UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2002
OR
[ ] 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)
REPUBLIC OF IRELAND N/A
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
107 NORTHEASTERN BOULEVARD 03062
NASHUA, NEW HAMPSHIRE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 324-3000
20 Industrial Park Drive, Nashua, New Hampshire 03062
-----------------------------------------------------
(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 [] No [x]
Indicate by check mark whether registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes [x] No [ ]
The number of Ordinary Shares (issued or issuable in exchange for
Registrant's outstanding American Depositary Shares ("ADSs")) outstanding as of
January 14, 2003 was 99,598,136.
1
SKILLSOFT PLC
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2002
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements: 3
Condensed Consolidated Balance Sheets as of October 31, 2002 and
January 31, 2002 3
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended October 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended October 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk 33
Item 4. Controls and Procedures 34
PART II - OTHER INFORMATION 34
Item 1. Legal Proceedings 34
Item 2. Changes in Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
Item 4. Submission of Matters to a Vote of Security Holders 37
Item 5. Other Information 38
Item 6. Exhibits and Reports on Form 8-K 38
SIGNATURES 40
CERTIFICATIONS 40
2
PART I
ITEM 1. - FINANCIAL STATEMENTS
SKILLSOFT PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
OCTOBER 31, JANUARY 31,
2002 2002
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 49,130 $ 25,185
Short-term investments 92,322 43,761
Accounts receivable, net 54,601 17,963
Prepaid expenses and other current assets 6,269 1,449
------------ ------------
Total current assets 202,322 88,358
Property and equipment, net 13,815 2,585
Goodwill and intangible assets, net 427,740 48,701
Long term investments 1,629 13,786
Other assets 5,618 28
------------ ------------
$ 651,124 $ 153,458
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 14,175 5,717
Accrued expenses 92,842 11,367
Deferred revenue 69,861 22,624
------------ ------------
Total current liabilities 176,878 39,708
Long term liabilities:
Other liabilities 163 --
------------ ------------
Total long term liabilities 163
Commitments and contingencies (Note 11)
Stockholders' equity:
Ordinary Shares, E0,11 par value: 250,000,000 and 120,000,000 shares
authorized at October 31, 2002 and January 31, 2002, respectively; 99,570,610
and 40,988,313 shares issued and outstanding at October 31, 2002 and January
31, 2002, respectively 10,728 4,348
Additional paid-in capital 546,050 175,902
Accumulated deficit (77,697) (63,645)
Deferred compensation (4,841) (2,563)
Notes receivable from stockholders (58) (338)
Cumulative translation adjustment (99) 46
Total stockholders' equity 474,083 113,750
------------ ------------
$ 651,124 $ 153,458
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SKILLSOFT PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS
OCTOBER 31, ENDED
OCTOBER 31,
2002 2001 2002 2001
Revenue $ 30,369 $ 11,156 $ 59,589 $ 29,048
Cost of revenue(1) 5,312 579 7,133 1,645
--------- --------- --------- ---------
Gross profit 25,057 10,577 52,456 27,403
Operating expenses:
Research and development(1) 7,702 6,126 14,886 13,485
Selling and marketing(1) 16,428 6,970 31,691 20,113
General and administrative(1) 7,791 1,886 11,392 5,176
Amortization of intangible
assets and stock based
compensation 2,263 184 3,125 552
Restructuring and other
non-recurring Items 6,607 -- 6,607 --
--------- --------- --------- ---------
Total operating expenses 40,791 15,166 67,701 39,326
Operating loss (15,734) (4,589) (15,245) (11,923)
Interest income 364 754 1,194 1,358
Net loss $ (15,370) $ (3,835) $ (14,051) $ (10,565)
========= ========= ========= =========
Net loss per share (Note 9):
Basic $ (0.20) $ (0.10) $ (0.27) $ (0.31)
Basic and diluted weighted
average ordinary shares
outstanding 76,193 38,445 52,816 33,945
(1) The following summarizes the departmental allocation of the stock-based
compensation
Cost of revenue $ 1 1 $ 3 $ 3
Research and development 113 26 292 78
Selling and marketing 175 82 527 246
General and administrative 150 75 316 225
--------- --------- --------- ---------
$ 439 $ 184 $ 1,138 $ 552
========= ========= ========= =========
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)
NINE MONTHS ENDED OCTOBER 31,
2002 2001
Cash flows from operating activities:
Net loss $(14,051) $(10,565)
Adjustments to reconcile net loss to net cash used in operating
activities -
Stock-based compensation 1,138 552
Depreciation and amortization 3,399 645
Amortization of intangible assets 1,987
Changes in current assets and liabilities -
Accounts receivable, net (3,838) (737)
Prepaid expenses and other current assets 2,058 (202)
Accounts payable 5,671 262
Accrued expenses (19,851) 2,478
Deferred revenue 4,961 14
-------- --------
Net cash used in operating activities (18,526) (7,553)
Cash flows from investing activities:
Merger of SkillSoft and SmartForce , net cash acquired 49,333
Purchases of property and equipment (5,124) (1,631)
Purchases of investments (11,540) (54,215)
Maturity of short-term investments 11,453 23,113
Other assets (2,661) --
-------- --------
Net cash provided by (used in) investing activities 41,461 (32,733)
Cash flows from financing activities:
Issuance of ordinary shares, net of issuance costs -- 71,977
Proceeds from exercise of stock options and employee stock
purchase plan 771 877
Payment on notes receivable 280 1
-------- --------
Net cash provided by financing activities 1,051 72,855
Effect of exchange rate changes on cash and cash equivalents (41) (3)
Net increase decrease in cash and cash equivalents 23,945 32,566
Cash and cash equivalents, beginning of period 25,185 12,547
-------- --------
Cash and cash equivalents, end of period $ 49,130 $ 45,113
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. On September 6,
2002, the Company completed its merger with SkillSoft Corporation and, on
November 19, 2002, changed its corporate name to SkillSoft PLC. For accounting
purposes, due to a number of factors, including composition of the board of
directors, management team, and concentrated shareholder interest, the merger
with SkillSoft Corporation is accounted for as a reverse acquisition, with
SkillSoft Corporation as the accounting acquirer. Accordingly, the historical
financial statements of SkillSoft Corporation are the historical financial
statements of the combined company, and the assets and liabilities of the
Company are accounted for as required under the purchase method of accounting.
The results of operations of SkillSoft PLC are included in the financial
statements of the combined company from September 6, 2002, the date on which the
merger was consummated. In connection with the merger, the Company changed its
fiscal year end to January 31 (the fiscal year end of SkillSoft Corporation)
from December 31 (the Company's historical fiscal year end).
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. Nevertheless, the management of the Company believes that the
disclosures herein are adequate to make the information presented not
misleading. 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, 2002, the
results of its operations for the three and nine months ended October 31, 2002
and 2001 and its cash flows for the nine months ended October 31, 2002 and 2001.
These condensed consolidated financial statements and notes thereto should be
read in conjunction with the consolidated financial statements and notes thereto
included in SkillSoft Corporation's Annual Report on Form 10-K for the fiscal
year ended January 31, 2002. The results of operations for the interim periods
are not necessarily indicative of the results of operations to be expected for
the full year.
3. CASH, CASH EQUIVALENTS 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, 2002 and January 31, 2002, cash equivalents consisted mainly of commercial
paper, short-term notes and money market funds. 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. Under SFAS No. 115, securities that the Company has the positive
intent and ability to hold to maturity are reported at amortized cost, which
approximates market value, and are classified as held-to-maturity. At October
31, 2002, the Company's investments consisted primarily of held-to-maturity
securities that are investments in short-term notes, which had an average
maturity of approximately 144 days. The investments in short-term notes are
classified as current assets in the accompanying consolidated balance sheets as
they mature within one year.
4. REVENUE RECOGNITION
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. The Company derives
revenue primarily pursuant to license agreements under which customers license
usage of delivered products for a period of one, two or three years. On each
anniversary date during the term of multi-year license
6
agreements for courseware, customers are generally allowed to exchange any or
all of the licensed products for an equivalent number of alternative products
within the Company's course library.
The annual license fee for the first year is generally billed in advance.
Revenue is recognized either at the time of delivery of products or over the
term of the contract, depending on specific contract terms. In the event that
the customer initially specifies the entire set of licensed courses to be
delivered and those courses are available and delivered on or before the
contract start date, the license revenue for the first year of the contract is
recognized upon execution of the contract and delivery of the courses. License
fees for subsequent years of multi-year license agreements are billed generally
on the anniversary date of the agreement and recognized in the manner described
above; and if the customer exchanges courses and receives the exchanged courses
by the renewal date, revenue is recognized in the manner described above.
Revenue is recognized ratably over the license period if the number of courses
that a customer has access to is not clearly defined, is not yet 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 initially specify the entire set of licensed
courses, the customer is given exchange privileges that are exercisable other
than on the contract anniversaries, the customer licenses all courses currently
available and to be developed during a particular term, or if VSOE does not
exist for an undelivered element. In some circumstances, the Company offers
payment terms of up to six months from the initial shipment date or anniversary
date for multi-year agreements to its customers. To the extent that a customer
is given extended payment terms, revenue is recognized as cash becomes due,
assuming all of the other elements of revenue recognition have been satisfied.
The Company also derives revenue from extranet hosting/application service
provider ("ASP") services and online mentoring services. Revenue related to
extranet hosting/ASP services and online mentoring services is recognized on a
straight line basis over the period in which the services are provided to the
extent the Company has VSOE for those services. For multi-element agreements
where the Company provides these services, vendor specific objective evidence
exists to allocate the total fee to the elements of the agreement.
The cost of satisfying any Post Contract Support ("PCS"), which essentially
represents a warranty obligation, is accrued at the time license revenue is
recognized, as PCS fees are included in the annual license fee. The accrued PCS
costs are included in deferred revenue in the accompanying consolidated balance
sheets. The estimated cost of providing PCS during the agreements is
insignificant and the Company does not offer it separately.
The Company records deferred revenue when either cash is received or
amounts have been billed in advance of products or services provided. Deferred
revenue includes the unrecognized portion of revenue associated with license
fees for which the Company has received payment or for which amounts have been
billed and are currently due for payment. In addition, deferred revenue includes
amounts which have been billed and not collected for which revenue is being
recognized ratably over the license period, which totaled (including amounts
valued in Note 5) approximately $69.9 million at October 31, 2002 and $22.6
million at January 31, 2002, respectively.
5. BUSINESS COMBINATION
SKILLSOFT CORPORATION
On September 6, 2002, the Company completed a merger (the "Merger") with
SkillSoft Corporation, a leading provider of e-learning courseware and
Referenceware for business and IT professionals. As a result of the Merger, each
issued and outstanding share of common stock, par value $0.001 per share, of
SkillSoft Corporation (the "SkillSoft Common Stock") was automatically converted
into the right to receive 2.3674 (the "Exchange Ratio") validly issued and fully
paid ordinary shares, nominal value E0.11 per share, of the Company, with each
ordinary share represented by an American Depositary Share of the Company (the
"ADS"). The Company also assumed each outstanding option to purchase SkillSoft
Common Stock, which had been granted under SkillSoft Corporation's existing
stock option plans, under the same exchange ratio. As SkillSoft Corporation is
the accounting acquirer in the transaction, the calculation of the stock
consideration is calculated based on SmartForce ordinary shares and options
outstanding. Consequently, this transaction resulted in the issuance of
approximately 57.4 million ordinary shares (represented by ADSs) of the Company
with a fair value of approximately $317.4 million, the assumption of options to
purchase approximately 15.7 million ordinary shares (represented by ADSs) with a
Black-Scholes fair value of approximately $38.9 million, and estimated direct
transaction costs of $15.3 million. The fair value of the Company's ADSs was
derived using a market price per ADS
7
of $5.53, which was based on an average of the closing prices for a range of six
trading days around the announcement date (June 10, 2002) of the acquisition.
Immediately following the Merger, the former stockholders of SkillSoft
Corporation owned approximately 42% of the outstanding ordinary shares of the
Company.
