e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
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þ |
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2007
OR
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o |
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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
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
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N/A
(I.R.S. EMPLOYER
IDENTIFICATION NO.) |
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107 NORTHEASTERN BOULEVARD |
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NASHUA, NEW HAMPSHIRE
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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03062
(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 August 31, 2007, the registrant had outstanding 111,245,599 Ordinary Shares (issued or issuable
in exchange for the registrants outstanding American Depository Shares).
SKILLSOFT PLC
FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 2007
INDEX
2
PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SKILLSOFT PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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JULY 31, |
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JANUARY 31, |
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2007 |
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2007 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
35,550 |
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$ |
48,612 |
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Short-term investments |
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22,042 |
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55,505 |
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Restricted cash |
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4,009 |
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20,095 |
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Accounts receivable, net |
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86,250 |
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94,343 |
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Assets held for sale |
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8,007 |
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Prepaid expenses and other current assets |
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21,749 |
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22,215 |
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Total current assets |
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177,607 |
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240,770 |
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Property and equipment, net |
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9,038 |
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9,672 |
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Intangible assets, net |
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40,285 |
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2,638 |
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Goodwill |
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304,007 |
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83,171 |
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Long-term investments |
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3,598 |
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Deferred tax assets, net |
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56,183 |
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159 |
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Other assets |
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6,069 |
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2,962 |
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Total assets |
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$ |
593,189 |
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$ |
342,970 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
3,553 |
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$ |
3,327 |
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Accrued compensation |
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21,201 |
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17,870 |
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Accrued expenses |
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51,459 |
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35,427 |
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Current maturities of long-term debt |
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2,000 |
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Liabilities of asset groups held for sale |
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1,838 |
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Deferred revenue |
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143,720 |
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146,012 |
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Total current liabilities |
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223,771 |
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202,636 |
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Long term debt |
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198,000 |
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Other long term liabilities |
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2,507 |
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2,405 |
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Total long term liabilities |
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200,507 |
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2,405 |
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Commitments and contingencies (Note 12) |
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Shareholders equity: |
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Ordinary shares, Euro 0.11 par value: 250,000,000
shares authorized; 111,207,193 and 109,255,366
shares issued at July 31, 2007 and January 31,
2007, respectively |
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12,326 |
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12,039 |
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Additional paid-in capital |
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584,947 |
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573,394 |
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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 |
) |
Accumulated deficit |
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(401,784 |
) |
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(421,661 |
) |
Accumulated other comprehensive loss |
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(2,054 |
) |
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(1,319 |
) |
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Total shareholders equity |
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168,911 |
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137,929 |
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Total liabilities and shareholders equity |
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$ |
593,189 |
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$ |
342,970 |
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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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SIX MONTHS ENDED |
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July 31, |
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July 31, |
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2007 |
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2006 |
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2007 |
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2006 |
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Revenue |
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$ |
71,469 |
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$ |
55,734 |
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$ |
128,609 |
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$ |
110,387 |
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Cost of revenue amortization of intangible
assets |
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1,744 |
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1,732 |
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1,942 |
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3,463 |
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Cost of revenue (1) |
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8,718 |
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6,665 |
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15,546 |
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13,116 |
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Gross profit |
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61,007 |
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47,337 |
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111,121 |
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93,808 |
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Operating expenses: |
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Research and development (1) |
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11,364 |
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9,901 |
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21,605 |
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19,866 |
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Selling and marketing (1) |
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23,714 |
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23,136 |
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46,262 |
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46,392 |
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General and administrative (1) |
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8,998 |
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6,846 |
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16,126 |
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14,127 |
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Amortization of intangible assets |
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3,741 |
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|
411 |
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4,320 |
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|
828 |
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Merger and integration related expenses |
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8,493 |
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8,528 |
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Restatement SEC investigations |
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351 |
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69 |
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1,223 |
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321 |
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Total operating expenses |
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56,661 |
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40,363 |
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98,064 |
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81,534 |
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Operating income |
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4,346 |
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6,974 |
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13,057 |
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|
12,274 |
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Other
expense, net |
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(251 |
) |
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(41 |
) |
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(383 |
) |
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(31 |
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Interest income |
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|
728 |
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|
1,069 |
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|
2,336 |
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|
1,874 |
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Interest expense |
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(3,762 |
) |
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(70 |
) |
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(3,814 |
) |
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(136 |
) |
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Income before (benefit) / provision for income taxes from
continuing operations |
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1,061 |
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|
7,932 |
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11,196 |
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13,981 |
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(Benefit) / provision for income taxes |
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(10,803 |
) |
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3,107 |
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(8,157 |
) |
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5,103 |
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Income from continuing operations |
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11,864 |
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|
4,825 |
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19,353 |
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|
8,878 |
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|
|
|
|
|
|
|
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Income from operations of businesses to be
disposed, net of income tax of $387 |
|
|
524 |
|
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|
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524 |
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Net income |
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$ |
12,388 |
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$ |
4,825 |
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$ |
19,877 |
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$ |
8,878 |
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Net income per share (Note 10): |
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Basic continuing operations |
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$ |
0.11 |
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$ |
0.05 |
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$ |
0.19 |
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$ |
0.09 |
|
Basic discontinued operations |
|
$ |
0.01 |
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$ |
|
|
|
$ |
0.01 |
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|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.12 |
|
|
$ |
0.05 |
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|
$ |
0.19 |
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|
$ |
0.09 |
|
|
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|
|
|
|
|
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|
Basic weighted average shares outstanding |
|
|
104,400,895 |
|
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|
101,524,912 |
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103,848,299 |
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101,285,185 |
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|
|
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Diluted continuing operations |
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$ |
0.11 |
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|
$ |
0.05 |
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$ |
0.18 |
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|
$ |
0.09 |
|
Diluted discontinued operations |
|
$ |
0.00 |
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|
$ |
|
|
|
$ |
0.00 |
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|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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$ |
0.11 |
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|
$ |
0.05 |
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|
$ |
0.18 |
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$ |
0.09 |
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|
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|
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|
|
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Diluted weighted average shares outstanding |
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108,423,593 |
|
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|
104,050,160 |
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|
107,739,609 |
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|
103,460,319 |
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(1) |
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Share-based compensation included in cost of revenue and operating expenses: |
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THREE MONTHS ENDED |
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SIX MONTHS ENDED |
|
|
July 31, |
|
July 31, |
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2007 |
|
2006 |
|
2007 |
|
2006 |
Cost of revenue |
|
$ |
48 |
|
|
$ |
11 |
|
|
$ |
65 |
|
|
$ |
17 |
|
Research and development |
|
|
225 |
|
|
|
284 |
|
|
|
433 |
|
|
|
667 |
|
Selling and marketing |
|
|
369 |
|
|
|
608 |
|
|
|
867 |
|
|
|
1,377 |
|
General and administrative |
|
|
631 |
|
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|
630 |
|
|
|
1,264 |
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|
1,253 |
|
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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SIX MONTHS ENDED |
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JULY 31, |
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2007 |
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|
2006 |
|
Cash flows from operating activities from continuing operations: |
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Net income, continuing operations |
|
$ |
19,353 |
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|
$ |
8,878 |
|
Adjustments to reconcile net income from continuing operations to net cash
provided by operating activities: |
|
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|
|
|
|
|
|
Share-based compensation |
|
|
2,629 |
|
|
|
3,314 |
|
Depreciation and amortization |
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|
4,009 |
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|
|
3,032 |
|
Amortization of intangible assets |
|
|
6,262 |
|
|
|
4,291 |
|
Provision for/(recovery of) bad debts |
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|
54 |
|
|
|
(363 |
) |
Non-cash interest expense |
|
|
226 |
|
|
|
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|
(Benefit)/provision for income tax non-cash |
|
|
(9,164 |
) |
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|
4,446 |
|
Changes in current assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
41,818 |
|
|
|
38,802 |
|
Prepaid expenses and other current assets |
|
|
4,942 |
|
|
|
5,867 |
|
Accounts payable |
|
|
(50 |
) |
|
|
(1,150 |
) |
Accrued expenses, including long-term liabilities |
|
|
(29,610 |
) |
|
|
(12,642 |
) |
Deferred revenue |
|
|
(30,463 |
) |
|
|
(28,156 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities from continuing operations |
|
|
10,006 |
|
|
|
26,319 |
|
Cash flows from investing activities from continuing operations: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(1,888 |
) |
|
|
(2,855 |
) |
Cash used in purchase of businesses, net of cash acquired |
|
|
(278,923 |
) |
|
|
|
|
Purchases of investments |
|
|
(1,000 |
) |
|
|
(53,484 |
) |
Maturity of investments |
|
|
37,973 |
|
|
|
22,245 |
|
Release of restricted cash |
|
|
16,090 |
|
|
|
316 |
|
|
|
|
|
|
|
|
Net cash used in investing activities from continuing operations |
|
|
(227,748 |
) |
|
|
(33,778 |
) |
Cash flows from financing activities from continuing operations: |
|
|
|
|
|
|
|
|
Borrowings under long-term debt, net of debt financing costs |
|
|
194,133 |
|
|
|
|
|
Exercise of share options |
|
|
8,122 |
|
|
|
1,301 |
|
Proceeds from employee share purchase plan |
|
|
1,088 |
|
|
|
1,703 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities from continuing operations |
|
|
203,343 |
|
|
|
3,004 |
|
Change in cash from discontinued operations |
|
|
240 |
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
1,097 |
|
|
|
490 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(13,062 |
) |
|
|
(3,965 |
) |
Cash and cash equivalents, beginning of period |
|
|
48,612 |
|
|
|
51,937 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
35,550 |
|
|
$ |
47,972 |
|
|
|
|
|
|
|
|
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 e-learning and performance support solutions for global
enterprises, government, education and small to medium-sized businesses. SkillSoft helps companies
to maximize business performance through a combination of content, online information resources,
flexible technologies and support services. SkillSoft is the surviving corporation as a result of a
merger between SmartForce PLC and SkillSoft Corporation on September 6, 2002 (the Merger). On May
14, 2007, the Company completed the acquisition of NETg from The Thomson Corporation for
approximately $270 million in cash (see Note 6).
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 July 31, 2007 and the results of its
operations and cash flows for the three and six months ended July 31, 2007 and 2006. 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, 2007. The results of operations for the interim
period are not necessarily indicative of the results of operations to be expected for the full
year.
Certain reclassifications have been made to the consolidated financial statements for the three and
six month periods ended July 31, 2006 to conform to current year classifications. Included in cost
of revenues is the amortization of intangible assets related to acquired technology and capitalized
software development costs of approximately $1.7 million and $3.5 million for the three and six
months ended July 31, 2006, respectively. These costs were previously recorded within operating
expense under the caption amortization of intangible assets.
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 July 31, 2007 and January 31, 2007, cash
equivalents consisted mainly of commercial paper. The Company considers the cash held in
certificates of deposit with a commercial bank (i) to secure certain facility leases and (ii) to
secure funds to defend named former executives and board members of SmartForce PLC for actions
arising out of the SEC investigation to be restricted cash. At July 31, 2007, the Company had
approximately $4.0 million of restricted cash: approximately $2.9 million is held voluntarily to
defend named former executives and board members of SmartForce PLC for actions arising out of the
SEC investigation and litigation related to the 2002 securities class action and approximately $1.1
million is held to secure certain facilities leases. In the quarter ended April 30, 2007, the
Company made the final payment with respect to the 2002 securities class action settlement of
approximately $15.5 million, which amount had previously been recorded as restricted cash.
The Company accounts for certain investments in accordance with 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 or for trading purposes are reported at market
value, and are classified as available for sale. At July 31, 2007, the Companys investments were
classified as available for sale and had an average maturity of approximately 79 days. These
investments are classified as current assets or long-term investments in the accompanying condensed
consolidated balance sheets based upon maturity date.
6
4. REVENUE RECOGNITION
The Company generates revenue from the license of products and services and from providing
hosting/application service provider services (ASP).
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 content 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
license can provide customers access to a range of learning products including courseware,
Referenceware®, simulations, mentoring and prescriptive assessment.
