September 30,				December 31,
		2010				2009
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	31,296			$	30,481
Restricted cash			-				87
Accounts receivable, net of allowances of  $2,590 and $2,470, respectively			36,812				25,898
Investments			960				3,414
Deferred taxes			6,979				6,979
Prepaid expenses and other current assets			7,125				6,355
Total current assets			83,172				73,214
Fixed assets, net			9,404				7,064
Capitalized software, net			25,230				20,734
Goodwill			215,478				215,478
Other intangibles, net			168,021				189,604
Other assets			1,911				3,247
Total assets		$	503,216			$	509,341
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY  (DEFICIT)
Current liabilities:
Accounts payable		$	5,646			$	8,870
Accrued expenses and other current liabilities			18,335				21,958
Deferred revenue			35,239				26,795
Total current liabilities			59,220				57,623
Long term debt			158,911				290,513
Deferred taxes			33,086				42,719
Other long term liabilities			3,300				4,040
Total liabilities			254,517				394,895
Commitments and contingencies (Note 13)
Redeemable convertible preferred stock:
Series A $0.001 par value, 10,000,000 shares authorized;  0 and 35,864,887 shares			-				176,478
issued and outstanding (liquidation preference of $0 and $176,604) as of September 30,
2010 and December 31, 2009, respectively
Stockholders' equity (deficit)
Common stock, $0.001 par value; 300,000,000 shares authorized; 50,256,662 and 3,152,669			50				3
shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively
Additional paid-in capital			326,797				4,302
Accumulated deficit			(78,314	)			(66,377	)
Accumulated other comprehensive income			166				40
Total stockholders' equity (deficit)			248,699				(62,032	)
Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit)		$	503,216			$	509,341

 

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

 

1

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INTRALINKS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenue		$	47,874			$	34,037			$	132,215			$	101,523
Cost of revenue			11,916				10,619				34,947				37,468
Gross profit			35,958				23,418				97,268				64,055
Operating expenses:
Product development			5,030				2,764				13,774				8,780
Sales and marketing			20,130				15,130				58,256				43,073
General and administrative			7,234				5,099				20,376				14,640
Restructuring costs (Note 12)			-				45				-				338
Total operating expenses			32,394				23,038				92,406				66,831
Income (loss) from operations			3,564				380				4,862				(2,776	)
Interest expense, net			5,862				7,405				19,998				21,430
Amortization of debt issuance costs			1,111				464				2,026				1,414
Loss on extinguishment of debt			4,974				-				4,974				-
Other (income) expense			(919	)			625				(1,229	)			10,326
Net loss before income tax			(7,464	)			(8,114	)			(20,907	)			(35,946	)
Income tax benefit			(4,951	)			(5,175	)			(8,970	)			(15,807	)
Net loss		$	(2,513	)		$	(2,939	)		$	(11,937	)		$	(20,139	)
Net loss per common share - basic and diluted		$	(0.14	)		$	(1.73	)		$	(1.94	)		$	(13.10	)
Weighted average number of shares used in
calculating net loss per common share - basic and diluted			18,056,423				1,699,094				6,153,359				1,537,136

 

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

 

 

2

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INTRALINKS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK

AND STOCKHOLDERS’ EQUITY (DEFICIT)

 (In Thousands, Except Share and per Share Data)

(unaudited)

		Series A Redeemable Convertible Preferred Stock																Common Stock
		Shares				Amount				Additional Paid-in Capital				Total				Shares				Amount				Additional Paid-in Capital				Accumulated Deficit				Accumulated Other Comprehensive Income				Total
Balance at December 31, 2009			35,864,886			$	36			$	176,442			$	176,478				3,152,669			$	3			$	4,302			$	(66,377	)		$	40			$	(62,032	)
Foreign currency translation adjustment			-				-				-				-				-				-				-				-				126				126
Net loss			-				-				-				-				-				-				-				(11,937	)			-				(11,937	)
Total comprehensive loss for the nine months ended September 30, 2010			-				-				-				-				-				-				-				-				-				(11,811	)
Forfeiture of Restricted Series A Preferred Stock			(1,617	)			-				(8	)			(8	)			-				-				-				-				-				-
Proceeds from initial public offering			-				-				-				-				11,000,000				11				132,979				-				-				132,990
Conversion of Preferred Stock to Common Stock			(35,863,269	)			(36	)			(176,560	)			(176,596	)			35,101,716				35				176,561				-				-				176,596
Proceeds from underwriters' overallotment shares			-				-				-				-				980,000				1				11,847				-				-				11,848
Offering costs paid in connection with initial public offering			-				-				-				-				-				-				(1,860	)			-				-				(1,860	)
Forfeiture of unvested Restricted Common Stock			-				-				-				-				(122,143	)			-				-				-				-				-
Exercise of stock options for Common Stock			-				-				-				-				144,420				-				240				-				-				240
Stock-based compensation expense			-				-				126				126				-				-				2,728				-				-				2,728
Balance at September 30, 2010			-			$	-			$	-			$	-				50,256,662			$	50			$	326,797			$	(78,314	)		$	166			$	248,699
The accompanying notes are an integral part of these consolidated financial statements.

 

3

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INTRALINKS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(unaudited)

 

		Nine Months Ended
		September 30,
		2010				2009
Net loss		$	(11,937	)		$	(20,139	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			12,137				8,610
Stock-based compensation expense			2,846				1,246
Amortization of intangible assets			21,583				27,721
Amortization of debt discount			116				116
Amortization of debt issuance cost			2,026				1,414
Provision for bad debts and customer credits			332				479
Gain on disposal of fixed assets, including insurance proceeds			(221	)			(4	)
Change in deferred taxes			(9,634	)			(16,252	)
(Gain) loss on interest rate swap			(1,393	)			9,666
Loss on extinguishment of debt			4,974				-
Non-cash interest expense			4,880				8,723
Changes in operating assets and liabilities:
Restricted cash			87				451
Accounts receivable			(11,219	)			(233	)
Prepaid expenses and other current assets			155				(330	)
Other assets			(2,391	)			50
Accounts payable			(3,231	)			(1,520	)
Accrued expenses and other liabilities			(1,800	)			(3,019	)
Deferred revenue			8,662				(266	)
Net cash provided by operating activities			15,972				16,713
Cash flows from investing activities:
Capital expenditures			(6,550	)			(3,745	)
Capitalized software development costs			(12,470	)			(7,801	)
Purchase of bank time deposits with maturities greater than three months			(4,320	)			-
Sale of investments and maturity of bank time deposits greater than three months			6,810				25
Net cash used in investing activities			(16,530	)			(11,521	)
Cash flows from financing activities:
Proceeds from exercise of stock options			240				1
Offering costs paid in connection with initial public offering			(1,767	)			-
Capital lease payments			(27	)			(93	)
Proceeds from initial public offering, including underwriters' overallotment			144,838				-
Repayments of outstanding principal on long-term debt			(137,778	)			(2,873	)
Prepayment penalty on PIK loan			(4,092	)			-
Net cash provided by (used in) financing activities			1,414				(2,965	)
Effect of foreign exchange rate changes on cash and cash equivalents			(41	)			(65	)
Net increase in cash and cash equivalents			815				2,162
Cash and cash equivalents at beginning of period			30,481				24,671
Cash and cash equivalents at end of period		$	31,296			$	26,833

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

 

4

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INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

1.

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of IntraLinks Holdings, Inc. (“IntraLinks Holdings”) and its subsidiaries (collectively, the “Company”). The consolidated financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP” or “U.S. GAAP”) have been condensed or omitted pursuant to such SEC rules and regulations.  The Company believes that the disclosures are adequate to make the information presented not misleading.  

 

On August 5, 2010, the SEC declared effective the Company’s registration statement on Form S-1, as amended (File No. 333-165991) (the “Registration Statement”), in connection with its initial public offering of 11,000,000 shares of Common Stock, par value $0.001 per share (“Common Stock”), at a public offering price of $13.00 per share. The offering closed on August 11, 2010. Upon consummation of the Company’s initial public offering, all outstanding shares of Series A Preferred Stock converted to 35,101,716 shares of Common Stock.  On September 9, 2010, the Company closed the sale of an additional 980,000 shares of Common Stock at the initial public offering price of $13.00 per share pursuant to the underwriters’ exercise of their over-allotment option in connection with the Company’s initial public offering that closed on August 11, 2010.

 

The financial statements contained herein should be read in conjunction with the Company’s audited consolidated financial statements and related notes to audited consolidated financial statements included in the Registration Statement.

 

In the opinion of management, the accompanying unaudited consolidated financial data contain all normal and recurring adjustments necessary to present fairly the consolidated financial condition, results of operations and changes in cash flows of the Company for the interim periods presented.  The Company’s historical results are not necessarily indicative of future operating results, and the results for the first nine months ended September 30, 2010 are not necessarily indicative of results to be expected for the full year or for any other period.

2.

Summary of Significant Accounting Policies

 

During the nine months ended September 30, 2010, there were no material changes to the Company’s significant accounting policies from those contained in the Company’s audited consolidated financial statements (and notes thereto) for the year ended December 31, 2009. 

Recently Adopted Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued two updates, now codified under Accounting Standards Update (“ASU”) 2009-16, Transfers and Servicing (Topic 860), Accounting for Transfers of Financial Assets  (“ASU 2009-16”), and ASU 2009-17,  Consolidations (Topic 810), Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities  (“ASU 2009-17”).  ASU 2009-16 amends the derecognition guidance in Accounting Standards Codification (“ASC”) 860, Transfer and Servicing, and eliminates the exemption from consolidation for qualifying special-purpose entities (‘‘QSPEs’’). As a result, a transferor will need to evaluate all existing QSPEs to determine whether they must now be consolidated in accordance with ASU 2009-17.  The amendments will significantly affect the overall consolidation analysis under ASC 810,  Consolidation  (‘‘ASC 810’’), and all entities and enterprises currently within the scope of ASC 810, as well as QSPEs that are currently excluded from the scope of ASC 810. ASU 2009-16 is effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after November 15, 2009. ASU 2009-17 is effective as of the beginning of the first fiscal year that begins after November 15, 2009. The Company adopted this guidance as of January 1, 2010. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

In September 2009, the FASB issued ASU No. 2009-12, Fair Value Measurements and Disclosures (“ASU 2009-12”).  ASU 2009-12 amended the existing guidance on arrangements with entities that calculate net value per share or its equivalent under ASC 820-10, Fair Value Measurements and Disclosures to disclose (a) the nature of restrictions on an investor’s ability to redeem its investments at the measurement date (b) any unfunded commitments (c) investment strategies of the investees, and (d) determine the basis of the nature and risks of the investment in a manner consistent with U.S. GAAP.  ASU 2009-12 is effective for the first reporting period, including interim periods, ending after December 15, 2009.  Early application is permitted in financial statements for interim or annual periods that have not been issued.  If early adoption is elected the entity is permitted to defer the adoption of the disclosure provisions until periods ending after December 15, 2009.  The Company adopted this guidance as of January 1, 2010.  The Company does not currently hold any investments in entities that calculate net asset value per share (or its equivalent).  Therefore, the adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

5

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INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). ASU 2009-13 amends the current guidance on arrangements with multiple deliverables under ASC 605-25,   Revenue Recognition — Multiple-Element Arrangements  , to (a) eliminate the separation criterion that requires entities to establish objective and reliable evidence of fair value for undelivered elements; (b) establish a selling price hierarchy to help entities allocate arrangement consideration to the separate units of account; (c) eliminate the residual allocation method which will be replaced by the relative selling price allocation method for all arrangements; and (d) significantly expand the disclosure requirements. ASU 2009-13 is effective for new or materially modified arrangements in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. If early adoption is elected and the period of adoption is not the beginning of the fiscal year, retrospective application from the beginning of the fiscal year of adoption and additional disclosure are required. Retrospective application for all prior periods presented in the financial statements is also permitted, but not required. The Company adopted this guidance as of July 1, 2010. As is disclosed in the notes to the Company’s audited consolidated financial statements for the year ended December 31, 2009, the Company has determined that the services delivered to customers under its existing arrangements represent a single unit of accounting.  Therefore, the adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures About Fair Value Measurements (‘‘ASU 2010-06’’), which amends ASC 820,  Fair Value Measurements and Disclosures , to add new requirements for disclosures about transfers into and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. ASU 2010-06 also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The ASU is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those years. Early adoption is permitted. The Company adopted the guidance related to the Level 1 and 2 disclosures during the three months ended March 31, 2010.  The adoption of the provisions related to Level 3 disclosures are not expected to have a material impact on the Company’s consolidated financial statements due to the fact that the Company does not currently have assets or liabilities measured at fair value using Level 3 inputs.  See Note 3 for further discussion.

 

3.