In preparing the closing balance sheet of SmartForce PLC as at September 6,
2002, the Company discovered certain accounting issues relating to the
historical financial statements of SmartForce PLC (which, following the Merger,
are no longer the Company's historical financial statements - see Note 1.) On
November 19, 2002, the Company announced its intent to restate the SmartForce
PLC financial statements for 1999, 2000, 2001 and the first two quarters of
2002. Due to the planned restatement, the Company is not currently providing the
pro forma results of the combined entity. In addition, the purchase price and
its allocation are still estimates and subject to revision based on the impact
of the results of the restatement of the historical SmartForce financial
statements, along with any other subsequent adjustments to pre-acquisition
contingencies and/or accrued expenses that might occur.
Based on an independent preliminary valuation, the total purchase price of
approximately $371.6 million has been allocated as follows (in thousands):
Cash and cash equivalents $ 51,318
Short-term investments 34,830
Accounts receivable, net 28,445
Prepaid expenses and other current assets 6,803
Property and equipment 9,491
Goodwill 344,026
Amortizable intangible assets 37,000
Other assets 4,491
Accounts payable (2,783)
Accrued expenses (103,610)
Deferred revenue (38,373)
---------
Total $ 371,638
=========
The Company allocated the purchase price to the tangible assets,
liabilities and intangible assets acquired, based on their estimated fair
values. The excess purchase price over those fair values was recorded as
goodwill. The fair value assigned to the intangible assets acquired was based on
valuations prepared by an independent third party appraisal firm using estimates
and assumptions provided by management. The goodwill recorded as a result of
these acquisitions is not expected to be deductible for tax purposes. The
assignment of goodwill to reporting units for these acquisitions has not yet
been completed. In accordance with SFAS No. 142, goodwill and purchased
intangibles with indefinite lives acquired after June 30, 2001 are not amortized
but will be reviewed periodically for impairment. The Company will complete an
impairment analysis of goodwill during the quarter ending January 31, 2003.
AMORTIZABLE INTANGIBLE ASSETS
Of the purchase price, approximately $37.0 million has been allocated to
amortizable intangible assets including contractual customer relationships
($12.0 million) and course content ($25.0 million). Contractual customer
relationships are existing contracts that relate to underlying customer
relationships pertaining to the services provided by the Company. The Company
expects to amortize the fair value of these assets on an accelerated basis over
a weighted average estimated useful life of approximately 5 years. Course
content includes courses in both soft skills and information technology. All
courseware is deployable via the Internet or corporate intranets. The Company
expects to amortize the fair value of these assets on a straight-line basis over
a weighted average estimated useful life of approximately 4 years.
DEFERRED REVENUE
Further, at the date of the Merger, due to the nature of the Company's
business, the Company had remaining
8
contractual obligations to customers of SmartForce PLC. The obligations
principally involve delivery of future products and services. The Company has
recorded deferred revenue as of the Merger date based on a preliminary valuation
prepared by an independent third party appraisal firm using estimates and
assumptions provided by management of these estimated obligations in accordance
with Emerging Issues Task Force ("EITF") 01-03, "Accounting in a Business
Combination for Deferred Revenue of an Acquiree". To the extent that in the
future, actual costs are determined to be significantly less than those
estimated in this valuation, the Company would reduce deferred revenue and
record a corresponding reduction in goodwill. The Company will be amortizing
deferred revenue over the average remaining term of the contracts and the
estimated period to satisfy these customer obligations.
DEFERRED COMPENSATION
The Company has recorded approximately $3.4 million of deferred
compensation attributable to unvested stock options assumed in the Merger, which
will be amortized over the remaining vesting period of the underlying options.
DEFERRED TAXES
The Company has recorded as part of purchase accounting a deferred tax
liability on the separately identified intangible assets. In addition, through
purchase accounting the Company has recognized a deferred tax asset relative to
acquired net operating losses of a similar amount.
6. OTHER CHARGES
MERGER AND EXIT COSTS
During the quarter ended October 31, 2002, in connection with the Merger,
the Company's management approved and initiated plans to restructure the
operations of pre-acquisition SmartForce PLC to eliminate redundant facilities
and headcount, reduce cost structure, and better align the Company's operating
expenses with existing economic conditions. Consequently, the Company recorded
$45.9 million of costs primarily relating to exiting activities of
pre-acquisition SmartForce PLC, such as severance and related benefits, costs to
vacate leased facilities and other pre-acquisition liabilities. These costs are
accounted for under EITF 95-3, "Recognition of Liabilities in Connection with
Purchase Business Combinations". These costs were recognized as a liability
assumed in the purchase business combination and included in the allocation of
the purchase price, and have been included as an increase to goodwill.
The reductions in employee headcount totaled approximately 518 employees
from the administrative, sales, marketing and development functions, and
amounted to a charge of approximately $12.1 million. Approximately $6.5 million
was paid out against the exit plan accrual during the quarter ended October 31,
2002, and the remaining amount of $39.4 million is expected to be paid by
October 2003. The merger and exit costs consist of the following:
Employee
Severance and Cost to Vacate Customer
Related Costs Facilities Obligations Other Costs Total
Exit costs incurred in the
acquisition $16,177 $11,187 $10,563 $ 7,966 $45,893
Payments made during the
quarter ended October 31, 2002 $ 4,305 $ 383 $ 9 $ 1,780 $ 6,477
------- ------- ------- ------- -------
Merger and cost accrual
October 31, 2002 $11,872 $10,804 $10,554 $ 6,186 $39,416
======= ======= ======= ======= =======
RESTRUCTURING AND OTHER NON-RECURRING ITEMS
9
During the quarter ended October 31, 2002, the Company incurred operating
expenses of approximately $6.6 million, which are classified as Restructuring
and Other Non-Recurring Items in the accompanying condensed consolidated
statements of operations. Approximately $4.2 million of these operating expenses
principally represent the compensation cost of severed SmartForce PLC employees
for services rendered during the quarter ended October 31, 2002 and prior to
such employees' termination dates. Also included in the $6.6 million are certain
other non-recurring costs incurred by SkillSoft Corporation as a result of the
Merger.
7. GOODWILL AND INTANGIBLE ASSETS
On February 1, 2002, the Company adopted SFAS No. 142 "Goodwill and Other
Intangible Assets", which requires companies to discontinue amortizing goodwill
and certain intangible assets with indefinite useful lives and requires an
annual review for impairment. The non-amortization provisions of SFAS 142 apply
to goodwill and intangible assets acquired after June 30, 2001. The Company's
goodwill and intangible assets relate to the Merger and the acquisition by
SkillSoft Corporation of Books24x7.com on December 28, 2001, which was accounted
for in accordance with the non-amortization provisions of SFAS 142. Therefore,
there is no impact on the comparability of the accompanying condensed
consolidated statements of operations as a result of discontinuing the
amortization of goodwill.
Goodwill and intangible assets are as follows:
October 31, 2002 January 31, 2002
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
(Dollars in thousands)
Internally developed
software/courseware $ 25,600 $ 1,208 $ 24,392 $ 600 $ 17 $ 583
Customer contracts 12,500 $ 806 11,694 500 10 490
Trademarks and trade name 900 -- 900 900 -- 900
----------- ----------- ----------- ----------- ----------- -----------
39,000 2,014 36,986 2,000 27 1,973
Goodwill 390,754 -- 390,754 46,728 -- 46,728
----------- ----------- ----------- ----------- ----------- -----------
$ 429,754 $ 2,014 $ 427,740 $ 48,728 $ 27 $ 48,701
=========== =========== =========== =========== =========== ===========
A reconciliation of the net carrying amount of intangible assets as of October
31, 2002 and January 31, 2002 is as follows:
Net Carrying
Amount
(in thousands)
Balance at January 31, 2002 48,701
Acquired intangibles 381,026
Amortization expense (1,987)
---------
Balance at October 31, 2002 $ 427,740
=========
10
Amortization expense for the nine months ended October 31, 2002 and the fiscal
year ended January 31, 2002 is as follows:
Nine Months Ended Fiscal Year Ended
October 31, 2002 January 31, 2002
(Dollars in thousands)
Internal developed
software/courseware $ 1,191 $ 17
Customer contracts 796 10
----------- -----------
$ 1,987 $ 27
=========== ===========
Amortization expense for the next five fiscal years is expected to be as
follows: (in thousands):
Fiscal Year Amortization Expense
2003 $4,683
2004 9,623
2005 8,996
2006 8,316
2007 4,686
The Company will be conducting its annual impairment test of goodwill in the
fourth quarter of the fiscal year ending January 31, 2003.
8. COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, "Reporting Comprehensive Income", requires disclosure of all
components of comprehensive income (loss) on an annual and interim basis.
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions, other events and circumstances
from non-owner sources. The translation adjustment is the only element of
comprehensive income (loss) incurred by the Company other than net income
(loss). The components of comprehensive income (loss) for the three and nine
months ended October 31, 2002 and 2001 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
2002 2001 2002 2001
Comprehensive loss:
Net loss $(15,370) $ (3,835) $(14,051) $(10,565)
Other comprehensive loss -
Foreign currency adjustment (97) (7) (141) (13)
Comprehensive income loss $(15,467) $ (3,842) $(14,192) $(10,578)
9. NET LOSS PER SHARE
Basic net loss per share was determined by dividing net loss by the weighted
average number of shares outstanding during the period. Diluted net loss per
share was computed by giving effect to all dilutive potential shares
outstanding. Basic and diluted net loss per share for the three and nine months
ended October 31, 2002 are the same as outstanding options, as unvested
restricted shares are antidilutive because the Company has recorded a net loss
for the period. As a result of the reverse acquisition, historical SkillSoft
Corporation shares have been restated into SmartForce ADSs using the exchange
ratio of 2.3674 SkillSoft Corporation shares per SmartForce ADS. Historical
SkillSoft Corporation shares for all periods presented have been adjusted to
reflect this exchange ratio. The calculation of basic net loss per share and
diluted net loss per share is as follows:
11
THREE MONTHS ENDED OCTOBER 31, NINE MONTHS ENDED OCTOBER 31,
2002 2001 2002 2001
Net loss applicable to ordinary shares $ (15,370) $ (3,835) $ (14,051) $ (10,565)
Computation of basic and diluted net loss per share:
Weighted average shares outstanding 76,193,237 38,445,255 52,816,127 33,944,768
Basic and diluted net loss per share $ (0.20) $ (0.10) $ (0.27) $ (0.31)
------------ ------------ ------------ ------------
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. For the periods presented, due to its losses
the Company did not have a tax provision.
The Company has significant net operating loss ("NOL") carryforwards, which
are subject to potential limitations based upon change in control provisions of
section 382 of the Internal Revenue Code. Other than the NOL's utilized to
offset the deferred tax requirement specified in Note 5 the Company has not
recognized any benefits from its NOL carryforwards.
11. COMMITMENTS AND CONTINGENCIES
See Part II - Item 1, entitled "Legal Proceedings", for a description of
litigation involving the Company.
12. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
SFAS No. 131 establishes 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 establishes 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 Company's chief operating decision-makers,
as defined under SFAS No. 131, are the Chief Executive Officer and the Chief
Financial Officer. To date, the Company has viewed its operations and managed
its business as principally one operating segment. As a result, the financial
information disclosed herein represents all of the material financial
information related to the Company's principal operating segment.
13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 146, "Accounting for
Costs Associated With Exit or Disposal Activities". SFAS 146 nullifies EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)". SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred.
Therefore, SFAS 146 eliminates the definition and requirements for recognition
of exit costs in EITF 94-3. The provisions of SFAS 146 are effective for exit or
disposal activities that are initiated after December 31, 2002. The Company does
not expect the adoption of this Statement to have a material impact on its
consolidated financial statements.
In November 2002, FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", which requires certain guarantees to be
12
recorded at fair value as opposed to the current practice of recording a
liability only when a loss is probable and reasonably estimable and also
requires a guarantor to make significant new guaranty disclosures, even when the
likelihood of making any payments under the guarantee is remote. The
Interpretation's initial recognition and initial measurement provisions are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for interim or
annual periods ending after December 15, 2002, and the Company will adopt the
disclosure requirements of the Interpretation in its January 31, 2003 annual
financial statements. The Company is currently evaluating the effects this
Interpretation may have on its consolidated financial statements.
