1,091,241  1,086,399  4,842    
2012.
PlanDate of adoption 
Options
outstanding

 
Range of
exercise prices
2004 Stock PlanMarch 23, 2004  21,383
 $8.60-$13.05
Kintera 2003 PlanJuly 8, 2008(1)6,086
 $10.59-$19.26
Convio 1999 PlanMay 5, 2012(1)28,977
 $9.10-$15.54
Convio 2009 PlanMay 5, 2012(1)4,329
 $15.62-$18.20
Total  60,775
  
(1)In connection with the acquisitionacquisitions of Kintera the Companyand Convio, we assumed certain stock options issued and outstanding at the date of acquisition.

Index to Financial Statements

Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

A summary of outstanding stock options as of December 31, 2009,2012, and changes during the year then ended, is as follows:

Options  Share
options		  Weighted
average
exercise
price		  

Weighted
average
remaining
contractual
term

(in years)

  Aggregate
intrinsic value
(in thousands)

Outstanding at January 1, 2009

  1,526,855   $10.46    

Exercised

  (434,463)   5.77    

Forfeited

  (1,151)   12.19    
   

Outstanding at December 31, 2009

  1,091,241   $12.32  2.9  $12,338
   

Unvested and expected to vest at December 31, 2009

  4,659   $11.56  8.3  $56
   

Vested and exercisable at December 31, 2009

  1,086,399   $12.33  2.9  $12,279

Options
Share
options

 
Weighted
average
exercise
price

 
Weighted
average
remaining
contractual
term
(in years)
 
Aggregate
intrinsic value
(in thousands)

Outstanding at January 1, 2012216,848
 $15.16
    
Assumed(1)
63,439
 13.24
    
Exercised(200,082) 15.73
    
Forfeited(19,205) 15.79
    
Expired(225) 10.92
    
Outstanding at December 31, 201260,775
 $11.09
 4.7 $713
Unvested and expected to vest at December 31, 20129,996
 $12.54
 6.6 $103
Vested and exercisable at December 31, 201249,986
 $10.78
 4.3 $602
(1)Stock options assumed in connection with the acquisition of Convio.
There have been no new stock option awards granted since 2005. The total intrinsic value of options exercised during the years ended December 31, 2009, 20082012, 2011 and 20072010 was $5.9$3.2 million $1.8, $3.1 million and $14.8and $9.1 million, respectively. The total fair value of options that vested during the year ended December 31, 2009, 20082012, was $0.6 million. The total fair value of options that vested during 2011 and 20072010 was $2.3 million, $2.8 million and $3.3 million, respectively.not material. All outstanding options granted by the Company had a fair market value assigned at the grant date based on the use of the Black-Scholes option pricing model. TheSignificant assumptions used in the valuation ofBlack-Scholes option pricing model for options are the sameassumed from Convio in May 2012 were as described in thefollows:
May 2012
Volatility32% to 39%
Dividend yield1.8%
Risk-free interest rate0.0% to 0.4%
Expected option life in years0.04 to 3.26
Restricted stock appreciation rights section below.

Thereawards

We have been no new stock option awards granted since 2005.

Restricted stock

The Company has also granted shares of common stock subject to certain restrictions under the 2008 Equity Plan and the 2004 Stock Plan. Restricted stock awards granted to employees vest in equal annual installments over four years from the grant date. Restricted stock awards granted to non-employee directors vestsvest after one year from the date of grant or, if earlier, immediately prior to the next annual election of directors, provided the non-employee director is serving as a director at that time. Restricted stock grantedThe fair


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Blackbaud, Inc.
Notes to the Company’s executive officers and certain members of management are subject to accelerated vesting upon a change in control of the Company as defined in the employees’ retention agreement. The fair consolidated financial statements (continued)

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 awards have the right to vote such shares and receive dividends.
A summary of unvested restricted stock awards as of December 31, 2012, and changes during the year then ended, is as follows:
Unvested restricted stock awards
Restricted
stock awards