The Company offers discounts from its ordinary pricing, and purchasers of licenses for a larger
number of courses, larger user bases or longer periods of time 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. Revenue
from nearly all of the Companys contractual arrangements is recognized on a subscription or
straight-line basis over the contractual 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 payments become 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. If the Company determines that the professional services are
not separable from an
7
existing customer arrangement, revenue from these services is recognized over the existing
contractual terms with the customer; otherwise the Company typically recognizes professional
service revenue as the services are performed.
The Company records reimbursable out-of-pocket expenses in both revenue and as a direct cost of
revenue, 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 servers
whereby customers may be entitled to credits in the event of nonperformance. The Company also
retains the right to remedy any nonperformance event prior to issuance of any 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 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 SHARE-BASED COMPENSATION
The Company has several share-based compensation plans under which employees, officers, directors
and consultants may be granted 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 up to ten years. As of July 31, 2007, 2,573,263 ordinary
shares remain available for future grant under the Companys share 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, 2007 for a detailed description of the Companys share option
plans.
A summary of share option activity under the Companys plans during the three months ended July 31,
2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Aggregate |
|
|
|
|
|
|
Weighted |
|
Remaining |
|
Intrinsic |
|
|
|
|
|
|
Average |
|
Contractual |
|
Value |
Share Options |
|
Shares |
|
Exercise Price |
|
Term (Years) |
|
(in thousands) |
Outstanding, April 30, 2007 |
|
|
19,173,432 |
|
|
$ |
7.61 |
|
|
|
5.23 |
|
|
|
|
|
Granted |
|
|
90,000 |
|
|
|
9.31 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(763,981 |
) |
|
|
5.26 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(420,546 |
) |
|
|
15.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, July 31, 2007 |
|
|
18,078,905 |
|
|
$ |
7.60 |
|
|
|
5.02 |
|
|
$ |
43,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, July 31, 2007 |
|
|
12,425,559 |
|
|
$ |
8.14 |
|
|
|
4.41 |
|
|
$ |
32,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Expected to Vest, July 31, 2007 (1) |
|
|
17,164,965 |
|
|
$ |
7.67 |
|
|
|
4.95 |
|
|
$ |
42,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This represents the number of vested options as of July 31, 2007 plus the number of unvested
options as of July 31, 2007 that are expected to vest as adjusted based on an estimated
forfeiture rate of 11.6%. The Company recognizes expense incurred under SFAS 123(R) on a
straight line basis. Due to the Companys vesting schedule, expense is incurred on options
that have not yet vested but which are expected to vest in a future period. The options for
which expense has been incurred but have not yet vested are included above as options expected
to vest. |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the
difference between the closing price of the shares on July 31, 2007 of $8.51 and the exercise price
of each in-the-money option) that would have been received by the option holders had all option
holders exercised their options on July 31, 2007.
8
The weighted average grant date fair value of options granted, as calculated by applying the Black
Scholes method, during each of the three and six months ended July 31, 2007 was $4.69 per share.
The total intrinsic value of options exercised during the three months ended July 31, 2007 and 2006
was approximately $2.6 million and $536,708, respectively. The total intrinsic value of options
exercised during the six months ended July 31, 2007 and 2006 was approximately $5.7 million and
$811,021, respectively.
6. ACQUISITIONS
(a) NETg
On May 14, 2007, the Company completed its acquisition
of NETg from The Thomson
Corporation for approximately $270 million in cash, subject to customary post-closing
adjustments. The combined entity offers a more robust multi-modal solution that includes online
courses, simulations, digitized books and an on-line video library as well as complementary
learning technologies. The acquisition supports SkillSofts mission to deliver comprehensive and
high quality learning solutions and positions the Company to serve the demands of this growing
marketplace. As a result of the acquisition $254.6 million and $43.1 million of the
purchase price have been allocated to goodwill and identified intangible assets, respectively.
Intangible assets consist of (i) a non-compete agreement valued at $6.9 million, which will be
amortized over a period of 30 months; (ii) customer relationships valued at $22.5 million, which
will be amortized over a period of 4 years; (iii) customer contracts valued at $1.0 million, which
will be amortized over a period of one year; (iv) course content valued at $10.0 million, which
will be amortized over a period of 18 months and (v) the NETg tradename valued at $2.7 million
which will be amortized over a period of 2 years. Useful lives were determined based on Company
estimates.
The acquisition of NETg was accounted for as a business combination under SFAS No. 141 Business
Combinations using the purchase method. Accordingly, the results of NETg have been included in the
Companys consolidated financial statements since the date of acquisition. The components of the
consideration paid are as follows
|
|
|
|
|
Cash paid |
|
$ |
269,738 |
|
Transaction costs incurred |
|
|
7,249 |
|
|
|
|
|
Total purchase price |
|
$ |
276,987 |
|
|
|
|
|
The Stock and Asset Purchase Agreement entered into in connection with the acquisition also
provides for an adjustment to the purchase price related to NETgs closing balance sheet, which the
Company has submitted to The Thomson Corporation for review. The Company has considered the provisions of EITF Issue No.
95-8, Accounting for Contingent Consideration Paid to the Shareholders of and Acquired Enterprise
in a Purchase Business Combination, and concluded that this contingent consideration represents
either additional purchase price or a reduction thereof. As a result, goodwill will be adjusted by
the amount of the change in consideration, if any.
The purchase price was allocated based upon the fair value of the assets acquired and liabilities
assumed at the date of acquisition. The following table summarizes the allocation of the initial
purchase price (in thousands):
|
|
|
|
|
Description |
|
Amount |
|
Current assets |
|
$ |
48,494 |
|
Property and equipment |
|
|
4,639 |
|
Goodwill |
|
|
254,590 |
|
Amortizable intangible assets |
|
|
43,050 |
|
Current liabilities* |
|
|
(48,301 |
) |
Deferred revenue |
|
|
(25,485 |
) |
|
|
|
|
Total |
|
$ |
276,987 |
|
|
|
|
|
|
|
|
|
|
Includes exit costs of $15.8 million |
9
The acquisition resulted in allocations of the purchase price to goodwill and identified intangible
assets of $254.6 million and $43.1 million, respectively. Intangible assets and their estimated
useful lives consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
Description |
|
Amount |
|
|
Life |
|
Non-compete agreement |
|
$ |
6,900 |
|
|
2.5 years |
Trademark/tradename |
|
|
2,700 |
|
|
2 years |
Developed software/courseware |
|
|
9,950 |
|
|
1.5 years |
Customer contractual relationships |
|
|
1,000 |
|
|
1 year |
Customer noncontractual relationships |
|
|
22,500 |
|
|
4 years |
|
|
|
|
|
|
|
|
|
|
$ |
43,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The non-compete agreement, trademark/tradename and customer relationships were valued using the
income approach and the developed software/courseware was valued using the cost approach. Values
and useful lives assigned to intangible assets were determined using managements estimates which
in part were based on valuation reports prepared by a third party specialist.
Goodwill represents the excess of the purchase price over the net identifiable tangible and
intangible assets acquired. The Company determined that the acquisition of NETg resulted in the
recognition of goodwill primarily because the acquisition is expected to help SkillSoft to reach
critical mass and shorten its timeframe to approach its long term operating profitability
objectives through incremental scalability and significant cost synergies. The goodwill
recorded as a result of this acquisition is expected to be deductible for tax purposes
The acquired intangible assets and goodwill are subject to review for impairment as indicators of
impairment develop and otherwise at least annually.
The Company assumed certain liabilities in the acquisition including deferred revenue that was
ascribed a fair value of $25.5 million using a cost-plus profit approach in accordance with
Emerging Issues Task Force (EITF) 01-03, Accounting in a Business Combination for Deferred Revenue
of an Acquiree. The Company is amortizing deferred revenue over the average remaining term of the
contracts, which reflects the estimated period to satisfy these customer obligations. In allocating
the preliminary purchase price, the Company recorded an adjustment to reduce the carrying value of
NETgs deferred revenue by $22.2 million. Approximately $14.7 million of acquired NETg deferred
revenue remained at July 31, 2007.
In connection with the acquisition, the Companys management approved and initiated plans to
integrate NETg into its operations and to eliminate redundant facilities and headcount, reduce cost
structure and better align operating expenses with existing economic conditions and the Companys
operating model. In accordance with EITF Issue No. 95-3, Recognition of Liabilities in Connection
with a Purchase Business Combination, the Company has accrued for certain liabilities incurred
directly related to the NETg acquisition and accounted for those in the allocation of the purchase
price. The items accounted for in accordance with EITF Issue No. 95-3 primarily relate to severance
related costs incurred in association with workforce reductions and totaled approximately $9.3
million for employee separation costs for approximately 360 employees. The Company also estimated a
liability of $1.8 million representing the estimated fair value of abandoned lease obligations. The
Company made severance payments of $6.1 million during the quarter ended July 31, 2007 and expects
to pay out the balance by the end of the second quarter of fiscal 2009. As of July 31, 2007, $3.2 million of
the liability for accrued severance was unpaid and included in accrued expenses in the accompanying
balance sheet. The Companys outstanding liability for abandoned leases at July 31, 2007 was $1.8
million, which is included in the accrued expense balance on the accompanying balance sheet as of
July 31, 2007 (see Note 7). The Companys outstanding liability for NETg content
re-branding and legal and outplacement services was $4.0 million and $0.7 million, respectively
which is included in the accrued expense balance on the accompanying balance sheet as
of July 31, 2007.
SUPPLEMETAL PRO-FORMA INFORMATION
10
The Company has concluded that the NETg acquisition represents a material business combination.
The following unaudited pro forma information presents the consolidated results of operations of
the Company and NETg as if the acquisition had occurred at the beginning of each of fiscal 2008
and 2007, with pro forma adjustments to give effect to amortization of intangible assets, an
increase in interest expense on acquisition financing and certain other adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
SIX MONTHS ENDED |
|
|
|
JULY 31, |
|
|
JULY 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands except per share data) |
|
Revenue |
|
$ |
102,719 |
|
|
$ |
92,925 |
|
|
$ |
191,109 |
|
|
$ |
184,769 |
|
Net loss |
|
|
(7,684 |
) |
|
|
(17,426 |
) |
|
|
(24,625 |
) |
|
|
(31,266 |
) |
Net loss per share basic |
|
$ |
(0.07 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share diluted |
|
$ |
(0.07 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.23 |
) |
|
$ |
(0.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The unaudited pro forma results are not necessarily indicative of the results that the Company
would have attained had the acquisition of NETg occurred at the beginning of the periods presented.
(b) Targeted Learning Corporation
On February 9, 2007, the Company acquired the assets of Targeted Learning Corporation (TLC), an
on-line video library business, for approximately $4.1 million in cash plus liabilities assumed of
$0.8 million. Additional consideration of up to $0.5 million is payable to the shareholders of TLC
at various times prior to February 2008 contingent upon achievement of certain integration
milestones. As of July 31, 2007, approximately $0.1 million of this contingent consideration had
been paid. The acquisition resulted in an allocation of the purchase price to goodwill and
identified intangible assets of $3.2 million and $0.9 million, respectively. Intangible assets
consist of internally developed software, comprised of learning content valued at $510,000, which
will be amortized over a period of 4 years, customer contracts and relationships valued at
$330,000, which will be amortized over 3 years and the TLC tradename valued at $20,000 which will
be amortized over 2 years. Values and useful lives assigned to intangible assets were determined
using managements estimates which in part were based on valuation reports prepared by a third
party specialist. The Company has concluded that the acquisition of TLC does not represent a
material business combination and therefore no pro forma financial information has been provided
herein.
7. SPECIAL CHARGES
MERGER AND EXIT COSTS
In connection with the closing of the NETg acquisition on May 14, 2007 (the Acquisition), the
Companys management effected a merger integration effort to eliminate redundant facilities and
employees and reduce the overall cost structure of the acquired business to better align the
Companys operating expenses with existing economic conditions, business requirements and the
Companys operating model. Pursuant to this restructuring, the Company recorded $15.8 million of
costs related to severance and related benefits, costs to vacate leased facilities and other
pre-Acquisition liabilities. These costs were accounted for under EITF 95-3, Recognition of
Liabilities in Connection with Purchase Business Combinations. These costs, which were recognized
as a liability assumed in the purchase business combination, were included in the allocation of the
purchase price.
