e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2006
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-25674
SKILLSOFT PUBLIC LIMITED COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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REPUBLIC OF IRELAND
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N/A |
(STATE OR OTHER JURISDICTION OF
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(I.R.S. EMPLOYER |
INCORPORATION OR ORGANIZATION)
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IDENTIFICATION NO.) |
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107 NORTHEASTERN BOULEVARD |
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03062 |
NASHUA, NEW HAMPSHIRE
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(ZIP CODE) |
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 324-3000
Not Applicable
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act). Yes o No þ
On May 31, 2006, the registrant had outstanding 108,017,675 Ordinary Shares (issued or issuable in
exchange for the registrants outstanding American Depository Shares).
SKILLSOFT PLC
FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2006
INDEX
2
PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SKILLSOFT PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
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APRIL 30, |
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JANUARY 31, |
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2006 |
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2006 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
55,465 |
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$ |
51,937 |
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Short-term investments |
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37,678 |
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21,632 |
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Restricted cash |
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4,907 |
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5,039 |
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Accounts receivable, net |
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47,904 |
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85,681 |
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Prepaid expenses and other current assets |
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19,679 |
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22,006 |
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Total current assets |
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165,633 |
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186,295 |
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Property and equipment, net |
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10,038 |
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10,231 |
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Intangible assets, net |
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6,563 |
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8,711 |
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Goodwill |
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92,058 |
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93,929 |
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Deferred tax assets, net |
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694 |
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694 |
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Other assets |
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43 |
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42 |
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Total assets |
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$ |
275,029 |
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$ |
299,902 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
2,302 |
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$ |
3,819 |
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Accrued expenses |
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41,481 |
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53,795 |
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Deferred revenue |
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117,918 |
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136,699 |
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Total current liabilities |
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161,701 |
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194,313 |
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Long term liabilities |
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3,137 |
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3,317 |
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Commitments and contingencies (Note 11) |
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Stockholders equity: |
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Ordinary shares, E0.11 par value: 250,000,000
shares authorized; 107,939,792 and 107,344,243
shares issued at April 30, 2006 and January 31,
2006, respectively |
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11,852 |
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11,773 |
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Additional paid-in capital |
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565,596 |
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562,052 |
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Treasury stock, at cost, 6,533,884 ordinary shares |
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(24,524 |
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(24,524 |
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Deferred compensation |
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(465 |
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Accumulated deficit |
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(441,761 |
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(445,814 |
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Accumulated other comprehensive loss |
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(972 |
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(750 |
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Total stockholders equity |
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110,191 |
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102,272 |
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Total liabilities and stockholders equity |
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$ |
275,029 |
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$ |
299,902 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
SKILLSOFT PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
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THREE MONTHS ENDED |
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April 30, |
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2006 |
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2005 |
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Revenue |
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$ |
54,653 |
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$ |
53,327 |
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Cost of revenue (1) |
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6,451 |
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5,834 |
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Gross profit |
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48,202 |
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47,493 |
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Operating expenses: |
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Research and development (1) |
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9,965 |
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9,917 |
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Selling and marketing (1) |
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23,257 |
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24,211 |
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General and administrative (1) |
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7,280 |
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6,284 |
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Amortization of intangible assets |
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2,148 |
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2,246 |
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Restructuring |
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703 |
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Restatement SEC investigation |
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252 |
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250 |
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Total operating expenses |
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42,902 |
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43,611 |
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Operating income |
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5,300 |
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3,882 |
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Other income / (expense), net |
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10 |
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(110 |
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Interest income |
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805 |
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356 |
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Interest expense |
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(66 |
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(61 |
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Loss on sale of assets, net |
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(681 |
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Income before provision for income taxes |
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6,049 |
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3,386 |
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Provision for income taxes |
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1,996 |
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919 |
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Net income |
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$ |
4,053 |
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$ |
2,467 |
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Net income per share (Note 9): |
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Basic |
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$ |
0.04 |
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$ |
0.02 |
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Basic weighted average shares outstanding |
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101,037,377 |
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105,662,213 |
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Diluted |
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$ |
0.04 |
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$ |
0.02 |
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Diluted weighted average shares outstanding |
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102,888,751 |
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105,877,094 |
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(1) |
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Stock-based compensation included in cost of revenue and operating expenses: |
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THREE MONTHS ENDED |
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April 30, |
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2006 |
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2005 |
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Cost of revenue |
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$ |
6 |
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$ |
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Research and development |
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383 |
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48 |
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Selling and marketing |
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769 |
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181 |
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General and administrative |
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623 |
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8 |
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$ |
1,781 |
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$ |
237 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SKILLSOFT PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
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THREE MONTHS ENDED |
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APRIL 30, |
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2006 |
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2005 |
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Cash flows from operating activities: |
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Net income |
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$ |
4,053 |
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$ |
2,467 |
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Adjustments to reconcile net income to net cash provided by operating activities - |
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Stock-based compensation |
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1,781 |
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237 |
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Depreciation and amortization |
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1,484 |
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1,226 |
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Amortization of intangible assets |
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2,148 |
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2,246 |
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Recovery of bad debts |
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(303 |
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(226 |
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Loss on disposition |
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681 |
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Provision for income tax non-cash |
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1,754 |
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785 |
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Changes in current assets and liabilities: |
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Accounts receivable, net |
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38,546 |
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38,835 |
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Prepaid expenses and other current assets |
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2,625 |
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286 |
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Accounts payable |
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(1,541 |
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760 |
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Accrued expenses, including long-term |
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(12,949 |
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(16,192 |
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Deferred revenue |
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(19,507 |
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(17,861 |
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Net cash provided by operating activities |
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18,091 |
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13,244 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(1,270 |
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(979 |
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Capitalized software development costs |
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(1,247 |
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Purchases of investments |
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(24,509 |
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(3,748 |
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Maturity of investments |
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8,370 |
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10,225 |
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Release of restricted cash, net |
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132 |
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Net cash (used in) / provided by investing activities |
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(17,277 |
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4,251 |
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Cash flows from financing activities: |
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Exercise of stock options |
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605 |
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242 |
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Proceeds from employee stock purchase plan |
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1,703 |
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1,336 |
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Payments to acquire treasury stock |
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(6,163 |
) |
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Net cash provided by / (used in) financing activities |
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2,308 |
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(4,585 |
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Effect of exchange rate changes on cash and cash equivalents |
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406 |
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(118 |
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Net increase in cash and cash equivalents |
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3,528 |
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12,792 |
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Cash and cash equivalents, beginning of period |
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51,937 |
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34,906 |
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Cash and cash equivalents, end of period |
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$ |
55,465 |
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$ |
47,698 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SKILLSOFT PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY
SkillSoft PLC (the Company or SkillSoft) was incorporated in Ireland on August 8, 1989. The Company
is a leading provider of comprehensive e-learning content and technology products for businesses
and information technology (IT) professionals within global enterprises. SkillSoft PLC is the
result of a merger between SmartForce PLC and SkillSoft Corporation on September 6, 2002 (the
Merger).
2. BASIS OF PRESENTATION
The accompanying, unaudited condensed consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities and Exchange
Commission (the SEC). Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles in the United
States have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of
management, the condensed consolidated financial statements reflect all material adjustments
(consisting only of those of a normal and recurring nature) which are necessary to present fairly
the consolidated financial position of the Company as of April 30, 2006 and, the results of its
operations and cash flows for the three months ended April 30, 2006 and 2005. These condensed
consolidated financial statements and notes thereto should be read in conjunction with the
consolidated financial statements and notes thereto included in the Companys Annual Report on Form
10-K for the fiscal year ended January 31, 2006. The results of operations for the interim period
are not necessarily indicative of the results of operations to be expected for the full year.
3. CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND INVESTMENTS
The Company considers all highly liquid investments with original maturities of 90 days or less at
the time of purchase to be cash equivalents. At April 30, 2006 and January 31, 2006, cash
equivalents consisted mainly of commercial paper, short-term federal agency notes and money market
funds. The Company considers the cash held in certificates of deposit with a commercial bank to
secure certain facility leases and to secure funds to defend named, former and current executives,
and board members of SmartForce PLC for actions arising out of the SEC investigation and litigation
related to the 2002 securities class action, to be restricted cash. The Company accounts for its
investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115). Under SFAS No.
115, securities that the Company does not intend to hold to maturity are reported at market value,
and are classified as available-for-sale. At April 30, 2006, the Companys investments had an
average remaining maturity of approximately 81 days. These investments are classified as current
assets in the accompanying condensed consolidated balance sheets as they mature within one year.
4. REVENUE RECOGNITION
The Company generates revenue from the license of products and services and from providing
hosting/application service provider (ASP) services.
The Company follows the provisions of the American Institute of Certified Public Accountants
(AICPA) Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4
and SOP 98-9 to account for revenue derived pursuant to license agreements under which customers
license the Companys products and services. The pricing for the Companys courses varies based
upon the number of course titles or the courseware bundle licensed by a customer, the number of
users within the customers organization and the length of the license agreement (generally one,
two or three years). License agreements permit customers to exchange course titles, generally on
the contract anniversary date. Additional product features, such as hosting and online mentoring
services, are separately licensed for an additional fee.
The pricing for the Companys SkillChoice multi-modal learning (SMML) licenses varies based on the
content offering selected by the customer, the number of users within the customers organization
and the length of the license agreement. A SMML license provides customers access to a full range
of learning products including courseware, Referenceware, simulations, mentoring and prescriptive
assessment.
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A Referenceware license gives users access to a full Referenceware library within one or more
Referenceware collections (examples of which include: ITPro, BusinessPro, FinancePro,
EngineeringPro, GovEssential and OfficeEssentials) from Books24x7.com, Inc. (Books). The pricing
for the Companys Referenceware licenses varies based on the collections specified by a customer,
the number of users within the customers organization and the length of the license agreement.
The Company offers discounts from its ordinary pricing, and purchasers of licenses for larger
numbers of courses, for larger user bases or for longer periods generally receive discounts.
Generally, customers may amend their license agreements, for an additional fee, to gain access to
additional courses or product lines and/or to increase the size of the user base. The Company also
derives revenue from hosting fees for clients that use its solutions on an ASP basis and from the
provision of online mentoring services and professional services. In selected circumstances, the
Company derives revenue on a pay-for-use basis under which some customers are charged based on the
number of courses accessed by users. Revenue derived from pay-for-use contracts has been minimal to
date.
The Company recognizes revenue ratably over the license period if the number of courses that a
customer has access to is not clearly defined, available or selected at the inception of the
contract, or if the contract has additional undelivered elements for which the Company does not
have vendor specific objective evidence (VSOE) of the fair value of the various elements. This may
occur if the customer does not specify all licensed courses at the outset, the customer chooses to
wait for future licensed courses on a when and if available basis, the customer is given exchange
privileges that are exercisable other than on the contract anniversaries or the customer licenses
all courses currently available and to be developed during the term of the arrangement. Nearly all
of the Companys contractual arrangements are recognized on a subscription or straight-line basis
over the period of service.
The Company also derives revenue from extranet hosting/ASP services and online mentoring services.
The Company recognizes revenue related to extranet hosting/ASP services and online mentoring
services on a straight-line basis over the period the services are provided. Upfront fees are
recorded over the contract period.
The Company generally bills the annual license fee for the first year of a multi-year license
agreement in advance and license fees for subsequent years of multi-year license arrangements are
billed on the anniversary date of the agreement. Occasionally, the Company bills customers on a
quarterly basis. In some circumstances, the Company offers payment terms of up to six months from
the initial shipment date or anniversary date for multi-year license agreements to its customers.
To the extent that a customer is given extended payment terms (defined by the Company as greater
than six months), revenue is recognized as cash becomes due, assuming all of the other elements of
revenue recognition have been satisfied.
The Company typically recognizes revenue from resellers when both the sale to the end user has
occurred and the collectibility of cash from the reseller is probable. With respect to reseller
agreements with minimum commitments, the Company recognizes revenue related to the portion of the
minimum commitment that exceeds the end user sales at the expiration of the commitment period
provided the Company has received payment. If a definitive service period can be determined,
revenue is recognized ratably over the term of the minimum commitment period, provided that cash
has been received or collectibility is probable.
The Company provides professional services, including instructor led training, customized content,
websites, and implementation services. The Company recognizes professional service revenue as the
services are performed.
The Company records reimbursable out-of-pocket expenses in both revenues and as a direct cost of
revenues, as applicable, in accordance with Emerging Issues Task Force (EITF) Issue No. 01-14,
Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred (EITF 01-14).
