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 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2005
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
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N/A |
(STATE OR OTHER JURISDICTION OF
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(I.R.S. EMPLOYER |
INCORPORATION OR ORGANIZATION)
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IDENTIFICATION NO.) |
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107 NORTHEASTERN BOULEVARD
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03062 |
NASHUA, NEW HAMPSHIRE |
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(ZIP CODE) |
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 324-3000
Not Applicable
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No
þ
On November 30, 2005, the registrant had 107,232,719 Ordinary Shares outstanding (issued or
issuable in exchange for the registrants outstanding American Depository Shares).
SKILLSOFT PLC
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2005
INDEX
2
PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SKILLSOFT PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS EXCEPT SHARE DATA)
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October 31, |
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January 31, |
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2005 |
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2005 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
48,059 |
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$ |
34,906 |
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Short-term investments |
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21,656 |
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20,021 |
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Restricted cash |
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5,409 |
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994 |
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Accounts receivable, net |
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44,741 |
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87,030 |
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Prepaid expenses and other current assets |
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16,213 |
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22,659 |
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Total current assets |
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136,078 |
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165,610 |
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Property and equipment, net |
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9,376 |
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9,137 |
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Intangible assets, net |
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10,581 |
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16,171 |
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Goodwill |
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94,217 |
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103,576 |
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Long-term investments |
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221 |
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8,943 |
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Other assets |
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454 |
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60 |
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Total Assets |
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$ |
250,927 |
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$ |
303,497 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
3,258 |
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$ |
5,361 |
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Accrued expenses |
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43,231 |
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66,995 |
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Deferred revenue |
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102,639 |
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140,008 |
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Total current liabilities |
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149,128 |
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212,364 |
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Long term liabilities |
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4,173 |
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6,214 |
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Commitments and contingencies (Note 11) |
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Stockholders equity: |
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Ordinary
Shares, 0.11 par value: 250,000,000 shares authorized;
107,227,094 and 106,207,818 shares
issued and outstanding at October
31, 2005 and January 31, 2005,
respectively |
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11,758 |
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11,617 |
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Additional paid-in capital |
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561,672 |
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559,052 |
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Treasury stock, at cost, 6,533,884
and 443,757 ordinary shares at
October 31, 2005 and January 31,
2005, respectively |
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(24,524 |
) |
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(2,523 |
) |
Accumulated deficit |
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(449,935 |
) |
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(481,029 |
) |
Deferred compensation |
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(682 |
) |
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(1,358 |
) |
Accumulated other comprehensive loss |
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(663 |
) |
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(840 |
) |
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Total stockholders equity |
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97,626 |
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84,919 |
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Total Liabilities and Stockholders Equity |
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$ |
250,927 |
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$ |
303,497 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
SKILLSOFT PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
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THREE MONTHS ENDED |
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NINE MONTHS ENDED |
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October 31, |
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October 31, |
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2005 |
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2004 |
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2005 |
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2004 |
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Revenue |
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$ |
53,901 |
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$ |
52,507 |
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$ |
160,833 |
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$ |
155,949 |
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Cost of revenue |
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6,509 |
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5,597 |
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18,662 |
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15,932 |
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Gross profit |
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47,392 |
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46,910 |
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142,171 |
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140,017 |
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Operating expenses: |
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Research and development |
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9,122 |
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10,505 |
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29,181 |
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32,587 |
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Selling and marketing |
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20,382 |
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22,441 |
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65,130 |
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69,467 |
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General and administrative |
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5,496 |
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6,388 |
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18,507 |
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18,625 |
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Legal settlements/ (insurance recoveries) |
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(19,500 |
) |
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Amortization of intangible assets |
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2,285 |
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2,390 |
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6,838 |
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7,202 |
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Amortization of stock-based compensation (1) |
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219 |
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296 |
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675 |
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944 |
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Restructuring |
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226 |
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(7 |
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813 |
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315 |
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Restatement: |
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SEC investigation |
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507 |
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803 |
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1,591 |
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1,905 |
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Other professional fees |
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250 |
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Total operating expenses |
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38,237 |
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42,816 |
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103,235 |
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131,295 |
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Operating income |
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9,155 |
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4,094 |
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38,936 |
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8,722 |
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Other income/(expense), net |
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341 |
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75 |
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727 |
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(164 |
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Interest income, net |
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268 |
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88 |
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872 |
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|
481 |
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Gain/(loss) on sale of assets, net |
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73 |
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(608 |
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Income before provision for income taxes |
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9,837 |
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4,257 |
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39,927 |
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9,039 |
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Provision for income taxes |
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4,154 |
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142 |
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8,833 |
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363 |
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Net income |
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$ |
5,683 |
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$ |
4,115 |
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$ |
31,094 |
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$ |
8,676 |
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Net income per share (Note 9): |
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Basic |
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$ |
0.06 |
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$ |
0.04 |
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$ |
0.30 |
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$ |
0.08 |
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Basic weighted average common shares outstanding |
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100,663,757 |
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105,935,620 |
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103,055,159 |
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104,851,577 |
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Diluted |
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$ |
0.06 |
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$ |
0.04 |
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$ |
0.30 |
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$ |
0.08 |
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Diluted weighted average common shares
outstanding |
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101,540,690 |
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108,941,334 |
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103,726,562 |
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109,974,424 |
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(1) |
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The following summarizes the departmental allocation of the stock-based compensation |
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THREE MONTHS ENDED |
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NINE MONTHS ENDED |
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October 31, |
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October 31, |
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2005 |
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2004 |
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2005 |
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2004 |
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Research and development |
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$ |
47 |
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$ |
66 |
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$ |
140 |
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$ |
224 |
|
Selling and marketing |
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|
164 |
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|
219 |
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|
511 |
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|
683 |
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General and administrative |
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8 |
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11 |
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24 |
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|
37 |
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$ |
219 |
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$ |
296 |
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$ |
675 |
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$ |
944 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SKILLSOFT PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
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NINE MONTHS ENDED |
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October 31, |
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2005 |
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2004 |
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Cash flows from operating activities: |
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Net income |
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$ |
31,094 |
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$ |
8,676 |
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Adjustments to reconcile net income to net cash provided by / (used in) operating activities
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Stock-based compensation |
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675 |
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|
944 |
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Depreciation and amortization |
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3,790 |
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|
3,439 |
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Amortization of intangible assets |
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6,838 |
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|
7,202 |
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Provision/(recovery) for bad debts |
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(772 |
) |
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(1 |
) |
Loss on sale of assets |
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|
608 |
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Provision for income tax non-cash |
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7,853 |
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|
226 |
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Changes in current assets and liabilities: |
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Accounts receivable, net |
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41,381 |
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|
26,903 |
|
Prepaid expenses and other current assets |
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6,815 |
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|
10,706 |
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Accounts payable |
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(2,644 |
) |
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(2,917 |
) |
Accrued expenses |
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(22,570 |
) |
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(58,900 |
) |
Deferred revenue |
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(36,547 |
) |
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(29,907 |
) |
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Net cash provided by / (used in) operating activities |
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36,521 |
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(33,629 |
) |
Cash flows from investing activities: |
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Purchases of property and equipment |
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(4,157 |
) |
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(6,423 |
) |
Capitalized software development costs |
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(1,247 |
) |
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Purchases of investments |
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(14,848 |
) |
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(40,481 |
) |
Maturity of investments |
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|
21,844 |
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|
35,258 |
|
(Designation) / release of restricted cash, net |
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(4,415 |
) |
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|
24,600 |
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Net cash (used in) / provided by investing activities |
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(2,823 |
) |
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|
12,954 |
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Cash flows from financing activities: |
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Proceeds from exercise of stock options |
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550 |
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|
20,553 |
|
Proceeds from employee stock purchase plan |
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|
2,210 |
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Purchase of treasury stock |
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(22,000 |
) |
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Net cash (used in)/provided by financing activities |
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|
(19,240 |
) |
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|
20,553 |
|
Effect of exchange rate changes on cash and cash equivalents |
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(1,305 |
) |
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|
359 |
|
|
|
|
|
|
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|
Net increase in cash and cash equivalents |
|
|
13,153 |
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|
237 |
|
Cash and cash equivalents, beginning of period |
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|
34,906 |
|
|
|
42,866 |
|
|
|
|
|
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|
Cash and cash equivalents, end of period |
|
$ |
48,059 |
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|
$ |
43,103 |
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|
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|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SKILLSOFT PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY
SkillSoft PLC, formerly known as SmartForce PLC (the Company or SkillSoft), was incorporated in
Ireland on August 8, 1989. The Company is a leading provider of content resources and complementary
technologies for integrated enterprise learning. On September 6, 2002, the Company completed its
merger with SkillSoft Corporation (the Merger). Due to a number of factors, including composition
of the board of directors, management team, and concentrated shareholder interest, all of which had
SkillSoft Corporation being in a control or majority position, the Merger was accounted for as a
reverse acquisition, with SkillSoft Corporation as the accounting acquirer.
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 October 31, 2005, the results of its
operations for the three and nine months ended October 31, 2005 and 2004 and its cash flows for the
nine months ended October 31, 2005 and 2004. 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,
2005. The results of operations for the interim period are not necessarily indicative of the
results of operations to be expected for the full year.
3. CASH 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 October 31, 2005 and January 31, 2005, cash
equivalents consisted mainly of commercial paper, short-term notes and money market funds. The
Company considers the cash held in certificates of deposit with a commercial bank to secure its
line of credit, to secure certain facility leases and to secure funds to defend named former and
current executives and board members of SmartForce PLC for actions arising out of the SEC
investigation to be restricted cash. The Company accounts for its investments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities (SFAS No. 115). Under SFAS No. 115, securities that the Company does not
intend to hold to maturity are reported at market value, and are classified as available-for-sale.
At October 31, 2005, the Companys investments were classified as available for sale and had an
average maturity of approximately 86 days. These investments are classified as current assets in
the accompanying condensed consolidated balance sheets as they mature within one year.
4. REVENUE RECOGNITION
The Company generates revenue from the license of products and services and from providing
hosting/application service provider (ASP) services.
The Company follows the provisions of the American Institute of Certified Public Accountants
(AICPA) Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4
and SOP 98-9 to account for revenue derived pursuant to license agreements under which customers
license the Companys products and services. The pricing for the Companys courses varies based
upon the number of course titles or the courseware bundle licensed by a customer, the number of
users within the customers organization and the length of the license agreement (generally one,
two or three years). License agreements permit customers to exchange course titles, generally on
the contract anniversary date. Additional product features, such as hosting and online mentoring
services, are separately licensed for an additional fee.
The pricing for the Companys SkillChoice multi-modal learning (SMML) licenses varies based on the
choice of SMML, the content offering selected by the customer, the number of users within the
customers organization and the length of the license agreement. A SMML license provides customers
access to a full range of learning products including courseware, Referenceware, simulations,
mentoring and prescriptive assessment.
6
A Referenceware license gives users access to a full Referenceware library within one or more
Referenceware collections (examples of which are; ITPro, BusinessPro, FinancePro and
OfficeEssentials) from Books24x7.com, Inc. (Books). The pricing for the Companys Referenceware
licenses varies based on the collections specified by a customer, the number of users within the
customers organization and the length of the license agreement.
The Company offers discounts from its ordinary pricing, and purchasers of licenses for larger
numbers of courses, for larger user bases or for longer periods generally receive discounts.
Generally, customers may amend their license agreements, for an additional fee, to gain access to
additional courses or product lines and/or to increase the size of the user base. The Company also
derives revenue from hosting fees for clients that use its solutions on an ASP basis and from the
provision of online mentoring services and professional services. In selected circumstances, the
Company derives revenue on a pay-for-use basis under which some customers are charged based on the
number of courses accessed by users. Revenue derived from pay-for-use contracts has been minimal to
date.
The Company recognizes revenue ratably over the license period if the number of courses that a
customer has access to is not clearly defined, available, or selected at the inception of the
contract, or if the contract has additional undelivered elements for which the Company does not
have vendor specific objective evidence (VSOE) of the fair value of the various elements. This may
occur if the customer does not specify all licensed courses at the outset, the customer chooses to
wait for future licensed courses on a when and if available basis, the customer is given exchange
privileges that are exercisable other than on the contract anniversaries, or the customer licenses
all courses currently available and to be developed during the term of the arrangement. Nearly all
of the Companys contractual arrangements result in the recognition of revenue ratably over the
license period.
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.
The Company generally bills the annual license fee for the first year of a multi-year license
agreement in advance and license fees for subsequent years of multi-year license arrangements are
billed on the anniversary date of the agreement. Occasionally, the Company bills customers on a
quarterly basis. In some circumstances, the Company offers payment terms of up to six months from
the initial shipment date or anniversary date for multi-year license agreements to its customers.
To the extent that a customer is given extended payment terms (defined by the Company as greater
than six months), revenue is recognized as cash becomes due, assuming all of the other elements of
revenue recognition have been satisfied.
The Company typically recognizes revenue from resellers when both the sale to the end user has
occurred and the collectibility of cash from the reseller is probable. With respect to reseller
agreements with minimum commitments, the Company recognizes revenue related to the portion of the
minimum commitment that exceeds the end user sales at the expiration of the commitment period
provided the Company has received payment. If a definitive service period can be determined,
revenue is recognized ratably over the term of the minimum commitment period, provided that cash
has been received or collectibility is probable.
The Company also provides professional services including instructor led training, customized
content, websites, and implementation services. The Company recognizes professional services
revenue as the services are performed.