The
reductions in employee headcount will total approximately 360 employees from the
administrative, sales, marketing and development functions, and amounted to a liability of
approximately $9.3 million. Approximately $6.1 million was paid against the exit plan accrual
through July 31, 2007, and the remaining amount of $3.2 million, net of adjustments for foreign
currency translation, is expected to be paid by the end of the second quarter of fiscal 2009.
In connection with the exit plan, the Company intends to abandon certain leased facilities
resulting in a facilities consolidation liability of $1.8 million as of July 31, 2007, consisting
of lease termination costs, broker commissions and other facility costs. As part of the plan, two
sites will be vacated. The fair value of the lease termination costs
was calculated with certain
assumptions related to the Companys estimated cost recovery efforts from subleasing
11
vacated
space, including (i) the time period over which the property will remain vacant, (ii)
the sublease terms and (iii) the sublease rates
The Companys merger and exit liabilities which include previous merger and
acquisition transactions are recorded in accrued expenses (see Note 14) and long-term liabilities. Activity in
the six month period ended July 31, 2007 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMPLOYEE |
|
|
|
|
|
|
|
|
|
|
|
|
SEVERANCE AND |
|
|
CLOSEDOWN OF |
|
|
|
|
|
|
|
|
|
RELATED COSTS |
|
|
FACILITIES |
|
|
OTHER |
|
|
TOTAL |
|
Merger and exit accrual January 31, 2007 |
|
$ |
878 |
|
|
$ |
2,278 |
|
|
$ |
121 |
|
|
$ |
3,277 |
|
Provision for merger and exit costs as of
the date of acquisition of NETg (May 14,
2007) accounted for in the allocation of
purchase price |
|
|
9,335 |
|
|
|
1,836 |
|
|
|
4,657 |
|
|
|
15,828 |
|
Payments made during the six months ended
July 31, 2007 |
|
|
(6,057 |
) |
|
|
(348 |
) |
|
|
(95 |
) |
|
|
(6,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger and exit accrual July 31, 2007 |
|
$ |
4,156 |
|
|
$ |
3,766 |
|
|
$ |
4,683 |
|
|
$ |
12,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company anticipates that the remainder of the merger and exit accrual will be paid by October
2011 as follows (in thousands):
|
|
|
|
|
Year ended January 31, |
|
|
|
|
2008 (remaining 6 months) |
|
$ |
11,129 |
|
2009 |
|
|
493 |
|
2010 |
|
|
332 |
|
2011 |
|
|
651 |
|
|
|
|
|
Total |
|
$ |
12,605 |
|
|
|
|
|
Certain of the former NETg employees continued employment during a transition period and
certain of the former NETg facilities being vacated are being used as the Company transitions
operations to other locations. In accordance with SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, such costs are being expensed as incurred and are included in
merger and integration related expenses in the accompanying
statements of income. The Company recorded $8.5 million of
merger and integration related expenses in the three months ended
July 31, 2007.
DISCONTINUED OPERATIONS
In connection with the NETg acquisition, the Company decided to discontinue four product lines
acquired from NETg because the Company believes these product offerings do not represent areas that
can grow in a manner consistent with the Companys operating model or be consistent with the Companys profit model. The product lines that have been
identified as discontinued operations are Wave, NETg Press Now, Interact Now and Financial Campus.
As a result, the assets and liabilities of NETg Press Now, Interact Now and Financial Campus have
been classified as held for sale and qualify for held for disposal treatment under Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The Company sold Financial Campus in August 2007 and expects to sell the NETg
Press Now and Interact Now business lines by the end of fiscal 2008.
The Company intends to shut down the Wave operations.
The Company has accounted for all of the business units as discontinued operations, in accordance
with the provisions of SFAS No. 144. The results for all periods presented since the acquisition
are included in the financial statements as discontinued operations.
The components of discontinued operations are as follows (in
thousands):
|
|
|
|
|
Balance Sheet |
|
JULY 31, 2007 |
|
Current assets: |
|
|
|
|
Accounts receivable, net |
|
$ |
2,112 |
|
Inventory |
|
|
2,357 |
|
Fixed assets |
|
|
3,353 |
|
Other current assets |
|
|
185 |
|
|
|
|
|
12
|
|
|
|
|
|
|
JULY 31, 2007 |
|
Total current assets |
|
$ |
8,007 |
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payable and accruals |
|
$ |
812 |
|
Deferred revenue |
|
|
1,026 |
|
|
|
|
|
Total current liabilities |
|
$ |
1,838 |
|
|
|
|
|
|
|
|
|
|
Income Statement |
|
THREE AND SIX |
|
|
|
MONTHS ENDED JULY |
|
|
|
31, 2007 |
|
Revenue from discontinued operations |
|
$ |
3,629 |
|
|
|
|
|
|
Income from discontinued operations before income taxes |
|
|
911 |
|
Income taxes |
|
|
387 |
|
|
|
|
|
Income from discontinued operations |
|
$ |
524 |
|
|
|
|
|
RESTRUCTURING
Activity in the Companys restructuring accrual was as follows (in thousands):
|
|
|
|
|
|
|
FACILITY LEASE |
|
|
|
OBLIGATIONS |
|
Total restructuring accrual as of January 31, 2007 |
|
$ |
1,421 |
|
Payments made during the six months ended July 31, 2007 |
|
|
(506 |
) |
Restructuring charges incurred during the six months ended July 31, 2007 |
|
|
228 |
|
|
|
|
|
Total restructuring accrual as of July 31, 2007 |
|
$ |
1,143 |
|
|
|
|
|
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JULY 31, 2007 |
|
|
JANUARY 31, 2007 |
|
|
|
GROSS |
|
|
|
|
|
|
NET |
|
|
GROSS |
|
|
|
|
|
|
NET |
|
|
|
CARRYING |
|
|
ACCUMULATED |
|
|
CARRYING |
|
|
CARRYING |
|
|
ACCUMULATED |
|
|
CARRYING |
|
|
|
AMOUNT |
|
|
AMORTIZATION |
|
|
AMOUNT |
|
|
AMOUNT |
|
|
AMORTIZATION |
|
|
AMOUNT |
|
Internally
developed software/
courseware |
|
$ |
38,716 |
|
|
$ |
29,778 |
|
|
$ |
8,938 |
|
|
$ |
28,257 |
|
|
$ |
27,836 |
|
|
$ |
421 |
|
Customer contracts |
|
|
36,848 |
|
|
|
14,988 |
|
|
|
21,860 |
|
|
|
13,018 |
|
|
|
11,701 |
|
|
|
1,317 |
|
Non-compete |
|
|
6,900 |
|
|
|
690 |
|
|
|
6,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and
trade names |
|
|
3,625 |
|
|
|
348 |
|
|
|
3,277 |
|
|
|
905 |
|
|
|
5 |
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,089 |
|
|
|
45,804 |
|
|
|
40,285 |
|
|
|
42,180 |
|
|
|
39,542 |
|
|
|
2,638 |
|
Goodwill |
|
|
304,007 |
|
|
|
|
|
|
|
304,007 |
|
|
|
83,171 |
|
|
|
|
|
|
|
83,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
390,096 |
|
|
$ |
45,804 |
|
|
$ |
344,292 |
|
|
$ |
125,351 |
|
|
$ |
39,542 |
|
|
$ |
85,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in goodwill at July 31, 2007 from the amount recorded at January 31, 2007 is as follows:
|
|
|
|
|
|
|
Total |
|
Gross carrying amount of goodwill, January 31, 2007 |
|
$ |
83,171 |
|
Utilization of tax benefit |
|
|
(36,829 |
) |
Acquisition of TLC |
|
|
3,233 |
|
Acquisition of NETg |
|
|
254,590 |
|
13
|
|
|
|
|
|
|
Total |
|
Other |
|
|
(158 |
) |
|
|
|
|
Gross carrying amount of goodwill, July 31, 2007 |
|
$ |
304,007 |
|
|
|
|
|
The Company will be conducting its annual impairment test of goodwill for fiscal 2008 in the fourth
quarter.
Amortization expense related to the intangible assets for the remainder of fiscal 2008 and the
following fiscal years is expected to be as follows (in thousands):
|
|
|
|
|
|
|
Amortization |
|
Fiscal Year |
|
Expense |
|
2008 |
|
$ |
10,397 |
|
2009 |
|
|
16,415 |
|
2010 |
|
|
8,245 |
|
2011 |
|
|
3,712 |
|
2012 |
|
|
616 |
|
|
|
|
|
Total |
|
$ |
39,385 |
|
|
|
|
|
9. 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 and six
months ended July 31, 2007 and 2006 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
SIX MONTHS ENDED |
|
|
|
JULY 31, |
|
|
JULY 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,388 |
|
|
$ |
4,825 |
|
|
$ |
19,877 |
|
|
$ |
8,878 |
|
Other comprehensive income/(loss)
Foreign currency adjustment |
|
|
(263 |
) |
|
|
(167 |
) |
|
|
(415 |
) |
|
|
(465 |
) |
Change in fair value of interest rate hedge |
|
|
(232 |
) |
|
|
|
|
|
|
(232 |
) |
|
|
|
|
Unrealized holding gains/(losses) |
|
|
(8 |
) |
|
|
(49 |
) |
|
|
(86 |
) |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
11,885 |
|
|
$ |
4,609 |
|
|
$ |
19,144 |
|
|
$ |
8,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income as of July 31, 2007 and January 31, 2007 was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS |
|
|
YEAR ENDED |
|
|
|
ENDED JULY 31, |
|
|
JANUARY 31, |
|
|
|
2007 |
|
|
2007 |
|
Unrealized holding (losses)/gains on available for sale securities |
|
$ |
(22 |
) |
|
$ |
67 |
|
Change in fair value of interest rate hedge |
|
|
(232 |
) |
|
|
|
|
Foreign currency adjustment |
|
|
(1,800 |
) |
|
|
(1,386 |
) |
|
|
|
|
|
|
|
Total accumulated other comprehensive loss |
|
$ |
(2,054 |
) |
|
$ |
(1,319 |
) |
|
|
|
|
|
|
|
10. 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:
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
SIX MONTHS ENDED |
|
|
|
JULY 31, |
|
|
JULY 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Basic weighted
average shares
outstanding |
|
|
104,400,895 |
|
|
|
101,524,912 |
|
|
|
103,848,299 |
|
|
|
101,285,185 |
|
Effect of dilutive
shares outstanding |
|
|
4,022,698 |
|
|
|
2,525,248 |
|
|
|
3,891,310 |
|
|
|
2,175,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding,
as adjusted |
|
|
108,423,593 |
|
|
|
104,050,160 |
|
|
|
107,739,609 |
|
|
|
103,460,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following share equivalents have been excluded from the computation of diluted weighted average
shares outstanding for the three and six months ended July 31, 2007 and 2006, respectively, as they
would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
SIX MONTHS ENDED |
|
|
JULY 31, |
|
JULY 31, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Options to
purchase shares |
|
|
14,056,207 |
|
|
|
14,005,126 |
|
|
|
14,187,595 |
|
|
|
14,355,240 |
|
11. 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.
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 United
States Internal Revenue Code.
Under SFAS No. 109 Accounting for Income Taxes, the Company can only recognize a deferred tax asset
for future benefit of our tax loss, temporary differences and tax credit carryforwards to the
extent that it is more likely than not that these assets will be realized. In determining the
realizability of these assets, the Company considered numerous factors, including historical
profitability, estimated future taxable income and the industry in which the Company operates.
Based on current and preceding years results of operations and anticipated profit levels, the
Company believes that certain of its deferred tax assets are more likely than not realizable.
Accordingly, the Company reduced the valuation allowance during the three months ended July 31,
2007 as a result of this assessment. For the six months ended July 31, 2007, the Company recorded a
tax benefit of $8.2 million. The tax benefit is largely attributable to the release of
approximately $49.1 million of U.S. valuation allowance on NOL carryforwards, which will more
likely than not, be realized in future periods. Approximately $25.0 million of this asset was
recorded through reductions to tax expense and $24.1 million was recorded through reductions to
goodwill. Also, included in the tax benefit of $8.2 million is the expected utilization of
approximately $5.5 million of acquired NOL carryforwards in 2008, which do not alleviate tax burden
in the statement of income, and are recorded as an adjustment to goodwill. In addition, there is
income generated in foreign countries, which cannot be offset through the utilization of NOL
carryforwards.
