e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2007
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-25674
SKILLSOFT PUBLIC LIMITED COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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| REPUBLIC OF IRELAND
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N/A |
| (STATE OR OTHER JURISDICTION OF
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(I.R.S. EMPLOYER |
| INCORPORATION OR ORGANIZATION)
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IDENTIFICATION NO.) |
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| 107 NORTHEASTERN BOULEVARD
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03062 |
| NASHUA, NEW HAMPSHIRE |
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| (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(ZIP CODE) |
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 324-3000
Not Applicable
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act). Yes o No þ
On May 31, 2007, the registrant had outstanding 111,009,350 Ordinary Shares (issued or issuable in
exchange for the registrant’s outstanding American Depository Shares).
SKILLSOFT PLC
FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2007
INDEX
2
PART I
ITEM 1. — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SKILLSOFT PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS)
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APRIL 30, |
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JANUARY 31, |
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2007 |
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2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
96,649 |
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$ |
48,612 |
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Short-term investments |
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34,379 |
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55,505 |
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Restricted cash |
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4,230 |
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|
20,095 |
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Accounts receivable, net |
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51,846 |
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|
94,343 |
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Prepaid expenses and other current assets |
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19,453 |
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22,215 |
|
|
|
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|
|
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Total current assets |
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206,557 |
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|
240,770 |
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Property and equipment, net |
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8,497 |
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9,672 |
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Intangible assets, net |
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2,720 |
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|
2,638 |
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Goodwill |
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84,444 |
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83,171 |
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Long-term investments |
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— |
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3,598 |
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Deferred tax assets, net |
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|
159 |
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|
159 |
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Other assets |
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3,238 |
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2,962 |
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Total assets |
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$ |
305,615 |
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$ |
342,970 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
1,905 |
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$ |
3,327 |
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Accrued compensation |
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|
9,872 |
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|
17,870 |
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Accrued expenses |
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16,647 |
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35,427 |
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Deferred revenue |
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123,106 |
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146,012 |
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Total current liabilities |
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151,530 |
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202,636 |
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Long term liabilities |
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2,347 |
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2,405 |
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Commitments and contingencies (Note 12)
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Stockholders’ equity: |
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Ordinary shares, €0.11 par value: 250,000,000
shares authorized; 110,443,212 and 109,255,366
shares issued at April 30, 2007 and January 31,
2007, respectively |
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12,212 |
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12,039 |
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Additional paid-in capital |
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579,771 |
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573,394 |
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Treasury stock, at cost, 6,533,884 ordinary shares |
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(24,524 |
) |
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(24,524 |
) |
Accumulated deficit |
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(414,174 |
) |
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|
(421,661 |
) |
Accumulated other comprehensive loss |
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(1,547 |
) |
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|
(1,319 |
) |
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Total stockholders’ equity |
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151,738 |
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|
137,929 |
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Total liabilities and stockholders’ equity |
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$ |
305,615 |
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$ |
342,970 |
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|
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|
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|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
SKILLSOFT PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
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THREE MONTHS ENDED |
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April 30, |
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2007 |
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2006 |
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Revenue |
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$ |
57,140 |
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$ |
54,653 |
|
Cost of revenue – amortization of intangible assets |
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|
198 |
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|
1,732 |
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Cost of revenue (1) |
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6,828 |
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6,451 |
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Gross profit |
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50,114 |
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|
46,470 |
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Operating expenses: |
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Research and development (1) |
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10,242 |
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9,965 |
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Selling and marketing (1) |
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22,548 |
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23,257 |
|
General and administrative (1) |
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7,128 |
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7,280 |
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Amortization of intangible assets |
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|
579 |
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|
416 |
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Restructuring |
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34 |
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— |
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Restatement – SEC investigation |
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872 |
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252 |
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Total operating expenses |
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41,403 |
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41,170 |
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Operating income |
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8,711 |
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|
5,300 |
|
Other income / (expense), net |
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(26 |
) |
|
|
10 |
|
Interest income |
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|
1,501 |
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|
805 |
|
Interest expense |
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(51 |
) |
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(66 |
) |
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Income before provision for income taxes |
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|
10,135 |
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|
|
6,049 |
|
Provision for income taxes |
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2,646 |
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|
1,996 |
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|
|
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Net income |
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$ |
7,489 |
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$ |
4,053 |
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Net income per share (Note 10): |
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Basic |
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$ |
0.07 |
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$ |
0.04 |
|
|
|
|
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Basic weighted average shares outstanding |
|
|
103,277,076 |
|
|
|
101,037,377 |
|
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Diluted |
|
$ |
0.07 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
107,065,456 |
|
|
|
102,888,751 |
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| (1) |
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Stock-based compensation included in cost of revenue and operating expenses: |
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THREE MONTHS ENDED |
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April 30, |
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2007 |
|
2006 |
Cost of revenue |
|
$ |
17 |
|
|
$ |
6 |
|
Research and development |
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|
208 |
|
|
|
383 |
|
Selling and marketing |
|
|
498 |
|
|
|
769 |
|
General and administrative |
|
|
633 |
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|
623 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SKILLSOFT PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
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THREE MONTHS ENDED |
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APRIL 30, |
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2007 |
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2006 |
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Cash flows from operating activities: |
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|
|
|
|
|
|
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Net income |
|
$ |
7,489 |
|
|
$ |
4,053 |
|
Adjustments to reconcile net income to net cash provided by operating activities - |
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
1,356 |
|
|
|
1,781 |
|
Depreciation and amortization |
|
|
1,667 |
|
|
|
1,484 |
|
Amortization of intangible assets |
|
|
777 |
|
|
|
2,148 |
|
Recovery of bad debts |
|
|
(32 |
) |
|
|
(303 |
) |
Provision for income tax — non-cash |
|
|
1,875 |
|
|
|
1,754 |
|
Changes in current assets and liabilities, net of acquisition: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
43,832 |
|
|
|
38,546 |
|
Prepaid expenses and other current assets |
|
|
2,705 |
|
|
|
2,625 |
|
Accounts payable |
|
|
(1,585 |
) |
|
|
(1,541 |
) |
Accrued expenses, including long-term |
|
|
(27,470 |
) |
|
|
(12,949 |
) |
Deferred revenue |
|
|
(24,861 |
) |
|
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(19,507 |
) |
|
|
|
|
|
|
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Net cash provided by operating activities |
|
|
5,753 |
|
|
|
18,091 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(433 |
) |
|
|
(1,270 |
) |
Cash used in purchase of business, net of cash acquired |
|
|
(3,933 |
) |
|
|
— |
|
Purchases of investments |
|
|
— |
|
|
|
(24,509 |
) |
Maturity of investments |
|
|
24,619 |
|
|
|
8,370 |
|
Release of restricted cash, net |
|
|
15,865 |
|
|
|
132 |
|
|
|
|
|
|
|
|
Net cash provided / (used in) provided by investing activities |
|
|
36,118 |
|
|
|
(17,277 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
4,106 |
|
|
|
605 |
|
Proceeds from employee stock purchase plan |
|
|
1,088 |
|
|
|
1,703 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
5,194 |
|
|
|
2,308 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
972 |
|
|
|
406 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
48,037 |
|
|
|
3,528 |
|
Cash and cash equivalents, beginning of period |
|
|
48,612 |
|
|
|
51,937 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
96,649 |
|
|
$ |
55,465 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SKILLSOFT PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY
SkillSoft PLC, (the Company or SkillSoft), was incorporated in Ireland on August 8, 1989. The
Company is a leading provider of e-learning and performance support solutions for global
enterprises, government, education and small to medium-sized businesses. SkillSoft helps companies
to maximize business performance through a combination of content, online information resources,
flexible technologies and support services. SkillSoft PLC is the result of a merger between
SmartForce PLC and SkillSoft Corporation on September 6, 2002 (the Merger).
2. BASIS OF PRESENTATION
The accompanying, unaudited condensed consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities and Exchange
Commission (the SEC). Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles in the United
States have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of
management, the condensed consolidated financial statements reflect all material adjustments
(consisting only of those of a normal and recurring nature) which are necessary to present fairly
the consolidated financial position of the Company as of April 30, 2007 and the results of its
operations and cash flows for the three months ended April 30, 2007 and 2006. These condensed
consolidated financial statements and notes thereto should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company’s Annual Report on Form
10-K for the fiscal year ended January 31, 2007. The results of operations for the interim period
are not necessarily indicative of the results of operations to be expected for the full year.