The Company records reimbursable out-of-pocket expenses in both maintenance and services revenue
and as a direct cost of maintenance and services 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). EITF 01-14 requires reimbursable out-of-pocket
expenses incurred to be characterized as revenue in the income statement.
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.
5. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation plans using the intrinsic value
method under the recognition and measurement principles of Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB No. 25) and
7
related Interpretations under APB No. 25. The Company provides pro forma disclosures only of the
compensation expense determined under the fair value provisions of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123).
See Note 16 for a description of FASB Statement No. 123 (revised 2004), Share-Based Payment.
SFAS No. 123 requires the measurement of the fair value of stock options to employees to be
included in the statements of operations or disclosed in the notes to financial statements. The
Company elected the disclosure-only alternative under SFAS No. 123, which requires disclosure of
the pro forma effects on earnings as if the fair-value-based method of accounting under SFAS No.
123 had been adopted, as well as certain other information. In accordance with SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure (SFAS No. 148), the Company has
computed the pro forma disclosures required under SFAS No. 123 for options granted using the
Black-Scholes option-pricing model prescribed by SFAS No. 123. The weighted average information and
assumptions used for the grants were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
NINE MONTHS ENDED |
|
|
|
OCTOBER 31, |
|
|
OCTOBER 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Risk-free interest rates |
|
|
4.08% 4.38 |
% |
|
|
3.75% 3.90 |
% |
|
|
3.86% 4.38 |
% |
|
|
3.31% 4.35 |
% |
Expected dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility factor |
|
|
65 |
% |
|
|
84 |
% |
|
|
73 |
% |
|
|
88 |
% |
Expected lives |
|
7 years |
|
7 years |
|
7 years |
|
7 years |
Weighted average fair value of options granted |
|
$ |
2.60 |
|
|
$ |
4.55 |
|
|
$ |
2.65 |
|
|
$ |
9.12 |
|
Weighted average remaining contractual life of
options outstanding |
|
6.09 years |
|
7.03 years |
|
6.09 years |
|
7.03 years |
Had compensation expense for its plans been determined consistent with SFAS No. 123, the Companys
net income and basic and diluted net income per share would have been decreased to the following
pro forma amounts (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
NINE MONTHS ENDED |
|
|
|
OCTOBER 31, |
|
|
OCTOBER 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
5,683 |
|
|
$ |
4,115 |
|
|
$ |
31,094 |
|
|
$ |
8,676 |
|
Add: Stock-based employee
compensation expense recognized
under APB No. 25 |
|
|
219 |
|
|
|
296 |
|
|
|
675 |
|
|
|
944 |
|
Less: Total stock-based employee
compensation expense determined
under fair value based method for
all employee awards |
|
|
(4,063 |
) |
|
|
(6,677 |
) |
|
|
(13,069 |
) |
|
|
(19,644 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income/(loss) |
|
$ |
1,839 |
|
|
$ |
(2,266 |
) |
|
$ |
18,700 |
|
|
$ |
(10,024 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income/(loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.06 |
|
|
$ |
0.04 |
|
|
$ |
0.30 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income/(loss) |
|
$ |
0.02 |
|
|
$ |
(0.02 |
) |
|
$ |
0.18 |
|
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Because additional option grants are expected to be made in future periods, the above pro forma
disclosures may not be representative of pro forma effects on results for future periods.
6. RESTRUCTURING AND OTHER CHARGES
MERGER AND EXIT COSTS
In connection with the Merger, the Companys management effected a restructuring to eliminate
redundant facilities and headcount, reduce cost structure and better align the Companys operating
expenses with existing economic conditions. Pursuant to this restructuring, the Company recorded
$30.3 million of costs in 2002 relating to exiting activities of pre-Merger SmartForce PLC such as
severance and related benefits, costs to vacate leased facilities and other pre-Merger 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 and increased
goodwill.
The reductions in employee headcount totaled approximately 632 employees from the administrative,
sales, marketing and development functions, and amounted to a liability of approximately $14.4
million in 2002. Approximately $13.1 million was paid out against the exit
8
plan accrual through October 31, 2005, and the remaining amount of $1.2 million, net of adjustments
for foreign currency translation, is expected to be paid by the end of fiscal 2007.
In connection with the exit plan, the Company abandoned or downsized certain leased facilities
resulting in a facilities consolidation liability of $12.7 million as of January 31, 2003,
consisting of sublease losses, broker commissions and other facility costs. As part of the plan, 11
sites were vacated and 4 sites were downsized. To determine the sublease loss, which is the loss
after the Companys estimated cost recovery efforts from subleasing vacated space, certain
assumptions were made related to the (1) time period over which the property will remain vacant,
(2) sublease terms and (3) sublease rates. The lease loss is an estimate under SFAS No. 5
Accounting for Contingencies (SFAS No. 5). In the year ended January 31, 2004, the Company
revised certain of its estimates made in connection with the original purchase price pertaining to
unoccupied facilities under lease as a result of the Merger. This adjustment to the exit plan
accrual fell within the one year purchase price allocation period prescribed by SFAS No. 141
Business Combinations (SFAS No. 141). In the fiscal year ended January 31, 2005, the Company
again revised certain of its estimates made in connection with the original purchase price
pertaining to unoccupied facilities under lease as a result of the Merger. This adjustment to the
exit accrual fell outside the one year purchase price allocation period and was charged to
restructuring and is included in the statement of operations. The net present value of the
obligation under this exit plan, as adjusted, was approximately $14.6 million, of which $3.8
million remains.
For the nine months ended October 31, 2005, activity in the Companys Merger and exit accrual,
which is included in accrued expenses (see Note 13) and long-term liabilities, was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMPLOYEE |
|
|
|
|
|
|
|
|
|
|
|
|
SEVERANCE AND |
|
|
CLOSEDOWN OF |
|
|
|
|
|
|
|
|
|
RELATED COSTS |
|
|
FACILITIES |
|
|
OTHER |
|
|
TOTAL |
|
Merger and exit accrual January 31, 2005 |
|
$ |
1,955 |
|
|
$ |
6,552 |
|
|
$ |
334 |
|
|
$ |
8,841 |
|
Payments |
|
|
(767 |
) |
|
|
(2,969 |
) |
|
|
(110 |
) |
|
|
(3,846 |
) |
Adjustments |
|
|
|
|
|
|
187 |
|
|
|
|
|
|
|
187 |
|
Merger and exit accrual October 31, 2005 |
|
$ |
1,188 |
|
|
$ |
3,770 |
|
|
$ |
224 |
|
|
$ |
5,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company anticipates that the remainder of the Merger and exit accrual will be paid out by
October 2011 as follows (in thousands):
|
|
|
|
|
Year ended January 31, |
|
|
|
|
2006 |
|
$ |
517 |
|
2007 |
|
|
2,742 |
|
2008 |
|
|
1,027 |
|
2009 |
|
|
564 |
|
Thereafter |
|
|
332 |
|
|
|
|
|
Total |
|
$ |
5,182 |
|
|
|
|
|
RESTRUCTURING, SEC INVESTIGATION AND OTHER PROFESSIONAL FEES
The Company recorded a $14.2 million restructuring charge during the fiscal year ended January 31,
2003, which was included in the statement of operations. Approximately $10.2 million of this charge
represented the compensation cost of terminated SmartForce PLC employees for services rendered from
the date of the Merger through such employees termination dates and certain other compensation
costs to terminated and continuing employees of the Company. Also included in the $14.2 million
charge are certain other one time costs incurred by SkillSoft Corporation as a result of the
Merger. These costs primarily consist of employee severance and related costs and contractual
obligations. Payments made under these obligations during the years ended January 31, 2003, 2004
and 2005 aggregated approximately $11.5 million, $2.6 million, and $100,000, respectively.
During the fiscal year ended January 31, 2005, the Company recorded and paid an additional $260,000
of restructuring charges related to the further restructuring of the pre-Merger SmartForce PLC
operations. These restructuring costs included additional compensation to pre-Merger SmartForce PLC
employees as well as additional facilities obligations as a result of the Merger.
The Company recorded a $13.4 million restructuring charge for the fiscal year ended January 31,
2005, which was included in the statement of income. Approximately $9.3 million of this charge
represented contractual obligations, and included in this amount is approximately $528,000 of exit
costs incurred during the fiscal year ended January 31, 2005. These costs primarily relate to
facilities consolidation and the repayment of government grant obligations resulting from the
restructuring. Approximately $3.4 million represented the compensation cost of terminated employees
for services rendered from the date of the restructuring through termination
9
dates and one time severance payouts and approximately $400,000 was related to the write-down of
fixed assets rendered obsolete as a result of the restructuring activities.
The Company recorded a $703,000 restructuring charge for the fiscal quarter ended April 30, 2005,
which is included in the statement of operations, related to its retail certification business.
Approximately $350,000 of this charge represents contractual obligations, which primarily relates
to the shut down of facilities resulting from the restructuring. Approximately $353,000 represents
the compensation cost of terminated employees for services rendered from the date of restructuring
through termination dates and one time severance payouts.
During the nine months ended October 31, 2005 the company revised certain of its estimates made in
connection to the previous restructurings related to both contractual obligations and employee
severance and related costs.
For the nine months ended October 31, 2005, activity in the Companys restructuring accrual related
to the Merger and the fiscal 2005 and 2006 restructurings was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMPLOYEE |
|
|
|
|
|
|
|
|
|
SEVERANCE |
|
|
|
|
|
|
|
|
|
AND RELATED |
|
|
CONTRACTUAL |
|
|
|
|
|
|
COSTS |
|
|
OBLIGATIONS |
|
|
TOTAL |
|
Restructuring accrual January 31, 2005 |
|
$ |
624 |
|
|
$ |
8,744 |
|
|
$ |
9,368 |
|
Payments and other adjustments |
|
|
(968 |
) |
|
|
(6,577 |
) |
|
|
(7,545 |
) |
Restructuring charge |
|
|
349 |
|
|
|
277 |
|
|
|
626 |
|
|
|
|
|
|
|
|
|
|
|
Restructuring accrual October 31, 2005 |
|
$ |
5 |
|
|
$ |
2,444 |
|
|
$ |
2,449 |
|
|
|
|
|
|
|
|
|
|
|
Consistent with the Companys accounting policy and historical treatment regarding annual audit
fees, the Company accrued the estimated audit fees related to the restatement of the historical
SmartForce PLC financial statements, the acquired business, in the year ended January 31, 2003. All
other costs associated with the restatement, the resulting SEC investigation, and the 2002
shareholder class action lawsuit are expensed as the work is performed. For the three and nine
months ended October 31, 2005, the Company recorded $507,000 and $1,591,000, respectively, in
expenses related to the ongoing SEC investigation. For the three and nine months ended October 31,
2004, the Company recorded $803,000 and $1,905,000, respectively, in expenses related to the
ongoing SEC investigation. For the nine months ended October 31, 2004, the Company recorded
$250,000 in professional fees related to the re-filing of statutory tax returns as a result of the
restatement of the historical SmartForce PLC financial statements.
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCTOBER 31, 2005 |
|
|
JANUARY 31, 2005 |
|
|
|
GROSS |
|
|
|
|
|
|
NET |
|
|
GROSS |
|
|
|
|
|
|
NET |
|
|
|
CARRYING |
|
|
ACCUMULATED |
|
|
CARRYING |
|
|
CARRYING |
|
|
ACCUMULATED |
|
|
CARRYING |
|
|
|
AMOUNT |
|
|
AMORTIZATION |
|
|
AMOUNT |
|
|
AMOUNT |
|
|
AMORTIZATION |
|
|
AMOUNT |
|
Internally
developed
software/courseware |
|
$ |
27,857 |
|
|
$ |
21,675 |
|
|
$ |
6,182 |
|
|
$ |
26,610 |
|
|
$ |
16,476 |
|
|
$ |
10,134 |
|
Customer contracts |
|
|
13,018 |
|
|
|
9,519 |
|
|
|
3,499 |
|
|
|
13,018 |
|
|
|
7,881 |
|
|
|
5,137 |
|
Trademarks and trade name |
|
|
900 |
|
|
|
|
|
|
|
900 |
|
|
|
900 |
|
|
|
|
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,775 |
|
|
|
31,194 |
|
|
|
10,581 |
|
|
|
40,528 |
|
|
|
24,357 |
|
|
|
16,171 |
|
Goodwill |
|
|
94,217 |
|
|
|
|
|
|
|
94,217 |
|
|
|
103,576 |
|
|
|
|
|
|
|
103,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
135,992 |
|
|
$ |
31,194 |
|
|
$ |
104,798 |
|
|
$ |
144,104 |
|
|
$ |
24,357 |
|
|
$ |
119,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer contracts are existing contracts that relate to underlying customer relationships
pertaining to the services provided by the acquired company. The Company amortizes the fair value
of customer contracts on an accelerated basis over a weighted average estimated useful life.
Internally developed software/courseware relates to the Books platform, GoTrain Corp. (GoTrain)
content and platform, the SmartForce PLC content and costs incurred subsequent to technological
feasibility and prior to general release for the development of SkillSoft Dialogue capitalized
under SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed. Course content includes courses in both the business skills and information technology
skills subject areas. All courseware is deployable via the Internet or corporate intranets. The
Company amortizes the Skillsoft Dialogue costs capitalized under SFAS No. 86 over the estimated
useful life of two years.
The change in goodwill at October 31, 2005 from the amount recorded at January 31, 2005 was due
primarily to the Companys utilization of net operating loss carryforwards assumed as part of the
Merger.