On December 31, 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS
No. 123 to require disclosure in the summary of significant accounting policies
of the effects of an entity's accounting policy with respect to stock-based
employee compensation on reported net income and earnings per share in annual
and interim financial statements. SFAS No. 148 does not amend SFAS No. 123 to
require companies to account for their employee stock-based awards using the
fair value method. However, the disclosure provisions are required for all
companies with stock-based employee compensation, regardless of whether they
utilize the fair method of accounting described in SFAS No. 123 or the intrinsic
value method described in APB Opinion No. 25, "Accounting for Stock Issued to
Employees". SFAS No. 148's amendment of the transition and annual disclosure
provisions of SFAS No. 123 are effective for fiscal years ending after December
15, 2002, with earlier application permitted for entities with fiscal years
ending prior to December 15, 2002, provided that financial statements for the
2002 fiscal year were not issued prior to the issuance of SFAS No. 148 (December
31, 2002). The disclosure requirements for interim financial statements
containing condensed consolidated financial statements are effective for interim
periods beginning after December 15, 2002. The Company will adopt the disclosure
requirements of SFAS No. 148 in its January 31, 2003 annual financial
statements.
ITEM 2. - MANAGEMENT'S 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.
OVERVIEW
We are a leading provider of comprehensive e-Learning solutions to global
5000 businesses and governmental organizations. We offer learning solutions in
both a variety of professional effectiveness and business topics (commonly
called "soft skills" or "business skills") and information technology (IT). We
provide our customers with a comprehensive offering of Web-based e-Learning
solutions and integrated performance support tools. Our soft skills library
encompasses a wide array of subjects including leadership, teamwork,
communications, sales, finance, marketing, and strategic planning. Our total
active courseware library consisted of approximately 4,946 courses as of October
31, 2002 with 1,732 in soft skills and 3,214 in IT. SkillSimulations totaled 43
for the quarter ended October 31, 2002. We regularly add new courses to cover
new technologies and new subjects requested by our customers or that we believe
our customers will want. We regularly retire courses from our active library as
certain technologies become outdated or used less frequently by our customers,
and as we replace older courses with newer and higher quality versions. This
combination of adding and retiring courses, which is part of our continuous
effort to ensure the currency and highest quality of our active library, will
cause the overall active library size to fluctuate.
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In addition to courseware, we are a leading provider of Referenceware solutions
offering subscription clients detailed online searches to more than 2,900
unabridged business and IT books.
The merger of SmartForce PLC and SkillSoft Corporation closed on September
6, 2002. For accounting purposes, the merger was accounted for as a reverse
acquisition, with SkillSoft Corporation as the accounting acquirer, and in
accordance with the purchase method of accounting. The historical financial
statements of SkillSoft Corporation have become our historical financial
statements, and the results of operations of SkillSoft PLC (formerly known as
SmartForce PLC) are included in our results of operations only from September 6,
2002. Accordingly, a primary reason for the increase in our revenue and
operating expenses from the three and nine months ended October 31, 2001 to the
three and nine months ended October 31, 2002 is the inclusion of the operating
results of SkillSoft PLC for the post-September 6, 2002 period.
We derive revenue primarily from license agreements under which customers
license our products for periods of one, two or three years. The pricing for our
courseware licenses varies based upon the number of course titles licensed by a
customer, the number of users within the customer's organization and the length
of the license agreement. For example, a customer who purchases 200 titles for
1,000 users for 1 year would ordinarily pay approximately $110,000. We do offer
discounts from this ordinary pricing, and purchasers of licenses for larger
numbers of courses, for larger user bases or for longer periods generally
receive discounts. Our license agreements typically permit customers to exchange
courses, generally on the contract anniversary date. A Referenceware license
gives users access to the full library within one or more collections (ITPro,
BusinessPro and OfficeEssentials) from our Books24x7.com Group. The pricing for
our Referenceware licenses varies based on the collections specified by the
customer, the number of users within the customer's organization and the length
of the license agreement. For example, a customer who purchases the ITPro
collection for 100 users for 3 years ordinarily would pay $177 per user. We
offer discounts on Referenceware products as well. Customers may amend the
license agreements, for an additional fee, to gain access to additional courses
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. 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 generally bill the annual license fee for the first year of a multi-year
agreement in advance. We recognize revenue with respect to licenses either at
the time of delivery of products or over the term of the contract, depending on
specific contract terms. In the event that the customer specifies all licensed
courses to be delivered at the outset and those courses are available and
delivered on or before the contract start date, we recognize license revenue for
the first year of the contract upon execution of the contract and delivery of
the courses. We generally bill license fees for subsequent years of multi-year
license arrangements on the anniversary date of the agreement, and if the
customer exchanges courses and receives the exchanged courses by the renewal
date, revenue is recognized in the manner described above. We recognize revenue
ratably over the license period if the number of courses that a customer has
access to is not clearly defined, or is not yet 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 is given
exchange privileges that are exercisable other than on the contract
anniversaries, the customer licenses all courses currently available and to be
developed during a particular term or if VSOE does not exist for an undelivered
element. This approach results in the building of backlog of future revenue
streams. If we give a customer extended payment terms, we recognize revenue as
cash becomes due, assuming all of the other requirements for revenue recognition
have been satisfied. 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 in which the services are provided to the extent the Company has VSOE
for those services.
Our backlog at any given time represents the amount of license fees which
are due to us under existing license agreements but which we have not yet
recognized as revenue. This amount is comprised of license fees attributable to
licensed courses that have not yet been selected by the customer or delivered by
us and to future years of non-cancelable multi-year license agreements. Our
backlog can vary based upon a number of factors, including the timing of the
execution of new license agreements, the timing of product deliveries, and the
length of our license agreements. Annual backlog includes license fees involving
(1) licensed courses/Referenceware that have not been
14
selected by and delivered to the customer, (2) special terms, including exchange
privileges and extended payment terms, as part of the non-cancelable license
agreement, and (3) revenue to be recognized for non-cancelable license
agreements that are renewing during the following twelve-month period.
Cost of revenue includes the cost of materials (such as storage media),
packaging, duplication, custom library CD production, internet hosting services,
the cost of online mentoring 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
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. To date, development costs after establishment of technological
feasibility have been immaterial, and we have expensed all software development
costs as incurred. Selling and marketing expenses consist primarily of salaries,
commissions and benefits, advertising and promotion, travel 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.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are summarized within the footnotes to
the consolidated financial statements included in the Annual Report on Form 10-K
of SkillSoft Corporation for the year ended January 31, 2002. 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 recognize revenue in accordance with American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) No. 97-2: Software
Revenue Recognition, as amended by SOP No. 98-4 and SOP No. 98-9. These
statements require that four basic criteria must be satisfied before revenue can
be recognized:
- Persuasive evidence of an arrangement between SkillSoft and a
third party exists;
- Delivery of our product has occurred;
- The sales price for the product is fixed or determinable; and
- Collection of the sales price is probable.
Our management uses its judgment concerning the satisfaction of these
criteria, particularly the criteria relating to the determination of when
delivery has occurred and the criteria relating to the collectibility of the
receivables relating to such sales. Should changes and conditions cause
management to determine that these criteria are not met for certain future
transactions, revenue recognized for any period could be adversely affected.
However, this is mitigated by the fact that the majority of our revenue is
recognized ratably over the term of the respective license.
DEFERRED REVENUE
We record deferred revenue when either cash is received or amounts have been
billed in advance of products or services provided. At the date of the merger,
due to the nature of our business, we had remaining contractual obligations to
customers of SmartForce PLC. The obligations principally involve delivery of
future products and services. We have recorded deferred revenue as of the merger
date based on a preliminary valuation prepared by an independent third party
appraisal firm using estimates and assumptions provided by management of these
estimated
15
obligations in accordance with EITF 01-03, "Accounting in a Business Combination
for Deferred Revenue of an Acquiree". To the extent that in the future, actual
costs are determined to be significantly less than those estimated in this
valuation, we would reduce deferred revenue and record a corresponding reduction
in goodwill. We will be amortizing deferred revenue over the average remaining
term of the contracts and the estimated period to satisfy these contractual
obligations.
IMPAIRMENT OF LONG-LIVED ASSETS
We review the carrying value of long-lived assets periodically, based
upon the expected future and discounted operating cash flows of our business.
Our cash flow estimates are based on historical results adjusted to reflect our
best estimate of future markets and operating conditions. Actual results may
differ materially from these estimates. The timing and size of impairment
charges involves the application of management's judgment and could
significantly affect our operating results. As a result of the merger, some of
our largest assets are long-lived assets, including goodwill. We will perform an
impairment analysis of the goodwill along with other intangibles in the quarter
ending January 31, 2003.
LEGAL CONTINGENCIES
We are currently involved in certain legal proceedings. In connection
with these legal proceedings, which we discuss in Part II - Item 1, management
periodically reviews estimates of potential costs to be incurred by SkillSoft 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. We do not currently
have a basis for concluding that these proceedings will have a material adverse
effect on our financial position; however, it is possible that future results
for any particular quarter or annual period may be materially affected by
changes in our assumptions or the effectiveness of our strategies relating to
these proceedings.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 2002 VERSUS THREE MONTHS ENDED OCTOBER 31, 2001
Revenue increased 172% to $30.4 million in the three months ended October
31, 2002 from $11.2 million in the three months ended October 31, 2001. This
increase was due primarily to the addition of revenue from SmartForce's
historical customer base. To a lesser extent, this increase resulted from new
SkillSoft Corporation customers and increased revenue from existing SkillSoft
Corporation customers.
Cost of revenue increased 817% to $5.3 million in the three months ended
October 31, 2002 from $579,000 in the three months ended October 31, 2001. Cost
of revenue as a percentage of total revenue was 17% for the three months ended
October 31, 2002 versus 5% for the three months ended October 31, 2001. These
increases were primarily due to increased costs of supporting the SmartForce
hosting business and royalty fees associated with SmartForce's IT product line
and, to a lesser extent, our Referenceware product line.
Research and development increased 26% to $7.7 million in the three months
ended October 31, 2002 from $6.1 million in the three months ended October 31,
2001. This increase was primarily due to the addition of SmartForce's
development organization. Research and development expenses as a percentage of
total revenue decreased to 25% in the three months ended October 31, 2002 from
55% in the three months ended October 31, 2001. We expect research and
development expenses to continue to increase in absolute dollars, although we
believe our outsourcing strategy for some of our courses provides us significant
flexibility to control these expenditures.
16
Selling and marketing expenses increased 136% to $16.4 million in the
three months ended October 31, 2002 from $7.0 million in the three months ended
October 31, 2001. Selling and marketing expenses increased due to the addition
of SmartForce's sales and marketing organization and related costs. Selling and
marketing expenses as a percentage of total revenue decreased to 54% in the
three months ended October 31, 2002 from 63% in the three months ended October
31, 2001. We believe that a significant investment in selling and marketing to
expand our distribution channels worldwide is required to remain competitive,
and we therefore expect selling and marketing expenses in absolute dollars to
continue to increase.
General and administrative expenses increased 313%, to $7.8 million in the
three months ended October 31, 2002 from $1.9 million in the three months ended
October 31, 2001. General and administrative expenses as a percentage of total
revenue increased to 26% in the three months ended October 31, 2002 from 17% in
the three months ended October 31, 2001. General and administrative expenses
increased primarily due to the SmartForce-SkillSoft merger. These expenses also
increased as a result of higher litigation costs in the quarter ended October
31, 2002. We anticipate that general and administrative expenses will continue
to increase in absolute dollars due primarily to increases in litigation
expenses and the increased costs of operating as a public company.
Amortization of intangible assets was $1.8 million in the three months
ended October 31, 2002; no amortization was recorded in the three months ended
October 31, 2001. Intangible assets being amortized are internally developed
software and courseware and customer contracts.
Stock-based compensation expense increased to $439,000 in the three months
ended October 31, 2002 from $184,000 in the three months ended October 31, 2001.
The increase reflects additional deferred compensation expense as a result of
the SmartForce-SkillSoft merger and the Books 24x7.com, Inc. acquisition in
December 2001. The expense was primarily the result of amortization of deferred
compensation resulting from granting of stock options to employees at exercise
prices below the fair market value of the stock and the sale of restricted
common stock with sales prices below the fair market value of the stock. The
stock options granted at exercise prices below fair market value of the stock
were granted by SkillSoft Corporation prior to its initial public offering and
by Books24x7.com, prior to its acquisition by SkillSoft Corporation in December
2001.
