sv1
As filed with the Securities and
Exchange Commission on April 29, 2010
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-1
REGISTRATION
STATEMENT
Under
The Securities Act of
1933
RealPage, Inc.
(Exact name of Registrant as
specified in its charter)
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Delaware
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7372
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75-2788861
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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4000 International
Parkway
Carrollton, Texas
75007
Tel:
(972) 820-3000
(Address, including zip code,
and telephone number, including area code, of Registrants
principal executive offices)
Timothy J. Barker
4000 International
Parkway
Carrollton, Texas
75007
Tel:
(972) 820-3000
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Paul R. Tobias
Wilson Sonsini Goodrich & Rosati,
Professional Corporation
900 S. Capital of Texas Hwy.
Las Cimas IV, Fifth Floor
Austin, Texas 78746
Tel: (512) 338-5400
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William H. Hinman Jr.
Simpson Thacher & Bartlett LLP
2550 Hanover Street
Palo Alto, California 94304
Tel: (650) 251-5000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ Smaller
reporting
company o
(Do
not check if a smaller reporting company)
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
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Amount of
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Title of Each Class of
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Aggregate Offering
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Registration
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Securities to be Registered
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Price(1)(2)
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Fee
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Common Stock, $0.001 par value per share
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$150,000,000
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$10,695.00
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(1)
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Includes offering price of shares
issuable upon exercise of the underwriters over-allotment
option.
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(2)
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Estimated solely for the purpose of
calculating the amount of the registration fee in accordance
with Rule 457(o) of the Securities Act of 1933.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. Neither we nor the selling stockholders may sell these
securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities, and neither we nor the
selling stockholders are soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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SUBJECT
TO COMPLETION, DATED APRIL 29, 2010
Shares
RealPage,
Inc.
Common
Stock
This is the initial
public offering of our common stock. We are
selling shares
of common stock and the selling stockholders identified in this
prospectus are
selling shares
of common stock. We will not receive any proceeds from the sale
of shares of common stock by the selling stockholders.
Prior to this
offering, there has been no public market for our common stock.
The initial public offering price of our common stock is
expected to be between $ and
$ per share. We will apply to list our common
stock on the NASDAQ Global Market under the symbol
.
The underwriters
have an option to purchase a maximum
of additional
shares from the selling stockholders to cover over-allotments.
Investing in our
common stock involves risks. See Risk
Factors on page 10.
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Underwriting
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Price to
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Discounts and
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Proceeds to
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Proceeds to
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Public
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Commissions
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RealPage
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Selling
Stockholders
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Per share
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$
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$
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$
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$
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Total
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$
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$
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$
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$
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Delivery of the
shares of common stock will be made on or
about ,
2010.
Neither the
Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
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Credit
Suisse |
Deutsche Bank Securities |
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William
Blair & Company |
RBC Capital Markets |
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JMP
Securities |
Pacific Crest Securities |
The date of this
prospectus
is ,
2010.
TABLE OF
CONTENTS
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Page
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1
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10
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35
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72
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89
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97
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120
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127
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132
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138
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144
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145
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145
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F-1
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You should rely only on the information contained in this
document or to which we have referred you. We have not
authorized anyone to provide you with information that is
different. This document may only be used where it is legal to
sell these securities. The information in this document may only
be accurate on the date of this document.
Dealer
Prospectus Delivery Obligation
Until ,
2010 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as an underwriter and with
respect to unsold allotments or subscriptions.
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus and does not contain all of the information you
should consider in making your investment decision. You should
read this entire prospectus carefully, especially the risks of
investing in our common stock discussed under Risk
Factors and the consolidated financial statements and
related notes included elsewhere in this prospectus, before
making an investment decision.
Company
Overview
We are a leading provider of on demand software solutions for
the rental housing industry. Our broad range of property
management solutions enables owners and managers of
single-family and a wide variety of multi-family rental property
types to manage their marketing, pricing, screening, leasing,
accounting, purchasing and other property operations. Our on
demand software solutions are delivered through an integrated
software platform that provides a single point of access and a
shared repository of prospect, resident and property data. By
integrating and streamlining a wide range of complex processes
and interactions among the rental housing ecosystem of owners,
managers, prospects, residents and service providers, our
platform optimizes the property management process and improves
the experience for all of these constituents.
Our solutions enable property owners and managers to increase
revenues and reduce operating costs through higher occupancy,
improved pricing methodologies, new sources of revenue from
ancillary services, improved collections and more integrated and
centralized processes. As of December 31, 2009, over 5,000
customers used one or more of our on demand software solutions
to help manage the operations of approximately 4.6 million
rental housing units. Our customers include nine of the ten
largest multi-family property management companies in the United
States, ranked as of January 1, 2009, based on number of
units managed.
We sell our solutions through our direct sales organization. Our
total revenues were approximately $83.6 million,
$112.6 million and $140.9 million in 2007, 2008 and
2009, respectively. In the same years, we had operating (loss)
income of approximately ($1.6 million), ($0.4 million)
and $6.9 million, respectively, and net (loss) income of
approximately ($3.1 million), ($3.2 million) and
$28.4 million, respectively. Net income for 2009 included a
discrete tax benefit of approximately $26.0 million as a
result of a reduction of our net deferred tax assets valuation
allowance.
Our Adjusted EBITDA in 2007, 2008 and 2009 was approximately
$6.0 million, $13.1 million and $25.6 million,
respectively. We believe Adjusted EBITDA is useful to investors
in evaluating our operating performance. Our management uses
Adjusted EBITDA in conjunction with accounting principles
generally accepted in the United States, or GAAP, operating
performance measures as part of its overall assessment of our
performance for planning purposes, including the preparation of
our annual operating budget, to evaluate the effectiveness of
our business strategies and to communicate with our board of
directors concerning our financial performance. Adjusted EBITDA
should not be considered as an alternative financial measure to
net (loss) income, which is the most directly comparable
financial measure calculated in accordance with GAAP, or any
other measure of financial performance calculated in accordance
with GAAP. The following table presents a reconciliation of net
(loss) income to Adjusted EBITDA:
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Year Ended December 31,
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2007
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2008
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2009
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(in thousands)
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Net (loss) income
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$
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(3,143
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$
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(3,209
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$
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28,429
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Depreciation and asset impairment
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4,854
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9,847
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9,231
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Amortization of intangible assets
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2,273
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2,095
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5,784
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Interest expense, net
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1,510
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2,152
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4,528
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Income tax expense (benefit)
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703
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(26,028
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Stock-based compensation expense
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490
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1,476
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2,805
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Acquisition-related expense
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844
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Adjusted EBITDA
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$
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5,984
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$
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13,064
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$
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25,593
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1
For further discussion regarding Adjusted EBITDA, see footnote 5
to the table in Selected Consolidated Financial Data.
Industry
Overview
The rental housing market is large and characterized by
challenging and location-specific operating requirements,
diverse industry participants, significant mobility among
residents and a variety of property types, including
single-family and a wide range of
multi-family
property types, including conventional, affordable, privatized
military, student and senior housing. According to the
U.S. Census Bureau American Housing Survey for the United
States: 2007, there were 39.3 million rental housing units
in the United States in 2007. Based on U.S. Census Bureau
data and our own estimates, we believe that the overall size of
the U.S. rental housing market, including rent, utilities
and insurance, exceeds $300 billion annually. We estimate
that the total addressable market for our current on demand
software solutions is approximately $5.5 billion per year.
This estimate assumes that each of the 39.3 million rental units
in the United States has the potential to generate annually a
range of approximately $100 in revenue per unit for
single-family units to approximately $240 in revenue per unit
for conventional multi-family units. We base this potential
revenue assumption on our review of the purchasing patterns of
our existing customers with respect to our on demand software
solutions, the on demand software solutions currently utilized
by our existing customers, the number of units our customers
manage with these solutions and our current pricing for our on
demand software solutions.
Rental property management spans both the resident lifecycle and
the operations of a property. The resident lifecycle can be
separated into four key stages: prospect, applicant, residency
and post-residency. Each stage of the lifecycle has unique
requirements, such as identifying and capturing quality
prospects, processing applications, assessing applicants
credit risk, processing payments to and from residents and
service providers and managing resident turnover. In addition to
managing the resident lifecycle, property owners and managers
must also manage the operations of their properties, including
material and service provider procurement, insurance and risk
mitigation, utility and energy management, information
technology and telecommunications management, accounting,
expense tracking and management, document management, security,
staff hiring and training, staff performance measurement and
management and marketing. A property owners or
managers ability to effectively address these requirements
can significantly impact their revenue and profitability.
A variety of software applications have been developed to
automate many of these functions. However, these applications
often require property owners and managers to implement a myriad
of third-party
and/or
internally developed point solutions. These solutions can be
expensive to implement and maintain and are often ineffective at
helping property owners and managers increase rental revenue and
reduce costs.
The
RealPage Solution
We provide a platform of on demand software solutions that
integrate and streamline rental property management business
functions. Our solutions enable owners and managers of
single-family and a wide variety of multi-family rental property
types, including conventional, affordable, privatized military,
student and senior housing, to manage their marketing, pricing,
screening, leasing, accounting, purchasing and other property
operations. These functions have traditionally been addressed by
individual, disparate applications. Our solutions enable
property owners and managers to increase revenues and reduce
operating costs through higher occupancy, improved pricing
methodologies, new sources of revenue from ancillary services,
improved collections and more integrated and centralized
business processes. Our solutions contribute to a more efficient
property management process and an improved experience for all
of the constituents involved in the rental housing ecosystem,
including owners, managers, prospects, residents and service
providers.
The benefits of our solutions for our customers include the
following:
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Increased revenues. Our solutions help our
customers improve sales and marketing effectiveness, optimize
pricing and occupancy and improve collection of rental payments,
utility expenses, late fees and other charges.
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Reduced operating costs. Our solutions help
our customers streamline and automate many ongoing property
management functions, centralize certain property operations,
control purchasing by on-site personnel and eliminate the need
to own and support property management applications and
associated hardware infrastructure.
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Improved quality of service for residents and
prospects. Our solutions expedite the processing
of a variety of recurring transactions and increase the
frequency and quality of communication with residents and
prospects, providing higher resident satisfaction and increased
differentiation from competing properties that do not use our
solutions.
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Streamlined and simplified property management business
processes. Our solutions share data and automate
the workflow of certain business processes, thereby eliminating
redundant data entry and simplifying many recurring tasks.
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Ability to integrate third-party products and
services. Our open architecture and application
framework facilitate the integration of third-party applications
and services into our solutions.
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Increased visibility into property
performance. Our integrated platform and common
data repository enable owners and managers to gain a
comprehensive view of the operational and financial performance
of each of their properties.
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Simple implementation and support. Our
solutions include pre-configured extensions that meet the
specific needs of a variety of property types and can be easily
tailored by our customers to meet the specific needs of their
properties or business processes.
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Improved scalability. Our application
infrastructure is designed to evolve with our customers
needs.
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The competitive strengths of our solutions are as follows:
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Integrated on demand software platform based on a common data
repository. Our solutions are delivered through
an integrated on demand software platform that provides a single
point of access via the Internet to all of our products and a
common repository of prospect, resident and property data.
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Large and growing ecosystem of property owners, managers,
prospects, residents and service providers. Our
solutions automate and streamline many of the recurring
transactions and interactions among a large and expanding rental
housing ecosystem of property owners and managers, prospects,
residents and service providers.
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Comprehensive platform of on demand software solutions for
property management. We provide what we believe
to be the broadest range of on demand capabilities for managing
the resident lifecycle and core operational processes for
residential property management.
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Deep rental housing industry expertise. We
design our solutions based on our extensive rental housing
industry expertise, insight into industry trends and
developments and best practices.
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Open cloud computing architecture. Our cloud
computing architecture enables our solutions to interface with
many of our customers existing systems and allows our
customers to outsource the management of third-party business
applications.
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Our
Strategy
We intend to leverage the breadth of our solutions and industry
presence to solidify our position as a leading provider of on
demand software solutions to the rental housing industry. The
key elements of our strategy to accomplish this objective are as
follows:
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acquire new customers;
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increase the adoption of additional solutions within our
existing customer base;
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add new solutions to our platform; and
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pursue acquisitions of complementary businesses, products and
technologies.
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Risks
Affecting Us
Our business is subject to a number of risks that you should
understand before making an investment decision. These risks are
discussed more fully in Risk Factors following this
prospectus summary. Some of these risks are:
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our quarterly operating results have fluctuated in the past and
may fluctuate in the future, which could cause our stock price
to decline;
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we have a history of operating losses and may not maintain
profitability in the future;
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if we are unable to manage the growth of our diverse and complex
operations, our financial performance may suffer;
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our business depends substantially on customers renewing and
expanding their subscriptions for our solutions and any increase
in customer cancellations or decline in customer renewals and
expansions would harm our future operating results;
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we face intense competitive pressures and our failure to compete
successfully could harm our operating results;
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we may not be able to continue to add new customers, which could
adversely affect our operating results; and
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if we are not able to integrate past or future acquisitions
successfully, our operating results and prospects could be
harmed.
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Company
Information
We were incorporated in the State of Delaware in December 2003
through a merger with our predecessor entity, RealPage, Inc., a
Texas corporation, which was originally incorporated in November
1998 as Seren Capital Acquisition Corp. Our principal executive
offices are located at 4000 International Parkway, Carrollton,
Texas 75007, and our telephone number is
(972) 820-3000.
Our website address is www.realpage.com. The information on, or
that can be accessed through, our website is not part of this
prospectus.
RealPage®,
OneSite®,
OneSite Leasing and
Rentstm,
OneSite
Facilitiestm,
OneSite
Purchasingtm,
OneSite
Accountingtm,
OneSite
Budgetingtm,
Propertyware®,
HUDManager®,
RentRoll®,
i-CAMtm,
Tenant
Pro®,
Spectratm,
CrossFire®,
CrossFire Contact
Centertm,
CrossFire Leasing
Portaltm,
CrossFire Resident
Portaltm,
CrossFire
Studiotm,
M/PF
Research®,
YieldStar®,
YieldStar Price
Optimizertm,
LeasingDesk®,
LeasingDesk
Screeningtm,
LeasingDesk Insurance
Servicestm,
eRenterPlantm,
Credit
Optimizertm,
Velocitytm,
OpsTechnologytm,
OpsMarkettm,
OpsAdvantagetm,
OpsBuyertm,
OpsBidtm
and
Domin-8®
are our trademarks and registered trademarks appearing in this
prospectus. All other trademarks and trade names appearing in
this prospectus are the property of their respective owners.
4
The
Offering
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Common stock offered by us |
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shares |
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Common stock offered by the selling stockholders |
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shares |
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Total common stock offered |
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shares |
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Common stock to be outstanding after this offering |
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shares |
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Use of proceeds |
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We intend to use the net proceeds from this offering to pay
accumulated and unpaid dividends on our outstanding shares of
Series A, Series A1 and Series B convertible
preferred stock that have accrued at a rate of 8% per annum of
the original issue price of each such share of preferred stock,
compounded quarterly, which amounted to
$ million as
of ,
2010, to repay approximately $18.2 million of our
indebtedness outstanding as of December 31, 2009 and for
general corporate purposes, including working capital. We also
may use a portion of the net proceeds to acquire complementary
businesses or technologies. We will not receive any proceeds
from the sale of shares by the selling stockholders. See
Use of Proceeds. |
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Risk factors |
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You should read the Risk Factors section of this
prospectus for a discussion of factors that you should consider
carefully before deciding to invest in shares of our common
stock. |
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Proposed NASDAQ Global Market symbol |
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The number of shares of common stock that will be outstanding
after this offering is based on 111,009,108 shares of our
common stock outstanding as of December 31, 2009 and
excludes:
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15,707,456 shares of common stock issuable upon the
exercise of options outstanding as of December 31, 2009
under our 1998 Stock Incentive Plan, with a weighted average
exercise price of $2.16 per share;
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150,000 shares of common stock issuable upon exercise of
options outstanding as of December 31, 2009 issued to
directors pursuant to stock option agreements outside of our
1998 Stock Incentive Plan, with a weighted average exercise
price of $3.00 per share;
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1,721,000 shares of common stock issuable upon exercise of
options granted in the quarter ended March 31, 2010 under
our 1998 Stock Incentive Plan, with a weighted average exercise
price of $3.75 per share;
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120,000 shares of common stock issuable upon exercise of
options granted in the quarter ended March 31, 2010 to
directors pursuant to stock option agreements outside of our
1998 Stock Incentive Plan, with a weighted average exercise
price of $3.75 per share;
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shares
of common stock reserved for future issuance under our 2010
Equity Incentive Plan, which will become effective in connection
with this offering (including 732,285 shares of common
stock reserved, as of December 31, 2009, for future
issuance under our 1998 Stock Incentive Plan, which shares will
be added to the shares reserved under our 2010 Equity Incentive
Plan, upon its effectiveness); and
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25,000 shares of common stock issuable upon the exercise of
warrants outstanding as of December 31, 2009, with a
weighted average exercise price of $1.00 per share.
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5
Unless otherwise indicated, the information in this prospectus
assumes:
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a -for-
reverse stock split of our common stock and convertible
preferred stock to be effected prior to the completion of this
offering;
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the conversion of all outstanding shares of our convertible
preferred stock into 58,087,500 shares of common stock
effective upon the completion of this offering;
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no exercise by the underwriters of their right to purchase up
to shares
of common stock to cover over-allotments; and
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the filing of our amended and restated certificate of
incorporation and the effectiveness of our amended and restated
bylaws, which will occur immediately upon the completion of this
offering.
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6
Summary
Consolidated Financial Data
The following tables present summary consolidated financial data
for the years ended December 31, 2007, 2008 and 2009 and
summary consolidated balance sheet data as of December 31,
2007, 2008 and 2009. We have derived the consolidated statement
of operations data for the years ended December 31, 2007,
2008, and 2009 and the consolidated balance sheet data as of
December 31, 2008 and 2009 from our audited consolidated
financial statements, which appear elsewhere in this prospectus.
We derived the consolidated balance sheet data as of
December 31, 2007 from our unaudited consolidated financial
statements that are not included in this prospectus. You should
read this information in conjunction with our consolidated
financial statements, the related notes to these financial
statements and the information in Managements
Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
On demand
|
|
$
|
62,592
|
|
|
$
|
95,192
|
|
|
$
|
128,377
|
|
On premise
|
|
|
11,560
|
|
|
|
7,582
|
|
|
|
3,860
|
|
Professional and other
|
|
|
9,429
|
|
|
|
9,794
|
|
|
|
8,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
83,581
|
|
|
|
112,568
|
|
|
|
140,902
|
|
Cost of revenue
|
|
|
35,703
|
|
|
|
46,058
|
|
|
|
58,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
47,878
|
|
|
|
66,510
|
|
|
|
82,389
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
21,708
|
|
|
|
28,806
|
|
|
|
27,446
|
|
Sales and marketing
|
|
|
18,047
|
|
|
|
23,923
|
|
|
|
27,804
|
|
General and administrative
|
|
|
9,756
|
|
|
|
14,135
|
|
|
|
20,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
49,511
|
|
|
|
66,864
|
|
|
|
75,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(1,633
|
)
|
|
|
(354
|
)
|
|
|
6,929
|
|
Interest expense, net
|
|
|
(1,510
|
)
|
|
|
(2,152
|
)
|
|
|
(4,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before taxes
|
|
|
(3,143
|
)
|
|
|
(2,506
|
)
|
|
|
2,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
703
|
|
|
|
(26,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3,143
|
)
|
|
$
|
(3,209
|
)
|
|
$
|
28,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(9,143
|
)
|
|
$
|
(10,658
|
)
|
|
$
|
10,757
|
|
Diluted
|
|
$
|
(9,143
|
)
|
|
$
|
(10,658
|
)
|
|
$
|
10,757
|
|
Net (loss) income per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.45
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
0.22
|
|
Diluted
|
|
$
|
(0.45
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
0.21
|
|
Weighted average shares used in computing net (loss) income per
share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
20,446
|
|
|
|
27,773
|
|
|
|
47,869
|
|
Diluted
|
|
|
20,446
|
|
|
|
27,773
|
|
|
|
51,025
|
|
Pro forma net income per share attributable to common
stockholders
(unaudited)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
0.27
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
0.26
|
|
Pro forma weighted average shares outstanding used in computing
net income per share attributable to common stockholders
(unaudited)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
105,957
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
109,113
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents(3)
|
|
$
|
2,731
|
|
|
$
|
4,248
|
|
|
$
|
4,427
|
|
Working capital, excluding deferred revenue
|
|
|
9,224
|
|
|
|
12,126
|
|
|
|
12,929
|
|
Total assets
|
|
|
59,518
|
|
|
|
102,340
|
|
|
|
142,113
|
|
Current and long-term
debt(4)
|
|
|
23,809
|
|
|
|
48,943
|
|
|
|
53,990
|
|
Total liabilities
|
|
|
87,954
|
|
|
|
129,622
|
|
|
|
136,757
|
|
Preferred stock
|
|
|
78,534
|
|
|
|
71,675
|
|
|
|
71,832
|
|
Total stockholders deficit
|
|
|
(106,970
|
)
|
|
|
(98,957
|
)
|
|
|
(66,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA(5)
|
|
$
|
5,984
|
|
|
$
|
13,064
|
|
|
$
|
25,593
|
|
Operating cash flow
|
|
|
4,441
|
|
|
|
7,962
|
|
|
|
24,758
|
|
Capital expenditures
|
|
|
7,122
|
|
|
|
10,263
|
|
|
|
9,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Selected Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of on demand customers at period end
|
|
|
2,199
|
|
|
|
2,669
|
|
|
|
5,032
|
|
Number of on demand units at period end (in thousands)
|
|
|
2,800
|
|
|
|
3,833
|
|
|
|
4,551
|
|
Total number of employees at period end
|
|
|
654
|
|
|
|
922
|
|
|
|
1,141
|
|
|
|
|
(1) |
|
Pro forma net income per share represents net income divided by
the pro forma weighted average shares outstanding as though the
conversion of our redeemable convertible preferred stock into
common stock occurred on the original issuance dates. |
|
(2) |
|
Pro forma weighted average shares outstanding reflects the
conversion of our redeemable convertible preferred stock (using
the if-converted method) into common stock as though the
conversion had occurred on the original dates of issuance. |
|
(3) |
|
Excludes restricted cash. |
|
(4) |
|
Includes capital lease obligations. |
|
(5) |
|
We define Adjusted EBITDA as net (loss) income plus depreciation
and asset impairment, amortization of intangible assets,
interest expense, net, income tax expense (benefit), stock-based
compensation expense and acquisition-related expense. |
|
|
|
We believe that the use of Adjusted EBITDA is useful to
investors and other users of our financial statements in
evaluating our operating performance because it provides them
with an additional tool to compare business performance across
companies and across periods. We believe that: |
|
|
|
|
|
Adjusted EBITDA provides investors and other users of our
financial information consistency and comparability with our
past financial performance, facilitates period-to-period
comparisons of operations and facilitates comparisons with our
peer companies, many of which use similar non-GAAP financial
measures to supplement their GAAP results; and
|
|
|
|
it is useful to exclude certain non-cash charges, such as
depreciation and asset impairment, amortization of intangible
assets and stock-based compensation and non-core operational
charges, such as acquisition-related expense, from Adjusted
EBITDA because the amount of such expenses in any specific
period may not directly correlate to the underlying performance
of our business operations and these expenses can vary
significantly between periods as a result of new acquisitions,
full amortization of previously acquired tangible and intangible
assets or the timing of new stock-based awards, as the case may
be.
|
|
|
|
|
|
We use Adjusted EBITDA in conjunction with traditional GAAP
operating performance measures as part of our overall assessment
of our performance, for planning purposes, including the
preparation of our |
8
|
|
|
|
|
annual operating budget, to evaluate the effectiveness of our
business strategies and to communicate with our board of
directors concerning our financial performance. |
|
|
|
We do not place undue reliance on Adjusted EBITDA as our only
measure of operating performance. Adjusted EBITDA should not be
considered as a substitute for other measures of liquidity or
financial performance reported in accordance with GAAP. There
are limitations to using non-GAAP financial measures, including
that other companies may calculate these measures differently
than we do, that they do not reflect our capital expenditures or
future requirements for capital expenditures and that they do
not reflect changes in, or cash requirements for, our working
capital. We compensate for the inherent limitations associated
with using Adjusted EBITDA measures through disclosure of these
limitations, presentation of our financial statements in
accordance with GAAP and reconciliation of Adjusted EBITDA to
the most directly comparable GAAP measure, net (loss) income. |
The following table presents a reconciliation of net (loss)
income to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Net (loss) income
|
|
$
|
(3,143
|
)
|
|
$
|
(3,209
|
)
|
|
$
|
28,429
|
|
Depreciation and asset impairment
|
|
|
4,854
|
|
|
|
9,847
|
|
|
|
9,231
|
|
Amortization of intangible assets
|
|
|
2,273
|
|
|
|
2,095
|
|
|
|
5,784
|
|
Interest expense, net
|
|
|
1,510
|
|
|
|
2,152
|
|
|
|
4,528
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
703
|
|
|
|
(26,028
|
)
|
Stock-based compensation expense
|
|
|
490
|
|
|
|
1,476
|
|
|
|
2,805
|
|
Acquisition-related expense
|
|
|
|
|
|
|
|
|
|
|
844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
5,984
|
|
|
$
|
13,064
|
|
|
$
|
25,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents stock-based compensation included
in each expense category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Cost of revenue
|
|
$
|
48
|
|
|
$
|
104
|
|
|
$
|
367
|
|
Product development
|
|
|
251
|
|
|
|
727
|
|
|
|
1,175
|
|
Sales and marketing
|
|
|
110
|
|
|
|
277
|
|
|
|
498
|
|
General and administrative
|
|
|
81
|
|
|
|
368
|
|
|
|
765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
490
|
|
|
$
|
1,476
|
|
|
$
|
2,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
RISK
FACTORS
An investment in our common stock involves a high degree of
risk. You should carefully consider the risks and uncertainties
described below, together with the financial and other
information contained in this prospectus, including our
consolidated financial statements and related notes, before
deciding whether to purchase shares of our common stock. If any
of the following risks actually occurs, our business, financial
condition, results of operations and future prospects could be
materially and adversely affected. In that event, the market
price of our common stock could decline and you could lose part
or all of your investment.
Risks
Related to Our Business
Our
quarterly operating results have fluctuated in the past and may
fluctuate in the future, which could cause our stock price to
decline.
Our quarterly operating results may fluctuate as a result of a
variety of factors, many of which are outside of our control.