10
Amortization expense for the nine months ended October 31, 2005 and October 31, 2004 was as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
NINE MONTHS ENDED |
|
|
NINE MONTHS ENDED |
|
|
|
OCTOBER 31, 2005 |
|
|
OCTOBER 31, 2004 |
|
Internally developed software/courseware |
|
$ |
5,200 |
|
|
$ |
5,168 |
|
Customer contracts |
|
|
1,638 |
|
|
|
2,034 |
|
|
|
|
|
|
|
|
|
|
$ |
6,838 |
|
|
$ |
7,202 |
|
|
|
|
|
|
|
|
Amortization expense for the next four fiscal years is expected to be as follows (in thousands):
|
|
|
|
|
|
FISCAL YEAR |
|
|
AMORTIZATION EXPENSE |
2006 |
|
|
$ |
9,112 |
|
2007 |
|
|
|
5,969 |
|
2008 |
|
|
|
1,425 |
|
2009 |
|
|
|
13 |
|
The Company will be conducting its annual impairment test of goodwill in the fourth quarter of the
fiscal year ending January 31, 2006.
8. COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of all components of
comprehensive income on an annual and interim basis. Comprehensive income 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 nine months
ended October 31, 2005 and 2004 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
NINE MONTHS ENDED |
|
|
|
OCTOBER 31, |
|
|
OCTOBER 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,683 |
|
|
$ |
4,115 |
|
|
$ |
31,094 |
|
|
$ |
8,676 |
|
Other comprehensive income/(loss) - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency adjustment |
|
|
(360 |
) |
|
|
(720 |
) |
|
|
187 |
|
|
|
(643 |
) |
Unrealized holding gains/(losses) |
|
|
30 |
|
|
|
4 |
|
|
|
(9 |
) |
|
|
(58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
5,353 |
|
|
$ |
3,399 |
|
|
$ |
31,272 |
|
|
$ |
7,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. NET INCOME PER SHARE
Basic net income per share was computed using the weighted average number of shares outstanding
during the period. Diluted net income per share was computed by giving effect to all dilutive
potential shares outstanding. The weighted average number of shares outstanding used to compute
basic net income per share and diluted net income per share was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
NINE MONTHS ENDED |
|
|
|
OCTOBER 31, |
|
|
OCTOBER 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Basic weighted average shares
outstanding |
|
|
100,663,757 |
|
|
|
105,935,620 |
|
|
|
103,055,159 |
|
|
|
104,851,577 |
|
Effect of dilutive shares outstanding |
|
|
876,933 |
|
|
|
3,005,714 |
|
|
|
671,403 |
|
|
|
5,122,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding, as adjusted |
|
|
101,540,690 |
|
|
|
108,941,334 |
|
|
|
103,726,562 |
|
|
|
109,974,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following share equivalents have been excluded from the computation of diluted weighted average
shares outstanding for the three and nine months ended as of October 31, 2005 and 2004, as they
would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
NINE MONTHS ENDED |
|
|
|
OCTOBER 31, |
|
|
OCTOBER 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Options excluded |
|
|
16,469,825 |
|
|
|
16,335,273 |
|
|
|
16,675,354 |
|
|
|
14,218,140 |
|
11
10. INCOME TAXES
The Company operates as a holding company with operating subsidiaries in several countries, and
each subsidiary is taxed based on the laws of the jurisdiction in which it operates.
The Company has significant net operating loss (NOL) carryforwards, some of which are subject to
potential limitations based upon the change in control provisions of Section 382 of the Internal
Revenue Code.
The provision for income tax in the three and nine months ended October 31, 2005 was approximately
$4.2 million and $8.8 million, respectively. Of this amount, in the nine months ended October 31,
2005, approximately $7.9 million relates to the expected utilization of acquired NOL carryforwards
which do not alleviate tax burden in the statement of income and is recorded as an adjustment to
goodwill. The $7.9 million of utilized acquired NOL carryforwards do not require cash payments to
the taxing authorities. In addition, there is income generated in foreign countries, which cannot
be offset through NOL carryforwards.
11. COMMITMENTS AND CONTINGENCIES
On or about February 4, 2003, the SEC informed the Company that it is the subject of a formal order
of private investigation relating to its November 19, 2002 announcement that it would restate the
financial statements of SmartForce PLC for the period 1999 through June 2002. The Company
understands that the SECs investigation concerns SmartForces financial disclosure and accounting
during that period, other related matters, compliance with rules governing reports required to be
filed with the SEC, and the conduct of those responsible for such matters. On June 2, 2005, the
Boston District Office of the SEC informed the Company that it had made a preliminary determination
to recommend that the SEC bring a civil injunctive action against the Company. Under the SECs
rules, the Company is permitted to make a so-called Wells Submission in which the Company seeks to
persuade the SEC that no such action should be commenced. The Company intends to make such a
submission. The Company continues to cooperate with the SEC in this matter. At the present time the
Company is unable to predict the outcome of this action and as such has not determined what, if
any, impact it may have on its financial statements.
On November 18, 2004, Jody Glidden, Michael LeBlanc and Trish Glidden filed a lawsuit against the
Company, David C. Drummond, Gregory M. Priest, Patrick E. Murphy and Jack Hayes in the United
States District Court for the Northern District of California. The plaintiffs subsequently
dismissed Patrick E. Murphy and Jack Hayes from the lawsuit. The plaintiffs had previously opted
out of the class action settlement that received final approval from the court on September 29,
2004. The lawsuit sets forth substantially the same claims as were alleged in the class action
litigation. In particular, the lawsuit alleges that the Company misrepresented or omitted to state
material facts in its SEC filings and press releases regarding the Companys revenues and earnings
and failed to correct such false and misleading SEC filings and press releases, which are alleged
to have artificially inflated the price of the Companys ADSs in connection with its acquisition of
IC Global in early 2001. The lawsuit seeks compensatory damages in excess of $3.7 million and other
unspecified damages, including punitive damages. Some of the plaintiffs claims have been dismissed
with leave to amend. Defendants filed a motion to dismiss the Second Amended Complaint on December
2, 2005, to be heard by the Court on January 20, 2006. No trial date has been set. The Company
believes that it has meritorious defenses to this lawsuit and intends to defend itself vigorously.
The Company is not able to estimate the amount or range of loss that could result from an
unfavorable outcome of this lawsuit.
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 to be
paid in the first half of 2006. In July 2005, the Company received $19.5 million, which resulted
from the final settlement with the insurance carriers regarding the 2002 securities class action
lawsuit settlement of $30.5 million in March 2004 and the ongoing related litigation and SEC
investigation. The Company recorded the aggregate settlement with the plaintiffs as a charge in its
fiscal 2004 fourth quarter; and the settlement with its insurers has been recorded in the fiscal
2006 second quarter.
12
12. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
The Company follows the provisions of SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information (SFAS No. 131). SFAS No. 131 established standards for reporting
information regarding operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports issued to stockholders.
SFAS No. 131 also established standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief operating decision
maker, or decision-making group, in making decisions how to allocate resources and assess
performance. The Companys chief operating decision makers, as defined under SFAS No. 131, are the
Chief Executive Officer and the Chief Financial Officer. The Company views its operations and
manages its business as principally two operating segments SMML and Retail Certification. On
April 29, 2005, the Company sold certain assets and transferred certain liabilities related to its
Retail Certification business and incurred a $681,000 loss on disposition. During the three months
ended October 31, 2005 the Company performed an additional analysis of the transferred liabilities
related to the sale which resulted in the Company recording a $73,000 gain on disposition which
revised the loss on disposition to $608,000 for the nine months ended October 31, 2005. The sale
did not have a negative impact on retail certification revenue for the quarter ended April 30,
2005, but did result in a reduction in revenue of approximately $880,000 for the quarter ended July
31, 2005 as compared to the quarter ended July 31, 2004 and approximately $2.4 million for the
quarter ended October 31, 2005 as compared to the quarter ended October 31, 2004 and that trend
will continue for the remainder of fiscal 2006 when compared to fiscal 2005.
The following tables set forth the Companys revenue and net income/(loss) by segment for the three
and nine months ended October 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31, 2005 |
|
|
|
Multi-Modal |
|
|
Retail Certification |
|
|
Consolidated |
|
|
|
(In thousands) |
|
Revenue |
|
$ |
51,005 |
|
|
$ |
2,896 |
|
|
$ |
53,901 |
|
Net income |
|
$ |
5,568 |
|
|
$ |
115 |
|
|
$ |
5,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31, 2004 |
|
|
|
Multi-Modal |
|
|
Retail Certification |
|
|
Consolidated |
|
|
|
(In thousands) |
|
Revenue |
|
$ |
47,241 |
|
|
$ |
5,266 |
|
|
$ |
52,507 |
|
Net income/(loss) |
|
$ |
4,127 |
|
|
$ |
(12 |
) |
|
$ |
4,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31, 2005 |
|
|
|
Multi-Modal |
|
|
Retail Certification |
|
|
Consolidated |
|
|
|
(In thousands) |
|
Revenue |
|
$ |
148,762 |
|
|
$ |
12,071 |
|
|
$ |
160,833 |
|
Net income/(loss) |
|
$ |
32,138 |
|
|
$ |
(1,044 |
) |
|
$ |
31,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31, 2004 |
|
|
|
Multi-Modal |
|
|
Retail Certification |
|
|
Combined |
|
|
|
(In thousands) |
|
Revenue |
|
$ |
141,322 |
|
|
$ |
14,627 |
|
|
$ |
155,949 |
|
Net income |
|
$ |
8,471 |
|
|
$ |
205 |
|
|
$ |
8,676 |
|
13
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 nine months ended October 31, 2005 and
2004 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
NINE MONTHS ENDED |
|
|
|
OCTOBER 31, |
|
|
OCTOBER 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
42,798 |
|
|
$ |
40,946 |
|
|
$ |
126,378 |
|
|
$ |
121,882 |
|
United Kingdom |
|
|
5,284 |
|
|
|
5,207 |
|
|
|
16,562 |
|
|
|
13,558 |
|
Canada |
|
|
2,400 |
|
|
|
2,040 |
|
|
|
6,787 |
|
|
|
5,957 |
|
Europe, excluding UK |
|
|
1,214 |
|
|
|
1,897 |
|
|
|
4,122 |
|
|
|
6,574 |
|
Australia/New Zealand |
|
|
1,940 |
|
|
|
1,811 |
|
|
|
5,621 |
|
|
|
5,090 |
|
Other |
|
|
265 |
|
|
|
606 |
|
|
|
1,363 |
|
|
|
2,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
53,901 |
|
|
$ |
52,507 |
|
|
$ |
160,833 |
|
|
$ |
155,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived tangible assets at international facilities are not significant.
13. ACCRUED EXPENSES
Accrued expenses in the accompanying condensed combined balance sheets consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
OCTOBER 31, 2005 |
|
|
JANUARY 31, 2005 |
|
Accrued compensation and benefits |
|
$ |
8,402 |
|
|
$ |
20,415 |
|
Course development fees |
|
|
1,487 |
|
|
|
2,205 |
|
Professional fees |
|
|
3,651 |
|
|
|
2,788 |
|
Accrued payables |
|
|
203 |
|
|
|
1,798 |
|
Accrued miscellaneous taxes |
|
|
307 |
|
|
|
238 |
|
Accrued merger related costs* |
|
|
2,717 |
|
|
|
5,271 |
|
Sales tax payable/VAT payable |
|
|
3,031 |
|
|
|
3,864 |
|
Accrued royalties |
|
|
3,096 |
|
|
|
2,422 |
|
Accrued litigation settlements |
|
|
15,415 |
|
|
|
15,250 |
|
Accrued restructuring |
|
|
1,162 |
|
|
|
8,005 |
|
Other accrued liabilities |
|
|
3,760 |
|
|
|
4,739 |
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
43,231 |
|
|
$ |
66,995 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes $1,586 and $1,684 of accrued income taxes at October 31, 2005 and January 31, 2005,
respectively. |
14. LINE OF CREDIT
The Company entered into a $25 million two-year line of credit with a bank on July 23, 2004, which
was amended in April 2005. Under the terms of the line of credit, the bank holds a first security
interest in all domestic business assets. All borrowings under the line of credit bear interest at
the banks prime rate (6.75% at October 31, 2005). The facility is subject to a commitment fee of
$50,000 to secure the line of credit and unused commitment fees of 0.125% based upon the daily
average of un-advanced amounts under the revolving line of credit. The Company paid approximately
$8,900 in unused commitment fees for the nine months ended October 31, 2005. In addition, the line
of credit contains certain financial and non-financial covenants. The Company is currently in
compliance with all covenants. Also, the line of credit provides that in the event of a Material
Adverse Change (as defined in the line of credit), the lender has the ability to call amounts
outstanding under the line of credit. As of October 31, 2005, there were no borrowings on the line
of credit; however, the Company had an outstanding letter of credit of $15.5 million that reduced
the availability under the line of credit. Letters of credit are subject to commission fees of
0.75% as well as administrative costs. The Company has paid approximately $49,500 in letters of
credit fees for the nine months ended October 31, 2005.
15. SHARE REPURCHASE PROGRAM
The Companys shareholders approved the repurchase by the Company of up to an aggregate of
7,000,000 ADSs. Unless terminated earlier by resolution of the Companys Board of Directors, the
Program will expire on March 24, 2006 or when the Company has repurchased all shares authorized for
repurchase thereunder. The Company has made cumulative repurchases of 6,533,884 and 443,757 shares at October 31,
14
2005 and January 31, 2005, respectively. As of October 31, 2005, up to 466,116 additional
outstanding shares were available for repurchase, subject to certain limitations, under the
shareholder approved program.
16. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123
(revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting
for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally,
the approach in Statement 123(R) is similar to the approach described in Statement 123. However,
Statement 123(R) requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair values. Pro forma disclosure
is no longer an alternative.
Statement 123(R) is effective for the first quarter of the first fiscal year that begins after June
15, 2005. Early adoption will be permitted in periods in which financial statements have not yet
been issued. The Company expects to adopt Statement 123(R) on February 1, 2006.
Statement 123(R) permits public companies to adopt its requirements using one of two methods:
1. A modified prospective method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of Statement 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of Statement 123 for all awards
granted to employees prior to the effective date of Statement 123(R) that remain unvested on the
effective date.
2. A modified retrospective method which includes the requirements of the modified prospective
method described above, but also permits entities to restate based on the amounts previously
recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods
presented or (b) prior interim periods of the year of adoption.
The Company has not yet determined which method to use in adopting SFAS 123(R).
The FASB recently issued Statement No. 154, Accounting Changes and Error Corrections, (SFAS 154),
which is a replacement of APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements. (SFAS 3). SFAS 154 applies to all
voluntary changes in accounting principle, and changes the requirements for accounting for and
reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior
periods financial statements of a voluntary change in accounting principle unless it is
impracticable. APB 20 previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative effect of changing
to the new accounting principle. SFAS 154 requires that a change in method of depreciation,
amortization, or depletion for long-lived, non-financial assets be accounted for as a change in
accounting estimate that is effected by a change in accounting principle. APB 20 previously
required that such a change be reported as a change in accounting principle. SFAS 154 carries
forward many provisions of APB 20 without change, including the provisions related to the reporting
of a change in accounting estimate, a change in the reporting entity, and the correction of an
error. SFAS 154 also carries forward the provisions of SFAS 3 that govern reporting accounting
changes in interim financial statements. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application
is permitted for accounting changes and corrections of errors made occurring in fiscal years
beginning after June 1, 2005. SFAS 154 does not change the transition provisions of any existing
accounting pronouncements, including those that are in a transition phase as of the effective date
of SFAS 154. The Company is currently evaluating the impact of SFAS 154.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Any statement in this Quarterly Report on Form 10-Q about our future expectations, plans and
prospects, including statements containing the words believes, anticipates, plans, expects,
will and similar expressions, constitute forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those
indicated by such forward-looking statements as a result of various important factors, including
those set forth in this Item 2 under the heading Future Operating Results.
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.
15
OVERVIEW
We are a leading provider of content resources and complementary technologies for integrated
enterprise learning. SkillChoice multi-modal learning (SMML) solutions offer powerful tools to
support and enhance the speed and effectiveness of both formal and informal learning processes.
SMML solutions integrate our in-depth courseware, learning management platform technology and
support services to meet our customers learning needs.
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.
The pricing for our SMML licenses varies based on the choice of SMML, the content offering selected
by the customer, the number of users within the customers organization and the length of the
license agreement. Our SMML license provides customers access to a full range of learning products
including courseware, Referenceware, simulations, mentoring and prescriptive assessment.
A Referenceware license from our subsidiary, Books24x7.com (Books), gives users access to a full
Referenceware library within one or more Referenceware collections (examples of which are: ITPro,
BusinessPro, FinancePro and OfficeEssentials). The pricing for our Referenceware licenses varies
based on the collections specified by a customer, the number of users within the customers
organization and the length of the license agreement.
We offer discounts from our ordinary pricing in arrangements covering larger numbers of courses,
for larger user bases or for longer periods. 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. We also derive revenue from hosting fees for clients that use
our solutions on an application service provider (ASP) basis and from online mentoring services and
professional services. In selected circumstances, we derive 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.
Cost of revenue includes the cost of materials (such as storage media), packaging, shipping and
handling, CD duplication, the cost of online mentoring and hosting services, royalties and certain
infrastructure and occupancy expenses. We generally recognize these costs as incurred. Research and
development expenses consist primarily of salaries and benefits, certain infrastructure and
occupancy expenses, fees to consultants and course content development fees. We account for
software development costs in accordance with Statement of Financial Accounting Standards (SFAS)
No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,
which requires the capitalization of certain computer software development costs incurred after
technological feasibility is established. In the nine month period ended October 31, 2005, we
capitalized approximately $1.2 million in software development costs and amortized to expense $0.4
million of capitalized software development cost. Selling and marketing expenses consist primarily
of salaries, commissions and benefits, advertising and promotion expenses, travel expenses and
certain infrastructure and occupancy expenses. General and administrative expenses consist
primarily of salaries and benefits, consulting and service expenses, legal expenses, other public
company costs and certain infrastructure and occupancy expenses.
Deferred compensation consists of the value of unvested options assumed in the Books acquisition
and the Merger and is amortized over the vesting period of the underlying share option or shares.
Amortization of intangibles represents the amortization of intangible assets, such as customer
value and content, from the Books acquisition, the GoTrain acquisition and the Merger, as well as
amortization of those assets capitalized under SFAS 86.
Restructuring primarily consists of charges associated with international restructuring activities
as well as activities related to our recent content development restructuring.
SEC investigation and other professional fees primarily consist of direct, incremental charges
associated with, and as a result of, the restatement of SmartForces financial statements for 1999,
2000, 2001 and the first two quarters of 2002, the re-filing of statutory tax returns as a result
of the restatement and charges for the ongoing SEC investigation.
16
BUSINESS OUTLOOK
In the nine months ended October 31, 2005, we generated revenue of $160.8 million, an increase of
$4.9 million compared to the nine months ended October 31, 2004, and we reported positive net
earnings. While we continue to find ourselves in a challenging business environment due to the
overall market adoption rate for e-learning solutions remaining relatively slow, budgetary
constraints on IT spending by our current and potential customers and price competition in the
e-learning market, we have seen some stability in the marketplace and our core business has
performed in accordance with our expectations. Our recent revenue growth and our growth prospects
are strongest in our product lines focused on informal learning, such as our Books24x7
Referenceware product line. As a result, we have increased our sales and marketing expenses in
those areas to help capitalize on the recent growth and potential continued growth for informal
learning. We have also invested aggressively in research and development in those areas to
accelerate the time by which our planned new products will be available to our customers.
In addition, during the fourth quarter of fiscal 2005, we restructured our content development
organization to more efficiently manage costs and capitalize further on the flexibility inherent in
our existing outsourcing model. The goal of the restructuring was to enable us to meet our existing
content production targets at a reduced cost and with greater flexibility with respect to the
product offerings in which we elect to make investments. The restructuring involved the elimination
of 119 jobs in Dublin, Ireland and 12 in Nashua, New Hampshire, within our research and development
organization as well as facilities consolidation in Dublin. We have shifted the remainder of our IT
skills content development activities to our outsourcing suppliers, while continuing to maintain
project management and quality control internally. This restructuring included a reduction of an
additional 12 jobs in Nashua, New Hampshire for a rightsizing of our inside sales operation and 9
jobs in Germany related to the shutdown of our German facility. We incurred restructuring charges
related to payments to terminated employees, facilities consolidation and the repayment of grants
previously awarded by Irish agencies. These charges totaled approximately $13.0 million and were
incurred in the fourth quarter of fiscal 2005. We believe that the restructuring has resulted in
content development cost savings of approximately $4.3 million so far this year and will result in
an ongoing annual cost savings of approximately $5.0 million. This will afford us more flexibility
to reinvest dollars that can be recaptured in an outsourcing model for other research and
development initiatives and/or to increase the profitability of the organization.
In the quarter ended April 30, 2005, in order to more fully focus on the Multi-Modal Learning (MML)
business (which includes informal learning), we sold certain assets of our retail IT certification
business, SmartCertify (the Retail Certification business). The Retail Certification business was
focused on direct-to-consumer business and contributed less revenue than expected. This action will
allow us to fully focus our attention and resources on our core enterprise business. We will
maintain a reseller arrangement with the acquiring organization, and we will also maintain the
existing customer contracts and service those contracts until the contractual obligation is
fulfilled. We will be recognizing revenue from the remaining deferred revenue balance related to
direct-to-consumer business over the next 12 to 18 months. Substantially all
of the sales, marketing and administrative costs of our IT certification business have been
eliminated.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are more fully described in Note 2 of the Notes to the
Consolidated Financial Statements in our Annual Report on Form 10-K as filed with the SEC on April
18, 2005. However, we believe the accounting policies described below 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.
Revenue Recognition
We generate revenue from the license of products and services and from providing hosting/ ASP
services.
We follow 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
our products and 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). 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 our SMML licenses varies based on the choice of SMML, the content offering selected
by the customer, the number of users within the customers organization and the length of the
license agreement. A SMML license provides customers access to a full range of learning products
including courseware, Referenceware, simulations, mentoring and prescriptive assessment.
17
A Referenceware license gives users access to a full Referenceware library within one or more
Referenceware collections (examples of which are: ITPro, BusinessPro, FinancePro and
OfficeEssentials) from Books. The pricing for our Referenceware licenses varies based on the
collections specified by a customer, the number of users within the customers organization and the
length of the license agreement.
We offer discounts from our ordinary pricing, and purchasers of licenses for larger numbers of
courses, for larger user bases or for longer periods generally receive discounts. Generally,
customers may amend their license agreements, for an additional fee, to gain access to additional
courses or product lines and/or to increase the size of the user base. We also derive revenue from
hosting fees for clients that use our solutions on an ASP basis, online mentoring services and
professional services. In selected circumstances, we derive 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.
We recognize 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 we do not have vendor specific objective
evidence (VSOE) of the fair value of the various elements. This may occur if the customer does not
specify all licensed courses at the outset, the customer chooses to wait for future licensed
courses on a when and if available basis, the customer is given exchange privileges that are
exercisable other than on the contract anniversaries, or the customer licenses all courses
currently available and to be developed during the term of the arrangement. Nearly all of our
contractual arrangements result in the recognition of revenue ratably over the license period.
We also derive revenue from extranet hosting/ASP services and online mentoring services. We
recognize revenue related to extranet hosting/ASP services and online mentoring services on a
straight-line basis over the period the services are provided.
We generally bill 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, we bill customers on a quarterly basis. In some
circumstances, we offer payment terms of up to six months from the initial shipment date or
anniversary date for multi-year license agreements to our customers. To the extent that a customer
is given extended payment terms (defined by us as greater than six months), revenue is recognized
as cash becomes due, assuming all of the other elements of revenue recognition have been satisfied.
We typically recognize 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, we recognize revenue related to the portion of the minimum commitment that
exceeds the end user sales at the expiration of the commitment period provided we have 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.
We also provide professional services including instructor led training, customized content,
websites, and implementation services. We recognize professional services revenue as the services
are performed.
We record reimbursable out-of-pocket expenses in both maintenance and services revenues and as a
direct cost of maintenances and services in accordance with EITF Issue No. 01-14, Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred (EITF 01-14).
EITF 01-14 requires reimbursable out-of-pocket expenses incurred to be characterized as revenue in
the income statement.
We record 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 we have 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.
18
Amortization of Intangible Assets and Impairment of Goodwill
We record intangible assets as historical cost. We amortize our intangible assets, which include
customer contracts and internally developed software. We review these intangible assets at least
annually to determine if any adverse conditions exist or a change in circumstances has occurred
that would indicate impairment or a change in their remaining useful life. We also review our
indefinite-lived intangible assets at least annually for impairment which includes trademarks and
tradenames.
We test goodwill during the fourth quarter of each year for impairment, or more frequently if
certain indicators are present or changes in circumstances suggest that impairment may exist. In
performing the test, we calculate the fair value of the reporting units as the present value of
estimated future cash flows using a risk-adjusted discount rate. The selection and use of an
appropriate discount rate requires significant management judgment with respect to revenue and
expense growth rates.
Stock Based Compensation
We account for our stock-based employee compensation plans on the intrinsic value method under the
recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB No. 25) and related Interpretations under APB No. 25. We
provide pro forma disclosures only of the compensation expense determined under the fair value
provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123).
See Note 16 for a description of FASB Statement No. 123 (revised 2004), Share-Based Payment.
Deferral of Commissions
We employ an accounting policy consistent with guidance provided by FASB Technical Bulletin 90-1,
Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts and SEC
Staff Accounting Bulletin 104 Revenue Recognition related to the concept of a direct and
incremental relationship between revenue and expense. As such, we defer the recognition of
commission expense until such time as the revenue related to the contract for which the commission
was paid is recognized.
Restructuring Charges
We account for our restructuring activities under guidance provided by SFAS No. 141 (SFAS 141),
Business Combinations and SFAS No. 146 (SFAS 146), Accounting for Costs Associated with Exit or
Disposal Activities. SFAS 141 states that after the end of the allocation period (generally one
year from date of merger) an adjustment that results from a pre-acquisition contingency other than
an income tax loss carryforward should be included in the determination of net income/(loss) in the
period in which the adjustment is determined. As such, adjustments to pre-acquisition contingencies
established at the time of the SmartForce Skillsoft merger are recorded as restructuring charges
in our statement of operations. SFAS 146 states that a liability related to an exit or disposal
activity should be recognized at fair value in the period in which it is incurred. As such, when we
identify restructuring charges that fulfill the requirements identified in SFAS 146 as incurred, we
record the charges in our statement of income.
Legal Contingencies
In connection with any material legal proceedings that we may become involved in, management
periodically reviews estimates of potential costs to be incurred by us in connection with the
adjudication or settlement, if any, of these proceedings. These estimates are developed in
consultation with our outside counsel and are based on an analysis of potential litigation outcomes
and settlement strategies. In accordance with SFAS No. 5, Accounting for Contingencies, loss
contingencies are accrued if, in the opinion of management, an adverse outcome is probable and such
outcome can be reasonably estimated. In accordance with SFAS No. 5, gain contingencies are recorded
at the time of realization. Legal costs are expensed as incurred.