The Company records as deferred revenue amounts that have been billed in advance for products or
services to be provided. Deferred revenue includes the unamortized portion of revenue associated
with license fees for which the Company has received payment or for which amounts have been billed
and are due for payment in 90 days or less for resellers and 180 days or less for direct customers.
In addition, deferred revenue includes amounts which have been billed and not collected for which
revenue is being recognized ratably over the license period.
SkillSoft contracts often include an uptime guarantee for solutions hosted on the Companys server
whereby customers would be entitled to credits in the event of nonperformance. The Company also
retains the right to remedy any nonperformance event prior to issuing a credit. Historically, the
Company has not incurred substantial costs relating to this guarantee and the Company currently
accrues for such costs as they are incurred. The Company reviews these costs on a regular basis as
actual experience and other information becomes available; and should they become more substantial,
the Company would accrue an estimated exposure and
7
consider the potential related effects of the timing of recording revenue on its license
arrangements. The Company has not accrued any costs related to these warranties in the accompanying
consolidated financial statements.
5. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has several stock-based compensation plans under which employees, officers, directors
and consultants may be granted stock options to purchase the Companys ordinary shares, generally
at the market price on the date of grant. The options become exercisable over various periods,
typically four years and have a maximum term of ten years. As of April 30, 2006, 8,427,168
ordinary shares remain available for future grant as stock options under the Companys stock option
plans. Please see Note 9 of the Notes to the Consolidated Financial
Statements in the Companys Annual
Report on Form 10-K as filed with the SEC on April 13, 2006 for a detailed description of the
Companys stock option plans.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS Statement No.
123(R) (SFAS 123(R)), Share-Based Payment, which is a revision of SFAS Statement No. 123 (SFAS
123), Accounting for Stock-Based Compensation. SFAS 123(R) supersedes APB Opinion No. 25,
(Opinion 25), Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of
Cash Flows. Generally, the approach on SFAS 123(R) is similar to the approach described in SFAS
123. However, SFAS 123(R) requires all stock-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro
forma disclosure is no longer an alternative.
SFAS 123(R) must be adopted for fiscal years starting after June 15, 2005. As a result, the Company
adopted SFAS 123(R) on February 1, 2006.
As permitted by SFAS 123, the Company historically accounted for share-based payments to employees
using Opinion 25s intrinsic value method and, as such, generally recognized no compensation cost
for employee stock options. The Company has adopted the modified prospective method alternative
outlined in SFAS 123(R). A modified prospective method is one in which compensation cost is
recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements of SFAS 123
for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested
on the effective date. As a result, the Company is amortizing the unamortized stock-based
compensation expense related to unvested option grants issued prior to the adoption of SFAS 123(R),
whose fair value was calculated utilizing a Black-Scholes Option Pricing Model. In addition, SFAS
123(R) requires companies to utilize an estimated forfeiture rate when calculating the expense for
the period, whereas, SFAS 123 permitted companies to record forfeitures based on actual
forfeitures, which was the Companys historical policy under SFAS 123.
The stock-based compensation expense reduced both basic and diluted earnings per share by $0.02 for
the three months ended April 30, 2006. These results reflect stock compensation expense of $1.8
million and no related tax benefit, due to the Companys full valuation allowance on its U.S.
deferred tax assets, for the three months ended April 30, 2006. In accordance with the
modified-prospective transition method of SFAS 123(R), results for prior periods have not been
restated. As of April 30, 2006, there was $2.0 million of unrecognized compensation expense related
to non-vested share awards that is expected to be primarily recognized through fiscal
2007.
Prior to adopting SFAS 123(R), the Company accounted for stock-based compensation under Opinion 25.
The following table illustrates the effect on net income and earnings per share if the fair value
based method had been applied to the three month period ending April 30, 2005.
|
|
|
|
|
|
|
THREE MONTHS |
|
|
|
ENDED APRIL 30, |
|
|
|
2005 |
|
Net income |
|
|
|
|
As reported |
|
$ |
2,467 |
|
Add: Stock-based compensation expense recognized under Opinion 25 |
|
|
237 |
|
Less: Total stock-based compensation expense determined under
fair value based method for all awards |
|
|
(4,809 |
) |
|
|
|
|
Pro forma net loss |
|
$ |
(2,105 |
) |
|
|
|
|
Basic and diluted net income (loss) per share |
|
|
|
|
As reported |
|
$ |
0.02 |
|
|
|
|
|
Pro forma net loss |
|
$ |
(0.02 |
) |
|
|
|
|
8
The Company uses the Black-Scholes option pricing model to determine the weighted average fair
value of options prior to and after adopting SFAS 123(R). The estimated fair value of employee
stock options is amortized to expense using the straight-line method over the vesting period. The
weighted average information and assumptions used for the grants are as follows:
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
APRIL 30, |
|
|
2006 |
|
2005 |
Risk-free interest rates |
|
|
5.03 |
% |
|
|
3.97% - 4.33 |
% |
Expected dividend yield |
|
|
|
|
|
|
|
|
Volatility factor |
|
|
60 |
% |
|
|
76 |
% |
Expected lives |
|
4 years |
|
|
7 years |
|
Weighted average fair value of options granted |
|
$ |
2.53 |
|
|
|
$ 2.72 |
|
Weighted average remaining contractual life of options outstanding |
|
5.74 years |
|
|
6.58 years |
|
The
Companys assumed dividend yield of zero is based on the fact
that it has never paid cash
dividends and have no present intention to pay cash dividends. Since adoption of SFAS 123(R) on
February 1, 2006, the expected stock-price volatility assumption
used by the Company has been based on a
blend of implied volatility in conjunction with calculations of the
Companys historical
volatility determined over a period commensurate with the expected
term of its option grants. The implied volatility is based on
exchange traded options of the Companys stock. The Company
believes that using a blended
volatility assumption will result in the best estimate of expected volatility. Prior to adoption of
SFAS 123(R), the expected volatility was based on historical volatilities of the underlying stock,
only. The assumed risk-free interest rate is the U.S. Treasury security rate with a term equal to
the expected life of the option. The assumed expected life is based on company-specific historical
experience. With regard to the estimate of the expected life, the
Company considers the exercise behavior of
past grants and the pattern of aggregate exercises. The Company looked at historical option grant
cancellation and termination data in order to determine its
assumption of forfeiture rate which was 11.6% as of April 30,
2006. Prior to
the adoption of SFAS 123(R), forfeitures were not estimated at the time of award and adjustments
were reflected in pro forma net income disclosures as forfeitures occurred.
For shares purchased under the 2004 Employee Share Purchase Plan (ESPP), the Company uses a
Black-Scholes option-pricing model, with the following assumptions: an assumed risk-free interest
rate of 4.79% for the three months ended April 30, 2006, an expected volatility factor of 39% for
the three months ended April 30, 2006 and an expected life of six months, with the assumption that
dividends will not be paid.
A summary of share option activity under the Companys plan during the three months ended April 30,
2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Aggregate |
|
|
|
|
|
|
Weighted |
|
Remaining |
|
Intrinsic |
|
|
|
|
|
|
Average |
|
Contractual |
|
Value |
Share Options |
|
Shares |
|
Exercise Price |
|
Term (Years) |
|
(in thousands) |
Outstanding, January 31, 2006 |
|
|
16,239,090 |
|
|
$ |
7.73 |
|
|
|
5.99 |
|
|
|
|
|
Granted |
|
|
25,000 |
|
|
|
5.00 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(170,085 |
) |
|
|
3.56 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(130,337 |
) |
|
|
12.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, April 30, 2006 |
|
|
15,963,668 |
|
|
$ |
7.73 |
|
|
|
5.74 |
|
|
$ |
12,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, April 30, 2006 |
|
|
15,317,502 |
|
|
$ |
7.87 |
|
|
|
5.69 |
|
|
$ |
12,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. SPECIAL CHARGES
MERGER AND EXIT COSTS
Activity in the Companys merger and exit costs, which are included in accrued expenses (see Note
13) and long-term liabilities, was as follows (in thousands):
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMPLOYEE |
|
|
|
|
|
|
|
|
|
|
|
|
SEVERANCE AND |
|
|
CLOSEDOWN OF |
|
|
|
|
|
|
|
|
|
RELATED COSTS |
|
|
FACILITIES |
|
|
OTHER |
|
|
TOTAL |
|
Merger and exit accrual January 31, 2006 |
|
$ |
1,186 |
|
|
$ |
3,457 |
|
|
$ |
169 |
|
|
$ |
4,812 |
|
Payments made during the three months ended April 30, 2006 |
|
|
(396 |
) |
|
|
(172 |
) |
|
|
(11 |
) |
|
|
(579 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger and exit accrual April 30, 2006 |
|
$ |
790 |
|
|
$ |
3,285 |
|
|
$ |
158 |
|
|
$ |
4,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company anticipates that the remainder of the merger and exit accrual will be paid out by
October 2011 as follows (in thousands):
|
|
|
|
|
Year ended January 31, |
|
|
|
|
2007 (remaining 9 months) |
|
$ |
2,631 |
|
2008 |
|
|
551 |
|
2009 |
|
|
493 |
|
2010 |
|
|
518 |
|
Thereafter |
|
|
40 |
|
|
|
|
|
Total |
|
$ |
4,233 |
|
|
|
|
|
RESTRUCTURING, SEC INVESTIGATION AND OTHER PROFESSIONAL FEES
Activity in the Companys restructuring accrual was as follows (in thousands):
|
|
|
|
|
|
|
FACILITY LEASE |
|
|
|
OBLIGATIONS |
|
Total restructuring accrual as of January 31, 2006 |
|
$ |
1,987 |
|
Payments made during the three months ended April 30, 2006 |
|
|
(70 |
) |
Total restructuring accrual as of April 30, 2006 |
|
$ |
1,917 |
|
|
|
|
|
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APRIL 30, 2006 |
|
|
JANUARY 31, 2006 |
|
|
|
GROSS |
|
|
|
|
|
|
NET |
|
|
GROSS |
|
|
|
|
|
|
NET |
|
|
|
CARRYING |
|
|
ACCUMULATED |
|
|
CARRYING |
|
|
CARRYING |
|
|
ACCUMULATED |
|
|
CARRYING |
|
|
|
AMOUNT |
|
|
AMORTIZATION |
|
|
AMOUNT |
|
|
AMOUNT |
|
|
AMORTIZATION |
|
|
AMOUNT |
|
Internally developed
software/courseware |
|
$ |
28,257 |
|
|
$ |
25,146 |
|
|
$ |
3,111 |
|
|
$ |
28,257 |
|
|
$ |
23,414 |
|
|
$ |
4,843 |
|
Customer contracts |
|
|
13,018 |
|
|
|
10,466 |
|
|
|
2,552 |
|
|
|
13,018 |
|
|
|
10,055 |
|
|
|
2,963 |
|
Trademarks and trade names |
|
|
905 |
|
|
|
5 |
|
|
|
900 |
|
|
|
905 |
|
|
|
|
|
|
|
905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,180 |
|
|
|
35,617 |
|
|
|
6,563 |
|
|
|
42,180 |
|
|
|
33,469 |
|
|
|
8,711 |
|
Goodwill |
|
|
92,058 |
|
|
|
|
|
|
|
92,058 |
|
|
|
93,929 |
|
|
|
|
|
|
|
93,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
134,238 |
|
|
$ |
35,617 |
|
|
$ |
98,621 |
|
|
$ |
136,109 |
|
|
$ |
33,469 |
|
|
$ |
102,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in goodwill at April 30, 2006 from the amount recorded at January 31, 2006 was due
primarily to the Companys utilization of the tax benefit of net operating loss carryforwards
assumed as part of the Merger.
|
|
|
|
|
|
|
Total |
|
Gross carrying amount of goodwill, January 31, 2006 |
|
$ |
93,929 |
|
Utilization of tax benefit |
|
|
(1,754 |
) |
Other |
|
|
(117 |
) |
|
|
|
|
Gross carrying amount of goodwill, April 30, 2006 |
|
$ |
92,058 |
|
|
|
|
|
Amortization expense for the remainder of fiscal 2007 and the following fiscal years is expected to
be as follows (in thousands):
|
|
|
|
|
|
|
Amortization |
|
Fiscal Year |
|
Expense |
|
2007 |
|
$ |
4,026 |
|
2008 |
|
|
1,625 |
|
2009 |
|
|
12 |
|
|
|
|
|
Total |
|
$ |
5,663 |
|
|
|
|
|
10
The Company will be conducting its annual impairment test of goodwill for fiscal 2007 in the fourth
quarter.