During the quarter ended October 31, 2002, in connection with the
SmartForce-SkillSoft merger, we recorded charges of $6.6 million for
restructuring and other non-recurring items. These relate to compensation costs
for certain terminated SmartForce employees. See Note 6 of the Notes to
Consolidated Financial Statements.
Interest income decreased to $364,000 in the three months ended October
31, 2002 from $754,000 in the three months ended October 31, 2001. This decrease
was primarily due to lower interest rates.
NINE MONTHS ENDED OCTOBER 31, 2002 VERSUS NINE MONTHS ENDED OCTOBER 31, 2001
Revenue increased 105% to $59.6 million in the nine months ended October
31, 2002 from $29.0 million in the nine months ended October 31, 2001. This
increase was due primarily to the addition of revenue from SmartForce's
historical customer base. To a lesser extent, this increase resulted from new
SkillSoft Corporation customers and increased revenue from existing SkillSoft
Corporation customers.
Cost of revenue increased 334% to $7.1 million in the nine months ended
October 31, 2002 from $1.6 million in the nine months ended October 31, 2001.
Cost of revenue as a percentage of revenue was 12% in the nine months ended
October 31, 2002 versus 6% in the nine months ended October 31, 2001. These
increases were primarily due to increased costs of supporting the SmartForce
hosting business and royalty fees associated with SmartForce's IT product line
and, to a lesser extent, our Referenceware product line.
Research and development expenses increased 10% to $14.9 million in the
nine months ended October 31, 2002 from $13.5 million in the nine months ended
October 31, 2001. This increase was primarily due to the addition of
SmartForce's development organization during the quarter ended October 31, 2002.
Research and development expenses as a percentage of total revenue decreased to
25% in the nine months ended October 31, 2002 from 46% in the nine months ended
October 31, 2001.
17
Selling and marketing expenses increased 58% to $31.7 million in the nine
months ended October 31, 2002 from $20.1 million in the nine months ended
October 31, 2001. Selling and marketing expenses increased primarily due to the
addition of SmartForce's sales and marketing organization and related costs in
the quarter ended October 31, 2002. This increase was due to a lesser extent to
increased costs associated with the SkillSoft Corporation sales and marketing
organization. Selling and marketing expenses as a percentage of total revenue
decreased to 53% in the nine months ended October 31, 2002 from 69% in the nine
months ended October 31, 2001.
General and administrative expenses increased approximately 120% to $11.4
million in the nine months ended October 31, 2002 from $5.2 million in the nine
months ended October 31, 2001. General and administrative expenses as a
percentage of total revenue increased to 19% in the nine months ended October
31, 2002 from 18% in the nine months ended October 31, 2001. General and
administrative expenses increased primarily due to the SmartForce-SkillSoft
merger. These expenses also increased as a result of higher litigation costs.
Amortization of intangible assets was approximately $2.0 million for the
nine months ended October 31, 2002; no amortization was recorded in the nine
months ended October 31, 2001. Intangible assets being amortized are internally
developed software and customer contracts.
Stock-based compensation expense increased to $1.1 million in the nine
months ended October 31, 2002 from $552,000 in the nine months ended October 31,
2001. The increase reflects additional deferred compensation expense as a result
of the SmartForce-SkillSoft merger and the Books 24x7.com, Inc. acquisition in
December 2001. The expense was primarily the result of amortization of deferred
compensation resulting from granting of stock options to employees at exercise
prices below the fair market value of the stock and the sale of restricted
common stock with sales prices below the fair market value of the stock. The
stock options granted at exercise prices below fair market value of the stock
were granted by SkillSoft Corporation prior to its initial public offering and
by Books24x7.com, prior to its acquisition by SkillSoft Corporation in December
2001.
Interest income decreased to $1.2 million in the nine months ended October
31, 2002 from $1.4 million in the nine months ended October 31, 2001. This
decrease was primarily due to lower interest rates.
PROVISION FOR INCOME TAXES
We operate 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. Because taxes are incurred at the subsidiary level, and one
subsidiary's tax losses cannot be used to offset the taxable income of
subsidiaries in other tax jurisdictions, our consolidated effective tax rate may
increase to the extent that we report tax losses in some subsidiaries and
taxable income in others.
We have significant operations and when we are profitable, will generate a
majority of our taxable income in Ireland. Certain of our Irish operating
subsidiaries are taxed at rates substantially lower than tax rates in effect in
the United States and other countries in which we have operations. The primary
Irish trading subsidiary currently qualifies for a 10% tax rate on income
derived from software substantially developed in Ireland. Another Irish
subsidiary is income tax exempt in respect of income from patented inventions,
the research and development of which was carried out in Ireland. If such
subsidiaries were no longer to qualify for such tax rates or if the tax laws
were rescinded or changed, our operating results could be materially adversely
affected. Moreover, because we incur income tax in several countries, an
increase in our profitability in one or more of these countries could result in
a higher overall tax rate. In addition, if tax authorities were to challenge
successfully the manner in which profits are recognized among our subsidiaries,
our taxes could increase and our cash flow and net income could be materially
adversely affected.
Following our merger with SkillSoft Corporation, a larger proportion of
our operations and of our revenue will be generated in the United States, where
tax rates are higher than our current effective tax rate. Though SkillSoft
Corporation has net operating loss carryforwards that can be used to reduce the
resulting taxes, those carryforwards are subject to limitation under the tax
laws which apply by virtue of the merger. Our tax rate in the future will depend
18
on, among other things, the proportion of our taxable income attributable to
activities performed by SkillSoft Corporation's U.S. operations. We are in the
process of exploring the reorganization of SkillSoft's operations and possibly
repatriating certain assets to Ireland. This potential reorganization may help
us maintain an effective tax rate similar to that currently applicable to us.
Due to the losses incurred for all of the periods presented, we have not
recorded a provision for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2002, our principal source of liquidity was our cash and
cash equivalents and short-term investments, which totaled $141.5 million.
Net cash used in operating activities was $18.5 million for the nine
months ended October 31, 2002, which reflects primarily our net loss, as well as
increased operating activities resulting from the SmartForce-SkillSoft merger.
Our primary investing activity during the nine months ended October 31,
2002 was the acquisition of cash as a result of the SmartForce-SkillSoft merger.
In addition the property and equipment purchases for the nine months ended
October 31, 2002 and 2001 were approximately $5.1 million and $1.6 million,
respectively. Maturation of investments, net of purchases (short and long-term),
generated a immaterial net cash inflow in the nine months ended October 31, 2002
compared to a net cash outflow of approximately $31.1 million in the nine months
ended October 31, 2001.
Cash provided by financing activities was approximately $1.1 million and
$72.9 million for the nine months ended October 31, 2002 and 2001, respectively.
For the nine months ended October 31, 2002, this consisted of approximately $0.9
million from the exercise of ordinary share options. For the nine months ended
October 31, 2001, this consisted of the net proceeds from the sale of SkillSoft
Corporation common stock in the secondary offering of approximately $72.0
million and $0.9 million from the exercise of stock options.
Working capital was approximately $26.0 million and $48.7 million as of
October 31, 2002 and January 31, 2002, respectively. Total assets were
approximately $651.1 million and $153.5 million as of October 31, 2002 and
January 31, 2002, respectively. As a result of the Smartforce-SkillSoft merger,
approximately $343.5 million and $37.0 million, respectively, have been
allocated to goodwill and separately identifiable intangible assets.
We expect to continue to experience significant growth in capital
expenditures and operating expenses, particularly sales and marketing and
product development expenses, for the foreseeable future in order to execute our
business plan. To the extent that our execution of the business plan results in
increased sales, we expect to experience corresponding increases in deferred
revenue and prepaid expenses. We expect that the principal sources of funding
for our operating expenses, capital expenditures and other liquidity needs will
be a combination of our available cash equivalents and marketable securities
(which totaled $141.5 million as of October 31, 2002) and funds generated from
operations. Approximately $6.5 million was paid out against the exit plan
accrual during the quarter ended October 31, 2002. Approximately $30.00 million
of the $39.4 million is expected to be paid by January 2004, and the remaining
value of approximately $9.4 million is expected to be disbursed between January
2004 and December 2005. 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 a number of factors that may negatively
impact our available sources of funds. The amount of cash generated from
operations will be dependent upon the successful execution of our business plan
and worldwide economic conditions. In addition, our cash needs may increase due
to factors such as unanticipated developments in our business or significant
acquisitions.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
With Exit or Disposal Activities". SFAS 146 EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)". SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Therefore, SFAS 146
19
eliminates the definition and requirements for recognition of exit costs in EITF
94-3. The provisions of SFAS 146 are effective for exit or disposal activities
that are initiated after December 31, 2002. We do not expect the adoption of
this statement to have a material impact on our consolidated financial
statements.
In November 2002, FASB issued Interpretation No. 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", which requires certain guarantees to be recorded at
fair value as opposed to the current practice of recording a liability only when
a loss is probable and reasonably estimable and also requires a guarantor to
make significant new guaranty disclosures, even when the likelihood of making
any payments under the guarantee is remote. The Interpretation's initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for interim or annual periods ending after December
15, 2002, and we will adopt the disclosure requirements of the Interpretation in
our January 31, 2003 annual financial statements. We are currently evaluating
the effects this Interpretation may have on our consolidated financial
statements.
On December 31, 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS
No. 123 to require disclosure in the summary of significant accounting policies
of the effects of an entity's accounting policy with respect to stock-based
employee compensation on reported net income and earnings per share in annual
and interim financial statements. SFAS No. 148 does not amend SFAS No. 123 to
require companies to account for their employee stock-based awards using the
fair value method. However, the disclosure provisions are required for all
companies with stock-based employee compensation, regardless of whether they
utilize the fair method of accounting described in SFAS No. 123 or the intrinsic
value method described in APB Opinion No. 25, "Accounting for Stock Issued to
Employees". SFAS No. 148's amendment of the transition and annual disclosure
provisions of SFAS No. 123 are effective for fiscal years ending after December
15, 2002, with earlier application permitted for entities with fiscal years
ending prior to December 15, 2002, provided that financial statements for the
2002 fiscal year were not issued prior to the issuance of SFAS No. 148 (December
31, 2002). The disclosure requirements for interim financial statements
containing condensed consolidated financial statements are effective for interim
periods beginning after December 15, 2002. We will adopt the disclosure
requirements of Statement 148 in our January 31, 2003 annual financial
statements.
FUTURE OPERATING RESULTS
RISKS RELATED TO LEGAL PROCEEDINGS
IN CONNECTION WITH OUR RESTATEMENT OF HISTORICAL FINANCIAL STATEMENTS, CLASS
ACTION LAWSUITS HAVE BEEN FILED AGAINST US AND ADDITIONAL LAWSUITS MAY BE FILED,
AND THE SEC MAY COMMENCE A FORMAL INVESTIGATION.
While preparing the closing balance sheet of SmartForce PLC as at September 6,
2002, the date on which we closed our merger with SkillSoft Corporation, we
discovered certain accounting issues relating to the historical financial
statements of SmartForce PLC (which, following the merger, are no longer our
historical financial statements - see Note 1 of Notes to Consolidated Financial
Statements). On November 19, 2002, we announced our intent to restate the
SmartForce PLC financial statements for 1999, 2000, 2001 and the first two
quarters of 2002. Following this announcement, four lawsuits claiming to be
class actions were commenced against us and certain of our current and former
directors and officers, by or on behalf of persons claiming to be our
shareholders and persons claiming to have purchased or otherwise acquired our
securities at specified periods beginning as early as October 19, 1999 and
continuing after September 6, 2002. Additional lawsuits may be filed against us.
Regardless of the outcome of any of these actions, it is likely that we will
incur substantial defense costs and that such actions will cause a diversion of
our management's time and attention. If we do not prevail in these cases we
could be required to pay substantial damages or settlement costs, which could
have a material adverse effect on our financial condition or results of
operation. We are unable at this time to assess the validity of the claims or
estimate the possible range of damages that might be incurred as a result of the
lawsuits. We have not yet established any financial reserves relating to any
20
of these lawsuits.