Fluctuations in our quarterly operating results may be due to a
number of factors, including the risks and uncertainties
discussed elsewhere in this prospectus. Some of the important
factors that could cause our revenues and operating results to
fluctuate from quarter to quarter include:
|
|
|
|
|
the extent to which on demand software solutions maintain
current and achieve broader market acceptance;
|
|
|
|
our ability to timely introduce enhancements to our existing
solutions and new solutions;
|
|
|
|
our ability to increase sales to existing customers and attract
new customers;
|
|
|
|
changes in our pricing policies or those of our competitors;
|
|
|
|
the variable nature of our sales and implementation cycles;
|
|
|
|
general economic, industry and market conditions in the rental
housing industry that impact the financial condition of our
current and potential customers;
|
|
|
|
the amount and timing of our investment in research and
development activities;
|
|
|
|
technical difficulties, service interruptions or security
breaches;
|
|
|
|
our ability to hire and retain qualified key personnel,
including the rate of expansion of our sales force;
|
|
|
|
changes in the legal, regulatory or compliance environment
related to the rental housing industry, fair credit reporting,
payment processing, privacy, utility billing, the Internet and
e-commerce;
|
|
|
|
the amount and timing of operating expenses and capital
expenditures related to the expansion of our operations and
infrastructure;
|
|
|
|
the timing of revenue and expenses related to recent and
potential acquisitions or dispositions of businesses or
technologies;
|
|
|
|
our ability to integrate acquisitions in a cost-effective and
timely manner;
|
|
|
|
litigation and settlement costs, including unforeseen
costs; and
|
|
|
|
new accounting pronouncements and changes in accounting
standards or practices, particularly any affecting the
recognition of subscription revenue or accounting for mergers
and acquisitions.
|
Fluctuations in our quarterly operating results may lead
analysts to change their long-term model for valuing our common
stock, cause us to face short-term liquidity issues, impact our
ability to retain or attract key personnel or cause other
unanticipated issues, all of which could cause our stock price
to decline. As a result of the potential variations in our
quarterly revenue and operating results, we believe that
quarter-to-quarter comparisons of our revenues and operating
results may not be meaningful and the results of any one quarter
should not be relied upon as an indication of future performance.
10
We
have a history of operating losses and may not maintain
profitability in the future.
Prior to the fiscal quarter ended March 31, 2009, we had
not been profitable on a quarterly or annual basis. We
experienced net losses of $3.1 million and
$3.2 million in 2007 and 2008, respectively. As of
December 31, 2009, our accumulated deficit was
$89.8 million. While we have experienced significant growth
over recent quarters and our net income was $28.4 million
in 2009, we may not be able to sustain or increase our growth or
profitability in the future. Net income for 2009 included a
discrete tax benefit of approximately $26.0 million as a
result of a reduction of our net deferred tax assets valuation
allowance. We expect to make significant future expenditures
related to the development and expansion of our business. In
addition, following the completion of this offering, we expect
that our general and administrative expenses will increase due
to the additional operational and reporting costs associated
with being a public company. As a result of these increased
expenditures and expenses, we will need to generate and sustain
increased revenue to achieve future profitability expectations.
We may incur significant losses in the future for a number of
reasons, including the other risks and uncertainties described
in this prospectus. Additionally, we may encounter unforeseen
operating expenses, difficulties, complications, delays and
other unknown factors that may result in losses in future
periods. If these losses exceed our expectations or our growth
expectations are not met in future periods, our financial
performance will be affected adversely.
If we
are unable to manage the growth of our diverse and complex
operations, our financial performance may suffer.
The growth in the size, complexity and diversity of our business
and the expansion of our product lines and customer base has
placed, and our anticipated growth may continue to place, a
significant strain on our managerial, administrative,
operational, financial and other resources. We have experienced
rapid growth over the past three years. We increased our number
of employees from 532 as of December 31, 2006 to 1,141 as
of December 31, 2009 and our number of on demand customers
from 1,469 as of December 31, 2006 to 5,032 as of
December 31, 2009. We increased the number of product
centers that we offer from 20 as of December 31, 2006 to 41
as of December 31, 2009. In addition, in the past, we have
grown and expect to continue to grow through acquisitions. For
example, we recently acquired the assets of Domin-8 Enterprise
Solutions, Inc., which was a holding company for several on
premise property management systems. Our ability to effectively
manage our anticipated future growth will depend on, among other
things, the following:
|
|
|
|
|
successfully supporting and maintaining a broad range of
solutions;
|
|
|
|
maintaining continuity in our senior management and key
personnel;
|
|
|
|
attracting, retaining, training and motivating our employees,
particularly technical, customer service and sales personnel;
|
|
|
|
enhancing our financial and accounting systems and controls;
|
|
|
|
enhancing our information technology infrastructure; and
|
|
|
|
managing expanded operations in geographically dispersed
locations.
|
If we do not manage the size, complexity and diverse nature of
our business effectively, we could experience delayed software
releases and longer response times for assisting our customers
with implementation of our solutions and could lack adequate
resources to support our customers on an ongoing basis, any of
which could adversely affect our reputation in the market and
our ability to generate revenue from new or existing customers.
The
nature of our platform is complex and highly integrated and if
we fail to successfully manage releases or integrate new
solutions, it could harm our revenues, operating income and
reputation.
We manage a complex platform of solutions that consists of our
property management systems and integrated software-enabled
value-added services. Many of our solutions include a large
number of product centers that are highly integrated and require
interoperability with each other and our other solutions, as
well as products and services of third-party service providers.
Additionally, we typically deploy new releases of the
11
software underlying our on demand software solutions on a
monthly or quarterly schedule depending on the solution. Due to
this complexity and the condensed development cycles under which
we operate, we may experience errors in our software or
unexpected performance issues from time to time. For example,
our solutions may face interoperability difficulties with
software operating systems or programs being used by our
customers, or new releases, upgrades, fixes or the integration
of acquired technologies may have unanticipated consequences on
the operation and performance of our other solutions. If we
encounter integration challenges or discover errors in our
solutions late in our development cycle, it may cause us to
delay our launch dates. Any major integration or
interoperability issues or launch delays could have a material
adverse effect on our revenues, operating income and reputation.
Our
business depends substantially on customers renewing and
expanding their subscriptions for our solutions and any increase
in customer cancellations or decline in customer renewals or
expansions would harm our future operating
results.
We generally license our solutions pursuant to customer
agreements with a term of one year. Our customers have no
obligation to renew these agreements after their term expires,
or to renew these agreements at the same or higher annual
contract value. In addition, under specific circumstances, our
customers have the right to cancel their customer agreements
before they expire, for example, in the event of an uncured
breach by us, or in some circumstances, by paying a cancellation
fee. In addition, customers often purchase a higher level of
professional services in the initial term than they do in
renewal terms to ensure successful activation. As a result, our
ability to grow is dependent in part on customers purchasing
additional solutions or professional services after the initial
term of their customer agreement. Though we maintain and analyze
historical data with respect to rates of customer renewals,
upgrades and expansions, those rates may not accurately predict
future trends in customer renewals. Our customers renewal
rates may decline or fluctuate for a number of reasons,
including, but not limited to, their satisfaction or
dissatisfaction with our solutions, our pricing, our
competitors pricing, reductions in our customers
spending levels or reductions in the number of units managed by
our customers. If our customers cancel their agreements with us
during their term, do not renew their agreements, renew on less
favorable terms or do not purchase additional solutions or
professional services in renewal periods, our revenue may grow
more slowly than expected or decline and our profitability may
be harmed.
Additionally, we have experienced, and expect to continue to
experience, some level of customer turnover as properties are
sold and the new owners and managers of properties previously
owned or managed by our customers do not continue to use our
solutions. We cannot predict the amount of customer turnover we
will experience in the future. However, we have experienced
slightly higher rates of customer turnover with our recently
acquired Propertyware property management system, primarily
because it serves smaller properties than our OneSite property
management system, and we may experience higher levels of
customer turnover to the extent Propertyware grows as a
percentage of our revenues. If we experience increased customer
turnover, our financial performance and operating results could
be adversely affected.
We have also experienced, and expect to continue to experience,
some number of consolidations of our customers with other
parties. If one of our customers consolidates with a party who
is not a customer, our customer may decide not to continue to
use our solutions. In addition, if one of our customers is
consolidated with another customer, the acquiring customer may
have negotiated lower prices for our solutions or may use fewer
of our solutions than the acquired customer. In each case, the
consolidated entity may attempt to negotiate lower prices for
using our solutions as a result of their increased size. These
consolidations may cause us to lose customers or require us to
reduce prices as a result of enhanced customer leverage, which
could cause our financial performance and operating results to
be adversely affected.
Because
we recognize subscription revenue over the term of the
applicable customer agreement, a decline in subscription
renewals or new service agreements may not be reflected
immediately in our operating results.
We generally recognize revenue from customers ratably over the
terms of their customer agreements, which are typically one
year. As a result, much of the revenue we report in each quarter
is deferred revenue from customer agreements entered into during
previous quarters. Consequently, a decline in new or renewed
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customer agreements in any one quarter will not be fully
reflected in our revenue or our results of operations until
future periods. Accordingly, this revenue recognition model also
makes it difficult for us to rapidly increase our revenue
through additional sales in any period, as revenue from new
customers must be recognized over the applicable subscription
term.
We may
not be able to continue to add new customers and retain and
increase sales to our existing customers, which could adversely
affect our operating results.
Our revenue growth is dependent on our ability to continually
attract new customers while retaining and expanding our service
offerings to existing customers. Growth in the demand for our
solutions may be inhibited and we may be unable to sustain
growth in our customer base for a number of reasons, including,
but not limited to:
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our inability to market our solutions in a cost-effective manner
to new customers or in new vertical or geographic markets;
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our inability to expand our sales to existing customers;
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our inability to build and promote our brand; and
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perceived security, reliability, quality or compatibility
problems with our solutions.
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A substantial amount of our past revenue growth was derived from
purchases of upgrades and additional solutions by existing
customers. Our costs associated with increasing revenue from
existing customers are generally lower than costs associated
with generating revenue from new customers. Therefore, a
reduction in the rate of revenue increase from our existing
customers, even if offset by an increase in revenue from new
customers, could reduce our profitability and have a material
adverse effect on our operating results.
If we
are not able to integrate past or future acquisitions
successfully, our operating results and prospects could be
harmed.
We have acquired new technology and domain expertise through
multiple acquisitions, including our most recent acquisition of
assets from Domin-8 Enterprise Solutions, Inc. in February 2010.
We expect to continue making acquisitions. The success of our
future acquisition strategy will depend on our ability to
identify, negotiate, complete and integrate acquisitions.
Acquisitions are inherently risky, and any acquisitions we
complete may not be successful. Any acquisitions we pursue would
involve numerous risks, including the following:
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difficulties in integrating and managing the operations and
technologies of the companies we acquire;
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diversion of our managements attention from normal daily
operations of our business;
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our inability to maintain the key employees, the key business
relationships and the reputations of the businesses we acquire;
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insufficient revenue to offset our increased expenses associated
with acquisitions;
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our responsibility for the liabilities of the businesses we
acquire, including, without limitation, liabilities arising out
of their failure to maintain effective data security and privacy
controls prior to the acquisition;
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difficulties in complying with new regulatory standards to which
we were not previously subject;
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delays in our ability to implement internal standards, controls,
procedures and policies in the businesses we acquire; and
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adverse effects of acquisition activity on the key performance
indicators we use to monitor our performance as a business.
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Our current acquisition strategy includes the acquisition of
companies that offer property management systems that may not
interoperate with our software-enabled
value-added
services. In order to integrate and
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fully realize the benefits of such acquisitions, we expect to
build application interfaces that enable such customers to use a
wide range of our solutions while they continue to use their
legacy management systems. In addition, over time we expect to
migrate the acquired companys customers to our on demand
property management systems to retain them as customers and to
be in a position to offer them our solutions on a cost-effective
basis. These efforts may be unsuccessful or entail costs that
result in losses or reduced profitability.
We may be unable to secure the equity or debt funding necessary
to finance future acquisitions on terms that are acceptable to
us, or at all. If we finance acquisitions by issuing equity or
convertible debt securities, our existing stockholders will
likely experience ownership dilution, and if we finance future
acquisitions with debt funding, we will incur interest expense
and may have to comply with additional financing covenants or
secure that debt obligation with our assets.
If we
are unable to successfully develop or acquire and sell
enhancements and new solutions, our revenue growth will be
harmed and we may not be able to meet profitability
expectations.
The industry in which we operate is characterized by rapidly
changing customer requirements, technological developments and
evolving industry standards. Our ability to attract new
customers and increase revenue from existing customers will
depend in large part on our ability to successfully develop,
bring to market and sell enhancements to our existing solutions
and new solutions that effectively respond to the rapid changes
in our industry. Any enhancements or new solutions that we
develop or acquire may not be introduced to the market in a
timely or cost-effective manner and may not achieve the broad
market acceptance necessary to generate the revenue required to
offset the operating expenses and capital expenditures related
to development or acquisition. If we are unable to timely
develop or acquire and sell enhancements and new solutions that
keep pace with the rapid changes in our industry, our revenue
will not grow as expected and we may not be able to maintain or
meet profitability expectations.
We
derive a substantial portion of our revenue from a limited
number of our solutions and failure to maintain demand for these
solutions or diversify our revenue base through increasing
demand for our other solutions could negatively affect our
operating results.
Historically, a majority of our revenue was derived from sales
of our OneSite property management system and our LeasingDesk
software-enabled
value-added
service. If we are unable to develop enhancements to these
solutions to maintain demand for these solutions or to diversify
our revenue base by increasing demand for our other solutions,
our operating results could be negatively impacted.
We use
a small number of data centers to deliver our solutions. Any
disruption of service at our facilities could interrupt or delay
our customers access to our solutions, which could harm
our operating results.
The ability of our customers to access our service is critical
to our business. We currently serve a majority of our customers
from a primary data center located in Carrollton, Texas. We also
maintain a secondary data center in downtown Dallas, Texas,
approximately 20 miles from our primary data center.
Services of our most recent acquisitions are provided from data
centers located in Wisconsin, Ohio, Texas and Winnipeg, Canada.
It is our intent to migrate all data centers to our primary and
secondary data centers in Carrollton and Dallas. Any event
resulting in extended interruption or delay in our
customers access to our services or their data could harm
our operating results. There can be no certainty that the
measures we have taken to eliminate single points of failure in
the primary and secondary data centers will be effective to
prevent or minimize interruptions to our operations. Our
facilities are vulnerable to interruption or damage from a
number of sources, many of which are beyond our control,
including, without limitation:
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extended power loss;
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telecommunications failures from multiple telecommunication
providers;
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natural disaster or an act of terrorism;
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software and hardware errors, or failures in our own systems or
in other systems;
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network environment disruptions such as computer viruses,
hacking and similar problems in our own systems and in other
systems;
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theft and vandalism of equipment; and
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actions or events caused by or related to third parties.
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The occurrence of an extended interruption of services at one or
more of our data centers could result in lengthy interruptions
in our services. Since January 1, 2007, we have experienced
two extended service interruptions lasting more than eight hours
caused by equipment and hardware failures. Our service level
agreements require us to refund a prorated portion of the access
fee if we fail to satisfy our service level commitments related
to availability. Refunds for breach of this service level
commitment have resulted in immaterial payments to customers in
the past. An extended service outage could result in refunds to
our customers and harm our customer relationships.
We attempt to mitigate these risks through various business
continuity efforts, including redundant infrastructure, 24 x 7 x
365 system activity monitoring, backup and recovery procedures,
use of a secure off-site storage facility for backup media,
separate test systems and change management and system security
measures, but our precautions may not protect against all
potential problems. Our secondary data center is equipped with
physical space, power, storage and networking infrastructure and
Internet connectivity to support the solutions we provide in the
event of the interruption of services at our primary data
center. Even with this secondary data center, however, our
operations would be interrupted during the transition process
should our primary data center experience a failure. Moreover,
both our primary and secondary data centers are located in the
greater metropolitan Dallas area. As a result, any regional
disaster could affect both data centers and result in a material
disruption of our services.
For customers who specifically pay for accelerated disaster
recovery services, we replicate their data from our primary data
center to our secondary data center with the necessary stand-by
servers and disk storage available to provide services within
two hours of a disaster. This process is currently audited by
some of our customers who pay for this service on an annual
basis. For customers who do not pay for such services, our
current service level agreements with our customers require that
we provide disaster recovery within 72 hours.
Disruptions at our data centers could cause disruptions in our
services and data loss or corruption. This could damage our
reputation, cause us to issue credits to customers, subject us
to potential liability or costs related to defending against
claims or cause customers to terminate or elect not to renew
their agreements, any of which could negatively impact our
revenues.
We
provide service level commitments to our customers, and our
failure to meet the stated service levels could significantly
harm our revenue and our reputation.
Our customer agreements provide that we maintain certain service
level commitments to our customers relating primarily to product
functionality, network uptime, critical infrastructure
availability and hardware replacement. For example, our service
level agreements generally require that our solutions are
available 98% of the time during coverage hours (normally
6:00 a.m. though 10:00 p.m. Central time daily)
365 days per year. If we are unable to meet the stated
service level commitments, we may be contractually obligated to
provide customers with refunds or credits. Additionally, if we
fail to meet our service level commitments a specified number of
times within a given time frame or for a specified duration, our
customers may terminate their agreement with us or extend the
term of their agreement at no additional fee. As a result, a
failure to deliver services for a relatively short duration
could cause us to issue credits or refunds to a large number of
affected customers or result in the loss of customers. In
addition, we cannot assure you that our customers will accept
these credits, refunds, termination or extension rights in lieu
of other legal remedies that may be available to them. Our
failure to meet our commitments could also result in substantial
customer dissatisfaction or loss. Because of the loss of future
revenues through the issuance of credits or the loss of
customers or other potential liabilities, our revenue could be
significantly impacted if we cannot meet our service level
commitments to our customers.
15
We
face intense competitive pressures and our failure to compete
successfully could harm our operating results.
The market for our solutions is intensely competitive,
fragmented and rapidly changing with relatively low barriers to
entry. With the introduction of new technologies and market
entrants, we expect competition to intensify in the future.
Increased competition generally could result in pricing
pressures, reduced sales and reduced margins. Often we compete
to sell our solutions against existing systems that our
potential customers have already made significant expenditures
to install.
We face competition primarily from point solution providers,
including traditional software vendors, application service
providers, or ASPs, and other software as a service, or SaaS,
providers. Our competitors vary depending on our product and
service. Our principal competitors in the multi-family
enterprise resource planning, or ERP, market are AMSI Property
Management (owned by Infor Global Solutions, Inc.), MRI Software
LLC and Yardi Systems, Inc. These competitors offer both
software and ASP delivery platforms. In the last 12 months
Yardi Systems, Inc. has expanded into other competitive areas
through smaller acquisitions and internally developed systems.
In the single-family market, our ERP systems compete primarily
with AppFolio, Inc.
We offer a number of software-enabled value-added services that
compete with a disparate and large group of competitors. In the
applicant screening market, our principal competitors are
ChoicePoint Inc. (a subsidiary of Reed Elsevier Group plc),
First Advantage Corporation (a subsidiary of The First American
Corporation), TransUnion Rental Screening Solutions, Inc. (a
subsidiary of TransUnion LLC) and Yardi Systems, Inc.
(following its recent acquisition of RentGrow Inc., an applicant
screening provider). In the insurance market, our principal
competitors are Assurant, Inc. and a number of national
insurance underwriters (including GEICO Corporation) that market
renters insurance. There are many smaller screening and
insurance providers in the risk mitigation area that we
encounter less frequently, but they nevertheless present a
competitive presence in the market.
In the customer relationship management, or CRM, market, we
compete with providers of contact center and call tracking
services, including Call Source Inc., Level One, Inc.,
Yardi Systems, Inc. (which recently announced its intention to
build a call center) and numerous regional and local call
centers. In addition, we compete with lead tracking solution
providers, including Call Source Inc., eReal Estate Integration,
Inc., Lead Tracking Solutions (a division of O.C. Concepts,
Inc.) and Whos Calling, Inc. In addition, we compete with
content syndications and reservations systems offered by eReal
Estate Integration, Inc. and Realty DataTrust Corporation.
Finally, we compete with companies providing web portal
services, including Apartments24-7.com, Inc., Ellipse
Communications, Inc., Property Solutions International, Inc.,
Spherexx.com and Yardi Systems, Inc. Certain Internet listing
services also offer websites for their customers, usually as a
free value add to their listing service.
In the utility billing market, we compete at a national level
with American Utility Management, Inc., Conservice, LLC, ista
North America, Inc., NWP Services Corporation and Yardi Systems,
Inc. (following its recent acquisition of Energy Billing
Systems, Inc.). Many other smaller utility billing companies
compete for smaller rental properties or in regional areas.
In the revenue management market, we compete with PROS Holdings,
Inc., The Rainmaker Group, Inc. and Yardi Systems, Inc.
In the payment processing market, we compete with Chase
Paymentech Solutions, LLC (a subsidiary of JPMorgan
Chase & Co.), First Data Corporation, Fiserv, Inc.,
MoneyGram International, Inc., NWP Services Corporation,
Property Solutions International, Inc., RentPayment.com (a
subsidiary of Yapstone, Inc.), Yardi Systems, Inc. and a number
of national banking institutions.
In addition, many of our existing or potential customers have
developed or may develop their own solutions that may be
competitive with our solutions. We also may face competition for
potential acquisition targets from our competitors who are
seeking to expand their offerings.
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With respect to all of our competitors, we compete based on a
number of factors, including total cost of ownership, ease of
implementation, product functionality and scope, performance,
security, scalability and reliability of service, brand and
reputation, sales and marketing capabilities and financial
resources. Some of our existing competitors and new market
entrants may enjoy substantial competitive advantages, such as
greater name recognition, longer operating histories, a larger
installed customer base and larger marketing budgets, as well as
greater financial, technical and other resources. In addition,
any number of our existing competitors or new market entrants
could combine or consolidate to become a more formidable
competitor with greater resources. As a result of such
competitive advantages, our existing and future competitors may
be able to:
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develop superior products or services, gain greater market
acceptance and expand their offerings more efficiently or more
rapidly;
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adapt to new or emerging technologies and changes in customer
requirements more quickly;
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take advantage of acquisition and other opportunities more
readily;
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adopt more aggressive pricing policies and devote greater
resources to the promotion of their brand and marketing and
sales of their products and services; and
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devote greater resources to the research and development of
their products and services.
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If we are not able to compete effectively, our operating results
will be harmed.
We integrate our software-enabled
value-added
services with competitive ERP applications for some of our
customers. We also provide services to assist in the
implementation, training, support and hosting with respect to
the integration of some of our competitors applications
with our solutions. We sometimes rely on the cooperation of our
competitors to implement solutions for our customers. However,
frequently our reliance on the cooperation of our competitors
can result in delays in integration. There is no assurance that
our competitors, even if contractually obligated to do so, will
continue to cooperate with us or will not prospectively alter
their obligations to do so. We also occasionally develop
interfaces between our software-enabled
value-added
services and competitor ERP systems without their cooperation or
consent. There is no assurance that our competitors will not
alter their applications in ways that inhibit integration or
assert that their intellectual property rights restrict our
ability to integrate our solutions with their applications. If
our competitors do not continue to cooperate with us or if they
alter their applications in ways that inhibit or restrict the
integration of our solutions and we are not able to find
alternative ways to integrate our solutions with our
competitors applications, our business will be harmed.
Variability
in our sales and activation cycles could result in fluctuations
in our quarterly results of operations and cause our stock price
to decline.
The sales and activation cycles for our solutions, from initial
contact with a potential customer to contract execution and
activation, vary widely by customer and solution. We do not
recognize revenue until the solution is activated. While most of
our activations follow a set of standard procedures, a
customers priorities may delay activation and our ability
to recognize revenue, which could result in fluctuations in our
quarterly operating results.
Many
of our customers are price sensitive, and if market dynamics
require us to change our pricing model or reduce prices, our
operating results will be harmed.
Many of our existing and potential customers are price
sensitive, and recent adverse global economic conditions have
contributed to increased price sensitivity in the multi-family
housing market and the other markets that we serve. As market
dynamics change, or as new and existing competitors introduce
more competitive pricing or pricing models, we may be unable to
renew our agreements with existing customers or customers of the
businesses we acquire or attract new customers at the same price
or based on the same pricing model as previously used. As a
result, it is possible that we may be required to change our
pricing model, offer price incentives or reduce our prices,
which could harm our revenue, profitability and operating
results.
17
If we
do not effectively expand and train our sales force, we may be
unable to add new customers or increase sales to our existing
customers and our business will be harmed.
We continue to be substantially dependent on our sales force to
obtain new customers and to sell additional solutions to our
existing customers. We believe that there is significant
competition for sales personnel with the skills and technical
knowledge that we require. Our ability to achieve significant
revenue growth will depend, in large part, on our success in
recruiting, training and retaining sufficient numbers of sales
personnel to support our growth. New hires require significant
training and, in most cases, take significant time before they
achieve full productivity. Our recent hires and planned hires
may not become as productive as we expect, and we may be unable
to hire or retain sufficient numbers of qualified individuals in
the markets where we do business or plan to do business. If we
are unable to hire and train sufficient numbers of effective
sales personnel, or the sales personnel are not successful in
obtaining new customers or increasing sales to our existing
customer base, our business will be harmed.
Material
defects or errors in the software we use to deliver our
solutions could harm our reputation, result in significant costs
to us and impair our ability to sell our
solutions.
The software applications underlying our solutions are
inherently complex and may contain material defects or errors,
particularly when first introduced or when new versions or
enhancements are released. We have from time to time found
defects in the software applications underlying our solutions
and new errors in our existing solutions may be detected in the
future. Any errors or defects that cause performance problems or
service interruptions could result in:
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a reduction in new sales or subscription renewal rates;
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unexpected sales credits or refunds to our customers, loss of
customers and other potential liabilities;
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delays in customer payments, increasing our collection reserve
and collection cycle;
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diversion of development resources and associated costs;
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harm to our reputation and brand; and
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unanticipated litigation costs.
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Additionally, the costs incurred in correcting defects or errors
could be substantial and could adversely affect our operating
results.
Failure
to effectively manage the development of our solutions and data
processing efforts outside the United States could harm our
business.
Our success depends, in part, on our ability to process high
volumes of customer data and enhance existing solutions and
develop new solutions rapidly and cost effectively. We currently
maintain an office in Hyderabad, India where we employ
development and data processing personnel. We believe that
performing these activities in Hyderabad increases the
efficiency and decreases the costs of our development and data
processing efforts. Managing and staffing international
operations requires managements attention and financial
resources. The level of cost-savings achieved by our
international operations may not exceed the amount of investment
and additional resources required to manage and operate these
international operations. Additionally, if we experience
problems with our workforce or facilities in Hyderabad, our
business could be harmed due to delays in product release
schedules or data processing services.
We
rely on third-party technologies and services that may be
difficult to replace or that could cause errors, failures or
disruptions of our service, any of which could harm our
business.