Certain reclassifications have been made to the consolidated financial statements for the period
ended April 30, 2006 to conform to current year classifications. Included in cost of revenues is
amortization of intangible assets, related to acquired technology and capitalized software
development costs, of approximately $1.7 million for the three months ended April 30, 2006. These
costs were previously recorded within operating expense under the caption “amortization of
intangible assets.”
3. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND INVESTMENTS
The Company considers all highly liquid investments with original maturities of 90 days or
less at the time of purchase to be cash equivalents. At April 30, 2007 and January 31, 2007, cash
equivalents consisted mainly of commercial paper. The Company considers the cash held in
certificates of deposit with a commercial bank (i) to secure certain facility leases and (ii) to
secure funds to defend named former executives and board members of SmartForce PLC for actions
arising out of the SEC investigation to be restricted cash. At April 30, 2007, the Company had
approximately $4.2 million of restricted cash: approximately $3.2 million is held voluntarily to
defend named former executives and board members of SmartForce PLC for actions arising out of the
SEC investigation and litigation related to the 2002 securities class action and approximately $1.0
million is held to secure certain facilities leases. In the quarter ended April 30, 2007, the
Company made the final payment of the 2002 securities class action settlement for approximately
$15.5 million, which had previously been recorded as restricted cash.
The Company accounts for certain investments in accordance with SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities” (SFAS No. 115). Under SFAS No. 115, securities
that the Company does not intend to hold to maturity or for trading purposes are reported at market
value, and are classified as available- for-sale. At April 30, 2007, the Company’s investments were
classified as available for sale and had an average maturity of approximately 79 days. These
investments are classified as current assets or long-term investments in the accompanying condensed
consolidated balance sheets based upon maturity date.
4. REVENUE RECOGNITION
The Company generates revenue from the license of products and services and from providing
hosting/application service provider services (ASP).
6
The Company follows the provisions of the American Institute of Certified Public Accountants
(AICPA) Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4
and SOP 98-9 to account for revenue derived pursuant to license agreements under which customers
license the Company’s products and services. The pricing for the Company’s courses varies based
upon the number of course titles or the courseware bundle licensed by a customer, the number of
users within the customer’s organization and the length of the license agreement (generally one,
two or three years). License agreements permit customers to exchange course titles, generally on
the contract anniversary date. Additional product features, such as hosting and online mentoring
services, are separately licensed for an additional fee.
The pricing for content licenses varies based on the content offering selected by the customer, the
number of users within the customer’s organization and the length of the license agreement. A
license can provide customers access to a range of learning products including courseware,
Referenceware®, simulations, mentoring and prescriptive assessment.
The Company offers discounts from its ordinary pricing, and purchasers of licenses for a larger
number of courses, larger user bases or longer periods of time generally receive discounts.
Generally, customers may amend their license agreements, for an additional fee, to gain access to
additional courses or product lines and/or to increase the size of the user base. The Company also
derives revenue from hosting fees for clients that use its solutions on an ASP basis and from the
provision of online mentoring services and professional services. In selected circumstances, the
Company derives revenue on a pay-for-use basis under which some customers are charged based on the
number of courses accessed by users. Revenue derived from pay-for-use contracts has been minimal to
date.
The Company recognizes revenue ratably over the license period if the number of courses that a
customer has access to is not clearly defined, available, or selected at the inception of the
contract, or if the contract has additional undelivered elements for which the Company does not
have vendor specific objective evidence (VSOE) of the fair value of the various elements. This may
occur if the customer does not specify all licensed courses at the outset, the customer chooses to
wait for future licensed courses on a when and if available basis, the customer is given exchange
privileges that are exercisable other than on the contract anniversaries, or the customer licenses
all courses currently available and to be developed during the term of the arrangement. Revenue
from nearly all of the Company’s contractual arrangements is recognized on a subscription or
straight-line basis over the contractual period of service.
The Company also derives revenue from extranet hosting/ASP services and online mentoring services.
The Company recognizes revenue related to extranet hosting/ASP services and online mentoring
services on a straight-line basis over the period the services are provided. Upfront fees are
recorded over the contract period.
The Company generally bills the annual license fee for the first year of a multi-year license
agreement in advance and license fees for subsequent years of multi-year license arrangements are
billed on the anniversary date of the agreement. Occasionally, the Company bills customers on a
quarterly basis. In some circumstances, the Company offers payment terms of up to six months from
the initial shipment date or anniversary date for multi-year license agreements to its customers.
To the extent that a customer is given extended payment terms (defined by the Company as greater
than six months), revenue is recognized as cash becomes due, assuming all of the other elements of
revenue recognition have been satisfied.
The Company typically recognizes revenue from resellers when both the sale to the end user has
occurred and the collectibility of cash from the reseller is probable. With respect to reseller
agreements with minimum commitments, the Company recognizes revenue related to the portion of the
minimum commitment that exceeds the end user sales at the expiration of the commitment period
provided the Company has received payment. If a definitive service period can be determined,
revenue is recognized ratably over the term of the minimum commitment period, provided that cash
has been received or collectibility is probable.
The Company provides professional services, including instructor led training, customized content,
websites, and implementation services. If the Company determines that the professional services are
not separable from an existing customer arrangement, revenue from these services is recognized over
the existing contractual terms with the customer; otherwise the Company typically recognizes
professional service revenue as the services are performed.
The Company records reimbursable out-of-pocket expenses in both revenue and as a direct cost of
revenue, as applicable, in accordance with Emerging Issues Task Force (EITF) Issue No. 01-14,
“Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses
Incurred” (“EITF 01-14”.)
The Company records as deferred revenue amounts that have been billed in advance for products or
services to be provided. Deferred revenue includes the unamortized portion of revenue associated
with license fees for which the Company has received payment or for which amounts have been billed
and are due for payment in 90 days or less for resellers and 180 days or less for direct customers.
In
7
addition, deferred revenue includes amounts which have been billed and not collected for which
revenue is being recognized ratably over the license period.
SkillSoft contracts often include an uptime guarantee for solutions hosted on the Company’s servers
whereby customers may be entitled to credits in the event of nonperformance. The Company also
retains the right to remedy any nonperformance event prior to issuance of any credit. Historically,
the Company has not incurred substantial costs relating to this guarantee and the Company currently
accrues for such costs as they are incurred. The Company reviews these costs on a regular basis as
actual experience and other information becomes available; and should they become more substantial,
the Company would accrue an estimated exposure and consider the potential related effects of the
timing of recording revenue on its license arrangements. The Company has not accrued any costs
related to these warranties in the accompanying consolidated financial statements.
5. ACCOUNTING FOR SHARE-BASED COMPENSATION
The Company has several share-based compensation plans under which employees, officers, directors
and consultants may be granted options to purchase the Company’s ordinary shares, generally at the
market price on the date of grant. The options become exercisable over various periods, typically
four years, and have a maximum term of up to ten years. As of April 30, 2007, 2,663,263 ordinary
shares remain available for future grant under the Company’s share option plans. Please see Note 9
of the Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K
as filed with the SEC on April 13, 2007 for a detailed description of the Company’s share option
plans.
A summary of share option activity under the Company’s plans during the three months ended April
30, 2007 is as follows:
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| |
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Weighted |
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|
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|
| |
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|
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|
|
|
|
Average |
|
|
Aggregate |
|
| |
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Intrinsic |
|
| |
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Value |
|
| Share Options |
|
Shares |
|
|
Exercise Price |
|
|
Term (Years) |
|
|
(in thousands) |
|
Outstanding, January 31, 2007 |
|
|
20,188,177 |
|
|
$ |
7.48 |
|
|
|
5.74 |
|
|
|
|
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(867,829 |
) |
|
|
4.08 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(146,916 |
) |
|
|
11.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, April 30, 2007 |
|
|
19,173,432 |
|
|
$ |
7.60 |
|
|
|
5.23 |
|
|
$ |
40,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, April 30, 2007 |
|
|
13,377,182 |
|
|
$ |
8.14 |
|
|
|
4.66 |
|
|
$ |
30,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Expected to Vest, April 30, 2007 (1) |
|
|
18,132,555 |
|
|
$ |
7.67 |
|
|
|
0.40 |
|
|
$ |
38,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
This represents the number of vested options as of April 30, 2007 plus the number of unvested
options as of April 30, 2007 expected to vest adjusted for an estimated forfeiture rate of
11.6%. The company recognizes expense incurred under SFAS 123(R) on a straight line basis. Due
to the Company’s vesting schedule, expense is incurred on options that have not yet vested but
which are expected to vest in a future period. The options for which expense has been incurred
but have not yet vested are included above as options expected to vest. |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the
difference between the closing price of the shares on April 30, 2007 of $8.07 and the exercise
price of each in-the-money option) that would have been received by the option holders had all
option holders exercised their options on April 30, 2007.