Fair Value Measurements

 

As of September 30, 2010, the fair values of the Company’s financial assets and liabilities are categorized as presented in the table below:

 

Assets:		Total				Level 1				Level 2				Level 3
Money market funds as cash equivalents		$	11,937			$	11,937			$	-			$	-
Bank time deposits, maturities in excess of three months		$	960			$	-			$	960			$	-
Investments in ARS(a)		$	-			$	-			$	-			$	-
Liability:
Interest rate swap(b)		$	7,034			$	-			$	7,034			$	-

(a)	At June 30, 2010 the Company held investments in auction rate securities (“ARS”) at a par value of $900.  On July 1, 2010, at the Company’s request under the Guarantee Rights Agreement, UBS AG redeemed the ARS at par value and the Company received $900.

 

 

6

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INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

(b)	Based on one-month U.S. Dollar LIBOR index, inclusive of a $221 credit valuation adjustment (see Note 8).

 

During the nine months ended September 30, 2010, the Company invested $4,320 in bank time deposits with maturity dates in excess of three months.  The Company classified these investments as trading securities, with gains and losses recorded to “Other (income) expense” within the Consolidated Statement of Operations.  The gains and losses incurred during the three and nine months ended September 30, 2010 were not material.  The fair value measurement for these bank time deposits is determined by obtaining quotes from the financial institution, as these time deposits are not traded on an active market.  Therefore, the bank time deposits are categorized as Level 2 assets, as shown in the table above.

During the three and nine months ended September 30, 2010, there were no transfers in or out of the Company’s Level 1 or Level 2 assets or liabilities, other than maturing bank time deposits, of which $3,360 matured during the three and nine months ended September 30, 2010.  Upon maturity, the bank time deposits are transferred into the Company’s money market fund.

Prior to September 30, 2010, the Company utilized Level 3 inputs to measure the ARS.  As such, the changes in fair value of the ARS and Rights during the three and nine months ended September 30, 2010 are as follows:

	ARS
		Balance at December 31, 2009	$	3,414
		Redemptions		(550)
		Gain on ARS portfolio		9
		Balance at March 31, 2010	$	2,873
		Gain on ARS portfolio		27
		Redemptions		(2,000)
		Balance at June 30, 2010	$	900
		Redemptions		(900)
		Balance at September 30, 2010	$	-
	Guarantee Rights Options
		Balance at December 31, 2009	$	36
		Loss on Rights		(9)
		Balance at March 31, 2010	$	27
		Loss on Rights		(27)
		Balance at June 30, 2010	$	-
		No further activity through September 30, 2010

4.

Goodwill and Other Intangibles

 

There were no changes in the carrying amount of goodwill through September 30, 2010.

 

7

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INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

As of September 30, 2010, Other intangibles consists of the following:

		Definite - Lived Intangible Assets
		Developed				Customer				Contractual				Trade Name				Non- Compete				Total
		Technology				Relationships				Backlog								Agreement
Acquired value at June 15, 2007		$	132,369			$	141,747			$	9,219			$	14,618			$	728			$	298,681
Amortization			(60,118	)			(36,027	)			(9,219	)			(3,096	)			(617	)			(109,077	)
Net book value at December 31, 2009		$	72,251			$	105,720			$	-			$	11,522			$	111			$	189,604
Amortization			(3,309	)			(3,544	)			-				(304	)			(61	)			(7,218	)
Net book value at March 31, 2010		$	68,942			$	102,176			$	-			$	11,218			$	50			$	182,386
Amortization			(3,309	)			(3,544	)			-				(305	)			(50	)			(7,208	)
Net book value at June 30, 2010		$	65,633			$	98,632			$	-			$	10,913			$	-			$	175,178
Amortization			(3,309	)			(3,544	)			-				(304	)			-				(7,157	)
Net book value at September 30, 2010		$	62,324			$	95,088			$	-			$	10,609			$	-			$	168,021

The Company has not identified impairment for any of the definite-lived intangible assets and no additional definite-lived intangible assets have been acquired through September 30, 2010.

 

Total intangible amortization expense is classified in each of the operating expense categories for the periods included below as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Cost of revenue		$	3,309			$	3,309			$	9,928			$	15,994
Sales and marketing			3,544				3,544				10,631				10,632
General and administrative			304				365				1,024				1,095
Total		$	7,157			$	7,218			$	21,583			$	27,721

Estimated intangible amortization expense on an annual basis for the succeeding five years is as follows:

For the year ended December 31,		Amount
2010 (remainder)		$	7,157
2011			28,630
2012			25,762
2013			23,335
2014			23,335
Thereafter			59,802
Total		$	168,021

5.

Fixed Assets and Capitalized Software

 

Fixed assets consisted of the following at:

8

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INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

		September 30,				December 31,
		2010				2009
		(unaudited)
Computer and office equipment and software		$	16,850			$	10,642
Furniture and fixtures			772				644
Leasehold improvements			1,697				1,528
Total fixed assets			19,319				12,814
Less: Accumulated depreciation and amortization			(9,915	)			(5,750	)
Fixed assets, net		$	9,404			$	7,064

The Company holds fixed assets in three locations: the United States, United Kingdom and Brazil.  No country outside of the United States holds greater than 10% of the Company’s total fixed assets.  Depreciation expense relating to fixed assets for the three and nine months ended September 30, 2010 was $1,736 and $4,163, respectively, compared to $707 and $2,728, respectively, for the three and nine months ended September 30, 2009.

 

On March 5, 2010, the Company entered into an equipment sales agreement to purchase previously leased equipment from the lessor for $3,424, thereby releasing the Company from any further commitment or obligation for continued operating lease payments.  The Company made the final payment for the purchase of the equipment in April 2010, at which time title of the assets that were previously subject to the lease arrangement passed to the Company.  The cost of the purchased equipment is being depreciated over the remaining useful lives of the respective assets.  During the nine months ended September 30, 2010 the Company recorded $1,363 of depreciation expense related to the purchased equipment.

Capitalized software consisted of the following at:
		September 30,				December 31,
		2010				2009
		(unaudited)
Capitalized software		$	42,777			$	30,307
Less: Accumulated amortization			(17,547	)			(9,573	)
Capitalize software, net		$	25,230			$	20,734

Amortization expense of capitalized software for the three and nine months ended September 30, 2010 was  $2,795  and $7,974, respectively, compared to $2,018  and $5,884 for the three and nine months ended September 30, 2009, respectively.

6.

Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consisted of the following at:

9

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INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

		September 30,				December 31,
		2010				2009
		(unaudited)
Sales commissions and bonuses		$	7,436			$	8,316
Current portion of interest rate swap			4,657				5,115
Current portion of long-term debt			1,350				2,530
Professional fees			444				275
Restructuring reserve			-				732
Current portion of capital lease obligations			-				29
Accrued interest payable			57				53
Other accrued expenses			4,391				4,908
Total accrued expenses and other current liabilities		$	18,335			$	21,958

7.

Income Taxes

The Company’s effective income tax rate for the three months ended September 30, 2010 was 66.3%, compared to 63.8% for the three months ended September 30, 2009 and 28.4% for the three months ended June 30, 2010.  The tax rate for the three months ended September 30, 2010 was impacted by discrete items, primarily a $3,261 benefit related to a change in the Company’s apportionment methodology used to determine its state tax liability, as well as $125 associated with the finalization of the Company’s 2009 tax return. Excluding discrete items, the Company’s effective income tax rate was 21.3% and 26.9% for the three and nine months ended September 30, 2010, respectively.  The change in apportionment methodology used to determine the state tax liability is a change in estimate that took place in conjunction with the filing of the Company’s 2009 state tax returns during the three months ended September 30, 2010.  The resulting income tax benefit from the decrease in the state rate was recorded as a discrete item in the third quarter ended September 30, 2010.

 

The tax rate for the three months ended September 30, 2009 was also impacted by discrete items, primarily a $3,083 benefit related to research and development tax credits, partially offset by ($872) associated with the finalization of the Company’s 2008 tax return. Excluding discrete items, the Company’s effective income tax rate was 36.5% for the three and nine months ended September 30, 2009.

 

8.

Debt and Derivative Financial Instrument

 

Debt

 

Long-term debt consisted of the following at:

10

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INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

		September 30,				December 31,
		2010				2009
		(unaudited)
First Lien Credit Agreement (“First Lien Credit Facility”)		$	127,573			$	129,765
Second Lien Credit Agreement (“Second Lien Credit Facility”):
–  Tranche B, net of discount of $652 and $768, respectively			14,736				29,232
–  Tranche C			17,952				35,000
Holdings Senior PIK Credit Agreement (“PIK Loan”)			-				99,046
Total notes			160,261				293,043
Less: current portion			(1,350	)			(2,530	)
Total long-term debt		$	158,911			$	290,513

Based on available market information, the estimated fair value of the Company’s long-term debt was approximately $155,361 as of September 30, 2010.

 

First Lien Credit Facility

 

The First Lien Credit Facility provides for term loans in the aggregate principal amount of $135,000, and quarterly installment payments equal to 0.25% of the initial principal balance due on the last day of each quarter, which commenced on September 30, 2007 and with the balance due in a final installment on June 15, 2014.   Additionally, the First Lien Credit Facility includes a requirement for mandatory prepayments based on annual excess free cash flow, as defined in the credit agreement. Term loans under the First Lien Credit Facility bear interest at the higher of the Eurodollar Rate (as defined in the credit agreement) or 1.5%, plus 4.5% per annum.  At September 30, 2010 the interest rate on the First Lien Credit Facility was 6.0%.  In March 2009, the Company made an election allowable by the credit agreement to change the basis which determines the variable Eurodollar interest rate from three-month LIBOR to one-month LIBOR, with a corresponding change in the timing of interest payments to be due on the last business day of each month.

 

The First Lien Credit Facility also provides for a $15,000 revolving line of credit, of which $12,613 was unused as of September 30, 2010.  At September 30, 2010, $2,387was reserved for standby letters of credit, $1,587 for operating lease agreements related to the Company’s various office locations and $800 related to the Company’s corporate charge card utilized by executives and certain other employees. The interest rate on the unutilized portion of the revolving line of credit was 0.5% for the three and nine months ended September 30, 2010.

 

The current portion of long-term debt reflects the quarterly mandatory principal payments of approximately $338 on the First Lien Credit Facility due in the following year. Current portion of long-term debt aggregated to $1,350 for the period ended September 30, 2010.

 

Second Lien Credit Facility

 

The Second Lien Credit Facility provides for two tranches of term loans, Tranche B in the amount of $30,000 and Tranche C in the amount of $35,000. Both tranches are due in full on the maturity date of December 15, 2014. Tranche B bears interest at the rate of 11.0% per annum through its maturity date. Tranche C bears interest at the higher of the Eurodollar Rate (as defined in the credit agreement) or 2.0%, plus 6.5% per annum.  At September 30, 2010 the interest rate on Tranche C of the Second Lien Credit Facility was 8.5%. Similar to the change noted for the First Lien Credit Facility above, in March 2009, the Company made an election allowable by the credit agreement to change the basis which determines the variable Eurodollar interest rate on the Tranche C term loan from three-month LIBOR to one-month LIBOR, with a corresponding change in the timing of interest payments to be due on the last business day of each month.

11

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INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

The Second Lien Credit Facility permits, at the Company’s option, interest on the Tranche C term loan to be payable in full or in part in kind by adding the accrued interest to the principal of the term loans, which thereafter accrues interest at the rate stated above, plus a PIK margin of 0.5%. Through September 30, 2010, the Company has not paid any of the interest on the Tranche C term loan in kind, either in part or in full.

 

In connection with the 2007 merger transaction, pursuant to which IntraLinks, Inc. became a wholly-owned subsidiary of IntraLinks Holdings, Inc., which was owned by TA Associates, Inc., Rho Capital Partners, Inc. and other stockholders, former and current officers and employees of IntraLinks, Inc. (the “2007 Merger”), the Company issued and sold to affiliates of TA Associates, Inc. an aggregate of 20,557,900 shares of Series A-2 Preferred Stock at a price of $4.92414 per share and 761,554 shares of Common Stock for a total of $761.55 and in consideration for the issuance of the $30,000 loan described above. The Company recognized a debt discount on Tranche B of the Second Lien Credit Facility of $1,164 representing the relative fair value associated with the issuance of the 761,554 shares of Common Stock.  The debt discount on Tranche B of the Second Lien Credit Facility is being recognized as additional interest expense, on a straight-line basis, over the contractual life of the loan.  The 20,557,900 shares of Series A-2 Preferred Stock held by affiliates of TA Associates, Inc. converted into 19,796,346 shares of Common Stock on the initial public offering date.