We rely on a number of third-party providers, including, but not
limited to, computer hardware and software vendors and database
providers, to deliver our solutions. We currently utilize
equipment, software and services from Avaya Inc., Cisco Systems,
Inc., Dell Inc., EMC Corporation, Microsoft Corporation, Oracle
Corporation and salesforce.com, inc., as well as many other
smaller providers. Our OneSite Accounting
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service relies on a SaaS-based accounting system developed and
maintained by a third-party service provider. We host this
application in our data centers and provide supplemental
development resources to extend this accounting system to meet
the unique requirements of the rental housing industry. Our
shared cloud portfolio reporting service will utilize software
licensed from IBM. We expect to utilize additional service
providers as we expand our platform. Although the third-party
technologies and services that we require are generally
commercially available from a number of providers, such
technologies and services may not continue to be available on
commercially reasonable terms, or at all. Any loss of the right
to use any of these technologies or services could result in
delays in the provisioning of our solutions until alternative
technology is either developed by us, or, if available, is
identified, obtained and integrated, and such delays could harm
our business. It also may be time consuming and costly to enter
into new relationships. Additionally, any errors or defects in
the third-party technologies we utilize or delays or
interruptions in the third-party services we rely on could
result in errors, failures or disruptions of our services, which
also could harm our business.
We
depend upon third-party service providers for important payment
processing functions. If these third-party service providers do
not fulfill their contractual obligations or choose to
discontinue their services, our business and operations could be
disrupted and our operating results would be
harmed.
We rely on several large payment processing organizations to
enable us to provide payment processing services to our
customers, including electronic funds transfers, or EFT, check
services, bank card authorization, data capture, settlement and
merchant accounting services and access to various reporting
tools. These organizations include Paymentech, LLC, Jack
Henry & Associates, Inc., JPMorgan Chase Bank, N.A.
and Wells Fargo, N.A. We also rely on third-party hardware
manufacturers to manufacture the check scanning hardware our
customers utilize to process transactions. Some of these
organizations and service providers are competitors who also
directly or indirectly sell payment processing services to
customers in competition with us. With respect to these
organizations and service providers, we have significantly less
control over the systems and processes than if we were to
maintain and operate them ourselves. In some cases, functions
necessary to our business are performed on proprietary
third-party systems and software to which we have no access. We
also generally do not have long-term contracts with these
organizations and service providers. Accordingly, the failure of
these organizations and service providers to renew their
contracts with us or fulfill their contractual obligations and
perform satisfactorily could result in significant disruptions
to our operations and adversely affect operating results. In
addition, businesses that we have acquired, or may acquire in
the future, typically rely on other payment processing service
providers. We may encounter difficulty converting payment
processing services from these service providers to our payment
processing platform. If we are required to find an alternative
source for performing these functions, we may have to expend
significant money, time and other resources to develop or obtain
an alternative, and if developing or obtaining an alternative is
not accomplished in a timely manner and without significant
disruption to our business, we may be unable to fulfill our
responsibilities to customers or meet their expectations, with
the attendant potential for liability claims, damage to our
reputation, loss of ability to attract or maintain customers and
reduction of our revenue or profits.
We
face a number of risks in our payment processing business that
could result in a reduction in our revenues and
profits.
In connection with our payment processing services, we collect
resident funds and subsequently remit these resident funds to
our customers after varying holding periods. These funds are
settled through our sponsor bank, and in the case of EFT, our
Originating Depository Financial Institution, or ODFI.
Currently, we rely on Wells Fargo, N.A. and JPMorgan Chase Bank,
N.A. as our sponsor banks. In 2010, we expect to enter into
similar sponsor bank relationships with one or more other
national banking institutions. The custodial balances that we
hold for our customers at our sponsor bank are identified in our
consolidated balance sheets as restricted cash and the
corresponding liability for these custodial balances is
identified as customer deposits. Our payment
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processing business and related maintenance of custodial
accounts subjects us to a number of risks, including, but not
limited to:
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liability for customer costs related to disputed or fraudulent
merchant transactions if those amounts exceed the amount of the
customer reserves we have established to make such payments;
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limits on the amount of custodial balances that any single ODFI
will underwrite;
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reliance on bank sponsors and card payment processors and other
service providers to process bank card transactions;
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failure by us or our bank sponsors to adhere to applicable laws
and regulatory requirements or the standards of the Visa and
MasterCard credit card associations;
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incidences of fraud or a security breach or our failure to
comply with required external audit standards; and
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our inability to increase our fees at times when Visa and
MasterCard increase their merchant transaction processing fees.
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If any of these risks related to our payment processing business
were to occur, our business or financial results could be
negatively affected. Additionally, with respect to the
processing of EFTs, we are exposed to financial risk. EFTs
between a resident and our customer may be returned for
insufficient funds, or NSFs, or rejected. These NSFs and rejects
are charged back to the customer by us. However, if we or our
sponsor banks are unable to collect such amounts from the
customers account or if the customer refuses or is unable
to reimburse us for the chargeback, we bear the risk of loss for
the amount of the transfer. While we have not experienced
material losses resulting from chargebacks in the past, there
can be no assurance that we will not experience significant
losses from chargebacks in the future. Any increase in
chargebacks not paid by our customers may adversely affect our
financial condition and results of operations.
If our
security measures are breached and unauthorized access is
obtained to our customers or their residents data,
we may incur significant liabilities, our solutions may be
perceived as not being secure and customers may curtail or stop
using our solutions.
The solutions we provide involve the collection, storage and
transmission of confidential personal and proprietary
information regarding our customers and our customers
current and prospective residents. Specifically, we collect,
store and transmit a variety of customer data including, but not
limited to, the demographic information and payment histories of
our customers prospective and current residents.
Additionally, we collect and transmit sensitive financial data
such as credit card and bank account information. If our
security measures are breached as a result of third-party
actions or any employees or contractors errors or
malfeasance or otherwise, and someone obtains unauthorized
access to this information, we could incur significant liability
to our customers and to their prospective or current residents
or significant fines and sanctions by processing networks or
governmental bodies, any of which could result in harm to our
business and damage to our reputation.
We also rely upon our customers as users of our system to
promote security of the system and the data within it, such as
administration of customer-side access credentialing and control
of customer-side display of data. On occasion, our customers
have failed to perform these activities in such a manner as to
prevent unauthorized access to data. To date, these breaches
have not resulted in claims against us or in material harm to
our business, but we cannot be certain that the failure of our
customers in future periods to perform these activities will not
result in claims against us, which could expose us to potential
litigation and harm to our reputation.
There can be no certainty that the measures we have taken to
protect the privacy and integrity of our customers and
their current or prospective residents data are adequate
to prevent or remedy unauthorized access to our system. Because
techniques used to obtain unauthorized access to, or to
sabotage, systems change frequently and generally are not
recognized until launched against a target, we may be unable to
anticipate these techniques or to implement adequate preventive
measures. Experienced computer programmers seeking to intrude or
cause harm, or hackers, may attempt to penetrate our service
infrastructure from time to
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time. Although we have not experienced any material security
breaches to date, a hacker who is able to penetrate our service
infrastructure could misappropriate proprietary or confidential
information or cause interruptions in our services. We might be
required to expend significant capital and resources to protect
against, or to alleviate, problems caused by hackers, and we may
not have a timely remedy against a hacker who is able to
penetrate our service infrastructure. In addition to purposeful
breaches, the inadvertent transmission of computer viruses could
expose us to security risks. If an actual or perceived breach of
our security occurs or if our customers and potential customers
perceive vulnerabilities, the market perception of the
effectiveness of our security measures could be harmed and we
could lose sales and customers.
If we
are unable to cost-effectively scale or adapt our existing
architecture to accommodate increased traffic, technological
advances or changing customer requirements, our operating
results could be harmed.
As we continue to increase our customer base, the number of
users accessing our on demand software solutions over the
Internet will continue to increase. Increased traffic could
result in slow access speeds. Since our customer agreements
typically include service availability commitments, slow access
speeds or our failure to accommodate increased traffic could
result in breaches of our customer agreements. In addition, the
market for our solutions is characterized by rapid technological
advances and changes in customer requirements. In order to
accommodate increased traffic and respond to technological
advances and evolving customer requirements, we expect that we
will be required to make future investments in our network
architecture. If we do not implement future upgrades to our
network architecture cost-effectively, or if we experience
prolonged delays or unforeseen difficulties in connection with
upgrading our network architecture, our service quality may
suffer and our operating results could be harmed.
Because
certain solutions we provide depend on access to customer data,
decreased access to this data or the failure to comply with
applicable privacy laws and regulations or address privacy
concerns applicable to such data could harm our
business.
Certain of our solutions depend on our continued access to our
customers data regarding their prospective and current
residents, including data compiled by other third-party service
providers who collect and store data on behalf of our customers.
Federal and state governments and agencies have adopted, or are
considering adopting, laws and regulations regarding the
collection, use and disclosure of such data. Any decrease in the
availability of such data from our customers, or other third
parties that collect and store such data on behalf of our
customers, and the costs of compliance with, and other burdens
imposed by, applicable legislative and regulatory initiatives
may limit our ability to collect, aggregate or use this data.
Any limitations on our ability to collect, aggregate or use such
data could reduce demand for certain of our solutions.
Additionally, any inability to adequately address privacy
concerns, even if unfounded, or comply with applicable privacy
laws, regulations and policies, could result in liability to us
or damage to our reputation and could inhibit sales and market
acceptance of our solutions and harm our business.
The
market for on demand software solutions in the rental housing
industry is new and continues to develop, and if it does not
develop further or develops more slowly than we expect, our
business will be harmed.
The market for on demand software solutions in the rental
housing industry delivered via the Internet through a web
browser is rapidly growing but still relatively immature
compared to the market for traditional on premise software
installed on a customers local personal computer or
server. It is uncertain whether the on demand delivery model
will achieve and sustain high levels of demand and market
acceptance, making our business and future prospects difficult
to evaluate and predict. While our existing customer base has
widely accepted this new model, our future success will depend,
to a large extent, on the willingness of our potential customers
to choose on demand software solutions for business processes
that they view as critical. Many of our potential customers have
invested substantial effort and financial resources to integrate
traditional enterprise software into their businesses and may be
reluctant or unwilling to switch to on demand software
solutions. Some businesses may be reluctant or unwilling to use
on demand software solutions because they have concerns
regarding the risks associated with security capabilities,
reliability and availability, among other
21
things, of the on demand delivery model. If potential customers
do not consider on demand software solutions to be beneficial,
then the market for these solutions may not further develop, or
it may develop more slowly than we expect, either of which would
adversely affect our operating results.
Economic
trends that affect the rental housing market may have a negative
effect on our business.
Our customers include a range of organizations whose success is
intrinsically linked to the rental housing market. Economic
trends that negatively affect the rental housing market may
adversely affect our business. The recent downturn in the global
economy has caused volatility in the real estate markets,
generally, including the rental housing market, and increases in
the rates of mortgage defaults and bankruptcy. Continued
instability or downturns affecting the rental housing market may
have a material adverse effect on our business, prospects,
financial condition and results of operations by:
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reducing the number of occupied sites and units on which we earn
revenue;
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preventing our customers from expanding their businesses and
managing new properties;
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causing our customers to reduce spending on our solutions;
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subjecting us to increased pricing pressure in order to add new
customers and retain existing customers;
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causing our customers to switch to lower-priced solutions
provided by our competitors or internally-developed solutions;
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delaying or preventing our collection of outstanding accounts
receivable; and
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causing payment processing losses related to an increase in
customer insolvency.
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We may
require additional capital to support business growth, and this
capital might not be available.
We intend to continue to make investments to support our
business growth and may require additional funds to respond to
business challenges or opportunities, including the need to
develop new solutions or enhance our existing solutions, enhance
our operating infrastructure or acquire businesses and
technologies. Accordingly, we may need to engage in equity or
debt financings to secure additional funds. If we raise
additional funds through further issuances of equity or
convertible debt securities, our existing stockholders could
suffer significant dilution, and any new equity securities we
issue could have rights, preferences and privileges superior to
those of holders of our common stock. Debt financing secured by
us in the future could involve additional restrictive covenants
relating to our capital raising activities and other financial
and operational matters, which may make it more difficult for us
to obtain additional capital and to pursue business
opportunities, including potential acquisitions. In addition, we
may not be able to obtain additional financing on terms
favorable to us, if at all. If we are unable to obtain adequate
financing or financing on terms satisfactory to us when we
require it, our ability to continue to support our business
growth and to respond to business challenges or opportunities
could be significantly limited.
Our
debt obligations contain restrictions that impact our business
and expose us to risks that could adversely affect our liquidity
and financial condition.
On September 3, 2009, we entered into a credit facility
with Wells Fargo Capital Finance, LLC (formerly Wells Fargo
Foothill, LLC) and Comerica Bank. As amended, the credit
facility provides for borrowings of up to $55.0 million,
including a revolving facility of up to $10.0 million,
which is subject to a borrowing base and provides for a sublimit
of $5.0 million for the issuance of letters of credit on
our behalf, and a term loan facility of $45.0 million. At
December 31, 2009, we had no outstanding indebtedness under
the revolving facility and approximately $33.7 million of
outstanding indebtedness under the term loan facility. On
February 10, 2010, we borrowed an additional
$10.0 million under the term loan facility in connection
with an acquisition. Our interest expense in 2009 for the credit
facility was approximately $0.9 million.
Advances under the credit facility may be voluntarily prepaid,
and must be prepaid with the proceeds of certain dispositions,
extraordinary receipts, indebtedness and equity, with excess
cash flow and in full upon a
22
change in control. Our lenders have waived the requirement under
the credit facility that we prepay the credit facility with the
proceeds of this offering. However, this waiver will expire if
we do not complete this offering by December 31, 2010.
Voluntary prepayments and mandatory prepayments from the
proceeds of indebtedness and equity are subject to a prepayment
premium of 2.0% in the first year of the credit facility, which
is reduced to 1.5% in the event the credit facility is
terminated and prepaid in full from the proceeds of this
offering, 1.0% in the second year of the facility, 0.5% in the
third year of the facility and 0% thereafter. Such prepayments
will be applied first to reduce the term loan, and then to
reduce availability under the revolver.
All of our obligations under the loan facility are secured by
substantially all of our property. All of our existing and
future domestic subsidiaries are required to guaranty our
obligations under the credit facility, other than certain
immaterial subsidiaries and our payment processing subsidiary,
RealPage Payment Processing Services, Inc. Our foreign
subsidiaries may, under certain circumstances, be required to
guaranty our obligations under the credit facility. Such
guarantees by existing and future subsidiaries are and will be
secured by substantially all of the property of such
subsidiaries.
Our credit facility contains customary covenants, which limit
our and certain of our subsidiaries ability to, among
other things:
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incur additional indebtedness or guarantee indebtedness of
others;
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create liens on our assets;
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enter into mergers or consolidations;
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dispose of assets;
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prepay indebtedness or make changes to our governing documents
and certain of our agreements;
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pay dividends and make other distributions on our capital stock,
and redeem and repurchase our capital stock;
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make investments, including acquisitions;
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enter into transactions with affiliates; and
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make capital expenditures.
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Our credit facility also contains customary affirmative
covenants, including a fixed charge coverage ratio and a senior
leverage ratio.
The credit facility contains customary events of default,
subject to customary cure periods for certain defaults, that
include, among others, non-payment defaults, covenant defaults,
material judgment defaults, bankruptcy and insolvency defaults,
cross-defaults to certain other material indebtedness and
inaccuracy of representations and warranties.
If we experience a decline in cash flow due to any of the
factors described in this Risk Factors section or
otherwise, we could have difficulty paying interest and
principal amounts due on our indebtedness and meeting the
financial covenants set forth in our credit facility. If we are
unable to generate sufficient cash flow or otherwise obtain the
funds necessary to make required payments under our credit
facility, or if we fail to comply with the requirements of our
indebtedness, we could default under our credit facility. Any
such default that is not cured or waived could result in the
acceleration of the obligations under the credit facility, an
increase in the applicable interest rate under the credit
facility and a requirement that our subsidiaries that have
guaranteed the credit facility pay the obligations in full, and
would permit our lender to exercise remedies with respect to all
of the collateral that is securing the credit facility,
including substantially all of our and our subsidiary
guarantors assets. Any such default could have a material
adverse effect on our liquidity and financial condition.
Even if we comply with all of the applicable covenants, the
restrictions on the conduct of our business could adversely
affect our business by, among other things, limiting our ability
to take advantage of financings, mergers, acquisitions and other
corporate opportunities that may be beneficial to the business.
Even if the
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credit facility were terminated, additional debt we could incur
in the future may subject us to similar or additional covenants.
We also have substantial equipment lease obligations, which
totaled approximately $2.1 million as of December 31,
2009. If we are unable to generate sufficient cash flow from our
operations or cash from other sources in order to meet the
payment obligations under these equipment leases, we may lose
the right to possess and operate the equipment used in our
business, which would substantially impair our ability to
provide our solutions and could have a material adverse effect
on our liquidity or results of operations.
Assertions
by a third party that we infringe its intellectual property,
whether successful or not, could subject us to costly and
time-consuming litigation or expensive licenses.
The software and technology industries are characterized by the
existence of a large number of patents, copyrights, trademarks
and trade secrets and by frequent litigation based on
allegations of infringement, misappropriation, misuse and other
violations of intellectual property rights. We have received in
the past, and may receive in the future, communications from
third parties claiming that we have infringed or otherwise
misappropriated the intellectual property rights of others. Our
technologies may not be able to withstand any third-party claims
against their use. Since we currently have no patents, we may
not use patent infringement as a defensive strategy in such
litigation. Additionally, although we have licensed from other
parties proprietary technology covered by patents, we cannot be
certain that any such patents will not be challenged,
invalidated or circumvented. If such patents are invalidated or
circumvented, this may allow existing and potential competitors
to develop products and services that are competitive with, or
superior to, our solutions.
Many of our customer agreements require us to indemnify our
customers for certain third-party intellectual property
infringement claims, which could increase our costs as a result
of defending such claims and may require that we pay damages if
there were an adverse ruling or settlement related to any such
claims. These types of claims could harm our relationships with
our customers, may deter future customers from purchasing our
solutions or could expose us to litigation for these claims.
Even if we are not a party to any litigation between a customer
and a third party, an adverse outcome in any such litigation
could make it more difficult for us to defend our intellectual
property in any subsequent litigation in which we are a named
party.
Any intellectual property rights claim against us or our
customers, with or without merit, could be time-consuming,
expensive to litigate or settle and could divert
managements attention and our financial resources. Any
such litigation could force us to stop selling, incorporating or
using our solutions that include the challenged intellectual
property or redesign those solutions that use the technology. In
addition, we may have to pay damages if we are found to be in
violation of a third partys rights. We may have to procure
a license for the technology, which may not be available on
reasonable terms, if at all, may significantly increase our
operating expenses or may require us to restrict our business
activities in one or more respects. As a result, we may also be
required to develop alternative non-infringing technology, which
could require significant effort and expense. We cannot assure
you we would be able to develop alternative solutions or, if
alternative solutions were developed, that they would perform as
required or be accepted in the relevant markets. In some
instances, if we are unable to offer non-infringing technology,
or obtain a license for such technology, we will be required to
refund some or the entire license fee paid for the infringing
technology to our customers.
Our exposure to risks associated with the use of intellectual
property may be increased as a result of acquisitions, as we
have a lower level of visibility into the development process
with respect to acquired technology or the care taken to
safeguard against infringement risks. Third parties may make
infringement and similar or related claims after we have
acquired technology that had not been asserted prior to our
acquisition.
Any
failure to protect and successfully enforce our intellectual
property rights could compromise our proprietary technology and
impair our brands.
Our success depends significantly on our ability to protect our
proprietary rights to the technologies we use in our solutions.
If we are unable to protect our proprietary rights adequately,
our competitors could use the intellectual property we have
developed to enhance their own products and services, which
could harm our business. We rely on a combination of copyright,
service mark, trademark and trade secret laws, as well as
24
confidentiality procedures and contractual restrictions, to
establish and protect our proprietary rights, all of which
provide only limited protection. We currently have no issued
patents or pending patent applications and may be unable to
obtain patent protection in the future. In addition, if any
patents are issued in the future, they may not provide us with
any competitive advantages, may not be issued in a manner that
gives us the protection that we seek and may be successfully
challenged by third parties. Unauthorized parties may attempt to
copy or otherwise obtain and use the technologies underlying our
solutions. Monitoring unauthorized use of our technologies is
difficult, and we do not know whether the steps we have taken
will prevent unauthorized use of our technology. If we are
unable to protect our proprietary rights, we may find ourselves
at a competitive disadvantage to others who have not incurred
the substantial expense, time and effort required to create
similar innovative products.
We cannot assure you that any future service mark or trademark
registrations will be issued for pending or future applications
or that any registered service marks or trademarks will be
enforceable or provide adequate protection of our proprietary
rights. If we are unable to secure new marks, maintain already
existing marks and enforce the rights to use such marks against
unauthorized third-party use, our ability to brand, identify and
promote our solutions in the marketplace could be impaired,
which could harm our business.
We customarily enter into agreements with our employees,
contractors and parties with whom we do business to limit access
to and disclosure of our proprietary information. The steps we
have taken, however, may not prevent unauthorized use or the
reverse engineering of our technology. Moreover, we may be
required to release the source code of our software to third
parties under certain circumstances. For example, some of our
customer agreements provide that if we cease to maintain or
support a certain solution without replacing it with a successor
solution, then we may be required to release the source code of
the software underlying such solution. In addition, others may
independently develop technologies that are competitive to ours
or infringe our intellectual property. Enforcement of our
intellectual property rights also depends on our legal actions
being successful against these infringers, but these actions may
not be successful, even when our rights have been infringed.
Furthermore, the legal standards relating to the validity,
enforceability and scope of protection of intellectual property
rights in Internet-related industries are uncertain and still
evolving.
Additionally, if we sell our solutions internationally in the
future, effective patent, trademark, service mark, copyright and
trade secret protection may not be available or as robust in
every country in which our solutions are available. As a result,
we may not be able to effectively prevent competitors outside
the United States from infringing or otherwise misappropriating
our intellectual property rights, which could reduce our
competitive advantage and ability to compete or otherwise harm
our business.
Current
and future litigation against us could be costly and time
consuming to defend.
We are from time to time subject to legal proceedings and claims
that arise in the ordinary course of business, including claims
brought by our customers in connection with commercial disputes,
claims brought by our customers current or prospective
residents, including potential class action lawsuits based on
asserted statutory or regulatory violations, and employment
claims made by our current or former employees. Litigation,
regardless of its outcome, may result in substantial costs and
may divert managements attention and our resources, which
may harm our business, overall financial condition and operating
results. In addition, legal claims that have not yet been
asserted against us may be asserted in the future. Insurance may
not cover such claims, may not be sufficient for one or more
such claims and may not continue to be available on terms
acceptable to us, or at all. A claim brought against us that is
uninsured or underinsured could result in unanticipated costs,
thereby harming our operating results.
On June 15, 2009, a prospective resident of one of our
customers filed a class action lawsuit styled Minor v.
RealPage, Inc. against us in the U.S. District Court
for the Central District of California, which was transferred to
the United States District Court for the Eastern District of
Texas
(No. 4:09CV-00439).
The plaintiff has alleged two individual claims and three
class-based
causes of action against us. Individually, the plaintiff alleges
that we (i) willfully failed to employ reasonable
procedures to ensure the maximum accuracy of our resident
screening reports as required by 15 U.S.C.
§ 1681e(b) and, in the alternative,
(ii) negligently (within the meaning of 15 U.S.C.
§ 1681o(a)) failed to employ reasonable procedures to
ensure the maximum
25
accuracy of our resident screening reports, as required by
15 U.S.C. § 1681e(b), in each case stemming from
our provision of a report that allegedly included inaccurate
criminal conviction information. The plaintiff seeks actual,
statutory and punitive damages on her individual claims. In her
capacity as the putative class representative, the plaintiff
also alleges that we: (i) willfully failed to provide
legally mandated disclosures upon a consumers request
inconsistent with 15 U.S.C. § 1681g;
(ii) willfully failed to provide prompt notice of
consumers disputes to the data furnishers who provided us
with the information whose accuracy was in question, as required
by 15 U.S.C. § 1681i(a)(2); and
(iii) willfully failed to provide prompt notice of
consumers disputes to the consumer reporting agencies
providing us with the information whose accuracy was in
question, as required by 15 U.S.C. § 1681i(f).
She seeks statutory and punitive damages, a declaration that our
practices and procedures are in violation of the Fair Credit
Reporting Act and attorneys fees and costs. Because this
lawsuit is at an early stage, it is not possible to predict its
outcome. We believe that we have meritorious defenses to the
claims in this case and intend to defend it vigorously. See
Business Legal Proceedings for further
information regarding this claim.
On March 4, 2008, we were named as a defendant in a class
action lawsuit styled Taylor, et al. v. Acxiom Corp.,
et al. filed in the U.S. District Court for the
Eastern District of Texas
(No. 2:07-CV-00001).
Plaintiffs alleged that we obtained and held motor vehicle
records in bulk from the State of Texas, an allegedly improper
purpose in violation of the federal Drivers Privacy
Protection Act, or the DPPA. In addition, the plaintiffs alleged
that we obtained these records for the purpose of re-selling
them, another allegedly improper purpose in violation of the
DPPA. Plaintiffs further purported to represent a putative class
of approximately 20.0 million individuals affected by the
defendants alleged DPPA violations. They sought statutory
damages of $2,500 per each violation of the DPPA, punitive
damages and an order requiring defendants to destroy information
obtained in violation of the DPPA. In September 2008, the
Eastern District of Texas dismissed plaintiffs complaint
for failure to state a claim. The plaintiffs subsequently
appealed the dismissal to the U.S. Court of Appeals for the
Fifth Circuit. In November 2009, the Fifth Circuit heard oral
argument on the appeal. A decision has not yet been rendered. We
believe that the claims are without merit, but there are no
assurances as to the outcome of the litigation. See
Business Legal Proceedings for further
information regarding this claim.
In March 2010, the District Attorney of Ventura County,
California issued an administrative subpoena to us seeking
certain information related to our provision of utility billing
services in the State of California. A representative of the
District Attorney has informed us that the subpoena was issued
in connection with a general investigation of industry practices
with respect to utility billing in California. Utility billing
in California is subject to regulation by state law and various
state administrative agencies, including the California Public
Utility Commission, or the CPUC, and the Division of Weights and
Measures, or the DWM. We have provided the District Attorney
with the information requested in the subpoena. As of
April 28, 2010, the District Attorneys office has not
initiated an administrative or other enforcement action against
us, nor have they asserted any violations of the applicable
regulations by us. Given the early stage of this investigation,
it is difficult to predict its outcome and whether the District
Attorney will pursue an administrative or other enforcement
action against us in the State of California and what the result
of any such action would be. However, penalties or assessments
of violations of regulations promulgated by the CPUC or DWM may
be calculated on a per occurrence basis. Due to the large number
of billing transactions we process for our customers in
California, our potential liability in an enforcement action
could be significant. If the District Attorney ultimately
pursues an administrative or other enforcement action against
us, we believe that we have meritorious defenses to the
potential claims and would defend them vigorously. However, even
if we were successful in defending against such claims, the
proceedings could result in significant costs and divert
managements attention. See Business
Legal Proceedings for further information regarding this
claim.