There were no options granted during the three months ended April 30, 2007. The total intrinsic
value of options exercised during the three months ended April 30, 2007 and 2006 was approximately
$3.1 million and $274,000, respectively.
6. ACQUISITIONS
On February 9, 2007, the Company acquired the assets of Targeted Learning Corporation (TLC), an
on-line video library business, for approximately $4.1 million in cash plus liabilities assumed of
$0.8 million. Additional consideration of up to $0.5 million is payable to the shareholders of TLC
at various times prior to February 2008 contingent upon achievement of certain integration
milestones. As of April 30, 2007, $0.1 million of this contingent consideration had been paid. The
acquisition resulted in allocations of the purchase price to goodwill and identified intangible
assets of $3.2 million and $0.9 million, respectively. Intangible assets consist of internally
8
developed
software, comprised of learning content valued at $510,000, which will be amortized
over a period of 4 years, customer contracts and relationships valued at $330,000, which will be
amortized over 3 years and the TLC Tradename valued at $20,000 which will be amortized over 2
years. Useful lives were determined based on Company estimates. The historical results of
operations for TLC were not material to the results of operations of the Company.
7. SPECIAL CHARGES
MERGER AND EXIT COSTS
Activity in the Company’s merger and exit costs, which are included in accrued expenses (see Note
14) and long-term liabilities, was as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
EMPLOYEE |
|
|
|
|
|
|
|
|
|
|
| |
|
SEVERANCE AND |
|
|
CLOSEDOWN OF |
|
|
|
|
|
|
|
| |
|
RELATED COSTS |
|
|
FACILITIES |
|
|
OTHER |
|
|
TOTAL |
|
Merger and exit accrual January 31, 2007 |
|
$ |
878 |
|
|
$ |
2,278 |
|
|
$ |
121 |
|
|
$ |
3,277 |
|
Payments made during the three months ended April 30, 2007 |
|
|
— |
|
|
|
(50 |
) |
|
|
— |
|
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger and exit accrual April 30, 2007 |
|
$ |
878 |
|
|
$ |
2,228 |
|
|
$ |
121 |
|
|
$ |
3,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company anticipates that the remainder of the merger and exit accrual will be paid out by April
2011 as follows (in thousands):
| |
|
|
|
|
Year ended January 31, |
|
|
|
|
2008 (remaining 9 months) |
|
$ |
1,751 |
|
2009 |
|
|
493 |
|
2010 |
|
|
332 |
|
2011 |
|
|
651 |
|
|
|
|
|
Total |
|
$ |
3,227 |
|
|
|
|
|
RESTRUCTURING
Activity in the Company’s restructuring accrual was as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
EMPLOYEE |
|
|
|
|
|
|
|
| |
|
SEVERANCE AND |
|
|
CONTRACTUAL |
|
|
|
|
| |
|
RELATED COST |
|
|
OBLIGATIONS |
|
|
TOTAL |
|
Total restructuring accrual as of January 31, 2007 |
|
$ |
88 |
|
|
$ |
1,333 |
|
|
$ |
1,421 |
|
Payments made during the three months ended April 30, 2007 |
|
|
(105 |
) |
|
|
(67 |
) |
|
|
(172 |
) |
Restructuring charge for the three months ended April 30, 2007 |
|
|
34 |
|
|
|
— |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
Total restructuring accrual as of April 30, 2007 |
|
$ |
17 |
|
|
$ |
1,266 |
|
|
$ |
1,283 |
|
|
|
|
|
|
|
|
|
|
|
The Company anticipates that the remainder of the restructuring accrual will be paid out by January
2010 as follows (in thousands):
| |
|
|
|
|
Year ended January 31, |
|
|
|
|
2008 (remaining 9 months) |
|
$ |
521 |
|
2009 |
|
|
394 |
|
2010 |
|
|
368 |
|
|
|
|
|
Total |
|
$ |
1,283 |
|
|
|
|
|
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
APRIL 30, 2007 |
|
|
JANUARY 31, 2007 |
|
| |
|
GROSS |
|
|
|
|
|
|
NET |
|
|
GROSS |
|
|
|
|
|
|
NET |
|
| |
|
CARRYING |
|
|
ACCUMULATED |
|
|
CARRYING |
|
|
CARRYING |
|
|
ACCUMULATED |
|
|
CARRYING |
|
| |
|
AMOUNT |
|
|
AMORTIZATION |
|
|
AMOUNT |
|
|
AMOUNT |
|
|
AMORTIZATION |
|
|
AMOUNT |
|
Internally developed
software/courseware |
|
$ |
28,767 |
|
|
$ |
28,035 |
|
|
$ |
732 |
|
|
$ |
28,257 |
|
|
$ |
27,836 |
|
|
$ |
421 |
|
Customer contracts |
|
|
13,348 |
|
|
|
12,278 |
|
|
|
1,070 |
|
|
|
13,018 |
|
|
|
11,701 |
|
|
|
1,317 |
|
Trademarks and trade names |
|
|
925 |
|
|
|
7 |
|
|
|
918 |
|
|
|
905 |
|
|
|
5 |
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,040 |
|
|
|
40,320 |
|
|
|
2,720 |
|
|
|
42,180 |
|
|
|
39,542 |
|
|
|
2,638 |
|
Goodwill |
|
|
84,444 |
|
|
|
— |
|
|
|
84,444 |
|
|
|
83,171 |
|
|
|
— |
|
|
|
83,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
127,484 |
|
|
$ |
40,320 |
|
|
$ |
87,164 |
|
|
$ |
125,351 |
|
|
$ |
39,542 |
|
|
$ |
85,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
The change in goodwill at April 30, 2007 from the amount recorded at January 31, 2007 was due
primarily to the goodwill acquired as a result of the purchase of TLC as well as the Company’s
utilization of the tax benefit of net operating loss carryforwards assumed as part of the Merger.
| |
|
|
|
|
| |
|
Total |
|
Gross carrying amount of goodwill, January 31, 2007 |
|
$ |
83,171 |
|
Utilization of tax benefit |
|
|
(1,875 |
) |
Acquisition of TLC |
|
|
3,233 |
|
Other |
|
|
(85 |
) |
|
|
|
|
Gross carrying amount of goodwill, April 30, 2007 |
|
$ |
84,444 |
|
|
|
|
|
Amortization expense for the remainder of fiscal 2008 and the following fiscal years is expected to
be as follows (in thousands):
| |
|
|
|
|
| |
|
Amortization |
|
| Fiscal Year |
|
Expense |
|
2008 |
|
$ |
1,095 |
|
2009 |
|
|
360 |
|
2010 |
|
|
238 |
|
2011 |
|
|
127 |
|
|
|
|
|
Total |
|
$ |
1,820 |
|
|
|
|
|
The Company will be conducting its annual impairment test of goodwill for fiscal 2008 in the fourth
quarter.