19
THREE MONTHS ENDED OCTOBER 31, 2005 VERSUS THREE MONTHS ENDED OCTOBER 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DOLLAR |
|
|
|
|
|
|
|
|
|
INCREASE/(DECREASE) |
|
|
PERCENT CHANGE |
|
|
|
|
|
|
2004/2005 |
|
|
INCREASE/(DECREASE) |
|
|
PERCENTAGE OF REVENUE |
|
|
|
(IN THOUSANDS) |
|
|
2004/2005 |
|
|
2005 |
|
|
2004 |
|
Revenue |
|
$ |
1,394 |
|
|
|
3 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenue |
|
|
912 |
|
|
|
16 |
% |
|
|
12 |
% |
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
482 |
|
|
|
1 |
% |
|
|
88 |
% |
|
|
89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
(1,383 |
) |
|
|
(13 |
%) |
|
|
17 |
% |
|
|
20 |
% |
Selling and marketing |
|
|
(2,059 |
) |
|
|
(9 |
%) |
|
|
38 |
% |
|
|
43 |
% |
General and administrative |
|
|
(892 |
) |
|
|
(14 |
%) |
|
|
10 |
% |
|
|
12 |
% |
Amortization of intangible
assets |
|
|
(105 |
) |
|
|
(4 |
%) |
|
|
4 |
% |
|
|
4 |
% |
Amortization of stock-based
compensation |
|
|
(77 |
) |
|
|
(26 |
%) |
|
|
0 |
% |
|
|
0 |
% |
Restructuring |
|
|
233 |
|
|
|
3,329 |
% |
|
|
1 |
% |
|
|
1 |
% |
Restatement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEC investigation |
|
|
(296 |
) |
|
|
(37 |
%) |
|
|
1 |
% |
|
|
1 |
% |
Other professional fees |
|
|
|
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses |
|
|
(4,579 |
) |
|
|
(11 |
%) |
|
|
71 |
% |
|
|
81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
5,061 |
|
|
|
124 |
% |
|
|
17 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense), net |
|
|
266 |
|
|
|
355 |
% |
|
|
1 |
% |
|
|
0 |
% |
Interest income, net |
|
|
180 |
|
|
|
205 |
% |
|
|
1 |
% |
|
|
0 |
% |
Loss on sale of assets, net |
|
|
73 |
|
|
|
100 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
provision for
income taxes |
|
|
5,580 |
|
|
|
131 |
% |
|
|
19 |
% |
|
|
8 |
% |
Provision for
income taxes |
|
|
4,012 |
|
|
|
2,825 |
% |
|
|
8 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,568 |
|
|
|
38 |
% |
|
|
11 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
The increase in revenue from the fiscal quarter ended October 31, 2004 to the fiscal quarter
ended October 31, 2005 was primarily due to revenue generated from new business primarily derived
from our product lines focused on informal learning and increased reseller revenues as well as a
greater share of business closed earlier in the quarter ended October 31, 2005 versus the prior
year. Due to our subscription revenue recognition model, business closed earlier in the quarter
generally results in a greater share of revenue within that quarter. We expect our revenues related
to informal learning to increase for the remainder of fiscal 2006 as compared to fiscal 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QUARTERS ENDED OCTOBER 31, |
|
(IN THOUSANDS) |
|
2005 |
|
|
2004 |
|
|
CHANGE |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
42,798 |
|
|
$ |
40,946 |
|
|
$ |
1,852 |
|
International |
|
|
11,103 |
|
|
|
11,561 |
|
|
|
(458 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
53,901 |
|
|
$ |
52,507 |
|
|
$ |
1,394 |
|
|
|
|
|
|
|
|
|
|
|
Revenue increased by 5% in the United States and decreased by 4% internationally in the quarter
ended October 31, 2005 as compared to the quarter ended October 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QUARTERS ENDED OCTOBER 31, |
|
(IN THOUSANDS) |
|
2005 |
|
|
2004 |
|
|
CHANGE |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Modal Learning |
|
$ |
51,005 |
|
|
$ |
47,241 |
|
|
$ |
3,764 |
|
Retail Certification |
|
|
2,896 |
|
|
|
5,266 |
|
|
|
(2,370 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
53,901 |
|
|
$ |
52,507 |
|
|
$ |
1,394 |
|
|
|
|
|
|
|
|
|
|
|
20
In the quarter ended April 30, 2005, we sold certain assets related to SmartCertify, our
Retail Certification business. The sale resulted in a reduction in revenue of $2.4 million for the
quarter ended October 31, 2005 as compared to the quarter ended October 31, 2004 and that trend
will continue for the remainder of fiscal 2006 when compared to fiscal 2005. This decrease in
revenue was offset by increases in the MML business. We anticipate MML revenue will remain
approximately the same or increase slightly in the remainder of fiscal 2006 when compared to fiscal
2005.
We exited the fiscal year ended January 31, 2005 with noncancellable backlog of approximately $168
million as compared to $170 million at January 31, 2004. This amount is calculated by combining the
amount of deferred revenue at our fiscal year end with the amounts to be added to deferred revenue
throughout the next twelve months as a result of committed customer contracts and determining how
much of these amounts are scheduled to amortize into revenue during fiscal 2006. The amount
scheduled to amortize into revenue during fiscal 2006 is disclosed as backlog as of January 31,
2005. Amounts to be added to deferred revenue during fiscal 2006 include subsequent billings for
ongoing contract periods as well as billings for new or continuing contracts. Company management
has 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 2006 revenue.
COSTS AND EXPENSES
The increase in cost of revenue in the fiscal quarter ended October 31 2005 versus the fiscal
quarter ended October 31, 2004 was primarily due to a higher mix of royalty-bearing content in the
fiscal 2006 third quarter due to the growth of our Books 24x7 Referenceware product line.
The decrease in research and development expenses in the fiscal quarter ended October 31, 2005
versus the fiscal quarter ended October 31, 2004 was due
primarily to the savings of $1.6 million
realized as the result of the reorganization of our content development organization completed in
the fiscal 2005 fourth quarter. This decrease was partially offset by increased outsourcing
activity of $0.5 million.
The decrease in selling and marketing expenses in the fiscal quarter ended October 31, 2005 versus
the fiscal quarter ended October 31, 2004 was primarily due to the expense reduction of $2.8
million resulting from the sale of certain assets related to SmartCertify, our Retail Certification
business, at the end of our fiscal 2006 first quarter. This was partially offset by incremental
expenses of $0.7 million to support the new Dialogue product line, the new telesales distribution
operation focusing on small and mid-sized businesses as well as the additional investment in our
Books sales force. While we plan to continue investing in new distribution channels, we expect that
selling and marketing costs will decrease in fiscal 2006 compared to fiscal 2005 as a result of the
sale of certain assets of our Retail Certification business at the end of our fiscal 2006 first
quarter. We expect that selling and marketing expenses as a percentage of revenue will be slightly
lower in fiscal 2006 as compared to fiscal 2005.
General and administrative expenses decreased in the fiscal quarter ended October 31, 2005 versus
the fiscal quarter ended October 31, 2004 primarily due to the reduction in costs of $0.4 million
resulting from the sale of certain assets related to our retail certification business at the end of our fiscal 2006
first quarter as well as a decrease of $0.4 million in legal, tax and other service fees.
OTHER INCOME/(EXPENSE), NET
Other income in the quarter ended October 31, 2005 was $341,000 as compared to other expenses of
$75,000 in the quarter ended October 31, 2004. This change was primarily due to foreign currency
fluctuations. Our business is subject to exchange rate fluctuations in the various currencies we do
business in.
INTEREST INCOME, NET
Interest income, net increased to $268,000 in the quarter ended October 31, 2005 from $88,000 in
the quarter ended October 31, 2004. This increase was primarily due to higher interest rates on our
cash, cash equivalents and investments, as well as higher cash and investment account balances in
the period.
21
PROVISION/(BENEFIT) FOR INCOME TAXES
See discussion for Nine Months Ended October 31, 2005 versus Nine Months Ended October 31, 2004.
NINE MONTHS ENDED OCTOBER 31, 2005 VERSUS NINE MONTHS ENDED OCTOBER 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DOLLAR |
|
|
|
|
|
|
|
|
|
INCREASE/(DECREASE) |
|
|
PERCENT CHANGE |
|
|
|
|
|
|
2004/2005 |
|
|
INCREASE/(DECREASE) |
|
|
PERCENTAGE OF REVENUE |
|
|
|
(IN THOUSANDS) |
|
|
2004/2005 |
|
|
2005 |
|
|
2004 |
|
Revenue |
|
$ |
4,884 |
|
|
|
3 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenue |
|
|
2,730 |
|
|
|
17 |
% |
|
|
12 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
2,154 |
|
|
|
2 |
% |
|
|
88 |
% |
|
|
90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
(3,406 |
) |
|
|
(10 |
%) |
|
|
18 |
% |
|
|
21 |
% |
Selling and marketing |
|
|
(4,337 |
) |
|
|
(6 |
%) |
|
|
40 |
% |
|
|
44 |
% |
General and administrative |
|
|
(118 |
) |
|
|
(1 |
%) |
|
|
12 |
% |
|
|
12 |
% |
Legal settlements/(insurance
recoveries) |
|
|
(19,500 |
) |
|
|
(100 |
%) |
|
|
(12 |
%) |
|
|
0 |
% |
Amortization of intangible assets |
|
|
(364 |
) |
|
|
(5 |
%) |
|
|
4 |
% |
|
|
5 |
% |
Amortization of stock-based
compensation |
|
|
(269 |
) |
|
|
(29 |
%) |
|
|
0 |
% |
|
|
1 |
% |
Restructuring |
|
|
498 |
|
|
|
158 |
% |
|
|
1 |
% |
|
|
0 |
% |
Restatement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEC investigation |
|
|
(314 |
) |
|
|
(16 |
%) |
|
|
1 |
% |
|
|
1 |
% |
Other professional fees |
|
|
(250 |
) |
|
|
(100 |
%) |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(28,060 |
) |
|
|
(21 |
%) |
|
|
64 |
% |
|
|
84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
30,214 |
|
|
|
346 |
% |
|
|
24 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense), net |
|
|
891 |
|
|
|
543 |
% |
|
|
0 |
% |
|
|
0 |
% |
Interest income, net |
|
|
391 |
|
|
|
81 |
% |
|
|
1 |
% |
|
|
0 |
% |
Loss on sale of assets, net |
|
|
(608 |
) |
|
|
(100 |
%) |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision
for income taxes |
|
|
30,888 |
|
|
|
342 |
% |
|
|
25 |
% |
|
|
6 |
% |
Provision for income taxes |
|
|
8,470 |
|
|
|
2,333 |
% |
|
|
6 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
22,418 |
|
|
|
258 |
% |
|
|
19 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
22
REVENUE
The increase in revenue during the nine months ended October 31, 2004 as compared to the nine
months ended October 31, 2005 was primarily due to revenue generated from new business primarily
derived from our product lines focused on informal learning and better than anticipated reseller
revenues as well as a greater share of business closed earlier in each of the respective quarterly
periods for the nine months ended October 31, 2005 than in the prior year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NINE MONTHS ENDED OCTOBER 31, |
|
(IN THOUSANDS) |
|
2005 |
|
|
2004 |
|
|
CHANGE |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
126,378 |
|
|
$ |
121,882 |
|
|
$ |
4,496 |
|
International |
|
|
34,455 |
|
|
|
34,067 |
|
|
|
388 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
160,833 |
|
|
$ |
155,949 |
|
|
$ |
4,884 |
|
|
|
|
|
|
|
|
|
|
|
Revenue increased by 4% and 1% in the United States and internationally, respectively, in the nine
months ended October 31, 2005 as compared to the nine months ended October 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NINE MONTHS ENDED OCTOBER 31, |
|
(IN THOUSANDS) |
|
2005 |
|
|
2004 |
|
|
CHANGE |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Modal Learning |
|
$ |
148,762 |
|
|
$ |
141,322 |
|
|
$ |
7,440 |
|
Retail Certification |
|
|
12,071 |
|
|
|
14,627 |
|
|
|
(2,556 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
160,833 |
|
|
$ |
155,949 |
|
|
$ |
4,884 |
|
|
|
|
|
|
|
|
|
|
|
In the
three months ended April 31, 2005, we sold certain assets
related to SmartCertify, our Retail Certification business.
The sale resulted in a reduction in revenue of $2.6 million for the nine months ended October 31,
2005 as compared to the nine months ended October 31, 2004, and that trend will continue for the
remainder of fiscal 2006 when compared to fiscal 2005. This decrease in revenue was offset by
increases in the MML generated from new business.
COSTS AND EXPENSES
The increase in cost of revenue in the nine months ended October 31, 2005 versus the nine months
ended October 31, 2004 was primarily due to a higher mix of royalty-bearing content in the nine
months ended October 31, 2005 as compared to the nine months ended October 31, 2004 due to the
growth of our Books Referenceware product line.
The decrease in research and development expenses in the nine months ended October 31, 2005 versus
the nine months ended October 31, 2004 was due primarily to the inclusion of $3.1 million of
purchased technology in fiscal 2005 and savings of $4.3 million realized as the result of the
reorganization of our content development organization completed in the quarter ended January 31,
2005. This decrease was partially offset by the costs associated with increased outsourcing
activity of $4.3 million.