The SEC has informed us that it is conducting an informal inquiry regarding the
restatement of the SmartForce PLC financial results. The SEC has requested that
we provide them with certain documents and other information. We are cooperating
with the SEC in connection with this informal inquiry. The SEC may decide to
bring a formal investigation or commence proceedings against us. We will likely
incur substantial costs in connection with the SEC inquiry, 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.
OUR AMERICAN DEPOSITARY SHARES MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET
DUE TO OUR FAILURE TO MAKE OUR REQUIRED SEC FILINGS ON TIME.
We received a NASDAQ staff determination letter on December 17, 2002 indicating
that we do not comply with the requirements for continued listing set forth in
Marketplace Rule 4310(c)(14) as a result of our failure to file this quarterly
report on Form 10-Q with the SEC by its December 15, 2002 due date. Accordingly,
our American Depositary Shares are subject to delisting from the NASDAQ National
Market. As permitted by NASDAQ rules, we requested a hearing before the NASDAQ
Listing Qualifications Panel to review the staff determination. The delisting
process has been stayed pending the outcome of this hearing. We hope that the
filing of this quarterly report on Form 10-Q prior to the date of the Panel
hearing will avoid a delisting of our American Depositary Shares, but we cannot
be certain that this will be the case.
WE HAVE MISSED THE DEADLINE FOR TWO RECENT SEC FILINGS, WHICH HAS SEVERAL
ADVERSE CONSEQUENCES FOR US.
This Quarterly Report on Form 10-Q was not filed with the SEC by its December
16, 2002 due date. In addition, the Company was required to file an amendment to
its Current Report on Form 8-K relating to the SmartForce-SkillSoft merger by
November 22, 2002, and that amendment has not yet been filed. Until we file our
Form 8-K amendment, we will not be able to have a registration statement under
the Securities Act of 1933, covering a public offering of securities, declared
effective by the SEC, and we will not be able to make offerings pursuant to
existing registration statements (including registration statements on Form S-8
covering employee stock plans), or pursuant to certain "private placement" rules
of the SEC under Regulation D, to any purchasers not qualifying as "accredited
investors". In addition, our affiliates will not be able to sell our securities
pursuant to Rule 144 under the Securities Act until the Form 8-K amendment is
filed. Finally, we will not be eligible to use a "short form" registration
statement on Form S-3 for a period of 12 months after the time our Form 8-K
amendment is filed. These restrictions may impair our ability to raise funds,
should we desire to do so, through an equity financing and to attract and retain
key employees.
OUR WHOLLY OWNED SUBSIDIARY, SKILLSOFT CORPORATION AND SEVERAL OF ITS
EXECUTIVES, THREE OF ITS KEY EMPLOYEES AND A FORMER MAJOR INVESTOR OF SKILLSOFT
CORPORATION ARE DEFENDANTS IN LITIGATION WITH NETG WHICH ALLEGES, AMONG OTHER
THINGS, MISAPPROPRIATION OF TRADE SECRETS; THIS LITIGATION WILL CONTINUE TO BE
COSTLY, MAY DIVERT THE EFFORTS OF OUR MANAGEMENT AND MAY ULTIMATELY RESTRICT OUR
ABILITY TO DO BUSINESS.
Our wholly owned subsidiary, SkillSoft Corporation, several of its executives,
three of its key employees and its former largest investor are defendants in a
lawsuit brought by National Education Training Group, Inc. (NETg), the former
employer of these individuals. NETg alleges in substance that the defendants
breached their fiduciary and contractual obligations to NETg in connection with
the organization and operation of SkillSoft Corporation, misappropriated trade
secrets from NETg, tortiously interfered with NETg's business and employees and
breached provisions of a license agreement with NETg relating to the use of its
software. NETg maintains that the trade secrets allegedly misappropriated by
SkillSoft Corporation and the other defendants include, among other things:
21
- various aspects of the design and functionality of its education and
training software and products;
- customer lists and information;
- relationships with service providers; and
- NETg's soft skills product line business plan.
The claims seek injunctive relief against the defendants demanding the return,
and no future use by these defendants, of the alleged trade secrets. The claims
also seek compensatory damages of $400 million and exemplary damages in the
additional amount of $400 million, compensatory, incidental and consequential
damages in an unspecified amount and punitive damages totaling $50 million or
such other amount as the court deems just or appropriate. In answers to
interrogatories served on NETg, an expert witness retained by NETg opined that
NETg may, based on certain assumptions provided to the expert by NETg's counsel,
be entitled to two categories of damages for lost profits of up to $386.8
million and damages for unjust enrichment which could total up to $616.3
million. Named as defendants in the lawsuit, in addition to SkillSoft
Corporation, are Charles E. Moran, Jerald A. Nine, Jr., Mark A. Townsend,
(Warburg) Lee A. Ritze, Dennis E. Brown, Sally H. Hovis, Warburg, Pincus
Ventures, L.P., a former major investor of SkillSoft Corporation, and each
general partner of Warburg.
In addition, NETg also filed suit against SkillSoft Corporation in July 2000
alleging that its educational and training software products infringe a patent
allegedly owned by NETg. The complaint seeks both monetary damages and
injunctive relief. SkillSoft has filed an answer and a counterclaim for a
declaration of invalidity of the NETg patent. On April 17, 2001 SkillSoft
Corporation filed a request for reexamination of the patent in suit with the
United States Patent and Trademark Office (PTO). After a series of interim
actions by the PTO and filings by NETg, on April 10, 2002 the PTO issued an
office action rejecting all of the claims of the patent. In 2002 the lawsuit was
dismissed "without prejudice with leave to reinstate upon full and final
resolution of the reexamination proceedings" with the PTO. The patent owner's
appeal of the PTO's Office Action rejecting all the claims of the patent remains
pending.
If we do not prevail in the NETg cases it could have any or all of the following
significant adverse effects on our business and financial performance:
- injunctive relief against SkillSoft Corporation, us and our officers
and employees, which could significantly restrict our ability to
conduct our business;
- an adverse judgment against us for monetary damages;
- a settlement on unfavorable terms to us;
- our obligations to indemnify our employees and directors for
liabilities and expenses they incur in connection with the lawsuits;
- obligations to customers for breach of warranties of
noninfringement; or
- a requirement to reengineer our products to avoid patent
infringement, which would likely result in additional expense and
delay.
In addition, these cases, regardless of their outcome, will continue to result
in significant expenses in defending the lawsuits. SkillSoft Corporation's legal
expenses related to the defense of these lawsuits totaled approximately $1.9
million in the fiscal year ended January 31, 2000, $1.4 million in the fiscal
year ended January 31, 2001 and $1.7 million in the fiscal year ended January
31, 2002. Moreover, these lawsuits may divert the efforts and attention of our
management team from normal business operations.
22
PENDING AND ANY FUTURE 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. In April 2002 and May 2002,
IP Learn, LLC (IP Learn) filed lawsuits against us and SkillSoft Corporation,
respectively, alleging infringement of certain of IP Learn's patents, and asking
the court for a preliminary and permanent injunction as well as unspecified
damages. These lawsuits were consolidated in December 2002. We are presently in
the process of evaluating IP Learn's claims against us and are vigorously
defending ourselves. On June 13, 2002, Lionet Limited, a limited liability
company incorporated and doing business in Ireland, filed a claim against us in
Dublin, alleging, among other things, that we breached the terms of our software
license agreement with Lionet Limited in that we permitted or failed to prevent
the decompilation of the provided software products and have failed to cooperate
in audits to determine the nature of such alleged copying or de-compilation.
Lionet Limited is seeking damages for lost license fees of $6.8 million and
seeks other damages. We are in the process of reviewing the statement of claim
and intend to vigorously defend ourselves in this matter. 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 ARE SUBJECT TO OTHER PENDING LEGAL PROCEEDINGS AND WE MAY BECOME SUBJECT TO
ADDITIONAL LEGAL PROCEEDINGS. ADVERSE DETERMINATIONS IN THESE PROCEEDINGS COULD
MATERIALLY HARM OUR BUSINESS.
Since the end of the third quarter of 1998, a class action lawsuit has been
pending in the United States District Court for the Northern District of
California against us, one of our subsidiaries, SmartForce USA, and certain of
our former and current officers and directors, alleging violation of the federal
securities laws. It has been alleged in this lawsuit that we misrepresented or
omitted to state material facts regarding our business and financial condition
and prospects in order to artificially inflate and maintain the price of our
ADSs, and misrepresented or omitted to state material facts in our registration
statement and prospectus issued in connection with our merger with Forefront,
which also is alleged to have artificially inflated the price of our ADSs.
Although we cannot presently determine the outcome of this action, an adverse
resolution of this matter could significantly negatively impact our financial
position and results of operations.
We may be from time to time involved in various lawsuits and legal proceedings,
which arise in the ordinary course of business. An adverse resolution of these
matters could significantly negatively impact our financial position and results
of operations.
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 customer's 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
23
to any future claim.
WE COULD BE SUBJECTED TO LEGAL ACTIONS BASED UPON THE CONTENT WE OBTAIN FROM
THIRD PARTIES OVER WHOM WE EXERT LIMITED CONTROL.
It is possible that we could become subject to legal actions based upon claims
that our course content infringes the rights of others or is erroneous. Any such
claims, with or without merit, could subject us to costly litigation and the
diversion of our financial resources and management personnel. The risk of such
claims is exacerbated by the fact that our course content is provided by third
parties over whom we exert limited control. Further, if those claims are
successful, we may be required to alter the content, pay financial damages or
obtain content from others.
RISKS RELATED TO OUR MERGER WITH SKILLSOFT CORPORATION
WE MAY NOT BE SUCCESSFUL IN INTEGRATING THE BUSINESSES OPERATED BY SKILLSOFT
CORPORATION AND SMARTFORCE PLC PRIOR TO THE MERGER AND, AS A RESULT, MAY NOT
REALIZE BENEFITS FROM THE MERGER.
We may not be successful in integrating the businesses operated by SkillSoft
Corporation and SmartForce PLC (the former name of our company) prior to the
merger, which was consummated on September 6, 2002. Integrating the operations
and personnel of the two companies will continue to be a complex process. The
integration may not be completed rapidly or successfully. The successful
integration of the two businesses will require, among other things, the
following:
- integration of the two companies' products and services, sales and
marketing, information and software systems and other operations;
- retention and integration of management and other key employees;
- coordination of ongoing and future research and development efforts and
marketing activities;
- retention of existing customers of both companies and attraction of
additional customers;
- retention of strategic partners of each company and attraction of new
strategic partners;
- developing and maintaining uniform standards, controls, procedures and
policies;
- identifying and eliminating redundant and underperforming operations and
assets;
- effectively leveraging our indirect sales presence;
- capitalizing on cross-selling opportunities;
- the successful migration of the companies' platforms;
- minimization of disruption of each company's ongoing business and
distraction of its management; and
- limiting expenses related to integration.
24
We may not succeed in addressing these risks or any other problems encountered
in connection with the merger. The diversion of the attention of management and
any difficulties encountered in the process of combining the companies could
cause the disruption of, or a loss of momentum in, the activities of our
business or could cause the impairment of relationships with customers and
business partners. Further, the process of combining the two companies'
businesses could negatively affect employee morale and our ability to retain
some key employees, and could cause customers to cancel existing license
agreements or choose not to purchase new products from us. In addition, we
intend to develop new products and services that combine both companies' assets.
Difficulties in combining the technology, products and service offerings of the
two companies could result in disruption of customer service and longer sales
cycles and product implementations, which could cause existing customers to
reduce or cease doing business with us altogether, and could cause revenue and
operating income to fluctuate and fail to meet expectations.
CERTAIN ASPECTS OF OUR MERGER WITH SKILLSOFT CORPORATION COULD HARM OUR
FINANCIAL RESULTS.
In connection with our merger with SkillSoft Corporation, certain aspects of the
integration of the two companies moving forward could harm our financial
results. For example, we have made certain changes in contracting practices,
which will have attendant accounting implications. For example, prior to the
merger, SmartForce PLC recorded license revenues with respect to contracts that
provide for perpetual licenses to software at the time that it sold the
perpetual licenses. Since the merger, we have been delivering perpetual licenses
as part of a bundled offering including services. As a result, the revenue from
both the perpetual licenses and services will be recognized as revenues as the
services are delivered over time. This means that rather than recognizing
substantial license revenue at the time of the execution of these contracts, we
will now recognize license revenue ratably over the term of these contracts. In
addition, due to purchase accounting in connection with the merger, a portion of
the SmartForce PLC deferred revenue as of September 6, 2002 will be reclassified
to goodwill and will therefore not be recognized as revenue.