 

On May 14, 2010, the Company entered into an agreement with its lenders to amend the First Lien Credit Agreement and Second Lien Credit Agreement. The purpose of the amended credit agreements was to allow the Company to use net proceeds from its initial public offering for the repayment in full of the PIK Loan under the Holdings Senior PIK Credit Agreement and for the repayment of the Tranche B and Tranche C term loans under the Second Lien Credit Agreement on a pro rata basis. Under the terms of the existing First and Second Lien Credit Agreements, the Company was restricted with regards to repayment preference. The amendment of the First Lien Credit Agreement includes updated terms on the interest rate, including a floor of 1.5% (should the Company elect the Eurodollar Rate option) and an increase in the rate margin of 1.75%. The amendment of the Second Lien Credit Agreement includes updated terms on the interest rate of the Tranche C term loan, including a floor of 2.0% (should the Company elect the Eurodollar Rate option) and an increase in the rate margin of 0.75%. The updated interest rates under the amended credit agreements became effective immediately following the consummation of the Company’s initial public offering, which occurred on August 11, 2010.  During the three months ended September 30, 2010, the Company incurred an amendment fee of $520, payable to the creditors, equal to 0.25% of the total outstanding balances, and an arrangement fee of $500 payable to Deutsche Bank Securities, Inc. who acted as sole arranger and book runner for the amendments to the First and Second Lien Credit Agreements. The arrangement fee of $500, paid to Deutsche Bank Securities, Inc. as a third-party administrator, was expensed as incurred during the three months ended September 30, 2010, with $333 classified as “Amortization of deferred financing costs” and $167, representing the portion of the fee allocated to the PIK Loan, classified as “Loss on extinguishment of debt” within the Consolidated Statement of Operations.  See Use of IPO Proceeds and Accounting for Debt Modification below for further details regarding the accounting treatment for the amendment fee.

PIK Loan

During the three months ended September 30, 2010, the Company prepaid the PIK Loan balance using the proceeds from the initial public offering (see “Use of IPO Proceeds” below for additional details).  The PIK Loan provided for loans in the amount of $75,000 and bore interest at the rate of 12.0% per annum for dates prior to June 15, 2009 and 13.0% per annum thereafter.  Interest payments were due quarterly on the last business day of each March, June, September and December.  PIK Loan interest was automatically payable in kind and added to the principal balance of the PIK Loan, which thereafter accrued interest.  Under the terms of the First Lien Credit Facility, the Company was allowed to elect to pay PIK Loan interest in cash in amounts up to $2,000 per year and an additional $7,500 over the term of the loan.  On March 31, 2010, the Company exercised its option and elected to pay the quarterly interest due in cash of $3,219.  All PIK Loan interest for the period of April 1, 2010 through the date the PIK Loan was paid in full, was paid-in-kind, adding to the principal amount due.

Use of IPO Proceeds

Pursuant to the amended terms of the First and Second Lien Credit Agreements, the Company used the proceeds from its initial public offering to first prepay in full all outstanding indebtedness under the PIK Loan, with a portion of the remaining proceeds applied to Tranche B and Tranche C of the Second Lien Credit Facility, on a pro rata basis.  Upon repayment of the PIK Loan, the Company incurred a prepayment penalty in the amount of $4,092, or 4% of the outstanding balance.  The prepayment penalty, as well as $715 in accelerated amortization of deferred financing costs from original issuance and $167 in financing costs from the arrangement of the credit amendments, was recorded as a “Loss on extinguishment of debt” within the Consolidated Statement of Operations for the three and nine months ended September 30, 2010.

12

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INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

Accounting for Debt Modification

The modification of certain terms of the First and Second Lien Credit Agreements, as described above, required the Company to perform an assessment of future cash flows to determine if the modified terms represented a substantial difference when compared to the original terms. Based on the results of the assessment of future cash flows, the Company concluded that the amendments to the First and Second Lien Credit Agreements did not represent substantially different terms and therefore, modification accounting, rather than debt extinguishment accounting, should be applied.  Therefore, the Company calculated a new effective interest rate based on the carrying amounts of the original debt instruments.  The effective interest rates for the First Lien Credit Facility and Tranches B and C of the Second Lien Credit Facility as of September 30, 2010 were 6.7%, 11.4% and 8.9%, respectively.  The effective interest rates for each debt instrument include the pro rata share of the amendment fee, which was deferred and will be amortized over the remaining term of the loan utilizing the effective interest rate method.  Amortization of deferred financing costs is disclosed separately as a non-operating expense within the Consolidated Statement of Operations.

The following table summarizes the interest expense incurred on long-term debt:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
First Lien Credit Facility		$	1,561			$	1,036			$	3,573			$	3,532
– Tranche B, inclusive of $39, $39, $117, and $117, respectively, related to debt discount			717				882				2,454				2,619
– Tranche C			513				540				1,571				1,724
PIK Loan			1,625				3,185				8,099				8,754
Interest Rate Swap (see below)			1,452				1,776				4,336				4,876
Total interest expense on long-term debt		$	5,868			$	7,419			$	20,033			$	21,505

Derivative Financial Instrument

 

Interest Rate Swap Transaction

 

For the periods presented, the Company recorded the fair value of the interest rate swap liability as follows:

		September 30,				December 31,
		2010				2009
		(unaudited)
Interest rate swap liability		$	7,034			$	8,427
Less: current portion as recorded within Accrued expenses and other current liabilities (See Note 6)			(4,657	)			(5,115	)
Total long-term liability as recorded within Other long - term liabilities		$	2,377			$	3,312

On July 19, 2007, the Company entered into an interest rate swap agreement that fixed the interest rate at 5.43% on a beginning notional amount of $170,000. The notional amount amortizes over a period ending June 30, 2012.  At September 30, 2010 the notional amount of $115,000 covered approximately 79% of the Company’s variable rate debt on the First Lien Credit Facility and Tranche C of the Second Lien Credit Facility.

13

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INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

On March 25, 2009, in conjunction with the elections made on the First and Second Lien Credit Facility variable rate bases (from three-month LIBOR to one-month LIBOR, and quarterly interest payments to monthly), the Company amended the variable leg of its interest rate swap agreement to mirror the current terms of the First and Second Lien Facilities. The fixed rate payable on the interest rate swap was also revised from 5.43% to 5.25%.

 

The fair value of the interest rate swap derivative is derived from dealer quotes, which incorporate a credit valuation adjustment at the reporting date. The credit valuation adjustments represent discounts to consider the Company’s own credit risk, since the interest rate swap is in a liability position. Valuations may fluctuate considerably from period-to-period due to volatility in underlying interest rates, which is driven by market conditions and the duration of the swap. The Company recorded $221 in credit valuation adjustments during the three months ended September 30, 2010.  The value of the interest rate swap represents the estimate amount the Company would receive (or pay) to terminate the agreement at the respective measurement date.

Prior to March 25, 2009, the Company had not recorded any gain or loss due to ineffectiveness of the hedge, or as the result of a discontinuance of the hedge. Based on the changes made to the swap agreement on March 25, 2009, as of that date, the Company no longer qualified to use hedge accounting, and therefore recorded a loss of $10,653 during the three months ended March 31, 2009, which was reflected in “Other (income) expense” within the Consolidated Statement of Operations.  The loss of $10,653 represents the accumulated fair value adjustments that were recorded through “Accumulated other comprehensive income” on the Consolidated Balance Sheet, from the inception of the swap agreement through the date of the hedge de-designation.

The effects of derivative instruments on the consolidated statements of operations were as follows for the periods presented (amounts presented excluded any income tax effects):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Other (income) expense		$	(639	)		$	611			$	(1,393	)		$	9,666

9.

Stockholders’ Equity (Deficit)

 

In August 2010, the Company completed its initial public offering, issuing 11,000,000 shares of Common Stock at a public offering price of $13.00 per share. As a result of the offering, the Company received net proceeds of $132,990 after deducting underwriting discounts and commissions of $10,010.  As of September 30, 2010, offering costs paid in connection with the initial public offering totaled $1,860, consisting primarily of legal and accounting fees.

 

Upon completion of the initial public offering, the Company filed an amended and restated certificate of incorporation to increase the Company’s authorized capital stock to 310,000,000 shares, consisting of 300,000,000 shares of Common Stock and 10,000,000 shares of Series A Preferred Stock.

 

At the closing of the initial public offering, all outstanding shares of Series A Preferred Stock converted to 35,101,716 shares of Common Stock.  At September 30, 2010, there were no shares of Series A Preferred Stock issued or outstanding.

 

In September 2010, the underwriters exercised their over-allotment option to purchase 980,000 shares of Common Stock at the public offering price of $13.00 per share. The Company received an additional $11,848 in net proceeds, after deducting underwriting discounts and commissions of $892.

 

At September 30, 2010, there were 50,256,662 shares of Common Stock issued and outstanding.

 

14

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INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

10.

Employee Stock Plans

 

The Company maintains several share-based compensation plans which are more fully described below.  Total stock-based compensation expense related to all of the Company’s stock awards was included in various operating expense categories for the periods included below, as follows:

2007 Restricted Preferred Stock Plan

The following table summarizes the Restricted Preferred Stock Plan activity for the three and nine months ended September 30, 2010:

		Shares				Weighted Average Grant Date Fair Value
Non-vested shares at December 31, 2009			48,065			$	4.92
Vested			(19,897	)			4.92
Cancelled			(1,617	)			4.92
Non-vested shares at March 31, 2010			26,551				4.92
Vested			(19,082	)			4.92
Non-vested shares at June 30, 2010			7,469				4.92
Vested			(1,516	)			4.92
Converted to Common Stock			(5,953	)		$	4.92
Non-vested shares at September 30, 2010			―

The aggregate intrinsic value of restricted Series A-1 Preferred shares outstanding at September 30, 2010 was $0.  Stock based compensation for the restricted Series A-1 Preferred shares during the three and nine months ended September 30, 2010 was $6 and $118, respectively, and $96 and $399, respectively, for the three and nine months ended September 30, 2009.

 

2007 Stock Option and Grant Plan

The maximum number of shares of Common Stock initially reserved and available for issuance under the 2007 Stock Option and Grant Plan was 4,000,000 shares. Under the 2007 Stock Option and Grant Plan, the maximum number of shares will increase by one share automatically for every share of restricted Series A-1 Preferred issued under the Restricted Preferred Stock Plan that fails to vest and is cancelled.  On March 8, 2010, an additional 4,000,000 shares of Common Stock were authorized for issuance under the 2007 Stock Option and Grant Plan, increasing the number of shares of Common Stock authorized for issuance to 8,000,000.  Effective upon the adoption of the Company’s 2010 Equity Incentive Plan, the Company’s board of directors decided not to grant any further awards under the 2007 Stock Option and Grant Plan.

2010 Equity Incentive Plan

The 2010 Equity Incentive Plan was adopted by the Company’s board of directors in March 2010 and approved by its stockholders in July 2010. The 2010 Equity Incentive Plan permits the Company to make grants of stock options (both incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, cash-based awards, performance shares and dividend equivalent rights to its executives, employees, non-employee directors and consultants.  The maximum number of shares of Common Stock reserved and available for issuance under the 2010 Equity Incentive Plan is 8,000,000 shares. Generally, shares that are forfeited or canceled from awards under the 2010 Equity Incentive Plan, the 2007 Stock Option and Grant Plan and the Restricted Preferred Stock Plan also will be available for future awards.

 

15

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INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

The following table summarizes the weighted average values of the assumptions used in the Black-Scholes pricing model to estimate the fair value of the options granted during the period presented:

			Three Months Ended				Nine Months Ended
			September 30,				September 30,
			2010		2009		2010		2009
	Expected volatility		78.1%		77.0%		77.1%		77.0%
	Expected life of option		6.19 Years		5.91 Years		6.17 Years		5.91 Years
	Risk free interest rate		2.00%		2.59%		2.48%		2.59%
	Estimated forfeiture rate		11% - 20%		11% - 20%		11% - 20%		11% - 20%
	Expected dividend yield		0%		0%		0%		0%

The following table summarizes stock option activity for the three and nine months ended September 30, 2010:

		Shares				Weighted Average Exercise Price
Outstanding at December 31, 2009			1,585,243			$	2.03
Granted			1,010,000				6.76
Exercised			(72,365	)			1.59
Cancelled			(36,023	)			2.06
Outstanding at March 31, 2010			2,486,855				3.97
Exercised			(14,597	)			1.59
Cancelled			(62,792	)			2.57
Outstanding at June 30, 2010			2,409,466				4.03
Granted			537,500				13.00
Exercised			(57,458	)			1.77
Cancelled			(93,642	)			4.37
Outstanding at September 30, 2010			2,795,866			$	5.76

At September 30, 2010 the aggregate intrinsic value of stock options outstanding and exercisable was $31,175 and $10,947, respectively. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the calculated fair value of such awards as of each respective period-end date.