8. COMPREHENSIVE INCOME/(LOSS)
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of all components of
comprehensive income/(loss) on an annual and interim basis. Comprehensive income/(loss) is defined
as the change in equity of a business enterprise during a period resulting from transactions, other
events and circumstances related to non-owner sources. Comprehensive income for the three months
ended April 30, 2006 and 2005 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
|
APRIL 30, |
|
|
|
2006 |
|
|
2005 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,053 |
|
|
$ |
2,467 |
|
Other comprehensive income/(loss) - |
|
|
|
|
|
|
|
|
Foreign currency adjustment |
|
|
(298 |
) |
|
|
(12 |
) |
Unrealized holding losses |
|
|
76 |
|
|
|
(28 |
) |
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
3,831 |
|
|
$ |
2,427 |
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income as of April 30, 2006 and
January 31, 2006 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS |
|
|
YEAR ENDED |
|
|
|
ENDED APRIL 30, |
|
|
JANUARY 31, |
|
|
|
2006 |
|
|
2006 |
|
Unrealized holding gains/(losses) |
|
$ |
61 |
|
|
$ |
(15 |
) |
Foreign currency adjustment |
|
|
(1,033 |
) |
|
|
(735 |
) |
|
|
|
|
|
|
|
Total accumulated other comprehensive loss |
|
$ |
(972 |
) |
|
$ |
(750 |
) |
|
|
|
|
|
|
|
9. NET INCOME PER SHARE
Basic net income per share was computed using the weighted average number of shares outstanding
during the period. Diluted net income per share was computed by giving effect to all dilutive
potential shares outstanding. The weighted average number of shares outstanding used to compute
basic net income per share and diluted net income per share was as follows:
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
APRIL 30, |
|
|
2006 |
|
2005 |
Basic weighted average shares outstanding |
|
|
101,037,377 |
|
|
|
105,662,213 |
|
Effect of dilutive shares outstanding |
|
|
1,851,374 |
|
|
|
214,881 |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, as adjusted |
|
|
102,888,751 |
|
|
|
105,877,094 |
|
|
|
|
|
|
|
|
|
|
The following share equivalents have been excluded from the computation of diluted weighted average
shares outstanding for the three months ended April 30, 2006 and 2005, respectively, as they would
be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
APRIL 30, |
|
|
2006 |
|
2005 |
Options excluded |
|
|
14,112,294 |
|
|
|
17,431,937 |
|
10. INCOME TAXES
The Company operates as a holding company with operating subsidiaries in several countries, and
each subsidiary is taxed based on the laws of the jurisdiction in which it operates.
11
The Company has significant net operating loss (NOL) carryforwards, some of which are subject to
potential limitations based upon the change in control provisions of Section 382 of the Internal
Revenue Code.
The provision for income tax in the three months ended April 30, 2006 was approximately $2.0
million. Of this amount approximately $1.8 million relates to the expected utilization of acquired
NOL carryforwards which do not alleviate tax burden in the statement of income and is recorded as
an adjustment to goodwill. The $1.8 million of utilized acquired NOL carryforwards do not require
cash payments to the taxing authorities. In addition, there is income generated in foreign
countries, which cannot be offset through NOL carryforwards.
11. COMMITMENTS AND CONTINGENCIES
On or about February 4, 2003, the SEC informed the Company that it is the subject of a formal order
of private investigation relating to its November 19, 2002 announcement that it would restate the
financial statements of SmartForce PLC for the period 1999 through June 2002. The Company
understands that the SECs investigation concerns SmartForces financial disclosure and accounting
during that period, other related matters, compliance with rules governing reports required to be
filed with the SEC, and the conduct of those responsible for such matters. On June 2, 2005, the
Boston District Office of the SEC informed the Company that it had made a preliminary determination
to recommend that the SEC bring a civil injunctive action against the Company. Under the SECs
rules, the Company is permitted to make a so-called Wells Submission in which the Company seeks to
persuade the SEC that no such action should be commenced. If the Company cannot resolve the SECs
potential claims by agreement, the Company intends to make such a submission. The Company continues
to cooperate with the SEC in this matter. At the present time the Company is unable to predict the
outcome of this action and as such has not determined what, if any, impact it may have on its
financial statements.
On November 18, 2004, Jody Glidden, Michael LeBlanc and Trish Glidden filed a lawsuit against the
Company, David C. Drummond, Gregory M. Priest, Patrick E. Murphy and Jack Hayes in the United
States District Court for the Northern District of California. The plaintiffs subsequently
dismissed Patrick E. Murphy and Jack Hayes from the lawsuit. The court subsequently dismissed Trish
Gliddens claims. The plaintiffs had previously opted out of the class action settlement that
received final approval from the court on September 29, 2004. The lawsuit set forth substantially
the same claims as were alleged in the class action litigation. In particular, the lawsuit alleged
that the Company misrepresented or omitted to state material facts in
its SEC filings and press
releases regarding its revenues and earnings and failed to correct such false and misleading SEC
filings and press releases, which were alleged to have artificially inflated the price of the
Companys ADSs in connection with its acquisition of IC Global in early 2001. The lawsuit sought
compensatory damages in excess of $3.7 million and other unspecified damages, including punitive
damages. The parties settled the lawsuit on April 7, 2006. Pursuant to the settlement, the Company
paid approximately $1.8 million to the plaintiffs on April 13, 2006 which the Company recorded and
expensed as of January 31, 2006. The Court entered the Dismissal with Prejudice of the action on
April 13, 2006.
Six class action lawsuits have been filed against the Company and certain of its current and former
officers and directors captioned: (1) Gianni Angeloni v. SmartForce PLC d/b/a SkillSoft, William
McCabe and Greg Priest; (2) Ari R. Schloss v. SkillSoft PLC f/k/a SmartForce PLC, Gregory M.
Priest, Patrick E. Murphy, David C. Drummond and William G. McCabe; (3) Joseph J. Bish v.
SmartForce PLC d/b/a SkillSoft, Gregory M. Priest, William G. McCabe, David C. Drummond, John M.
Grillos, John P. Hayes and Patrick E. Murphy; (4) Stacey Cohen v. SmartForce PLC d/b/a SkillSoft,
William G. McCabe and Greg Priest; (5) Daniel Schmelz v. SmartForce PLC d/b/a SkillSoft, William G.
McCabe and Greg Priest; and (6) John ODonoghue v. SmartForce PLC d/b/a SkillSoft, William G.
McCabe and Greg Priest. Each lawsuit was filed in the United States District Court for the District
of New Hampshire. In March 2004, the Company reached a settlement of this litigation for total
settlement payments of $30.5 million, with one-half paid in August 2004 and the remainder expected
to be paid in fiscal 2007. In July 2005, the Company received $19.5 million, which resulted from
the final settlement with the insurance carriers regarding the 2002 securities class action lawsuit
settlement of $30.5 million in March 2004 and the ongoing related litigation and SEC investigation.
The Company recorded the aggregate settlement with the plaintiffs as a charge in its fiscal 2004
fourth quarter; and the settlement with its insurers was recorded in the fiscal 2006 second
quarter.
12. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
The Company follows the provisions of SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information (SFAS No. 131). SFAS No. 131 established standards for reporting
information regarding operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports issued to stockholders.
SFAS No. 131 also established standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation
12
by the chief operating decision maker, or decision-making group, in making decisions how to
allocate resources and assess performance. The Companys chief operating decision makers, as
defined under SFAS No. 131, are the Chief Executive Officer and the Chief Financial Officer. The
Company views its operations and manages its business as principally two operating segments
Multi-Modal Learning (MML) and Retail Certification. On April 29, 2005, the Company sold certain
assets and transferred certain liabilities related to its Retail Certification business and
incurred a $681,000 loss on disposition. The sale did not have a negative impact on Retail
Certification revenue for the quarter ended April 30, 2005, but did result in a reduction in
revenue in subsequent fiscal quarters and that trend will continue for the remainder of fiscal 2007
when compared to fiscal 2006.
The following tables set forth the Companys statements of operations for the fiscal quarters ended
April 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended April 30, 2006 |
|
|
Multi-Modal |
|
Retail Certification |
|
Combined |
|
|
(In thousands) |
Revenue |
|
$ |
52,922 |
|
|
$ |
1,731 |
|
|
$ |
54,653 |
|
Net income |
|
$ |
3,980 |
|
|
$ |
73 |
|
|
$ |
4,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended April 30, 2005 |
|
|
Multi-Modal |
|
Retail Certification |
|
Combined |
|
|
(In thousands) |
Revenue |
|
$ |
48,050 |
|
|
$ |
5,277 |
|
|
$ |
53,327 |
|
Net income/(loss) |
|
$ |
3,702 |
|
|
$ |
(1,235 |
) |
|
$ |
2,467 |
|
The Company attributes revenues to different geographical areas on the basis of the location of the
customer. Revenues by geographical area for the three month periods ended April 30, 2006 and 2005
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
|
APRIL 30, |
|
|
|
2006 |
|
|
2005 |
|
Revenue: |
|
|
|
|
|
|
|
|
United States |
|
$ |
42,864 |
|
|
$ |
41,971 |
|
United Kingdom |
|
|
6,061 |
|
|
|
5,587 |
|
Canada |
|
|
2,361 |
|
|
|
2,172 |
|
Europe, excluding UK |
|
|
523 |
|
|
|
1,339 |
|
Australia/New Zealand |
|
|
2,238 |
|
|
|
1,871 |
|
Other |
|
|
606 |
|
|
|
387 |
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
54,653 |
|
|
$ |
53,327 |
|
|
|
|
|
|
|
|
Long-lived tangible assets at international facilities are not significant.
13. ACCRUED EXPENSES
Accrued expenses in the accompanying condensed combined balance sheets consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
APRIL 30, 2006 |
|
|
JANUARY 31, 2006 |
|
Accrued compensation and benefits |
|
$ |
7,750 |
|
|
$ |
15,984 |
|
Course development fees |
|
|
1,523 |
|
|
|
1,170 |
|
Professional fees |
|
|
3,020 |
|
|
|
2,989 |
|
Accrued payables |
|
|
1,050 |
|
|
|
1,254 |
|
Accrued miscellaneous taxes |
|
|
281 |
|
|
|
395 |
|
Accrued merger related costs* |
|
|
2,509 |
|
|
|
2,977 |
|
Sales tax payable/VAT payable |
|
|
2,813 |
|
|
|
4,193 |
|
Accrued royalties |
|
|
3,363 |
|
|
|
3,129 |
|
Accrued litigation settlements |
|
|
15,250 |
|
|
|
17,040 |
|
Accrued restructuring |
|
|
809 |
|
|
|
810 |
|
Other accrued liabilities |
|
|
3,113 |
|
|
|
3,854 |
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
41,481 |
|
|
$ |
53,795 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes $1,188 and $1,584 of accrued payroll income taxes in April 30, 2006 and January 31,
2006, respectively. |
13
14. LINE OF CREDIT
The Company has a $25 million line of credit with a bank expiring on July 22, 2006. Under the terms
of the line of credit, the bank holds a first security interest in all domestic business assets.
All borrowings under the line of credit bear interest at the banks prime rate. The facility is
subject to a commitment fee of $50,000 to secure the line of credit and unused commitment fees of
0.125% based upon the daily average of
un-advanced amounts under the revolving line of credit. In
addition, the line of credit contains certain financial and non-financial covenants. The Company is
currently in compliance with all covenants. Also, the line of credit provides that in the event of
a Material Adverse Change (as defined in the line of credit), the lender has the ability to call
amounts outstanding under the line of credit. As of April 30, 2006, there were no borrowings on the
line of credit; however, the Company had an outstanding letter of credit of $15.5 million that
reduced the availability under the line of credit. Letters of credit are subject to commission fees
of 0.75% as well as administrative costs. The Company paid approximately $29,000 in letters of
credit fees in the three months ended April 30, 2006.
15. SHARE REPURCHASE PROGRAM
In fiscal 2005, the Companys shareholders approved the repurchase by the Company of up to an
aggregate of 7,000,000 ADSs. The Company repurchased 1,841,514 for the three months ended April 30,
2005. The program expired on March 24, 2006. On March 23, 2006, the Companys shareholders approved
the renewal and extension of the program and the repurchase by the Company of up to an aggregate of
3,500,000 ADSs. Currently, none of the shares under the renewed program have been repurchased and
as a result 3,500,000 are available for repurchase, subject to certain limitations, under the
shareholder approved program.
16. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The FASB recently issued Statement No. 154, Accounting Changes and Error Corrections, (SFAS 154),
which is a replacement of APB Opinion No. 20, Accounting Changes, (APB 20) and FASB Statement No.