9. COMPREHENSIVE INCOME/(LOSS)
SFAS No. 130, “Reporting Comprehensive Income,” requires disclosure of all components of
comprehensive income/(loss) on an annual and interim basis. Comprehensive income/(loss) is defined
as the change in equity of a business enterprise during a period resulting from transactions, other
events and circumstances related to non-owner sources. Comprehensive income for the three months
ended April 30, 2007 and 2006 was as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
THREE MONTHS ENDED |
|
| |
|
APRIL 30, |
|
| |
|
2007 |
|
|
2006 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,489 |
|
|
$ |
4,053 |
|
Other comprehensive income/(loss) - |
|
|
|
|
|
|
|
|
Foreign currency adjustment |
|
|
(150 |
) |
|
|
(298 |
) |
Unrealized (losses)/gains on available-for-sale securities |
|
|
(78 |
) |
|
|
76 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
7,261 |
|
|
$ |
3,831 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income as of April 30, 2007 and January 31, 2007 was as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
| |
|
AS OF |
|
|
AS OF |
|
| |
|
APRIL 30, |
|
|
JANUARY 31, |
|
| |
|
2007 |
|
|
2007 |
|
Unrealized holding gains/(losses) |
|
$ |
(11 |
) |
|
$ |
67 |
|
Foreign currency adjustment |
|
|
(1,536 |
) |
|
|
(1,386 |
) |
|
|
|
|
|
|
|
Total accumulated other comprehensive loss |
|
$ |
(1,547 |
) |
|
$ |
(1,319 |
) |
|
|
|
|
|
|
|
10. NET INCOME PER SHARE
Basic net income per share was computed using the weighted average number of shares outstanding
during the period. Diluted net income per share was computed by giving effect to all dilutive
potential shares outstanding. The weighted average number of shares outstanding used to compute
basic net income per share and diluted net income per share was as follows:
10
| |
|
|
|
|
|
|
|
|
| |
|
THREE MONTHS ENDED |
|
| |
|
APRIL 30, |
|
| |
|
2007 |
|
|
2006 |
|
Basic weighted average shares Outstanding |
|
|
103,277,076 |
|
|
|
101,037,377 |
|
Effect of dilutive shares outstanding |
|
|
3,788,380 |
|
|
|
1,851,374 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, as adjusted |
|
|
107,065,456 |
|
|
|
102,888,751 |
|
|
|
|
|
|
|
|
The following share equivalents have been excluded from the computation of diluted weighted average
shares outstanding for the three months ended April 30, 2007 and 2006, respectively, as they would
be anti-dilutive:
| |
|
|
|
|
|
|
|
|
| |
|
THREE MONTHS ENDED |
| |
|
APRIL 30, |
| |
|
2007 |
|
2006 |
Options excluded |
|
|
15,385,052 |
|
|
|
14,112,294 |
|
11. INCOME TAXES
The Company operates as a holding company with operating subsidiaries in several countries, and
each subsidiary is taxed based on the laws of the jurisdiction in which it operates.
The Company has significant net operating loss (NOL) carryforwards, some of which are subject to
potential limitations based upon the change in control provisions of Section 382 of the United
States Internal Revenue Code.
The provision for income tax in the three months ended April 30, 2007 was approximately $2.6
million. Of this amount, approximately $1.9 million relates to the expected utilization of acquired
NOL carryforwards, which does not alleviate tax burden in the statement of income and is recorded
as an adjustment to goodwill. The $1.9 million of utilized acquired NOL carryforwards do not
require cash payments to the taxing authorities. In addition, there is income generated in foreign
countries that cannot be offset through NOL carryforwards.
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), on February 1, 2007. On the date of adoption of FASB Interpretation No.
48, the Company had total unrecognized tax benefits of approximately $3.6 million (including
interest and penalties of $1.1 million) that, if recognized, would impact the Company’s effective
tax rate. At April 30, 2007 the Company had $4.0 million of unrecognized tax benefits. The Company recognizes
interest and penalties accrued related to unrecognized tax benefits as income tax expense. As of
April 30, 2007 the Company had approximately $0.4 million of accrued interest related to uncertain tax
positions.
The Company conducts business globally and, as a result, the Company and its subsidiaries file
income tax returns in the U.S. and foreign jurisdictions. In the normal course of business the
Company is subject to examination by taxing authorities throughout the world, including but not
limited to such major jurisdictions as Canada, the United Kingdom and the United States. With few
exceptions, the Company is no longer subject to U.S. and international income tax examinations for
years before 2002.
12. COMMITMENTS AND CONTINGENCIES
Six class action lawsuits have been filed against the Company and certain of its current and former
officers and directors captioned: (1) Gianni Angeloni v. SmartForce PLC d/b/a SkillSoft, William
McCabe and Greg Priest; (2) Ari R. Schloss v. SkillSoft PLC f/k/a SmartForce PLC, Gregory M.
Priest, Patrick E. Murphy, David C. Drummond and William G. McCabe; (3) Joseph J. Bish v.
SmartForce PLC d/b/a SkillSoft, Gregory M. Priest, William G. McCabe, David C. Drummond, John M.
Grillos, John P. Hayes and Patrick E. Murphy; (4) Stacey Cohen v. SmartForce PLC d/b/a SkillSoft,
William G. McCabe and Greg Priest; (5) Daniel Schmelz v. SmartForce PLC d/b/a SkillSoft, William G.
McCabe and Greg Priest; and (6) John O’Donoghue v. SmartForce PLC d/b/a SkillSoft, William G.
McCabe and Greg Priest. Each lawsuit was filed in the United States District Court for the District
of New Hampshire. In March 2004, the Company reached a settlement of this litigation for total
settlement payments of $30.5 million, with one-half paid in August 2004 and the remainder paid in
April 2007. In July 2005, the Company received $19.5 million, which resulted from the final
settlement with the insurance carriers regarding the 2002 securities class action lawsuit
settlement of $30.5 million in March 2004 and the related litigation and ongoing SEC investigation.
The Company recorded the aggregate settlement with the plaintiffs as a charge in its fiscal 2004
fourth quarter; and the settlement with its insurers has been recorded in the fiscal 2006 second
quarter.
The
Company is not a party to any other material legal proceedings.
11
From time to time, the Company is a party to or may be threatened with other litigation in the
ordinary course of its business. The Company regularly analyzes current information, including, as
applicable, the Company’s defenses and insurance coverage and, as necessary, provides accruals for
probable and estimable liabilities for the eventual disposition of these matters.
13. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
The Company previously viewed its operations and managed its business as principally two operating
segments: multi modal learning (MML) and Retail Certification. However, on April 29, 2005, the
Company sold certain assets and transferred certain liabilities related to its Retail Certification
business and incurred a $608,000 loss on disposition in fiscal 2006. For fiscal 2008 the Retail
Certification business will not generate material revenue or activity and as a result management
has determined that the Company operates only in the MML business segment.
The following table set forth the Company’s segment information for the fiscal quarter ended April
30, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended April 30, 2006 |
| |
|
Multi-Modal |
|
Retail Certification |
|
Combined |
| |
|
|
|
|
|
(In thousands) |
|
|
|
|
Revenue |
|
$ |
52,922 |
|
|
$ |
1,731 |
|
|
$ |
54,653 |
|
Net income |
|
$ |
3,980 |
|
|
$ |
73 |
|
|
$ |
4,053 |
|
The Company attributes revenues to different geographical areas on the basis of the location of the
customer. Revenues by geographical area for the three month periods ended April 30, 2007 and 2006
were as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
THREE MONTHS ENDED |
|
| |
|
APRIL 30, |
|
| |
|
2007 |
|
|
2006 |
|
Revenue: |
|
|
|
|
|
|
|
|
United States |
|
$ |
43,819 |
|
|
$ |
42,864 |
|
United Kingdom |
|
|
6,941 |
|
|
|
6,061 |
|
Canada |
|
|
2,553 |
|
|
|
2,361 |
|
Europe, excluding UK |
|
|
393 |
|
|
|
523 |
|
Australia/New Zealand |
|
|
2,762 |
|
|
|
2,238 |
|
Other |
|
|
672 |
|
|
|
606 |
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
57,140 |
|
|
$ |
54,653 |
|
|
|
|
|
|
|
|
Long-lived tangible assets at non — US locations are not significant.
14. ACCRUED EXPENSES
Accrued expenses in the accompanying condensed combined balance sheets consisted of the following
(in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
APRIL 30, 2007 |
|
|
JANUARY 31, 2007 |
|
Course development fees |
|
|
1,775 |
|
|
|
1,860 |
|
Professional fees |
|
|
2,299 |
|
|
|
2,639 |
|
Accrued payables |
|
|
380 |
|
|
|
415 |
|
Accrued miscellaneous taxes |
|
|
377 |
|
|
|
385 |
|
Accrued merger related costs* |
|
|
1,915 |
|
|
|
1,892 |
|
Sales tax payable/VAT payable |
|
|
2,967 |
|
|
|
4,405 |
|
Accrued royalties |
|
|
3,830 |
|
|
|
3,693 |
|
Accrued litigation settlements |
|
|
— |
|
|
|
15,250 |
|
Accrued restructuring |
|
|
528 |
|
|
|
659 |
|
Other accrued liabilities |
|
|
2,576 |
|
|
|
4,229 |
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
16,647 |
|
|
$ |
35,427 |
|
|
|
|
|
|
|
|
|
|
|
| * |
|
Includes $1,406 and $1,188 of accrued payroll income taxes in April 30, 2007 and January 31,
2007, respectively. |
12
15. LETTER OF CREDIT
The Company had an outstanding letter of credit of $15.5 million, which expired on April 17, 2007
as a result of the final payment of the 2002 securities class action lawsuit. The letter of credit
was subject to a commission fee of 0.75% as well as administrative costs. The Company paid
approximately $33,000 in letter of credit fees in the three months ended April 30, 2007.