We
could be sued for contract or product liability claims, and such
lawsuits may disrupt our business, divert managements
attention and our financial resources or have an adverse effect
on our financial results.
We provide warranties to customers of certain of our solutions
relating primarily to product functionality, network uptime,
critical infrastructure availability and hardware replacement.
General errors, defects,
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inaccuracies or other performance problems in the software
applications underlying our solutions or inaccuracies in the
data we provide to our customers could result in financial or
other damages to our customers. There can be no assurance that
any limitations of liability set forth in our contracts would be
enforceable or would otherwise protect us from liability for
damages. We maintain general liability insurance coverage,
including coverage for errors and omissions, in amounts and
under terms that we believe are appropriate. There can be no
assurance that this coverage will continue to be available on
terms acceptable to us, or at all, or in sufficient amounts to
cover one or more large product liability claims, or that the
insurer will not deny coverage for any future claim. The
successful assertion of one or more large product liability
claims against us that exceeds available insurance coverage,
could have a material adverse effect on our business, prospects,
financial condition and results of operations.
If we
fail to develop our brands cost-effectively, our financial
condition and operating results could be harmed.
We market our solutions under discrete brand names. We believe
that developing and maintaining awareness of our brands is
critical to achieving widespread acceptance of our existing and
future solutions and is an important element in attracting new
customers and retaining our existing customers. Additionally, we
believe that developing these brands in a cost-effective manner
is critical in meeting our expected margins. In the past, our
efforts to build our brands have involved significant expenses
and we intend to continue to make expenditures on brand
promotion. Brand promotion activities may not yield increased
revenue, and even if they do, any increased revenue may not
offset the expenses we incurred in building our brands. If we
fail to cost-effectively build and maintain our brands, we may
fail to attract new customers or retain our existing customers,
and our financial condition and results of operations could be
harmed.
If we
fail to maintain proper and effective internal controls, our
ability to produce accurate and timely financial statements
could be impaired, which could harm our operating results, our
ability to operate our business and investors views of
us.
Ensuring that we have adequate internal financial and accounting
controls and procedures in place so that we can produce accurate
financial statements on a timely basis is a costly and
time-consuming effort that needs to be re-evaluated frequently.
Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements in accordance with GAAP. We are in the
process of documenting, reviewing and improving our internal
controls and procedures for compliance with Section 404 of
the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, which
requires annual management assessment of the effectiveness of
our internal control over financial reporting and a report by
our independent auditors. Both we and our independent auditors
will be testing our internal controls in connection with the
audit of our financial statements for the year ending
December 31, 2011 and, as part of that testing, may
identify areas for further attention and improvement. If we fail
to maintain proper and effective internal controls, our ability
to produce accurate and timely financial statements could be
impaired, which could harm our operating results, harm our
ability to operate our business and reduce the trading price of
our stock.
Changes
in, or errors in our interpretations and applications of,
financial accounting standards or practices may cause adverse,
unexpected financial reporting fluctuations and affect our
reported results of operations.
A change in accounting standards or practices can have a
significant effect on our reported results and may even affect
our reporting of transactions completed before the change is
effective. New accounting pronouncements and varying
interpretations of accounting pronouncements have occurred and
may occur in the future. Changes to existing rules or the
questioning of current practices or errors in our
interpretations and applications of financial accounting
standards or practices may adversely affect our reported
financial results or the way in which we conduct our business.
27
We
will incur increased costs and demands upon management as a
result of complying with the laws and regulations affecting
public companies, which could harm our operating
results.
As a public company, we will incur significant legal,
accounting, investor relations and other expenses that we did
not incur as a private company, including costs associated with
public company reporting requirements. We also have incurred and
will incur costs associated with current corporate governance
requirements, including requirements under Section 404 and
other provisions of the Sarbanes-Oxley Act, as well as rules
implemented by the Securities Exchange Commission and the NASDAQ
Global Market. We expect these rules and regulations to increase
our legal and financial compliance costs substantially and to
make some activities more time-consuming and costly. We also
expect that, as a public company, it will be more expensive for
us to obtain director and officer liability insurance and that
it may be more difficult for us to attract and retain qualified
individuals to serve on our board of directors or as our
executive officers.
Government
regulation of the rental housing industry, including background
screening services and utility billing, the Internet and
e-commerce
is evolving, and changes in regulations or our failure to comply
with regulations could harm our operating results.
The rental housing industry is subject to extensive and complex
federal, state and local regulations. Our services and solutions
must work within the extensive and evolving regulatory
requirements applicable to our customers and third-party service
providers, including, but not limited to, those under the Fair
Credit Reporting Act, the Fair Housing Act, the Deceptive Trade
Practices Act, the DPPA, the Gramm-Leach-Bliley Act, the Fair
and Accurate Credit Transactions Act, the Privacy Rules,
Safeguards Rule and Consumer Report Information Disposal Rule
promulgated by the Federal Trade Commission, or FTC, the
regulations of the United States Department of Housing and Urban
Development, or HUD, and complex and divergent state and local
laws and regulations related to data privacy and security,
credit and consumer reporting, deceptive trade practices,
discrimination in housing, utility billing and energy and gas
consumption. These regulations are complex, change frequently
and may become more stringent over time. Although we attempt to
structure and adapt our solutions and service offerings to
comply with these complex and evolving laws and regulations, we
may be found to be in violation. If we are found to be in
violation of any applicable laws or regulations, we could be
subject to administrative and other enforcement actions as well
as class action lawsuits. Additionally, many applicable laws and
regulations provide for penalties or assessments on a per
occurrence basis. Due to the nature of our business, the type of
services we provide and the large number of transactions
processed by our solutions, our potential liability in an
enforcement action or class action lawsuit could be significant.
In addition, entities such as HUD and the FTC have the authority
to promulgate rules and regulations that may impact our
customers and our business. We believe increased regulation is
likely in the area of data privacy, and laws and regulations
applying to the solicitation, collection, processing or use of
personally identifiable information or consumer information
could affect our customers ability to use and share data,
potentially reducing demand for our on demand software solutions.
We deliver our on demand software solutions over the Internet
and sell and market certain of our solutions over the Internet.
As Internet commerce continues to evolve, increasing regulation
by federal, state or foreign agencies becomes more likely.
Taxation of products or services provided over the Internet or
other charges imposed by government agencies or by private
organizations for accessing the Internet may also be imposed.
Any regulation imposing greater fees for Internet use or
restricting information exchange over the Internet could result
in a decline in the use of the Internet and the viability of on
demand software solutions, which could harm our business and
operating results.
Our
LeasingDesk insurance business is subject to governmental
regulation which could reduce our profitability or limit our
growth.
We hold insurance agent licenses from a number of individual
state departments of insurance and are subject to state
governmental regulation and supervision in connection with the
operation of our LeasingDesk insurance business. This state
governmental supervision could reduce our profitability or limit
the growth of our LeasingDesk insurance business by increasing
the costs of regulatory compliance, limiting or restricting the
solutions we provide or the methods by which we provide them or
subjecting us to the possibility of
28
regulatory actions or proceedings. Our continued ability to
maintain these insurance agent licenses in the jurisdictions in
which we are licensed depends on our compliance with the rules
and regulations promulgated from time to time by the regulatory
authorities in each of these jurisdictions. Furthermore, state
insurance departments conduct periodic examinations, audits and
investigations of the affairs of insurance agents.
In all jurisdictions, the applicable laws and regulations are
subject to amendment or interpretation by regulatory
authorities. Generally, such authorities are vested with
relatively broad discretion to grant, renew and revoke licenses
and approvals and to implement regulations. Accordingly, we may
be precluded or temporarily suspended from carrying on some or
all of the activities of our LeasingDesk insurance business or
otherwise be fined or penalized in a given jurisdiction. No
assurances can be given that our LeasingDesk insurance business
can continue to be conducted in any given jurisdiction as it has
been conducted in the past.
We
generate commission revenue from the insurance policies we sell
as a registered insurance agent and if insurance premiums
decline or if the insureds experience greater than expected
losses, our revenues could decline and our operating results
could be harmed.
Through our wholly owned subsidiary, Multifamily Internet
Ventures LLC, a managing general insurance agency, we generate
commission revenue from offering liability and renters
insurance. Additionally, Multifamily Internet Ventures LLC has
recently commenced the sale of additional insurance products,
including auto and other personal lines insurance, to residents
that buy renters insurance from us. These policies are
ultimately underwritten by various insurance carriers. Some of
the property owners and managers that subscribe to our solution
opt to require residents to purchase rental insurance policies
and agree to allow Multifamily Internet Ventures LLC to act as
the exclusive insurance broker to their property. If demand for
residential rental housing declines, property owners and
managers may be forced to reduce their rental rates and to stop
requiring the purchase of rental insurance in order to reduce
the overall cost of renting. If property owners or managers
cease to require renters insurance, elect to offer
policies from competing providers or insurance premiums decline,
our revenues from selling insurance policies will be adversely
affected.
Additionally, one type of commission paid by insurance carriers
to Multifamily Internet Ventures LLC is contingent commission,
which is based on claims experienced at the properties for which
the residents purchase insurance. In the event that claims by
the insureds increase unexpectedly, the contingent commission we
typically earn will be adversely affected. As a result, our
quarterly operating results could fall below the expectations of
analysts or investors, in which event our stock price may
decline.
Our
ability to use net operating losses to offset future taxable
income may be subject to certain limitations.
In general, under Section 382 of the Internal Revenue Code
of 1986, as amended, or the Internal Revenue Code, a corporation
that undergoes an ownership change is subject to
limitations on its ability to utilize its pre-change net
operating losses, or NOLs, to offset future taxable income. Our
ability to utilize NOLs of companies that we may acquire in the
future may be subject to limitations. Future changes in our
stock ownership, some of which are outside of our control, could
result in an ownership change under Section 382 of the
Internal Revenue Code. For these reasons, we may not be able to
utilize a material portion of the NOLs reflected on our balance
sheet, even if we maintain profitability.
If we
are required to collect sales and use taxes on the solutions we
sell in additional taxing jurisdictions, we may be subject to
liability for past sales and our future sales may
decrease.
States and some local taxing jurisdictions have differing rules
and regulations governing sales and use taxes, and these rules
and regulations are subject to varying interpretations that may
change over time. We review these rules and regulations
periodically and currently collect and remit sales taxes in
taxing jurisdictions where we believe we are required to do so.
However, additional state
and/or local
taxing jurisdictions may seek to impose sales or other tax
collection obligations on us, including for past sales. A
successful assertion that we should be collecting additional
sales or other taxes on our solutions could result in
substantial tax liabilities for past sales, discourage customers
from purchasing our solutions or may otherwise harm our business
and operating results. This risk is greater with regard to
solutions acquired through acquisitions.
29
We may also become subject to tax audits or similar procedures
in jurisdictions where we already collect and remit sales taxes.
A successful assertion that we have not collected and remitted
taxes at the appropriate levels may also result in substantial
tax liabilities for past sales. Liability for past taxes may
also include very substantial interest and penalty charges. Our
customer contracts provide that our customers must pay all
applicable sales and similar taxes. Nevertheless, customers may
be reluctant to pay back taxes and may refuse responsibility for
interest or penalties associated with those taxes. If we are
required to collect and pay back taxes and the associated
interest and penalties, and if our customers fail or refuse to
reimburse us for all or a portion of these amounts, we will
incur unplanned expenses that may be substantial. Moreover,
imposition of such taxes on our solutions going forward will
effectively increase the cost of such solutions to our customers
and may adversely affect our ability to retain existing
customers or to gain new customers in the areas in which such
taxes are imposed.
Changes
in our effective tax rate could harm our future operating
results.
We are subject to federal and state income taxes in the United
States and various foreign jurisdictions, and our domestic and
international tax liabilities are subject to the allocation of
expenses in differing jurisdictions. Our tax rate is affected by
changes in the mix of earnings and losses in jurisdictions with
differing statutory tax rates, including jurisdictions in which
we have completed or may complete acquisitions, certain
non-deductible expenses arising from the requirement to expense
stock options and the valuation of deferred tax assets and
liabilities, including our ability to utilize our net operating
losses. Increases in our effective tax rate could harm our
operating results.
We
rely on our management team and need additional personnel to
grow our business, and the loss of one or more key employees or
our inability to attract and retain qualified personnel could
harm our business.
Our success and future growth depend on the skills, working
relationships and continued services of our management team. The
loss of our Chief Executive Officer or other senior executives
could adversely affect our business. Our future success also
will depend on our ability to attract, retain and motivate
highly skilled software developers, marketing and sales
personnel, technical support and product development personnel
in the United States and internationally. All of our employees
work for us on an at-will basis. Competition for these types of
personnel is intense, particularly in the software industry. As
a result, we may be unable to attract or retain qualified
personnel. Our inability to attract and retain the necessary
personnel could adversely affect our business.
Our
corporate culture has contributed to our success, and if we
cannot maintain this culture as we grow, we could lose the
innovation, creativity and teamwork fostered by our culture, and
our business may be harmed.
We believe that a strong corporate culture that nurtures core
values and philosophies is essential to our long-term success.
We call these values and philosophies the RealPage
Promise and we seek to practice the RealPage Promise in
our actions every day. The RealPage Promise embodies our
corporate values with respect to customer service, investor
communications, employee respect and professional development
and management decision-making and leadership. As our
organization grows and we are required to implement more complex
organizational structures, we may find it increasingly difficult
to maintain the beneficial aspects of our corporate culture
which could negatively impact our future success.
Risks
Related to this Offering and Ownership of our Common
Stock
The
concentration of our capital stock owned by insiders upon the
completion of this offering will limit your ability to influence
corporate matters.
We anticipate that our executive officers, directors, current 5%
or greater stockholders and entities affiliated with them will
together beneficially own approximately % of
our common stock following this offering, or %
if the underwriters exercise their over-allotment option in
full. Further, we anticipate that Stephen T. Winn, our Chief
Executive Officer and Chairman of the Board, or entities
beneficially owned by
30
Mr. Winn will hold an aggregate of
approximately % of our common stock following
this offering, or % if the underwriters
exercise their over-allotment option in full. This significant
concentration of ownership may adversely affect the trading
price for our common stock because investors often perceive
disadvantages in owning stock in companies with controlling
stockholders. Mr. Winn, or other insider stockholders
acting together, will be able to control our management and
affairs and matters requiring stockholder approval, including
the election of directors and the approval of significant
corporate transactions, such as mergers, consolidations or the
sale of substantially all of our assets. Consequently, this
concentration of ownership may have the effect of delaying or
preventing a change of control, including a merger,
consolidation or other business combination involving us, or
discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control, even if that change of
control would benefit our other stockholders.
An
active, liquid and orderly trading market for our common stock
may not develop, the price of our stock may be volatile and you
could lose all or part of your investment.
Before this offering, there has been no public market for shares
of our common stock. We cannot predict the extent to which
investor interest in our company will lead to the development of
a trading market or how liquid that market might become. The
initial public offering price for the shares of our common stock
will be determined by negotiations among us, the selling
stockholders and the underwriters, and may not be indicative of
the price that will prevail in the trading market following this
offering. In addition, the trading price of our common stock
following this offering is likely to be highly volatile and
could be subject to wide fluctuations in response to various
factors, including, but not limited to, those described in this
Risk Factors section, some of which are beyond our
control. Factors affecting the trading price of our common stock
will include:
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variations in our operating results or in expectations regarding
our operating results;
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variations in operating results of similar companies;
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announcements of technological innovations, new solutions or
enhancements, strategic alliances or agreements by us or by our
competitors;
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announcements by competitors regarding their entry into new
markets, and new product, service and pricing strategies;
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marketing and advertising initiatives by us or our competitors;
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the gain or loss of customers;
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threatened or actual litigation;
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major changes in our board of directors or management;
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recruitment or departure of key personnel;
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changes in the estimates of our operating results or changes in
recommendations by any research analysts that elect to follow
our common stock;
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market conditions in our industry and the economy as a whole;
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the overall performance of the equity markets;
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sales of our shares of common stock by existing stockholders;
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volatility in our stock price, which may lead to higher
stock-based compensation expense under applicable accounting
standards; and
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adoption or modification of regulations, policies, procedures or
programs applicable to our business.
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In addition, the stock market in general, and the market for
technology and specifically Internet-related companies, has
experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of those companies. Broad market and industry
factors may harm the market price of our common stock regardless
of our actual operating performance. These fluctuations
31
may be even more pronounced in the trading market for our stock
shortly following this offering. In addition, in the past,
following periods of volatility in the overall market and the
market price of a particular companys securities,
securities class action litigation has often been instituted
against these companies. This litigation, if instituted against
us, could result in substantial costs and a diversion of our
managements attention and our resources, whether or not we
are successful in such litigation.
Our
stock price could decline due to the large number of outstanding
shares of our common stock eligible for future
sale.
Sales of substantial amounts of our common stock in the public
market following this offering, or the perception that these
sales could occur, could cause the market price of our common
stock to decline. These sales could also make it more difficult
for us to sell equity or equity-related securities in the future
at a time and price that we deem appropriate.
Upon completion of this offering, we will
have shares
of common stock outstanding, assuming no exercise of outstanding
options after December 31, 2009. The shares sold in this
offering will be immediately tradable without restriction. Of
the remaining shares:
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shares
will be eligible for sale immediately upon completion of this
offering;
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shares
will be eligible for sale beginning 90 days after the date
of this prospectus; and
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shares
will be eligible for sale upon the expiration of
lock-up
agreements, subject in some cases to volume and other
restrictions of Rule 144 and Rule 701 under the
Securities Act of 1933, as amended, or the Securities Act.
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The lock-up
agreements expire 180 days after the date of this
prospectus, except that the
180-day
period may be extended in certain cases for up to 34 additional
days under certain circumstances where we announce or
pre-announce earnings or a material event occurs within
approximately 17 days prior to, or approximately
16 days after, the termination of the
180-day
period. The representatives of the underwriters may, in their
sole discretion and at any time without notice, release all or
any portion of the securities subject to
lock-up
agreements.
Following this offering, holders
of % of our common stock not
sold in this offering will be entitled to rights with respect to
the registration of these shares under the Securities Act. See
Description of Capital Stock Registration
Rights. If we register their shares of common stock
following the expiration of the
lock-up
agreements, these stockholders could sell those shares in the
public market without being subject to the volume and other
restrictions of Rule 144 and Rule 701.
After the closing of this offering, we intend to register
approximately shares
of common stock that have been issued or reserved for future
issuance under our stock incentive plans. Of these
shares, shares
will be eligible for sale upon the exercise of vested options
after the expiration of the
lock-up
agreements.
Because
our initial public offering price is substantially higher than
the pro forma as adjusted net tangible book value per share of
our outstanding common stock, new investors will incur immediate
and substantial dilution.
We expect the initial public offering price of our common stock
to be substantially higher than the pro forma as adjusted net
tangible book value per share of our common stock based on the
total value of our tangible assets less our total liabilities
immediately following this offering. Therefore, if you purchase
common stock in this offering, you will experience immediate and
substantial dilution of approximately $ per
share, the difference between the price you pay for our common
stock and its pro forma as adjusted net tangible book value
after the completion of this offering. Furthermore, investors
purchasing common stock in this offering will own only
approximately % of our shares outstanding after
the completion of this offering even though they will have
contributed % of the total consideration
received by us in connection with our sales of common stock.
After this offering, we will have an aggregate
of shares
of common stock
32
authorized but unissued and not reserved for issuance under our
stock option plans or otherwise. We intend to continue to
actively pursue strategic acquisitions. We may pay for such
acquisitions, partly or in full, through the issuance of
additional equity. Following the completion of this offering, we
may issue shares of our
common stock without any action or approval by our stockholders.
Any issuance of shares in connection with our acquisitions, the
exercise of stock options or otherwise would dilute the
percentage ownership held by the investors who purchase our
shares in this offering.
Our
management will have broad discretion over the use of the
proceeds we receive in this offering and might not apply the
proceeds in ways that increase the value of your
investment.
Our management will have broad discretion in the application of
the net proceeds of this offering. We intend to use net proceeds
of this offering to pay accumulated and unpaid dividends on our
outstanding shares of Series A, Series A1 and
Series B convertible preferred stock that have accrued at a
rate of 8% per annum of the original issue price of each such
share of preferred stock, compounded quarterly, which amounted
to $ million as
of ,
2010, and to repay approximately $18.2 million of our
indebtedness outstanding as of December 31, 2009. Although
we currently expect to apply the net proceeds from this offering
primarily for working capital and general corporate purposes,
which may include future investments in, or acquisitions of,
complementary businesses, products or technologies, we cannot
specify with certainty how we will apply these net proceeds and
our use of the net proceeds of this offering may not increase
the value of your investment.
Our
charter documents and Delaware law could prevent a takeover that
stockholders consider favorable and could also reduce the market
price of our stock.
We expect that our amended and restated certificate of
incorporation and our amended and restated bylaws, to be
effective upon the completion of this offering, will contain
provisions that could delay or prevent a change in control of
our company. These provisions could also make it more difficult
for stockholders to elect directors and take other corporate
actions. These provisions include:
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not providing for cumulative voting in the election of directors;
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authorizing our board of directors to issue, without stockholder
approval, preferred stock with rights senior to those of our
common stock;
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prohibiting stockholder action by written consent; and
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requiring advance notification of stockholder nominations and
proposals.
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These and other provisions we expect to be included in our
amended and restated certificate of incorporation and our
amended and restated bylaws, to be effective upon the completion
of this offering, and under Delaware law could discourage
potential takeover attempts, reduce the price that investors
might be willing to pay in the future for shares of our common
stock and result in the market price of our common stock being
lower than it would be without these provisions. See
Description of Capital Stock Preferred
Stock and Description of Capital Stock
Anti-Takeover Effects of Delaware Law and Our Certificate of
Incorporation and Bylaws.
If
securities analysts do not publish research or reports about our
business or if they publish negative evaluations of our stock,
the price of our stock could decline.
We expect that the trading price for our common stock may be
affected by research or reports that industry or financial
analysts publish about us or our business. If one or more of the
analysts who cover us downgrade their evaluations of our stock,
the price of our stock could decline. If one or more of these
analysts cease coverage of our company, we could lose visibility
in the market for our stock, which in turn could cause our stock
price to decline.
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We do
not anticipate paying any dividends on our common
stock.
We do not anticipate paying any cash dividends on our common
stock in the foreseeable future. If we do not pay cash
dividends, you could receive a return on your investment in our
common stock only if the market price of our common stock has
increased when you sell your shares. In addition, the terms of
our credit facilities currently restrict our ability to pay
dividends.
34
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY
DATA
This prospectus contains forward-looking statements that are
based on our managements beliefs and assumptions and on
information currently available to our management. The
forward-looking statements are contained principally in
Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Business
and Executive Compensation. Forward-looking
statements include information concerning our possible or
assumed future results of operations, business strategies,
financing plans, competitive position, industry environment,
potential growth opportunities, potential market opportunities
and the effects of competition. Forward-looking statements
include all statements that are not historical facts and can be
identified by terms such as anticipates,
believes, could, seeks,
estimates, expects, intends,
may, plans, potential,
predicts, projects, should,
will, would or similar expressions and
the negatives of those terms.
Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different
from any future results, performance or achievements expressed
or implied by the forward-looking statements. We discuss these
risks in greater detail in Risk Factors and
elsewhere in this prospectus. Given these uncertainties, you
should not place undue reliance on these forward-looking
statements. Also, forward-looking statements represent our
managements beliefs and assumptions only as of the date of
this prospectus. You should read this prospectus and the
documents that we have filed as exhibits to the registration
statement, of which this prospectus is a part, completely and
with the understanding that our actual future results may be
materially different from what we expect.
Except as required by law, we assume no obligation to update
these forward-looking statements publicly, or to update the
reasons actual results could differ materially from those
anticipated in these forward-looking statements, even if new
information becomes available in the future.
This prospectus also contains estimates and other information
concerning our industry, including market opportunity, size and
growth rates, that are based on industry and government
publications, reports, surveys and forecasts, including those
generated by the United States Census Bureau and the National
Multi Housing Council, and on assumptions that we have made that
are based on that data, our review of the purchasing patterns of
our existing customers with respect to our current on demand
software solutions, the on demand software solutions currently
utilized by our existing customers, the number of units our
customers manage with these solutions and customer demand for
our solutions. This information involves a number of assumptions
and limitations, and you are cautioned not to give undue weight
to these estimates. With respect to information contained in
industry and government publications, surveys and forecasts, we
have assessed the information in the publications and found it
to be reasonable and believe the publications are reliable, but
we have not independently verified their data and cannot
guarantee its accuracy or completeness. While we believe the
market opportunity and market size information included in this
prospectus is based on reasonable assumptions, such information
is inherently imprecise. In addition, projections, assumptions
and estimates of the future performance of the industry in which
we operate and the markets we serve are necessarily subject to a
high degree of uncertainty and risk, including those described
in Risk Factors.
35
USE OF
PROCEEDS
We estimate that the net proceeds from our sale
of shares
of common stock in this offering at an assumed initial public
offering price of $ per share, the midpoint of
the price range set forth on the front cover of this prospectus,
after deducting estimated underwriting discounts and commissions
and estimated offering expenses, will be approximately
$ million. A $1.00 increase (decrease) in
the assumed initial public offering price of $
per share would increase (decrease) our net proceeds to us from
this offering by approximately $ million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting estimated underwriting discounts and commissions and
estimated offering expenses that we expect to pay. We will not
receive any proceeds from the sale of shares of our common stock
by the selling stockholders.
We intend to use the net proceeds from this offering to pay
accumulated and unpaid dividends on our outstanding shares of
Series A, Series A1 and Series B convertible
preferred stock that have accrued at a rate of 8% per annum of
the original issue price of each such share of preferred stock,
compounded quarterly, which amounted to
$ million as
of ,
2010, and to repay approximately $18.2 million of our
indebtedness outstanding as of December 31, 2009.
The outstanding indebtedness under our unsecured subordinated
promissory notes held by certain holders of our preferred stock
has a stated maturity of the earlier of either October 1,
2013 for notes issued December 31, 2008 or April 1,
2014 for notes issued April 23, 2010, immediately prior to
this offering or immediately prior to our acquisition by another
person or the sale of all or substantially all of our assets. At
December 31, 2009, we had $8.2 million of outstanding
indebtedness under the unsecured subordinated promissory notes
and on April 23, 2010, we issued additional unsecured
promissory notes having an aggregate principal amount of
approximately $0.4 million. These outstanding amounts bear
interest at a per annum rate equal to 8.0%. Pursuant to the
terms of our unsecured subordinated promissory notes, we will be
required to repay the outstanding principal amount and all
accrued and unpaid interest under our unsecured subordinated
promissory notes from the net proceeds from this offering. We
expect this repayment to be approximately
$ million.