The following table summarizes non-vested stock option activity for the three and nine months ended September 30, 2010:

 

16

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INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

		Shares				Weighted Average Grant Date Fair Value
Non-vested options outstanding at December 31, 2009			972,811			$	3.35
Granted			1,010,000				7.05
Vested			(85,003	)			2.51
Cancelled			(16,288	)			4.04
Non-vested options outstanding at March 31, 2010			1,881,520				5.36
Vested			(104,610	)			3.36
Cancelled			(59,793	)			4.25
Non-vested options outstanding at June 30, 2010			1,717,117				5.52
Granted			537,500				8.95
Vested			(95,066	)			3.18
Cancelled			(90,231	)			5.82
Non-vested options outstanding at September 30, 2010			2,069,320			$	6.50

Stock-based compensation expense for the Company’s stock options under the 2007 Stock Option and Grant Plan, during the three and nine months ended September 30, 2010 was $750 and $1,763, respectively, and $116 and $309, respectively, for the three and nine months ended September 30, 2009.

 

Restricted Stock Awards (“RSAs”)

 

Information concerning RSA’s outstanding under the 2007 Stock Option and Grant Plan is as follows:

		Shares				Weighted Average Grant Date Fair Value
Non-vested shares at December 31, 2009			1,197,607			$	2.90
Vested and exchanged for Common Stock			(141,820	)			2.94
Cancelled			(41,786	)			1.59
Non-vested shares at March 31, 2010			1,014,001				2.95
Vested and exchanged for Common Stock			(105,215	)			1.59
Non-vested shares at June 30, 2010			908,786			$	3.11
Preferred shares converted to Common Stock			5,953				4.92
Vested and exchanged for Common Stock			(162,747	)			3.73
Cancelled			(80,357	)			1.59
Non-vested shares at September 30, 2010			671,635			$	3.14

The aggregate intrinsic value of RSAs outstanding at September 30, 2010 was $11,278.  The intrinsic value for RSAs is calculated based on the par value of the underlying awards and the calculated fair value of such awards as of each period-end date.

Stock-based compensation expense for the Company’s RSAs under the 2007 Stock Option and Grant Plan, for the three and nine months ended September 30, 2010 was $346 and $965, respectively, and $217 and $539, respectively, for the three and nine months ended September 30, 2009.

 

2010 Employee Stock Purchase Plan

The 2010 Employee Stock Purchase Plan (the “2010 ESPP”) was adopted by the Company’s board of directors and approved by its stockholders in July 2010. The Company’s 2010 Employee Stock Purchase Plan authorizes the issuance of up to a total of 400,000 shares of its Common Stock to participating employees.  The Company will make one or more offerings each year to its employees to purchase stock under the 2010 Employee Stock Purchase Plan, usually beginning on each January 1, April 1, July 1 and October 1 and will continue for three-month periods.  For the three months ended September 30, 2010, no shares were issued under the 2010 ESPP.

 

17

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INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

11.

Net Loss per Share

 

Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period, excluding the dilutive effects of Common Stock equivalents.  Common Stock equivalents include stock options, unvested shares of restricted Common Stock and convertible securities, such as convertible preferred stock.  Diluted net loss per share assumes the conversion of the Series A Preferred Stock using the “if converted” method, if dilutive, and includes the dilutive effect of stock options and restricted shares of Common Stock under the treasury stock method.

 

The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net loss per common share:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Numerator:
Net loss		$	(2,513	)		$	(2,939	)		$	(11,937	)		$	(20,139	)
Denominator:
Basic shares			―				―				―				―
Weighted-average common shares outstanding			18,056,423				1,699,094				6,153,359				1,537,136
Diluted shares:
Weighted-average shares used to compute basic net loss per share			18,056,423				1,699,094				6,153,359				1,537,136
Effect of potentially dilutive securities:			―				―				―				―
Options to purchase Common Stock			―				―				―				―
Unvested shares of restricted Common Stock			―				―				―				―
Series A Preferred Stock			―				―				―				―
Weighted-average shares used to compute diluted net loss per share			18,056,423				1,699,094				6,153,359				1,537,136
Net loss per share:
Basic and Diluted		$	(0.14	)		$	(1.73	)		$	(1.94	)		$	(13.10	)

The following outstanding options, unvested shares of restricted Common Stock, and Series A Preferred Stock were excluded from the computation of diluted net loss per share for the periods presented as their effect would have been antidilutive:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Options to purchase Common Stock			2,795,866				1,635,397				2,795,866				1,635,397
Unvested shares of restricted Common Stock			671,635				1,090,945				671,635				1,090,945
Series A Preferred Stock (as-converted basis)			―				35,110,873				―				35,110,873

12.

Restructuring Costs

 

The restructuring in 2009 included employee severance and other employee-related termination costs and primarily involved a reorganization of the Company’s sales and sales supporting operation functions (the “2009 Plan”). The 2009 Plan was designed to enable the Company to operate more efficiently in a still uncertain economic environment and for continued expansion of its services into broader markets. The 2009 Plan encompassed approximately 60 employees that were terminated in 2009.

 

18

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INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

The restructuring in 2008 included employee severance and other employee-related termination costs and involved a broad organizational streamlining, consolidating responsibilities in certain related functions and eliminating overlapping support functions (the “2008 Plan”).  These changes were designed to streamline internal processes and to enable the Company to continue to be more effective and efficient in meeting the needs of the organization and its customers.  The 2008 Plan was also designed to enable the Company to operate more efficiently in an uncertain economic environment, as well as to position the Company for expansion of its services into broader markets.  The 2008 Plan encompassed approximately 69 employees that were terminated in 2008.

 

The following table displays activity and balances of the restructuring reserves through September 30, 2010:

		2008 Plan				2009 Plan				Total Costs
Balance at December 31, 2008		$	657			$	-			$	657
Expense			-				47				47
Payments			(551	)			(56	)			(607	)
Balance at March 31, 2009			106				(9	)			97
Expense			-				244				244
Payments			(106	)			(235	)			(341	)
Balance at June 30, 2009			-				-				-
Expense			-				46				46
Payments			-				(46	)			(46	)
Balance at September 30, 2009			-				-				-
Expense			-				1,157				1,157
Payments			-				(425	)			(425	)
Balance at December 31, 2009			-				732				732
Payments			-				(557	)			(557	)
Balance at March 31, 2010			-				175				175
Payments			-				(175	)			(175	)
Balance at June 30, 2010		$	-			$	-			$	-
No further activity through September 30, 2010

13.

Commitments and Contingencies

 

Legal Proceedings

 

The Company is involved in claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of such matters will not have a material effect on the Company’s financial position, results of operations, or liquidity. Presently, the Company is not involved in any material legal proceedings.

 

      14.    Comprehensive Loss

 

Comprehensive Loss is comprised of two components, net loss and other comprehensive loss. For the three and nine months ended September 30, 2010 and 2009, comprehensive loss consisted of the following:

 

19

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INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and per Share Data)

(unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net loss		$	(2,513	)		$	(2,939	)		$	(11,937	)		$	(20,139	)
Other comprehensive income, net of tax:
Foreign currency translation adjustments (net of tax of $7, $12, $34 and ($108), respectively)			31				33				126				(295	)
Loss on derivatives, reclassified to earnings (net of tax of $4,634)			―				―				―				6,019
Total other comprehensive income, net of tax			31				33				126				5,724
Comprehensive loss		$	(2,482	)		$	(2,906	)		$	(11,811	)		$	(14,415	)

 

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ITEM 2:  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 together with our consolidated financial statements and related notes to consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.  Dollars in tabular format are presented in thousands, except share and per share data, or otherwise indicated.

 

Overview

IntraLinks is a leading global provider of Software-as-a-Service (“SaaS”) solutions for securely managing content, exchanging critical business information and collaborating within and among organizations.  Our cloud-based solutions enable organizations to control, track, search and exchange time-sensitive information inside and outside the firewall, all within a secure and easy-to-use environment.  Our customers rely on our cost-effective solutions to manage large amounts of electronic information, accelerate information intensive business processes, reduce time to market, optimize critical information workflow, meet regulatory and risk management requirements and collaborate with business counterparties in a secure, auditable and compliant manner.  We help our customers eliminate the inherent risks and inefficiencies of using email, fax, courier services and other existing solutions to collaborate and exchange information.

 

At our founding in 1996, we introduced cloud-based collaboration for the debt capital markets industry and, shortly thereafter, extended our solutions to merger and acquisitions transactions.  We have since enhanced our IntraLinks Platform to address the needs of a wider enterprise market consisting of customers of all sizes across a variety of industries using our solutions for the secure management and online exchange of information within and among organizations.  Today, this enterprise market is our largest and fastest growing market and includes organizations in the financial services, pharmaceutical, biotechnology, consumer, energy, industrial, legal, insurance, real estate and technology sectors, as well as government agencies.  Across all of our principal markets, we help transform a wide range of slow, expensive and information-intensive tasks into streamlined, efficient and real-time business processes.  In the year ended December 31, 2009, over 4,300 customers across 25 countries used the IntraLinks Platform to enable collaboration among more than 400,000 end-users and approximately 50,000 organizations worldwide.

We deliver our solutions entirely through a multi-tenant SaaS architecture in which a single instance of our software serves all of our customers.  Our business model has provided us with a high level of revenue visibility.  We sell our solutions directly through an enterprise sales team with industry-specific expertise, and indirectly through a customer referral network and channel partners.  During the nine months ended September 30, 2010, we generated $132.2 million in revenue, of which approximately 35% was derived from international sales across 60 countries.

On August 5, 2010, the SEC declared effective our registration statement on Form S-1, as amended (File No. 333-165991) (the “Registration Statement”), in connection with our initial public offering of 11,000,000 shares of Common Stock, par value $0.001 per share (“Common Stock”), at a public offering price of $13.00 per share. The offering closed on August 11, 2010.  On September 9, 2010, we closed the sale of an additional 980,000 shares of Common Stock at the initial public offering price of $13.00 per share pursuant to the underwriters’ exercise of their over-allotment option in connection with our initial public offering that closed on August 11, 2010.  Total net proceeds received from the initial public offering, including the underwriters’ exercise of the over-allotment option, was $144.8 million after deducting underwriter commissions and discounts of $10.9 million.  We used substantially all of the net proceeds of our initial public offering and the sale of the underwriters’ over-allotment shares to repay indebtedness.  

 

 We evaluate our operating and financial performance using various performance indicators, including the financial metrics discussed under “Key Metrics” below, as well as the macroeconomic trends affecting the demand for our solutions in our principal markets.  We also monitor relevant industry performance, including transactional activity in the debt capital markets and M&A market globally, to provide insight into the success of our sales activities as compared to our peers and to estimate our market share in each of our principal markets.

Key Metrics

 

Our management relies on certain performance indicators to manage and assess our business.  The key performance indicators set forth below help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies.  We discuss revenue and cash flow provided by operating activities  under “Results of Operations” and “Liquidity and Capital Resources”, respectively, below.  The non-GAAP measures of our performance, including adjusted gross margin, adjusted EBITDA and adjusted EBITDA margin are discussed under “Non-GAAP Financial Measures” below.

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		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Consolidated Statement of Operations Data:
Revenue		$	47,874			$	34,037			$	132,215			$	101,523
Adjusted gross margin		82.1		%		78.6		%		81.1		%		78.9		%
Adjusted EBITDA		$	16,354			$	10,752			$	41,428			$	34,803
Adjusted EBITDA margin		34.2		%		31.6		%		31.3		%		34.3		%
Consolidated Balance Sheet Data:
Deferred revenue at September 30,(1)		$	35,239			$	24,797			$	35,239			$	24,797
Consolidated Statement of Cash Flows Data:
Cash flow provided by operating activities		$	11,887			$	8,761			$	15,972			$	16,713

(1)	Deferred revenue represents the billed but unearned portion of existing contracts for services to be provided.  Deferred revenue does not include future potential revenue represented by the unbilled portion of existing contractual commitments of our customers.

 

In addition to the metrics listed in the table above, our management regularly analyzes customer contract data, including aggregate contract values, contract durations and payment terms, which provide indications of future revenue represented by contractual fees not yet billed.  Management also monitors sales and marketing activity, customer renewal rates, the mix of subscription and transaction business and international business growth to evaluate various aspects of our operating and financial performance.  These items are discussed elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Non-GAAP Financial Measures

 

To supplement our consolidated financial statements presented in accordance with generally accepted accounting principles in the United States (“GAAP” or “U.S. GAAP”), we consider certain financial measures that are not prepared in accordance with GAAP, including non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margin and non-GAAP adjusted gross margin. These non-GAAP measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies.