As a result of the integration, we may not obtain some revenue we otherwise
might have obtained. For example, although the products and customer bases of
the two companies are complementary and should provide us with numerous cross
selling opportunities, we do expect some degree of commercial overlap that could
negatively impact revenue. Also, we intend to de-emphasize customer service
revenue activities to focus on higher margin segments of the business, which we
expect will result in lost revenue. In addition, volume discounting of mutual
customers now combined as a result of the merger may result in lower revenues.
If the benefits of the merger do not exceed the associated costs, including
costs associated with integrating the two companies, lost or deferred revenues
and dilution of our shareholders resulting from the issuance of our ADSs in
connection with the merger, our financial results, including earnings per share,
could be materially harmed.
THE ALLOCATION OF THE PURCHASE PRICE FOR THE SMARTFORCE-SKILLSOFT MERGER AND
CERTAIN OTHER MERGER-RELATED ACCOUNTING MATTERS INVOLVE THE USE OF ESTIMATES,
CHANGES IN WHICH WOULD HAVE AN IMPACT ON OUR FUTURE FINANCIAL STATEMENTS.
In preparing the closing balance sheet of SmartForce PLC and determining the
purchase price allocation for purposes of the SmartForce-SkillSoft merger, we
have used various estimates, including those inherent in the valuation of the
various components of purchase price. In addition, the closing balance sheet
includes estimates regarding pre-acquisition contingencies, including warranty
and other obligations. Actual amounts could differ from these estimates for a
variety of reasons, which would increase or decrease the purchase price.
We allocated the purchase price to the tangible assets, liabilities and
intangible assets acquired, based on their estimated fair values. The excess
purchase price over those fair values was recorded as goodwill. The fair value
assigned to intangible assets acquired was based on valuations prepared by an
independent third party appraisal firm using estimates and assumptions provided
by management. The goodwill recorded as a result of these acquisitions is not
expected to be deductible for tax purposes. In accordance with SFAS No. 142,
goodwill and purchased intangibles with indefinite lives acquired after June 30,
2001 are not amortized but will be reviewed periodically for impairment. We will
complete an impairment analysis of goodwill during the quarter ending January
31, 2003. Any impairment of goodwill will adversely affect our operating
results.
Further, at the date of the merger, due to the nature of our business, we had
remaining contractual obligations to customers of SmartForce PLC. The
obligations principally involve delivery of future products and services. We
have recorded deferred revenue as of the merger date based on a preliminary
valuation prepared by an independent third party appraisal firm using estimates
and assumptions provided by management of these estimated obligations in
accordance with Emerging Issues Task Force 01-03,
25
"Accounting in a Business Combination for Deferred Revenue of an Acquiree". To
the extent that in the future, actual costs are determined to be significantly
less than those estimated in this valuation, we would reduce deferred revenue
and record a corresponding reduction in goodwill.
IF WE ARE UNABLE TO TAKE ADVANTAGE OF OPPORTUNITIES TO MARKET AND SELL THE
PRODUCTS AND SERVICES OF THE TWO COMPANIES TO EACH OTHER'S TRADITIONAL
CUSTOMERS, DISTRIBUTION CHANNELS AND BUSINESS PARTNERS, WE MAY NOT REALIZE SOME
OF THE EXPECTED BENEFITS OF THE MERGER.
Prior to the merger, we and SkillSoft Corporation each maintained separate and
distinct customer bases, distribution channels and business partners specific to
our respective businesses. Following the merger, we are attempting to take
advantage of the customer bases and distribution channels of the formerly
separate businesses in order to promote and sell the products and services of
one company to the traditional customers and business partners of the other
company. The products and services of the two companies are highly technical and
the salespersons of one company may not be successful in marketing the products
and services of the other company. In the event that the traditional customers
and business partners of either company are not receptive to the products and
services of the other, we may not realize some of the expected benefits of the
merger, and our business may be harmed.
WE ARE OPERATING UNDER A NEW NAME, WHICH MAY ADVERSELY AFFECT OUR BUSINESS.
Following the consummation of the merger, we changed our name from SmartForce
PLC to SkillSoft PLC. The adoption of this new name may prevent us from taking
advantage of certain goodwill existing customers and strategic partners
associate with our former name. Further, we expect to incur an expense in
effecting the name change and in marketing efforts to promote brand recognition
of the new name.
RISKS RELATED TO THE OPERATION OF OUR BUSINESS
WE AND SKILLSOFT CORPORATION HAVE EXPERIENCED NET LOSSES IN THE PAST, AND WE MAY
BE UNABLE TO ACHIEVE OR MAINTAIN PROFITABILITY.
SmartForce PLC incurred substantial net losses both recently and in the past,
including net losses of $37.7 million in the three months ended June 30, 2002
and $19.1 million in the three months ended March 31, 2002. SkillSoft
Corporation incurred substantial net losses in every fiscal quarter prior to its
fiscal quarter ended January 31, 2002. In addition, the combined company
recorded a net loss of $15.4 million for the quarter ended October 31, 2002,
including $6.6 million of restructuring and other non-recurring items. We expect
to incur significant expenses in connection with our integration of the
businesses of SkillSoft Corporation and SmartForce PLC and the continued
expansion of this combined business, and, as a result, the business will need to
generate significant revenues to achieve and maintain profitability. We cannot
guarantee whether our combined business will achieve or 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:
26
- 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 fourth quarter of our fiscal year and
weakest in the first quarter;
- the spending patterns of our customers;
- litigation costs and expenses;
- non-recurring charges related to acquisitions;
- 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.
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 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
27
existing courses on a timely basis. We cannot predict whether new content or
enhancements would be available from reliable alternative sources on reasonable
terms. In addition, our Books24x7.com group relies on third party publishers to
provide all of the content incorporated into its Referenceware products. If one
of more of these publishers were to terminate their license with us, we may not
be able to find substitute publishers for such content. In addition, we may be
forced to pay increased royalties to these publishers to continue our licenses
with them.
In the event that we are unable to maintain or expand our current development
alliances or enter into new development alliances, our operating results and
financial condition could be materially adversely affected. Furthermore, we will
be required to pay royalties to some of our development partners on products
developed with them, which could reduce our gross margins. We expect that cost
of revenues may fluctuate from period to period in the future based upon many
factors, including the revenue mix and the timing of expenses associated with
development alliances. In addition, the collaborative nature of the development
process under these alliances may result in longer development times and less
control over the timing of product introductions than for e-Learning offerings
developed solely by us. Our strategic alliance partners may from time to time
renegotiate the terms of their agreements with us, which could result in changes
to the royalty or other arrangements, adversely affecting our results of
operations.
The independent third party strategic partners we rely on for educational
content and product marketing may compete with us, harming our results of
operations. Our agreements with these third parties generally do not restrict
them from developing courses on similar topics for our competitors or from
competing directly with us. As a result, our competitors may be able to
duplicate some of our course content and gain a competitive advantage.
WE RELY ON STRATEGIC ALLIANCES FOR MARKETING, WHICH ALLIANCES ARE NOT EXCLUSIVE,
MAY BE TERMINATED OR MAY FAIL TO MEET OUR REQUIREMENTS IN THE FUTURE.
We have developed strategic alliances to market many of our products. However,
these relationships are not exclusive, and our marketing partners could market
other products in preference to, and in competition with, those developed by us.
In addition, we may be unable to continue to market future products through
these alliances or may be unable to negotiate additional alliances in the future
on acceptable terms, if at all. The marketing efforts of our strategic partners
may also disrupt our direct sales efforts.
OUR SUCCESS DEPENDS ON OUR ABILITY TO MEET THE NEEDS OF THE RAPIDLY CHANGING
MARKET.
The market for education and training software is characterized by rapidly
changing technology, evolving industry standards, changes in customer
requirements and preferences and frequent introductions of new products and
services embodying new technologies. New methods of providing interactive
education in a technology-based format are being developed and offered in the
marketplace, including intranet and Internet offerings. In addition, multimedia
and other product functionality features are being added to educational
software. Our future success will depend upon the extent to which we are able to
develop and implement products which address these emerging market requirements
on a cost effective and timely basis. Product development is risky because it is
difficult to foresee developments in technology, coordinate technical personnel
and identify and eliminate design flaws. Any significant delay in releasing new
products could have a material adverse effect on the ultimate success of our
products and could reduce sales of predecessor products. We may not be
successful in introducing new products on a timely basis. In addition, new
products introduced by us may fail to achieve a significant degree of market
acceptance or, once accepted, may fail to sustain viability in the market for
any significant period. If we are unsuccessful in addressing the changing needs
of the marketplace due to resource, technological or other constraints, or in
anticipating and responding adequately to changes in customers' software
technology and preferences, our business and results of operations would be
materially adversely affected.
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 company's 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
28
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.
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 down times, 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 customer's 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 its 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.
To bring our cost base in line with decreased revenues, on April 18, 2002, we
announced a restructuring and a cost reduction plan, which we proceeded to
implement immediately following the announcement. At the time of the
announcement, we anticipated that the restructuring plan would require reducing
our workforce by over 20%, implementing hiring and pay freezes, consolidating
facilities and other activities. In addition, in connection with the
SmartForce-SkillSoft merger, we recorded $6.6 million of restructuring and other
non-recurring charges; see Note 6 of Notes to Consolidated Financial Statements.
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 achieving
our planned cost reductions, and that even if we are successful in doing so, we
will still not be able to reduce expenditures quickly enough to restore
profitability, and
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hence that we may have to undertake further restructuring initiatives that would
entail additional charges and create additional risks. In addition, there is the
risk that cost-cutting initiatives will impair our ability to effectively
develop and market products and remain competitive. Each of the above measures
could have long-term effects on our business by reducing our pool of talent,
decreasing or slowing improvements in our products, making it more difficult for
us to respond to customers, limiting our ability to increase production quickly
if and when the demand for our products increases and limiting our ability to
hire and retain key personnel. These circumstances could cause our earnings to
be lower than they otherwise might be.
WE DEPEND ON A FEW KEY PERSONNEL TO MANAGE AND OPERATE THE BUSINESS AND MUST BE
ABLE TO ATTRACT AND RETAIN HIGHLY QUALIFIED EMPLOYEES.
Our success is largely dependent on the personal efforts and abilities of our
senior management. Failure to retain these executives, or the loss of certain
additional senior management personnel or other key employees, could have a
material adverse effect on our business and future prospects. In addition,
certain of our senior executives left the company in connection with our merger
with SkillSoft Corporation. If we fail to adequately replace these executives or
fail to manage the transition to new management effectively, our results of
operations could be negatively affected.
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 SmartForce
PLC's historical financial statements, uncertainties surrounding the SkillSoft
Corporation 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.
INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND FOR OUR PRODUCTS AND
SERVICES, WHICH MAY RESULT IN REDUCED REVENUES AND GROSS MARGINS 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 and vendors of application software,
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 and training departments of potential customers;
and
- value-added resellers and network integrators.
Growing competition may result in price reductions, reduced revenue and gross
margins 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.
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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.
OUR CORPORATE TAX RATE MAY INCREASE, WHICH COULD ADVERSELY AFFECT OUR CASH FLOW,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our corporate tax rate may increase, which could adversely affect our cash flow,
financial condition and results of operations. We currently have significant
foreign operations and generate a majority of our taxable income in Ireland, and
some of our Irish operating subsidiaries are taxed at rates substantially lower
than tax rates in effect in the United States and other countries in which we
have operations. As SkillSoft Corporation's assets and properties are
substantially located in, and its business operations are principally conducted
in, the United States, we are in the process of exploring the reorganization of
SkillSoft Corporation's operations and repatriating certain assets to Ireland in
order to maintain an effective tax rate at the level currently applicable to us.