 
Weighted
average
grant-date
fair value

Unvested at January 1, 20121,079,930
 $25.22
Granted687,652
 22.77
Vested(421,636) 22.82
Forfeited(142,760) 26.00
Unvested at December 31, 20121,203,186
 $24.58
As of December 31, 2012, the number and intrinsic value of restricted stock awards expected to vest was 1,144,693 and $26.1 million, respectively. The total fair value of restricted stock awards that vested during the years ended December 31, 2012, 2011 and 2010 was $9.6 million, $9.9 million and $9.0 million, respectively. The weighted average grant-date fair value of restricted stock awards granted during the years ended December 31, 2011 and 2010 was $27.98 and $26.61, respectively.
Restricted stock units
We have also granted restricted stock units subject to certain restrictions under the 2008 Equity Plan and assumed restricted stock units in connection with the Convio acquisition. Restricted stock units granted to employees vest in equal annual installments generally over three years from the grant date. We have also granted restricted stock units for which vesting is subject to meeting certain performance and/or market conditions. The fair market value of the stock at the time of the grant is amortized to expense on a straight-line basis over the period of vesting except for awards with market or performance conditions which are amortized on an accelerated basis over the period of vesting. Income tax benefits resulting from the vesting of restricted stock units are recognized in the period the restrictions lapseunit is exercised 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. During 2009 and 2008, the Company purchased 170,729 and 106,446 shares, respectively, from restricted stockholders upon lapsing of stock restrictions in order for the holders to satisfy personal tax liabilities.

Index to Financial Statements

Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

A summary of unvested restricted stock units as of December 31, 2009, and changes during the year then ended,2012 is as follows:

Unvested restricted stock  Restricted
stock		  Weighted
average
grant-date
fair value

Unvested at January 1, 2009

  1,259,909  $19.16

Granted

  492,964   21.36

Vested

  (492,432)   18.81

Forfeited

  (54,070)   20.63
   

Unvested at December 31, 2009

  1,206,371  $20.20

Unvested restricted stock units
Restricted
stock units

 
Weighted
average
grant-date
fair value

Unvested at January 1, 2012159,462
 $25.60
Granted30,738
 21.41
Assumed(1)
331,196
 28.84
Forfeited(53,976) 27.84
Vested(77,507) 27.59
Unvested at December 31, 2012389,913
 $27.55
(1)Restricted stock units assumed in connection with the acquisition of Convio.

As of December 31, 2009,2012, the number and intrinsic value of restricted awardsstock units expected to vest was 1,147,662376,306 and $27.1$8.6 million, respectively. The totalweighted average grant date fair value of restricted stock that vested duringunits granted for the years ended December 31, 2009, 20082011 and 20072010 was $9.3 million, $6.9 million$26.68 and $4.4 million,$22.79, respectively. The weighted average grant-date fair value of restricted stock granted during the years ended December 31, 2009, 2008 and 2007 was $21.36, $14.89 and $25.80, respectively.

Stock appreciation rights

The Company has

We have granted SARs under the 2008 Equity Plan and the 2004 Stock Plan to certain members of management. The SARs will be settled in stock at the time of exercise and vest three and four years from the date of grant subject to the recipient’s continued employment with the Company. SARs granted to the Company’s executive officers and certain members of management are subject to accelerated vesting upon a change in control of the Company as defined in the employees’ retention agreement.us. The number of shares issued upon the exercise of the SARs is calculated as the difference between the

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Blackbaud, Inc.
Notes to consolidated financial statements (continued)

share price of the Company’sour stock on the date of exercise and the date of grant multiplied by the number of SARs divided by the share price on the exercise date. During 2009, the Company purchased 12,146 shares from SAR holders upon the exercise of SARs in order for the holders to satisfy personal tax liabilities.

A summary of SARs as of December 31, 2009,2012, and changes during the year then ended, is as follows:

Stock appreciation rights  Stock
appreciation
rights		  Weighted
average
exercise
price		  

Weighted
average
remaining
contractual
term

(in years)

  

Aggregate
intrinsic value

(in thousands)

Outstanding at January 1, 2009

  1,285,626   $21.40    

Granted

  569,064    22.34    

Exercised

  (17,116)   12.40    

Forfeited

  (72,971)   21.42    
   

Outstanding at December 31, 2009

  1,764,603   $21.79  5.4  $5,090
   

Unvested and expected to vest at December 31, 2009

  1,221,112   $20.94  5.9  $4,004
   

Vested and exercisable at December 31, 2009

  507,136   $23.94  4.1  $961

Index to Financial Statements

Stock appreciation rights
Stock
appreciation
rights

 
Weighted
average
exercise
price

 
Weighted
average
remaining
contractual
term
(in  years)
 
Aggregate
intrinsic value
(in thousands)