 

Adjusted EBITDA represents net income (loss) adjusted for (1) interest expense, net of interest income, (2) income tax provision (benefit), (3) depreciation and amortization, (4) amortization of intangible assets, (5) stock-based compensation expense, (6) amortization of debt issuance costs, (7) loss on extinguishment of debt and (8) other (income) expense. Items (1) through (8) are excluded from net income (loss) internally when evaluating our operating performance. Adjusted EBITDA margin represents adjusted EBITDA as a percentage of revenue. Adjusted gross margin represents gross profit, adjusted for amortization of intangible assets and stock-based compensation expense classified within the cost of revenue line item, as a percentage of revenue.

Management believes that adjusted EBITDA, adjusted EBITDA margin and adjusted gross margin, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating our operating performance. Additionally, management believes that adjusted EBITDA, adjusted EBITDA margin and adjusted gross margin provide a more meaningful comparison of our operating results against those of other companies in our industry, as well as on a period-to-period basis, because these measures exclude items that are not representative of our operating performance, such as ongoing costs related to the 2007 Merger, including amortization of intangible assets that were recorded as a result of the merger, and interest expense and fair value adjustments to the interest rate swap related to the long-term debt incurred to finance the merger. Management believes that including these costs in our results of operations results in a lack of comparability between our operating results and those of our peers in the industry, the majority of which are not highly leveraged and do not have comparable amortization costs related to intangible assets. However, adjusted EBITDA, adjusted EBITDA margin and adjusted gross margin are not measures of financial performance under U.S. GAAP and, accordingly, should not be considered as an alternative to net loss as an indicator of operating performance.

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The table below provides reconciliations between the non-GAAP financial measures discussed above to the comparable U.S. GAAP measures of net loss and gross profit, respectively:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net loss		$	(2,513	)		$	(2,939	)		$	(11,937	)		$	(20,139	)
Interest expense, net			5,862				7,405				19,998				21,430
Income tax benefit			(4,951	)			(5,175	)			(8,970	)			(15,807	)
Depreciation and amortization			4,531				2,725				12,137				8,612
Amortization of intangible assets			7,157				7,218				21,583				27,721
Stock-based compensation expense			1,102				429				2,846				1,246
Amortization of debt issuance costs			1,111				464				2,026				1,414
Loss on extinguishment of debt			4,974				―				4,974				―
Other (income) expense			(919	)			625				(1,229	)			10,326
Adjusted EBITDA		$	16,354			$	10,752			$	41,428			$	34,803
Adjusted EBITDA margin			34.2	%			31.6	%			31.3	%			34.3	%
Gross profit			35,958				23,418				97,268				64,055
Gross margin			75.1	%			68.8	%			73.6	%			63.1	%
Adjustments:
Cost of revenue - amortization of intangible assets			3,309				3,309				9,928				15,994
Cost of revenue - stock-based compensation expense			36				13				64				53
Adjusted gross profit		$	39,303			$	26,740			$	107,260			$	80,102
Adjusted gross margin			82.1	%			78.6	%			81.1	%			78.9	%

 

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Results of Operations

 

		Three Months Ended																Nine Months Ended
		September 30,																September 30,
		2010								2009								2010								2009
		Amount				% of Revenue				Amount				% of Revenue				Amount				% of Revenue				Amount				% of Revenue
Revenue		$	47,874				100.0	%		$	34,037				100.0	%		$	132,215				100.0	%		$	101,523				100.0	%
Cost of revenue			11,916				24.9				10,619				31.2				34,947				26.4				37,468				36.9
Gross profit			35,958				75.1	%			23,418				68.8	%			97,268				73.6	%			64,055				63.1	%
Operating expenses:
Product development			5,030				10.5				2,764				8.1				13,774				10.4				8,780				8.6
Sales and marketing			20,130				42.0				15,130				44.5				58,256				44.1				43,073				42.4
General and administrative			7,234				15.1				5,099				15.0				20,376				15.4				14,640				14.4
Restructuring costs			-				0.0				45				0.1				-				0.0				338				0.3
Total operating expenses			32,394				67.7				23,038				67.7				92,406				69.9				66,831				65.8
Income (loss) from operations			3,564				7.4				380				1.1				4,862				3.7				(2,776	)			(2.7	)
Interest expense, net			5,862				12.2				7,405				21.8				19,998				15.1				21,430				21.1
Amortization of debt issuance costs			1,111				2.3				464				1.4				2,026				1.5				1,414				1.4
Loss on extinguishment of debt			4,974				10.4				-				0.0				4,974				3.8				-				0.0
Other (income) expense			(919	)			(1.9	)			625				1.8				(1,229	)			(0.9	)			10,326				10.2
Net loss before income tax			(7,464	)			(15.6	)			(8,114	)			(23.8	)			(20,907	)			(15.8	)			(35,946	)			(35.4	)
Income tax benefit			(4,951	)			(10.3	)			(5,175	)			(15.2	)			(8,970	)			(6.8	)			(15,807	)			(15.6	)
Net loss		$	(2,513	)			(5.2	)%		$	(2,939	)			(8.6	)%		$	(11,937	)			(9.0	)%		$	(20,139	)			(19.8	)%
Net loss per common share - basic and diluted		$	(0.14	)						$	(1.73	)						$	(1.94	)						$	(13.10	)
Weighted average number of shares used in
calculating net loss per common share - basic and diluted			18,056,423								1,699,094								6,153,359								1,537,136

Comparison of the Three Months Ended September 30, 2010 and 2009

 

Revenue

 

Revenue increased to $47.9 million for the three months ended September 30, 2010, from $34.0 million for the three months ended September 30, 2009.  For the three months ended September 30, 2010, approximately 16% of the contracts we entered into with our customers were based in foreign currency.  Comparatively, during the three months ended September 30, 2009, approximately 11% of the contracts we entered into with our customers were based in foreign currency.  Foreign exchange transaction gains and losses are recorded in “Other (income) expense” on the Consolidated Statement of Operations.  See Item 3: Quantitative and Qualitative Disclosures about Market Risk within this Quarterly Report on Form 10-Q for additional details.

 

The following table sets forth revenues by our principal markets: Enterprise, Mergers and Acquisitions (“M&A”) and Debt Capital Markets (“DCM”), for the three months ended September 30, 2010 compared to the three months ended September 30, 2009, the percentage increase or decrease between those periods, and the percentage of total revenue that each principal market represented for those periods:

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																		% Revenue
		Three Months Ended																Three Months Ended
		September 30,								Increase				% Increase				September 30,
		2010				2009				(Decrease)				(Decrease)				2010				2009
Enterprise		$	22,082			$	14,865			$	7,217				48.6	%			46.1	%			43.7	%
M&A			18,153				11,483				6,670				58.1				37.9				33.7
DCM			7,639				7,689				(50	)			(0.7	)			16.0				22.6
Total Revenues		$	47,874			$	34,037			$	13,837				40.7	%			100.0	%			100.0	%

Enterprise – The results for the three months ended September 30, 2010 reflect an increase in Enterprise revenue of $7.2 million or 48.6%, as compared to the three months ended September 30, 2009.  The increase in Enterprise revenue for the three month period, as compared to the prior year period, was primarily driven by an increased customer base, larger contract values for new customers (compared to historic levels), as well as higher exchange utilization and renewal levels for existing customers.  This activity reflects both wider adoption of our services across customers’ organizations and greater utilization of our services than customers initially expected, thus resulting in increased overage fees and higher renewal levels.  We attribute this growth to our increased investment in Enterprise-related product development initiatives, additional sales headcount and marketing resources dedicated to this market, as well as improved global market conditions.  We believe our revenue growth going forward will be driven by the following key trends: expanded geographic and industry focus to establish a wider distribution of our services, ongoing investment in our platform to ensure we continue to meet customer needs, and increased focus on providing the types of services that generate repeat business and expand our subscription base.  We believe that the resources invested in our platform, as well as our operational infrastructure, will allow us to better serve larger clients on a global basis.  Additionally, we believe the Enterprise principal market represents a significant long-term expansion opportunity and we plan to continue to invest in resources dedicated to serving this market.

 

M&A – The results for the three months ended September 30, 2010 reflect an increase in M&A revenue of $6.7 million, or 58.1%, as compared to the three months ended September 30, 2009.  The increase in M&A revenue for the three month period, as compared to the prior year period, was primarily driven by improved global economic conditions resulting in an increased volume of transactions in the overall market, and also reflects the capture of market share from our competition.  Our growth in this principal market will be driven primarily by the pace of the overall economic recovery, our ability to continue to increase our market share by winning business from our competition and by penetrating sectors that are currently not yet taking advantage of services such as ours, both geographic and deal size dependent.  We plan to continue to invest in our platform as well as our operating, sales and servicing infrastructures in order to enhance our offering for existing customers and better attract new customers.

 

DCM – DCM revenue for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, remained relatively flat.  The DCM market continues to be affected by the slower recovery of the loan credit markets, compared to other financial service areas. While we have experienced certain client-specific over-utilization of existing exchanges and contract renewals at generally larger amounts, these are not yet at a level that has been able to offset prior year over-utilization and subscription levels. However, we are seeing positive trends on a quarter-over-quarter basis, primarily driven by increased subscription renewals and revenue generated by customer overutilization of existing exchanges.  We believe results in this principal market will continue to generally be in line with macroeconomic conditions and also reflect the maturity of this market in terms of organizations adopting services such as ours, as well as our current leading market position.  We plan to increase our growth potential in this market primarily through a focus on product development initiatives, which will allow us to expand the level of services provided to our existing customer base, attract customers away from our competition and allow us to enter adjacent and similar markets to expand our customer reach. 

Cost of Revenue and Gross Margin

 

The following table presents cost of revenue, gross profit and gross margin for the three months ended September 30, 2010, compared to the three months ended September 30, 2009:

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		Three Months Ended
		September 30,								Increase				% Increase
		2010				2009				(Decrease)				(Decrease)
Cost of revenue		$	11,916			$	10,619			$	1,297				12.2	%
Gross profit		$	35,958			$	23,418			$	12,540				53.5	%
Gross margin			75.1	%			68.8	%			6.3	%

The results for the three months ended September 30, 2010 reflect an increase in cost of revenue of $1.3 million, or 12.2%, as compared to the three months ended September 30, 2009.  The increase in cost of revenue for the three month period, as compared to the prior year period, was attributed primarily to an increase in amortization of capitalized software costs and an increase in client support costs, reflecting the growth of the business and expanded product portfolio.  The increase in total revenue described above, offset by the increase in cost of revenue, drove improvements in gross margin of 6.3 percentage points for the three months ended September 30, 2010, on a year-over-year basis.

 

Operating Expenses

 

Total operating expenses for the three months ended September 30, 2010 increased by approximately $9.4 million, or 40.6%, as compared to the three months ended September 30, 2009.

 

The following table presents the components of operating expenses for the three months ended September 30, 2010, compared to the three months ended September 30, 2009:

		Three Months Ended
		September 30,								Increase				% Increase
		2010				2009				(Decrease)				(Decrease)
Product development		$	5,030			$	2,764			$	2,266				82.0	%
Sales and marketing			20,130				15,130				5,000				33.0
General and administrative			7,234				5,099				2,135				41.9
Restructuring costs			―				45				(45	)			(100.0	)
Total operating expenses		$	32,394			$	23,038			$	9,356				40.6	%

Product Development – The results for the three months ended September 30, 2010 reflect an increase in product development expense of $2.3 million, or 82.0%, as compared to the three months ended September 30, 2009.  The increase in product development expense for the three month period, as compared to prior year period, was primarily driven by additional development on previously launched platforms and commencement of various development initiatives that under our guidelines of software capitalization cannot yet be capitalized.  Product development expense as a percentage of revenue was 10.5% for the three months ended September 30, 2010, compared to 8.1% for the three months ended September 30, 2009.

 

Total product development costs comprise both capitalized software and product development expense.  For the three months ended September 30, 2010, product development costs totaled $8.9 million, $3.9 million of capitalized software related to product development enhancements and $5.0 million in product development expense.  For the three months ended September 30, 2009, product development costs totaled $6.1 million, $3.1 million of capitalized software related to product development enhancements and $2.8 million of product development expense.  The increase in total product development costs of $2.8 million, or 45.9% reflects a higher level of spending to support our expanded focus on Enterprise-related and geography-related initiatives as well as increased support and maintenance costs reflecting an expanded product portfolio.  Total product development costs as a percentage of revenue was 18.6% for the three months ended September 30, 2010, compared to 17.9% for the three months ended September 30, 2009.