3, Reporting Accounting Changes in Interim Financial Statements. (SFAS 3). SFAS 154 applies to
all voluntary changes in accounting principle, and changes the requirements for accounting for and
reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior
periods financial statements of a voluntary change in accounting principle unless it is
impracticable. APB 20 previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative effect of changing
to the new accounting principle. SFAS 154 requires that a change in method of depreciation,
amortization, or depletion for long-lived, non-financial assets be accounted for as a change in
accounting estimate that is effected by a change in accounting principle. APB 20 previously
required that such a change be reported as a change in accounting principle. SFAS 154 carries
forward many provisions of APB 20 without change, including the provisions related to the reporting
of a change in accounting estimate, a change in the reporting entity, and the correction of an
error. SFAS 154 also carries forward the provisions of SFAS 3 that govern reporting accounting
changes in interim financial statements. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application
is permitted for accounting changes and corrections of errors made occurring in fiscal years
beginning after June 1, 2005. SFAS 154 does not change the transition provisions of any existing
accounting pronouncements, including those that are in a transition phase as of the effective date
of SFAS 154.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Any statement in this Quarterly Report on Form 10-Q about our future expectations, plans and
prospects, including statements containing the words believes, anticipates, plans, expects,
will and similar expressions, constitute forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those
indicated by such forward-looking statements as a result of various important factors, including
those set forth under Part II, Item 1A, Risk Factors.
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our financial statements and notes appearing elsewhere in this
Quarterly Report on Form 10-Q.
OVERVIEW
14
We are a leading provider of content resources and complementary technologies for integrated
enterprise learning. Our multi-modal learning solutions support and enhance the speed and
effectiveness of both formal and informal learning processes and integrate SkillSofts in-depth
content resources, learning management system, virtual classroom technology and support services.
We derive revenue primarily from agreements under which customers license our products and purchase
our services. The pricing for our courses varies based upon the number of course titles or the
courseware bundle licensed by a customer, the number of users within the customers organization
and the length of the license agreement (generally one, two or three years). Our agreements permit
customers to exchange course titles, generally on the contract anniversary date. Additional
services, such as hosting and online mentoring, are subject to additional fees.
Cost of revenue includes the cost of materials (such as storage media), packaging, shipping and
handling, CD duplication, the cost of online mentoring and hosting services, royalties and certain
infrastructure and occupancy expenses. We generally recognize these costs as incurred. Research and
development expenses consist primarily of salaries and benefits, stock-based compensation, certain
infrastructure and occupancy expenses, fees to consultants and course content development fees. We
account for software development costs in accordance with Statement of Financial Accounting
Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed, which requires the capitalization of certain computer software development
costs incurred after technological feasibility is established. In the fiscal year ended January 31,
2006, we capitalized approximately $1.7 million in software development costs of which $0.2 million
was amortized in the three months ended April 30, 2006. Selling and marketing expenses consist
primarily of salaries and benefits, stock-based compensation, commissions, advertising and
promotion expenses, travel expenses and certain infrastructure and occupancy expenses. General and
administrative expenses consist primarily of salaries and benefits, stock-based compensation,
consulting and service expenses, legal expenses, audit and tax preparation costs, regulatory
compliance costs and certain infrastructure and occupancy expenses.
Amortization of intangibles represents the amortization of intangible assets, such as customer
value and content, from our acquisition of Books and our acquisition of GoTrain Corp. (GoTrain) and
the Merger, as well as amortization of those assets capitalized under SFAS No. 86.
Restructuring primarily consists of charges associated with international restructuring activities
as well as activities related to our fiscal 2005 content development restructuring.
Restatement - SEC investigation primarily consists of direct, incremental charges associated with,
and as a result of, the restatement of SmartForces financial statements for 1999, 2000, 2001 and
the first two quarters of 2002, the re-filing of statutory tax returns as a result of the
restatement and charges related to the ongoing SEC investigation.
BUSINESS OUTLOOK
In the three months ended April 30, 2006, we generated revenue of $54.7 million as compared to
$53.3 million in the three months ended April 30, 2005, and we reported net income in the three
months ended April 30, 2006 of $4.1 million as compared to $2.5 million in the three months ended
April 30, 2005. We continue to find ourselves in a challenging business environment due to (i) the
overall market adoption rate for e-learning solutions remaining relatively slow, (ii) budgetary
constraints on IT spending by our current and (iii) potential customers and price competition in
the e-learning market generally. Despite these challenges, we have seen some stability in the
marketplace and our core business has performed in accordance with our expectations. Our recent
revenue growth and our growth prospects are strongest in our product lines focused on informal
learning, such as those available from our Books24x7 subsidiary. As a result, we have increased our
sales and marketing investment related to those product lines to help capitalize on the recent
growth and potential continued growth for informal learning. We have also invested aggressively in
research and development in those areas to accelerate the time by which our planned new products
will be available to our customers.
In the fourth quarter of fiscal 2005, we restructured our content development organization to more
efficiently manage costs and capitalize further on the flexibility inherent in our existing
outsourcing model. The goal of the restructuring was to enable us to meet our existing content
production targets at a reduced cost and with greater flexibility with respect to the product
offerings in which we elect to make investments. The restructuring involved the elimination of 119
jobs in Dublin, Ireland and 12 in Nashua, New Hampshire within our research and development
organization as well as facilities consolidation in Dublin. We shifted the remainder of our IT
skills content development activities to our outsourcing suppliers, while continuing to maintain
project management and quality control internally. This same restructuring included a reduction of
an additional 15 jobs in Nashua, New Hampshire for a rightsizing of our inside sales operation and
9 jobs in Germany related to the shutdown of our German facility. As a result, we incurred
restructuring charges related to payments to terminated employees, facilities consolidation and the
repayment of grants previously awarded by Irish
15
agencies. These charges totaled approximately $13.0 million and were incurred in the fourth quarter
of fiscal 2005. We believe that the restructuring has resulted in content development cost savings
which afforded us more flexibility to reinvest in an outsourcing model for other research and
development initiatives and to increase profitability of the organization.
In the first quarter of fiscal 2006, in order to more fully focus on the MML business (which
includes informal learning), we sold certain assets of our retail IT certification business,
SmartCertify (the Retail Certification business). The Retail Certification business was focused
on direct-to-consumer business and contributed less revenue than expected. This action has allowed
us to fully focus our attention and resources on our core enterprise business. We have maintained a
reseller arrangement with the acquiring organization, and we have maintained the existing customer
contracts and will service those contracts until the contractual obligation is fulfilled. We have
been recognizing revenue from the deferred revenue balance related to direct-to-consumer business
over the 18 to 24 months subsequent to the date of sale. Substantially all of the sales, marketing
and administrative costs of our Retail Certification business were eliminated.
During fiscal 2007, we plan to focus on revenue and earnings growth primarily through new customer
acquisitions, continuing to execute on our new product and telesales distribution initiatives to
provide new revenue streams, and a higher priority approach to produce a long-term contribution
from possible merger and acquisition opportunities.
CRITICAL ACCOUNTING POLICIES
We believe that our critical accounting policies are those related to revenue recognition,
amortization of intangible assets and impairment of goodwill, share-based compensation, deferral of
commission, restructuring charges, legal contingencies and income taxes. We believe these
accounting policies are particularly important to the portrayal and understanding of our financial
position and results of operations and require application of significant judgment by our
management. In applying these policies, management uses its judgment in making certain assumptions
and estimates. Our critical accounting policies are more fully
described under the heading Critical Accounting Policies
and in Note 2 of the Notes to
the Consolidated Financial Statements in our Annual Report on Form 10-K as filed with the SEC on
April 13, 2006. The policies set forth in our Form 10-K have not
changed, except that the critical accounting policy for share-based compensation, which follows, is being
modified as of this report as a result of the adoption of SFAS 123(R) on February 1, 2006.
Share Based Compensation
During the first quarter of fiscal 2006, we adopted the provisions of and accounted for stock-based
compensation in accordance with SFAS No. 123 (revised 2004), Share-Based Payment, which is a
revision of SFAS No. 123, Accounting for Stock Based Compensation. SFAS 123(R) requires employee
stock-based compensation awards to be accounted for under the fair value method and eliminates the
ability to account for these instruments under the intrinsic value method as prescribed by
Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. We adopted SFAS 123(R) on February 1, 2006 using the modified
prospective application method as permitted under SFAS 123(R). Under this method, we are
required to record compensation cost, based on the fair value estimated in accordance with SFAS
123(R), for stock-based awards granted after the date of adoption over the requisite service
periods for the individual awards, which generally equals the vesting period. We are also required
to record compensation cost for the unvested portion of previously granted stock-based awards
outstanding at the date of adoption over the requisite service periods for the individual awards
based on the fair value estimated in accordance with the original provisions of SFAS No. 123.
Prior to the adoption of SFAS 123(R), we accounted for stock-based compensation under the
recognition and measurement principles of APB Opinion No. 25 and related interpretations.
Accordingly, no compensation expense was recorded for options issued to employees and non-employee
directors in fixed amounts and with fixed exercise prices at least equal to the market price of our
ordinary shares at the date of grant. When the exercise price of stock options granted to employees
was less than the market price of our ordinary shares at the date of grant, we recorded the
difference multiplied by the number of shares under option as deferred compensation, which was
amortized over the vesting period of the options. Additionally, deferred compensation was recorded
for the options assumed in connection with the Merger on September 6, 2002. We are amortizing this
deferred compensation over the vesting period of the underlying options. We reversed deferred
compensation associated with unvested stock options upon the cancellation of shares for terminated
employees and upon the adoption of SFAS 123(R) against additional paid-in capital.
In anticipation of the adoption of SFAS 123(R), in the fourth quarter of fiscal 2006, our Board of
Directors approved the accelerated vesting of all currently outstanding unvested stock options
previously awarded to employees effective January 13, 2006. This vesting acceleration did not
extend to any options held by executive officers or directors. Vesting was accelerated for options
to purchase approximately 1.7 million of our ordinary shares, or approximately 11% of the Companys
total outstanding stock options at the time.
16
The decision to accelerate vesting of these options was made to avoid recognizing compensation cost
related to these options in our future statements of operations upon the adoption of SFAS 123(R).
It is estimated that the maximum future compensation expense that would have been recorded in our
statements of operations had the vesting of these options not been accelerated is approximately
$9.1 million, including approximately $4.7 million of stock-based compensation expense in the
fiscal year ending January 31, 2007. The amounts were instead
reflected in our pro-forma charge as presented in Note 2 of the Notes
to the Consolidated Financial Statements in our Annual Report on Form 10-K as filed with the SEC on April 13, 2006.
As permitted under SFAS No. 123 and SFAS 123(R), we use the Black-Scholes option pricing model to
estimate the fair value of stock option grants. The Black-Scholes model relies on a number of key
assumptions to calculate estimated fair values. The estimated fair value of employee stock options
is amortized to expense using the straight-line method over the vesting period. Our assumed
dividend yield of zero is based on the fact that we have never paid cash dividends and have no
present intention to pay cash dividends. Since adoption of SFAS 123(R) on February 1, 2006, the
expected stock-price volatility assumption used by us has been based on a blend of implied
volatility in conjunction with calculations of our historical volatility determined
over a period commensurate with the expected term of our option grants. The implied volatility is based on exchange traded options of our stock. We believe that using a blended volatility
assumption will result in the best estimate of expected volatility. Prior to adoption of SFAS
123(R), the expected volatility was based on historical volatilities of the underlying stock, only.
The assumed risk-free interest rate is the U.S. Treasury security rate with a term equal to the
expected life of the option. The assumed expected life is based on company-specific historical
experience. With regard to the estimate of the expected life, we consider the exercise behavior of
past grants and the pattern of aggregate exercises. We looked at historical option grant
cancellation and termination data in order to determine our assumption of forfeiture rate. Prior to
the adoption of SFAS 123(R), forfeitures were not estimated at the time of award and adjustments
were reflected in pro forma net income disclosures as forfeitures occurred.
If factors change and we employ different assumptions for estimating stock-based compensation
expense in future periods, or if we decide to use a different valuation model, the stock-based
compensation expense we recognize in future periods may differ significantly from what we have
recorded in the current period and could materially affect our operating income, net income and
earnings per share. It may also result in a lack of comparability with other companies that use
different models, methods and assumptions. The Black-Scholes option-pricing model was developed for
use in estimating the fair value of traded options that have no vesting restrictions and are fully
transferable. These characteristics are not present in our option grants. Existing valuation
models, including the Black-Scholes model, may not provide reliable measures of the fair values of
our stock-based compensation. Consequently, there is a risk that our estimates of the fair values
of our stock-based compensation awards on the grant dates may bear little resemblance to the actual
values realized upon the exercise, expiration, early termination or forfeiture of those stock-based
payments in the future. Certain stock-based payments, such as employee stock options, may expire
with little or no intrinsic value compared to the fair values originally estimated on the grant
date and reported in our financial statements. Alternatively, the value realized from these
instruments may be significantly higher than the fair values originally estimated on the grant date
and reported in our financial statements. Currently, there is no market-based mechanism or other
practical application to verify the reliability and accuracy of the estimates stemming from these
valuation models, nor is there a means to compare and adjust the estimates to actual values. The
guidance in SFAS 123(R) is relatively new from an application perspective and the application of
these principles may be subject to further interpretation and refinement over time. See Note 5 of
the Condensed Consolidated Financial Statements in Item 1 for further information regarding our
adoption of SFAS 123(R).