Outstanding at January 1, 20122,305,049
 $24.47
    
Granted990,007
 22.66
    
Exercised(246,383) 21.42
    
Forfeited(213,100) 26.91
    
Expired(48,745) $27.00
    
Outstanding at December 31, 20122,786,828
 $23.87
 5.2 $2,160
Unvested and expected to vest at December 31, 20121,545,181
 $24.21
 6.2 $565
Vested and exercisable at December 31, 20121,194,294
 $23.39
 3.8 $1,581
Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

The total intrinsic value of SARs exercised during the year ended December 31, 20092012, 2011 and 2010 was $0.2 million. There were no SAR exercises prior to 2009.$2.4 million, $2.2 million and $1.4 million, respectively. The total fair value of SARs that vested during the year ended December 31, 20092012, 2011 and 20082010 was $3.1$3.9 million, $3.6 million and $1.1$3.6 million, respectively. Prior to 2008, there were no vested SARs. The weighted average grant date fair value of SARs granted for the years ended December 31, 2009, 20082012, 2011 and 20072010 was $7.38, $5.02$6.36, $8.10 and $9.17,$7.17, respectively. All outstanding SARs granted by the Company had a fair market value assigned at the grant date based on the use of the Black-Scholes option pricing model. All SARs granted with a market condition had a fair market value assigned at the grant date based on the use of a Monte Carlo simulation model. Significant assumptions used in the Black-Scholes option pricing model for SARs granted in 2009, 2008,2012, 2011 and 2007 are2010 were as follows:

    Years ended December 31,
    2009  2008  2007

Volatility

  45%  39% to 44%  42% to 46%

Dividend yield

  1.7%  1.5% to 1.7%  1.3% to 1.4%

Risk-free interest rate

  1.8%  2.10% to 3.21%  3.89% to 4.80%

Expected SAR life in years

  4   4   3 to 4   

  
Years ended December 31, 
 2012
 2011
 2010
Volatility35% to 41%
 41% to 42%
 40% to 42%
Dividend yield1.7%
 1.7% to 1.8%
 1.6% to 1.8%
Risk-free interest rate0.5% to 0.6%
 0.6% to 1.9%
 0.9% to 1.9%
Expected SAR life in years4
 4
 4
The expected volatility assumption is determined by calculatingbased on the historical volatility for a number of comparable companiesour stock and calculating the average expected volatility over the expected life of the SAR. The dividend yield is based on the adopted dividend policy in effect at the time of grant.grant and the expectation of future dividends. The risk-free interest rate is based on United States Treasury rate for a term consistent with the expected life of the SAR at the time of grant. The expected life of the SAR represents the length of time from grant until the SAR is exercised based on experience.

12.Stockholders’ equity

14. Stockholders’ equity
Preferred stock

The Company’s

Our Board of Directors may fix the relative rights and preferences of each series of preferred stock in a resolution of the Board of Directors.

Dividends

The Company’s

Our Board of Directors has adopted a dividend policy which provides for the distribution to stockholders a portion of cash generated by the Companyus that is in excess of operational needs and capital expenditures. The Company’sOur credit facility limits the amount of dividends payable and certain state laws restrict the amount of dividends distributed.


F-30


The following table provides information with respect to quarterly dividends paid on common stock during the year ended December 31, 2009:

Declaration Date  Dividend per Share  Record Date  Payable Date

February 2009

  $0.10  February 27  March 13

April 2009

  $0.10  May 28  June 15

July 2009

  $0.10  August 28  September 15

October 2009

  $0.10  November 27  December 15

On 2012.

Declaration DateDividend per Share
Record DatePayable Date
February 2012$0.12
March 5March 15
May 2012$0.12
May 25June 15
August 2012$0.12
August 28September 14
October 2012$0.12
November 28December 14
In February 4, 2010, the Company’s2013, our Board of Directors declared a first quarter dividend of $0.11$0.12 per share payable on March 15, 20092013 to stockholders of record on February 26, 2010.

Index to Financial Statements

28, 2013Blackbaud, Inc..

Notes to consolidated financial statements—(Continued)

Stock repurchase program

In May 2008, the Company’s Board of Directors approved

We have a new stock repurchase program that authorizes the Companyus to purchase up to $40.0$50.0 million of itsour outstanding shares of common stock. The prior program was terminated at that date and the remaining balance that was authorized but not used was included in the amount authorized under the new program. The new program does not have an expiration date. The shares can be purchased from time to time on the open market or in privately negotiated transactions depending upon market conditions and other factors.