Sales and Marketing – The results for the three months ended September 30, 2010 reflect an increase in sales and marketing expense of $5.0 million, or 33.0%, as compared to the three months ended September 30, 2009.  The increase in sales and marketing expense for the three month period, as compared to the prior year period, was primarily driven by (i) an increase in headcount-related expenses, including recruitment, which reflects the expansion of the sales function in line with growth plans, particularly around the Enterprise principal market, (ii) an increase in travel and entertainment expenses, driven by increased headcount and a wider geographic focus (iii) additional expenditures on marketing programs and initiatives as well as consulting and research projects, (iv) higher sales commission expense reflecting both the higher level of sales achieved during the period by our internal sales representatives as well as our partners, and the impact of the revised 2010 commission plan for our internal sales representatives as compared to the 2009 plan, and (v) additional non-cash stock compensation charges.  Sales and marketing expense as a percentage of revenue was 42.0% for the three months ended September 30, 2010, compared to 44.5% for the three months ended September 30, 2009.

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General and Administrative – The results for the three months ended September 30, 2010 reflect an increase in general and administrative expense of $2.1 million, or 41.9%, as compared to the three months ended September 30, 2009.  The increase in general and administrative expenses was driven by our overall growth strategy, specifically, (i) an increase in accrued expense relating to 2010 Company bonus plan in line with performance against targets, for which payments will be made in Q1 2011,  (ii) sales tax, to be absorbed by the Company rather than charged to customers, relating to our subsidiary in Brazil, (iii) increase in salaries reflecting an increase in headcount supporting our growth strategies, (iv) an increase in depreciation expense as a result of capital expenditures made during 2009 and 2010, and (v) expenses incurred related to the initial public offering as well as ongoing public company operating costs not incurred in the prior year.  General and administrative expense as a percentage of revenue was 15.1% for the three months ended September 30, 2010, compared to 15.0% for the three months ended September 30, 2009.

 

Restructuring Costs –Restructuring costs incurred during the three months ended September 30, 2009 included employee severance and other employee related termination costs, for which we have no comparable costs during the current year period.  The 2009 restructuring plan primarily involved a reorganization of our sales and sales supporting operation functions and was designed to enable us to operate more efficiently in a still uncertain economic environment and for continued expansion of our services into broader markets.

 

Non-Operating Expenses

 

The following table presents the components of non-operating expenses for the three months ended September 30, 2010 compared to the three months ended September 30, 2009:

		Three Months Ended September 30,								Increase				% Increase
		2010				2009				(Decrease)				(Decrease)
Interest expense, net		$	5,862			$	7,405			$	(1,543	)			(20.8	)%
Amortization of debt issuance costs		$	1,111			$	464			$	647				139.4	%
Loss on extinguishment of debt		$	4,974			$	―			$	4,974				100.0	%
Other (income) expense		$	(919	)		$	625			$	(1,544	)			(247.0	)%

Interest Expense, Net

 

Interest expense, net for the three months ended September 30, 2010 decreased by $1.5 million, or 20.8%, compared to $7.4 million for the three months ended September 30, 2009.  The decrease was primarily driven by the use of the initial public offering net proceeds to repay $137.8 million of our debt during the three months ended September 30, 2010.  Interest expense, net represented 12.2% and 21.8% of total revenue for the three months ended September 30, 2010 and 2009, respectively.  In our consolidated statement of operations, interest expense is shown net of interest income.  Interest income for the three months ended September 30, 2010 and 2009 was de minimis. 

Amortization of Debt Issuance Costs

 

Amortization of debt issuance costs for the three months ended September 30, 2010 increased by $0.6 million, or 139.4%, as compared to the three months ended September 30, 2009, primarily due to acceleration of $0.3 million representing the pro rata share of the original debt issuance costs incurred during the 2007 merger transaction, as it relates to the portion of debt that was repaid during the three months ended September 30, 2010.  In addition to the acceleration of the original debt issuance costs, we also incurred $0.3 million in issuance costs related to the amendment of the First and Second Lien Credit Facilities, which allowed us to change the priority of repayment and use the net proceeds from the initial public offering to first reduce outstanding indebtedness under the PIK Loan, with a portion of the remaining proceeds applied to Tranche B and C of the Second Lien Credit Facility, on a pro rata basis.  The balance of the debt issuance costs will be amortized over the term of the remaining loans, using the effective interest rate method.  Amortization of debt issuance costs for the three months ended September 30, 2010 and 2009 was approximately 2.3% and 1.4% of total revenue, respectively.  

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Loss on Extinguishment of Debt

During the three months ended September 30, 2010, we recorded $5.0 million as a loss on extinguishment of debt, which included a 4% prepayment penalty on the PIK Loan totalling $4.1 million, $0.7 million in accelerated recognition of original issuance costs and $0.2 million in issuance costs related to the amendment of the First and Second Lien Credit Facilities, which allowed us to change the priority of repayment and use the net proceeds from the initial public offering to reduce outstanding indebtedness under the PIK Loan.  No comparable costs were incurred during the three months ended September 30, 2009.

Other (Income) Expense

 

The major components of other (income) expense are foreign exchange gains and losses and fair value adjustments to our interest rate swap.  Other income for the three months ended September 30, 2010 was $0.9 million, primarily driven by the decrease of $0.6 million in the fair value of our interest rate swap liability and $0.1 million in foreign exchange gains, compared to other expense of $0.6 million incurred during the three months ended September 30, 2009, representing a $0.6 million increase in the fair value of our interest rate swap liability.  We expect the fair value adjustments to the interest rate swap will continue to be recorded in “Other (income) expense” through the end of the swap agreement in 2012.

Income Tax Provision (Benefit)
		Three Months Ended
		September 30,								Increase				% Increase
		2010				2009				(Decrease)				(Decrease)
Income tax benefit		$	(4,951	)		$	(5,175	)		$	(224	)			(4.3	)%
Effective tax rate			66.3	%			63.8	%			2.6	%

The effective tax rate was 66.3% for the three months ended September 30, 2010, compared with an effective tax rate of 63.8% for the three months ended September 30, 2009.  The effective tax rate for the three months ended September 30, 2010 was impacted by discrete items, primarily a $3,261 benefit related to a change in the apportionment methodology used to determine our state tax liability, as well as $125 associated with the finalization of our 2009 tax return. Excluding discrete items, our effective tax rate was 21.3% for the three months ended September 30, 2010.

The change in apportionment methodology used to determine our state tax liability is a change in estimate that took place in conjunction with the filing of our 2009 state tax returns during the three months ended September 30, 2010.  Therefore, the resulting income tax benefit from the decrease in the state rate was recorded as a discrete item in the three months ended September 30, 2010.

The effective tax rate for the three months ended September 30, 2009 was impacted by discrete items, primarily a $3,083 benefit related to research and development tax credits, partially offset by ($872) associated with the finalization of our 2008 tax return. Excluding these items, our effective tax rate was 36.5% for the three months ended September 30, 2009.  Our effective tax rates for the periods described above, excluding the discrete items, differ from the statutory rate due to the impact of state and local income taxes, certain nondeductible expenses and foreign earnings taxed at different tax rates.

 

 

Comparison of the Nine Months Ended September 30, 2010 and 2009

 

Revenue

 

Revenue increased to $132.2 million for the nine months ended September 30, 2010, from $101.5 million for the nine months ended September 30, 2009. For the nine months ended September 30, 2010, approximately 15% of the contracts we entered into with our customers were based in foreign currency.  Comparatively, during the nine months ended September 30, 2009, approximately 6% of the contracts we entered into with our customers were based in foreign currency.  Foreign exchange transaction gains and losses are recorded in “Other (income) expense” on the Consolidated Statement of Operations.  See Item 3: Quantitative and Qualitative Disclosures about Market Risk within this Quarterly Report on Form 10-Q for additional details.

 

The following table sets forth revenues by principal market for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009, the percentage increase or decrease between those periods, and the percentage of total revenue that each principal market represented for those periods:

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																		% Revenue
		Nine Months Ended																Nine Months Ended
		September 30,								Increase				% Increase				September 30,
		2010				2009				(Decrease)				(Decrease)				2010				2009
Enterprise		$	59,817			$	38,824			$	20,993				54.1	%			45.3	%			38.2	%
M&A			48,578				37,019				11,559				31.2				36.7				36.5
DCM			23,820				25,680				(1,860	)			(7.2	)%			18.0				25.3
Total Revenues		$	132,215			$	101,523			$	30,692				30.2	%			100.0	%			100.0	%

 

Enterprise – The results for the nine months ended September 30, 2010 reflect an increase in Enterprise revenue of $21.0 million or 54.1%, as compared to the nine months ended September 30, 2009.  The increase in Enterprise revenue for the nine month period, as compared to the prior year period, was primarily driven by an increased customer base, larger contract values for new customers (compared to historic levels), as well as higher renewal levels for existing customers.  This activity reflects both wider adoption of our services across customers’ organizations and greater utilization of our services than customers initially expected, thus resulting in increased overage fees and higher renewal levels.  We attribute this growth to improved global market conditions as well as our increased investment in product development, sales headcount and marketing resources dedicated to this market.  

 

M&A – The results for the nine months ended September 30, 2010 reflect an increase in M&A revenue of $11.6 million, or 31.2%, as compared to the nine months ended September 30, 2009.  The increase in M&A revenue for the nine month period, as compared to the prior year period, was primarily driven by improved global economic conditions resulting in increased volume of transactions in the overall market, and also reflects the capture of market share from our competition.  

 

DCM – The results for the nine months ended September 30, 2010 reflect a decrease in DCM revenue of $1.9 million, or 7.2%, as compared to the nine months ended September 30, 2009.  The decrease in the nine month period, as compared to the prior year period, reflects the impact of lower subscription commitment levels year-over-year, partially offset by account overages.  In light of the slower recovery of the loan credit markets throughout most of 2010, clients are still adopting a cautious stance regarding upfront annual commitment levels.

Our beliefs regarding future performance in these principal markets were discussed in the Comparison of the Three Months Ended September 30, 2010 and 2009 section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Cost of Revenue and Gross Margin

 

The following table presents cost of revenue, gross profit and gross margin for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009:

		Nine Months Ended
		September 30,								Increase				% Increase
		2010				2009				(Decrease)				(Decrease)
Cost of revenue		$	34,947			$	37,468			$	(2,521	)			(6.7	)%
Gross profit		$	97,268			$	64,055			$	33,213				51.9	%
Gross margin			73.6	%			63.1	%			10.5	%

The results for the nine months ended September 30, 2009 reflect a decrease in cost of revenue of $2.5 million, or 6.7%, as compared to the nine months ended September 30, 2009.  The decrease in cost of revenue for the nine month period, as compared to the prior year period, was attributed primarily to the scheduled decrease in amortization of definite-lived intangible assets.  This decrease in cost of revenue was partially offset by an increase in amortization of capitalized software costs and an increase in software maintenance and license fees reflecting the growth of, and costs to support, the business.  The decrease in cost of revenue, coupled with the increase in total revenue described above, drove improvements in gross margin of 10.5 percentage points, from 63.1% to 73.6% for the nine months ended September 30, 2010, on a year-over-year basis.

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Operating Expenses

 

Total operating expenses for the nine months ended September 30, 2010 increased by approximately $25.6 million, or 38.3%, as compared to the nine months ended September 30, 2009.

 

The following table presents the components of operating expenses for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009:

		Nine Months Ended
		September 30,								Increase				% Increase
		2010				2009				(Decrease)				(Decrease)
Product development		$	13,774			$	8,780			$	4,994				56.9	%
Sales and marketing			58,256				43,073				15,183				35.2
General and administrative			20,376				14,640				5,736				39.2
Restructuring costs			―				338				(338	)			(100.0	)
Total operating expenses		$	92,406			$	66,831			$	25,575				38.3	%

Product Development – The results for the nine months ended September 30, 2010 reflect an increase in product development expense of $5.0 million, or 56.9%, as compared to the nine months ended September 30, 2009.  The increase in product development expense for the nine month period, as compared to prior year period, was primarily driven by additional development on previously launched platforms and commencement of various new development initiatives that, under our guidelines of software capitalization cannot yet be capitalized.   Product development expense as a percentage of revenue was 10.4% for the nine months ended September 30, 2010, compared to 8.6% for the nine months ended September 30, 2009.

 

Total product development costs comprise both capitalized software and product development expense.  For the nine months ended September 30, 2010, product development costs totaled $26.3 million, $12.5 million of capitalized software related to product development enhancements and $13.8 million in product development expense.  For the nine months ended September 30, 2009, product development costs totaled $16.6 million, $7.6 million of capitalized software related to product development enhancements and $8.8 million of product development expense.  The increase in total product development costs of $9.7 million, or 58.4% reflects a higher level of spending to support our expanded focus on Enterprise-related and geography-related initiatives as well as increased support and maintenance costs reflecting an expanded product portfolio.  Total product development costs as a percentage of revenue was 19.9% for the nine months ended September 30, 2010, compared to 16.4% for the nine months ended September 30, 2009. 