For the six months ended July 31, 2007 and 2006, the Companys effective tax rates were (72.9%) and
36.5% respectively. For the six month period ended July 31, 2007, the tax benefit of $8.2 million
(72.9%) is the result of a $25.0 million deferred tax benefit related to the reduction in the
Companys deferred tax asset valuation allowance, offset by a provision for income taxes based on
the Companys projected effective tax rate for the fiscal year, exclusive of the valuation
allowance adjustment The projected provision for income taxes is impacted by the effects of
certain tax adjustments required in purchase accounting for the NETg
acquisition. The tax rate benefit of 72.9% is comprised of a non-cash benefit of approximately $9.2 million or
81.9% offset by a cash tax payable of approximately $1.0 million, or 9.0%.
Deferred Taxes
As a result of purchase accounting for the NETg acquisition, the Company recorded a $10.2 million
deferred tax asset on certain deferred revenue that has previously been recognized for tax
purposes which is included in current assets in the allocation of
purchase price (See Note 6). At July 31, 2007, the value of this deferred tax asset is $7.3 million.
15
The goodwill created in the NETg acquisition is tax deductible and the resulting tax amortization
will reduce the Companys tax basis in the acquired goodwill, thereby creating a deferred tax
liability. As of July 31, 2007, the amount of this liability was $1.3 million. The goodwill that
creates the taxable temporary difference is infinite lived and; as such, makes it impossible to
schedule the reversal of the deferred tax liability.
Correspondingly, the amortization of goodwill, for tax purposes, increases the Companys NOL
carryforwards and results in an increase to deferred tax assets. Given the indefinite reversal
status of the deferred tax liability and the absence of other positive evidence, the Company feels
that it is more likely than not that the incremental NOL carryforwards will not be realized and has
provided a full valuation allowance on the NOL carryforwards resulting from the goodwill tax
amortization.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48), on February 1, 2007. On the date of adoption of FASB Interpretation No.
48, the Company had total unrecognized tax benefits of approximately $3.6 million (including
interest and penalties of $1.1 million) that, if recognized, would impact the Companys effective
tax rate. During the three months ended July 31, 2007, the Company continued to assess recognition
and measurement for new and existing uncertain positions and monitor tax developments in relevant
jurisdictions for potential changes in the sustainability or measurement of positions. At July 31,
2007 the Company had $4.1 million of unrecognized tax benefits. The Company recognizes interest and
penalties accrued related to unrecognized tax benefits as income tax expense. As of July 31, 2007
the Company had approximately $0.5 million of accrued interest related to uncertain tax positions.
The Company conducts business globally and, as a result, the Company and its subsidiaries file
income tax returns in the U.S. and foreign jurisdictions. In the normal course of business the
Company is subject to examination by taxing authorities throughout the world, including but not
limited to such major jurisdictions as Canada, the United Kingdom and the United States. With few
exceptions, the Company is no longer subject to U.S. and international income tax examinations for
years before 2002.
12. COMMITMENTS AND CONTINGENCIES
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 paid in
April 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 related litigation and ongoing 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 has been recorded in the fiscal 2006 second
quarter.
The Company has been the subject of a formal investigation by the United States Securities and
Exchange Commission (SEC) into the events and circumstances giving rise to the 2003 restatement
of SmartForce PLCs accounts (the Restatement Investigation). On July 19, 2007, the SEC
announced that three former officers and one former employee of SmartForce had settled SEC claims
in connection with the Restatement Investigation. The SEC staff did not ask that any claims be
brought against the Company, or request that the Company enter into any
16
settlement, and the Company does not believe that the SEC will make any claim against the Company
in connection with the Restatement Investigation, including any claim for payment by the Company.
In January 2007, the Boston District Office of the SEC informed the Company that it is the subject
of an informal investigation concerning stock option granting practices at SmartForce for the
period beginning April 12, 1996 through July 12, 2002 (the Option Granting Investigation), prior
to the September 6, 2002 merger with SmartForce PLC. The Company has produced documents in response
to requests from the SEC. The SEC staff has also informed the Company that despite closure of the
Restatement Investigation, the staff has not determined whether to close the Options Granting
Investigation.
The Company believes that it accounted for SmartForce stock option grants properly in the merger,
and believes that as a result of the merger accounting the Companys financial statements are
unlikely to change even if the SEC concludes that SmartForce did not properly account for its
pre-merger option grants. When SkillSoft Corporation and SmartForce merged on September 6, 2002,
SkillSoft Corporation was for accounting purposes deemed to have acquired SmartForce. Accordingly,
the pre-merger financial statements of SmartForce are not included in the historical financial
statements of the Company, and the Companys financial statements include results from what had
been the business of SmartForce only from the date of the merger. Under applicable accounting
rules, the Company valued all of the outstanding SmartForce stock options assumed in the merger at
fair value upon consummation of the merger.
Accordingly, SkillSoft believes that its accounting for SmartForce stock options will not be
affected by any error that SmartForce may have made in its own accounting for stock option grants
and that that the Options Granting Investigation should not require any change in SkillSofts
financial statements.
We continue to cooperate with the SEC in the Option Granting Investigation. At the present
time, the Company is unable to predict the outcome of the Option Granting Investigation or its
potential impact on our operating results or financial position.
From time to time, the Company is a party to or may be threatened with other litigation in the
ordinary course of its business. The Company regularly analyzes current information, including, as
applicable, the Companys defenses and insurance coverage and, as necessary, provides accruals for
probable and estimable liabilities for the eventual disposition of these matters.
13. GEOGRAPHICAL DISTRIBUTION OF REVENUES
The Company attributes revenues to different geographical areas on the basis of the location of the
customer. Revenues by geographical area for the three and six month periods ended July 31, 2007 and
2006 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
SIX MONTHS ENDED |
|
|
|
JULY 31, |
|
|
JULY 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
57,261 |
|
|
$ |
43,603 |
|
|
$ |
101,080 |
|
|
$ |
86,466 |
|
United Kingdom (UK) |
|
|
7,319 |
|
|
|
6,260 |
|
|
|
14,259 |
|
|
|
12,321 |
|
Canada |
|
|
2,575 |
|
|
|
2,354 |
|
|
|
5,129 |
|
|
|
4,716 |
|
Europe, excluding UK |
|
|
626 |
|
|
|
518 |
|
|
|
1,024 |
|
|
|
1,041 |
|
Australia/New Zealand |
|
|
3,077 |
|
|
|
2,058 |
|
|
|
5,838 |
|
|
|
4,296 |
|
Other |
|
|
611 |
|
|
|
941 |
|
|
|
1,279 |
|
|
|
1,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
71,469 |
|
|
$ |
55,734 |
|
|
$ |
128,609 |
|
|
$ |
110,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived tangible assets at international facilities are not significant.
14. ACCRUED EXPENSES
Accrued expenses in the accompanying condensed combined balance sheets consisted of the following
(in thousands):
17
|
|
|
|
|
|
|
|
|
|
|
JULY 31, 2007 |
|
|
JANUARY 31, 2007 |
|
Course development fees |
|
$ |
1,472 |
|
|
$ |
1 ,860 |
|
Professional fees |
|
|
5,917 |
|
|
|
2,639 |
|
Accrued payables |
|
|
2,395 |
|
|
|
415 |
|
Accrued miscellaneous taxes |
|
|
485 |
|
|
|
385 |
|
Account payable other |
|
|
8,355 |
|
|
|
|
|
Accrued merger related costs* |
|
|
11,242 |
|
|
|
1,892 |
|
Sales tax payable/VAT payable |
|
|
4,649 |
|
|
|
4,405 |
|
Accrued royalties |
|
|
7,846 |
|
|
|
3,693 |
|
Accrued interest |
|
|
1,499 |
|
|
|
|
|
Accrued litigation settlements |
|
|
|
|
|
|
15,250 |
|
Accrued restructuring |
|
|
504 |
|
|
|
659 |
|
Other accrued liabilities |
|
|
7,095 |
|
|
|
4,229 |
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
51,459 |
|
|
$ |
35,427 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes $1,431 and $1,188 of accrued payroll taxes in July 31, 2007 and January 31, 2007,
respectively. |
15. LINE OF CREDIT
On May 14, 2007, in connection with the closing of the NETg acquisition, the Company entered into a
Credit Agreement (the Credit Agreement) with certain lenders (the Lenders) providing for a $225
million senior secured credit facility comprised of a $200 million term loan facility and a $25
million revolving credit facility. The term loan was used to finance the Acquisition and the
revolving credit facility will be used for general corporate purposes. The term loan bears
interest at a rate per annum equal to, at the Companys election, (i) an alternative base rate plus
a margin of 1.75% or (ii) adjusted LIBOR plus a margin of 2.75%, and revolving loans bear interest
at a rate per annum equal to, at the Companys election, (i) an alternative base rate plus a margin
of 1.50% to 1.75% or (ii) adjusted LIBOR plus a margin of 2.50% to 2.75%. The alternative base
rate is the greater of certain of the Lenders prime rate and the federal funds effective rate plus
0.50%. Overdue amounts under the Credit Agreement bear interest at a rate per annum equal to 2.00%
plus the rate otherwise applicable to such loan.
The Company is required to pay the Lenders a commitment fee at a rate per annum of 0.50% on the
average daily unused amount of the revolving credit facility commitments of such Lenders during the
period for which payment is made, payable quarterly in arrears. The term loan is payable in 24
consecutive quarterly installments of (i) $500,000 in the case of each of the first 23
installments, on the last day of each of September, December, March, and June commencing September
30, 2007 and ending on March 31, 2013, and (ii) the balance due on May 14, 2013. The revolving
credit facility terminates on May 14, 2012, at which time all outstanding borrowings under the
revolving credit facility are due. The Company may optionally prepay loans under the Credit
Agreement at any time, without penalty. The loans are subject to mandatory prepayment in certain
circumstances.
The Credit Agreement contains customary representations and warranties as well as affirmative and
negative covenants. Affirmative covenants include, among others, with respect to the Company and
its subsidiaries, maintenance of existence, financial and other reporting, payment of obligations,
maintenance of properties and insurance, maintenance of a credit rating, and interest rate
protection. Negative covenants include, among others, with respect to the Company and its
subsidiaries, limitations on incurrence or guarantees of indebtedness, limitations
18
on liens, limitations on sale and lease-back transactions, limitations on investments, limitations
on mergers, consolidations, asset sales and acquisitions, limitations on dividends, share
redemptions and other restricted payments, limitations on affiliate transactions, limitations on
hedging transactions, and limitations on capital expenditures. The Credit Agreement also includes a
leverage ratio covenant and an interest coverage ratio covenant (the ratio of the Companys
consolidated EBITDA to its consolidated interest expense as calculated pursuant to the Credit
Agreement).
Within
the definitions of the Credit Agreement, a material adverse effect
shall mean a material adverse condition or material adverse change in
or materially and adversely affecting (a) the business, assets,
liabilities, operations or financial condition of Holdings, the
Borrower and the Subsidiaries, taken as a whole, or (b) the
validity or enforceability of any of the Loan Documents or the rights
and remedies of Administrative Agent, the Collateral Agent or the
Secured Parties there under. No event, change or condition has occurred since January 31, 2007 that has caused, or could
reasonably be expected to cause, a material adverse effect and as of
July 31, 2007 the Company was in compliance with all other
covenants under the Credit Agreement.
The Companys obligations under the Credit Agreement are guaranteed by the Company, the domestic
subsidiaries of the Company, and certain other material subsidiaries pursuant to a Guarantee and
Collateral Agreement, dated May 14, 2007 (the Guarantee and Collateral Agreement), among the
Company, the subsidiary guarantors party thereto from time to time (the Guarantors), and the
Agent on behalf of the Lenders, and in addition by certain foreign law guarantees issued by certain
of the Guarantors. The loans and the other obligations of the Company under the Credit Agreement
and related loan documents and the guarantee obligations of the Company and Guarantors are secured
by substantially all of the tangible and intangible assets of the Company, and each Guarantor
(including, without limitation, intellectual property and the capital stock of certain
subsidiaries) pursuant to the Guarantee and Collateral Agreement, and pursuant to certain foreign
debentures and charges against their assets.