If we are unable to effect such a reorganization, or if at any time our Irish
subsidiaries were no longer to qualify for these lower tax rates or if the
applicable tax laws were rescinded or later changed, our operating results could
be materially adversely affected. Moreover, because we will incur income tax in
several countries, an increase in our profitability in one or more of these
countries could result in a higher overall tax rate. In addition, if U.S. or
other foreign tax authorities were to change applicable tax laws or successfully
challenge the manner in which our subsidiaries' profits are currently
recognized, our taxes could increase, and our business, cash flow, financial
condition and results of operations could be materially adversely affected. In
addition, there may be limitations imposed on the level and timing of the
utilization of historic net operating losses for tax purposes as a result of the
merger with SkillSoft Corporation. These limitations may apply to either or both
SkillSoft Corporation and us and may adversely impact cash flow depending on the
extent of any such limitation.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS. UNAUTHORIZED USE OF OUR
INTELLECTUAL PROPERTY MAY RESULT IN DEVELOPMENT OF PRODUCTS OR SERVICES THAT
COMPETE WITH OURS.
Our success depends to a degree upon the protection of our rights in
intellectual property. We rely upon a combination of patent, copyright, and
trademark laws to protect our proprietary rights. We have also entered into, and
will continue to enter into, confidentiality agreements with our employees,
consultants and third parties to seek to limit and protect the distribution of
confidential information. However, we have not signed protective agreements in
every case.
Although we have taken steps to protect our proprietary rights, these steps may
be inadequate. Existing patent, copyright, and trademark laws offer only limited
protection. Moreover, the laws of other countries in which we market our
products may afford little or no effective protection of our intellectual
property. Additionally, unauthorized parties may copy aspects of our products,
services or technology or obtain and use information that we regard as
proprietary. Other parties may also breach protective contracts we have executed
or will in the future execute. We may not become aware of, or have adequate
remedies in the event of, a breach. Litigation may be necessary in the future to
enforce or to determine the validity and scope of our intellectual property
rights or to determine the validity and scope of the proprietary rights of
others. Even if we were to prevail, such litigation could result in substantial
costs and diversion of management and technical resources.
OUR NON-U.S. OPERATIONS ARE SUBJECT TO RISKS WHICH COULD NEGATIVELY IMPACT OUR
FUTURE OPERATING RESULTS.
We expect that international operations will continue to account for a
significant portion of our revenues. Operations outside of the United States are
subject to inherent risks, including:
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- difficulties or delays in developing and supporting non-English
language versions of our products and services;
- political and economic conditions in various jurisdictions;
- difficulties in staffing and managing foreign subsidiary operations;
- longer sales cycles and account receivable payment cycles;
- multiple, conflicting and changing governmental laws and
regulations;
- foreign currency exchange rate fluctuations;
- protectionist laws and business practices that may favor local
competitors;
- difficulties in finding and managing local resellers;
- potential adverse tax consequences; and
- 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 FOR 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. Factors that contribute to our long sales
cycle, include:
- our need to educate potential customers about the benefits of our
products;
- competitive evaluations by customers;
- the customers' internal budgeting and approval processes;
- the fact that many customers view training products as discretionary
spending, rather than purchases essential to their business; and
- 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, which typically range from three to twelve months or
more, 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.
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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.
THE CONVICTION OF ARTHUR ANDERSEN LLP ON OBSTRUCTION OF JUSTICE CHARGES MAY
ADVERSELY AFFECT ARTHUR ANDERSEN LLP'S ABILITY TO SATISFY ANY CLAIMS ARISING
FROM THE PROVISION OF AUDITING SERVICES TO SKILLSOFT CORPORATION AND MAY IMPEDE
OUR ACCESS TO CAPITAL MARKETS AFTER THE MERGER.
Arthur Andersen LLP audited SkillSoft Corporation's financial statements for the
fiscal years ended January 31, 2002, January 31, 2001 and January 31, 2000. On
March 14, 2002, an indictment was unsealed charging it with federal obstruction
of justice arising from the government's investigation of Enron Corp. On June
15, 2002, Arthur Andersen LLP was convicted of these charges. It is possible
that the effect of this conviction on Arthur Andersen LLP's financial condition
may adversely affect the ability of Arthur Andersen LLP to satisfy any claims
arising from its provision of auditing services to SkillSoft Corporation.
Should we seek to access the public capital markets, SEC rules will require us
to include or incorporate by reference in any prospectus three years of audited
financial statements. The SEC's current rules would require us to present
audited financial statements for one or more fiscal years audited by Arthur
Andersen LLP and use reasonable efforts to obtain its consent until the audited
financial statements for the fiscal year ending January 31, 2005 become
available. If prior to that time the SEC ceases accepting financial statements
audited by Arthur Andersen LLP, it is possible that the available audited
financial statements for the fiscal years ended January 31, 2002, January 31,
2001 and January 31, 2000 audited by Arthur Andersen LLP might not satisfy the
SEC's requirements. In that case, we would be unable to access the public
capital markets unless Ernst & Young LLP, our current independent accounting
firm, or another independent accounting firm, is able to audit the financial
statements originally audited by Arthur Andersen LLP. Any delay or inability to
access the public capital markets caused by these circumstances could have a
material adverse effect on our business, profitability and growth prospects.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 material 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
and pound sterling relative to the U.S. dollar, which could adversely affect our
business and the results of operations.
At October 31, 2002, we had a forward exchange contract of $5 million
outstanding. The contract at October 31, 2002 expired on December 31, 2002. This
forward exchange contract hedged certain operational ("cashflow") exposures
resulting from changes in foreign currency exchange rates. Such cashflow
exposures resulted from a large portion of our costs being denominated in euro.
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EQUITY PRICE RISKS
We are exposed to equity price risks on marketable equity securities.
These investments are not for trading purposes and are in publicly traded
companies in the high technology industry sector. We typically do not attempt to
reduce or eliminate our market exposure on these securities. An adverse change
in the equity price would result in a decrease in the fair value of our
marketable equity securities.
ITEM 4. - CONTROLS AND PROCEDURES
Following the merger of SmartForce PLC and SkillSoft Corporation on
September 6, 2002, we began the process of integrating the business processes,
human resources, and disclosure controls and procedures and internal controls of
the two companies. As part of this post-merger integration process, deficiencies
in the business processes, disclosure controls and internal controls and
procedures of the former SmartForce PLC have been identified, and improvements
have been implemented. Although substantial progress has been made, additional
changes to the business processes, disclosure controls and procedures and
internal controls will need to be implemented, and we are in the process of
doing so.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, and with the
assistance of outside consultants, we evaluated the effectiveness of the design
and operation of our disclosure controls and procedures shortly prior to the
filing date of this quarterly report on Form 10-Q. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms, and are operating in an
effective manner. Subsequent to the performance of such evaluation, there have
been no significant changes in our internal controls or in other factors that
could significantly affect these internal controls.
PART II
ITEM 1. - LEGAL PROCEEDINGS
Class Action Lawsuits
Four class action lawsuits have been filed against us and certain of
our 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, 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; and (4) Stacey Cohen 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; the first
action was filed on November 22, 2002, the second action was filed on December
4, 2002 and the remaining two actions were filed on December 11, 2002. These
lawsuits allege that we misrepresented or omitted to state material facts in our
SEC filings and press releases regarding our revenues and earnings and failed to
correct such false and misleading SEC filings and press releases, which are
alleged to have artificially inflated the price of our ADSs. These lawsuits seek
unspecified monetary damages, including punitive damages together with interest,
costs, fees and expenses. We are in the process of reviewing these complaints
and intend to vigorously defend ourselves.
At the end of our third quarter of 1998, several purported class
action lawsuits were filed in the United States District Court for the Northern
District of California against us, one of our subsidiaries and certain of our
former and current officers and directors alleging violations of the federal
securities laws. It has been alleged in these lawsuits that we misrepresented or
omitted to state material facts regarding our business and financial condition
and prospects in order to artificially inflate and maintain the price of our
ADSs, and misrepresented or omitted to state material facts in our registration
statement and prospectus issued in connection with our merger with ForeFront,
which also is alleged to have artificially inflated the price of our ADSs. The
court has set a trial date of June 2003. We believe that we have meritorious
defenses to these actions and intend to vigorously defend ourselves against
them. Although we cannot presently determine the outcome of these actions, an
adverse resolution of these matters could significantly negatively impact our
financial position and results of operations.
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NETg
Our subsidiary, SkillSoft Corporation, several of its executive officers
and key employees, and a former major investor of SkillSoft Corporation are
named as defendants in a lawsuit pending in the Circuit Court of Cook County,
Illinois filed by National Education Training Group, Inc. ("NETg"), the former
employer of several of those individuals.
NETg's most recent complaint alleges in substance that:
- Charles E. Moran, as the former President of NETg, breached his
fiduciary obligations to NETg by usurping NETg's corporate
opportunities, by commencing a rival business while still employed
by NETg and by soliciting NETg personnel to join his rival business
while still employed by NETg;
- Jerald A. Nine, as the former Vice President of Sales and Marketing
of NETg, breached his fiduciary duty to NETg by assisting Mr. Moran
in the creation, commencement and operation of the rival concern
prior to Mr. Nine's resignation from NETg, by assisting Mr. Moran in
the usurpation of corporate opportunities, by failing to inform his
superiors at NETg of Mr. Moran's plans to form a rival business and
by otherwise failing to use his best efforts on behalf of NETg while
still employed there;
- SkillSoft Corporation, Mr. Moran, Mr. Nine, Mark A. Townsend, Dennis
E. Brown, Lee A. Ritze and Sally Hovis misappropriated trade secrets
of NETg, and SkillSoft Corporation and Mr. Moran tortiously
interfered with NETg's "prospective economic advantage;"
- Mr. Moran, Mr. Townsend, Mr. Nine, Mr. Ritze, Mr. Brown and Ms.
Hovis breached certain confidentiality and proprietary matters
policies of NETg by misappropriating trade secrets and disclosing
confidential and proprietary information during and after their
employment with NETg;
- Mr. Moran, Mr. Townsend, Mr. Nine, Mr. Ritze and Mr. Brown breached
the conflict of interest policy of NETg's former corporate parent,
National Education Corporation, by failing to disclose that Mr.
Moran formed and solicited funding for SkillSoft Corporation, that
Messrs. Townsend, Nine, Ritze and Brown had employment-related
discussions with SkillSoft Corporation, and that Mr. Nine
participated in forming and soliciting funding for SkillSoft
Corporation, during their employment with NETg;
- SkillSoft Corporation and Mr. Moran tortiously interfered with
NETg's contractual relations with Mr. Townsend, Mr. Nine, Mr. Brown,
Mr. Ritze and Ms. Hovis by offering them employment and inducing
them to breach their confidentiality and trade secret obligations to
NETg;
- SkillSoft Corporation breached provisions of a license agreement
with NETg relating to the use of NETg's software; and
- Warburg Pincus Ventures, L.P., a major investor, tortiously
interfered with Mr. Moran's and Mr. Nine's fiduciary duty to NETg
NETg maintains that the trade secrets allegedly misappropriated by the
other defendants and SkillSoft Corporation include, among other things:
- various aspects of the design and functionality of its education and
training software and products;
- customer lists and information;
- relationships with service providers; and
- NETg's soft skills product line business plan.
The claims seek injunctive relief against SkillSoft Corporation and Messrs.
Moran, Nine, Townsend, Brown and Ritze and Ms. Hovis and demand the return, and
no future use by SkillSoft Corporation and these defendants, of the alleged
trade secrets. The claims also seek compensatory damages of $400 million,
exemplary damages in the additional amount of $400 million, additional
compensatory, incidental and consequential damages in an unspecified amount and
punitive damages of $50 million or such other amount as the court deems just or
appropriate. In answers to interrogatories served on NETg, an expert witness
retained by NETg opined that NETg may, based on certain assumptions provided to
the expert by NETg's counsel, be entitled to two categories of damages,
including damages for lost profits of up to $386.8 million and damages for
unjustment enrichment of up to $616.3 million. On April 30, 2001, the court
denied SkillSoft Corporation's motion to dismiss all of NETg's claims against
SkillSoft Corporation and its executive officers and key employees and granted
Warburg, Pincus Ventures, L.P.'s motion to dismiss claims related to its alleged
tortious interference with NETg's prospective economic advantage and unfair
competition. The case is currently in discovery and a trial has been scheduled
for February 2004.