Sales and Marketing – The results for the nine months ended September 30, 2010 reflect an increase in sales and marketing expense of $15.2 million, or 35.2%, as compared to the nine months ended September 30, 2009.  The increase in sales and marketing expense for the nine month period, as compared to the prior year period, was primarily driven by (i) an increase in headcount related expenses, including recruitment, which reflects the expansion of the sales function in line with growth plans, particularly around the Enterprise principal market, (ii) an increase in travel and entertainment expenses, driven by increased headcount, a wider geographic focus and the costs of our worldwide annual sales conference which was reinstated for 2010, (iii) additional expenditures on marketing programs and initiatives as well as consulting and research projects, and (iv) additional non-cash stock compensation charges as a result of the nine months ended September 30, 2010 representing a full nine months of expense as compared to the nine months ended September 30, 2009, due to awards being granted to sales executives during the third quarter of 2009 (therefore, resulting in less than nine months of expense).  Sales and marketing expense as a percentage of revenue was 44.1% for the nine months ended September 30, 2010, compared to 42.4% for the nine months ended September 30, 2009.

 

General and Administrative – The results of the nine months ended September 30, 2010 reflect an increase in general and administrative expense of $5.7 million, or 39.2%, as compared to the nine months ended September 30, 2009.  The increase in general and administrative costs for the nine month period, as compared to prior year period, was attributed to the primarily one-time professional fees and other related expenses incurred in preparation of becoming a public company.  Additionally, the increase in general and administrative expenses was driven by our overall growth strategy, specifically, (i) increased professional and advisory fees incurred in setting up our new global entity organization structure, (ii) an increase in depreciation expense as a result of capital expenditures made during 2009 and 2010, (iii) sales tax to be absorbed by the Company, relating to our subsidiary in Brazil, (iv) an increase in costs for temporary services and consultants to support our overall growth strategy, and (v) expenses incurred related to the initial public offering, as well as ongoing public company operating costs not incurred in the prior year.  Additionally, during the first quarter of 2010, we recorded a $0.9 million credit to general and administrative expenses representing a reversal of an accrual for corporate, non-income taxes, for which we had no liability as of March 31, 2010.  This credit to general and administrative expenses in the first quarter of 2010 partially offset the increase in general and administrative expense described above.  General and administrative expense as a percentage of revenue was 15.4% for the nine months ended September 30, 2010, compared to 14.4% for the nine months ended September 30, 2009.

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Restructuring Costs –Restructuring costs incurred during the nine months ended September 30, 2009 included employee severance and other employee related termination costs, for which we have no comparable costs during the current year period.  The 2009 restructuring plan primarily involved a reorganization of our sales and sales supporting operation functions and was designed to enable us to operate more efficiently in a still uncertain economic environment and for continued expansion of our services into broader markets.

 

Non-Operating Expenses

 

The following table presents the components of non-operating expenses for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009:

		Nine Months Ended
		September 30,								Increase				% Increase
		2010				2009				(Decrease)				(Decrease)
Interest expense, net		$	19,998			$	21,430			$	(1,432	)			(6.7	)%
Amortization of debt issuance costs		$	2,026			$	1,414			$	612				43.3	%
Loss on extinguishment of debt		$	4,974			$	-			$	4,974				100.0	%
Other (income) expense		$	(1,229	)		$	10,326			$	(11,555	)			(111.9	)%

Interest Expense, Net

 

Interest expense, net for the nine months ended September 30, 2010 decreased by $1.4 million, or 6.7%, as compared to the nine months ended September 30, 2009.  The decrease was primarily driven by the use of the initial public offering net proceeds to repay $137.8 million of our debt during the nine months ended September 30, 2010.  Interest expense, net represented 15.1% and 21.1% of revenue for the nine months ended September 30, 2010 and 2009, respectively.  In our consolidated statement of operations, interest expense is shown net of interest income.  Interest income for the nine months ended September 30, 2010 and 2009, respectively, was de minimis.

 

Amortization of Debt Issuance Costs

 

Amortization of debt issuance costs for the nine months ended September 30, 2010 increased by $0.6 million, or 43.3%, as compared to the nine months ended September 30, 2009, primarily due to acceleration of $0.3 million representing the pro rata share of the original debt issuance costs incurred during the 2007 merger transaction, as it relates to the portion of debt that was paid down during the nine months ended September 30, 2010.  In addition to the acceleration of the original debt issuance costs, we also incurred $0.3 million in issuance costs related to the amendment of the First and Second Lien Credit Facilities, which allowed us to change the priority of repayment and use the net proceeds from the initial public offering to first reduce outstanding indebtedness under the PIK Loan, with a portion of the remaining proceeds applied to Tranche B and C of the Second Lien Credit Facility, on a pro rata basis.  The balance of the debt issuance costs will be amortized over the term of the remaining loans, using the effective interest rate method.   Amortization of debt issuance costs for the nine months ended September 30, 2010 and 2009 was approximately 1.5% and 1.4% of total revenue, respectively.  

 

Loss on Extinguishment of Debt

During the nine months ended September 30, 2010, we recorded $5.0 million as a loss on extinguishment of debt, which included a 4% prepayment penalty on the PIK Loan totalling $4.1 million, $0.7 million in accelerated recognition of original issuance costs and $0.2 million in issuance costs related to the amendment of the First and Second Lien Credit Facilities, which allowed us to change the priority of repayment and use the net proceeds from the initial public offering to reduce outstanding indebtedness under the PIK Loan.  No comparable costs were incurred during the nine months ended September 30, 2009.

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Other (Income) Expense

 

The major components of other (income) expense are foreign exchange gains and losses and fair value adjustments to our interest rate swap.  Other income for the nine months ended September 30, 2010 was $1.2 million, compared to other expense $10.3 million for the nine months ended September 30, 2009.  Other income for the nine months ended September 30, 2010 was $1.2 million, primarily driven by the decrease of $1.4 million in the fair value of our interest rate swap liability, partially offset by $0.3 million in foreign exchanges losses.  Other expense for the nine months ended September 30, 2009 included a reclassification of $10.7 million from accumulated other comprehensive income within the consolidated balance sheet, due to the determination that our interest rate swap no longer qualified for hedge accounting under the FASB’s standards (see Note 8) to our Financial Statements in Item 1 of this Form 10-Q for additional details regarding the accounting treatment of the interest rate swap prior to March 31, 2009).  The $10.7 million recorded to other expense during the nine months ended September 30, 2009 represents cumulative fair value adjustments that were made through accumulated other comprehensive income during the period that the hedge was determined to be effective for accounting purposes. We expect the fair value adjustments to the interest rate swap will continue to be recorded in “Other (income) expense” through the end of the swap agreement in 2012.

Income Tax Provision (Benefit)
		Nine Months Ended
		September 30,								Increase				% Increase
		2010				2009				(Decrease)				(Decrease)
Income tax benefit		$	(8,970	)		$	(15,807	)		$	(6,837	)			(43.3	)%
Effective tax rate			42.9	%			44.0	%			(1.1	)%

The effective tax rate was 42.9% for the nine months ended September 30, 2010, compared with an effective tax rate of 44.0% for the nine months ended September 30, 2009.  The effective tax rate for the nine months ended September 30, 2010 was impacted by discrete items recorded in the third quarter of 2010, primarily a $3,261 benefit related to a change in the apportionment methodology used to determine our state tax liability, as well as $125 associated with the finalization of our 2009 tax return, as described within the three month discussion and analysis.

The effective tax rate for the nine months ended September 30, 2009 was impacted by discrete items recorded in the third quarter of 2009, primarily a $3,083 benefit related to research and development tax credits, partially offset by ($872) associated with the finalization of our 2008 tax return.  Our effective tax rates for the periods described above, excluding the discrete items, differ from the statutory rate due to the impact of state and local income taxes, certain non-deductible expenses and foreign earnings taxed at different tax rates.

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Liquidity and Capital Resources

 

		As of September 30,
		2010				2009
Cash and cash equivalents		$	31,296			$	26,833
Cash provided by operating activities			15,972				16,713
Cash used in investing activities			(16,530	)			(11,521	)
Cash provided by (used in) financing activities			1,414				(2,965	)
Effect of exchange rates on cash and cash equivalents			(41	)			(65	)
Net increase in cash  and cash equivalents		$	815			$	2,162

Since inception, we have financed our operations primarily through private sales of equity securities, credit facilities and more recently, cash generated from operations.  We currently use the net cash generated from operations to fund our working capital needs and our capital expenditure requirements.  Our available financing arrangements include credit under a $15.0 million revolving line of credit, of which $12.6 million is available to us as of September 30, 2010, term loans and credit agreements with financial institutions and vendor financing arrangements.  At September 30, 2010, we had approximately $31.2 million in cash and cash equivalents, $1.0 million in short-term investments, and $36.8 million in accounts receivable, net of allowances for doubtful accounts and credit reserves.  We believe that we have sufficient cash resources to continue in operation for at least the next 12 months.

 

On August 5, 2010, the SEC declared effective our registration statement on Form S-1, as amended (File No. 333-165991) (the “Registration Statement”), in connection with our initial public offering of 11,000,000 shares of Common Stock at a public offering price of $13.00 per share. The offering closed on August 11, 2010. As a result of the offering, we received net proceeds of approximately $133.0 million, after deducting underwriting discounts and commissions of $10.0 million. In September 2010, the underwriters exercised their over-allotment option to purchase 980,000 shares of Common Stock at the public offering price of $13.00 per share.  We received an additional $11.8 million in net proceeds, after deducting underwriting discounts and commissions of $0.9 million.

 

We used substantially all of the net proceeds of our initial public offering, including the underwriters’ exercise of their over-allotment option, to repay indebtedness.  Pursuant to the amended terms of the First and Second Lien Agreements, as discussed in detail below under “Financing Activities,” we used the net proceeds from our initial public offering to first reduce outstanding indebtedness under the PIK Loan, with a portion of the remaining initial public offering proceeds, as well as the proceeds from the underwriters’ exercise of their over-allotment option, applied to Tranche B and Tranche C of the Second Lien Credit Facility, on a pro rata basis.  The reduction in debt will reduce our total interest expense due to a decrease in the non-cash interest on the PIK Loan.  However, from a cash flow perspective, the resulting benefits from reducing the debt will be offset by the increase in interest rates on the remaining term loans.

 

The credit markets have experienced disruption that reached unprecedented levels during late 2008 and 2009.  The disruption in the financial markets has affected some of the financial institutions with which we do business.  A continued, sustained decline in the stability of these financial institutions could adversely affect our access to financing, as well as our revenue growth (due to our customer base in the DCM and M&A markets).  Additionally, if the national or global economy or credit market conditions in general were to deteriorate further, it is possible that such changes could adversely affect our ability to obtain external financing or to refinance our existing indebtedness.

 

Operating Activities

 

Cash flows provided by operating activities during the nine months ended September 30, 2010 were $16.0 million, consisting of a net loss of $11.9 million plus the impact of the change in deferred taxes of $9.6 million, offset by non-cash items including amortization of intangible assets of $21.6 million, depreciation and amortization of $12.1 million, non-cash interest expense of $4.9 million, non-cash stock-based compensation of $2.8 million and an unrealized gain on the interest rate swap of $1.4 million,.  Working capital uses of cash during the nine months ended September 30, 2010 included (i) a $3.2 million decrease in accounts payable due to timing of payments (ii) a $2.5 million net decrease in accounts receivable ($11.2 million increase in accounts receivable offset by $8.7 million increase in deferred revenue) primarily driven by an increase in business activity for the period reflected by increased invoicing.

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Cash flows provided by operating activities during the nine months ended September 30, 2009 were $16.7 million, consisting of a net loss of $20.1 million, plus the impact of the change in deferred taxes of $16.3 million, offset by non-cash items including amortization of intangible assets of $27.7 million, an unrealized loss on the interest rate swap of $9.7 million, depreciation and amortization of $8.6 million and non-cash interest expense of $8.7 million. Working capital uses of cash during the nine months ended September 30, 2009 included a $3 million decrease in accrued expenses and other current liabilities primarily attributable to payments made during the period for capital expenditures on investments in our software and equipment and sales commissions and annual bonuses awarded under our 2008 cash incentive plans, and a $1.5 million decrease in accounts payable due to timing of payments.

 

Investing Activities

 

Currently, our investing activities primarily relate to our investment in the business through capital expenditures for network infrastructure and investments in software development.  Cash used in investing activities for the nine months ended September 30, 2010 and 2009 was $16.5 million and $11.5 million, respectively. Cash used in investing activities related to capital expenditures for infrastructure during the nine months ended September 30, 2010 and 2009 was $6.6 million and $3.7 million, respectively.  Investments in capitalized software development costs for the nine months ended September 30, 2010 and 2009 were $12.5 million and $7.8 million, respectively. We anticipate future capital expenditures and investments in our software development may increase in future periods, however, due to restrictive covenants contained within the current, amended credit agreements, future capital expenditures are not expected to exceed $25.0 million on an annual basis.  Additionally, purchases of investments during the nine months ended September 30, 2010 totaled $4.3 million and consisted primarily of bank time deposits with maturities greater than three months. Sales of investments during the nine months ended September 30, 2010 totaled $6.8 million and consisted primarily of redemptions of our auction rate securities and maturities of our bank time deposits.