The Company accounts

We account for purchases of treasury stock under the cost method. There were no shares purchased during the year ended December 31, 2009. The remaining amount available to purchase stock under the stock repurchase program was $30.8$50.0 million as of December 31, 2009.

2012Stock surrenders.

During the year ended December 31, 2009 and 2008, restricted stock and stock appreciation right holders surrendered 182,875 and 106,446 shares of common stock, totaling $3.8 million and $1.4 million, respectively, to satisfy their tax obligations due upon vesting of restricted stock and exercise of stock appreciation rights.

15. Employee profit-sharing plan
Treasury stock

The following table sets forth the changes in treasury stock for the years ended December 31, 2009 and 2008:

(in thousands, except shares)  Plan date  Shares  Amount

Balance as of December 31, 2007

    5,431,852  $85,487

Stock purchased in connection with stock repurchase program

  June 13, 2007  1,435,745   34,498

Stock purchased in connection with stock repurchase program

  May 7, 2008  520,423   9,229

Stock acquired via surrender of shares of restricted stock to the Company upon vesting for settlement of taxes

    106,446   1,380
     

Balance as of December 31, 2008

    7,494,466   130,594

Stock acquired via surrender of shares to the Company upon vesting of restricted stock or exercise of stock appreciation rights for settlement of taxes

    182,875   3,788
     

Balance as of December 31, 2009

     7,677,341  $134,382

13.Employee profit-sharing plan

The Company hasWe have a 401(k) profit-sharing plan (401K(the 401K Plan) covering substantially all employees. Employees can contribute between 1% and 30% of their salaries in 2009, 20082012, 2011 and 20072010, and the Company matches we match 50% of qualified employees’ contributions up to 6% of their salary. The 401K Plan also provides for additional employer contributions to be made at the Company’sour discretion. Total matching contributions to the 401K Plan for the years ended December 31, 2009, 20082012, 2011 and 20072010 were $3.4$4.6 million $2.2, $4.0 million and $2.4$3.5 million, respectively. There was no discretionary contribution by the Companyus to the 401K Plan in 2009, 20082012, 2011 and 2007.

2010.
16. Segment information
As of 14.
Segment information

The Company has determined that through December 31, 2009 it had six2012, our reportable segments basedwere as follows: the ECBU, the GMBU, the International Business Unit, or IBU, and Target Analytics. Following is a description of each reportable segment:

The ECBU is focused on the way that management organized operating resultsmarketing, sales, delivery and support to make operating decisionslarge and/or strategic, specifically identified prospects and customers in North America;
The GMBU is focused on marketing, sales, delivery and support to assess financial performance. Internal financial reports disaggregated certain operating information into these six reportable segments. all emerging and mid-sized prospects and customers in North America;
The

Index IBU is focused on marketing, sales, delivery and support to Financial Statements

Blackbaud, Inc.

Notesall prospects and customers outside of North America; and

Target Analytics is primarily focused on marketing, sales and delivery of analytics services to consolidated financial statements—(Continued)

Company’sall prospects and customers in North America.

Our chief operating decision maker is itsour chief executive officer, or CEO. The CEO used thereviews financial information presented in these reports to makeon an operating segment basis for the purposes of making certain operating decisions.decisions and assessing financial performance. The CEO diduses internal financial reports that provide segment revenues and operating income, excluding stock-based compensation expense, amortization expense, depreciation expense, research and development expense and certain corporate sales, marketing, general and administrative expenses. Currently, the CEO believes that the exclusion of these costs allows for a better understanding of the operating performance of the operating units and management of other operating expenses and cash needs. The CEO does not review any report presenting segment balance sheet information. The

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Blackbaud, Inc.
Notes to consolidated financial statements (continued)

We have recast our segment revenuesdisclosures for 2011 and direct controllable costs, which include salaries, related benefits, third-party contractors, data expense and classroom rentals,2010 to present the reportable segments on a consistent basis with the current year. Summarized reportable segment financial results for the years ended December 31, 2009, 20082012, 2011 and 20072010 were as follows:

(in thousands)  License
fees		  Consulting
and
education
services(1)		  Analytic
services(2)		  Maintenance  Subscriptions  Other  Total 

Year ended December 31, 2009

              

Revenue

  $25,392  $65,342  $22,492  $116,476  $72,898  $6,738  $309,338  

Direct controllable costs

   3,221   41,845   10,046   15,769   22,252   6,009   99,142  
     

Segment income

   22,171   23,497   12,446   100,707   50,646   729   210,196  

Corporate costs not allocated(3)