In connection with the Credit Agreement, the Company incurred debt financing costs of $5.9 million.
The Company capitalized these fees and amortizes them to interest expense over the term of the
loans. During the three and six months ended July 31, 2007, the Company paid approximately $2.1
million in interest and recorded $226,000 of amortized interest expense related to the capitalized
debt financing costs.
The Lenders required the Company to enter into an interest rate swap agreement for at least 50% of
the term loan, or $100 million, as a means of reducing the Companys interest rate exposure.
Accordingly, the Company entered into an interest rate swap agreement with an initial notional
amount of $160 million which amortizes over a period consistent with the Companys anticipated
payment schedule. This strategy uses an interest rate swap to effectively convert $160 million in
variable rate borrowings into fixed rate liabilities at 5.1015% effective interest rate. The
interest rate swap is considered to be a hedge against changes in the amount of future cash flows
associated with interest payments on a variable rate loan (see Note 16).
16. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133), as amended and interpreted, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. As required by SFAS 133, the Company records all
derivatives on the balance sheet at fair value. The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative and the resulting designation.
Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm
commitment attributable to a particular risk, such as interest rate risk, are considered fair value
hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or
other types of forecasted transactions, are considered cash flow hedges.
For derivatives designated as fair value hedges, changes in the fair value of the derivative and
the hedged item related to the hedged risk are recognized in earnings. For derivatives designated
as cash flow hedges, the effective portion of changes in the fair value of the derivative is
initially reported in other comprehensive income (outside of earnings) and subsequently
reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion
of changes in the fair value of the derivative is recognized directly in earnings. The Company
assesses the effectiveness of each hedging relationship by comparing the changes in fair value or
cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the
designated hedged item or transaction. For derivatives not designated as hedges, changes in fair
value are recognized in earnings.
The Companys objective in using derivatives is to add stability to interest expense and to manage
its exposure to interest rate movements or other identified risks. To accomplish this objective,
the Company primarily uses interest
19
rate swaps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow
hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the
life of the agreements without exchange of the underlying principal amount. During the three
months ended July 31, 2007, an interest rate swap was used to hedge the variable cash flows
associated with $160 million of existing variable-rate debt.
At July 31, 2007, no derivatives were designated as fair value hedges, hedges of net investments in
foreign operations or were not designated in hedging relationships under SFAS 133. Additionally,
the Company does not use derivatives for trading or speculative purposes.
At July 31, 2007, the interest rate swap was designated as a cash flow hedge with a fair value of
$232,000 which was included in other liabilities. No hedge ineffectiveness on the cash flow hedge
was recognized in earnings during the three months ended July 31, 2007.
Amounts reported in accumulated other comprehensive income related to the interest rate swap will
be reclassified to interest expense as interest payments are made on the Companys variable-rate
debt. For the three months ended July 31, 2007, the change in net unrealized losses on the cash
flow hedge reflects a reclassification of ($83,000) of net unrealized losses from accumulated other
comprehensive income to interest expense. For the year ending January 31, 2008, the Company
estimates that an additional $7,000 of net unrealized losses will be reclassified from accumulated
other comprehensive income to interest expense.
20
17. RELATED PARTY TRANSACTION
In connection with the NETg acquisition, the Company paid a special bonus of $500,000 to one of the
members of our Board of Directors for his assistance in negotiating and completing the transaction.
Such bonus is included in general and administrative expense in the accompanying statements of
income for the three and six months ended July 31, 2007.
21
18. SHARE REPURCHASE PROGRAM
On March 23, 2006, the Companys shareholders approved a program for the repurchase by the Company
of up to an aggregate of 3,500,000 ADSs. Currently, none of these shares have been repurchased and
3,500,000 remain available for repurchase, subject to certain limitations, under the shareholder
approved repurchase program, which expires on September 22, 2007. On May 14, 2007, in connection
with the closing of the NETg acquisition, the Company entered into a Credit Agreement that contains
customary negative covenants that place limitations on the repurchase of the Companys shares.
19. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value under generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS No. 157 applies to other
accounting pronouncements that require or permit fair value measurements. The new guidance is
effective for financial statements issued for fiscal years beginning after November 15, 2007, and
for interim periods within those fiscal years. The Company is currently analyzing the effect, if
any, SFAS No. 157 will have on its consolidated financial position and results of operations.
In February 2007, the Financial Accounting Standards Board, or FASB, issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments
and certain other items at fair value and is effective for fiscal years beginning after November
15, 2007, or February 1, 2008 for SkillSoft. Early adoption is permitted as of the beginning of the
previous fiscal year provided that the entity makes that choice in the first 120 days of that
fiscal year and also elects to apply the provisions of SFAS No. 157. The Company is in the process
of evaluating the impact this pronouncement may have on its results of operations and financial
condition and whether to adopt the provisions of SFAS No 159 for the fiscal year beginning February
1, 2007.
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
We are a leading provider of e-learning and performance support solutions for global enterprises,
government, education and small to medium-sized businesses. SkillSoft helps companies to maximize
employee performance through a combination of comprehensive e-learning content, online information
resources, flexible learning technologies and support services. 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, certain
infrastructure and occupancy
22
expenses and share-based compensation. We generally recognize these costs as incurred. Also
included in cost of revenue is amortization expense related to capitalized software development
costs and intangible assets related to developed software and courseware acquired in business
combinations.
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. No software development costs
incurred during the first or second quarters of fiscal 2008 met the requirements for capitalization
in accordance with SFAS No. 86.
Research and development expenses consist primarily of salaries and benefits, share-based
compensation, certain infrastructure and occupancy expenses, fees to consultants and course content
development fees. Selling and marketing expenses consist primarily of salaries and benefits,
share-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, share-based compensation, consulting and service expenses,
legal expenses, audit and tax preparation costs, regulatory compliance costs and certain
infrastructure and occupancy expenses.
Amortization of intangible assets represents the amortization of customer value, non-compete
agreements, trademarks and tradenames from our acquisitions of NETg, TLC, Books 24x7
(Books) and GoTrain Corp. (GoTrain) and our merger with SkillSoft Corporation (the SmartForce
Merger).
Merger and integration related expenses primarily consist of salaries paid to NETg employees for
transitional work assignments and certain consultancy fees.
Restructuring primarily consists of charges associated with international restructuring activities.
Restatement SEC investigation primarily consists of legal and consulting fees incurred related to
the ongoing SEC investigation relating to the restatement of SmartForces financial statements for
1999, 2000, 2001 and the first two quarters of 2002, and more recently, the SECs review of
SmartForces option granting practices prior to the SmartForce Merger.
BUSINESS OUTLOOK
In the three and six months ended July 31, 2007, we generated revenue of $71.5 million and $128.6
respectively, as compared to $55.7 million and $110.4 million in the three and six months ended
July 31, 2006, respectively. We reported net income in the three and six months ended July 31, 2007
of $12.4 million and $19.9 million, respectively, as compared to $4.8 million and $8.9 million in
the three and six months ended July 31, 2006, respectively.
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
information technology (IT) spending by our current and potential customers and (iii) price
competition and value based competitive offerings from a broad array of competitors in the 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 or bundled with informal learning,
such as those available from our Books 24x7 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 related products. 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 order to pursue the small business market we
continue to invest in our telesales unit, but we need to see renewal rates consistent with those of
our direct sales business to determine its potential. We also will consider investing in a new
business direct field sales team and lead generators.
On May 14, 2007, we completed our acquisition of NETg for approximately $270 million, subject to
customary post-closing adjustments. NETg is a global enterprise-learning delivering integrated
learning solutions for
23
businesses, professional associations and government agencies that include instructional content,
multiple delivery options, enabling technologies, and a range of expert consulting services. NETg
offers many of the same financial and operating characteristics as SkillSofts business model,
including an annual recurring subscription-based licensing model for access to its learning
resources library, a direct sales force distribution system complemented by resellers and telesales
support, and a Global 2000 client base offering visibility through multi-year contracts and renewal
rates. The acquisition added to our existing offerings through the addition of complementary NETg
offerings such as live virtual instructor-led training, blended learning, learning content and
custom development services among others. The acquisition supports our overall strategy to
continually increase the quality, breadth and flexibility of the learning solutions we can make
available to our corporate, government, education and small-to-medium size business customers.
Also, the addition of NETgs capabilities strengthens our ability to compete for a greater share of
the $13.2 billion corporate training market that includes many larger players with more
comprehensive product offerings. In addition to our recent acquisition of NETg, we acquired
Targeted Learning Corporation (TLC) on February 9, 2007. Under the terms of the acquisition, we
paid approximately $4.1 million in cash to acquire TLC. Additional consideration of up to $0.5
million is payable to the shareholders of TLC upon achievement of certain integration milestones
prior to February 2008. As of July 31, 2007, $0.1 million of this additional consideration has been
paid. The acquisition provides us with a new offering that includes an on-line library of over 300
video-based programs featuring organizational and leadership experts, CEOs and best-selling
authors. Programs range in length from two minutes to two hours, and much of this content is
presented as 3 to 5 minute segments, or Quick Talks, for easy access. Selected programs as
indicated on the course profile page are available for offline use with portable devices that
support video, including the Apple iPod®. Users can search the content by Leadership Model category
or by title, speaker/author or topic. This product offers many of the same financial and operating
characteristics as our business model, including an annual recurring subscription-based licensing
model for access to its video-based resource library to be sold through our direct sales force,
complemented by resellers and telesales.
During fiscal 2008, we will continue to focus on the integration of NETg into our operations. We
also will continue to focus on revenue and earnings growth, excluding the normal and anticipated
acquisition and integration related expenses, primarily by cross selling and up selling, looking at
new markets, acquiring new customers, continuing to execute on our new product and telesales
distribution initiatives, and continuing to evaluate merger and acquisition opportunities that
could contribute to our long-term objectives.
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
commissions, restructuring charges, legal contingencies, income taxes and valuation of business
combinations. 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 in Note 2 of the Notes to the Consolidated
Financial Statements and under Managements Discussion and Analysis of Financial Conditions and
Results of Operations Critical Accounting Policies in our Annual Report on Form 10-K as filed
with the SEC on April 13, 2007. The policies set forth in our Form 10-K have not changed, except
that the critical accounting policy for business combinations described below is a new critical
accounting policy in light of the NETg acquisition and the income tax policy has been modified as a
result of the adoption of FASB Interpretation (FIN) 48 on February 1, 2007, as described in our
Form 10-Q filed with the SEC on June 11, 2007.