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2006 VERSUS THREE MONTHS ENDED APRIL 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DOLLAR |
|
|
QUARTER ENDED APRIL 30, |
|
|
|
|
|
|
INCREASE/(DECREASE) |
|
|
PERCENT CHANGE |
|
|
|
|
|
|
2005/2006 |
|
|
INCREASE/(DECREASE) |
|
|
PERCENTAGE OF REVENUE |
|
|
|
(IN THOUSANDS) |
|
|
2005/2006 |
|
|
2006 |
|
|
2005 |
|
Revenue |
|
$ |
1,326 |
|
|
|
3 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenue |
|
|
617 |
|
|
|
11 |
% |
|
|
12 |
% |
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
709 |
|
|
|
2 |
% |
|
|
88 |
% |
|
|
89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
48 |
|
|
|
1 |
% |
|
|
18 |
% |
|
|
19 |
% |
Selling and marketing |
|
|
(954 |
) |
|
|
(4 |
%) |
|
|
43 |
% |
|
|
45 |
% |
General and administrative |
|
|
996 |
|
|
|
16 |
% |
|
|
13 |
% |
|
|
12 |
% |
Amortization of intangible assets |
|
|
(98 |
) |
|
|
(4 |
%) |
|
|
4 |
% |
|
|
4 |
% |
Restructuring |
|
|
(703 |
) |
|
|
100 |
% |
|
|
|
|
|
|
1 |
% |
Restatement SEC investigation |
|
|
2 |
|
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(709 |
) |
|
|
(2 |
%) |
|
|
79 |
% |
|
|
82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
1,418 |
|
|
|
37 |
% |
|
|
10 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DOLLAR |
|
|
QUARTER ENDED APRIL 30, |
|
|
|
|
|
|
INCREASE/(DECREASE) |
|
|
PERCENT CHANGE |
|
|
|
|
|
|
2005/2006 |
|
|
INCREASE/(DECREASE) |
|
|
PERCENTAGE OF REVENUE |
|
|
|
(IN THOUSANDS) |
|
|
2005/2006 |
|
|
2006 |
|
|
2005 |
|
Other income/(expense), net |
|
|
120 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
Interest income |
|
|
449 |
|
|
|
126 |
% |
|
|
2 |
% |
|
|
1 |
% |
Interest expense |
|
|
(5 |
) |
|
|
8 |
% |
|
|
|
|
|
|
|
|
Loss on sale of assets, net |
|
|
681 |
|
|
|
* |
|
|
|
|
|
|
|
(1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
2,663 |
|
|
|
79 |
% |
|
|
11 |
% |
|
|
6 |
% |
Provision for income taxes |
|
|
1,077 |
|
|
|
117 |
% |
|
|
4 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,586 |
|
|
|
64 |
% |
|
|
7 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Not meaningful |
|
|
|
Does not add due to rounding |
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QUARTERS ENDED APRIL 30, |
|
(IN THOUSANDS) |
|
2006 |
|
|
2005 |
|
|
CHANGE |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Modal Learning |
|
$ |
52,922 |
|
|
$ |
48,050 |
|
|
$ |
4,872 |
|
Retail Certification |
|
|
1,731 |
|
|
|
5,277 |
|
|
|
(3,546 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
54,653 |
|
|
$ |
53,327 |
|
|
$ |
1,326 |
|
|
|
|
|
|
|
|
|
|
|
In the three months ended April 30, 2005, we sold certain assets related to SmartCertify, our
Retail Certification business. The sale resulted in a reduction in revenue of $3.5 million in our
Retail Certification business for the three months ended April 30, 2006 as compared to the three
months ended April 30, 2005. The 10% increase in our MML revenue is primarily due to revenue
generated from new business primarily derived from our product lines focused on informal learning,
better than anticipated reseller revenues and a greater share of business having closed earlier in
the respective quarterly period for the three months ended April 30, 2006. We expect the trend in
our Retail Certification business to continue with a reduction to approximately $5.0 million in
revenue in fiscal 2007 when compared to $14.3 million in fiscal 2006. We expect this decrease in
revenue to be offset in fiscal 2007 by increased MML revenue generated from new business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QUARTERS ENDED APRIL 30, |
|
(IN THOUSANDS) |
|
2006 |
|
|
2005 |
|
|
CHANGE |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
42,864 |
|
|
$ |
41,971 |
|
|
$ |
893 |
|
International |
|
|
11,789 |
|
|
|
11,356 |
|
|
|
433 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
54,653 |
|
|
$ |
53,327 |
|
|
$ |
1,326 |
|
|
|
|
|
|
|
|
|
|
|
Revenue increased by 2% and 4% in the United States and internationally, respectively, in the three
months ended April 30, 2006 as compared to the three months
ended April 30, 2005 as a result of the reasons described above.
We exited the fiscal year ended January 31, 2006 with non-cancelable backlog of approximately $171
million as compared to $168 million at January 31, 2005. This amount is calculated by combining the
amount of deferred revenue at our fiscal year end with the amounts to be added to deferred revenue
throughout the next twelve months as a result of committed customer contracts and determining how
much of these amounts are scheduled to amortize into revenue during fiscal 2007. The amount
scheduled to amortize into revenue during fiscal 2007 is disclosed as backlog as of January 31,
2006. Amounts to be added to deferred revenue during fiscal 2007 include subsequent installment
billings for ongoing contract periods as well as billings for new or continuing contracts. As a
result of the previously described sale of certain assets related to SmartCertify, the balance of
non-cancelable backlog at January 31, 2006 reflects a reduction of approximately $10.6 million in
SmartCertify backlog when compared to January 31, 2005, and SmartCertify will not contribute new
contracts during fiscal 2007. We have included this non-GAAP disclosure due to the fact that it is
directly related to our subscription based revenue recognition policy. This is a key business
metric, which factors into our forecasting and planning activities and provides visibility into
fiscal 2007 revenue.
COSTS AND EXPENSES
The increase in cost of revenue in the three months ended April 30, 2006 versus the three months
ended April 30, 2005 was primarily due to a higher mix of royalty-bearing content due to the growth
of our Books 24x7 Referenceware product line.
The increase in research and development expenses in the three months ended April 30, 2006 versus
the three months ended April 30, 2005 was primarily due to stock-based compensation expense, which
had been recorded on a pro-forma basis only in the financial
18
statement footnotes, in the prior fiscal year, of $0.4 million. This increase was partially offset
by a reduction of $0.3 million in outsourcing activity primarily due to incremental costs incurred
in the three months ended April 30, 2005 to introduce the SkillSoft Dialogue product offering. We
anticipate that research and development expenses will be between 18% and 19% of revenue in fiscal
2007.
The decrease in selling and marketing expenses in the three months ended April 30, 2006 versus the
three months ended April 30, 2005 was primarily due to the expense reduction of $2.8 million
resulting from the sale of certain assets related to SmartCertify, our Retail Certification
business, at the end of our fiscal 2006 first quarter. This was partially offset by stock-based
compensation expense, which had been recorded on a pro-forma basis only in the financial statement
footnotes, in the prior fiscal year, of $0.8 million, and additional investment in our Books sales
force of $0.7 million and the direct sales force, targeted at new customers, of $0.3 million. We
anticipate that selling and marketing expenses will be between 40% and 41% of revenue in fiscal
2007.
The increase in general and administrative expenses in the three months ended April 30, 2006 versus
the three months ended April 30, 2005 was primarily due to stock-based compensation expense, which
had been recorded on a pro-forma basis only in the financial statement footnotes, in the prior
fiscal year, of $0.6 million and $0.5 million of expenses related to IT consulting services for use
with our internal financial systems. These increases were partially offset by the expense reduction
of $0.4 million resulting from the sale of certain assets of SmartCertify at the end of our fiscal
2006 first quarter. We anticipate that general and administrative expense will be between 12% and
13% of revenue in fiscal 2007.
The decrease in restructuring expenses in the three months ended April 30, 2006 versus the three
months ended April 30, 2005 was due to the restructuring of our Retail Certification business in
the three months ended April 30, 2005. We did not incur any restructuring charges in the three
months ended April 30, 2006.
OTHER EXPENSE, NET
The change in other income/(expense), net in the three months ended April 30, 2006 versus the three
months ended April 30, 2005 was primarily due to foreign currency fluctuations. Due to our
multi-national operations, our business is subject to fluctuations based upon changes in the
exchange rates between the currencies used in our business.
INTEREST INCOME
The increase in interest income in the three months ended April 30, 2006 versus the three months
ended April 30, 2005 was primarily due to more funds being available for investment and higher
interest rates on our cash and cash equivalents and investments.
LOSS ON SALE OF ASSETS, NET
We recorded a loss of $681,000 in the three months ended April 30, 2005. This loss is primarily
the result of investment banking and professional fees associated with the sale of certain assets
of the Retail Certification business.
PROVISION FOR INCOME TAXES
We are using an effective tax rate of 33.0% for fiscal year 2007 compared to 20.6% for fiscal year
2006. The increase in the rate reflects nontaxable insurance proceeds received in fiscal year 2006
and the Companys increased utilization of acquired net operating loss carryforwards in the U.S. in
fiscal year 2007.
The 2007
and 2006 effective tax rates are less than the combined U.S. Federal and state rate due to the
utilization of net operating losses in the U.S. and in certain
foreign jurisdictions as well as the $19.5 million insurance
settlement received in fiscal year 2006 not being taxable.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2006, our principal source of liquidity was our cash and cash equivalents and
short-term investments, which totaled $93.1 million. This compares to $73.3 million at January 31,
2006.
Net cash provided by operating activities was $18.1 million for the three months ended April 30,
2006, which includes net income of $4.1 million, depreciation and amortization of $3.6 million,
stock-based compensation expense of $1.8 million, non-cash income tax provision of $1.8 million and
a reduction of accounts receivable of $38.6 million. These amounts were partially offset by a
decrease in
19
deferred revenue of $19.5 million as well as a decrease in accrued expenses of $13.0 million. The
decrease in accounts receivable, deferred revenue and accrued expenses are primarily a result of
the seasonality of our operations with the fourth quarter of our fiscal year historically
generating the most activity.
Net cash used in investing activities was $17.3 million for the three months ended April 30, 2006,
which includes the purchase of investments, net of maturities, generating a net cash outflow of
approximately $16.1 million in the three months ended April 30, 2006. In addition, purchases of
capital assets, primarily related to additional investments in our hosting infrastructure, totaled
approximately $1.3 million.
Net cash provided by financing activities was $2.3 million for the three months ended April 30,
2006. This was the result of proceeds from the exercise of share options and share purchases under
our 2004 Employee Share Purchase Plan.
Our working capital/(deficit) was approximately $3.9 million and ($8.2) million as of April 30,
2006 and January 31, 2006, respectively. The increase in our working capital was primarily due to
our net income of $4.1 million, depreciation and amortization of $3.6 million, stock-based
compensation expense of $1.8 million, a non-cash provision for income tax of $1.8 million and $2.3
million of proceeds from the exercise of share options and share purchases under our 2004 Employee
Share Purchase Plan, which was partially offset by the purchase of property and equipment of $1.3
million.
We have a $25 million line of credit with a bank expiring on July 22, 2006. Under the terms of the
line of credit, the bank holds a first security interest in all domestic business assets. All
borrowings under the line of credit bear interest at the banks prime rate. The facility is subject
to a commitment fee of $50,000 to secure the line of credit and unused commitment fees of 0.125%
based upon the daily average of un-advanced amounts under the revolving line of credit. In
addition, the line of credit contains certain financial and non-financial covenants. We are
currently in compliance with all covenants. Also, the line of credit provides that in the event of
a Material Adverse Change (as defined in the line of credit), the lender has the ability to call
amounts outstanding under the line of credit. As of April 30, 2006, there were no borrowings on the
line of credit; however, we had an outstanding letter of credit of $15.5 million that reduced the
availability under the line of credit. Letters of credit are subject to commission fees of 0.75% as
well as administrative costs. We paid approximately $29,000 in letters of credit fees in the three
months ended April 30, 2006.