               21,798  

Operating expenses

               142,606  

Interest expense, net

               325  

Other income, net

               (220) 
                 

Income before provision for income taxes

                          $45,687  

Year ended December 31, 2008

              

Revenue

  $35,932  $77,687  $23,137  $107,304  $49,705  $8,730  $302,495  

Direct controllable costs

   3,070   44,392   9,881   15,334   15,677   8,279   96,633  
     

Segment income

   32,862   33,295   13,256   91,970   34,028   451   205,862  

Corporate costs not allocated(3)

               19,783  

Operating expenses

               138,678  

Interest expense, net

               1,000  

Other expense, net

               194  
                 

Income before provision for income taxes

                          $46,207  

Year ended December 31, 2007

              

Revenue

  $37,569  $73,174  $18,202  $94,602  $25,389  $8,102  $257,038  

Direct controllable costs

   2,717   38,778   8,009   13,382   7,837   7,164   77,887  
     

Segment income

   34,852   34,396   10,193   81,220   17,552   938   179,151  

Corporate costs not allocated(3)

               14,590  

Operating expenses

               112,154  

Interest expense, net

               351  

Other expense, net

               503  
                 

Income before provision for income taxes

                          $51,553  
 Year ended December 31, 
(in thousands)2012
 2011
 2010
Revenue by segment:     
ECBU$165,161
 $127,945
 $104,764
GMBU203,177
 171,999
 159,336
IBU40,068
 33,841
 27,322
Target Analytics37,453
 35,769
 33,313
Other(1)
1,560
 1,314
 1,830
Total revenue$447,419
 $370,868
 $326,565
Segment operating income(2):
     
ECBU$74,134
 $53,141
 $48,825
GMBU121,120
 101,572
 91,827
IBU5,755
 6,922
 7,883
Target Analytics17,451
 16,882
 16,472
Other(1) 
600
 1,203
 794
 219,060
 179,720
 165,801
Less:     
Corporate unallocated costs(3)
163,036
 106,330
 99,586
Stock-based compensation costs19,240
 14,884
 13,059
Amortization expense17,349
 7,578
 7,132
Interest expense (income), net5,718
 17
 (10)
Other expense (income), net392
 (346) 98
Income before provision for income taxes$13,325
 $51,257
 $45,936
(1)This segment consistsOther includes revenue and the related costs from the sale of consulting, installationproducts and implementation, document imaging, customer training and other educational services.services not directly attributable to an operating segment.
(2)ThisSegment operating income includes direct, controllable costs related to the sale of products and services by the reportable segment, consists of donor prospect researchexcept for IBU, which includes operating costs from our foreign locations such as sales, marketing, general, administrative, depreciation and data modeling services.facilities costs.
(3)VariousCorporate unallocated costs include research and development, depreciation expense, and certain corporate costs such as depreciation, facilitiessales, marketing, general and IT support costs, stock-based compensation and amortization of intangibles arising from business combinations are not allocated to the segment income as management believes that the exclusion of these costs allows the Company to better understand and manage other operating expenses and cash needs.administrative expenses.

Index to Financial Statements

Blackbaud, Inc.

Notes to consolidated financial statements—(Continued)

The Company


We also derivesderive a portion of itsour revenue from itsour foreign operations. The following table presents revenue by geographic region based on country of invoice origin and identifiable, and long-lived assets by geographic region based on the location of the assets.

(in thousands)  United States  Canada  Europe  Pacific  Total

Revenue from external customers:

          

2009

  $269,604  $13,793  $20,490  $5,451  $309,338

2008

   262,170   13,951   20,401   5,973   302,495

2007

   220,851   13,978   17,927   4,282   257,038

Property and equipment:

          

December 31, 2009

  $21,570  $83  $662  $192  $22,507

December 31, 2008

   20,738   50   419   177   21,384

(in thousands)United States
 Canada
 Europe
 Pacific
 Total Foreign
 Total
Revenue from external customers:           
2012$386,376
 $22,770
 $23,022
 $15,251
 $61,043
 $447,419
2011317,305
 21,725
 21,162
 10,676
 53,563
 370,868
2010282,450
 17,862
 19,251
 7,002
 44,115
 326,565
Property and equipment:           
December 31, 2012$47,826
 $188
 $810
 $239
 $1,237
 $49,063
December 31, 201133,255
 106
 772
 264
 1,142
 34,397

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Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements (continued)

It is impractical for the Companyus to identify itsour revenues by product category.