The decrease in selling and marketing expenses in the nine months ended October 31, 2005 versus the
nine months ended October 31, 2004 was primarily due to the expense reduction of $6.4 million
resulting from the sale of certain assets related to SmartCertify, our retail IT certification
business, at the end of our fiscal 2006 first quarter. This was partially offset by incremental
expenses incurred of $2.4 million to support the new Dialogue product line, new telesales
distribution operation focusing on small and mid-sized businesses and the additional investment in
our Books sales force.
The decrease in general and administrative expenses in the nine months ended October 31, 2005
versus the nine months ended October 31, 2004 was primarily due to the expense reduction of $1.1
million resulting from the sale of certain assets related to SmartCertify at the end of our fiscal 2006 first quarter
which was partially offset by an increase in compensation expense of $0.8 million and service fees
of $0.1 million related to the share repurchase program.
Within legal settlements/(insurance recoveries), we received an insurance settlement of $19.5
million in the nine months ended October 31, 2005, which resulted from the final settlement with
our insurance carriers regarding the 2002 securities class action lawsuit settlement of $30.5
million in March 2004 and the ongoing related litigation and SEC investigation.
23
OTHER INCOME/(EXPENSE), NET
Other income in the nine months ended October 31, 2005 was $727,000 as compared to other expenses
of $164,000 in the nine months ended October 31, 2004. This change was primarily due to foreign
currency fluctuations. Our business is subject to exchange rate fluctuations in the various
currencies we do business in.
INTEREST INCOME, NET
Interest income, net increased to $872,000 in the nine months ended October 31, 2005 from $481,000
in the nine months ended October 31, 2004. This increase was primarily due to higher interest rates
on our cash and cash equivalents and investments.
PROVISION/(BENEFIT) FOR INCOME TAXES
The increase in the provision for income taxes in the nine months ended October 31, 2005 versus the
nine months ended October 31, 2004 was primarily a result of our expectation of generating a higher
taxable income in fiscal 2006 versus fiscal 2005. The estimated effective tax rate for the year
increased from 15.5% at July 31, 2005 to 22.0% at October 31, 2005. This increase is primarily due
to higher profitability distributed more significantly in jurisdictions with higher tax rates. Our
effective tax rate is significantly less than the combined federal and state tax rates due
primarily to utilization of net operating loss carryforwards and income being earned in lower or no
tax jurisdictions.
LOSS ON SALE OF ASSETS, NET
We recorded a loss of $608,000 in the nine months ended October 31, 2005. This loss is primarily
the result of investment banking and professional fees associated with the sale of certain assets
of the Retail Certification business in the first quarter of fiscal 2006.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2005, our principal source of liquidity was our cash and cash equivalents and
short-term investments, which totaled $69.7 million. This compares to $54.9 million at January 31,
2005.
Net cash provided by operating activities was $36.5 million for the nine months ended October 31,
2005, which reflects primarily our net income of $31.1 million (inclusive of the insurance
settlement of $19.5 million), a decrease in accounts receivable of $41.4 million, a decrease in
prepaid and other current assets of $6.8 million, depreciation and amortization of $10.6 million
and non-cash income tax provision of $7.9 million. These amounts were partially offset by a
decrease in deferred revenue of $36.5 million as well as changes in accrued expenses of $22.6
million. The decrease in accounts receivable, prepaids and other current assets, deferred revenue
and accrued expenses are all a result of the seasonality of our business. Our fiscal fourth
quarter includes a higher proportion of order intake then does any other fiscal quarter which
generates additional billing, prepaid and accrued commissions and deferred revenue. These amounts
tend to decrease through our first three fiscal quarters.
Net cash used in investing activities was $2.8 million for the nine months ended October 31, 2005.
Maturity of investments, net of purchases (short and long-term), generated a net cash inflow of
approximately $7.0 million in the nine months ended October 31, 2005. This was more than offset by
purchases of capital assets, primarily investment in our hosting infrastructure, and capitalized
development software costs related to our Skillsoft Dialogue totaling approximately $5.4 million as
well as the designation of restricted cash, net of $4.4 million.
Net cash used in financing activities was $19.2 million for the nine months ended October 31, 2005.
Cash was used to purchase shares having a value of $22.0 million on the open market under our
shareholder approved share repurchase program. This was partially offset by proceeds from the
exercise of stock options and stock purchases under our 2004 Employee Share Purchase Plan of $2.8
million.
Our working capital deficit was approximately $13.1 million and $46.8 million as of October 31,
2005 and January 31, 2005, respectively. The reduction in our working capital deficit in the nine
months ended October 31, 2005 was primarily due to our cash generated from operating activity of
$36.5 million, $2.8 million of proceeds from the exercise of stock options and stock purchases
under our 2004 Employee Share Purchase Plan and the maturity of long-term investments, net of
purchases of $8.7 million, which was partially offset by the repurchase of shares with a value of
$22.0 million and the purchase of property and equipment of $4.2 million.
24
We entered into a $25 million two year, line of credit with a bank on July 23, 2004, which was
amended in April 2005. Under the terms of the line of credit, the bank holds a first security
interest in all domestic business assets. All borrowings under the line of credit bear interest at
the banks prime rate. The facility is subject to a commitment fee of $50,000 to secure the line of
credit and unused commitment fees of 0.125% based upon the daily average of un-advanced amounts
under the revolving line of credit. We paid approximately $8,900 in unused commitment fees for the
nine months ended October 31, 2005. In addition, the line of credit contains certain financial and
non-financial covenants. We are currently in compliance with all covenants. Also, the line of
credit provides that in the event of a Material Adverse Change (as defined in the line of credit),
the lender has the ability to call amounts outstanding under the line of credit. As of October 31,
2005, there were no borrowings on the line of credit; however we had an outstanding letter of
credit of $15.5 million that reduced the availability under the line of credit. Letters of credit
are subject to commission fees of 0.75% as well as administrative costs. We paid approximately
$49,500 in letters of credit fees in the nine months ended October 31, 2005.
As of January 31, 2005, we had U.S. federal net operating loss carryforwards (NOLs) of
approximately $342.9 million. These NOLs, which are subject to potential limitations based upon
change in control provisions of Section 382 of the Internal Revenue Code, are available to reduce
future taxable income, if any, through 2025. We also had U.S. federal tax credit carryforwards of
approximately $3.3 million at January 31, 2005. Additionally, we had approximately $101.5 million
of net operating loss carryforwards in jurisdictions outside of the U.S. If not utilized, these
carryforwards expire at various dates through the year ending January 31, 2025. Included in the
$342.9 million are approximately $217.7 million of U.S. net operating loss carryforwards and
$365,000 of U.S. tax credit carryforwards that were acquired in the Merger and the purchase of
Books. In addition, included in the $101.5 million is approximately $62.5 million of net operating
loss carryforwards in jurisdictions outside the U.S. acquired in the Merger and the purchase of
Books. We will realize the benefits of these acquired net operating losses through reductions to
goodwill and non-goodwill intangibles during the period that the losses are utilized to reduce tax
payments. Also included in the $342.9 million at January 31, 2005, we have approximately $27.5
million of net operating loss carryforwards in the United States resulting from disqualifying
dispositions. We will realize the benefit of these losses through increases to stockholders equity
in the periods in which the losses are utilized to reduce tax payments.
We lease certain of our facilities and certain equipment and furniture under operating lease
agreements that expire at various dates through 2023. In March 2004, the Company reached a
settlement of the 2002 securities litigation for total settlement payments of $30.5 million which
was accrued in fiscal 2005, with one-half paid in August of 2004 and the remainder to be paid in
the first half of 2006. Future minimum lease payments, net of estimated rentals, under these
agreements are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Than |
|
|
1-3 |
|
|
3-5 |
|
|
More Than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Operating lease obligations |
|
$ |
31,358 |
|
|
$ |
5,130 |
|
|
$ |
8,973 |
|
|
$ |
3,890 |
|
|
$ |
13,365 |
|
Litigation settlement |
|
|
15,250 |
|
|
|
15,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
46,608 |
|
|
$ |
20,380 |
|
|
$ |
8,973 |
|
|
$ |
3,890 |
|
|
$ |
13,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We expect to continue to experience growth in capital expenditures in the fiscal year ending
January 31, 2006, as compared to the fiscal year ended January 31, 2005, and continue to invest in
our research and development and sales and marketing in order to execute our business plan and
achieve expected revenue growth. To the extent that our execution of the business plan results in
increased sales, we expect to experience corresponding increases in deferred revenue, cash flow and
prepaid expenses. Capital expenditures, most significantly related to
our hosting environment, for the fiscal year ending January 31, 2006 are expected to
be approximately $7.0 million. We have the ability to purchase, subject to certain limitations, up
to 466,116 of our outstanding shares under our shareholder approved share repurchase plan (above
the 6,533,884 we have already purchased through October 31, 2005). Under the program, there are
limitations on our ability to purchase shares up to this level, which include the availability of
distributable profits under Irish regulations and available cash. We expect that the principal
sources of funding for our operating expenses, capital expenditures, litigation settlement payments
and other liquidity needs will be a combination of our available cash and cash equivalents and
short-term investments (which totaled approximately $69.7 million as of October 31, 2005), and
funds generated from future cash flows from operating activities. We believe our current funds and
expected cash flows from operating activities will be sufficient to fund our operations for at
least the next 12 months. However, there are several items that may negatively impact our available
sources of funds. In addition, our cash needs may increase due to factors such as unanticipated
developments in our business or significant acquisitions. The amount of cash generated from
operations will be dependent upon the successful execution of our business plan. Although we do not
foresee the need to raise additional capital, any unanticipated economic or business events could
require us to raise additional capital to support operations.
25
FUTURE OPERATING RESULTS
RISKS RELATED TO LEGAL PROCEEDINGS
IN CONNECTION WITH OUR RESTATEMENT OF THE HISTORICAL FINANCIAL STATEMENTS OF SMARTFORCE, CLASS
ACTION LAWSUITS HAVE BEEN FILED AGAINST US AND ADDITIONAL LAWSUITS MAY BE FILED, AND WE ARE THE
SUBJECT OF A FORMAL ORDER OF PRIVATE INVESTIGATION ENTERED BY THE SEC.
While preparing the closing balance sheet of SmartForce as at September 6, 2002, the date on
which we closed our merger with SkillSoft Corporation, certain accounting matters were identified
relating to the historical financial statements of SmartForce (which, following the Merger, are no
longer our historical financial statements see Note 1 of the Notes to the Condensed Consolidated
Financial Statements). On November 19, 2002, we announced our intent to restate the SmartForce
financial statements for 1999, 2000, 2001 and the first two quarters of 2002. We have settled
several class action lawsuits that were filed following the announcement of the restatement and are
subject to one lawsuit pending in the United States District Court for the Northern District of
California.
We are the subject of a formal order of private investigation entered by the SEC. We will
likely incur substantial costs in connection with the SEC investigation, which could cause a
diversion of management time and attention. In addition, we could be subject to substantial
penalties, fines or regulatory sanctions, which could adversely affect our business.
On June 2, 2005, the Boston District Office of the SEC informed us that it had made a
preliminary determination to recommend that the SEC bring a civil injunctive action against us.
Under the SECs rules, we are permitted to make a so-called Wells Submission in which we seek to
persuade the SEC that no such action should be commenced. We intend to make such a submission. We
continue to cooperate with the SEC in this matter. At the present time we are unable to predict the
outcome of this action and as such have not determined what, if any, impact it may have on our
financial statements.
CLAIMS THAT WE INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS COULD RESULT IN COSTLY
LITIGATION OR ROYALTY PAYMENTS TO THIRD PARTIES, OR REQUIRE US TO REENGINEER OR CEASE SALES OF OUR
PRODUCTS OR SERVICES.
Third parties have in the past and could in the future claim that our current or future
products infringe their intellectual property rights. Any claim, with or without merit, could
result in costly litigation or require us to reengineer or cease sales of our products or services,
any of which could have a material adverse effect on our business. Infringement claims could also
result in an injunction in the use of our products or require us to enter into royalty or licensing
agreements. Licensing agreements, if required, may not be available on terms acceptable to the
combined company or at all.
From time to time we learn of parties that claim broad intellectual property rights in the
e-learning area that might implicate our offerings. These parties or others could initiate actions
against us in the future.
WE COULD INCUR SUBSTANTIAL COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS RELATING TO OUR CUSTOMERS
USE OF OUR PRODUCTS AND SERVICES.
Many of the business interactions supported by our products and services are critical to our
customers businesses. Any failure in a customers business interaction or other collaborative
activity caused or allegedly caused in the future by our products and services could result in a
claim for substantial damages against us, regardless of our responsibility for the failure.
Although we maintain general liability insurance, including coverage for errors and omissions,
there can be no assurance that existing coverage will continue to be available on reasonable terms
or will be available in amounts sufficient to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim.
WE COULD BE SUBJECTED TO LEGAL ACTIONS BASED UPON THE CONTENT WE OBTAIN FROM THIRD PARTIES OVER
WHOM WE EXERT LIMITED CONTROL.
It is possible that we could become subject to legal actions based upon claims that our course
content infringes the rights of others or is erroneous. Any such claims, with or without merit,
could subject us to costly litigation and the diversion of our financial resources and management
personnel. The risk of such claims is exacerbated by the fact that our course content is provided
by third parties over whom we exert limited control. Further, if those claims are successful, we
may be required to alter the content, pay financial damages or obtain content from others.