As of January 31, 2006, we had U.S. federal net operating loss carryforwards (NOLs) of
approximately $314.0 million. These NOLs, which are subject to potential limitations based upon
change in control provisions of Section 382 of the Internal Revenue Code, are available to reduce
future taxable income, if any, through 2025. We also had U.S. federal tax credit carryforwards of
approximately $5.6 million at January 31, 2006. Additionally, we had approximately $99.7 million of
net operating loss carryforwards in jurisdictions outside of the U.S. If not utilized, these
carryforwards expire at various dates through the year ending January 31, 2025. Included in the
$314.0 million are approximately $200.1 million of U.S. net operating loss carryforwards and
$365,000 of U.S. tax credit carryforwards that were acquired in the Merger and the purchase of
Books. In addition, included in the $99.7 million is approximately $61.1 million of net operating
loss carryforwards in jurisdictions outside the U.S. acquired in the Merger and the purchase of
Books. We will realize the benefits of these acquired net operating losses through reductions to
goodwill and non-goodwill intangibles during the period that the losses are utilized to reduce tax
payments. Also included in the $314.0 million at January 31, 2006 is approximately $28.0 million of
net operating loss carryforwards in the United States resulting from disqualifying dispositions. We
will realize the benefit of these losses through increases to stockholders equity in the periods
in which the losses are utilized to reduce tax payments.
We lease certain of our facilities and certain equipment and furniture under operating lease
agreements that expire at various dates through 2023. Future minimum lease payments, net of
estimated rentals, under these agreements are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less Than |
|
|
1-3 |
|
|
3-5 |
|
|
More Than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Operating Lease Obligations |
|
$ |
29,677 |
|
|
$ |
5,142 |
|
|
$ |
8,290 |
|
|
$ |
3,144 |
|
|
$ |
13,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have no future contracted obligations related to long-term debt, capital leases or purchase
obligations.
We have a remaining payout to be made in the fiscal year ending January 31, 2007 of $15.25 million
relating to the settlement of the 2002 securities class action litigation described in Note 8(c) of
the Notes to the Consolidated Financial Statements in our Form 10-K filed on April 13, 2006.
20
We expect to experience similar spending related to capital expenditures in the fiscal year ending
January 31, 2007, as compared to the fiscal year ended January 31, 2006, and we will continue to
invest in our research and development and sales and marketing in order to execute our business
plan and achieve expected revenue growth. To the extent that our execution of the business plan
results in increased sales, we expect to experience corresponding increases in deferred revenue,
cash flow and prepaid expenses. Capital expenditures for the fiscal year ending January 31, 2007
are expected to be approximately $7.0 million. We purchased 6,533,884 shares under our shareholder
approved repurchase plan during fiscal 2005 and 2006. This plan expired on March 24, 2006 with
466,116 shares available for repurchase under the original program. Our shareholders have approved
the renewal and extension of the plan and as a result we currently have the ability to purchase,
subject to certain limitations, up to 3,500,000 of our outstanding shares under the approved
shareholder plan. Under the program, there are limitations on our ability to purchase shares up to
this level, which include, but are not limited to, the availability of distributable profits under
Irish regulations and available cash. We expect that the principal sources of funding for our
operating expenses, capital expenditures, litigation settlement payments and other liquidity needs
will be a combination of our available cash and cash equivalents and short-term investments, and
funds generated from future cash flows from operating activities. We believe our current funds and
expected cash flows from operating activities will be sufficient to fund our operations for at
least the next 12 months. However, there are several items that may negatively impact our available
sources of funds. In addition, our cash needs may increase due to factors such as unanticipated
developments in our business or significant acquisitions. The amount of cash generated from
operations will be dependent upon the successful execution of our business plan. Although we do not
foresee the need to raise additional capital, any unanticipated economic or business events could
require us to raise additional capital to support operations.
EXPLANATION OF USE OF NON-GAAP FINANCIAL RESULTS
In addition to our audited financial results in accordance with United States generally accepted
accounting principles (GAAP), to assist investors we may on occasion provide certain non-GAAP
financial results as an alternative means to explain our periodic results. The non-GAAP financial
results typically exclude non-cash or one-time charges or benefits.
Our management uses the non-GAAP financial results internally as an alternative means for assessing
our results of operations. By excluding non-cash charges such as stock-based compensation,
amortization of purchased intangible assets, impairment of goodwill and purchased intangible
assets, management can evaluate our operations excluding these non-cash charges and can compare its
results on a more consistent basis to the results of other companies in our industry. By excluding
charges such as restructuring charges (benefits), our management can compare our ongoing operations
to prior quarters where such items may be materially different and to ongoing operations of other
companies in our industry who may have materially different one-time charges. Our management
recognizes that non-GAAP financial results are not a substitute for GAAP results, and believes that
non-GAAP measures are helpful in assisting them in understanding and managing our business.
Our management believes that the non-GAAP financial results may also provide useful information to
investors. Non-GAAP results may also allow investors and analysts to more readily compare our
operations to prior financial results and to the financial results of other companies in the
industry who similarly provide non-GAAP results to investors and analysts. Investors may seek to
evaluate our business performance and the performance of our competitors as they relate to cash.
Excluding one-time and non-cash charges may assist investors in this evaluation and comparisons.
We intend to continue to assess the potential value of reporting non-GAAP results consistent with
applicable rules and regulations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of April 30, 2006, we did not use derivative financial instruments for speculative or trading
purposes.
INTEREST RATE RISK
Our general investing policy is to limit the risk of principal loss and to ensure the safety of
invested funds by limiting market and credit risk. We currently use a registered investment manager
to place our investments in highly liquid money market accounts and government-backed securities.
All highly liquid investments with original maturities of three months or less are considered to be
cash equivalents. Interest income is sensitive to changes in the general level of U.S. interest
rates. Based on the short-term nature of our investments, we have concluded that there is no
significant market risk exposure.
FOREIGN CURRENCY RISK
21
Due to our multi-national operations, our business is subject to fluctuations based upon changes in
the exchange rates between the currencies in which we collect revenues or pay expenses and the U.S.
dollar. Our expenses are not necessarily incurred in the currency in which revenue is generated,
and, as a result, we are required from time to time to convert currencies to meet our obligations.
These currency conversions are subject to exchange rate fluctuations, in particular changes to the
value of the euro, Canadian dollar, Australian dollar, New Zealand dollar, Singapore dollar, and
pound sterling relative to the U.S. dollar, which could adversely affect our business and the
results of operations. During the three months ended April 30, 2006 and 2005, we incurred foreign
currency exchange losses of $30,000 and $165,000, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures as of April 30, 2006. The
term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the Exchange Act), means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the companys management, including its principal executive
and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Our management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of our disclosure controls and procedures as of April 30,
2006, our chief executive officer and chief financial officer concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance level.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended April 30, 2006 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
On November 18, 2004, Jody Glidden, Michael LeBlanc and Trish Glidden filed a lawsuit against us,
David C. Drummond, Gregory M. Priest, Patrick E. Murphy and Jack Hayes in the United States
District Court for the Northern District of California. The plaintiffs subsequently dismissed
Patrick E. Murphy and Jack Hayes from the lawsuit. The court subsequently dismissed Trish
Gliddens claims. The plaintiffs had previously opted out of the class action settlement that
received final approval from the court on September 29, 2004. The lawsuit set forth substantially
the same claims as were alleged in the class action litigation. In particular, the lawsuit alleged
that we misrepresented or omitted to state material facts in our SEC filings and press releases
regarding our revenues and earnings and failed to correct such false and misleading SEC filings and
press releases, which were alleged to have artificially inflated the price of the our ADSs in
connection with our acquisition of IC Global in early 2001. The lawsuit sought compensatory damages
in excess of $3.7 million and other unspecified damages, including punitive damages. The parties
settled the lawsuit on April 7, 2006. Pursuant to the settlement, we paid approximately $1.8
million to the plaintiffs on April 13, 2006. The Court entered the Dismissal with Prejudice of the
action on April 13, 2006.
See Part I Item 3 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2006 for
a discussion of legal proceedings for which there were no material developments during the quarter
ended April 30, 2006.
ITEM 1A. RISK FACTORS
Investors should carefully consider the risks described below before making an investment decision
with respect to shares of the Company.
While the following risk factors have been updated to reflect developments subsequent to the filing
of our Annual Report on Form 10-K for the fiscal year ended January 31, 2006, there have been no
material changes to the risk factors included in that report.
RISKS RELATED TO LEGAL PROCEEDINGS
22
IN CONNECTION WITH OUR RESTATEMENT OF THE HISTORICAL FINANCIAL STATEMENTS OF SMARTFORCE, CLASS
ACTION LAWSUITS HAVE BEEN FILED AGAINST US AND ADDITIONAL LAWSUITS MAY BE FILED, AND WE ARE THE
SUBJECT OF A FORMAL ORDER OF PRIVATE INVESTIGATION ENTERED BY THE SEC.
While preparing the closing balance sheet of SmartForce as at September 6, 2002, the date on which
we closed our merger with SkillSoft Corporation (the Merger), certain accounting matters were
identified relating to the historical financial statements of SmartForce (which, following the
Merger, are no longer our historical financial statements). On November 19, 2002, we announced our
intent to restate the SmartForce financial statements for 1999, 2000, 2001 and the first two
quarters of 2002. We have settled several class action lawsuits that were filed following the
announcement of the restatement.
We are the subject of a formal order of private investigation entered by the SEC. We may incur
substantial costs in connection with the SEC investigation, which could cause a diversion of
management time and attention. In addition, we could be subject to substantial penalties, fines or
regulatory sanctions or claims by our former officers, directors or employees for indemnification
of costs they may incur in connection with the SEC investigation, which could adversely affect our
business and operating results.
On June 2, 2005, the Boston District Office of the SEC informed us that it had made a preliminary
determination to recommend that the SEC bring a civil injunctive action against us. Under the SECs
rules, we are permitted to make a so-called Wells Submission in which we seek to persuade the SEC
that no such action should be commenced. In the event we are unable to resolve the SECs potential
claims by agreement, we intend to make such a submission. We continue to cooperate with the SEC in
this matter. At the present time we are unable to predict the outcome of this action and as such
have not determined what, if any, impact it may have on our financial statements.
CLAIMS THAT WE INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS COULD RESULT IN COSTLY
LITIGATION OR ROYALTY PAYMENTS TO THIRD PARTIES, OR REQUIRE US TO REENGINEER OR CEASE SALES OF OUR
PRODUCTS OR SERVICES.
Third parties have in the past and could in the future claim that our current or future products
infringe their intellectual property rights. Any claim, with or without merit, could result in
costly litigation or require us to reengineer or cease sales of our products or services, any of
which could have a material adverse effect on our business. Infringement claims could also result
in an injunction in the use of our products or require us to enter into royalty or licensing
agreements. Licensing agreements, if required, may not be available on terms acceptable to the
combined company or at all.
From time to time we learn of parties that claim broad intellectual property rights in the
e-learning area that might implicate our offerings. These parties or others could initiate actions
against us in the future.
WE COULD INCUR SUBSTANTIAL COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS RELATING TO OUR CUSTOMERS
USE OF OUR PRODUCTS AND SERVICES.
Many of the business interactions supported by our products and services are critical to our
customers businesses. Any failure in a customers business interaction or other collaborative
activity caused or allegedly caused in the future by our products and services could result in a
claim for substantial damages against us, regardless of our responsibility for the failure.
Although we maintain general liability insurance, including coverage for errors and omissions,
there can be no assurance that existing coverage will continue to be available on reasonable terms
or will be available in amounts sufficient to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim.
WE COULD BE SUBJECTED TO LEGAL ACTIONS BASED UPON THE CONTENT WE OBTAIN FROM THIRD PARTIES OVER
WHOM WE EXERT LIMITED CONTROL.
It is possible that we could become subject to legal actions based upon claims that our course
content infringes the rights of others or is erroneous. Any such claims, with or without merit,
could subject us to costly litigation and the diversion of our financial resources and management
personnel. The risk of such claims is exacerbated by the fact that our course content is provided
by third parties over whom we exert limited control. Further, if those claims are successful, we
may be required to alter the content, pay financial damages or obtain content from others.
RISKS RELATED TO THE OPERATION OF OUR BUSINESS
23
SOME OF OUR INTERNATIONAL SUBSIDIARIES HAVE NOT COMPLIED WITH REGULATORY REQUIREMENTS RELATING TO
THEIR FINANCIAL STATEMENTS AND TAX RETURNS.