16. SHARE REPURCHASE PROGRAM
On March 23, 2006, the Company’s shareholders approved a program for the repurchase by the Company
of up to an aggregate of 3,500,000 ADSs. Currently, none of these shares have been repurchased and
3,500,000 remain available for repurchase, subject to certain limitations, under the shareholder
approved repurchase program. On May 14, 2007, in connection with the closing of the NETg
acquisition, the Company entered into a Credit Agreement that contains customary negative covenants
that place limitations on the repurchase of the Company’s shares.
17. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair
value, establishes a framework for measuring fair value under generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS No. 157 applies to other
accounting pronouncements that require or permit fair value measurements. The new guidance is
effective for financial statements issued for fiscal years beginning after November 15, 2007, and
for interim periods within those fiscal years. The Company is currently analyzing the effect, if any, SFAS
No. 157 will have on its consolidated financial position and results of operations.
In February 2007, the Financial Accounting Standards Board, or FASB, issued SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments
and certain other items at fair value and is effective for fiscal years beginning after November
15, 2007, or February 1, 2008 for SkillSoft. Early adoption is permitted as of the beginning of the
previous fiscal year provided that the entity makes that choice in the first 120 days of that
fiscal year and also elects to apply the provisions of SFAS
No. 157. The Company is in the process of
evaluating the impact this pronouncement may have on its results of operations and financial
condition and whether to adopt the provisions of SFAS No 159 for the fiscal year beginning February
1, 2007.
18. SUBSEQUENT EVENTS
On October 25, 2006 the Company signed a definitive agreement to acquire Thomson NETg from The
Thomson Corporation and the Company closed the acquisition on May 14, 2007. Under the terms of the
agreement the Company paid approximately $270 million in cash to Thomson, subject to customary
post-closing adjustments. In connection with the closing of the Thomson NETg acquisition, the
Company and its subsidiary SkillSoft Corporation entered into a Credit Agreement with Credit
Suisse, as agent, and certain other parties. The Credit Agreement provides for a $225 million
senior secured credit facility comprised of a $200 million term loan facility and a $25 million
revolving credit facility. Proceeds of the Credit Agreement were used to finance the Thomson NETg
acquisition and for general corporate purposes. In connection with the Thomson NETg acquisition,
SkillSoft Corporation borrowed the entire $200 million available under the term loan facility. The
term loan bears interest at a rate per annum equal to, at the
Company’s election, (i) an alternative base
rate plus a margin of 1.75% or (ii) adjusted LIBOR plus a margin of 2.75%, and revolving loans bear
interest at a rate per annum equal to, at the Company’s election, (i) an alternative base rate plus a margin
of 1.50% to 1.75% or (ii) adjusted LIBO plus a margin of 2.50% to 2.75%. The alternative base rate
is the greater of Credit Suisse’s prime rate and the federal funds effective rate plus 0.50%.
Overdue amounts under the Credit Agreement bear interest at a rate per annum equal to 2.00% plus
the rate otherwise applicable to such loan.
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 under Part II, Item 1A, “Risk Factors.”
13
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our financial statements and notes appearing elsewhere in this
Quarterly Report on Form 10-Q.
OVERVIEW
We are a leading provider of e-learning and performance support solutions for global enterprises,
government, education and small to medium-sized businesses. SkillSoft helps companies to maximize
employee performance through a combination of comprehensive e-learning content, online information
resources, flexible learning technologies and support services. Our multi-modal learning solutions
support and enhance the speed and effectiveness of both formal and informal learning processes and
integrate SkillSoft’s in-depth content resources, learning management system, virtual classroom
technology and support services.
We derive revenue primarily from agreements under which customers license our products and purchase
our services. The pricing for our courses varies based upon the number of course titles or the
courseware bundle licensed by a customer, the number of users within the customer’s organization
and the length of the license agreement (generally one, two or three years). Our agreements permit
customers to exchange course titles, generally on the contract anniversary date. Additional
services, such as hosting and online mentoring, are subject to additional fees.
Cost of revenue includes the cost of materials (such as storage media), packaging, shipping and
handling, CD duplication, the cost of online mentoring and hosting services, royalties and certain
infrastructure and occupancy expenses. We generally recognize these costs as incurred. Also
included in cost of revenue is amortization expense related to capitalized software development
costs and intangible assets related to technology acquired in business combinations.
We account for software development costs in accordance with Statement of Financial Accounting
Standards (SFAS) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed,” which requires the capitalization of certain computer software development
costs incurred after technological feasibility is established. No software development costs
incurred during the first quarter of fiscal 2008 met the requirements for capitalization in
accordance with SFAS No. 86.
Research and development expenses consist primarily of salaries and benefits, share-based
compensation, certain infrastructure and occupancy expenses, fees to consultants and course content
development fees. Selling and marketing expenses consist primarily of salaries and benefits,
share-based compensation, commissions, advertising and promotion expenses, travel expenses and
certain infrastructure and occupancy expenses. General and administrative expenses consist
primarily of salaries and benefits, share-based compensation, consulting and service expenses,
legal expenses, audit and tax preparation costs, regulatory compliance costs and certain
infrastructure and occupancy expenses.
Legal settlements/(insurance recoveries) includes amounts incurred in connection with the
settlement of various legal matters, such as the 2002 securities class action lawsuit, the NETg
infringement lawsuit and other matters. Any insurance recoveries related to these legal settlements
are recorded and, if appropriate, netted in legal settlements (insurance recoveries). Legal fees
incurred in connection with the settlement of lawsuits are recorded as legal expenses within
general and administrative expenses in our statement of operations, as incurred.
Amortization of intangible assets represents the amortization of customer value and content, from
our acquisitions of Books and GoTrain Corp. (GoTrain) and the Merger.
Restructuring primarily consists of charges associated with international restructuring activities.
Restatement — SEC investigation primarily consists of charges related to the ongoing SEC
investigation relating to the restatement of SmartForce’s financial statements for 1999, 2000, 2001
and the first two quarters of 2002, and more recently, the SEC’s review of SmartForce’s option
granting practices prior to the Merger.
BUSINESS OUTLOOK
At this time, we are not in a position to share financial guidance on the combined operations of
SkillSoft and NETg for fiscal 2008 or the second quarter of fiscal 2008 ending July 31, 2007. We
are currently focused on validating our restructuring assumptions and developing a more
comprehensive understanding as to how we will be able to leverage the strengths of both
organizations while eliminating redundancy and underperforming operations and assets. We expect to
complete our review of NETg operations and be in a position to provide financial targets for the
remainder of fiscal 2008 no later than our earnings release for the fiscal 2008 second quarter
ending July 31, 2007.
14
In the three months ended April 30, 2007, we generated revenue of $57.1 million, an increase of
$2.4 million compared to the revenue generated in the three months ended April 30, 2006 of $54.7
million. We reported net income in the three months ended April 30, 2007 of $7.5 million, an
increase of $3.4 million compared to the net income generated in the three months ended April 30,
2006 of $4.1 million.
We continue to find ourselves in a challenging business environment due to (i) the overall market
adoption rate for e-learning solutions remaining relatively slow, (ii) budgetary constraints on
information technology (IT) spending by our current and potential customers and (iii) price
competition and value based competitive offerings from a broad array of competitors in the learning
market generally. Despite these challenges, we have seen some stability in the marketplace and our
core business has performed in accordance with our expectations. Our recent revenue growth and our
growth prospects are strongest in our product lines focused on or bundled with informal learning,
such as those available from our Books24x7 subsidiary. As a result, we have increased our sales and
marketing investment related to those product lines to help capitalize on the recent growth and
potential continued growth for informal learning related products. We have also invested
aggressively in research and development in those areas to accelerate the time by which our planned
new products will be available to our customers.