26
RISKS RELATED TO THE OPERATION OF OUR BUSINESS
SOME OF OUR INTERNATIONAL SUBSIDIARIES HAVE NOT COMPLIED WITH REGULATORY REQUIREMENTS RELATING TO
THEIR FINANCIAL STATEMENTS AND TAX RETURNS.
We operate our business in various foreign countries through subsidiaries organized in those
countries. Due to our restatement of the historical SmartForce financial statements, some of our
subsidiaries have not filed their audited statutory financial statements and have been delayed in
filing their tax returns in their respective jurisdictions. As a result, some of these foreign
subsidiaries may be subject to regulatory restrictions, penalties and fines and additional taxes.
WE HAVE EXPERIENCED NET LOSSES IN THE PAST, AND WE MAY BE UNABLE TO MAINTAIN PROFITABILITY.
We recorded a net loss of $284 million for the fiscal year ended January 31, 2003, $113.3
million for the fiscal year ended January 31, 2004 and $20.1 million for the fiscal year ended
January 31, 2005. We achieved profitability in the first three quarters of the fiscal year ending
January 31, 2006; however, we cannot guarantee that our business will sustain profitability in any
future period.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. THIS LIMITS YOUR ABILITY TO EVALUATE
HISTORICAL FINANCIAL RESULTS AND INCREASES THE LIKELIHOOD THAT OUR RESULTS WILL FALL BELOW MARKET
ANALYSTS EXPECTATIONS, WHICH COULD CAUSE THE PRICE OF OUR ADSS TO DROP RAPIDLY AND SEVERELY.
We have in the past experienced fluctuations in our quarterly operating results, and we
anticipate that these fluctuations will continue. As a result, we believe that our quarterly
revenue, expenses and operating results are likely to vary significantly in the future. If in some
future quarters our results of operations are below the expectations of public market analysts and
investors, this could have a severe adverse effect on the market price of our ADSs.
Our operating results have historically fluctuated, and our operating results may in the
future continue to fluctuate, as a result of factors, which include (without limitation):
|
|
|
the size and timing of new/renewal agreements and upgrades; |
|
|
|
|
royalty rates; |
|
|
|
|
the announcement, introduction and acceptance of new products, product enhancements and
technologies by us and our competitors; |
|
|
|
|
the mix of sales between our field sales force, our other direct sales channels and our telesales channels; |
|
|
|
|
general conditions in the U.S. or the international economy; |
|
|
|
|
the loss of significant customers; |
|
|
|
|
delays in availability of new products; |
|
|
|
|
product or service quality problems; |
|
|
|
|
seasonality due to the budget and purchasing cycles of our customers, we expect our
revenue and operating results will generally be strongest in the second half of our fiscal
year and weakest in the first half of our fiscal year; |
|
|
|
|
the spending patterns of our customers; |
|
|
|
|
litigation costs and expenses, including the costs related to the restatement of the SmartForce financial statements; |
|
|
|
|
non-recurring charges related to acquisitions; |
27
|
|
|
growing competition that may result in price reductions; and |
|
|
|
|
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.
DEMAND FOR OUR PRODUCTS AND SERVICES MAY BE ESPECIALLY SUSCEPTIBLE TO ADVERSE ECONOMIC CONDITIONS.
Our business and financial performance may be damaged by adverse financial conditions
affecting our target customers or by a general weakening of the economy. Companies may not view
training products and services as critical to the success of their businesses. If these companies
experience disappointing operating results, whether as a result of adverse economic conditions,
competitive issues or other factors, they may decrease or forego education and training
expenditures before limiting their other expenditures or in conjunction with lowering other
expenses.
INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES, WHICH MAY
RESULT IN REDUCED REVENUES AND GROSS PROFITS AND LOSS OF MARKET SHARE.
The market for corporate education and training solutions is highly fragmented and
competitive. We expect the market to become increasingly competitive due to the lack of significant
barriers to entry. In addition to increased competition from new companies entering into the
market, established companies are entering into the market through acquisitions of smaller
companies, which directly compete with us, and this trend is expected to continue. We may also face
competition from publishing companies, vendors of application software and HR outsourcers,
including those vendors with whom we have formed development and marketing alliances.
Our primary sources of direct competition are:
|
|
|
third-party suppliers of instructor-led information technology, business, management and
professional skills education and training; |
|
|
|
|
suppliers of computer-based training and e-learning solutions; |
|
|
|
|
internal education, training departments and HR outsourcers of potential customers; and |
|
|
|
|
value-added resellers and network integrators. |
Growing competition may result in price reductions, reduced revenue and gross profits and loss
of market share, any one of which would have a material adverse effect on our business. Many of our
current and potential competitors have substantially greater financial, technical, sales, marketing
and other resources, as well as greater name recognition, and we expect to face increasing price
pressures from competitors as managers demand more value for their training budgets. Accordingly,
we may be unable to provide e-learning solutions that compare favorably with new instructor-led
techniques, other interactive training software or new e-learning solutions.
WE RELY ON A LIMITED NUMBER OF THIRD PARTIES TO PROVIDE US WITH EDUCATIONAL CONTENT FOR OUR COURSES
AND REFERENCEWARE, AND OUR ALLIANCES WITH THESE THIRD PARTIES MAY BE TERMINATED OR FAIL TO MEET OUR
REQUIREMENTS.
We rely on a limited number of independent third parties to provide us with the educational
content for a majority of our courses based on learning objectives and specific instructional
design templates that we provide to them. We do not have exclusive arrangements or long-term
contracts with any of these content providers. If one or more of our third party content providers
were to stop working with us, we would have to rely on other parties to develop our course content.
In addition, these providers may fail to develop new courses or existing courses on a timely basis.
We cannot predict whether new content or enhancements would be available from reliable alternative
sources on reasonable terms. In addition, 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
28
publishers for such content. In addition, we may be forced to pay increased royalties to these
publishers to continue our licenses with them.
In the event that we are unable to maintain or expand our current development alliances or
enter into new development alliances, our operating results and financial condition could be
materially adversely affected. Furthermore, we will be required to pay royalties to some of our
development partners on products developed with them, which could reduce our gross margins. We
expect that cost of revenues may fluctuate from period to period in the future based upon many
factors, including the revenue mix and the timing of expenses associated with development
alliances. In addition, the collaborative nature of the development process under these alliances
may result in longer development times and less control over the timing of product introductions
than for e-learning offerings developed solely by us. Our strategic alliance partners may from time
to time renegotiate the terms of their agreements with us, which could result in changes to the
royalty or other arrangements, adversely affecting our results of operations.
The independent third party strategic partners we rely on for educational content and product
marketing may compete with us, harming our results of operations. Our agreements with these third
parties generally do not restrict them from developing courses on similar topics for our
competitors or from competing directly with us. As a result, our competitors may be able to
duplicate some of our course content and gain a competitive advantage.
OUR SUCCESS DEPENDS ON OUR ABILITY TO MEET THE NEEDS OF THE RAPIDLY CHANGING MARKET.
The market for education and training software is characterized by rapidly changing
technology, evolving industry standards, changes in customer requirements and preferences and
frequent introductions of new products and services embodying new technologies. New methods of
providing interactive education in a technology-based format are being developed and offered in the
marketplace, including intranet and Internet offerings. In addition, multimedia and other product
functionality features are being added to educational software. Our future success will depend upon
the extent to which we are able to develop and implement products which address these emerging
market requirements in a cost effective and timely basis. Product development is risky because it
is difficult to foresee developments in technology, coordinate technical personnel and identify and
eliminate design flaws. Any significant delay in releasing new products could have a material
adverse effect on the ultimate success of our products and could reduce sales of predecessor
products. We may not be successful in introducing new products on a timely basis. In addition, new
products introduced by us may fail to achieve a significant degree of market acceptance or, once
accepted, may fail to sustain viability in the market for any significant period. If we are
unsuccessful in addressing the changing needs of the marketplace due to resource, technological or
other constraints, or in anticipating and responding adequately to changes in customers software
technology and preferences, our business and results of operations would be materially adversely
affected. We, along with the rest of the industry, face a challenging and competitive market for IT
spending that has resulted in reduced contract value for our formal learning product lines. This
pricing pressure is having a negative impact on revenue for these product lines and may have a
continued or increased adverse impact in the future.
THE E-LEARNING MARKET IS A DEVELOPING MARKET, AND OUR BUSINESS WILL SUFFER IF E-LEARNING IS NOT
WIDELY ACCEPTED.
The market for e-learning is a new and emerging market. Corporate training and education have
historically been conducted primarily through classroom instruction and have traditionally been
performed by a companys internal personnel. Many companies have invested heavily in their current
training solutions. Although technology-based training applications have been available for several
years, they currently account for only a small portion of the overall training market.
Accordingly, our future success will depend upon the extent to which companies adopt
technology-based solutions for their training activities, and the extent to which companies utilize
the services or purchase products of third-party providers. Many companies that have already
invested substantial resources in traditional methods of corporate training may be reluctant to
adopt a new strategy that may compete with their existing investments. Even if companies implement
technology-based training or e-learning solutions, they may still choose to design, develop,
deliver or manage all or part of their education and training internally. If technology-based
learning does not become widespread, or if companies do not use the products and services of third
parties to develop, deliver or manage their training needs, then our products and service may not
achieve commercial success.
29
THE SUCCESS OF OUR E-LEARNING STRATEGY DEPENDS ON THE RELIABILITY AND CONSISTENT PERFORMANCE OF OUR
INFORMATION SYSTEMS AND INTERNET INFRASTRUCTURE.
The success of our e-learning strategy is highly dependent on the consistent performance of
our information systems and Internet infrastructure. If our Web site fails for any reason or if it
experiences any unscheduled downtimes, even for only a short period, our business and reputation
could be materially harmed. We have in the past experienced performance problems and unscheduled
downtime, and these problems could recur. We currently rely on third parties for proper functioning
of computer infrastructure, delivery of our e-learning applications and the performance of our
destination site. Our systems and operations could be damaged or interrupted by fire, flood, power
loss, telecommunications failure, break-ins, earthquake, financial patterns of hosting providers
and similar events. Any system failures could adversely affect customer usage of our solutions and
user traffic results in any future quarters, which could adversely affect our revenues and
operating results and harm our reputation with corporate customers, subscribers and commerce
partners. Accordingly, the satisfactory performance, reliability and availability of our Web site
and computer infrastructure is critical to our reputation and ability to attract and retain
corporate customers, subscribers and commerce partners. We cannot accurately project the rate or
timing of any increases in traffic to our Web site and, therefore, the integration and timing of
any upgrades or enhancements required to facilitate any significant traffic increase to the Web
site are uncertain. We have in the past experienced difficulties in upgrading our Web site
infrastructure to handle increased traffic, and these difficulties could recur. The failure to
expand and upgrade our Web site or any system error, failure or extended down time could materially
harm our business, reputation, financial condition or results of operations.
BECAUSE MANY USERS OF OUR E-LEARNING SOLUTIONS WILL ACCESS THEM OVER THE INTERNET, FACTORS
ADVERSELY AFFECTING THE USE OF THE INTERNET OR OUR CUSTOMERS NETWORKING INFRASTRUCTURES COULD HARM
OUR BUSINESS.
Many of our customers users access our e-learning solutions over the Internet or through our
customers internal networks. Any factors that adversely affect Internet usage could disrupt the
ability of those users to access our e-learning solutions, which would adversely affect customer
satisfaction and therefore our business.
For example, our ability to increase the effectiveness and scope of our services to customers
is ultimately limited by the speed and reliability of both the Internet and our customers internal
networks. Consequently, the emergence and growth of the market for our products and services
depends upon the improvements being made to the entire Internet as well as to our individual
customers networking infrastructures to alleviate overloading and congestion. If these
improvements are not made, and the quality of networks degrades, the ability of our customers to
use our products and services will be hindered and our revenues may suffer.
Additionally, a requirement for the continued growth of accessing e-learning solutions over
the Internet is the secure transmission of confidential information over public networks. Failure
to prevent security breaches into our products or our customers networks, or well-publicized
security breaches affecting the Internet in general could significantly harm our growth and
revenue. Advances in computer capabilities, new discoveries in the field of cryptography or other
developments may result in a compromise of technology we use to protect content and transactions,
our products or our customers proprietary information in our databases. Anyone who is able to
circumvent our security measures could misappropriate proprietary and confidential information or
could cause interruptions in our operations. We may be required to expend significant capital and
other resources to protect against such security breaches or to address problems caused by security
breaches. The privacy of users may also deter people from using the Internet to conduct
transactions that involve transmitting confidential information.
OUR RESTRUCTURING PLANS MAY BE INEFFECTIVE OR MAY LIMIT OUR ABILITY TO COMPETE.
Since the Merger, we have recorded an aggregate of $31.5 million in merger and exit costs and
an aggregate of $30.0 million of restructuring charges. There are several risks inherent in these
efforts to transition to a new cost structure. These include the risk that we will not be
successful in restoring profitability, and hence we may have to undertake further restructuring
initiatives that would entail additional charges and create additional risks. In addition, there is
the risk that cost-cutting initiatives will impair our ability to effectively develop and market
products and remain competitive. Each of the above measures could have long-term effects on our
business by reducing our pool of talent, decreasing or slowing improvements in our products, making
it more difficult for us to respond to customers, limiting our ability to increase production
quickly if and when the demand for our products increases and limiting our ability to hire and
retain key personnel. These circumstances could cause our earnings to be lower than they otherwise
might be.
WE DEPEND ON A FEW KEY PERSONNEL TO MANAGE AND OPERATE THE BUSINESS AND MUST BE ABLE TO ATTRACT AND
RETAIN HIGHLY QUALIFIED EMPLOYEES.