 

Financing Activities

 

Cash flows provided by financing activities for the nine months ended September 30, 2010 were $1.4 million, primarily consisting of $144.8 million in net proceeds from our initial public offering, including the underwriters’ exercise of their over-allotment option, partially offset by $137.8 million in payments made on our outstanding long-term debt and a $4.1 million prepayment penalty on the PIK Loan during the nine months ended September 30, 2010.  Cash flows used in financing activities for the nine months ended September 30, 2009 were $3.0 million, primarily consisting of $2.9 million of principal payments on our long-term debt.

 

As described in Note 8 to our consolidated financial statements set forth in Item 1 of this Form 10-Q, on May 14, 2010, we entered into an agreement with our lenders to amend the First Lien Credit Agreement and Second Lien Credit Agreement. The purpose of the amended credit agreements was to allow us to use the net proceeds from our initial public offering for the repayment in full of the PIK Loan under the Holdings Senior PIK Credit Agreement and for the repayment of the Tranche B and Tranche C term loans under the Second Lien Credit Agreement on a pro rata basis.  Under the terms of the original First and Second Lien Credit Agreements, we were restricted with regards to repayment preference. The amendment of the First Lien Credit Agreement includes updated terms on the interest rate, including a floor of 1.5% (should we elect the Eurodollar Rate option) and an increase in the rate margin of 1.75%. The amendment of the Second Lien Credit Agreement includes updated terms on the interest rate of the Tranche C term loan, including a floor of 2.0% (should we elect the Eurodollar Rate option) and an increase in the rate margin of 0.75%.  The updated interest rates under the amended credit agreements became effective immediately following the consummation of our initial public offering, which occurred on August 11, 2010.

The First Lien Credit Agreement (“First Lien Credit Facility”) provides for term loans in the aggregate principal amount of $135.0 million, with quarterly installment payments equal to 0.25% of the initial principal balance due on the last day of each quarter, which commenced on September 30, 2007 and continues for 27 installments, with the balance due in a final installment on June 15, 2014. Additionally, the First Lien Credit Facility includes a requirement for mandatory prepayments of 50% of our excess free cash flow as measured on an annual basis. Excess free cash flow is generally defined as our adjusted EBITDA less debt service costs, capital expenditures, current income taxes paid and any cash security deposits made in respect of leases for office space, as adjusted for changes in our working capital. As a result of our fiscal 2009 excess free cash flow, we made a mandatory prepayment on April 1, 2010 of approximately $1.2 million under the First Lien Credit Facility. The term loans under the amended First Lien Credit Agreement bear interest at the higher of the Eurodollar Rate (as defined in the credit agreement) or 1.50%, plus 4.50% per annum, which was 6.00% at September 30, 2010.  As of September 30, 2009, the interest rate on the First Lien Credit Facility was based on the Eurodollar Rate, plus 2.75% per annum, which was 3.01%.  Interest payments on the First Lien Credit Facility are due on the last business day of each month. The First Lien Credit Facility also provides for a $15.0 million revolving line of credit, of which $12.6 million was unused as of September 30, 2010. As of September 30, 2010, $1.6 million of the revolving line of credit was reserved for standby letters of credit for several of the operating lease agreements related to our various office locations.  During the three months ended September 30, 2010, an additional $0.8 million of the revolving line of credit was reserved for a standby letter of credit related to our corporate charge card utilized by executives and certain other employees.

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The Second Lien Credit Agreement (“Second Lien Credit Facility”) provides for two tranches of term loans, Tranche B in the amount of $30.0 million and Tranche C in the amount of $35.0 million. Both tranches are due in full on the maturity date of December 15, 2014. Tranche B bears interest at the rate of 11.00% per annum through its maturity date, with interest payments due on the last business day of each March, June, September and December of each year. Under the amended terms of the Second Lien Credit Agreement, Tranche C bears interest at the higher of the Eurodollar Rate (as defined in the credit agreement), or 2.00%, plus 6.50% per annum, which was 8.50% at September 30, 2010.  As of September 30, 2009, the interest rate on Tranche C was based on the Eurodollar Rate, plus 5.75% per annum, which was 6.01%.  Interest payments on the Tranche C term loan are due on the last business day of each month. The Second Lien Credit Facility permits, at our option, interest on the Tranche C term loan to be payable in full or in part in kind by adding the accrued interest to the principal of the term loans, which thereafter accrues interest at the rate stated above, plus a PIK margin of 0.5%. To date, we have not paid any of the interest on the Tranche C term loan in kind, either in part or in full.

 

The First Lien Credit Facility and Second Lien Credit Facility are secured by security interests and liens against all of our assets, including a pledge of 100% of the equity interests in our domestic subsidiaries and an obligation to pledge 65% of the equity interests in our direct foreign subsidiaries.

 

All obligations under the First Lien Credit Facility and Second Lien Credit Facility are unconditionally guaranteed by our direct and indirect domestic subsidiaries. These guarantees are secured by substantially all the present and future property of the guarantors.

 

Cash paid for interest on the loans described above, during the three and nine months ended September 30, 2010 was $4.2 million and $15.0 million, respectively.  Cash paid for interest on the loans described above, during the three and nine months ended September 30, 2009 was $4.2 million and $12.7 million, respectively.

Due to the continued positive operating performance of our business and the absence of any acquisition activity, we have not needed to borrow additional amounts under our credit facilities or obtain additional financing to fund operations and capital expenditures.

 

Contractual Obligations and Commitments

 

The following table sets forth, as of September 30, 2010, certain significant cash obligations that will affect our future liquidity.

						Less than				1-3				3-5				More than
		Total				1 year				Years				Years				5 years
Long-term debt, including current portion		$	160,913			$	1,350			$	2,700			$	156,863			$	-
Interest on long-term debt			49,124				16,006				23,878				9,240				-
Operating leases			26,009				2,348				4,565				5,456				13,640
Third-party hosting commitments			10,451				3,114				6,495				842				-
Total		$	246,497			$	22,818			$	37,638			$	172,401			$	13,640

Long-Term Debt and Interest on Long-Term Debt

 

Cash obligations on long-term debt, presented in the table above, represent scheduled principal payments due in each respective period.

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Interest on long-term debt consists of expected interest payments on the First and Second Lien Credit Facilities through the respective maturity dates, based on assumptions regarding the amount of debt outstanding and assumed interest rates. The assumed interest rate on the First Lien Credit Facility was 6.0%, representing a 1.5% LIBOR floor plus 4.5% spread.  The assumed interest rate on Tranche C of the Second Lien Credit Facility was 8.5%, representing a 2.0% LIBOR floor plus 6.5% spread.  The interest rate on Tranche B of the Second Lien Credit Facility is fixed at 11%. Interest expense was assumed through maturity of the loans.  In addition, this amount reflects the impact of the interest rate swap on the variable rate debt, for which we expect to pay a fixed rate of 5.25% through June 2012.

Operating Leases and Service Obligations

Our principal commitments consist of obligations under operating leases for office space in New York, NY, Boston, MA London, UK, Chicago, IL, Sao Paolo, Brazil, Paris, France and Hong Kong which expire in July 2011 (see below for details regarding execution of new lease for the space in New York, NY beginning August 2011), December 2015, June 2013, April 2013, January 2012, May 2011 and March 2011 respectively. Rent is amortized on a straight-line basis over the applicable lease terms. Our office space lease obligations may increase as a result of customary contractual escalation clauses or if we enter into new agreements to lease additional office space. In December 2009, we executed a new 10 year lease directly with the landlord for our corporate headquarters in New York, NY. Currently we occupy the space under a sublease arrangement that expires immediately prior to the time the new lease takes effect. The new lease begins in August 2011 for 10 years and provides for approximately 12 months of initial free rent and an allowance from the landlord to be used for office improvements and certain other payments of approximately $1.9 million. The present value of the future minimum lease payments of the new lease is included in the above table.

Service obligations consist of our commitments to our third-party hosting provider, which expire in December 2013. Our hosting obligations are largely impacted by service expansion requirements in line with the growth of our business.

Uncertain Tax Positions

In addition to the above, our uncertain tax positions are included within ‘‘other long term liabilities’’ on the consolidated balance sheet. We have classified these uncertain tax positions as long-term, as we do not anticipate that settlement of the liabilities will require payment of cash within the next twelve months. We are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but do not believe that the ultimate settlement of our obligations will materially affect our liquidity.

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities on an ongoing basis. We evaluate these estimates including those related to the determination of the fair value of stock options and awards issued, fair value of our reporting unit, valuation of intangible assets (and their related useful lives), fair value of financial instruments, income tax provisions, compensation accruals, and accounts receivable and sales. Actual results may differ from those estimates under different assumptions or conditions.

 

We believe the accounting policies and estimates discussed within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Registration Statement reflect our more significant judgments and estimates used in the preparation of the consolidated financial statements. There have been no material changes to the critical accounting policies and estimates as filed in such report.

 

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our consolidated balance sheets.

Recently Adopted Accounting Pronouncements

We refer to Note 2 to the Consolidated Financial Statements, contained within Item 1 of this Quarterly Report on Form 10-Q, for discussion regarding the expected impact of the adoption of certain accounting pronouncements on future period consolidated financial statements.

 

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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion should be read together with our consolidated financial statements and related notes to consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, as well as those discussed within our audited consolidated financial statements, related notes to audited consolidated financial statements included in our Registration Statement.

 

Interest Rate Sensitivity

 

The primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income without significantly increasing risk. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we maintain our portfolio of cash and cash equivalents and investments in a variety of securities, including bank time deposits, money market funds, and U.S. treasuries. A 10% decrease in interest rates in the three and nine months ended September 30, 2010, or the three and nine months ended September 30, 2009, would not have had a material impact (on a total dollar basis) on our interest income during those periods, respectively, due to the immateriality of the interest income generated by our investments during those periods.

 

We maintain an interest rate swap agreement that, as of September 30, 2010, fixed the interest rate on 79% of our variable rate debt. The fair value of the interest rate swap derivative is measured based on dealer quotes and a credit valuation adjustment to reflect credit risk. The fair value measurement of the swap may fluctuate considerably from period-to-period due to volatility in underlying interest rates, which is driven by market conditions and the duration of the swap. For the three and nine months ended September 30, 2010, a 10% increase or decrease in interest rates would have resulted in an increase or decrease of less than $0.1 million to “Other (income) expense,” within our consolidated statement of operations.  For the three and nine months ended September 30, 2009, a 10% increase or decrease in interest rates would have resulted in an increase or decrease of $0.4 million to “Other (income) expense,” within our consolidated statement of operations.

 

Foreign Currency Exchange Risk

 

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British Pounds Sterling and the Euro. During the nine months ended September 30, 2010, approximately 35% of our revenues were generated from sales across 60 countries outside of the United States.  However, for the three and nine months ended September 30, 2010, only 16% and 15%, respectively, of the contracts we entered into with our customers were based in foreign currency.  Comparatively, during the nine months ended September 30, 2009, approximately 32% of our revenues were generated from sales across 60 countries outside of the United States.  However, for the three and nine months ended September 30, 2009, only 11% and 6%, respectively, of the contracts we entered into with our customers were based in foreign currency.  Additionally, during the three and nine months ended September 30, 2010, approximately 25% and 22%, respectively, of our expenses were incurred in foreign currency.  For the comparable periods of the prior year approximately 15% and 14%, respectively, of our expenses were incurred in foreign currency.

 

To date, we have not entered into any foreign currency hedging contracts, since exchange rate fluctuations have had little impact on our operating results and cash flows. For the three and nine months ended September 30, 2010, we incurred a $0.1 million foreign currency transaction gain and a $0.3 million foreign currency transaction loss, respectively, which represents less than 1% of our revenues for the same periods. For the three and nine months ended September 30, 2009, we incurred foreign currency transaction losses of less than $0.1 million and $0.7 million, respectively, which represents less than 1% of our revenues from the same periods.

Inflation Risk

 

Our monetary assets, consisting primarily of cash, cash equivalents and investments, are not affected significantly by inflation because they are short-term. We believe the impact of inflation on replacement costs of equipment, furniture and leasehold improvements will not materially affect our operations. The rate of inflation, however, affects our cost of revenue and expenses, such as those for employee compensation, which may not be readily recoverable in the price of the services offered by us.

 

 

 

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ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.