BUSINESS COMBINATIONS
When we acquire new businesses, we allocate the purchase price of businesses acquired to the assets
acquired, including intangible assets, and the liabilities assumed based on their estimated fair
values, with any amount in excess of such allocations designated as goodwill. Significant
management judgments and assumptions are required in determining the fair value of acquired assets
and liabilities, particularly acquired intangible assets. The valuation of purchased intangible
assets is based upon estimates of the future performance and cash flows from the acquired
24
business. If different assumptions are used, it could materially impact the purchase price
allocation and our financial position and results of operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2007 VERSUS THREE MONTHS ENDED JULY 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
|
Dollar |
|
|
Percent Change |
|
|
|
|
|
|
Increase/(Decrease) |
|
|
Increase/(Decrease) |
|
|
Percentage of Revenue |
|
|
|
2006/2007 |
|
|
2006/2007 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Revenue |
|
$ |
15,735 |
|
|
|
28 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenue amortization of
intangible assets |
|
|
12 |
|
|
|
1 |
% |
|
|
2 |
% |
|
|
3 |
% |
Cost of revenue |
|
|
2,053 |
|
|
|
31 |
% |
|
|
12 |
% |
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
13,670 |
|
|
|
29 |
% |
|
|
85 |
% |
|
|
85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
1,463 |
|
|
|
15 |
% |
|
|
16 |
% |
|
|
18 |
% |
Selling and marketing |
|
|
578 |
|
|
|
3 |
% |
|
|
33 |
% |
|
|
42 |
% |
General and administrative |
|
|
2,152 |
|
|
|
31 |
% |
|
|
13 |
% |
|
|
12 |
% |
Amortization of intangible assets |
|
|
3,330 |
|
|
|
810 |
% |
|
|
5 |
% |
|
|
1 |
% |
Merger related integration expenses |
|
|
8,493 |
|
|
|
* |
|
|
|
11 |
% |
|
|
|
|
Restatement SEC investigation |
|
|
282 |
|
|
|
409 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
16,298 |
|
|
|
40 |
% |
|
|
79 |
% |
|
|
72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
(2,628 |
) |
|
|
(38 |
)% |
|
|
6 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense) , net |
|
|
(210 |
) |
|
|
512 |
% |
|
|
|
|
|
|
|
|
Interest income |
|
|
(341 |
) |
|
|
(32 |
)% |
|
|
1 |
% |
|
|
2 |
% |
Interest expense |
|
|
(3,692 |
) |
|
|
5,274 |
% |
|
|
(5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before (benefit) / provision for income taxes from continuing operations |
|
|
(6,871 |
) |
|
|
(87 |
)% |
|
|
1 |
% |
|
|
14 |
% |
(Benefit) / provision for income taxes |
|
|
(13,910 |
) |
|
|
* |
|
|
|
(15 |
)% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
7,039 |
|
|
|
146 |
% |
|
|
17 |
% |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations of businesses to be disposed, net of income tax |
|
|
524 |
|
|
|
* |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,563 |
|
|
|
157 |
% |
|
|
17 |
% |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED JULY 31, |
|
|
|
2007 |
|
|
2006 |
|
|
CHANGE |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Modal Learning |
|
$ |
71,469 |
|
|
$ |
54,210 |
|
|
$ |
17,259 |
|
Retail Certification |
|
|
|
|
|
|
1,524 |
|
|
|
(1,524 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
71,469 |
|
|
$ |
55,734 |
|
|
$ |
15,735 |
|
|
|
|
|
|
|
|
|
|
|
The primary cause for the increase in revenue is due to additional revenue from the acquisition of
TLC in February 2007 and NETg in May 2007, a growth in sales of our informal learning product lines
and additional revenue earned under agreements with third party resellers of our products.
Approximately $10.8 million of revenues earned in the three months ended July 31, 2007 relates to
the amortization of acquired deferred revenue we retained following the NETg acquisition.
The sale of certain assets related to SmartCertify, our Retail Certification business, resulted in
a reduction in revenue of $1.5 million in our Retail Certification business for the three months
ended July 31, 2007 as compared to the three months ended July 31, 2006. Revenues from our Retail
Certification business are $0.2 million in fiscal 2008 as
compared to $5.0 million in fiscal 2007. Our Retal Certification
business will not contribute additional revenue in fiscal 2008.
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED JULY 31, |
|
|
|
2007 |
|
|
2006 |
|
|
CHANGE |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
57,261 |
|
|
$ |
43,603 |
|
|
$ |
13,658 |
|
International |
|
|
14,208 |
|
|
|
12,131 |
|
|
|
2,077 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
71,469 |
|
|
$ |
55,734 |
|
|
$ |
15,735 |
|
|
|
|
|
|
|
|
|
|
|
Revenue increased by 31% and 17% in the United States and internationally, respectively, in the
three months ended July 31, 2007 as compared to the three months ended July 31, 2006, as a result
of increased Multi-Modal Learning (MML) revenue generated from the NETg and TLC acquisition and increased orders from
existing customers and new business.
We exited the fiscal year ended January 31, 2007 with non-cancelable backlog of approximately $181
million compared to $171 million at January 31, 2006. This amount is calculated by combining the
amount of deferred revenue at each fiscal year end with the amounts to be added to deferred revenue
throughout the next twelve months from billings under committed customer contracts and determining
how much of these amounts are scheduled to amortize into revenue during fiscal 2008. The amount
scheduled to amortize into revenue during fiscal 2008 is disclosed as backlog as of January 31,
2007. Amounts to be added to deferred revenue during fiscal 2008 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, 2007 reflects a reduction of approximately $5.0 million in
SmartCertify backlog when compared to January 31, 2006, and SmartCertify will not contribute new
contracts during fiscal 2008. 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 2008 revenue. The backlog figures provided do not give effect to the NETg acquisition.
COSTS AND EXPENSES
The increase in cost of revenue in the three months ended July 31, 2007 versus the three months
ended July 31, 2006 was primarily due to increased revenue, including costs associated with legacy
NETg revenue transactions.
The increase in cost of revenue amortization of intangible assets in the three months ended July
31, 2007 versus the three months ended July 31, 2006 was primarily due to the addition of the
amortization of the intangible assets acquired from the acquisition of NETg. This increase was
partially offset by certain intangible assets related to capitalized software development costs and
technology acquired in previous business combinations becoming fully amortized during the previous
fiscal year.
The increase in research and development expenses in the three months ended July 31, 2007 versus
the three months ended July 31, 2006 was primarily due to increased repairs and maintenance
expenses of $1.2 million associated with maintaining multiple platforms as a result of the NETg
acquisition, fulfilling obligations of acquired customer contracts and product commitments assumed in the
acquisition of NETg. We anticipate that there will be additional research and development expenses
in subsequent periods for content outsourcing, software outsourcing and additional personnel. We
expect to incur research and development expenses of approximately $28.4 to $30.4 million in the
second half of fiscal 2008.
The increase in selling and marketing expenses in the three months ended July 31, 2007 versus the
three months ended July 31, 2006 was primarily due to an increase in salary and benefits of $1.3
million as a result of headcount additions, which include direct sales, telesales and field support
to service the increased customer base as a result of the NETg acquisition. This increase was
partially offset by a decrease of $0.2 million in stock-based compensation expense, as well as a
reduction in commissions of $0.7 million. We anticipate continued investments in sales
distribution, field support and marketing as required to support the increased customer base and
our growth initiatives. We expect to incur sales and marketing expenses of approximately $54.7
million to $57.7 million in the second half of fiscal 2008.
26
The increase in general and administrative expenses in the three months ended July 31, 2007 versus
the three months ended July 31, 2006 was primarily due to $1.5 million of costs associated with
the inclusion of additional headcount, contractors and professional services required to support
the increase in customer contracts and transition activities from the NETg acquisition. In
addition, we incurred approximately $0.5 million of consulting expense paid to a member of our
board of directors related to the NETg acquisition. We anticipate continued investments in
headcount and services as required to support the increased customer base and our growth
initiatives. We expect to incur general and administrative expenses of approximately $16.4 million
to $18.4 million for the second half of fiscal 2008.
The increase in amortization of intangible assets in the three months ended July 31, 2007 versus
the three months ended July 31, 2006 was primarily due to the amortization of intangible assets
acquired as a result of the NETg acquisition.
In the three months ended July 31, 2007 we incurred approximately $8.5 million of merger and
integration related expenses as a result of efforts undertaken to integrate NETgs operations into
ours. Included in these costs are approximately $6.1 million of salary and benefits for NETg
employees conducting transition activities as well as approximately $ 2.4 million of charges
related to facilities, systems and process integration activities.
Restatement SEC investigation charges increased in the three months ended July 31, 2007 versus
the three months ended July 31, 2006 due to an increase in legal expenses related to the SECs
informal inquiry into the pre-merger option granting practices at SmartForce.
OTHER INCOME/(EXPENSE), NET
The change in other income/(expense), net in the three months ended July 31, 2007 versus the three
months ended July 31, 2006 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 decrease in interest income in the three months ended July 31, 2007 versus the three months
ended July 31, 2006 was primarily due to less funds being available for investment as a result of
cash used for the acquisition of NETg in May 2007.
INTEREST EXPENSE
The increase in interest expense in the three months ended July 31, 2007 versus the three months
ended July 31, 2006 was primarily due to the interest expense recognized as a result of the debt
incurred for the acquisition of NETg as well as the amortization of prepaid debt financing costs as
interest expense.
PROVISION FOR INCOME TAXES
For the three months ended July 31, 2007 we had a tax benefit of $10.8 million versus a tax
provision of $3.1 million for the three months ended July 31, 2006. The tax benefit the three
months ended July 31, 2007 has been influenced significantly by certain tax adjustments required in
purchase accounting for the NETg acquisition and the release of approximately $49.1 million of U.S.
valuation allowance on net operating loss (NOL) carryforwards. Approximately $25 million of this
valuation allowance was recorded through reductions to tax expense and $24.1 million was recorded
through adjustments to goodwill.
DISONTINUED OPERATIONS
In connection with the NETg acquisition, we decided to discontinue four product lines acquired from
NETg because we believe these product offerings do not represent areas that can grow or be
consistent with our profit model. The product lines that have been identified as discontinued
operations are Wave, NETG Press Now, Interact Now and Financial Campus. We recorded income from discontinued operations, net of tax, of $524,000 in the
three months ended July 31, 2007.
27
SIX MONTHS ENDED JULY 31, 2007 VERSUS SIX MONTHS ENDED JULY 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended July 31, |
|
|
|
Dollar |
|
|
Percent Change |
|
|
|
|
|
|
Increase/(Decrease) |
|
|
Increase/(Decrease) |
|
|
Percentage of Revenue |
|
|
|
2006/2007 |
|
|
2006/2007 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Revenue |
|
$ |
18,222 |
|
|
|
17 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenue amortization of
intangible assets |
|
|
(1,521 |
) |
|
|
(44 |
)% |
|
|
2 |
% |
|
|
3 |
% |
Cost of revenue |
|
|
2,430 |
|
|
|
19 |
% |
|
|
12 |
% |
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
17,313 |
|
|
|
18 |
% |
|
|
86 |
% |
|
|
85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
1,739 |
|
|
|
9 |
% |
|
|
17 |
% |
|
|
18 |
% |
Selling and marketing |
|
|
(130 |
) |
|
|
|
|
|
|
36 |
% |
|
|
42 |
% |
General and administrative |
|
|
1,999 |
|
|
|
14 |
% |
|
|
13 |
% |
|
|
13 |
% |
Amortization of intangible assets |
|
|
3,492 |
|
|
|
422 |
% |
|
|
3 |
% |
|
|
1 |
% |
Merger related integration expenses |
|
|
8,528 |
|
|
|
* |
|
|
|
7 |
% |
|
|
|
|
Restatement SEC investigation |
|
|
902 |
|
|
|
281 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
16,530 |
|
|
|
20 |
% |
|
|
76 |
% |
|
|
74 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
783 |
|
|
|
6 |
% |
|
|
10 |
% |
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense), net |
|
|
(352 |
) |
|
|
1,135 |
% |
|
|
|
|
|
|
|
|
Interest income |
|
|
462 |
|
|
|
25 |
% |
|
|
2 |
% |
|
|
2 |
% |
Interest expense |
|
|
(3,678 |
) |
|
|
2,704 |
% |
|
|
(3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before (benefit) / provision for income taxes from continuing
operations |
|
|
(2,785 |
) |
|
|
(20 |
)% |
|
|
9 |
% |
|
|
13 |
% |
(Benefit) / provision for income taxes |
|
|
(13,260 |
) |
|
|
* |
|
|
|
(6 |
)% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations |
|
|
10,475 |
|
|
|
118 |
% |
|
|
15 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
operations of businesses to be disposed, net of income tax |
|
|
524 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,999 |
|
|
|
124 |
|
|
|
15 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS ENDED JULY 31, |
|
|
|
2007 |
|
|
2006 |
|
|
CHANGE |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Modal Learning |
|
$ |
128,396 |
|
|
$ |
107,131 |
|
|
$ |
21,265 |
|
Retail Certification |
|
|
213 |
|
|
|
3,256 |
|
|
|
(3,043 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
128,609 |
|
|
$ |
110,387 |
|
|
$ |
18,222 |
|
|
|
|
|
|
|
|
|
|
|
The
primary cause of the increase in revenue is due to additional revenue from the NETg acquisition, a
growth in sales of our informal learning product lines and additional revenue earned under
agreements with third party resellers of our products. Approximately $10.8 million of revenue
earned in the six months ended July 31, 2007 relates to the amortization of acquired deferred
revenue we retained following the NETg acquisition.