The outstanding indebtedness under our secured promissory notes
held by HV Capital Investors, L.L.C. has a stated maturity of
August 1, 2013. At December 31, 2009, we had
$10.0 million of outstanding indebtedness under two secured
promissory notes in principal amount of $5.0 million each.
These outstanding amounts bear interest at a per annum rate
equal to 13.75%, payable quarterly in arrears. We intend to use
net proceeds of this offering to repay all indebtedness
outstanding under one or both of our secured promissory notes.
We expect this repayment to be approximately
$ million.
We currently do not intend to prepay with the proceeds from this
offering any additional outstanding indebtedness.
We intend to use our remaining net proceeds from this offering
for working capital and general corporate purposes. We may also
use a portion of the net proceeds received by us from this
offering for the future acquisition of, or investment in,
businesses, products or technologies that enhance or add new
services or additional functionality to our solutions, further
solidify our market position or allow us to offer complementary
products, services or technologies which we believe will further
enhance our competitive position. Accordingly, our management
will have broad discretion in the application of these proceeds
and investors will be relying on the judgment of our management
regarding their application.
Pending use of the proceeds from this offering, we intend to
invest the remaining proceeds in short-term, interest-bearing
investment grade securities.
DIVIDEND
POLICY
We do not expect to pay dividends on our common stock for the
foreseeable future. Instead, we anticipate that all of our
earnings will be used for the operation and growth of our
business. Any future determination to declare cash dividends
would be subject to the discretion of our board of directors and
would depend upon
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various factors, including our results of operations, financial
condition and liquidity requirements, restrictions that may be
imposed by applicable law and our contracts and other factors
deemed relevant by our board of directors. In addition, the
terms of our credit facilities currently restrict our ability to
pay dividends.
37
CAPITALIZATION
The following table sets forth our consolidated cash and cash
equivalents and capitalization as of December 31, 2009 on:
|
|
|
|
|
an actual basis;
|
|
|
|
a pro forma basis to reflect (i)
the -for-
reverse stock split of our common stock and convertible
preferred stock to be effected prior to the completion of this
offering and (ii) the conversion of all outstanding shares of
our convertible preferred stock into 58,087,500 shares of
our common stock upon the closing of this offering; and
|
|
|
|
a pro forma as adjusted basis to reflect (i) our receipt of
the net proceeds from our sale of shares of common stock in this
offering at an assumed initial public offering price of
$ per share, the midpoint of the range set
forth on the front cover of this prospectus, after deducting
estimated underwriting discounts and commissions and estimated
offering expenses and (ii) the application of the net
proceeds from this offering as described under Use of
Proceeds.
|
The information below is illustrative only and our
capitalization following the completion of this offering will be
adjusted based on the actual initial public offering price and
other terms of this offering determined at pricing. You should
read this table in conjunction with Selected Consolidated
Financial Data and Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and related notes
included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,427
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
Current and long
term-debt(1)
|
|
$
|
53,990
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock Series A and A1,
$0.001 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
51,812,500 shares authorized, issued and outstanding,
actual; shares
authorized, no shares issued or outstanding, pro forma; no
shares authorized, issued and outstanding, pro forma as adjusted
|
|
|
51,786
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock Series B,
$0.001 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
3,250,000 shares authorized, issued and outstanding,
actual; shares
authorized, no shares issued or outstanding, pro forma; no
shares authorized, issued and outstanding, pro forma as adjusted
|
|
|
6,491
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock Series C,
$0.001 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
3,025,000 authorized, issued and outstanding,
actual; shares
authorized, no shares issued or outstanding, pro forma; no
shares authorized issued and outstanding, pro forma as adjusted
|
|
|
13,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total redeemable convertible preferred stock
|
|
$
|
71,832
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes capital lease obligations. |
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Stockholders (deficit) equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value per share
135,000,000 shares authorized; 53,334,684 issued and
52,921,608 outstanding,
actual; shares
authorized, issued
and outstanding, pro
forma; shares
authorized, issued and outstanding, pro forma as adjusted
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; no shares authorized,
issued or outstanding, actual or pro
forma; shares
authorized, no shares issued or outstanding, pro forma as
adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid in capital
|
|
|
24,206
|
|
|
|
|
|
|
|
|
|
Treasury stock
|
|
|
(938
|
)
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(89,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
(66,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
59,346
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of pro forma and pro forma as adjusted shares of
common stock shown as issued and outstanding in the table are
based on the number of shares of our common stock outstanding as
of December 31, 2009 and excludes:
|
|
|
|
|
15,707,456 shares of common stock issuable upon the
exercise of options outstanding as of December 31, 2009
under our 1998 Stock Incentive Plan, with a weighted average
exercise price of $2.16 per share;
|
|
|
|
150,000 shares of common stock issuable upon exercise of
options outstanding as of December 31, 2009 issued to
directors pursuant to stock option agreements outside of our
1998 Stock Incentive Plan, with a weighted average exercise
price of $3.00 per share;
|
|
|
|
1,721,000 shares of common stock issuable upon exercise of
options granted in the quarter ended March 31, 2010 under
our 1998 Stock Incentive Plan, with a weighted average exercise
price of $3.75 per share;
|
|
|
|
120,000 shares of common stock issuable upon exercise of
options granted in the quarter ended March 31, 2010 to
directors pursuant to stock option agreements outside of our
1998 Stock Incentive Plan, with a weighted average exercise
price of $3.75 per share.
|
|
|
|
shares
of common stock reserved for future issuance under our 2010
Equity Incentive Plan, which will become effective in connection
with this offering (including 732,285 shares of common
stock reserved, as of December 31, 2009, for future
issuance under our 1998 Stock Incentive Plan, which shares will
be added to the shares reserved under our 2010 Equity Incentive
Plan, upon its effectiveness); and
|
|
|
|
25,000 shares of common stock issuable upon the exercise of
warrants outstanding as of December 31, 2009, with a
weighted average exercise price of $1.00 per share.
|
A $1.00 increase or decrease in the assumed initial public
offering price would result in an approximately
$ million decrease or increase in each of
pro forma as adjusted cash and cash equivalents, additional
paid-in capital, total stockholders (deficit) equity and
total capitalization.
39
DILUTION
As of December 31, 2009, our pro forma net tangible book
value (deficit) was approximately
$( ) million, or
$( ) per share of common stock. Our pro
forma net tangible book value (deficit) per share represents the
amount of our total tangible assets less our liabilities,
divided by the shares of common stock outstanding at
December 31, 2009 after giving effect to
the -for-
reverse stock split of our common stock and convertible
preferred stock to be effected prior to the completion of this
offering and the conversion of all outstanding shares of our
convertible preferred stock into 58,087,500 shares of
common stock effective upon the completion of this offering. Our
pro forma as adjusted net tangible book value at
December 31, 2009 would have been
$ million, or $ per
share of common stock after giving effect to our sale
of shares
of common stock in this offering at an assumed initial public
offering price of $ per share, the midpoint of
the price range set forth on the front cover of this prospectus.
Our pro forma as adjusted net tangible book value also assumes
the deduction of (i) estimated underwriting discounts and
commissions and offering expenses, (ii) the application of
a portion of the proceeds of this offering to pay accumulated
and unpaid dividends on our outstanding shares of Series A,
Series A1 and Series B convertible preferred stock
that have accrued at a rate of 8%, per annum of the original
issue price of each such share of preferred stock, compounded
quarterly, which amounted to
$ million as
of ,
2010, and (iii) the application of a portion of the
proceeds of this offering to repay approximately
$18.2 million of our indebtedness outstanding as of
December 31, 2009.
This represents an immediate increase in net tangible book value
of $ per share to existing stockholders and an
immediate dilution in net tangible book value of
$ per share to purchasers of common stock in
this offering.
The following table illustrates this dilution:
|
|
|
|
|
|
|
|
|
Assumed initial offering price per share
|
|
|
|
|
|
$
|
|
|
Pro forma net tangible book value per share as of
December 31, 2009
|
|
$
|
(
|
)
|
|
|
|
|
Increase per share attributable to this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after
this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tangible book value dilution per share to new investors in
this offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
If all our outstanding options and warrants had been exercised,
our pro forma net tangible book value (deficit) as of
December 31, 2009 would have been
$( ) million, or
$( ) per share, and the pro forma as
adjusted net tangible book value after this offering would have
been $ million, or $
per share, causing dilution to new investors of
$ per share.
The following table summarizes, on a pro forma as adjusted basis
as of December 31, 2009, the total number of shares of
common stock purchased from us, the total consideration paid to
us and the average price per share paid to us by existing
stockholders and by new investors purchasing shares in this
offering at the initial public offering price of
$ , the midpoint of the price
range set forth on the front cover of this prospectus, before
deducting estimated underwriting discounts and commissions and
estimated offering expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total
|
|
|
Average Price Per
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
|
Existing stockholders
|
|
|
111,009,108
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
|
100.0
|
%
|
|
$
|
|
|
|
$
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
The calculations in the foregoing table are based on
111,009,108 shares of our common stock as of
December 31, 2009 and exclude:
|
|
|
|
|
15,707,456 shares of common stock issuable upon the
exercise of options outstanding as of December 31, 2009
under our 1998 Stock Incentive Plan, with a weighted average
exercise price of $2.16 per share;
|
|
|
|
150,000 shares of common stock issuable upon exercise of
options outstanding as of December 31, 2009 issued to
directors pursuant to stock option agreements outside of our
1998 Stock Incentive Plan, with a weighted average exercise
price of $3.00 per share;
|
|
|
|
1,721,000 shares of common stock issuable upon exercise of
options granted in the quarter ended March 31, 2010 under
our 1998 Stock Incentive Plan, with a weighted average exercise
price of $3.75 per share;
|
|
|
|
120,000 shares of common stock issuable upon exercise of
options granted in the quarter ended March 31, 2010 to
directors pursuant to stock option agreements outside of our
1998 Stock Incentive Plan, with a weighted average exercise
price of $3.75 per share.
|
|
|
|
shares
of common stock reserved for future issuance under our 2010
Equity Incentive Plan, which will become effective in connection
with this offering (including 732,285 shares of common
stock reserved, as of December 31, 2009, for future
issuance under our 1998 Stock Incentive Plan, which shares will
be added to the shares reserved under our 2010 Equity Incentive
Plan, upon its effectiveness); and
|
|
|
|
25,000 shares of common stock issuable upon the exercise of
warrants outstanding as of December 31, 2009, with a
weighted average exercise price of $1.00 per share.
|
41
SELECTED
CONSOLIDATED FINANCIAL DATA
We have derived the consolidated statements of operations data
for the years ended December 31, 2007, 2008 and 2009 and
the consolidated balance sheet data as of December 31, 2008 and
2009 from our audited consolidated financial statements, which
have been audited by Ernst & Young LLP, independent
registered public accounting firm, and are included elsewhere in
this prospectus. We have derived the consolidated statement of
operations data for the years ended December 31, 2005 and
2006 and the consolidated balance sheet data as of
December 31, 2005, 2006 and 2007 from our unaudited
consolidated financial statements that are not included in this
prospectus. You should read the following selected consolidated
financial data in conjunction with our consolidated financial
statements and related notes, the information in
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the other
financial information included elsewhere in this prospectus. Our
historical results are not necessarily indicative of our future
results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On demand
|
|
$
|
21,049
|
|
|
$
|
36,525
|
|
|
$
|
62,592
|
|
|
$
|
95,192
|
|
|
$
|
128,377
|
|
On premise
|
|
|
17,277
|
|
|
|
15,183
|
|
|
|
11,560
|
|
|
|
7,582
|
|
|
|
3,860
|
|
Professional and other
|
|
|
4,801
|
|
|
|
6,937
|
|
|
|
9,429
|
|
|
|
9,794
|
|
|
|
8,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
43,127
|
|
|
|
58,645
|
|
|
|
83,581
|
|
|
|
112,568
|
|
|
|
140,902
|
|
Cost of revenue
|
|
|
29,168
|
|
|
|
29,596
|
|
|
|
35,703
|
|
|
|
46,058
|
|
|
|
58,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,959
|
|
|
|
29,049
|
|
|
|
47,878
|
|
|
|
66,510
|
|
|
|
82,389
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
15,075
|
|
|
|
16,959
|
|
|
|
21,708
|
|
|
|
28,806
|
|
|
|
27,446
|
|
Sales and marketing
|
|
|
7,142
|
|
|
|
10,487
|
|
|
|
18,047
|
|
|
|
23,923
|
|
|
|
27,804
|
|
General and administrative
|
|
|
5,782
|
|
|
|
6,267
|
|
|
|
9,756
|
|
|
|
14,135
|
|
|
|
20,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
27,999
|
|
|
|
33,713
|
|
|
|
49,511
|
|
|
|
66,864
|
|
|
|
75,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(14,040
|
)
|
|
|
(4,664
|
)
|
|
|
(1,633
|
)
|
|
|
(354
|
)
|
|
|
6,929
|
|
Interest expense, net
|
|
|
(381
|
)
|
|
|
(508
|
)
|
|
|
(1,510
|
)
|
|
|
(2,152
|
)
|
|
|
(4,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before taxes
|
|
|
(14,421
|
)
|
|
|
(5,172
|
)
|
|
|
(3,143
|
)
|
|
|
(2,506
|
)
|
|
|
2,401
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
703
|
|
|
|
(26,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(14,421
|
)
|
|
$
|
(5,172
|
)
|
|
$
|
(3,143
|
)
|
|
$
|
(3,209
|
)
|
|
$
|
28,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(19,426
|
)
|
|
$
|
(10,590
|
)
|
|
$
|
(9,143
|
)
|
|
$
|
(10,658
|
)
|
|
$
|
10,757
|
|
Diluted
|
|
$
|
(19,426
|
)
|
|
$
|
(10,590
|
)
|
|
$
|
(9,143
|
)
|
|
$
|
(10,658
|
)
|
|
$
|
10,757
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except per share data)
|
|
|
Net (loss) income per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.02
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
0.22
|
|
Diluted
|
|
$
|
(1.02
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
0.21
|
|
Weighted average number of shares used in computing net (loss)
income per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,087
|
|
|
|
20,021
|
|
|
|
20,446
|
|
|
|
27,773
|
|
|
|
47,869
|
|
Diluted
|
|
|
19,087
|
|
|
|
20,021
|
|
|
|
20,446
|
|
|
|
27,773
|
|
|
|
51,025
|
|
Pro forma net income per share attributable to common
stockholders
(unaudited)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.27
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.26
|
|
Pro forma weighted average shares used in computing net income
per share attributable to common stockholders
(unaudited)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,957
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents(3)
|
|
$
|
5,341
|
|
|
$
|
2,493
|
|
|
$
|
2,731
|
|
|
$
|
4,248
|
|
|
$
|
4,427
|
|
Working capital, excluding deferred revenue
|
|
|
9,505
|
|
|
|
4,636
|
|
|
|
9,224
|
|
|
|
12,126
|
|
|
|
12,929
|
|
Total assets
|
|
|
27,292
|
|
|
|
32,511
|
|
|
|
59,518
|
|
|
|
102,340
|
|
|
|
142,113
|
|
Current and long-term
debt(4)
|
|
|
3,849
|
|
|
|
6,682
|
|
|
|
23,809
|
|
|
|
48,943
|
|
|
|
53,990
|
|
Total liabilities
|
|
|
49,275
|
|
|
|
59,485
|
|
|
|
87,954
|
|
|
|
129,622
|
|
|
|
136,757
|
|
Preferred stock
|
|
|
66,514
|
|
|
|
72,300
|
|
|
|
78,534
|
|
|
|
71,675
|
|
|
|
71,832
|
|
Total stockholders deficit
|
|
|
(88,497
|
)
|
|
|
(99,274
|
)
|
|
|
(106,970
|
)
|
|
|
(98,957
|
)
|
|
|
(66,476
|
)
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA(5)
|
|
$
|
(8,162
|
)
|
|
$
|
(692
|
)
|
|
$
|
5,984
|
|
|
$
|
13,064
|
|
|
$
|
25,593
|
|
Operating cash flow
|
|
|
(2,614
|
)
|
|
|
969
|
|
|
|
4,441
|
|
|
|
7,962
|
|
|
|
24,758
|
|
Capital expenditures
|
|
|
3,970
|
|
|
|
5,597
|
|
|
|
7,122
|
|
|
|
10,263
|
|
|
|
9,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Selected Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of on demand customers at period end
|
|
|
1,025
|
|
|
|
1,469
|
|
|
|
2,199
|
|
|
|
2,669
|
|
|
|
5,032
|
|
Number of on demand units at period end (in thousands)
|
|
|
1,181
|
|
|
|
1,708
|
|
|
|
2,800
|
|
|
|
3,833
|
|
|
|
4,551
|
|
Total number of employees at period end
|
|
|
478
|
|
|
|
532
|
|
|
|
654
|
|
|
|
922
|
|
|
|
1,141
|
|
|
|
|
(1) |
|
Pro forma net income per share represents net income divided by
the pro forma weighted average shares outstanding as though the
conversion of our redeemable convertible preferred stock into
common stock occurred on the original issuance dates. |
43
|
|
|
(2) |
|
Pro forma weighted average shares outstanding reflects the
conversion of our redeemable convertible preferred stock (using
the if-converted method) into common stock as though the
conversion had occurred on the original dates of issuance. |
|
(3) |
|
Excludes restricted cash. |
|
(4) |
|
Includes capital lease obligations. |
|
(5) |
|
We define Adjusted EBITDA as net (loss) income plus depreciation
and asset impairment, amortization of intangible assets,
interest expense, net, income tax expense (benefit), stock-based
compensation expense and acquisition-related expense. |
|
|
|
We believe that the use of Adjusted EBITDA is useful to
investors and other users of our financial statements in
evaluating our operating performance because it provides them
with an additional tool to compare business performance across
companies and across periods. We believe that: |
|
|
|
|
|
Adjusted EBITDA provides investors and other users of our
financial information consistency and comparability with our
past financial performance, facilitates period-to-period
comparisons of operations and facilitates comparisons with our
peer companies, many of which use similar non-GAAP financial
measures to supplement their GAAP results; and
|
|
|
|
it is useful to exclude certain non-cash charges, such as
depreciation and asset impairment, amortization of intangible
assets and stock-based compensation and non-core operational
charges, such as acquisition-related expense, from Adjusted
EBITDA because the amount of such expenses in any specific
period may not directly correlate to the underlying performance
of our business operations and these expenses can vary
significantly between periods as a result of new acquisitions,
full amortization of previously acquired tangible and intangible
assets or the timing of new stock-based awards, as the case may
be.
|
|
|
|
|
|
We use Adjusted EBITDA in conjunction with traditional GAAP
operating performance measures as part of our overall assessment
of our performance, for planning purposes, including the
preparation of our annual operating budget, to evaluate the
effectiveness of our business strategies and to communicate with
our board of directors concerning our financial performance. |
|
|
|
We do not place undue reliance on Adjusted EBITDA as our only
measure of operating performance. Adjusted EBITDA should not be
considered as a substitute for other measures of liquidity or
financial performance reported in accordance with GAAP. There
are limitations to using non-GAAP financial measures, including
that other companies may calculate these measures differently
than we do, that they do not reflect our capital expenditures or
future requirements for capital expenditures and that they do
not reflect changes in, or cash requirements for, our working
capital. We compensate for the inherent limitations associated
with using Adjusted EBITDA measures through disclosure of these
limitations, presentation of our financial statements in
accordance with GAAP and reconciliation of Adjusted EBITDA to
the most directly comparable GAAP measure, net (loss) income. |
The following table presents a reconciliation of net (loss)
income to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Net (loss) income
|
|
$
|
(14,421
|
)
|
|
$
|
(5,172
|
)
|
|
$
|
(3,143
|
)
|
|
$
|
(3,209
|
)
|
|
$
|
28,429
|
|
Depreciation and asset impairment
|
|
|
2,010
|
|
|
|
3,269
|
|
|
|
4,854
|
|
|
|
9,847
|
|
|
|
9,231
|
|
Amortization of intangible assets
|
|
|
3,868
|
|
|
|
670
|
|
|
|
2,273
|
|
|
|
2,095
|
|
|
|
5,784
|
|
Interest expense, net
|
|
|
381
|
|
|
|
508
|
|
|
|
1,510
|
|
|
|
2,152
|
|
|
|
4,528
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
703
|
|
|
|
(26,028
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
33
|
|
|
|
490
|
|
|
|
1,476
|
|
|
|
2,805
|
|
Acquisition-related expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(8,162
|
)
|
|
$
|
(692
|
)
|
|
$
|
5,984
|
|
|
$
|
13,064
|
|
|
$
|
25,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
The following table presents stock-based compensation included
in each expense category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
$
|
48
|
|
|
$
|
104
|
|
|
$
|
367
|
|
Product development
|
|
|
|
|
|
|
|
|
|
|
251
|
|
|
|
727
|
|
|
|
1,175
|
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
110
|
|
|
|
277
|
|
|
|
498
|
|
General and administrative
|
|
|
|
|
|
$
|
33
|
|
|
|
81
|
|
|
|
368
|
|
|
|
765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
|
|
|
|
$
|
33
|
|
|
$
|
490
|
|
|
$
|
1,476
|
|
|
$
|
2,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read together with
Selected Consolidated Financial Data and our
financial statements and accompanying notes included elsewhere
in this prospectus. This discussion contains forward-looking
statements, based on current expectations and related to our
plans, estimates, beliefs and anticipated future financial
performance. These statements involve risks and uncertainties
and our actual results may differ materially from those
anticipated in these forward-looking statements as a result of
many factors, including those set forth under Risk
Factors, Special Note Regarding Forward-Looking
Statements and Industry Data and elsewhere in this
prospectus.
Overview
We are a leading provider of on demand software solutions for
the rental housing industry. Our broad range of property
management solutions enable owners and managers of single-family
and a wide variety of multi-family rental property types to
manage their marketing, pricing, screening, leasing, accounting,
purchasing and other property operations. We deliver our on
demand software solutions via the Internet through an integrated
software platform that provides a single point of access and a
shared repository of prospect, resident and property data.
We derive a substantial majority of our revenue from sales of
our on demand software solutions. We also derive revenue from
our professional and other services. A small percentage of our
revenue is derived from sales of our on premise software
solutions to our existing on premise customers. Our on demand
software solutions are sold pursuant to subscription license
agreements, and our on premise software solutions are sold
pursuant to term or perpetual license agreements and associated
maintenance agreements. Typically, we price our solutions based
primarily on the number of units the customer manages with our
solutions. For our insurance and transaction-based solutions, we
price based on a fixed commission rate of earned premiums or a
fixed rate per transaction, respectively. We sell our solutions
through our direct sales organization and derive substantially
all of our revenue from sales in the United States. Our revenue
has increased from $83.6 million in 2007 to
$140.9 million in 2009. This increase in revenue has
primarily been driven by increased sales of our on demand
software solutions, a substantial amount of which has been
derived from purchases of additional on demand software
solutions by our existing customers. In 2009, our on demand
revenue represented 91.1% of our total revenue.
While the adoption of on demand software solutions in the rental
housing industry is growing rapidly, it remains at a relatively
early stage of development. Additionally, there is a low level
of penetration of our on demand software solutions in our
existing customer base. We believe these factors present us with
significant opportunities to generate revenue through sales of
additional on demand software solutions. Our existing and
potential customers base their decisions to invest in our
solutions on a number of factors, including general economic
conditions. Accordingly, macroeconomic conditions negatively
impacted our business in 2009 and may continue to negatively
impact our business.
Our company was formed in 1998 to acquire Rent Roll, Inc., which
marketed and sold on premise property management systems for the
conventional and affordable multi-family rental housing markets.
In June 2001, we released OneSite, our first on demand property
management system. Since 2002, we have expanded our on demand
software solutions to include a number of software-enabled
value-added services that provide complementary sales and
marketing, asset optimization, risk mitigation, billing and
utility management and spend management capabilities. In
connection with this expansion, we have allocated greater
resources to the development and infrastructure needs of
developing and increasing sales of our suite of on demand
software solutions. In addition, since July 2002, we have
completed 13 acquisitions of complementary technologies and
businesses (including our recent February 2010 acquisition) to
supplement our internal product development and sales and
marketing efforts, enabling us to expand the scope of our
solutions, the types of rental housing properties served by our
solutions and our customer base.
46
Key
Business Metrics
In addition to traditional financial measures, we monitor our
operating performance using a number of financially and
non-financially derived metrics that are not included in our
consolidated financial statements. We monitor the key
performance indicators reflected in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except dollar per unit data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
83,581
|
|
|
$
|
112,568
|
|
|
$
|
140,902
|
|
On demand revenue
|
|
$
|
62,592
|
|
|
$
|
95,192
|
|
|
$
|
128,377
|
|
On demand revenue as a percentage of total revenue
|
|
|
74.9%
|
|
|
|
84.6%
|
|
|
|
91.1%
|
|
Ending on demand units
|
|
|
2,800
|
|
|
|
3,833
|
|
|
|
4,551
|
|
Average on demand units
|
|
|
2,293
|
|
|
|
3,138
|
|
|
|
4,128
|
|
On demand revenue per average on demand unit
|
|
$
|
27.30
|
|
|
$
|
30.34
|
|
|
$
|
31.10
|
|
Adjusted EBITDA
|
|
$
|
5,984
|
|
|
$
|
13,064
|
|
|
$
|
25,593
|
|
Adjusted EBITDA as a percentage of total revenue
|
|
|
7.2%
|
|
|
|
11.6%
|
|
|
|
18.2%
|
|
On demand revenue. This metric represents the
license and subscription fees for accessing our on demand
software solutions, typically licensed for one year terms,
commission income from sales of renters insurance policies
and transaction fees for certain of our on demand software
solutions. We consider on demand revenue to be a key business
metric because we believe the market for our on demand software
solutions represents the largest growth opportunity for our
business.
On demand revenue as a percentage of total
revenue. This metric represents on demand revenue
for the period presented divided by total revenue for the same
period. We use on demand revenue as a percentage of total
revenue to measure our success in executing our strategy to
increase the penetration of our on demand software solutions and
expand our recurring revenue streams attributable to these
solutions. We expect our on demand revenue to remain a
significant percentage of our total revenue although the actual
percentage may vary from period to period due to a number of
factors, including the timing of acquisitions and professional
and other revenue.
Ending on demand units. This metric represents
the number of rental housing units managed by our customers with
one or more of our on demand software solutions at the end of
the period. We use ending on demand units to measure the success
of our strategy of increasing the number of rental housing units
managed with our on demand software solutions. Property unit
counts are provided to us by our customers as new sales orders
are processed. Property unit counts may be adjusted periodically
as information related to our customers properties is
updated or supplemented, which could result in adjusting the
number of units previously reported. We expect ending on demand
units will continue to increase in 2010 and 2011.
On demand revenue per average on demand
unit. This metric represents on demand revenue
for the period presented divided by average on demand units for
the same period. We calculate average on demand units as the
average of the beginning and ending on demand units for each
quarter in the period presented. We monitor this metric to
measure our success in increasing the number of on demand
software solutions utilized by our customers to manage their
rental housing units, our overall revenue and profitability.