During fiscal 2007, we continued to focus on revenue and earnings growth primarily by acquiring new
customers, continuing to execute on our new product and telesales distribution initiatives, and by
making a higher priority the evaluation of merger and acquisition opportunities that could
contribute to our long-term objectives. As a result of this focus, on October 25, 2006, we signed a
definitive agreement to acquire Thomson NETg from The Thomson Corporation and we closed the
acquisition on May 14, 2007. Under the terms of the agreement we paid approximately $270 million in
cash to Thomson, subject to customary post-closing adjustments. Approximately $200 million of the
purchase price was funded through bank financing with Credit Suisse. The acquisition is expected to
add to our existing offerings through the addition of complementary Thomson NETg offerings such as
live virtual instructor-led training, blended learning, learning content and custom development
services among others. The acquisition supports our overall strategy to continually increase the
quality, breadth and flexibility of the learning solutions we can make available to our corporate,
government, education and small-to-medium size business customers. Also, the addition of Thomson
NETg’s capabilities strengthens our ability to compete for a greater share of the $13.2 billion
corporate training market that includes many larger players with more comprehensive product
offerings. In addition to our acquisition of Thomson NETg, we acquired Targeted Learning
Corporation (TLC) on February 9, 2007. Under the terms of the acquisition, we paid approximately
$4.1 million in cash to acquire TLC. Additional consideration of
up to $500,000 is payable to
the shareholders of TLC upon achievement of certain integration milestones prior to February 2008.
The acquisition provides us with a new offering that includes an on-line library of over 300
video-based programs featuring organizational and leadership experts, CEOs and best-selling
authors. Programs range in length from two minutes to two hours, and much of this content is
presented as 3 to 5 minute segments, or Quick Talks, for easy access. Selected programs as
indicated on the course profile page are available for offline use with portable devices that
support video, including the Apple iPod®. Users can search the content by Leadership Model category
or by title, speaker/author or topic. This product offers many of the same financial and operating
characteristics as our business model, including an annual recurring subscription-based licensing
model for access to its video-based resource library to be sold through our direct sales force,
complemented by resellers and telesales.
CRITICAL ACCOUNTING POLICIES
We believe that our critical accounting policies are those related to revenue recognition,
amortization of intangible assets and impairment of goodwill, share-based compensation, deferral of
commissions, restructuring charges, legal contingencies and income taxes. We believe these
accounting policies are particularly important to the portrayal and understanding of our financial
position and results of operations and require application of significant judgment by our
management. In applying these policies, management uses its judgment in making certain assumptions
and estimates. Our critical accounting policies are more fully described under the heading
“Critical Accounting Policies” in Note 2 of the Notes to the Consolidated Financial Statements
and under “Management’s Discussion and Analysis of Financial Conditions and Results of Operations –
Critical Accounting Policies” in our Annual Report on Form 10-K as filed with the SEC on April 13,
2007. The policies set forth in our Form 10-K have not changed, except that the critical accounting
policy for income taxes, which follows, is being modified as of this report as a result of the
adoption of FASB Interpretation (FIN) 48 in July 2006.
In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in
Income Taxes”, which is an interpretation of SFAS No. 109, “Accounting for Income Taxes.” FIN 48
clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax
position is required to meet before being recognized in the financial statements. FIN 48 also
provides guidance on recognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. In addition, FIN 48 clearly scopes out income taxes
from SFAS No. 5, “Accounting for Contingencies.” FIN 48 is effective
15
for fiscal years beginning after December 15, 2006. We implemented this interpretation in the
fiscal year starting February 1, 2007. We have completed our preliminary assessment regarding the
effect of the implementation of FIN 48 and have determined that the adoption of FIN 48 will not
have a material impact on our consolidated financial position or results of operations.
As a result of the implementation of FIN 48, we recognized a $0.4 million increase in our liability
for unrecognized tax benefits. On the date of adoption of FASB Interpretation No. 48, we had total
unrecognized tax benefits of approximately $3.6 million (including interest and penalties of $1.1
million) that, if recognized, would impact our effective tax rate. At
April 30, 2007 we have $4.0 million of
unrecognized tax benefits. We recognize interest and penalties accrued related to unrecognized tax
benefits as income tax expense. As of April 30, 2007 we had
approximately $0.4 million of accrued interest
related to uncertain tax positions.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2007 VERSUS THREE MONTHS ENDED APRIL 30, 2006
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended April 30, |
|
| |
|
Dollar |
|
|
Percent Change |
|
|
Percentage |
|
| |
|
Increase/(Decrease) |
|
|
Increase/(Decrease) |
|
|
of Revenue |
|
| |
|
2006/2007 |
|
|
2006/2007 |
|
|
2007 |
|
|
2006 |
|
| |
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
2,487 |
|
|
|
5 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenue |
|
|
377 |
|
|
|
6 |
% |
|
|
12 |
% |
|
|
12 |
% |
Cost of revenue — amortization of intangible assets |
|
|
(1,534 |
) |
|
|
(89 |
)% |
|
|
— |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
3,644 |
|
|
|
8 |
% |
|
|
88 |
% |
|
|
85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
277 |
|
|
|
3 |
% |
|
|
18 |
% |
|
|
18 |
% |
Selling and marketing |
|
|
(709 |
) |
|
|
(3 |
)% |
|
|
39 |
% |
|
|
43 |
% |
General and administrative |
|
|
(152 |
) |
|
|
(2 |
)% |
|
|
12 |
% |
|
|
13 |
% |
Amortization of intangible assets |
|
|
163 |
|
|
|
39 |
% |
|
|
1 |
% |
|
|
1 |
% |
Restructuring |
|
|
34 |
|
|
|
* |
|
|
|
— |
|
|
|
— |
|
Restatement – SEC investigation |
|
|
620 |
|
|
|
246 |
% |
|
|
2 |
% |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
233 |
|
|
|
1 |
% |
|
|
72 |
% |
|
|
75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
3,411 |
|
|
|
64 |
% |
|
|
15 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense), net |
|
|
(36 |
) |
|
|
* |
|
|
|
— |
|
|
|
— |
|
Interest income |
|
|
696 |
|
|
|
86 |
% |
|
|
3 |
% |
|
|
1 |
% |
Interest expense |
|
|
15 |
|
|
|
(23 |
)% |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
4,086 |
|
|
|
68 |
% |
|
|
18 |
% |
|
|
11 |
% |
Provision for income taxes |
|
|
650 |
|
|
|
33 |
% |
|
|
5 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,436 |
|
|
|
85 |
% |
|
|
13 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
QUARTERS ENDED APRIL 30, |
|
| (IN THOUSANDS) |
|
2007 |
|
|
2006 |
|
|
CHANGE |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Modal Learning |
|
$ |
56,927 |
|
|
$ |
52,922 |
|
|
$ |
4,005 |
|
Retail Certification |
|
|
213 |
|
|
|
1,731 |
|
|
|
(1,518 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
57,140 |
|
|
$ |
54,653 |
|
|
$ |
2,487 |
|
|
|
|
|
|
|
|
|
|
|
The sale of certain assets related to SmartCertify, our Retail Certification business, resulted in
a reduction in revenue of $1.5 million in our Retail Certification business for the three months
ended April 30, 2007 as compared to the three months ended April 30, 2006. This reduction was more
than offset by an 8% increase in MML revenue primarily due to growth in sales of our informal
learning product lines and additional revenue earned under agreements with third party resellers of
our products. We expect revenue from our Retail Certification business to be approximately $0.2
million in fiscal 2008 as compared to $5.0 million in fiscal 2007. We expect this decrease in
revenue to be more than offset in fiscal 2008 by increased MML revenue generated from existing
customers, new
16
business, including additional revenue anticipated from the acquisitions of TLC in February 2007
and NETg in May 2007 and the telesales distribution operation focusing on small and mid-sized
businesses.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
QUARTERS ENDED APRIL 30, |
|
| (IN THOUSANDS) |
|
2007 |
|
|
2006 |
|
|
CHANGE |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
43,819 |
|
|
$ |
42,864 |
|
|
$ |
955 |
|
International |
|
|
13,321 |
|
|
|
11,789 |
|
|
|
1,532 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
57,140 |
|
|
$ |
54,653 |
|
|
$ |
2,487 |
|
|
|
|
|
|
|
|
|
|
|
Revenue increased by 2% and 13% in the United States and internationally, respectively, in the
three months ended April 30, 2007 as compared to the three months ended April 30, 2006. The
reduction in Retail Certification revenue, which is primarily earned in the United States, was more
than offset by an 8% increase in MML revenue globally, primarily due to growth in sales of our
informal learning product lines and additional revenue earned under agreements with third party
resellers of our products.