The sale of certain assets related to SmartCertify, our Retail Certification business, resulted in
a reduction in revenue of $3.0 million in our Retail Certification business for the six months
ended July 31, 2007 as compared to the six months ended July 31, 2006. Revenue from our Retail
Certification business are $0.2 million in fiscal 2008 as
compared to $5.0 million in fiscal 2007. Our Retail Certification
business will not contribute additional revenue in fiscal 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS ENDED JULY 31, |
|
(IN THOUSANDS) |
|
2007 |
|
|
2006 |
|
|
CHANGE |
|
|
|
(In thousands) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
101,080 |
|
|
$ |
86,467 |
|
|
$ |
14,613 |
|
International |
|
|
27,529 |
|
|
|
23,920 |
|
|
|
3,609 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
128,609 |
|
|
$ |
110,387 |
|
|
$ |
18,222 |
|
|
|
|
|
|
|
|
|
|
|
28
Revenue increased by 17% and 15% in the United States and internationally, respectively, in the six
months ended July 31, 2007 as compared to the six months ended July 31, 2006 as a result of
increased MML revenue generated from the NETg and TLC acquisitions and from existing customers and
new business.
COSTS AND EXPENSES
The increase in cost of revenue in the six months ended July 31, 2007 versus the six months ended
July 31, 2006 was primarily due to increased revenue as well as costs associated with legacy NETg
revenue transactions.
The decrease in cost of revenue amortization of intangible assets in the six months ended July
31, 2007 versus the six months ended July 31, 2006 was primarily due to certain intangible assets
related to capitalized software development costs and technology acquired in business combinations
becoming fully amortized during the previous fiscal year. This decrease was partially offset by the
addition of the amortization of the intangible assets acquired from the acquisition of NETg.
The increase in research and development expenses in the six months ended July 31, 2007 versus the
six months ended July 31, 2006 was primarily due to increased repairs and maintenance expenses of
$1.2 million associated with maintaining multiple platforms as a
result of the NETg acquisition,
fulfilling obligations of acquired customer contracts and product commitments assumed in the acquisition of NETg.
In addition we incurred $0.4 million in expenses related to our new Leadership Development Channel
(LDC) operations for video content development acquired from TLC, which was partially offset by a
reduction of $0.2 million in stock based compensation.
The decrease in selling and marketing expenses in the six months ended July 31, 2007 versus the six
months ended July 31, 2006 was primarily due to a decrease of $0.5 million of stock-based
compensation expense, as well as a reduction in consulting expense of $0.3 million and commission
expense of $1.1 million. This decrease was partially offset by increased salary and benefits
expense of $1.3 million as a result of headcount additions which include direct sales, telesales,
field service to support the increased customer base as a result of the NETg acquisition.
The increase in general and administrative expenses in the six months ended July 31, 2007 versus
the six months ended July 31, 2006 was primarily due to $1.5 million of costs associated with
additional personnel, contractors and professional services required to support the increase in
customer contracts and transition activities from the NETg acquisition. In addition we incurred
approximately $0.5 million of consulting expense paid to a member of our board of directors related
to the NETg acquisition.
The increase in amortization of intangible assets in the six months ended July 31, 2007 versus the
six months ended July 31, 2006 was primarily due to the amortization of intangible assets acquired
as a result of the NETg acquisition.
We have unamortized stock expense of $11.8 million and $2.8 million at July 31, 2007 and
July 31, 2006, respectively.
In the six months ended July 31, 2007 we incurred approximately $8.5 million of merger and
integration related expenses as a result of efforts undertaken to integrate NETgs operations into
ours. Included in these costs are approximately $6.1 million of salary and benefits for NETg
employees conducting transition activities as well as approximately $2.4 million of charges
related to facilities, systems and process integration activities.
Restatement SEC investigation charges increased in the six months ended July 31, 2007 versus the
six months ended July 31, 2006 due to an increase in legal expenses related to the SECs informal
inquiry into the pre-merger option granting practices at SmartForce.
OTHER INCOME/(EXPENSE), NET
The change in other income/ (expense), net in the six months ended July 31, 2007 versus the six
months ended July 31, 2006 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.
29
INTEREST INCOME
The increase in interest income in the six months ended July 31, 2007 versus the six months ended
July 31, 2006 was primarily due to more funds being available for investment and higher interest
rates on our cash and cash equivalents and investments during the first three months of fiscal
2008. This increase was partially offsets by the reduction of funds available for investment as a
result of cash used for the acquisition of NETg in May 2007.
INTEREST EXPENSE
The increase in interest expense in the six months ended July 31, 2007 versus the six months ended
July 31, 2006 was primarily due to the interest expense recognized as a result of the debt incurred
for the acquisition of NETg as well as the amortization of prepaid debt financing costs as interest
expense.
PROVISION FOR INCOME TAXES
For the six months ended July 31, 2007we had a tax benefit of $8.2 million versus a tax provision
of $5.1 million for the six months ended July 31, 2006. For the six month period ended July 31,
2007, the $8.2 million tax benefit comprised of a $25 million deferred tax benefit related to the
reduction in our deferred tax asset valuation allowance, offset by the effects of certain tax
adjustments required in purchase accounting for the NETg acquisition.
DISONTINUED OPERATIONS
In connection with the NETg acquisition, the Company decided to discontinue four product lines
acquired from NETg because the Company believes these product offerings do not represent areas that
can grow or be consistent with the Companys profit model. The product lines that have been
identified as discontinued operations are Wave, NETG Press Now, Interact Now and Financial Campus.
The Company recorded income from discontinued operations, net of tax, of $524,000 in the six
months ended July 31, 2007.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 2007, our principal source of liquidity was our cash and cash equivalents and
short-term investments, which totaled $57.6 million. This compares to $104.1 million at January 31,
2007.
Net cash provided by operating activities of $10.2 million for the six months ended July 31, 2007
was primarily due to net income from continuing operations of $19.4 million, which included the
impact of non-cash expenses for depreciation and amortization and amortization of intangible assets
of $10.3 million, share-based compensation expense of $2.6 million and a non-cash income tax
benefit of $9.2 million. Net cash provided by operating activities was also a result of a decrease
in accounts receivable of $41.8 million as well as a decrease in prepaid and other current assets
of $4.9 million. These amounts were partially offset by a decrease in accrued expenses of $29.6
million and a decrease in deferred revenue of $30.5 million. These decreases in accounts
receivable, accrued expenses and deferred revenue 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 $227.7 million for the six months ended July 31, 2007,
which includes cash used to acquire NETg of $275 million, net
of cash acquired and cash used to acquire TLC of $3.9
million, net of cash acquired. This was partially offset by the maturity of investments generating a cash inflow of
approximately $38.0 million in the six months ended July 31, 2007. In addition, approximately $16.1
million of cash was released from restricted cash as a result of making the final payment related
to the settlement of the 2002 class action lawsuit in April 2007. Prior to making that payment, we
were required to place a restriction on this cash to secure an outstanding letter of credit of
$15.5 million.
Net cash provided by financing activities was $203.3 million for the six months ended July 31,
2007. This was the result of borrowing under long-term debt of $194.1 million net of debt
acquisition costs, as well as proceeds we received from the exercise of share options under our
various share option programs and share purchases under our 2004 Employee Share Purchase Plan of
$9.2 million.
30
We had a working capital deficit of approximately $46.2 million as of July 31, 2007 and had working
capital of approximately $38.1 million as of January 31, 2007. The decrease in our working capital
was primarily due to cash used to acquire NETg of $77.0 million and cash used to acquire TLC of
$4.1 million.
As of
January 31, 2007, we had U.S. federal net operating loss (NOL) carryforwards of approximately $284.2 million. These NOL
carryforwards, 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. Included in the $284.2 million are approximately $157.1 million of U.S. NOL
carryforwards that were acquired in the SmartForce Merger and the purchase of Books 24x7. As a result of the release of
the U.S. valuation allowance, in the three months ended July 31,
2007, we realized the benefits of approximately $69 million of these acquired NOL carryforwards through
a reduction to goodwill. We will realize the remaining benefits of
these acquired NOL carryforwards through reductions to goodwill and
non-goodwill intangible assets. Also included in the
$284.2 million are approximately $127.1 million of U.S. NOL
carryforwards that relate to our operations. As a result of the
release of the U.S. valuation allowance, in the three months ended
July 31, 2007, we realized the benefits of $7.1 million of
these NOL carryforwards through a reduction to the provision for
income taxes. Also included in the $284.2 million at January 31, 2007 is approximately $31.3 million of NOL carryforwards in the
United States resulting from disqualifying dispositions. We will realize the benefit of these
losses through increases to shareholders equity in the periods in which the losses are utilized to
reduce tax payments. We also acquired $365,000 of U.S. tax credit carryforwards in the SmartForce
Merger and the purchase of Books 24x7. As with the acquired NOL carryforwards, we will realize the
benefits of these credit carryforwards through reductions to goodwill
and non-goodwill intangible assets.
Additionally, we had approximately $93.5 million of NOL carryforwards in jurisdictions outside of
the U.S.. In addition, included in the $93.5 million is approximately $88.1 million of NOL
carryforwards in jurisdictions outside the U.S. acquired in the SmartForce Merger and the purchase
of Books 24x7. We will realize the benefits of these acquired NOL carryforwards through reductions to
goodwill and non-goodwill intangible assets. We also had U.S. federal tax credit carryforwards of
approximately $6.8 million at January 31, 2007.
We lease certain of our facilities and certain equipment and furniture under operating lease
agreements that expire at various dates through 2023. In addition we have a note payable related to
the acquisition of NETg which will be paid out over the next 6 years. Future minimum lease
payments, net of estimated rentals, under these agreements and the debt repayments schedule 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 |
|
$ |
23,875 |
|
|
$ |
8,099 |
|
|
$ |
7,263 |
|
|
$ |
2,364 |
|
|
$ |
6,149 |
|
Debt Obligations |
|
|
200,000 |
|
|
|
2,000 |
|
|
|
4,000 |
|
|
|
4,000 |
|
|
|
190,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Obligations |
|
$ |
223,875 |
|
|
$ |
10,099 |
|
|
$ |
11,263 |
|
|
$ |
6,364 |
|
|
$ |
196,149 |
|
On February 9, 2007, we acquired the assets of TLC for approximately $4.1 million with an
additional consideration of up to $0.5 million payable to the shareholders of TLC upon achievement
of certain integration milestones prior to February 2008. As of July 31, 2007, $0.1 million of this
additional consideration had been paid.
We used approximately $77.0 million of our cash on May 14, 2007 for the purchase price and related
expenses of the NETg acquisition. In connection with the closing of the NETg acquisition, we and
our subsidiary SkillSoft Corporation entered into a Credit Agreement with Credit Suisse, as agent,
and certain other parties. The Credit Agreement provides for a $225 million senior secured credit
facility comprised of a $200 million term loan facility and a $25 million revolving credit
facility. Proceeds of the Credit Agreement were used to finance the NETg acquisition and for
general corporate purposes. In connection with the NETg acquisition, SkillSoft Corporation borrowed
the entire $200 million available under the term loan facility. The term loan bears interest at a
rate per annum equal to, at our election, (i) an alternative base rate plus a margin of 1.75% or
(ii) adjusted LIBOR plus a margin of 2.75%, and revolving loans bear interest at a rate per annum
equal to, at our election, (i) an alternative base rate plus a margin of 1.50% to 1.75% or (ii)
adjusted LIBOR plus a margin of 2.50% to 2.75%. The alternative base rate is the greater of Credit
Suisses prime rate and the federal funds effective rate plus 0.50%. Overdue amounts under the
Credit Agreement bear interest at a rate per annum equal to 2.00% plus the rate otherwise
applicable to such loan.
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We are required to pay the lenders a commitment fee at a rate per annum of 0.50% on the average
daily unused amount of the revolving credit facility commitments of the lenders during the period
for which payment is made, payable quarterly in arrears. The term loan is payable in 24 consecutive
quarterly installments of (i) $500,000 in the case of each of the first 23 installments, on the
last day of each of September, December, March, and June commencing September 30, 2007 and ending
on March 31, 2013, and (ii) the balance due on May 14, 2013. The revolving credit facility
terminates on May 14, 2012, at which time all outstanding borrowings under the revolving credit
facility are due. We may optionally prepay loans under the Credit Agreement at any time, without
penalty. The loans are subject to mandatory prepayment in certain circumstances.