Effective January 1, 2010, the Company reorganized its business into three operating units to better align its organization around key customer groups. The three operating units are the General Markets Business Unit, the Enterprise Customer Business Unitcategory and the International Business Unit. The Company will reflect this reorganization in the Form 10-Q for the period during which management organizes operatingtotal assets by segment.

17. Quarterly results to make operating decisions and to assess financial performance based on the new operating unit structure.

15.Quarterly results (unaudited)

(in thousands, except per share data)  

March 31,

2009

  

June 30,

2009

  September 30,
2009		  December 31,
2009

Total revenue

  $74,741  $76,415  $79,205  $78,977

Gross profit

   44,463   45,919   48,664   49,352

Income from operations

   7,762   10,841   13,883   13,306

Income before provision for income taxes

   7,238   10,639   13,960   13,850

Net income

   4,072   6,588   9,828   7,959

Earnings per share

        

Basic

  $0.10  $0.15  $0.23  $0.18

Diluted

  $0.09  $0.15  $0.22  $0.18
(in thousands, except per share data)  

March 31,

2008

  

June 30,

2008

  September 30,
2008		  December 31,
2008

Total revenue

  $69,436  $72,502  $80,098  $80,459

Gross profit

   42,693   46,348   48,792   48,246

Income from operations

   11,254   14,594   11,500   10,053

Income before provision for income taxes

   11,260   14,529   10,964   9,454

Net income

   7,043   8,987   7,316   6,532

Earnings per share

        

Basic

  $0.16  $0.21  $0.17  $0.15

Diluted

  $0.16  $0.21  $0.17  $0.15

(unaudited)


(in thousands, except per share data)December 31, 2012
 September 30, 2012
 June 30, 2012
 March 31, 2012
Total revenue$120,051
 $122,472
 $110,190
 $94,706
Gross profit64,299
 67,344
 59,685
 53,631
Income from operations9,875
 6,185
 (1,877) 5,252
Income before provision for income taxes7,342
 4,629
 (3,446) 4,800
Net income3,270
 2,825
 (2,271) 2,759
Earnings per share       
Basic$0.07
 $0.06
 $(0.05) $0.06
Diluted$0.07
 $0.06
 $(0.05) $0.06
  
       
(in thousands, except per share data)December 31, 2011
 September 30, 2011
 June 30, 2011
 March 31, 2011
Total revenue$95,045
 $95,413
 $93,782
 $86,628
Gross profit52,971
 55,722
 54,494
 50,487
Income from operations10,599
 16,034
 14,487
 9,808
Income before provision for income taxes10,760
 15,923
 14,688
 9,886
Net income6,351
 10,214
 9,362
 7,293
Earnings per share       
Basic$0.15
 $0.23
 $0.22
 $0.17
Diluted$0.14
 $0.23
 $0.21
 $0.17
Earnings per common share are computed independently for each of the periods presented and, therefore, may not add up to the total for the year. The results of operations of acquired companies are included in the consolidated results of operations from the date of their respective acquisition as described in Note 2.

F-37

3.
18. Restructuring
During 2012, in an effort to consolidate our operating locations we decided not to renew our current lease for office space in San Diego, CA, which matures on June 30, 2013. As a result, we initiated a plan to transition most of our operations based in San Diego, CA to our Austin, TX location. We expect to incur a total of $1.3 million in before-tax restructuring costs through June 2013. Restructuring costs incurred consist primarily of costs to separate and relocate employees. For the year ended December 31, 2012, we incurred restructuring costs of $0.2 million, which were recorded in general and administrative expense.
The following table summarizes our restructuring costs as of December 31, 2012:
 Total amount expected to be incurred
 Included in accrued expenses and other current liabilities at
(in thousands)December 31, 2012
Employee severance costs$546
 $137
Employee relocation costs589
 —
Employee retention costs152
 38
 $1,287
 $175


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Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements (continued)

19. Subsequent events
In January 2013, we implemented a realignment of our workforce in response to changes in the nonprofit industry and global economy. The realignment included a reduction in workforce of approximately 130 positions. We expect to record a charge of approximately $2.5 million in 2013 relating to this reduction in workforce, consisting primarily of one-time severance and termination benefits.

F-34