We exited the fiscal year ended January 31, 2007 with non-cancelable backlog of approximately $181
million compared to $171 million at January 31, 2006. This amount is calculated by combining the
amount of deferred revenue at each fiscal year end with the amounts to be added to deferred revenue
throughout the next twelve months from billings under committed customer contracts and determining
how much of these amounts are scheduled to amortize into revenue during fiscal 2008. The amount
scheduled to amortize into revenue during fiscal 2008 is disclosed as “backlog” as of January 31,
2007. Amounts to be added to deferred revenue during fiscal 2008 include subsequent installment
billings for ongoing contract periods as well as billings for new or continuing contracts. As a
result of the previously described sale of certain assets related to SmartCertify, the balance of
non-cancelable backlog at January 31, 2007 reflects a reduction of approximately $5.0 million in
SmartCertify backlog when compared to January 31, 2006, and SmartCertify will not contribute new
contracts during fiscal 2008. We have included this non-GAAP disclosure due to the fact that it is
directly related to our subscription based revenue recognition policy. This is a key business
metric, which factors into our forecasting and planning activities and provides visibility into
fiscal 2008 revenue.
COSTS AND EXPENSES
The increase in cost of revenue in the three months ended April 30, 2007 versus the three months
ended April 30, 2006 was primarily due to increased revenue from our royalty-bearing Books24x7
Referenceware offerings.
The decrease in cost of revenue — amortization of intangible assets in the three months ended April
30, 2007 versus the three months ended April 30, 2006 was primarily due to certain intangible
assets related to capitalized software development costs and technology acquired in business
combinations becoming fully amortized during the previous fiscal year.
The increase in research and development expenses in the three months ended April 30, 2007 versus
the three months ended April 30, 2006 was primarily due to an increase of $0.4 million related to
our new Leadership Development Channel (LDC) operations for video content development
acquired from TLC, which was partially offset by a reduction of $0.2 million in stock based
compensation.
The decrease in selling and marketing expenses in the three months ended April 30, 2007 versus the
three months ended April 30, 2006 was primarily due to a decrease of $0.3 million of stock-based
compensation expense, as well as a reduction in consulting expense of $0.3 million.
The decrease in general and administrative expenses in the three months ended April 30, 2007 versus
the three months ended April 30, 2006 was primarily due to a decrease of $0.4 million in business
systems software development expense.
The increase in amortization of intangible assets in the three months ended April 30, 2007 versus
the three months ended April 30, 2006 was primarily due to the amortization of intangible assets
acquired as a result of the TLC acquisition.
Restatement — SEC investigation charges increased in the three months ended April 30, 2007 versus
the three months ended April 30, 2006 due to an increase in legal expenses related to the ongoing
SEC investigation as a result of the recent notification from the SEC of its informal inquiry into
the pre-merger option granting practices at SmartForce.
17
OTHER EXPENSE, NET
The change in other income/(expense), net in the three months ended April 30, 2007 versus the three
months ended April 30, 2006 was primarily due to foreign currency fluctuations. Due to our
multi-national operations, our business is subject to fluctuations based upon changes in the
exchange rates between the currencies used in our business.
INTEREST INCOME
The increase in interest income in the three months ended April 30, 2007 versus the three months
ended April 30, 2006 was primarily due to more funds being available for investment and higher
interest rates on our cash and cash equivalents and investments.
PROVISION FOR INCOME TAXES
We are using an effective tax rate of 22.5%, exclusive of any discrete charges, for fiscal 2008
compared to 33.0% for fiscal year 2007. The decrease in the rate reflects our increased utilization
of operational NOL carryforwards in the U.S. in fiscal 2008 (as opposed to acquired NOL
carryforwards in fiscal 2007). For the three months ended April 30, 2007, the effective tax rate
was higher then the Irish statutory tax rate of 12.5% due primarily to earnings in higher tax
jurisdictions outside of Ireland. The effective tax rate of 22.5% for fiscal 2008 does not
contemplate the impact of the NETg acquisition and may be subject to material change.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2007, our principal source of liquidity was our cash and cash equivalents and
short-term investments, which totaled $131.0 million. This compares to $104.1 million at January
31, 2007.
Net cash provided by operating activities of $5.8 million for the three months ended April 30, 2007
was primarily due to net income of $7.5 million, which included the impact of non-cash expenses for
depreciation and amortization and amortization of intangible assets of $2.4 million, share-based
compensation expense of $1.4 million and non-cash income tax provision of $1.9 million. Net cash
provided by operating activities was also a result of a decrease in accounts receivable of $43.8
million. These amounts were partially offset by a decrease in accrued expenses of $27.5 million as
well as a decrease in deferred revenue of $24.9 million. These decreases in accounts receivable,
accrued expenses and deferred revenue are primarily a result of the seasonality of our operations,
with the fourth quarter of our fiscal year historically generating the most activity.
Net cash provided by investing activities was $36.1 million for the three months ended April 30,
2007, which includes the maturity of investments generating a cash inflow of approximately $24.6
million in the three months ended April 30, 2007. In addition, approximately $15.9 million of cash
was released from restricted cash as a result of making the final payment related to the settlement
of the 2002 class action lawsuit. Prior to making that payment, we were required to place a
restriction on this cash to secure an outstanding letter of credit of $15.5 million. These inflows
were partially offset by cash used to acquire TLC of $3.9 million.
Net cash provided by financing activities was $5.2 million for the three months ended April 30,
2007. This was the result of proceeds we received from the exercise of share options under our
various share option programs and share purchases under our 2004 Employee Share Purchase Plan.
We had working capital of approximately $55.0 million as of April 30, 2007 and approximately $38.1
million as of January 31, 2007. The increase in our working capital was primarily due to our net
income of $7.5 million, which includes non-cash charges for depreciation and amortization of $2.4
million, share-based compensation expense of $1.4 million and a non-cash provision for income tax
of $1.9 million. Additionally, the increase included $5.2 million of proceeds from the exercise of
share options and share purchases under our 2004 Employee Share Purchase Plan as well as the
maturity of long-term investments of $3.6 million. The impact of these items was partially offset
by cash used to acquire TLC of $3.9 million and the purchase of property and equipment of $0.4
million.
As of January 31, 2007, we had U.S. federal net operating loss (NOL) carryforwards of approximately
$284.2 million. These NOL carryforwards, which are subject to potential limitations based upon
change in control provisions of Section 382 of the Internal Revenue Code, are available to reduce
future taxable income, if any, through 2025. Included in the $284.2 million are approximately
$157.1 million of U.S. NOL carryforwards that were acquired in the Merger and the purchase of
Books. We will realize the benefits of these acquired NOL carryforwards through reductions to
goodwill and non-goodwill intangibles. Also included in the $284.2 million at January 31, 2007 is
approximately $31.3 million of NOL carryforwards in the United States resulting from disqualifying
dispositions. We will realize the benefit of these losses through increases to shareholder’s equity
in the periods in which the losses are
18
utilized to reduce tax payments. We also acquired $365,000 of U.S. tax credit carryforwards in the
Merger and the purchase of Books. As with the acquired NOL carryforwards, we will realize the
benefits of these credit carryforwards through reductions to goodwill and non-goodwill intangibles.
Additionally, we had approximately $93.5 million of NOL carryforwards in jurisdictions outside of
the U.S. If not utilized, these NOL carryforwards expire at various dates through the year ending
January 31, 2025. In addition, included in the $93.5 million is approximately $88.1 million of NOL
carryforwards in jurisdictions outside the U.S. acquired in the Merger and the purchase of Books.
We will realize the benefits of these acquired NOL carryforwards through reductions to goodwill and
non-goodwill intangibles. We also had U.S. federal tax credit carryforwards of approximately $6.8
million at January 31, 2007.
We lease certain of our facilities and certain equipment and furniture under operating lease
agreements that expire at various dates through 2023. Future minimum lease payments, net of
estimated rentals, under these agreements are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period |
|
| |
|
|
|
|
|
Less Than |
|
|
1-3 |
|
|
3-5 |
|
|
More Than |
|
| Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Operating Lease Obligations |
|
$ |
29,677 |
|
|
$ |
5,142 |
|
|
$ |
8,290 |
|
|
$ |
3,144 |
|
|
$ |
13,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
February 9, 2007, we acquired the assets of TLC for approximately $4.1 million with an
additional consideration of up to $0.5 million payable to the shareholders of TLC upon achievement
of certain integration milestones prior to February 2008.