Adjusted EBITDA. We define this metric as net
(loss) income plus depreciation and asset impairment;
amortization of intangible assets; interest expense, net; income
tax expense (benefit); stock-based compensation expense and
acquisition-related expense. We believe that the use of Adjusted
EBITDA is useful in evaluating our operating performance because
it excludes certain non-cash expenses, including depreciation,
amortization and stock-based compensation. Adjusted EBITDA is
not determined in accordance with accounting principles
generally accepted in the United States, or GAAP, and should not
be considered as a substitute for or superior to financial
measures determined in accordance with GAAP. For further
discussion regarding Adjusted EBITDA and a reconciliation of
Adjusted EBITDA to net income, refer to the table below. Our
47
Adjusted EBITDA grew from approximately $6.0 million in
2007 to approximately $25.6 million in 2009, as a result of
our efforts to expand market share and increase revenue.
The following provides a reconciliation of net (loss) income to
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Net (loss) income
|
|
$
|
(3,143
|
)
|
|
$
|
(3,209
|
)
|
|
$
|
28,429
|
|
Depreciation and asset impairment
|
|
|
4,854
|
|
|
|
9,847
|
|
|
|
9,231
|
|
Amortization of intangible assets
|
|
|
2,273
|
|
|
|
2,095
|
|
|
|
5,784
|
|
Interest expense, net
|
|
|
1,510
|
|
|
|
2,152
|
|
|
|
4,528
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
703
|
|
|
|
(26,028
|
)
|
Stock-based compensation expense
|
|
|
490
|
|
|
|
1,476
|
|
|
|
2,805
|
|
Acquisition-related expense
|
|
|
|
|
|
|
|
|
|
|
844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
5,984
|
|
|
$
|
13,064
|
|
|
$
|
25,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
Components of our Results of Operations
Revenue
We derive our revenue from three primary sources: our on demand
software solutions; our on premise software solutions; and our
professional and other services. In 2007, 2008 and 2009, we
generated revenue of $83.6 million, $112.6 million and
$140.9 million, respectively.
On Demand
Revenue
Revenue from our on demand software solutions is comprised of
license and subscription fees for accessing our on demand
software solutions, typically licensed for one year terms,
commission income from sales of renters insurance
policies, and transaction fees for certain on demand software
solutions, such as payment processing, spend management and
billing services. Typically, we price our on demand software
solutions based primarily on the number of units the customer
manages with our solutions. For our insurance and
transaction-based
solutions, we price based on a fixed commission rate of earned
premiums or a fixed rate per transaction, respectively.
In 2007, 2008 and 2009, revenue from our on demand software
solutions was approximately $62.6 million,
$95.2 million and $128.4 million, respectively,
representing approximately 74.9%, 84.6% and 91.1% of our total
revenue for the same years. Revenue from our on demand software
solutions has continued to increase in absolute dollars and as a
percentage of our total revenue as we have ceased actively
marketing our on premise software solutions to new customers and
as many of our existing on premise customers have transitioned
to our on demand software solutions. We expect our on demand
revenue to continue to increase in absolute dollars and as a
percentage of revenue in 2010, although the actual percentage of
revenue may vary from period to period due to a number of
factors, including the impact of acquisitions and revenue
derived from our professional and other services related to our
on demand software solutions.
On
Premise Revenue
Our on premise software solutions are distributed to our
customers and maintained locally on the customers
hardware. Revenue from our on premise software solutions is
comprised of license fees under term and perpetual license
agreements. Typically, we have licensed our on premise software
solutions pursuant to term license agreements with an initial
term of one year that include maintenance and support. Customers
can renew their term license agreement for additional one-year
terms at renewal price levels. In February 2010, we completed a
strategic acquisition of assets that included on premise
software solutions that were historically marketed and sold
pursuant to perpetual license agreements and related maintenance
agreements.
48
We no longer actively market our on premise software solutions
to new customers, and only license our on premise software
solutions to a small portion of our existing on premise
customers as they expand their portfolio of rental housing
properties. While we intend to continue to support our recently
acquired on premise software solutions, we expect that many of
the customers who license these solutions will transition to our
on demand software solutions over time.
In 2007, 2008 and 2009, revenue from our on premise software
solutions was approximately $11.6 million,
$7.6 million and $3.9 million, respectively,
representing approximately 13.8%, 6.7% and 2.7% of our total
revenue for the same years, respectively. Revenue from our on
premise software solutions has continued to decrease in absolute
dollars and as a percentage of our total revenue as we have
ceased actively marketing our on premise software solutions to
new customers and as many of our existing on premise customers
have transitioned to our on demand software solutions. We expect
our on premise revenue to decrease over time in absolute dollars
and as a percentage of our total revenue; however, our February
2010 acquisition could result in a
near-term
increase in on premise revenue in terms of both absolute dollars
and as a percentage of our total revenue until we transition
these customers to our on demand software solutions. In
addition, the actual percentage of revenue may vary from period
to period due to a number of factors, including the impact of
our recent and potential future acquisition of on premise
software solutions.
Professional
and Other Revenue
Revenue from professional and other services consists of
consulting and implementation services, training and other
ancillary services. Professional and other services engagements
are typically time and material.
We complement our solutions with professional and other
services. In 2007, 2008 and 2009, revenue from professional and
other services was approximately $9.4 million,
$9.8 million and $8.7 million, respectively,
representing approximately 11.3%, 8.7% and 6.2% of our total
revenue for the same years, respectively. We expect professional
and other services will represent 10.0% or less of our total
revenue in 2010 consistent with 2008 and 2009 performance.
Cost
of Revenue
Cost of revenue consists primarily of personnel costs related to
our operations, support services, training and implementation
services, expenses related to the operation of our data center
and fees paid to third-party service providers. Personnel costs
include salaries, bonuses, stock-based compensation and employee
benefits. Cost of revenue also includes an allocation of
facilities costs, overhead costs and depreciation, as well as
amortization of acquired technology related to strategic
acquisitions and amortization of capitalized development costs.
We allocate facilities costs, overhead costs and depreciation
based on headcount. We expect our cost of revenue in 2010 to
increase in absolute dollars.
Operating
Expenses
We classify our operating expenses into three categories:
product development, sales and marketing, and general and
administrative. Our operating expenses primarily consist of
personnel costs, which includes compensation, employee benefits
and payroll taxes, costs for third-party contracted development,
marketing, legal, accounting and consulting services and other
professional service fees. Personnel costs for each category of
operating expenses include salaries, bonuses, stock-based
compensation and employee benefits for employees in that
category. In addition, our operating expenses include an
allocation of our facilities costs, overhead costs and
depreciation based on headcount for that category, as well as
amortization of purchased intangible assets resulting from our
acquisitions.
Our operating expenses increased in absolute dollars in each of
2008 and 2009 as we have built infrastructure and added
employees across all categories in order to accelerate and
support our growth and to expand our markets. We expect our
operating expenses in 2010 to continue to increase in absolute
dollars as compared to 2009, as the capacity we have added in
prior years is more fully utilized and we continue to create
operating leverage.
49
Product development. Product development
expense consists primarily of personnel costs for our product
development employees and executives and fees to contract
development vendors. Our product development efforts are focused
primarily on increasing the functionality and enhancing the ease
of use of our on demand software solutions and expanding our
suite of on demand software solutions. In 2008, we established a
product development and service center in Hyderabad, India to
take advantage of strong technical talent at lower personnel
costs compared to the United States. We expect our product
development expenses in 2010 to increase in absolute dollars.
Sales and marketing. Sales and marketing
expense consists primarily of personnel costs for our sales,
marketing and business development employees and executives,
travel and entertainment and marketing programs. Marketing
programs consist of advertising, tradeshows, user conferences,
public relations, industry sponsorships and affiliations and
product marketing. In addition, sales and marketing expense
includes amortization of certain purchased intangible assets,
including customer relationships and key vendor and supplier
relationships obtained in connection with our acquisitions. We
expect our sales and marketing expense in 2010 to increase in
absolute dollars.
General and administrative. General and
administrative expense consists of personnel costs for our
executive, finance and accounting, human resources, management
information systems and legal personnel, as well as legal,
accounting and other professional service fees and other
corporate expenses. We expect our general and administrative
expense in 2010 to increase in absolute dollars as compared to
2009 primarily due to the increased costs of operating as a
public company.
Interest
Expense, Net
Interest expense, net, consists primarily of interest income and
interest expense. Interest income represents earnings from our
cash, cash equivalents and short-term investments. Interest
expense is associated with our term loan, revolver, secured
promissory note, promissory note issued to preferred
stockholders, capital lease obligations and certain
acquisition-related liabilities. Total amounts outstanding under
our interest-bearing obligations at December 31, 2007, 2008
and 2009 include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Term loan
|
|
$
|
9,583
|
|
|
$
|
12,650
|
|
|
$
|
33,688
|
|
Revolver
|
|
|
8,584
|
|
|
|
10,000
|
|
|
|
|
|
Secured promissory note
|
|
|
|
|
|
|
10,000
|
|
|
|
10,000
|
|
Promissory notes issued to preferred stockholders
|
|
|
|
|
|
|
11,064
|
|
|
|
8,173
|
|
Capital lease obligations
|
|
|
5,642
|
|
|
|
5,229
|
|
|
|
2,129
|
|
Interesting bearing acquisition-related liabilities
|
|
|
3,455
|
|
|
|
2,966
|
|
|
|
2,470
|
|
We expect interest expense to decrease in absolute dollars and
as a percentage of our total revenue in the periods following
this public offering as we anticipate repaying a portion of our
outstanding term loan and repaying all of our secured promissory
note and promissory notes issued to preferred stockholders.
Income
Taxes
Historically, we have incurred annual operating losses and have
not benefited from these losses and have only provided for state
and foreign income taxes. As of December 31, 2009, we had
net operating loss carry forwards for federal and state income
tax purposes of approximately $67.2 million. In December
2009, based on current year income and projected future year
income, we concluded that it is more likely than not that the
net deferred tax assets recorded will be realized. As such, we
deemed it appropriate to decrease this valuation allowance by
$27.0 million during 2009. If not utilized, our federal net
operating loss and tax credit carry forwards will begin to
expire in 2018. While not currently subject to an annual
limitation, the utilization of these carry forwards may become
subject to an annual limitation because of provisions in the
Internal Revenue
50
Code that are applicable if we experience an ownership
change, which may occur, for example, as a result of this
offering or other issuances of stock.
Critical
Accounting Policies
Our consolidated financial statements are prepared in accordance
with GAAP. In many cases, the accounting treatment of a
particular transaction is specifically dictated by GAAP and does
not require managements judgment in its application, while
in other cases, managements judgment is required in
selecting among available alternative accounting standards that
allow different accounting treatment for similar transactions.
The preparation of our consolidated financial statements and
related disclosures require us to make estimates, assumptions
and judgments that affect the reported amount of assets,
liabilities, revenue, costs and expenses, and related
disclosures. We base our estimates and assumptions on historical
experience and other factors that we believe to be reasonable
under the circumstances. In some instances, we could reasonably
use different accounting estimates, and in some instances
results could differ significantly from our estimates. We
evaluate our estimates and assumptions on an ongoing basis. To
the extent that there are differences between our estimates and
actual results, our future financial statement presentation,
financial condition, results of operations and cash flows will
be affected.
We believe that the assumptions and estimates associated with
revenue recognition, accounts receivable, business combinations,
goodwill and other intangible assets with indefinite lives,
impairment of long-lived assets, intangible assets, stock-based
compensation, income taxes and capitalized product development
costs have the greatest potential impact on our consolidated
financial statements. Therefore, we believe the accounting
policies discussed below are critical to understanding our
historical and future performance, as these policies relate to
the more significant areas involving our managements
judgments, assumptions and estimates.
Revenue
Recognition
We derive our revenue from three primary sources: our on demand
software solutions; our on premise software solutions; and
professional and other services. We commence revenue recognition
when all of the following conditions are met:
|
|
|
|
|
there is persuasive evidence of an arrangement;
|
|
|
|
the solution and/or service has been provided to the customer;
|
|
|
|
the collection of the fees is probable; and
|
|
|
|
the amount of fees to be paid by the customer is fixed or
determinable.
|
For multi-element arrangements that include multiple solutions
and/or
services, we allocate arrangement consideration to all
deliverables that have stand-alone value based on their relative
selling prices. In such circumstances, we utilize the following
hierarchy to determine the selling price to be used for
allocating revenue to deliverables as follows:
|
|
|
|
|
Vendor specific objective evidence (VSOE), if
available. The price at which we sell the element
in a separate stand-alone transaction;
|
|
|
|
Third-party evidence of selling price (TPE), if VSOE of
selling price is not available. Evidence from us
or other companies of the value of a largely interchangeable
element in a transaction; and
|
|
|
|
Estimated selling price, if neither VSOE nor TPE of selling
price is available. Our best estimate of the
stand-alone selling price of an element in a transaction.
|
From time to time, we sell on demand software solutions with
professional services. In such cases, we allocate arrangement
consideration based on our estimated selling price of the on
demand software solution and VSOE of the selling price of the
professional services.
51
On Demand
Revenue
Our on demand revenue consists of license and subscription fees,
transaction fees related to certain of our software-enabled
value-added services and commissions derived from us selling
certain risk mitigation services.
License and subscription fees are comprised of a charge billed
at the initial order date and monthly or annual subscription
fees for accessing our on demand software solutions.
The license fee billed at the initial order date is recognized
as revenue on a straight-line basis over the longer of the
contractual term or the period in which the customer is expected
to benefit, which we consider to be four years. Recognition
starts once the product has been activated. Revenue from monthly
and annual subscription fees is recognized on a straight-line
basis over the access period.
We act as an insurance agent as a part of our risk mitigation
services. We recognize the commissions related to these services
ratably over the policy term.
We recognize revenue from transaction fees derived from certain
of our software-enabled value-added services as the related
services are performed.
On
Premise Revenue
Revenue from our on premise software solutions is comprised of
an annual term license, which includes maintenance and support.
Customers can renew their annual term license for additional
one-year terms at renewal price levels. We recognize the annual
term license on a straight-line basis over the license term.
Professional
and Other Revenue
Professional and other revenue is recognized as the services are
rendered for time and material contracts. Training revenues are
recognized after the services are performed.
Accounts
Receivable
For several of our solutions, we invoice our customers prior to
the period in which service is provided. Accounts receivable
represent trade receivables from customers when we have invoiced
for software solutions
and/or
services and we have not yet received payment. We present
accounts receivable net of an allowance for doubtful accounts.
We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of customers to make
required payments, or the customer cancelling prior to the
service being rendered. In doing so, we consider the current
financial condition of the customer, the specific details of the
customer account, the age of the outstanding balance, the
current economic environment and historical credit trends. As a
result of a portion of our allowance being for services not yet
rendered, a portion of our allowance is charged as an offset to
deferred revenue, which does not have an effect on the statement
of operations. Any change in the assumptions used in analyzing a
specific account receivable might result in an additional
allowance for doubtful accounts being recognized in the period
in which the change occurs.
Business
Combinations
When we acquire businesses, we allocate the total consideration
to the fair value of tangible assets and liabilities and
identifiable intangible assets acquired. Any residual purchase
price is recorded as goodwill. The allocation of the purchase
price requires management to make significant estimates in
determining the fair values of assets acquired and liabilities
assumed, especially with respect to intangible assets. These
estimates are based on the application of valuation models using
historical experience and information obtained from the
management of the acquired companies. These estimates can
include, but are not limited to, the cash flows that an asset is
expected to generate in the future, the appropriate weighted
average cost of capital and the cost savings expected to be
derived from acquiring an asset. These estimates are inherently
uncertain and unpredictable. In addition, unanticipated events
and circumstances may occur which may affect the accuracy or
validity of these estimates. Beginning in 2009, we began
including the fair value of contingent consideration
52
to be paid within the total consideration allocated to the fair
value of the assets acquired and the liabilities assumed.
Goodwill
and Other Intangible Assets with Indefinite Lives
We test goodwill and other intangible assets with indefinite
lives for impairment on an annual basis in the fourth quarter of
each year. Additionally, we test goodwill and other intangible
assets with indefinite lives in the interim if events and
circumstances indicate that goodwill and other intangible assets
with indefinite lives may be impaired. The events and
circumstances that we consider include the significant
under-performance relative to projected future operating results
and significant changes in our overall business
and/or
product strategies. We evaluate impairment of goodwill and other
intangible assets with indefinite lives using a two-step
process. The first step involves a comparison of the fair value
of a reporting unit with its carrying amount. If the carrying
amount of the reporting unit exceeds its fair value, the second
step of the process involves a comparison of the fair value and
carrying amount of the goodwill and other intangible assets with
indefinite lives of that reporting unit. If the carrying amount
of the goodwill and other intangible assets with indefinite
lives of a reporting unit exceeds the fair value of that
goodwill and other intangible assets with indefinite lives, we
recognize an impairment loss equal to the amount by which the
carrying amount exceeds the fair market value of the asset. If
an event occurs that causes us to revise our estimates and
assumptions used in analyzing the value of our goodwill and
other intangible assets with indefinite lives, the revision
could result in a non-cash impairment charge that could have a
material impact on our financial results.
We recorded goodwill and other intangible assets with indefinite
lives in conjunction with all seven of our business acquisitions
completed since the beginning of 2007. We test goodwill for
impairment based on a single reporting unit. We believe we
operate in a single reporting unit because our chief operating
decision maker does not regularly review our operating results
other than at a consolidated level for purposes of decision
making regarding resource allocation and operating performance.
Impairment
of Long-lived Assets
We perform an impairment review of long-lived assets held and
used whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Factors we consider
important that could trigger an impairment review include, but
are not limited to, significant under-performance relative to
projected future operating results, significant changes in the
manner of our use of the acquired assets or our overall business
and/or
product strategies and significant industry or economic trends.
When we determine that the carrying value of a long-lived asset
may not be recoverable based upon the existence of one or more
of these indicators, we determine the recoverability by
comparing the carrying amount of the asset to net future
undiscounted cash flows that the asset is expected to generate.
We would then recognize an impairment charge equal to the amount
by which the carrying amount exceeds the fair market value of
the asset.
Intangible
Assets
Intangible assets consist of acquired developed product
technologies, acquired customer relationships, vendor
relationships, non-competition agreements and trade names. We
record intangible assets at fair value and amortize those with
finite lives over the shorter of the contractual life or the
estimated useful life. We estimate the useful lives of acquired
developed product technologies and customer relationships based
on factors that include the planned use of each developed
product technology and the expected pattern of future cash flows
to be derived from each developed product technology and
existing customer relationships. We include amortization of
acquired developed product technologies in cost of revenue,
amortization of acquired customer relationships in sales and
marketing expenses and amortization of vendor relationships and
non-competition agreements in general and administrative
expenses in our consolidated statements of operations.
Stock-Based
Compensation
Prior to January 1, 2006, we accounted for share-based
awards, including stock options, to employees using the
intrinsic value method. Under the intrinsic value method,
compensation expense was measured on
53
the date of award as the difference, if any, between the deemed
fair value of our common stock and the option exercise price,
multiplied by the number of options granted. The option exercise
prices and fair value of our common stock are determined by our
board of directors based on a review of various objective and
subjective factors. No compensation expense was recorded for
stock options issued to employees prior to January 1, 2006
because all options were granted in fixed amounts and with fixed
exercise prices at least equal to the fair value of our common
stock at the date of grant.
Effective January 1, 2006, we changed our accounting
treatment to recognize compensation expense based on the fair
value of all share-based awards granted, modified, repurchased
or cancelled on or after that date.
Our stock-based compensation is measured on the grant date based
on the fair value of the award and is recognized as an expense
over the requisite service period, which is generally the
vesting period, on a straight-line basis.
The fair value of share-based awards is calculated through the
use of option pricing models. These models require subjective
assumptions regarding future share price volatility and the
expected life of each option grant.
The fair value of employee stock options granted since
January 1, 2009 was estimated at the grant date using the
Black-Scholes option pricing model by applying the following
weighted average assumptions:
|
|
|
|
|
Risk-free interest rates
|
|
|
1.5-4.8
|
%
|
Expected option life (in years)
|
|
|
6
|
|
Dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
50-60
|
%
|
At each stock option grant date, we utilized peer group data to
calculate our expected volatility. Expected volatility was based
on historical and expected volatility rates of comparable
publicly traded peers. The expected life of each option grant is
based on existing employee exercise patterns and our historical
pre-vested forfeiture experience. The risk-free interest rate
was based on the treasury yield rate with a maturity
corresponding to the expected option life assumed at the grant
date.
Changes to the underlying assumptions may have a significant
impact on the underlying value of the stock options, which could
have a material impact on our consolidated financial statements.
We have granted stock options at exercise prices above the fair
value of our common stock as of the grant date, as determined by
our compensation committee on a contemporaneous basis. Given the
absence of any active market for our common stock, the fair
value of the common stock underlying stock options granted was
determined by our compensation committee, with input from our
management. In arriving at these valuations, our compensation
committee and management also considered contemporaneous
third-party valuations.
Valuation
of Common Stock
In 2009 and in the quarter ended March 31, 2010, we granted
options to purchase shares of our common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
Fair Value
|
|
Grant Date
|
|
Options Granted
|
|
|
Per Share
|
|
|
Per Share
|
|
|
February 2009
|
|
|
1,437,500
|
|
|
$
|
3.00
|
|
|
$
|
2.72
|
|
June 2009
|
|
|
571,000
|
|
|
|
3.00
|
|
|
|
2.88
|
|
September 2009
|
|
|
1,763,000
|
|
|
|
3.00
|
|
|
|
2.52
|
|
October 2009
|
|
|
225,000
|
|
|
|
3.00
|
|
|
|
2.52
|
|
November 2009
|
|
|
472,500
|
|
|
|
3.00
|
|
|
|
2.52
|
|
December 2009
|
|
|
100,000
|
|
|
|
3.00
|
|
|
|
2.83
|
|
February 2010
|
|
|
1,721,000
|
|
|
|
3.75
|
|
|
|
3.37
|
|
54
Significant
Factors in Determining Fair Value
For all grant dates in 2009 and 2010, we granted employees
options at exercise prices greater than the fair value of the
underlying common stock at the time of grant, as determined by
our compensation committee on a contemporaneous basis. To
determine the fair value of our common stock, we consider many
factors, including:
|
|
|
|
|
our current and historical operating performance;
|
|
|
|
our expected future operating performance;
|
|
|
|
our financial condition at the grant date;
|
|
|
|
the liquidation rights and other preferences of our preferred
stock;
|
|
|
|
any recent privately negotiated sales of our securities to
independent third parties;
|
|
|
|
input from management;
|
|
|
|
the lack of marketability of our common stock;
|
|
|
|
the potential future marketability of our common stock;
|
|
|
|
the business risks inherent in our business and in technology
companies, generally;
|
|
|
|
the market performance of comparable publicly traded
companies; and
|
|
|
|
the U.S. and global capital market conditions.
|
Valuation
Methodologies Used in Determining Fair Value
In valuing our common stock, we utilize a probability weighted
expected return method to estimate the value of our common stock
based upon an analysis of expected future cash flows considering
possible future liquidity events, as well as the liquidation
rights and other preferences of our preferred stock. In
determining the value of our common stock on each grant date in
2009 and in February 2010, we considered two possible scenarios:
the completion of an initial public offering, or the IPO
Scenario, and remaining private, or the Private Scenario. For
purposes of determining the fair market value of our common
stock on each grant date in 2009 and February 2010, we estimated
the probability of the future liquidity event being our initial
public offering at 75% and remaining a private company at 25%.
In valuing our common stock in the IPO Scenario, we utilize a
market approach that estimates the fair value of a company by
applying to that company the market multiples of comparable
publicly traded companies. Based on the range of these observed
multiples, we apply judgment in determining an appropriate
multiple to apply to our metrics in order to derive an
indication of value. In connection with valuing our common stock
under the IPO Scenario for grants in February, June and
September 2009, we determined fair value based on the
probability of going public in 2009, 2010 or 2011. In connection
with valuing our common stock under the IPO Scenario for grants
in December 2009 and February 2010, we determined the
probability of going public in 2010 or 2011. For each of the
grants in 2009 and February 2010, we concluded that the market
value of invested capital to revenue multiple would yield the
most appropriate indication of value for us based on our
projections.
In valuing our common stock in the Private Scenario, we apply
the income and market approaches utilizing a terminal period
value and a residual revenue growth rate of 5.5% in the terminal
year based on our expectation of long-term growth. In connection
with valuing our common stock under the Private Scenario, we
apply the income approach utilizing discounted cash flows. We
concluded that this was the best indication of value because,
beginning in the fourth quarter of 2008, we had moved towards a
long-term expectation of earnings.
55
Fair
Value of Stock Option Grants in 2009 and 2010
February 2009. In connection with our stock
option grants in February 2009, we considered the factors
described above, including the continued downturn in the
U.S. and global capital markets and its impact on our short
term projected revenue growth and the market value of invested
capital of comparable publicly traded peers, and a
contemporaneous valuation report, dated February 27, 2009,
and utilized the valuation methodologies described above to
arrive at a fair value of our common stock of $2.72 per share
and granted options at an exercise price of $3.00 per share.
June 2009. In connection with our stock option
grants in June 2009, we considered the factors described above,
including the slight recovery of the U.S. and global
capital markets and its impact on our short term projected
revenue growth and comparable publicly traded peers since the
grants in February 2009, as well as a contemporaneous valuation
report, dated June 4, 2009, and utilized the valuation
methodologies described above to arrive at a fair value of our
common stock of $2.88 per share and granted options at an
exercise price of $3.00 per share.
September 2009. In connection with our stock
option grants in September 2009, we considered the factors
described above, including the continued recovery of the
U.S. and global capital markets offset by the reduction in
our projected revenue growth due to mixed expectations of
projected macroeconomic conditions since the grants in June
2009, as well as a contemporaneous valuation report, dated
September 18, 2009, and utilized the valuation
methodologies described above to arrive at a fair value of our
common stock of $2.52 per share and granted options at an
exercise price of $3.00 per share.
October and November 2009. In connection with
our stock options grants in October and November, we continued
to use the $2.52 per share valuation analyzed in September. Our
board of directors reviewed the events since the grant of
options in September 2009 and the continued recovery of the
U.S. capital markets and concluded that there had been no
significant change in our performance to cause an increase or
decrease in the per share valuation of our common stock and
granted options at an exercise price of $3.00 per share.
December 2009. In connection with our stock
option grants in December 2009, we considered the factors
described above, including our improved sales performance and
outlook and the improved market performance of our comparable
public company peers since the September 2009 grants, as well as
a contemporaneous valuation report, dated December 15,
2009, and utilized the valuation methodologies described above
to arrive at a fair value of our common stock of $2.83 per share
and granted options at an exercise price of $3.00 per share.