The Credit Agreement contains customary representations and warranties as well as affirmative and
negative covenants. Affirmative covenants include, among others, with respect to us and our
subsidiaries, maintenance of existence, financial and other reporting, payment of obligations,
maintenance of properties and insurance, maintenance of a credit rating, and interest rate
protection. Negative covenants include, among others, with respect to us and our subsidiaries,
limitations on incurrence or guarantees of indebtedness, limitations on liens, limitations on sale
and lease-back transactions, limitations on investments, limitations on mergers, consolidations,
asset sales and acquisitions, limitations on dividends, share redemptions and other restricted
payments, limitations on affiliate transactions, limitations on hedging transactions, and
limitations on capital expenditures. The Credit Agreement also includes a leverage ratio covenant
and an interest coverage ratio covenant (the ratio of our consolidated EBITDA to our consolidated
interest expense as calculated pursuant to the Credit Agreement).
The Credit Agreement contains customary events of default, including, among others, inaccuracy of
representations and warranties in any material respect, non-payment of principal, interest or other
amounts when due, violation of covenants, cross-defaults with other material indebtedness, certain
undischarged judgments, the occurrence of certain ERISA or bankruptcy or insolvency events and the
occurrence of a Change in Control (as defined in the Credit Agreement). Upon the occurrence and
during the continuance of an event of default under the Credit Agreement, the lenders may declare
the loans and all other obligations under the Credit Agreement immediately due and payable. A
bankruptcy or insolvency event of default causes such obligations automatically to become
immediately due and payable.
Within the
definitions of the Credit Agreement, a material adverse effect shall
mean a material adverse condition or material adverse change in or
materially and adversely affecting (a) the business, assets,
liabilities, operations or financial condition of Holdings, the
Borrower and the Subsidiaries, taken as a whole, or
(b) the validity or enforceability of any of the loan
Documents or the rights and remedies of Administrative Agent, the
Collateral Agent or the Secured Parties there under. No event, change or condition has occurred since January 31, 2007 that has caused, or could
reasonably be expected to cause, a material adverse effect and as of
July 31, 2007 we were in compliance with all other covenants under the
Credit Agreement.
The loans and our other obligations under the Credit Agreement and related loan documents are
secured by substantially all of our tangible and intangible assets.
In conjunction with the Credit Agreement we entered into a $160 million Hedge Contract at a rate of
5.1015% to limit our exposure to the possible fluctuations of the LIBOR. Under the terms of the
Credit Agreement we are required to hedge a minimum of 50% of the Term Loan for a period of two
years.
We expect to experience similar spending related to capital expenditures in the fiscal year ending
January 31, 2008, as compared to the fiscal year ended January 31, 2007, excluding capital
expenditures related to the acquisition of NETg. These expenditures cannot be accurately estimated
at this time. In addition we will continue to invest in 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, 2008 are expected to be approximately $6.0 to $8.0 million.
We currently have the ability to purchase, subject to certain limitations, up to 3,500,000 of
our outstanding shares under an approved shareholder repurchase plan that expires on September 22,
2007. Under the plan, 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 have also incurred additional restrictions as a result of the
term loan agreement with Credit Suisse we executed as part of the NETg acquisition. We expect that
the principal sources of funding for our operating expenses, capital expenditures, debt payment
obligations 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, including the debt repayment for at least the
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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 (in addition to and including NETg). 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 share-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 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 comparison.
In addition, certain covenants in our Credit Agreement are based on non-GAAP financial measures and
evaluating and presenting these measures allows us and our investors to assess our compliance with
the covenants in our Credit Agreement and thus our liquidity situation.
Our management recognizes that non-GAAP financial results are not a substitute for GAAP results,
but believes that non-GAAP measures are helpful in assisting them in understanding and managing our
business.
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 July 31, 2007, 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.
In order
to limit our exposure to interest rate changes, we entered into an interest rate swap agreement with an initial notional amount of $160
million which amortizes over a period consistent with our anticipated payment schedule.
This strategy uses an interest rate swap to effectively convert $160 million in variable rate
borrowings into fixed rate liabilities at 5.1015%.
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effective interest rate. The interest rate swap is considered to be a hedge against changes in the
amount of future cash flows associated with interest payments on a variable rate loan.
FOREIGN CURRENCY RISK
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
United Kingdom pound sterling relative to the U.S. dollar, which could adversely affect our
business and the results of operations. During the six months ended July 31, 2007 and 2006, we
incurred foreign currency exchange losses of $407,000 and $110,000, 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 July 31, 2007. The term
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (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 July 31, 2007, 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 July 31, 2007 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
We have been the subject of a formal investigation by the SEC into the events and circumstances
giving rise to the 2003 restatement of SmartForce PLCs accounts (the Restatement Investigation).
On July 19, 2007, the SEC announced that three former officers
and one former employee of SmartForce had
settled SEC claims in connection with the Restatement Investigation. The SEC staff did not ask
that ant claims be brought against us, or request that we enter into any settlement and we do not
believe that the SEC will make any claim against us in connection with the Restatement
Investigation, including any claim for payment by us.
In January 2007, the Boston District Office of the SEC informed us that we are the subject of an
informal investigation concerning options granting practices at SmartForce for the period beginning
April 12, 1996 through July 12, 2002 (the Option Granting Investigation), prior to the September
6, 2002 merger with SmartForce PLC. We have provided documents in response to requests from the
SEC. The SEC staff has also informed us that despite closure of the Restatement Investigation, the
staff has not determined whether to close the Options Granting Investigation.
We believe that we accounted for SmartForce stock options grants properly in the merger, and
believe that as a result of the merger accounting our financial statements are unlikely to change
even if the SEC concludes that
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SmartForce did not properly account for its pre-merger option grants. When SkillSoft Corporation
and SmartForce merged on September 6, 2002, SkillSoft Corporation was for accounting purposes
deemed to have acquired SmartForce. Accordingly, the pre-merger financial statements of SmartForce
are not included in our historical financial statements, and our financial statements include
results from what had been the business of SmartForce only from the date of the merger. Under
applicable accounting rules, we valued all of the outstanding SmartForce stock options assumed in
the merger at fair value upon consummation of the merger. Accordingly, we believe that our
accounting for SmartForce stock options will not be affected by any error that SmartForce may have
made in its own accounting for stock option grants, and that that the Options Granting
Investigation should not require any change in our financial statements.
We continue to cooperate with the SEC in the Option Granting Investigation. At the present
time, we are unable to predict the outcome of the Option Granting Investigation or its potential
impact on our operating results or financial position.
We are not a party to any other material legal proceedings.
ITEM 1A. RISK FACTORS
Investors should carefully consider the risks described below before making an investment decision
with respect to our shares. 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, 2007, there have been no material changes to the risk factors included in that report,
except that the risk related to the ongoing investigation by the SEC has been revised to reflect
developments in that investigation.
RISKS RELATED TO LEGAL PROCEEDINGS
WE ARE THE SUBJECT OF AN ONGOING INVESTIGATION BY THE SEC.
We have been the subject of a formal investigation by the United States Securities and Exchange
Commission (SEC) into the events and circumstances giving rise to the 2003 restatement of
SmartForce PLCs accounts (the Restatement Investigation). On July 19, 2007, the SEC announced
that three former officers and one former employee of SmartForce had settled SEC claims in
connection with the Restatement Investigation. The former officers/employee will make payments in
connection with their settlements. It is possible that they may seek to require us to indemnify
them for such payments. The SEC staff did not ask that any claims be brought against us, or
request that we enter into any settlement, and we do not believe that the SEC will make any claim
against us in connection with the Restatement Investigation, including any claim for payment by us.
The Boston District Office of the SEC informed us in January 2007 that we are the subject of an
informal investigation concerning options granting practices at SmartForce for the period beginning
April 12, 1996 through July 12, 2002, prior to the September 6, 2002 merger with SmartForce PLC. We
have produced documents in response to requests from the SEC.
We continue to cooperate with the SEC in this matter. At the present time, we are unable to predict
the outcome of this matter or its potential impact on our operating results or financial position.
However, we may incur substantial costs in connection with the SEC investigation, and this
investigation could cause a diversion of management time and attention. In addition, we could be
subject to 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. Any
or all of those issues could adversely affect our business, operating results and financial
position.
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
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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.
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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.
RISKS RELATED TO THE OPERATION OF OUR BUSINESS
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):
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the size and timing of new/renewal agreements and upgrades; |
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royalty rates; |
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the announcement, introduction and acceptance of new products, product enhancements and
technologies by us and our competitors; |
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the mix of sales between our field sales force, our other direct sales channels and our telesales channels; |
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general conditions in the U.S. or the international economy; |
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the loss of significant customers; |
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delays in availability of new products; |
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product or service quality problems; |
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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; |
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the spending patterns of our customers; |
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litigation costs and expenses; |
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non-recurring charges related to acquisitions; |
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growing competition that may result in price reductions; and |
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currency fluctuations. |
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.
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PAST AND FUTURE ACQUISITIONS, INCLUDING THE RECENT ACQUISITION OF NETG, 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. On May 14, 2007, we acquired NETg from The Thomson
Corporation. However, we may not be successful in identifying or consummating future attractive
acquisition opportunities. Moreover, any acquisitions we do consummate, including the NETg
acquisition, may not produce benefits commensurate with the purchase price we pay or our
expectations for the acquisition. In addition, acquisitions, including the NETg acquisition,
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 retaining or transitioning customers and employees 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 financial, accounting or other problems
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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. |
WE HAVE EXPERIENCED NET LOSSES IN THE PAST, AND WE MAY BE UNABLE TO MAINTAIN PROFITABILITY.
We recorded a net loss of $20.1 million for the fiscal year ended January 31, 2005, net income of
$35.2 million for the fiscal year ended January 31, 2006 and net income of $24.2 million for the
fiscal year ended January 31, 2007. While we achieved profitability in the last two fiscal years,
we cannot guarantee that our business will sustain profitability in any future period.
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.
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INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES, WHICH MAY
RESULT IN REDUCED REVENUE 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:
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third-party suppliers of instructor-led information technology, business, management
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technology companies that offer learning courses covering their own technology products; |
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suppliers of computer-based training and e-learning solutions; |
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internal education, training departments and HR outsourcers of potential customers; and |
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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
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
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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 on 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 has 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.
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.
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
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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 revenue 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 are 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 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 revenue 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.
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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. 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.
OUR BUSINESS IS SUBJECT TO CURRENCY FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Due to our multinational operations, our operating results are subject to fluctuations based upon
changes in the exchange rates between the currencies in which revenue is 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.
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 revenue 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 revenue, 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.
RISKS RELATED TO OUR ADSs
THE MARKET PRICE OF OUR ADSs MAY FLUCTUATE AND MAY NOT BE SUSTAINABLE.
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.
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SALES OF LARGE BLOCKS OF OUR ADSs COULD CAUSE THE MARKET PRICE OF OUR ADSs TO DROP SIGNIFICANTLY,
EVEN IF OUR BUSINESS IS DOING WELL.
Some shareholders own 5% or more of our outstanding shares. We cannot predict the effect, if any,
that public sales of these shares will have on the market price of our ADSs. If our significant
shareholders, or our directors and officers, sell substantial amounts of our ADSs in the public
market, or if the public perceives that such sales could occur, this could have an adverse impact
on the market price of our ADSs, even if there is no relationship between such sales and the
performance of our business.
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
Not applicable
ITEM 5. OTHER INFORMATION
In connection with the acquisition of NETg on May 14, 2007, our management effected an acquisition
and integration effort to eliminate redundant facilities and employees, reduce the cost structure
of the business and better align our operating expenses with existing economic conditions. We
expect to complete this exit plan by the second quarter of fiscal 2009. Please see Note 7 to the
Condensed Consolidated Financial Statements included in this Form 10-Q for a detailed description
of the exit plan.
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: September 10, 2007 |
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
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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. |
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