We operate our business in various foreign countries through subsidiaries organized in those
countries. Due to our restatement of the historical SmartForce financial statements, some of our
subsidiaries have not filed their audited statutory financial statements and have been delayed in
filing their tax returns in their respective jurisdictions. As a result, some of these foreign
subsidiaries may be subject to regulatory restrictions, penalties and fines and additional taxes.
WE HAVE EXPERIENCED NET LOSSES IN THE PAST, AND WE MAY BE UNABLE TO MAINTAIN PROFITABILITY.
We recorded a net loss of $113.3 million for the fiscal year ended January 31, 2004, $20.1 million
for the fiscal year ended January 31, 2005 and net income of $35.2 million for the fiscal year
ended January 31, 2006. While we achieved profitability in the fiscal year ending January 31, 2006
and the first quarter of fiscal 2007, we cannot guarantee that our business will sustain
profitability in any future period.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. THIS LIMITS YOUR ABILITY TO EVALUATE
HISTORICAL FINANCIAL RESULTS AND INCREASES THE LIKELIHOOD THAT OUR RESULTS WILL FALL BELOW MARKET
ANALYSTS EXPECTATIONS, WHICH COULD CAUSE THE PRICE OF OUR ADSs TO DROP RAPIDLY AND SEVERELY.
We have in the past experienced fluctuations in our quarterly operating results, and we anticipate
that these fluctuations will continue. As a result, we believe that our quarterly revenue, expenses
and operating results are likely to vary significantly in the future. If in some future quarters
our results of operations are below the expectations of public market analysts and investors, this
could have a severe adverse effect on the market price of our ADSs.
Our operating results have historically fluctuated, and our operating results may in the future
continue to fluctuate, as a result of factors, which include (without limitation):
|
|
the size and timing of new/renewal agreements and upgrades; |
|
|
|
royalty rates; |
|
|
|
the announcement, introduction and acceptance of new products, product enhancements and technologies by us and our
competitors; |
|
|
|
the mix of sales between our field sales force, our other direct sales channels and our telesales channels; |
|
|
|
general conditions in the U.S. or the international economy; |
|
|
|
the loss of significant customers; |
|
|
|
delays in availability of new products; |
|
|
|
product or service quality problems; |
|
|
|
seasonality due to the budget and purchasing cycles of our customers, we expect our revenue and operating results will
generally be strongest in the second half of our fiscal year and weakest in the first half of our fiscal year; |
|
|
|
the spending patterns of our customers; |
|
|
|
litigation costs and expenses, including the costs related to the restatement of the SmartForce financial statements; |
|
|
|
non-recurring charges related to acquisitions; |
|
|
|
growing competition that may result in price reductions; and |
24
Most of our expenses, such as rent and most employee compensation, do not vary directly with
revenue and are difficult to adjust in the short-term. As a result, if revenue for a particular
quarter is below our expectations, we could not proportionately reduce operating expenses for that
quarter. Any such revenue shortfall would, therefore, have a disproportionate effect on our
expected operating results for that quarter.
DEMAND FOR OUR PRODUCTS AND SERVICES MAY BE ESPECIALLY SUSCEPTIBLE TO ADVERSE ECONOMIC CONDITIONS.
Our business and financial performance may be damaged by adverse financial conditions affecting our
target customers or by a general weakening of the economy. Companies may not view training products
and services as critical to the success of their businesses. If these companies experience
disappointing operating results, whether as a result of adverse economic conditions, competitive
issues or other factors, they may decrease or forego education and training expenditures before
limiting their other expenditures or in conjunction with lowering other expenses.
INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES, WHICH MAY
RESULT IN REDUCED REVENUES AND GROSS PROFITS AND LOSS OF MARKET SHARE.
The market for corporate education and training solutions is highly fragmented and competitive. We
expect the market to become increasingly competitive due to the lack of significant barriers to
entry. In addition to increased competition from new companies entering into the market,
established companies are entering into the market through acquisitions of smaller companies, which
directly compete with us, and this trend is expected to continue. We may also face competition from
publishing companies, vendors of application software and HR outsourcers, including those vendors
with whom we have formed development and marketing alliances.
Our primary sources of direct competition are:
|
|
third-party suppliers of instructor-led information technology, business, management and professional skills education and
training; |
|
|
|
technology companies that offer e-learning courses covering their own technology products; |
|
|
|
suppliers of computer-based training and e-learning solutions; |
|
|
|
internal education, training departments and HR outsourcers of potential customers; and |
|
|
|
value-added resellers and network integrators. |
Growing competition may result in price reductions, reduced revenue and gross profits and loss of
market share, any one of which would have a material adverse effect on our business. Many of our
current and potential competitors have substantially greater financial, technical, sales, marketing
and other resources, as well as greater name recognition, and we expect to face increasing price
pressures from competitors as managers demand more value for their training budgets. Accordingly,
we may be unable to provide e-learning solutions that compare favorably with new instructor-led
techniques, other interactive training software or new e-learning solutions.
WE RELY ON A LIMITED NUMBER OF THIRD PARTIES TO PROVIDE US WITH EDUCATIONAL CONTENT FOR OUR COURSES
AND REFERENCEWARE, AND OUR ALLIANCES WITH THESE THIRD PARTIES MAY BE TERMINATED OR FAIL TO MEET OUR
REQUIREMENTS.
We rely on a limited number of independent third parties to provide us with the educational content
for a majority of our courses based on learning objectives and specific instructional design
templates that we provide to them. We do not have exclusive arrangements or long-term contracts
with any of these content providers. If one or more of our third party content providers were to
stop working with us, we would have to rely on other parties to develop our course content. In
addition, these providers may fail to develop new courses or existing courses on a timely basis. We
cannot predict whether new content or enhancements would be available from reliable alternative
sources on reasonable terms. In addition, our subsidiary, Books 24x7.com (Books) relies on third
25
party publishers to provide all of the content incorporated into its Referenceware products. If one
or more of these publishers were to terminate their license with us, we may not be able to find
substitute publishers for such content. In addition, we may be forced to pay increased royalties to
these publishers to continue our licenses with them.
In the event that we are unable to maintain or expand our current development alliances or enter
into new development alliances, our operating results and financial condition could be materially
adversely affected. Furthermore, we will be required to pay royalties to some of our development
partners on products developed with them, which could reduce our gross margins. We expect that cost
of revenues may fluctuate from period to period in the future based upon many factors, including
the revenue mix and the timing of expenses associated with development alliances. In addition, the
collaborative nature of the development process under these alliances may result in longer
development times and less control over the timing of product introductions than for e-learning
offerings developed solely by us. Our strategic alliance partners may from time to time renegotiate
the terms of their agreements with us, which could result in changes to the royalty or other
arrangements, adversely affecting our results of operations.
The independent third party strategic partners we rely on for educational content and product
marketing may compete with us, harming our results of operations. Our agreements with these third
parties generally do not restrict them from developing courses on similar topics for our
competitors or from competing directly with us. As a result, our competitors may be able to
duplicate some of our course content and gain a competitive advantage.
OUR SUCCESS DEPENDS ON OUR ABILITY TO MEET THE NEEDS OF THE RAPIDLY CHANGING MARKET.
The market for education and training software is characterized by rapidly changing technology,
evolving industry standards, changes in customer requirements and preferences and frequent
introductions of new products and services embodying new technologies. New methods of providing
interactive education in a technology-based format are being developed and offered in the
marketplace, including intranet and Internet offerings. In addition, multimedia and other product
functionality features are being added to educational software. Our future success will depend upon
the extent to which we are able to develop and implement products which address these emerging
market requirements in a cost effective and timely basis. Product development is risky because it
is difficult to foresee developments in technology, coordinate technical personnel and identify and
eliminate design flaws. Any significant delay in releasing new products could have a material
adverse effect on the ultimate success of our products and could reduce sales of predecessor
products. We may not be successful in introducing new products on a timely basis. In addition, new
products introduced by us may fail to achieve a significant degree of market acceptance or, once
accepted, may fail to sustain viability in the market for any significant period. If we are
unsuccessful in addressing the changing needs of the marketplace due to resource, technological or
other constraints, or in anticipating and responding adequately to changes in customers software
technology and preferences, our business and results of operations would be materially adversely
affected. We, along with the rest of the industry, face a challenging and competitive market for IT
spending that has resulted in reduced contract value for our formal learning product lines. This
pricing pressure is having a negative impact on revenue for these product lines and may have a
continued or increased adverse impact in the future.
THE E-LEARNING MARKET IS A DEVELOPING MARKET, AND OUR BUSINESS WILL SUFFER IF E-LEARNING IS NOT
WIDELY ACCEPTED.
The market for e-learning is a new and emerging market. Corporate training and education have
historically been conducted primarily through classroom instruction and have traditionally been
performed by a companys internal personnel. Many companies have invested heavily in their current
training solutions. Although technology-based training applications have been available for several
years, they currently account for only a small portion of the overall training market.
Accordingly, our future success will depend upon the extent to which companies adopt
technology-based solutions for their training activities, and the extent to which companies utilize
the services or purchase products of third-party providers. Many companies that have already
invested substantial resources in traditional methods of corporate training may be reluctant to
adopt a new strategy that may compete with their existing investments. Even if companies implement
technology-based training or e-learning solutions, they may still choose to design, develop,
deliver or manage all or part of their education and training internally. If technology-based
learning does not become widespread, or if companies do not use the products and services of third
parties to develop, deliver or manage their training needs, then our products and service may not
achieve commercial success.
NEW PRODUCTS INTRODUCED BY US MAY NOT BE SUCCESSFUL.
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An important part of our growth strategy is the development and introduction of new products that
open up new revenue streams for us. Despite our efforts, we cannot assure you that we will be
successful in developing and introducing new products, or that any new products we do introduce
will meet with commercial acceptance. The failure to successfully introduce new products will not
only hamper our growth prospects but may also adversely impact our net income due to the
development and marketing expenses associated with those new products.
POTENTIAL FUTURE ACQUISITIONS MAY NOT PRODUCE THE BENEFITS WE ANTICIPATE AND COULD HARM OUR CURRENT
OPERATIONS.
One aspect of our business strategy is to pursue acquisitions of businesses or technologies that
will contribute to our future growth. However, we may not be successful in identifying or
consummating attractive acquisition opportunities. Moreover, any acquisitions we do consummate may
not produce benefits commensurate with the purchase price we pay or our expectations for the
acquisition. In addition, acquisitions involve numerous risks, including:
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difficulties in integrating the technologies, operations, financial controls and personnel of the acquired company; |
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difficulties in transitioning customers of the acquired company; |
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diversion of management time and focus; |
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the incurrence of unanticipated expenses associated with the acquisition or the assumption of unknown liabilities or
unanticipated problems of the acquired company; and |
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accounting charges related to the acquisition, including restructuring charges, write-offs of in-process research and
development costs, and subsequent impairment charges relating to goodwill or other intangible assets acquired in the
transaction. |
THE SUCCESS OF OUR E-LEARNING STRATEGY DEPENDS ON THE RELIABILITY AND CONSISTENT PERFORMANCE OF OUR
INFORMATION SYSTEMS AND INTERNET INFRASTRUCTURE.
The success of our e-learning strategy is highly dependent on the consistent performance of our
information systems and Internet infrastructure. If our Web site fails for any reason or if it
experiences any unscheduled downtimes, even for only a short period, our business and reputation
could be materially harmed. We have in the past experienced performance problems and unscheduled
downtime, and these problems could recur. We currently rely on third parties for proper functioning
of computer infrastructure, delivery of our e-learning applications and the performance of our
destination site. Our systems and operations could be damaged or interrupted by fire, flood, power
loss, telecommunications failure, break-ins, earthquake, financial patterns of hosting providers
and similar events. Any system failures could adversely affect customer usage of our solutions and
user traffic results in any future quarters, which could adversely affect our revenues and
operating results and harm our reputation with corporate customers, subscribers and commerce
partners. Accordingly, the satisfactory performance, reliability and availability of our Web site
and computer infrastructure is critical to our reputation and ability to attract and retain
corporate customers, subscribers and commerce partners. We cannot accurately project the rate or
timing of any increases in traffic to our Web site and, therefore, the integration and timing of
any upgrades or enhancements required to facilitate any significant traffic increase to the Web
site are uncertain. We have in the past experienced difficulties in upgrading our Web site
infrastructure to handle increased traffic, and these difficulties could recur. The failure to
expand and upgrade our Web site or any system error, failure or extended down time could materially
harm our business, reputation, financial condition or results of operations.