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In addition, on July 26, 2000, NETg filed suit against SkillSoft
Corporation in the United States District Court for the Northern District of
Illinois alleging that SkillSoft Corporation's educational and training software
products infringe United States Patent No. 6,039,575, which was issued on March
21, 2000 and is allegedly owned by NETg. The complaint seeks both monetary
damages and injunctive relief. SkillSoft Corporation filed its answer and a
counterclaim for a declaration of invalidity of the NETg patent on August 17,
2000. NETg filed its reply and affirmative defenses to SkillSoft Corporation's
counterclaim on February 2, 2001.
On April 17, 2001, SkillSoft Corporation filed a request for reexamination
of the patent in suit with the United States Patent and Trademark Office (the
"PTO"). On May 11, 2001, the United States District Court for the Northern
District of Illinois entered an order staying the proceedings in NETg's patent
infringement action, with certain exceptions, pending resolution of SkillSoft
Corporation's request to the PTO to reexamine the patentability of the claims of
the patent on which NETg bases the lawsuit and any resulting reexamination
proceedings. After a series of interim actions by the PTO and filings by the
patent owner, on April 10, 2002 the PTO issued an Office Action rejecting all of
the claims of the patent. On September 6, 2002, an order was issued dismissing
the Federal Court litigation "without prejudice with leave to reinstate upon
full and final resolution of the reexamination proceedings." NETg's appeal of
the PTO's Office Action rejecting all of the claims of the patent remains
pending and, on or about September 10, 2002, the patent owner filed with the PTO
its brief in support of its appeal.
SkillSoft Corporation and the other defendants are vigorously defending
themselves against NETg's allegations, and we believe that both SkillSoft
Corporation and the other defendants have meritorious defenses to the claims
made in the lawsuits. None of the defendants in the first lawsuit were bound by
written non-competition or non-solicitation agreements with NETg. We are not yet
able to assess our potential liability or the potential liability of the other
defendants. Nonetheless, SkillSoft Corporation's failure to prevail in this
litigation could have any or all of the following significant adverse effects on
our business and financial performance:
- injunctive relief issued against SkillSoft Corporation and its
officers and employees, which could significantly restrict our
ability to conduct our business;
- an adverse judgment against SkillSoft Corporation for monetary
damages;
- a settlement on unfavorable terms;
- obligations SkillSoft Corporation has to indemnify its employees for
liabilities and expenses they incur in connection with the lawsuits;
- obligations to customers for breach of SkillSoft Corporation's
warranty of noninfringement; or
- a requirement to reengineer SkillSoft Corporation's products to
avoid patent infringement, which would likely result in additional
expense and delay.
In addition, this litigation, regardless of its outcome, will continue to
result in significant expenses in defending the lawsuit and may divert the
efforts and attention of our management team from normal business operations.
IP Learn
On April 23, 2002, IP Learn, LLC ("IP Learn") filed a complaint in the
United States District Court for the Northern District of California against us.
The complaint alleges that we infringed on five United States patents assigned
to IP Learn. The complaint was subsequently amended to add an additional patent.
The IP Learn patents in question are U.S. Patent Nos. 6,126,448; 6,118,973;
5,934,909; 5,779,486, 5,743,746; and 6,398,556. Based on preliminary
information, we believe that these patents are related primarily to
computer-aided learning methods and systems. In the complaint, IP Learn asked
the court for a preliminary and permanent injunction as well as unspecified
damages. On June 27, 2002, we filed our answer to IP Learn's amended complaint,
denying infringement and asserting counterclaims seeking declaratory relief that
the patents-in-suit are invalid and that we have not infringed the
patents-in-suit.
On July 1, 2002, IP Learn served SkillSoft Corporation with an amended
complaint alleging that SkillSoft Corporation infringed on U.S. Patent Nos.
6,126,448; 6,118,973; 5,934,909; 5,779,486 and 6,398,556. The complaint seeks
both monetary damages and injunctive relief. In response to the amended
complaint, SkillSoft Corporation filed a motion to dismiss or, in the
alternative, for a more definite statement. The United States District Court for
the Northern District of California granted SkillSoft Corporation's motion to
dismiss on October 15, 2002, and on October 25, 2002, IP Learn filed its Second
Amended Complaint alleging again that SkillSoft Corporation is infringing the
five IP United States patents assigned to IP Learn listed above. The Second
Amended Complaint seeks both monetary damages in an unspecified amount and
injunctive relief. On November 8, 2002, SkillSoft Corporation filed its Answer
to the Second Amended Complaint, in which it denied liability and asserted
counterclaims seeking declaratory relief that the specified patents are invalid
and that SkillSoft Corporation has not infringed the specified patents.
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On December 6, 2002, the court ordered that the IP Learn cases against us
and SkillSoft Corporation be consolidated. A case management conference in the
consolidated action is scheduled for February 5, 2003.
KPMG
In May 2002, KPMG International Investments B.V. ("KPMG") filed suit
against us for breach of contract in the Superior Court of the State of
California, County of San Mateo. KMPG alleged that we failed to deliver a
customized e-learning platform and sought damages in the amount of approximately
$5 million. We filed a counterclaim against KPMG for its material breach of the
same contract and we sought damages in the amount of approximately $2.8 million,
which represented the balance due under the contract. On September 26, 2002, we
settled the lawsuit and the counterclaim. Neither party made a monetary payment
in connection with the settlement, and both parties dismissed their claims
against the other without prejudice.
Lionet
On June 13, 2002, Lionet Limited, a limited liability company incorporated
and doing business in Ireland, filed a claim against us in Ireland, alleging,
among other things, that we breached the terms of our software license agreement
with Lionet Limited in that we permitted or failed to prevent the decompilation
of the provided software products and that we have failed to cooperate in audits
to determine the nature of such alleged copying or de-compilation. Lionet
Limited is seeking damages for lost license fees of $6.8 million and seeks other
damages. We have filed a Motion to Compel Replies to the Notice of Particulars
we served on Lionet Limited in July 2002. A hearing on the motion is scheduled
for January 20, 2003. We intend to vigorously defend ourselves in this matter.
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Extraordinary General Meeting Regarding the Merger
We held an extraordinary general meeting of shareholders on September 6,
2002. 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. Three individual shareholders and a
representative of AIB, the custodian for the ordinary shares represented by
ADS's, were present for the vote. 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 extraordinary general meeting. The following is a brief
description of each matter submitted to a vote of the ordinary shareholders at
the extraordinary general meeting and a summary of the votes tabulated with
respect to each such matter, as well as a summary of the votes cast by the Bank
of New York based on the ADR facility:
To (i) approve our Agreement and Plan of Merger dated June 10, 2002 with
Slate Acquisition Corp. and SkillSoft Corporation, the merger and the issuance
of ordinary shares pursuant to the merger; (ii) increase our authorized share
capital from E13,200,000 to E27,500,000 by the creation of an additional
130,000,000 ordinary shares of E0.11 each ranking pari passu in all respects
with the existing ordinary shares; (iii) amend our Memorandum of Association to
reflect the increase in our authorized share capital; (iv) amend our Articles of
Association to reflect the increase in our authorized share capital; (v) amend
our Articles of Association to provide that the maximum number of directors is
seven; (vi) generally and unconditionally authorize our directors to allot our
relevant securities up to an amount equal to but not exceeding our authorized
but unissued share capital; and (vii) empower our directors to allot our equity
securities as if certain Irish statutory pre-emption provisions did not apply to
any such allotment.
37
Votes Votes
Votes "FOR" "AGAINST" "ABSTAIN"
----------- --------- ---------
Ordinary Shareholders 4 0 0
ADS Holders 27,241,635 64,963 55,966
Extraordinary General Meeting Regarding the Corporate Name Change and
Share Repurchase
We held an extraordinary general meeting of shareholders on November 19,
2002. 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. Three individual shareholders and a
representative of AIB, the custodian for the ordinary shares representing the
ADS's, were present for the vote. 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 extraordinary general meeting. 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
extraordinary general meeting, as well as a summary of the votes cast by the
Bank of New York based on the ADR facility:
(1) That with the consent of the Registrar of Companies the name of
SmartForce PLC be and it is hereby changed to "SkillSoft Public Limited Company"
and that paragraph 1 of the Memorandum of Association of SmartForce be amended
to read as follows: "1. The name of the Company is SkillSoft Public Limited
Company."
(2) That the terms of a share repurchase agreement proposed to be entered
into between SmartForce PLC and Credit Suisse First Boston Corporation relating
to the purchase by SmartForce PLC of its own ordinary shares (represented by
American Depositary Shares ("ADSs")), a copy of which agreement has been
available for inspection by the members of SmartForce PLC in accordance with
Section 213 (5) of the Companies Act, 1990 (the "1990 Act"), be and the same
hereby are approved and authorized for the purposes of Part XI of the 1990 Act,
provided that this authority shall expire at the close of business on November
30, 2003 unless previously renewed, varied or revoked in accordance with Section
213 of the 1990 Act. SmartForce PLC shall be entitled under such authority or
under any renewal thereof to enter into, at any time prior to the expiry of such
authority, a contract of purchase, which would or might be wholly executed after
such expiry, and may complete any such contract as if the authority hereby
conferred had not expired. All ordinary shares (represented by ADSs) repurchased
by SmartForce PLC pursuant to the share repurchase agreement shall be cancelled
upon their repurchase.
Votes for Proposal 1 regarding the Corporate Name Change:
Votes Votes
Votes "FOR" "AGAINST" "ABSTAIN"
----------- --------- ---------
Ordinary Shareholders 4 0 0
ADS Holders 50,785,693 95,273 11,304
Votes for Proposal 2 regarding the Share Repurchase:
Votes Votes
Votes "FOR" "AGAINST" "ABSTAIN"
----------- --------- ---------
Ordinary Shareholders 4 0 0
ADS Holders 50,680,771 156,243 55,256
ITEM 5. - OTHER INFORMATION
Not applicable.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See the Exhibit Index attached hereto.
38
(b) Reports.
On September 20, 2002, we filed a Current Report on Form 8-K September 6,
2002 that reported under Item 2 the completion of our merger with SkillSoft
Corporation on September 6, 2002.
On November 14, 2002, we filed a Current Report on Form 8-K dated
September 4, 2002 that reported under Item 5 the amendment of certain deposit
agreements with The Bank of New York.
On November 18, 2002, we filed a Current Report on Form 8-K dated June 10,
2002 that reported under Item 5 amendments to our Declaration of
Subscription Rights.
On November 20, 2002, we filed a Current Report on Form 8-K dated November
19, 2002 that reported under Item 5 our intent to restate certain historical
financial statements of SmartForce PLC.
39
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.
SKILLSOFT PUBLIC LIMITED COMPANY
Date: January 21, 2003 By /s/ Thomas J. McDonald
-----------------------------
Thomas J. McDonald
Chief Financial Officer
CERTIFICATIONS
I, Charles E. Moran, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SkillSoft Public
Limited Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Charles E. Moran
------------------------------------
Dated: January 21, 2003 Charles E. Moran
President and Chief Executive Officer
40
CERTIFICATIONS
I, Thomas J. McDonald, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SkillSoft Public
Limited Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Thomas J. McDonald
------------------------------------
Dated: January 21, 2003 Thomas J. McDonald
Chief Financial Officer
41
EXHIBIT INDEX
3.1 Memorandum of Association of the Company as amended on March 24, 1992,
March 31, 1995, April 28, 1998, January 26, 2000, July 10, 2001, September
6, 2002 and November 19, 2002.
3.2 Articles of Association of the Company as amended on July 6, 1995, April
28, 1998, January 26, 2000, July 10, 2001, September 6, 2002 and November
19, 2002.
10.1 Books24x7.com, Inc. 1994 Stock Option Plan.
10.2 SkillSoft Corporation 1998 Stock Incentive Plan.
10.3 SkillSoft Corporation 1999 Non-Employee Directors Stock Option Plan.
10.4 SkillSoft Corporation 2001 Stock Incentive Plan.
10.5 Agreement and Release, dated as of May 1, 2002, between SmartForce PLC and
Jeff Newton.
10.6 Separation Agreement and Release, dated as of September 13, 2002, between
SmartForce and Thomas Francis McKeagny.
99.1 Certifications of the Company's CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.