February 2010. In connection with our stock
option grants in February 2010, we considered the factors
described above, including continued improvement in our sales
performance and outlook and the improved market performance of
our comparable public company peers since the grant in December
2009, as well as a contemporaneous valuation report, dated
February 25, 2010, and utilized the valuation methodologies
described above to arrive at a fair value of our common stock of
$3.37 per share and granted options at an exercise price of
$3.75 per share in February 2010.
Income
Taxes
Income taxes are provided based on the liability method, which
results in income tax assets and liabilities arising from
temporary differences. Temporary differences are differences
between the tax basis of assets and liabilities and their
reported amounts in the financial statements that will result in
taxable or deductible amounts in future years. The liability
method requires the effect of tax rate changes on current and
accumulated deferred income taxes to be reflected in the period
in which the rate change was enacted. The liability method also
requires that deferred tax assets be reduced by a valuation
allowance unless it is more likely than not that the assets will
be realized.
We may recognize the tax benefit from uncertain tax positions
only if it is at least more likely than not that the tax
position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The
tax benefits recognized in the financial statements from such a
position should be measured based on the largest benefit that
has a greater than fifty percent likelihood of being realized
upon
56
settlement with the taxing authorities. Upon our adoption of the
related standard, there was no liability for uncertain tax
positions due to the fact that there were no material identified
tax benefits that were considered uncertain positions.
We establish valuation allowances when necessary to reduce
deferred tax assets to the amounts expected to be realized. We
evaluate the need for, and the adequacy of, valuation allowances
based on the expected realization of our deferred tax assets.
The factors used to assess the likelihood of realization include
historical earnings, our latest forecast of taxable income and
available tax planning strategies that could be implemented to
realize the net deferred tax assets. In December 2009, based on
current year income and projected future year income, we
concluded that it is more likely than not that the net deferred
tax assets recorded will be realized. As such, we deemed it
appropriate to decrease the valuation allowance by
$27.0 million during 2009.
Our effective tax rates are primarily affected by the amount of
our taxable income or losses in the various taxing jurisdictions
in which we operate, the amount of federal and state net
operating losses and tax credits, the extent to which we can
utilize these net operating loss carryforwards and tax credits
and certain benefits related to stock option activity.
Capitalized
Product Development Costs
We capitalize specific product development costs, including
costs to develop software products or the software components of
our solutions to be marketed to our customers, as well as
software programs to be used solely to meet our internal needs.
The costs incurred in the preliminary stages of development
related to research, project planning, training, maintenance and
general and administrative activities, and overhead costs are
expensed as incurred. The costs of relatively minor upgrades and
enhancements to the software are also expensed as incurred. Once
an application has reached the development stage, internal and
external costs incurred in the performance of application
development stage activities, including materials, services and
payroll-related costs for employees are capitalized, if direct
and incremental, until the software is substantially complete
and ready for its intended use. Capitalization ceases upon
completion of all substantial testing. We also capitalize costs
related to specific upgrades and enhancements when it is
probable the expenditures will result in additional
functionality. Capitalized costs are recorded as part of
property and equipment. Internal use software is amortized on a
straight-line basis over its estimated useful life, generally
three years. We capitalized $1.5 million and
$1.4 million of product development costs during the years
ended December 31, 2008 and 2009, respectively, and
recognized amortization expense of $0.8 million,
$0.9 million and $1.3 million during the years ended
December 31, 2007, 2008 and 2009, respectively, included as
a component of cost of revenue. Unamortized product development
cost was $2.9 million and $3.1 million at
December 31, 2008 and 2009, respectively. Management
evaluates the useful lives of these assets on an annual basis
and tests for impairment whenever events or changes in
circumstances occur that could impact the recoverability of
these assets. There were no impairments to internal use software
during the years ended December 31, 2007, 2008 or 2009.
57
Results
of Operations
The following tables set forth our results of operations for the
specified periods. The period-to-period comparison of financial
results is not necessarily indicative of future results.
Consolidated
Statements of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
On demand
|
|
$
|
62,592
|
|
|
$
|
95,192
|
|
|
$
|
128,377
|
|
On premise
|
|
|
11,560
|
|
|
|
7,582
|
|
|
|
3,860
|
|
Professional and other
|
|
|
9,429
|
|
|
|
9,794
|
|
|
|
8,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
83,581
|
|
|
|
112,568
|
|
|
|
140,902
|
|
Cost of
revenue(1)
|
|
|
35,703
|
|
|
|
46,058
|
|
|
|
58,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
47,878
|
|
|
|
66,510
|
|
|
|
82,389
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
development(1)
|
|
|
21,708
|
|
|
|
28,806
|
|
|
|
27,446
|
|
Sales and
marketing(1)
|
|
|
18,047
|
|
|
|
23,923
|
|
|
|
27,804
|
|
General and
administrative(1)
|
|
|
9,756
|
|
|
|
14,135
|
|
|
|
20,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
49,511
|
|
|
|
66,864
|
|
|
|
75,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(1,633
|
)
|
|
|
(354
|
)
|
|
|
6,929
|
|
Interest expense, net
|
|
|
(1,510
|
)
|
|
|
(2,152
|
)
|
|
|
(4,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before taxes
|
|
|
(3,143
|
)
|
|
|
(2,506
|
)
|
|
|
2,401
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
703
|
|
|
|
(26,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3,143
|
)
|
|
$
|
(3,209
|
)
|
|
$
|
28,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Cost of revenue
|
|
$
|
48
|
|
|
$
|
104
|
|
|
$
|
367
|
|
Product development
|
|
|
251
|
|
|
|
727
|
|
|
|
1,175
|
|
Sales and marketing
|
|
|
110
|
|
|
|
277
|
|
|
|
498
|
|
General and administrative
|
|
|
81
|
|
|
|
368
|
|
|
|
765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
490
|
|
|
$
|
1,476
|
|
|
$
|
2,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
The following table sets forth our results of operations for the
specified periods as a percentage of our revenue for those
periods. The period-to-period comparison of financial results is
not necessarily indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(as a percentage of total revenue)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
On demand
|
|
|
74.9
|
%
|
|
|
84.6
|
%
|
|
|
91.1
|
%
|
On premise
|
|
|
13.8
|
|
|
|
6.7
|
|
|
|
2.7
|
|
Professional and other
|
|
|
11.3
|
|
|
|
8.7
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of revenue
|
|
|
42.7
|
|
|
|
40.9
|
|
|
|
41.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
57.3
|
|
|
|
59.1
|
|
|
|
58.5
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
26.0
|
|
|
|
25.6
|
|
|
|
19.5
|
|
Sales and marketing
|
|
|
21.6
|
|
|
|
21.3
|
|
|
|
19.7
|
|
General and administrative
|
|
|
11.7
|
|
|
|
12.6
|
|
|
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
59.3
|
|
|
|
59.5
|
|
|
|
53.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(2.0
|
)
|
|
|
(0.4
|
)
|
|
|
5.0
|
|
Interest expense, net
|
|
|
(1.8
|
)
|
|
|
(1.9
|
)
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before taxes
|
|
|
(3.8
|
)
|
|
|
(2.3
|
)
|
|
|
1.8
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
0.6
|
|
|
|
(18.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(3.8
|
)
|
|
|
(2.9
|
)
|
|
|
20.3
|
|
Year
Ended December 31, 2008 and 2009
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Change
|
|
|
% Change
|
|
|
|
(in thousands, except dollar per unit data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On demand
|
|
$
|
95,192
|
|
|
$
|
128,377
|
|
|
$
|
33,185
|
|
|
|
34.9
|
%
|
On premise
|
|
|
7,582
|
|
|
|
3,860
|
|
|
|
(3,722
|
)
|
|
|
(49.1
|
)
|
Professional and other
|
|
|
9,794
|
|
|
|
8,665
|
|
|
|
(1,129
|
)
|
|
|
(11.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
112,568
|
|
|
$
|
140,902
|
|
|
$
|
28,334
|
|
|
|
25.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On demand unit metrics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending on demand units
|
|
|
3,833
|
|
|
|
4,551
|
|
|
|
718
|
|
|
|
18.7
|
%
|
Average on demand units
|
|
|
3,138
|
|
|
|
4,128
|
|
|
|
990
|
|
|
|
31.5
|
|
On demand revenue per average on demand unit
|
|
$
|
30.34
|
|
|
$
|
31.10
|
|
|
$
|
0.76
|
|
|
|
2.5
|
%
|
On demand revenue. Our on demand revenue
increased $33.2 million, or 34.9%, in 2009 as compared to
2008, primarily due to a 31.5% increase in the average on demand
units managed with our on demand software solutions and an
increase in the number of our on demand software solutions
utilized by our existing customer base.
On premise revenue. On premise revenue
decreased $3.7 million, or (49.1)%, in 2009 as compared to
2008, primarily due to the impact of our decision to cease
actively marketing our on premise software solutions and our
efforts to migrate customers of our on premise software
solutions to our on demand software
59
solutions. In addition, our on premise software solution for
conventional multi-family properties, RentRoll, was discontinued
and was no longer supported after July 2009.
Professional and other revenue. Professional
and other services revenue decreased $1.1 million, or
(11.5)%, in 2009 as compared to 2008, primarily due to a
decrease in revenue from training and consulting services and a
decrease in revenue from sub-meter installations.
Total revenue. Our total revenue increased
$28.3 million, or 25.2%, in 2009 as compared to 2008,
primarily due to an increase in rental property units managed
with our on demand software solutions and improved penetration
of our on demand software solutions into our customer base.
On demand unit metrics. As of
December 31, 2009, one or more of our on demand software
solutions was utilized in the management of 4.6 million
rental housing units, representing an increase of
718,000 units, or 18.7%, as compared to 2008. The increase
in the number of rental units managed by one or more of our on
demand software solutions was primarily due to new customer
sales and marketing efforts, our 2009 acquisitions and to a
lesser degree, migration of our current customers from our on
premise software solutions to our on demand software solutions.
In 2009, our on demand revenue per average on demand unit was
$31.10, representing an increase of $0.76, or 2.5%, as compared
to 2008, primarily due to improved penetration of our on demand
software solutions into our customer base.
Cost
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Cost of revenue
|
|
$
|
40,783
|
|
|
$
|
51,260
|
|
|
$
|
10,477
|
|
|
|
25.7
|
%
|
Depreciation and amortization
|
|
|
5,275
|
|
|
|
7,253
|
|
|
|
1,978
|
|
|
|
37.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
46,058
|
|
|
$
|
58,513
|
|
|
$
|
12,455
|
|
|
|
27.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue. Cost of revenue increased
$12.5 million, or 27.0%, in 2009 as compared to 2008. The
increase in cost of revenue was primarily due to: a
$10.2 million increase from costs related to the increased
sales of our solutions; a $1.1 million increase in non-cash
amortization of acquired technology as a result of our 2008 and
2009 acquisitions; a $0.8 million increase in property and
equipment depreciation expense resulting from expanding our
infrastructure to support revenue delivery activities; and
$0.3 million increase in
stock-based
compensation related to our professional services and data
center operations personnel.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Product development
|
|
$
|
26,514
|
|
|
$
|
25,277
|
|
|
$
|
(1,237
|
)
|
|
|
(4.7
|
)%
|
Depreciation and amortization
|
|
|
2,292
|
|
|
|
2,169
|
|
|
|
(123
|
)
|
|
|
(5.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product development expense
|
|
$
|
28,806
|
|
|
$
|
27,446
|
|
|
$
|
(1,360
|
)
|
|
|
(4.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development. Product development
expense decreased $1.4 million, or (4.7)%, in 2009 as
compared to 2008. The decrease in product development expense
was primarily due to: the absence of non-recurring charges
related to the discontinuance of a business development project
in 2008; a decrease in third-party development costs; and a
decrease in depreciation of property and equipment. The decrease
was partially offset by an increase in stock-based compensation
in 2009 related to our product development personnel.
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Change
|
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
Sales and marketing
|
|
$
|
21,649
|
|
|
$
|
23,744
|
|
|
$
|
2,095
|
|
|
|
9.7
|
%
|
Depreciation and amortization
|
|
|
2,274
|
|
|
|
4,060
|
|
|
|
1,786
|
|
|
|
78.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales and marketing expense
|
|
$
|
23,923
|
|
|
$
|
27,804
|
|
|
$
|
3,881
|
|
|
|
16.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing. Sales and marketing
expense increased $3.9 million, or 16.2%, in 2009 as
compared to 2008. The increase in sales and marketing expense
was primarily due to: a $1.7 million increase in non-cash
intangible amortization related to our 2008 and 2009
acquisitions, which included acquired customer relationships and
key supplier and vendor relationships; a $1.5 million
increase in personnel expense and a $1.0 million increase
in marketing program expense in 2009 as part of our strategy to
expand our market share and further penetrate our existing
customer base with sales of additional on demand software
solutions; and a $0.2 million increase in stock-based
compensation related to our sales and marketing personnel.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Change
|
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
General and administrative
|
|
$
|
12,979
|
|
|
$
|
18,923
|
|
|
$
|
5,944
|
|
|
|
45.8
|
%
|
Depreciation and amortization
|
|
|
1,156
|
|
|
|
1,287
|
|
|
|
131
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expense
|
|
$
|
14,135
|
|
|
$
|
20,210
|
|
|
$
|
6,075
|
|
|
|
43.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative. General and
administrative expense increased $6.1 million, or 43.0%, in
2009 as compared to 2008. The increase in general and
administrative expense was primarily due to: a $2.8 million
increase in personnel expense and expense related to accounting,
management information systems, legal, human resources and
business development staff to support the growth in our
business; a $0.7 million increase in legal fees primarily
related to pursuing and closing acquisition opportunities; a
$0.4 million increase in stock-based compensation; and an
increase in various other general and administrative expenses
driven by the investments in our administrative functions.
Interest
Expense, Net
Interest expense, net, increased $2.4 million, or 110.4%,
in 2009 as compared to 2008. The increase in interest expense,
net, was primarily due to higher average debt balances related
to the financing of our acquisitions and the issuance of notes
payable to holders of our preferred stock in December 2008 in
payment of accrued dividends. See Note 7 to Notes to
Consolidated Financial Statements for the year ended
December 31, 2009.
Provision
for Taxes
We have not incurred federal income taxes due to the carry
forward of net operating losses. At December 31, 2009, we
had a net operating loss carry forward for federal income tax
purposes of approximately $67.2 million that will begin to
expire in 2018. We have historically offset all of our net
deferred tax assets by a valuation allowance. However, in
December 2009, based on current year income and our
projections of future income, we concluded it was more likely
than not that certain of our deferred tax assets would be
realizable, and therefore the valuation allowance was reduced by
$27.0 million.
61
Year
Ended December 31, 2007 and 2008
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
% Change
|
|
|
|
(in thousands, except dollar per unit data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On demand
|
|
$
|
62,592
|
|
|
$
|
95,192
|
|
|
$
|
32,600
|
|
|
|
52.1
|
%
|
On premise
|
|
|
11,560
|
|
|
|
7,582
|
|
|
|
(3,978
|
)
|
|
|
(34.4
|
)
|
Professional and other
|
|
|
9,429
|
|
|
|
9,794
|
|
|
|
365
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
83,581
|
|
|
$
|
112,568
|
|
|
$
|
28,987
|
|
|
|
34.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On demand unit metrics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending on demand units
|
|
|
2,800
|
|
|
|
3,833
|
|
|
|
1,033
|
|
|
|
36.9
|
%
|
Average on demand units
|
|
|
2,293
|
|
|
|
3,138
|
|
|
|
845
|
|
|
|
36.9
|
|
On demand revenue per average on demand unit
|
|
$
|
27.30
|
|
|
$
|
30.34
|
|
|
$
|
3.04
|
|
|
|
11.1
|
|
On demand revenue. On demand revenue increased
$32.6 million, or 52.1%, in 2008 as compared to 2007,
primarily due to an increase in rental property units managed
with our on demand software solutions and an increase in the
number of our on demand software solutions utilized by our
existing customer base.
On premise revenue. On premise revenue
decreased $4.0 million, or (34.4)%, in 2008 as compared to
2007. The revenue decrease was primarily due to: our higher
focus on sales of our on demand software solutions; a decrease
in the number of rental property units utilizing our on premise
software solutions, which was a result of customers converting
to our on demand software solutions, not renewing their on
premise software license or customers property sites
turning over due to their sale or change in property management
company.
Professional and other revenue. Professional
and other revenue increased $0.4 million, or 3.9%, in 2008
as compared to 2007, primarily due to increased consulting and
implementation activity associated with new sales of our on
demand software solutions, which was partially offset by lower
training and seminar revenue.
Total revenue. Our total revenue increased
$29.0 million, or 34.7%, in 2008 as compared to 2007,
primarily due to an increase in rental property units managed
with our on demand software solutions and improved penetration
of our on demand software solutions into our customer base.
On demand unit metrics. As of
December 31, 2008, one or more of our on demand software
solutions was utilized in the management of 3.8 million
rental property units, an increase of approximately
1.0 million units, or 36.9%, as compared to 2007. The
increase in the number of rental property units managed by one
or more of our on demand software solutions was primarily due to
new customer sales and marketing efforts, our 2008 acquisitions
and, to a lesser degree, migration of our current customers from
our on premise software solutions. In 2008, our on demand
revenue per average on demand unit was $30.34, representing an
increase of $3.04, or 11.1%, as compared to 2007, primarily due
to improved penetration of our on demand software solutions into
our customer base.
Cost
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Cost of revenue
|
|
$
|
32,056
|
|
|
$
|
40,783
|
|
|
$
|
8,727
|
|
|
|
27.2
|
%
|
Depreciation and amortization
|
|
|
3,647
|
|
|
|
5,275
|
|
|
|
1,628
|
|
|
|
44.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
35,703
|
|
|
$
|
46,058
|
|
|
$
|
10,355
|
|
|
|
29.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
Cost of revenue. Cost of revenue increased
$10.4 million, or 29.0%, in 2008 as compared to 2007. The
increase in cost of revenue was primarily due to: a
$8.6 million increase from costs related to the increased
sales of our solutions; a $1.3 million increase in property
and equipment depreciation expense resulting from expanding our
infrastructure to support revenue delivery activities; and a
$0.3 million increase in non-cash amortization of acquired
technology as a result of our 2008 acquisitions.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Product development
|
|
$
|
20,459
|
|
|
$
|
26,514
|
|
|
$
|
6,055
|
|
|
|
29.6
|
%
|
Depreciation and amortization
|
|
|
1,249
|
|
|
|
2,292
|
|
|
|
1,043
|
|
|
|
83.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product development
|
|
$
|
21,708
|
|
|
$
|
28,806
|
|
|
$
|
7,098
|
|
|
|
32.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development. Product development
expense increased $7.1 million, or 32.7%, in 2008 as
compared to 2007. The increase in product development expense
was primarily due to: a $3.8 million increase in personnel
expense primarily related to the associated costs to support our
growth initiatives and the addition of new solutions; a
$1.0 million increase in depreciation of property and
equipment from expanding our infrastructure to support our
revenue growth; a $0.8 million non-cash asset disposal
resulting from the discontinuance of a business development
project in 2008; and a $0.5 million increase in stock-based
compensation related to our product development personnel.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Sales and marketing
|
|
$
|
16,215
|
|
|
$
|
21,649
|
|
|
$
|
5,434
|
|
|
|
33.5
|
%
|
Depreciation and amortization
|
|
|
1,832
|
|
|
|
2,274
|
|
|
|
442
|
|
|
|
24.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales and marketing expense
|
|
$
|
18,047
|
|
|
$
|
23,923
|
|
|
$
|
5,876
|
|
|
|
32.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing. Sales and marketing
expense increased $5.9 million, or 32.6%, in 2008 as
compared to 2007. The increase in sales and marketing expense
was primarily due to: a $3.2 million increase in personnel
expense related to expanding our sales and marketing workforce
as part of our strategy to increase our market share and further
penetrate our existing customer base with additional on demand
software solutions; a $1.5 million increase in marketing
program expense in support of our growth strategy; a
$0.4 million increase in property and equipment
depreciation expense; and a $0.2 million increase in
stock-based compensation related to our sales and marketing
personnel.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
General and administrative
|
|
$
|
9,357
|
|
|
$
|
12,979
|
|
|
$
|
3,622
|
|
|
|
38.7
|
%
|
Depreciation and amortization
|
|
|
399
|
|
|
|
1,156
|
|
|
|
757
|
|
|
|
189.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expense
|
|
$
|
9,756
|
|
|
$
|
14,135
|
|
|
$
|
4,379
|
|
|
|
44.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative. General and
administrative expense increased $4.4 million, or 44.9%, in
2008 as compared to 2007. The increase in general and
administrative expense was primarily due to: a $2.4 million
increase in personnel expense related to an increase in
accounting, management information systems, legal and human
resources personnel to support the growth in our business; a
$0.8 million increase in depreciation of property and
equipment in 2008 driven by the investments in our
administrative support functions; a $0.3 million increase
in stock-based compensation related to our general and
administrative personnel; and an increase various other general
and administrative expenses driven by the investment in our
administrative functions necessary to support our growth.
63
Interest
Expense, Net
Interest expense, net, increased $0.6 million, or 42.5%, in
2008 as compared to 2007. The increase in interest expense, net,
was primarily due to higher average debt balances related to the
financing of our acquisition activities.
Provision
for Taxes
We have recorded a valuation allowance related to income taxes
to reflect uncertainties associated with the realization of
deferred tax assets. As a result, the benefit from income taxes
is zero in 2007.
Quarterly
Results of Operations
The following table presents our unaudited consolidated
quarterly results of operations for the eight fiscal quarters
ended December 31, 2009. This information is derived from
our unaudited consolidated financial statements, and includes
all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for fair statement of
our financial position and operating results for the quarters
presented. Operating results for these periods are not
necessarily indicative of the operating results for a full year.
Historical results are not necessarily indicative of the results
to be expected in future periods. You should read this data
together with our consolidated financial statements and the
related notes to these financial statements included elsewhere
in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On demand
|
|
$
|
20,724
|
|
|
$
|
22,486
|
|
|
$
|
24,520
|
|
|
$
|
27,462
|
|
|
$
|
29,264
|
|
|
$
|
30,852
|
|
|
$
|
33,069
|
|
|
$
|
35,192
|
|
On premise
|
|
|
2,140
|
|
|
|
1,902
|
|
|
|
1,766
|
|
|
|
1,774
|
|
|
|
1,437
|
|
|
|
1,441
|
|
|
|
468
|
|
|
|
514
|
|
Professional and other
|
|
|
1,936
|
|
|
|
2,351
|
|
|
|
2,982
|
|
|
|
2,525
|
|
|
|
1,942
|
|
|
|
2,175
|
|
|
|
2,117
|
|
|
|
2,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
24,800
|
|
|
|
26,739
|
|
|
|
29,268
|
|
|
|
31,761
|
|
|
|
32,643
|
|
|
|
34,468
|
|
|
|
35,654
|
|
|
|
38,137
|
|
Cost of
revenue(1)
|
|
|
10,060
|
|
|
|
10,811
|
|
|
|
12,074
|
|
|
|
13,113
|
|
|
|
13,035
|
|
|
|
14,568
|
|
|
|
15,201
|
|
|
|
15,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
14,740
|
|
|
|
15,928
|
|
|
|
17,194
|
|
|
|
18,648
|
|
|
|
19,608
|
|
|
|
19,900
|
|
|
|
20,453
|
|
|
|
22,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
development(1)
|
|
|
6,668
|
|
|
|
7,074
|
|
|
|
6,932
|
|
|
|
8,132
|
|
|
|
6,711
|
|
|
|
6,887
|
|
|
|
6,675
|
|
|
|
7,173
|
|
Sales and
marketing(1)
|
|
|
5,308
|
|
|
|
5,600
|
|
|
|
6,325
|
|
|
|
6,690
|
|
|
|
6,180
|
|
|
|
6,833
|
|
|
|
7,363
|
|
|
|
7,428
|
|
General and
administrative(1)
|
|
|
3,173
|
|
|
|
3,456
|
|
|
|
3,648
|
|
|
|
3,858
|
|
|
|
4,536
|
|
|
|
4,187
|
|
|
|
4,552
|
|
|
|
6,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
15,149
|
|
|
|
16,130
|
|
|
|
16,905
|
|
|
|
18,680
|
|
|
|
17,427
|
|
|
|
17,907
|
|
|
|
18,590
|
|
|
|
21,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(409
|
)
|
|
|
(202
|
)
|
|
|
289
|
|
|
|
(32
|
)
|
|
|
2,181
|
|
|
|
1,993
|
|
|
|
1,863
|
|
|
|
892
|
|
Interest expense, net
|
|
|
(460
|
)
|
|
|
(418
|
)
|
|
|
(493
|
)
|
|
|
(781
|
)
|
|
|
(985
|
)
|
|
|
(998
|
)
|
|
|
(1,123
|
)
|
|
|
(1,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before taxes
|
|
|
(869
|
)
|
|
|
(620
|
)
|
|
|
(204
|
)
|
|
|
(813
|
)
|
|
|
1,196
|
|
|
|
995
|
|
|
|
740
|
|
|
|
(530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
638
|
|
|
|
69
|
|
|
|
85
|
|
|
|
64
|
|
|
|
(26,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(869
|
)
|
|
$
|
(685
|
)
|
|
$
|
(204
|
)
|
|
$
|
(1,451
|
)
|
|
$
|
1,127
|
|
|
$
|
910
|
|
|
$
|
676
|
|
|
$
|
25,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Cost of revenue
|
|
$
|
19
|
|
|
$
|
23
|
|
|
$
|
21
|
|
|
$
|
41
|
|
|
$
|
67
|
|
|
$
|
85
|
|
|
$
|
103
|
|
|
$
|
112
|
|
Product development
|
|
|
181
|
|
|
|
158
|
|
|
|
170
|
|
|
|
218
|
|
|
|
246
|
|
|
|
252
|
|
|
|
277
|
|
|
|
400
|
|
Sales and marketing
|
|
|
39
|
|
|
|
76
|
|
|
|
76
|
|
|
|
86
|
|
|
|
98
|
|
|
|
117
|
|
|
|
135
|
|
|
|
148
|
|
General and administrative
|
|
|
57
|
|
|
|
98
|
|
|
|
101
|
|
|
|
112
|
|
|
|
154
|
|
|
|
159
|
|
|
|
211
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
296
|
|
|
$
|
355
|
|
|
$
|
368
|
|
|
$
|
457
|
|
|
$
|
565
|
|
|
$
|
613
|
|
|
$
|
726
|
|
|
$
|
901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
The following table sets forth our results of operations for the
specified periods as a percentage of our revenue for those
periods. The period-to-period comparison of financial results is
not necessarily indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(as a percentage of total revenue)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On demand
|
|
|
83.6
|
%
|
|
|
84.1
|
%
|
|
|
83.8
|
%
|
|
|
86.5
|
%
|
|
|
89.6
|
%
|
|
|
89.5
|
%
|
|
|
92.7
|
%
|
|
|
92.3
|
%
|
On premise
|
|
|
8.6
|
|
|
|
7.1
|
|
|
|
6.0
|
|
|
|
5.5
|
|
|
|
4.5
|
|
|
|
4.2
|
|
|
|
1.4
|
|
|
|
1.3
|
|
Professional and other
|
|
|
7.8
|
|
|
|
8.8
|
|
|
|
10.2
|
|
|
|
8.0
|
|
|
|
5.9
|
|
|
|
6.3
|
|
|
|
5.9
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software and services
|
|
|
40.6
|
|
|
|
40.4
|
|
|
|
41.3
|
|
|
|
41.3
|
|
|
|
39.9
|
|
|
|
42.3
|
|
|
|
42.6
|
|
|
|
41.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
59.4
|
|
|
|
59.6
|
|
|
|
58.7
|
|
|
|
58.7
|
|
|
|
60.1
|
|
|
|
57.7
|
|
|
|
57.4
|
|
|
|
58.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
26.9
|
|
|
|
26.5
|
|
|
|
23.7
|
|
|
|
25.6
|
|
|
|
20.6
|
|
|
|
20.0
|
|
|
|
18.7
|
|
|
|
18.8
|
|
Sales and marketing
|
|
|
21.4
|
|
|
|
20.9
|
|
|
|
21.6
|
|
|
|
21.1
|
|
|
|
18.9
|
|
|
|
19.8
|
|
|
|
20.7
|
|
|
|
19.5
|
|
General and administrative
|
|
|
12.8
|
|
|
|
12.9
|
|
|
|
12.5
|
|
|
|
12.1
|
|
|
|
13.9
|
|
|
|
12.1
|
|
|
|
12.8
|
|
|
|
18.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
61.1
|
|
|
|
60.3
|
|
|
|
57.8
|
|
|
|
58.8
|
|
|
|
53.4
|
|
|
|
51.9
|
|
|
|
52.2
|
|
|
|
56.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(1.6
|
)
|
|
|
(0.8
|
)
|
|
|
1.0
|
|
|
|
(0.1
|
)
|
|
|
6.7
|
|
|
|
5.8
|
|
|
|
5.2
|
|
|
|
2.3
|
|
Interest expense, net
|
|
|
(1.9
|
)
|
|
|
(1.6
|
)
|
|
|
(1.7
|
)
|
|
|
(2.5
|
)
|
|
|
(3.0
|
)
|
|
|
(2.9
|
)
|
|
|
(3.1
|
)
|
|
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before taxes
|
|
|
(3.5
|
)
|
|
|
(2.4
|
)
|
|
|
(0.7
|
)
|
|
|
(2.6
|
)
|
|
|
3.7
|
|
|
|
2.9
|
|
|
|
2.1
|
|
|
|
(1.4
|
)
|
Income tax expense (benefit)
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
2.0
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
(68.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(3.5
|
)
|
|
|
(2.6
|
)
|
|
|
(0.7
|
)
|
|
|
(4.6
|
)
|
|
|
3.5
|
|
|
|
2.7
|
|
|
|
1.9
|
|
|
|
67.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our revenue increased in each of the quarters presented above
primarily as a result of increases in rental property units
managed with our on demand software solutions, successful
efforts to increase the number of on demand software solutions
utilized by our customer base and our 2008 and 2009
acquisitions. To date, we have not experienced any significant
impact on our results of operations due to seasonality.