30
Our success is largely dependent on the personal efforts and abilities of our senior
management. Failure to retain these executives, or the loss of certain additional senior management
personnel or other key employees, could have a material adverse effect on our business and future
prospects. We are also dependent on the continued service of our key sales, content development and
operational personnel and on our ability to attract, train, motivate and retain highly qualified
employees. In addition, we depend on writers, programmers, Web designers and graphic artists. We
may be unsuccessful in attracting, training, retaining or motivating key personnel. In particular,
the negative consequences (including litigation) of having to restate SmartForces historical
financial statements, uncertainties surrounding the Merger, and our recent adverse operating
results and stock price performance could create uncertainties that materially and adversely affect
our ability to attract and retain key personnel. The inability to hire, train and retain qualified
personnel or the loss of the services of key personnel could have a material adverse effect upon
our business, new product development efforts and future business prospects.
CHANGES IN ACCOUNTING STANDARDS REGARDING STOCK OPTION PLANS COULD LIMIT THE DESIRABILITY OF
GRANTING STOCK OPTIONS, WHICH COULD HARM OUR ABILITY TO ATTRACT AND RETAIN EMPLOYEES, AND COULD
ALSO REDUCE OUR PROFITABILITY.
The Financial Accounting Standards Board has determined to require all companies to treat the
value of stock options granted to employees as an expense commencing in our first quarter of fiscal
2007. This change will require companies to record a compensation expense equal to the value of
each stock option granted. This expense will be spread over the vesting period of the stock option.
Due to the fact that we will be required to expense stock option grants, it could reduce the
attractiveness of granting stock options because the additional expense associated with these
grants would reduce our profitability. However, stock options are an important employee recruitment
and retention tool, and we may not be able to attract and retain key personnel if we reduce the
scope of our employee stock option program. Accordingly, either our profitability, or our ability
to use stock options as an employee recruitment and retention tool would be adversely impacted.
OUR BUSINESS IS SUBJECT TO CURRENCY FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Due to our multinational operations, our operating results are subject to fluctuations based
upon changes in the exchange rates between the currencies in which revenues are collected or
expenses are paid. In particular, the value of the U.S. dollar against the euro and related
currencies will impact our operating results. Our expenses will not necessarily be incurred in the
currency in which revenue is generated, and, as a result, we will be required from time to time to
convert currencies to meet our obligations. These currency conversions are subject to exchange rate
fluctuations, and changes to the value of the euro, pound sterling and other currencies relative to
the U.S. dollar could adversely affect our business and results of operations.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS. UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY
MAY RESULT IN DEVELOPMENT OF PRODUCTS OR SERVICES THAT COMPETE WITH OURS.
Our success depends to a degree upon the protection of our rights in intellectual property. We
rely upon a combination of patent, copyright, and trademark laws to protect our proprietary rights.
We have also entered into, and will continue to enter into, confidentiality agreements with our
employees, consultants and third parties to seek to limit and protect the distribution of
confidential information. However, we have not signed protective agreements in every case.
Although we have taken steps to protect our proprietary rights, these steps may be inadequate.
Existing patent, copyright, and trademark laws offer only limited protection. Moreover, the laws of
other countries in which we market our products may afford little or no effective protection of our
intellectual property. Additionally, unauthorized parties may copy aspects of our products,
services or technology or obtain and use information that we regard as proprietary. Other parties
may also breach protective contracts we have executed or will in the future execute. We may not
become aware of, or have adequate remedies in the event of, a breach. Litigation may be necessary
in the future to enforce or to determine the validity and scope of our intellectual property rights
or to determine the validity and scope of the proprietary rights of others. Even if we were to
prevail, such litigation could result in substantial costs and diversion of management and
technical resources.
31
OUR NON-U.S. OPERATIONS ARE SUBJECT TO RISKS WHICH COULD NEGATIVELY IMPACT OUR FUTURE OPERATING
RESULTS.
We expect that international operations will continue to account for a significant portion of
our revenues. Operations outside of the United States are subject to inherent risks, including:
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difficulties or delays in developing and supporting non-English language versions of our products and services; |
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political and economic conditions in various jurisdictions; |
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difficulties in staffing and managing foreign subsidiary operations; |
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longer sales cycles and account receivable payment cycles; |
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multiple, conflicting and changing governmental laws and regulations; |
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foreign currency exchange rate fluctuations; |
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protectionist laws and business practices that may favor local competitors; |
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difficulties in finding and managing local resellers; |
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potential adverse tax consequences; and |
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the absence or significant lack of legal protection for intellectual property rights. |
Any of these factors could have a material adverse effect on our future operations outside of
the United States, which could negatively impact our future operating results.
THE MARKET PRICE OF OUR ADSs MAY FLUCTUATE AND MAY NOT BE SUSTAINABLE.
The market price of our ADSs has fluctuated significantly since our initial public offering
and is likely to continue to be volatile. In addition, in recent years the stock market in general,
and the market for shares of technology stocks in particular, have experienced extreme price and
volume fluctuations, which have often been unrelated to the operating performance of affected
companies. The market price of our ADSs may continue to experience significant fluctuations in the
future, including fluctuations that are unrelated to our performance. As a result of these
fluctuations in the price of our ADSs, it is difficult to predict what the price of our ADSs will
be at any point in the future, and you may not be able to sell your ADSs at or above the price that
you paid for them.
OUR SALES CYCLE MAY MAKE IT DIFFICULT TO PREDICT OUR OPERATING RESULTS.
The period between our initial contact with a potential customer and the purchase of our
products (not including SmartCertify) by that customer typically ranges from three to twelve months
or more. Factors that contribute to our long sales cycle, include:
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our need to educate potential customers about the benefits of our products; |
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competitive evaluations by customers; |
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the customers internal budgeting and approval processes; |
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the fact that many customers view training products as discretionary spending, rather
than purchases essential to their business; and |
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the fact that we target large companies, which often take longer to make purchasing
decisions due to the size and complexity of the enterprise. |
These long sales cycles make it difficult to predict the quarter in which sales may occur.
Delays in sales could cause significant variability in our revenues and operating results for any
particular period.
32
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS CONTAIN ERRORS.
Software products as complex as ours contain known and undetected errors or bugs that result
in product failures. The existence of bugs could result in loss of or delay in revenues, loss of
market share, diversion of product development resources, injury to reputation or damage to efforts
to build brand awareness, any of which could have a material adverse effect on our business,
operating results and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of October 31, 2005, we did not use derivative financial instruments for speculative or trading
purposes.
INTEREST RATE RISK
Our general investing policy is to limit the risk of principal loss and to ensure the safety
of invested funds by limiting market and credit risk. We currently use a registered investment
manager to place our investments in highly liquid money market accounts and government-backed
securities. All highly liquid investments with original maturities of three months or less are
considered to be cash equivalents. Interest income is sensitive to changes in the general level of
U.S. interest rates. Based on the short-term nature of our investments, we have concluded that
there is no significant market risk exposure.
FOREIGN CURRENCY RISK
Due to our multinational operations, our business is subject to fluctuations based upon
changes in the exchange rates between the currencies in which we collect revenues or pay expenses
and the U.S. dollar. Our expenses are not necessarily incurred in the currency in which revenue is
generated, and, as a result, we are required from time to time to convert currencies to meet our
obligations. These currency conversions are subject to exchange rate fluctuations, in particular
changes to the value of the euro, Canadian dollar, Australian dollar, New Zealand dollar, Singapore
dollar, and pound sterling relative to the U.S. dollar, which could adversely affect our business
and the results of operations.
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 October 31,
2005. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act), means controls and other procedures
of a company that are designed to ensure that information required to be disclosed by a company in
the reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the companys management, including its principal executive
and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Our management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of our disclosure controls and procedures as of October 31,
2005, 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 October 31, 2005 that
has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
33
PART II
ITEM 1. LEGAL PROCEEDINGS
On November 18, 2004, Jody Glidden, Michael LeBlanc and Trish Glidden filed a lawsuit against the
Company, David C. Drummond, Gregory M. Priest, Patrick E. Murphy and Jack Hayes in the United
States District Court for the Northern District of California. The plaintiffs subsequently
dismissed Patrick E. Murphy and Jack Hayes from the lawsuit. The plaintiffs had previously opted
out of the class action settlement that received final approval from the court on September 29,
2004. The lawsuit sets forth substantially the same claims as were alleged in the class action
litigation. In particular, the lawsuit alleges that the Company misrepresented or omitted to state
material facts in its SEC filings and press releases regarding the Companys revenues and earnings
and failed to correct such false and misleading SEC filings and press releases, which are alleged
to have artificially inflated the price of the Companys ADSs in connection with its acquisition of
IC Global in early 2001. The lawsuit seeks compensatory damages in excess of $3.7 million and other
unspecified damages, including punitive damages. Some of the plaintiffs claims have been dismissed
with leave to amend. Defendants filed a motion to dismiss the Second Amended Complaint on December
2, 2005, to be heard by the Court on January 20, 2006. No trial date has been set. We believe that
we have meritorious defenses to this lawsuit and intend to defend ourselves vigorously.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
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(c) |
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(d) |
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Total Number of |
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Maximum Number (or |
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Shares (or Units) |
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Approximate Dollar |
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(a) |
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(b) |
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Purchased as Part |
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Value) of Shares (or |
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Total Number of |
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Average Price |
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of Publicly |
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Units) that May Yet Be |
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Shares (or Units) |
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Paid per Share (or |
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Announced Plans |
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Purchased Under the |
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Period |
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Purchased (1) |
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Unit) $ |
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or Programs (2) |
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Plans or Programs |
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August 1, 2005 through August 31, 2005 |
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430,700 |
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$ |
4.08 |
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430,700 |
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466,116 |
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September 1, 2005 through September 30, 2005 |
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466,116 |
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October 1, 2005 through October 31, 2005 |
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466,116 |
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Total |
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430,700 |
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$ |
4.08 |
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430,700 |
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466,116 |
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Through October 31, 2005, we repurchased an aggregate of 6,533,884 ADSs pursuant to our
shareholder approved repurchase program that we publicly announced on September 27, 2004 (the
Program). |
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Our Board of Directors and shareholder approved the repurchase by us of up to an aggregate of
7,000,000 ADSs at a per share purchase price which complies with the requirements of Rule
10b-18 pursuant to the Program. Unless terminated earlier by resolution of our Board of
Directors, the Program will expire on March 24, 2006 or when we have repurchased all shares
authorized for repurchase thereunder. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 2005 annual general meeting of shareholders (the AGM) on September 29, 2005.
Under the terms of the deposit agreement, The Bank of New York is entitled to vote or cause to be
voted on behalf of, and in accordance with the instructions received from, the ADS holders. Two
individual shareholders and the Chairman, as proxy for BNY (Nominees) Limited, the custodian for
the ordinary shares representing the ADSs, were present for the vote along with the auditor and a
legal representative. Voting was conducted on a show of hands in accordance with Irish law. There
were no abstentions, broker non-votes or votes withheld with respect to any matter submitted to a
vote of the ordinary shareholders at the AGM.
The following is a brief description of each matter submitted to a vote of the ordinary
shareholders and a summary of the votes tabulated with respect to each such matter at the AGM, as
well as a summary of the votes cast by The Bank of New York based on the ADR facility:
(1) Receipt and consideration of the consolidated financial statements for the fiscal year
ended January 31, 2005 and the Report of the Directors and Auditors thereon.
34
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Votes FOR |
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AGAINST |
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ABSTAIN |
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Ordinary Shareholders |
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3 |
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0 |
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0 |
ADS Holders |
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106,425,239 |
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12,706 |
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6,017 |
(2)(A) Re-election of Charles E. Moran, who retired by rotation, as a director.
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Votes FOR |
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AGAINST |
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ABSTAIN |
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Ordinary Shareholders |
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3 |
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0 |
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0 |
ADS Holders |
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106,357,181 |
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76,714 |
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10,067 |
(2)(B) Re-election of Stewart K.P. Gross, who retired by rotation, as a director.
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Votes FOR |
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AGAINST |
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ABSTAIN |
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Ordinary Shareholders |
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3 |
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0 |
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0 |
ADS Holders |
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106,090,762 |
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343,344 |
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9,856 |
(3) Authorization of the Audit Committee of the Board of Directors to fix the remuneration of
our auditors and reporting accountants for the fiscal year ending January 31, 2006.
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Votes FOR |
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AGAINST |
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ABSTAIN |
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Ordinary Shareholders |
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3 |
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0 |
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0 |
ADS Holders |
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106,324,726 |
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113,940 |
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5,296 |
(4) Amendment of the 2001 Outside Director Plan to increase the total number of shares
reserved for issuance thereunder by 400,000 ordinary shares of 0.11 each (to 750,000 ordinary
shares of 0.11 each) and authorization of the directors to do such acts and things as they may
consider necessary or expedient to establish and carry into effect the increase in the number of
shares available under the Outside Director Plan.
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Votes FOR |
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AGAINST |
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ABSTAIN |
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Ordinary Shareholders |
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3 |
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0 |
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0 |
ADS Holders |
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91,173,485 |
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15,201,726 |
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68,751 |
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
See the Exhibit Index attached hereto.
35
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 |
Date: December 9, 2005 |
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By: |
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/s/ Thomas J. McDonald |
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Thomas J. McDonald |
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Chief Financial Officer |
36
EXHIBIT INDEX
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31.1
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Certification of the Companys CEO pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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31.2
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Certification of the Companys CFO pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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32.1
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Certification of the Companys CEO pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934. |
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32.2
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Certification of the Companys CFO pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934. |
37