BECAUSE MANY USERS OF OUR E-LEARNING SOLUTIONS WILL ACCESS THEM OVER THE INTERNET, FACTORS
ADVERSELY AFFECTING THE USE OF THE INTERNET OR OUR CUSTOMERS NETWORKING INFRASTRUCTURES COULD HARM
OUR BUSINESS.
Many of our customers users access our e-learning solutions over the Internet or through our
customers internal networks. Any factors that adversely affect Internet usage could disrupt the
ability of those users to access our e-learning solutions, which would adversely affect customer
satisfaction and therefore our business.
For example, our ability to increase the effectiveness and scope of our services to customers is
ultimately limited by the speed and reliability of both the Internet and our customers internal
networks. Consequently, the emergence and growth of the market for our
27
products and services depends upon the improvements being made to the entire Internet as well as to
our individual customers networking infrastructures to alleviate overloading and congestion. If
these improvements are not made, and the quality of networks degrades, the ability of our customers
to use our products and services will be hindered and our revenues may suffer.
Additionally, a requirement for the continued growth of accessing e-learning solutions over the
Internet is the secure transmission of confidential information over public networks. Failure to
prevent security breaches into our products or our customers networks, or well-publicized security
breaches affecting the Internet in general could significantly harm our growth and revenue.
Advances in computer capabilities, new discoveries in the field of cryptography or other
developments may result in a compromise of technology we use to protect content and transactions,
our products or our customers proprietary information in our databases. Anyone who is able to
circumvent our security measures could misappropriate proprietary and confidential information or
could cause interruptions in our operations. We may be required to expend significant capital and
other resources to protect against such security breaches or to address problems caused by security
breaches. The privacy of users may also deter people from using the Internet to conduct
transactions that involve transmitting confidential information.
OUR RESTRUCTURING PLANS MAY BE INEFFECTIVE OR MAY LIMIT OUR ABILITY TO COMPETE.
In the fiscal year ended January 31, 2005 we recorded approximately $13.4 million of restructuring
charges related to the reorganization of our content development organization as well as the shut
down of our German facility. There are several risks inherent in these efforts to transition to a
new cost structure. These include the risk that we will not be successful in maintaining
profitability, and hence we may have to undertake further restructuring initiatives that would
entail additional charges and create additional risks. In addition, there is the risk that
cost-cutting initiatives will impair our ability to effectively develop and market products and
remain competitive. Each of the above measures could have long-term effects on our business by
reducing our pool of talent, decreasing or slowing improvements in our products, making it more
difficult for us to respond to customers, limiting our ability to increase production quickly if
and when the demand for our products increases and limiting our ability to hire and retain key
personnel. These circumstances could cause our earnings to be lower than they otherwise might be.
WE DEPEND ON A FEW KEY PERSONNEL TO MANAGE AND OPERATE THE BUSINESS AND MUST BE ABLE TO ATTRACT AND
RETAIN HIGHLY QUALIFIED EMPLOYEES.
Our success is largely dependent on the personal efforts and abilities of our senior management.
Failure to retain these executives, or the loss of certain additional senior management personnel
or other key employees, could have a material adverse effect on our business and future prospects.
We are also dependent on the continued service of our key sales, content development and
operational personnel and on our ability to attract, train, motivate and retain highly qualified
employees. In addition, we depend on writers, programmers, Web designers and graphic artists. We
may be unsuccessful in attracting, training, retaining or motivating key personnel. In particular,
the negative consequences (including litigation) of having to restate SmartForces historical
financial statements, uncertainties surrounding the Merger, and our recent adverse operating
results and stock price performance could create uncertainties that materially and adversely affect
our ability to attract and retain key personnel. The inability to hire, train and retain qualified
personnel or the loss of the services of key personnel could have a material adverse effect upon
our business, new product development efforts and future business prospects.
CHANGES IN ACCOUNTING STANDARDS REGARDING STOCK OPTION PLANS COULD LIMIT THE DESIRABILITY OF
GRANTING STOCK OPTIONS, WHICH COULD HARM OUR ABILITY TO ATTRACT AND RETAIN EMPLOYEES, AND COULD
ALSO REDUCE OUR PROFITABILITY.
The Financial Accounting Standards Board has determined to require all companies to treat the value
of stock options granted to employees as an expense commencing in our first quarter of fiscal 2007.
The Company adopted this accounting in the quarter ended April 30, 2006 and recorded $1.5 million
of stock-based compensation expense. This change requires companies to record a compensation
expense equal to the value of each stock option granted. This expense will be spread over the
vesting period of the stock option. Due to the fact that we will be required to expense stock
option grants, it could reduce the attractiveness of granting stock options because the additional
expense associated with these grants would reduce our profitability. However, stock options are an
important employee recruitment and retention tool, and we may not be able to attract and retain key
personnel if we reduce the scope of our employee stock option program. Accordingly, either our
profitability, or our ability to use stock options as an employee recruitment and retention tool
would be adversely impacted.
OUR BUSINESS IS SUBJECT TO CURRENCY FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
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Due to our multinational operations, our operating results are subject to fluctuations based upon
changes in the exchange rates between the currencies in which revenues are collected or expenses
are paid. In particular, the value of the U.S. dollar against the euro and related currencies will
impact our operating results. Our expenses will not necessarily be incurred in the currency in
which revenue is generated, and, as a result, we will be required from time to time to convert
currencies to meet our obligations. These currency conversions are subject to exchange rate
fluctuations, and changes to the value of the euro, pound sterling and other currencies relative to
the U.S. dollar could adversely affect our business and results of operations.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS. UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY
MAY RESULT IN DEVELOPMENT OF PRODUCTS OR SERVICES THAT COMPETE WITH OURS.
Our success depends to a degree upon the protection of our rights in intellectual property. We rely
upon a combination of patent, copyright, and trademark laws to protect our proprietary rights. We
have also entered into, and will continue to enter into, confidentiality agreements with our
employees, consultants and third parties to seek to limit and protect the distribution of
confidential information. However, we have not signed protective agreements in every case.
Although we have taken steps to protect our proprietary rights, these steps may be inadequate.
Existing patent, copyright, and trademark laws offer only limited protection. Moreover, the laws of
other countries in which we market our products may afford little or no effective protection of our
intellectual property. Additionally, unauthorized parties may copy aspects of our products,
services or technology or obtain and use information that we regard as proprietary. Other parties
may also breach protective contracts we have executed or will in the future execute. We may not
become aware of, or have adequate remedies in the event of, a breach. Litigation may be necessary
in the future to enforce or to determine the validity and scope of our intellectual property rights
or to determine the validity and scope of the proprietary rights of others. Even if we were to
prevail, such litigation could result in substantial costs and diversion of management and
technical resources.
OUR NON-U.S. OPERATIONS ARE SUBJECT TO RISKS WHICH COULD NEGATIVELY IMPACT OUR FUTURE OPERATING
RESULTS.
We expect that international operations will continue to account for a significant portion of our
revenues. Operations outside of the United States are subject to inherent risks, including:
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difficulties or delays in developing and supporting non-English language versions of our products and services; |
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political and economic conditions in various jurisdictions; |
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difficulties in staffing and managing foreign subsidiary operations; |
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longer sales cycles and account receivable payment cycles; |
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multiple, conflicting and changing governmental laws and regulations; |
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foreign currency exchange rate fluctuations; |
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protectionist laws and business practices that may favor local competitors; |
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difficulties in finding and managing local resellers; |
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potential adverse tax consequences; and |
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the absence or significant lack of legal protection for intellectual property rights. |
Any of these factors could have a material adverse effect on our future operations outside of the
United States, which could negatively impact our future operating results.
THE MARKET PRICE OF OUR ADSs MAY FLUCTUATE AND MAY NOT BE SUSTAINABLE.
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The market price of our ADSs has fluctuated significantly since our initial public offering and is
likely to continue to be volatile. In addition, in recent years the stock market in general, and
the market for shares of technology stocks in particular, have experienced extreme price and volume
fluctuations, which have often been unrelated to the operating performance of affected companies.
The market price of our ADSs may continue to experience significant fluctuations in the future,
including fluctuations that are unrelated to our performance. As a result of these fluctuations in
the price of our ADSs, it is difficult to predict what the price of our ADSs will be at any point
in the future, and you may not be able to sell your ADSs at or above the price that you paid for
them.
OUR SALES CYCLE MAY MAKE IT DIFFICULT TO PREDICT OUR OPERATING RESULTS.
The period between our initial contact with a potential customer and the purchase of our products
by that customer typically ranges from three to twelve months or more. Factors that contribute to
our long sales cycle, include:
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our need to educate potential customers about the benefits of our products; |
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competitive evaluations by customers; |
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the customers internal budgeting and approval processes; |
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the fact that many customers view training products as discretionary spending, rather than purchases essential to their
business; and |
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the fact that we target large companies, which often take longer to make purchasing decisions due to the size and
complexity of the enterprise. |
These long sales cycles make it difficult to predict the quarter in which sales may occur. Delays
in sales could cause significant variability in our revenues and operating results for any
particular period.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS CONTAIN ERRORS.
Software products as complex as ours contain known and undetected errors or bugs that result in
product failures. The existence of bugs could result in loss of or delay in revenues, loss of
market share, diversion of product development resources, injury to reputation or damage to efforts
to build brand awareness, any of which could have a material adverse effect on our business,
operating results and financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held an extraordinary general meeting of shareholders (the EGM) on March 23, 2006. Under the
terms of the deposit agreement, The Bank of New York is entitled to vote or cause to be voted on
behalf of, and in accordance with the instructions received from, the ADS holders. Two individual
shareholders and the Chairman, as proxy for BNY (Nominees) Limited, the custodian for the ordinary
shares representing the ADSs, were present for the vote along with the auditor and a legal
representative. Voting was conducted on a show of hands in accordance with Irish law. There were no
abstentions, broker non-votes or votes withheld with respect to any matter submitted to a vote of
the ordinary shareholders at the EGM.
The following is a brief description of each matter submitted to a vote of the ordinary
shareholders and a summary of the votes tabulated with respect to each such matter at the EGM, as
well as a summary of the votes cast by The Bank of New York based on the ADR facility:
(1) Approval of a remuneration package for non-executive directors for their ordinary
non-executive services as directors.
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Votes FOR |
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AGAINST |
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ABSTAIN |
Ordinary Shareholders |
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3 |
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0 |
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0 |
ADS Holders |
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106,478,661 |
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845,887 |
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88,077 |
(2) Approval of the renewal and extension of the current share purchase program to allow us
and/or certain of our subsidiaries to purchase our shares out of profits available for
distribution.
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Votes FOR |
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AGAINST |
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ABSTAIN |
Ordinary Shareholders |
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3 |
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0 |
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0 |
ADS Holders |
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107,245,6775 |
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92,745 |
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74,205 |
(3) Approval of an amendment to our 2002 share option plan to increase the total number of
shares reserved for issuance thereunder by 5,100,000 ordinary shares of 0.11 each (to 7,450,000
ordinary shares of 0.11 each) to be effected through a reallocation of shares currently available
for grant under other existing SkillSoft share option plans, resulting in amendments to the other
plans to reduce the shares issuable thereunder by an aggregate of 5,100,000 ordinary shares.
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Votes FOR |
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AGAINST |
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ABSTAIN |
Ordinary Shareholders |
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3 |
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0 |
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0 |
ADS Holders |
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86,737,448 |
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20,582,032 |
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93,145 |
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
See the Exhibit Index attached hereto.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SKILLSOFT PUBLIC LIMITED COMPANY
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Date: June 9, 2006 |
By: |
/s/ Thomas J. McDonald
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Thomas J. McDonald |
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Chief Financial Officer |
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EXHIBIT INDEX
10.1 |
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Summary of Fiscal 2007 Executive Incentive Compensation Program (Incorporated by reference to
Exhibit 99.1 to SkillSoft PLCs Current Report on Form 8-K as filed with the Securities and
Exchange Commission on April 28, 2006 (File No. 000-25674)). |
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31.1 |
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Certification of SkillSoft PLCs Chief Executive Officer pursuant to Rule 13a-14(a)/Rule
15(d)-14(a) under the Securities Exchange Act of 1934. |
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31.2 |
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Certification of SkillSoft PLCs Chief Financial Officer pursuant to Rule 13a-14(a)/Rule
15(d)-14(a) under the Securities Exchange Act of 1934. |
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32.1 |
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Certification of SkillSoft PLCs Chief Executive Officer pursuant to Rule 13a-14(b)/Rule
15d-14(b) under the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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32.2 |
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Certification of SkillSoft PLCs Chief Financial Officer pursuant to Rule 13a-14(b)/Rule
15d-14(b) under the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
33