Cost of revenue increased over the course of the quarters
presented above primarily due to increase in operating costs
related to the increased sales of our solutions; higher
technology support costs in order to support our growth; the
cost of revenue added by our acquisitions; and higher non-cash
amortization of technology acquired through our acquisitions.
While cost of revenue increased in absolute dollars, gross
margin has remained relatively consistent in each of the
quarters presented.
Operating expense has steadily increased in absolute dollars
over the course of the quarters presented above primarily due to
increased personnel related expenses in support of our growth
initiatives in addition to incremental expenses associated with
acquired companies. Operating expense may vary as a result of
the timing of sales and marketing activities, the timing of
acquisitions or the discontinuance of projects, among other
factors. For example, operating expense decreased from the
fourth quarter of 2008 to the first quarter of 2009 primarily
due to a decline in product development expense attributable to
the discontinuance of a business development project during the
fourth quarter of 2008. Additionally, during the fourth quarter
of 2009, operating expense increased as a percentage of revenue
when compared to the prior three quarters primarily as a result
of an increase in general and administrative expense associated
with higher professional fees and other costs related to
pursuing acquisition opportunities combined with incremental
general and administrative expense associated with the
acquisitions we completed during the third and fourth quarters
of 2009. Since our inception, we have made significant
investments in developing new solutions, enhancing existing
solutions, and expanding our sales and marketing efforts in
order to increase our market share and to further penetrate our
existing customer base with additional on demand software
solutions. As a result of these investments, we have experienced
significant revenue growth, which has resulted in a trend of
decreased operating expense as a percentage of our total revenue.
65
Reconciliation
of Quarterly Non-GAAP Financial Measures
We anticipate that our investor and analyst presentations will
include Adjusted EBITDA. We define Adjusted EBITDA as net (loss)
income plus depreciation and asset impairment, amortization of
intangible assets, interest expense, net, income tax expense
(benefit), stock-based compensation expense and
acquisition-related expense. We believe that the use of Adjusted
EBITDA is useful to investors and other users of our financial
statements in evaluating our operating performance because it
provides them with an additional tool to compare business
performance across companies and across periods. We believe that:
|
|
|
|
|
Adjusted EBITDA provides investors and other users of our
financial information consistency and comparability with our
past financial performance, facilitates period-to-period
comparisons of operations and facilitates comparisons with our
peer companies, many of which use similar non-GAAP financial
measures to supplement their GAAP results; and
|
|
|
|
it is useful to exclude certain non-cash charges, such as
depreciation and asset impairment, amortization of intangible
assets and stock-based compensation and non-core operational
charges, such as acquisition-related expense, from Adjusted
EBITDA because the amount of such expenses in any specific
period may not directly correlate to the underlying performance
of our business operations and these expenses can vary
significantly between periods as a result of new acquisitions,
full amortization of previously acquired tangible and intangible
assets or the timing of new stock-based awards, as the case may
be.
|
We use Adjusted EBITDA in conjunction with traditional GAAP
operating performance measures as part of our overall assessment
of our performance, for planning purposes, including the
preparation of our annual operating budget, to evaluate the
effectiveness of our business strategies and to communicate with
our board of directors concerning our financial performance.
We do not place undue reliance on Adjusted EBITDA as our only
measure of operating performance. Adjusted EBITDA should not be
considered as a substitute for other measures of liquidity or
financial performance reported in accordance with GAAP. There
are limitations to using non-GAAP financial measures, including
that other companies may calculate these measures differently
than we do, that they do not reflect our capital expenditures or
future requirements for capital expenditures and that they do
not reflect changes in, or cash requirements for, our working
capital. We compensate for the inherent limitations associated
with using the Adjusted EBITDA measures through disclosure of
these limitations, presentation of our financial statements in
accordance with GAAP and reconciliation of Adjusted EBITDA to
the most directly comparable GAAP measure, net (loss) income.
The following table presents a reconciliation of net (loss)
income to Adjusted EBITDA for the eight fiscal quarters ended
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Net (loss) income
|
|
$
|
(869
|
)
|
|
$
|
(685
|
)
|
|
$
|
(204
|
)
|
|
$
|
(1,451
|
)
|
|
$
|
1,127
|
|
|
$
|
910
|
|
|
$
|
676
|
|
|
$
|
25,716
|
|
Depreciation and asset impairment
|
|
|
1,835
|
|
|
|
2,018
|
|
|
|
2,244
|
|
|
|
3,750
|
|
|
|
2,043
|
|
|
|
2,470
|
|
|
|
2,419
|
|
|
|
2,299
|
|
Amortization of intangible assets
|
|
|
657
|
|
|
|
333
|
|
|
|
331
|
|
|
|
774
|
|
|
|
1,362
|
|
|
|
1,322
|
|
|
|
1,279
|
|
|
|
1,821
|
|
Interest expense, net
|
|
|
460
|
|
|
|
418
|
|
|
|
493
|
|
|
|
781
|
|
|
|
985
|
|
|
|
998
|
|
|
|
1,123
|
|
|
|
1,422
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
638
|
|
|
|
69
|
|
|
|
85
|
|
|
|
64
|
|
|
|
(26,246
|
)
|
Stock-based compensation expense
|
|
|
296
|
|
|
|
355
|
|
|
|
368
|
|
|
|
457
|
|
|
|
565
|
|
|
|
613
|
|
|
|
726
|
|
|
|
901
|
|
Acquisition-related expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
2,379
|
|
|
$
|
2,504
|
|
|
$
|
3,232
|
|
|
$
|
4,949
|
|
|
$
|
6,151
|
|
|
$
|
6,398
|
|
|
$
|
6,307
|
|
|
$
|
6,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
66
Liquidity
and Capital Resources
We have financed our operations primarily through private
placements of preferred equity securities and common stock,
secured credit facilities with commercial lenders, a private
placement of subordinated debt securities and cash provided by
operating activities. Our primary sources of liquidity as of
December 31, 2009 consisted of $4.4 million of cash
and cash equivalents, $10 million available under our
revolving line of credit and $12.9 million of working
capital (excluding deferred revenue).
Our principal uses of liquidity have been to fund our
operations, working capital requirements, capital expenditures
and acquisitions and to service our debt obligations. We expect
that working capital requirements, capital expenditures and
acquisitions will continue to be our principal needs for
liquidity over the near term. Our planned capital expenditures
for 2010 are not expected to exceed $12.0 million. In addition,
we have made several acquisitions in which a portion of the cash
purchase price is payable at various times through 2014. We
expect to fund these obligations from cash provided by operating
activities.
We believe that our existing cash and cash equivalents, working
capital (excluding deferred revenue) and our cash flow from
operations, together with the proceeds of this offering, will be
sufficient to fund our operations and planned capital
expenditures and service our debt obligations for at least the
next 12 months. Our future capital requirements will depend
on many factors, including our rate of revenue growth, the
timing and size of acquisitions, the expansion of our sales and
marketing activities, the timing and extent of spending to
support product development efforts, the timing of introductions
of new solutions and enhancements to existing solutions and the
continuing market acceptance of our solutions. We may enter into
acquisitions of, complementary businesses, applications or
technologies, in the future, which could require us to seek
additional equity or debt financing. Additional funds may not be
available on terms favorable to us, or at all.
The following table sets forth cash flow data for the periods
indicated therein:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
4,441
|
|
|
$
|
7,962
|
|
|
$
|
24,758
|
|
Net cash used in investing activities
|
|
|
(16,155
|
)
|
|
|
(32,320
|
)
|
|
|
(24,676
|
)
|
Net cash provided by financing activities
|
|
|
11,952
|
|
|
|
25,875
|
|
|
|
97
|
|
Net
Cash Provided by Operating Activities
In 2009, we generated $24.8 million of net cash from
operating activities, which consisted of our net income of
$28.4 million, offset by net non-cash income of
$8.5 million, representing an increase of
$16.8 million, or 211.0%, as compared to 2008. Net non-cash
charges primarily consisted of a non-cash deferred tax benefit
offset by depreciation, amortization and stock-based
compensation expense. The increase in our net cash from
operating activities in 2009 was primarily due to our net
income, cash inflows from changes in working capital and greater
collection of accounts receivable, which resulted in an
improvement in the number of days that sales were outstanding
from 68 days in 2008 to 57 days in 2009. This decrease
in accounts receivable occurred despite an increase in revenues
during the fourth quarter.
In 2008, we generated $8.0 million of net cash from
operating activities, which consisted of our net loss of
$3.2 million, offset by net non-cash charges of
$13.9 million, representing an increase of
$3.5 million, or 79.3%, as compared to 2007. Net non-cash
charges to income primarily consisted of depreciation,
amortization and stock-based compensation expense. The increase
in our net cash from operating activities in 2008 was primarily
due to cash outflows from changes in working capital including
an increase in accounts receivable of $7.6 million from
increased sales during the fourth quarter, partially offset by
an increase in deferred revenues of $5.6 million. The
increase in our net cash from operating activities in 2008 was
primarily due to a reduction in our net loss, an increase of
$6.3 million in non-cash charges and an increase in
deferred revenue from increased sales during the fourth quarter,
partially offset by increases in accounts receivable.
In 2007, we generated $4.4 million of net cash from
operating activities, which consisted of our net loss of
$3.1 million, offset by net non-cash charges of
$7.6 million. Net non-cash charges to income primarily
67
consisted of depreciation, amortization and stock-based
compensation expense. Additionally, cash outflows from changes
in working capital included an increase in accounts receivable
of $5.2 million from increased sales near the end of the
year, partially offset by an increase in deferred revenues of
$4.4 million.
Net
Cash Used in Investing Activities
In 2009, our investing activities used $24.7 million.
Investing activities consisted of acquisition consideration of
$11.6 million net of cash acquired for our 2009
acquisitions, acquisition-related payments of $3.6 million
for commitments related to prior years acquisitions and
$9.5 million of capital expenditures. The decrease in cash
used in investing activities from 2008 relates to a decrease in
capital spending of $0.8 million combined with a decrease
in acquisition-related payments of $6.9 million.
In 2008, our investing activities used $32.3 million.
Investing activities consisted of $20.1 million for our
2008 acquisitions, acquisition-related payments of
$1.9 million for commitments related to prior years
acquisitions and capital expenditures of $10.3 million. The
increase in cash used in investing activities from 2007 relates
to an increase in capital spending of $3.1 million and in
increase in acquisition-related payments of $13.0 million.
In 2007, our investing activities used $16.2 million.
Investing activities consisted of $7.0 million for our 2007
acquisition, acquisition-related payments of $2.1 million
for commitments related to prior years acquisitions and
capital expenditures of $7.1 million.
Capital expenditures in 2009, 2008 and 2007 were primarily
related to investments in technology infrastructure to support
our growth initiatives.
Net
Cash Provided by Financing Activities
Our financing activities provided $0.1 million in 2009,
representing a decrease of $25.8 million, or 99.6%, as
compared to 2008. Cash provided by financing activities in 2009
was primarily related to net proceeds from refinancing our
credit facility, offset by payments for scheduled term debt
maturities, capital lease obligations and preferred stockholder
notes payable.
Our financing activities provided $25.9 million in 2008,
representing an increase of $13.9 million, or 116.5%, as
compared to 2007. On February 22, 2008, in order to secure
capital for future growth and business development activities,
we entered into a securities purchase agreement whereby
investors purchased an aggregate of 3,025,000 shares of
Series C convertible preferred stock at a purchase price of
$4.50 per share resulting in $13.4 million of net proceeds.
Additionally, we had net proceeds of $4.5 million from our
credit facility, $10.0 million of proceeds from a private
placement of a note purchase agreement and common stock
issuances of $0.6 million resulting from employees
and third parties exercise of stock options and warrants.
These proceeds were offset by $2.6 million of scheduled
payments of capital lease obligations.
Our financing activities provided $12.0 million in 2007.
Cash provided by financing activities in 2007 was primarily
related to net proceeds of $11.5 million from our credit
facility and common stock issuances of $1.1 million
resulting from employees and third parties exercise
of stock options and warrants. These proceeds were offset by
$0.7 million of scheduled payments of capital lease
obligations.
Cash provided by financing activities during 2009, 2008 and 2007
was used to support our operations until we achieved positive
operating cash flow, as a funding source for acquisitions and
for capital expenditures related to the expansion of our
technology infrastructure.
68
Contractual
Obligations, Commitments and Contingencies
After giving effect to the February 2010 amendment to our credit
facility, the following table summarizes, as of
December 31, 2009, our minimum payments for long-term debt
and other obligations for the next five years and thereafter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
|
(in thousands)
|
|
|
Long-term debt
obligations(1)
|
|
$
|
61,861
|
|
|
$
|
11,093
|
|
|
$
|
23,443
|
|
|
$
|
27,325
|
|
|
$
|
|
|
Capital (finance) leases
|
|
|
2,273
|
|
|
|
1,670
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
27,051
|
|
|
|
4,922
|
|
|
|
8,197
|
|
|
|
7,591
|
|
|
|
6,341
|
|
Acquisition-related
liabilities(2)
|
|
|
4,359
|
|
|
|
1,653
|
|
|
|
1,842
|
|
|
|
864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
95,544
|
|
|
$
|
19,338
|
|
|
$
|
34,085
|
|
|
$
|
35,780
|
|
|
$
|
6,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amount of long-term debt obligations shown in the table
above does not include any interest payments. |
|
(2) |
|
We have made several acquisitions in which a portion of the cash
purchase price is payable at various times through 2014. |
Long-Term
Debt Obligations
In September 2009, we entered into a credit facility which
provided for a $35.0 million term loan and a
$10.0 million revolving line of credit. A portion of the
proceeds from the credit facility was used to repay the balance
outstanding under our prior credit facility. The term loan and
revolving line of credit bear interest at rates of the greater
of 7.5%, a stated rate of 5.0% plus LIBOR, or a stated rate of
5.0% plus the banks prime rate (or, if greater than 3.5%,
the federal funds rate plus 0.5% or three month LIBOR plus
1.0%). The term loan and revolving line of credit are
collateralized by all our personal property and were subject to
financial covenants, including meeting certain financial
measures.
In February 2010, we entered into an amendment to the credit
facility. Under terms of the amendment, the original term loan
was increased by an additional $10.0 million. This
amendment increased the balance outstanding on the term loan to
$43.7 million. The proceeds from the amendment were
primarily used to finance the February 2010 acquisition of
certain assets of Domin-8 Enterprise Solutions, Inc. The related
interest rates and maturity periods remained consistent with the
terms of the credit facility. Principal payments on the term
loan are due in quarterly installments of approximately $1.8
million until September 30, 2010, increasing to approximately
$2.3 million until September 30, 2011, increasing to
approximately $2.4 million until September 30, 2012 and
increasing to quarterly installments of approximately $2.5
million through March 31, 2013, with the balance due on June 30,
2013. The effects of the payments related to this amendment have
been included in the table above.
In August 2008, we entered into a note purchase agreement with a
separate lender. Under the terms of the agreement, we issued
secured promissory notes in the aggregate principal amount of
$10.0 million with an interest rate of 13.75%, payable
quarterly. These notes are to be paid in full before
August 1, 2013. These notes are collateralized by all our
personal property and are subordinated to the Credit Agreement.
The balance of these notes at December 31, 2009 was
$10.0 million.
On December 30, 2008, in connection with a declaration of
dividend for all holders of our preferred stock, we issued
promissory notes to the holders of our preferred stock in an
aggregate principal amount of $11.1 million. The promissory
notes bear interest at a rate of 8% and are payable in 16
consecutive quarterly payments of principal and interest. An
additional amount equal to $0.9 million became payable in
September 2009 under the terms of these promissory notes and
will be paid upon maturity. The payments may be deferred at the
discretion of the board of directors. The balance of these notes
at December 31, 2009 was $8.2 million.
69
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet financing arrangements and
we do not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
Recent
Accounting Pronouncements
Accounting
Standards Codification
In September 2009, we adopted the Accounting Standards
Codification, or ASC, established by the Financial Accounting
Standards Board, or FASB. The FASB established the ASC as the
single source of authoritative non-governmental GAAP,
superseding various existing authoritative accounting
pronouncements. It eliminates the previous GAAP hierarchy and
establishes one level of authoritative GAAP. All other
literature is considered non-authoritative. The FASB will not
issue new standards in the form of Statements, FASB Staff
Positions or Emerging Issues Task Force Abstracts. Instead, it
will issue an Accounting Standards Update, or ASU. The FASB will
not consider ASUs as authoritative in their own right. ASUs will
serve only to update the ASC, provide background information
about the guidance and provide the bases for conclusions on the
change(s) in the ASC.
Business
Combinations
In December 2007, the FASB issued guidance regarding business
combinations, which significantly changes the principles and
requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non-controlling interest
in the acquiree, and the goodwill acquired. This statement is
effective prospectively, except for certain retrospective
adjustments to deferred tax balances, for fiscal years beginning
after December 15, 2008. We applied these provisions to our
2009 acquisitions which resulted in expensing related
transaction costs and valuing contingent consideration at the
date of acquisition.
Fair
Value Measurements
In September 2009, the FASB issued an ASU providing
clarification for measuring the fair value of a liability when a
quoted price in an active market for the identical liability is
not available. It also clarifies that when estimating the fair
value of a liability, a reporting entity is not required to
include a separate input or adjustment to other inputs relating
to the existence of a restriction that prevents the transfer of
the liability. This ASU is effective for fiscal periods
beginning after August 27, 2009. The Company does not
believe this update will have a material impact on its
consolidated financial statements.
Subsequent
Events
In May 2009, the FASB issued an ASU that established general
standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are
issued or are available to be issued. Although there is new
terminology, the standard is based on the same principles as
those that currently exist in the auditing standards. The
standard, which requires Companies to evaluate the disclosure of
subsequent events, is effective for interim or annual periods
ending after June 15, 2009. The adoption of this update had
no impact on our consolidated results of operations or financial
position.
Multiple
Element Arrangements
In October 2009, the FASB issued an ASU that amended the
accounting rules addressing revenue recognition for
multiple-deliverable revenue arrangements by eliminating the
existing criteria that objective and reliable evidence of fair
value for undelivered products or services exist in order to be
able to separately account for deliverables. Additionally, the
ASU provides for elimination of the use of the residual method
of allocating arrangement consideration and requires that
arrangement consideration be allocated at the inception
70
of the arrangement to all deliverables that can be accounted for
separately based on their relative selling price. A hierarchy
for estimating such selling price is included in the update.
This ASU will be effective prospectively for revenue
arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption is
permitted. The Company adopted these accounting standards for
all periods herein.
In October 2009, the FASB issued an ASU that changes the
criteria for determining when an entity should account for
transactions with customers using the revenue recognition
guidance applicable to the selling or licensing of software.
This ASU is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on
or after June 15, 2010. Early adoption is permitted. The
Company does not believe this update will have a material impact
on its consolidated financial statements.
Quantitative
and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our
financial position due to adverse changes in financial market
prices and rates. Our market risk exposure is primarily a result
of fluctuations in interest rates. We do not hold or issue
financial instruments for trading purposes.
We had cash and cash equivalents of $2.7 million,
$4.2 million and $4.4 million at December 31,
2007, 2008 and 2009, respectively. We held these amounts
primarily in cash or money market funds.
We hold cash and cash equivalents for working capital purposes.
We do not have material exposure to market risk with respect to
investments, as our investments consist primarily of highly
liquid investments purchased with original maturities of three
months or less. We do not use derivative financial instruments
for speculative or trading purposes; however, we may adopt
specific hedging strategies in the future. Any declines in
interest rates, however, will reduce future interest income.
We had total outstanding debt of $18.2 million,
$43.7 million and $51.9 million at December 31,
2007, 2008 and 2009, respectively. The interest rate on this
debt is variable and adjusts periodically based on the
three-month LIBOR rate. If the LIBOR rate changes by 1%, our
annual interest expense would change by approximately
$0.6 million.
71
BUSINESS
Company
Overview
We are a leading provider of on demand software solutions for
the rental housing industry. Our broad range of property
management solutions enables owners and managers of
single-family and a wide variety of multi-family rental property
types to manage their marketing, pricing, screening, leasing,
accounting, purchasing and other property operations. Our on
demand software solutions are delivered through an integrated
software platform that provides a single point of access and a
shared repository of prospect, resident and property data. By
integrating and streamlining a wide range of complex processes
and interactions among the rental housing ecosystem of owners,
managers, prospects, residents and service providers, our
platform optimizes the property management process and improves
the experience for all of these constituents.
Our solutions enable property owners and managers to increase
revenues and reduce operating costs through higher occupancy,
improved pricing methodologies, new sources of revenue from
ancillary services, improved collections and more integrated and
centralized processes. As of December 31, 2009, over
5,000 customers used one or more of our on demand software
solutions to help manage the operations of approximately
4.6 million rental housing units. Our customers include
nine of the ten largest multi-family property management
companies in the United States, ranked as of January 1,
2009, based on number of units managed.
We sell our solutions through our direct sales organization. Our
total revenues were approximately $83.6 million,
$112.6 million and $140.9 million in 2007, 2008 and
2009, respectively. In the same years, we had operating (loss)
income of approximately ($1.6 million), ($0.4 million)
and $6.9 million, respectively, and net (loss) income of
approximately ($3.1 million), ($3.2 million) and
$28.4 million, respectively. Net income for 2009 included a
discrete tax benefit of approximately $26.0 million as a
result of a reduction of our net deferred tax assets valuation
allowance.
Industry
Overview
The
rental housing market is large, growing and
complex.
The rental housing market is large and characterized by
challenging and location-specific operating requirements,
diverse industry participants, significant mobility among
residents and a variety of property types, including
single-family
and a wide range of
multi-family
property types, including conventional, affordable, privatized
military, student and senior housing. According to the
U.S. Census Bureau American Housing Survey for the United
States: 2007, there were 39.3 million rental housing units
in the United States in 2007. The U.S. Census Bureau
divides the rental housing market into the following categories:
|
|
|
|
|
|
|
Number of
|
|
Property Size
|
|
Estimated Units
|
|
|
|
(in millions)
|
|
|
Single-family properties
|
|
|
|
|
1 unit
|
|
|
13.8
|
|
2-4 units
|
|
|
8.1
|
|
Multi-family properties
|
|
|
|
|
5-9 units
|
|
|
5.3
|
|
10-49 units
|
|
|
8.6
|
|
50 or more units
|
|
|
3.5
|
|
|
|
|
|
|
Total Rental Units
|
|
|
39.3
|
|
|
|
|
|
|
Based on U.S. Census Bureau data and our own estimates, we
believe that the overall size of the U.S. rental housing
market, including rent, utilities and insurance, exceeds
$300 billion annually. We estimate that the total
addressable market for our current on demand software solutions
is approximately $5.5 billion per year. This estimate
assumes that each of the 39.3 million rental units in the
United States has the potential to generate annually a range of
approximately $100 in revenue per unit for single-family units
to approximately $240 in revenue per unit for conventional
multi-family units. We base this potential revenue
72
assumption on our review of the purchasing patterns of our
existing customers with respect to our on demand software
solutions, the on demand software solutions currently utilized
by our existing customers, the number of units our customers
manage with these solutions and our current pricing for on
demand software solutions. Furthermore, the U.S. rental
housing market has recently benefited from a number of
significant trends, including decreased home ownership resulting
in additional renter households and tougher mortgage lending
standards reducing first-time home purchases and contributing to
lower rates of renter attrition as renters choose to remain in
rental units.
Rental
property management spans both the resident lifecycle and the
operations of a property.
The resident lifecycle can be separated into four key stages:
prospect, applicant, residency and post-residency. Each stage
has unique requirements, and a property owners or
managers ability to effectively address these requirements
can significantly impact revenue and profitability.