We used approximately $79 million of our cash on May 14, 2007 for the purchase price and related
expenses of the NETg acquisition. In connection with the closing of the Thomson NETg acquisition,
we and our subsidiary SkillSoft Corporation entered into a Credit Agreement with Credit Suisse, as
agent, and certain other parties. The Credit Agreement provides for a $225 million senior secured
credit facility comprised of a $200 million term loan facility and a $25 million revolving credit
facility. Proceeds of the Credit Agreement were used to finance the Thomson NETg acquisition and
for general corporate purposes. In connection with the Thomson NETg acquisition, SkillSoft
Corporation borrowed the entire $200 million available under the term loan facility. The term loan
bears interest at a rate per annum equal to, at our election, (i) an alternative base rate plus a
margin of 1.75% or (ii) adjusted LIBOR plus a margin of 2.75%, and revolving loans bear interest at
a rate per annum equal to, at our election, (i) an alternative base rate plus a margin of 1.50% to
1.75% or (ii) adjusted LIBO plus a margin of 2.50% to 2.75%. The alternative base rate is the
greater of Credit Suisse’s prime rate and the federal funds effective rate plus 0.50%. Overdue
amounts under the Credit Agreement bear interest at a rate per annum equal to 2.00% plus the rate
otherwise applicable to such loan.
We are required to pay the lenders a commitment fee at a rate per annum of 0.50% on the average
daily unused amount of the revolving credit facility commitments of the lenders during the period
for which payment is made, payable quarterly in arrears. The term loan is payable in 24 consecutive
quarterly installments of (i) $500,000 in the case of each of the first 23 installments, on the
last day of each of September, December, March, and June commencing September 30, 2007 and ending
on March 31, 2013, and (ii) the balance due on May 14, 2013. The revolving credit facility
terminates on May 14, 2012, at which time all outstanding borrowings under the revolving credit
facility are due. We may optionally prepay loans under the Credit Agreement at any time, without
penalty. The loans are subject to mandatory prepayment in certain circumstances.
The Credit Agreement contains customary representations and warranties as well as affirmative and
negative covenants. Affirmative covenants include, among others, with respect to us and our
subsidiaries, maintenance of existence, financial and other reporting, payment of obligations,
maintenance of properties and insurance, maintenance of a credit rating, and interest rate
protection. Negative covenants include, among others, with respect to us and our subsidiaries,
limitations on incurrence or guarantees of indebtedness, limitations on liens, limitations on sale
and lease-back transactions, limitations on investments, limitations on mergers, consolidations,
asset sales and acquisitions, limitations on dividends, share redemptions and other restricted
payments, limitations on affiliate transactions, limitations on hedging transactions, and
limitations on capital expenditures. The Credit Agreement also includes a leverage ratio covenant
and an interest coverage ratio covenant (the ratio of our consolidated EBITDA to our consolidated
interest expense as calculated pursuant to the Credit Agreement).
The Credit Agreement contains customary events of default, including, among others, inaccuracy of
representations and warranties in any material respect, non-payment of principal, interest or other
amounts when due, violation of covenants, cross-defaults with other material indebtedness, certain
undischarged judgments, the occurrence of certain ERISA or bankruptcy or insolvency events and the
occurrence of a Change in Control (as defined in the Credit Agreement). Upon the occurrence and
during the continuance of an event of default under the Credit Agreement, the lenders may declare
the loans and all other obligations under the Credit Agreement immediately due and payable. A
bankruptcy or insolvency event of default causes such obligations automatically to become
immediately due and payable.
19
The loans and our other obligations under the Credit Agreement and related loan documents are
secured by substantially all of our tangible and intangible assets.
In conjunction with the Credit Agreement we entered into a $160 million Hedge Contract at a rate of
5.1015% to limit our exposure to the possible fluctuations of the LIBOR. Under the terms of the
Credit Agreement we are required to hedge a minimum of 50% of the Term Loan for a period of two
years.
We expect to experience similar spending related to capital expenditures in the fiscal year ending
January 31, 2008, as compared to the fiscal year ended January 31, 2007, excluding capital
expenditures related to the acquisition of Thomson NETg. These expenditures cannot be accurately
estimated at this time. In addition we will continue to invest in research and development and
sales and marketing in order to execute our business plan and achieve expected revenue growth. To
the extent that our execution of the business plan results in increased sales, we expect to
experience corresponding increases in deferred revenue, cash flow and prepaid expenses. Capital
expenditures for the fiscal year ending January 31, 2008 are expected to be approximately $6.0 to
$8.0 million.
We purchased 6,533,884 shares under our shareholder approved repurchase plan during fiscal 2005 and
2006. This plan expired on March 24, 2006 with 466,116 shares remaining available for repurchase
under the original plan. Our shareholders have approved the renewal and extension of the plan, and
as a result we currently have the ability to purchase, subject to certain limitations, up to
3,500,000 of our outstanding shares under the approved shareholder plan. Under the plan, there are
limitations on our ability to purchase shares up to this level, which include, but are not limited
to, the availability of distributable profits under Irish regulations and available cash. We have
also incurred additional restrictions as a result of the term loan agreement with Credit Suisse we
executed as part of the Thomson NETg acquisition. We expect that the principal sources of funding
for our operating expenses, capital expenditures, litigation settlement payments and other
liquidity needs will be a combination of our available cash and cash equivalents and short-term
investments, and funds generated from future cash flows from operating activities. We believe our
current funds and expected cash flows from operating activities will be sufficient to fund our
operations, including the debt repayment for at least the next 12 months. However, there are
several items that may negatively impact our available sources of funds. In addition, our cash
needs may increase due to factors such as unanticipated developments in our business or significant
acquisitions (in addition to and including Thomson NETg). The amount of cash generated from
operations will be dependent upon the successful execution of our business plan. Although we do not
foresee the need to raise additional capital, any unanticipated economic or business events could
require us to raise additional capital to support operations.
EXPLANATION OF USE OF NON-GAAP FINANCIAL RESULTS
In addition to our audited financial results in accordance with United States generally accepted
accounting principles (GAAP), to assist investors we may on occasion provide certain non-GAAP
financial results as an alternative means to explain our periodic results. The non-GAAP financial
results typically exclude non-cash or one-time charges or benefits.
Our management uses the non-GAAP financial results internally as an alternative means for assessing
our results of operations. By excluding non-cash charges such as share-based compensation,
amortization of purchased intangible assets, impairment of goodwill and purchased intangible
assets, management can evaluate our operations excluding these non-cash charges and can compare its
results on a more consistent basis to the results of other companies in our industry. By excluding
charges such as restructuring charges (benefits), our management can compare our ongoing operations
to prior quarters where such items may be materially different and to ongoing operations of other
companies in our industry who may have materially different one-time charges. Our management
recognizes that non-GAAP financial results are not a substitute for GAAP results, but believes that
non-GAAP measures are helpful in assisting them in understanding and managing our business.
Our management believes that the non-GAAP financial results may also provide useful information to
investors. Non-GAAP results may also allow investors and analysts to more readily compare our
operations to prior financial results and to the financial results of other companies in the
industry who similarly provide non-GAAP results to investors and analysts. Investors may seek to
evaluate our business performance and the performance of our competitors as they relate to cash.
Excluding one-time and non-cash charges may assist investors in this evaluation and comparisons.
We intend to continue to assess the potential value of reporting non-GAAP results consistent with
applicable rules and regulations.
ITEM 3. — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of April 30, 2007, we did not use derivative financial instruments for speculative or trading
purposes.
20
INTEREST RATE RISK
Our general investing policy is to limit the risk of principal loss and to ensure the safety of
invested funds by limiting market and credit risk. We currently use a registered investment manager
to place our investments in highly liquid money market accounts and government-backed securities.
All highly liquid investments with original maturities of three months or less are considered to be
cash equivalents. Interest income is sensitive to changes in the general level of U.S. interest
rates. Based on the short-term nature of our investments, we have concluded that there is no
significant market risk exposure.
FOREIGN CURRENCY RISK
Due to our multi-national operations, our business is subject to fluctuations based upon changes in
the exchange rates between the currencies in which we collect revenues or pay expenses and the U.S.
dollar. Our expenses are not necessarily incurred in the currency in which revenue is generated,
and, as a result, we are required from time to time to convert currencies to meet our obligations.
These currency conversions are subject to exchange rate fluctuations, in particular changes to the
value of the euro, Canadian dollar, Australian dollar, New Zealand dollar, Singapore dollar, and
pound sterling relative to the U.S. dollar, which could adversely affect our business and the
results of operations. During the three months ended April 30, 2007 and 2006, we incurred foreign
currency exchange losses of $143,000 and $30,000, respectively.
ITEM 4. — CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures as of April 30, 2007. The
term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the “Exchange Act”), means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the company’s management, including its principal executive
and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Our management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of our disclosure controls and procedures as of April 30,
2007, our chief executive officer and chief financial officer concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance level.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended April 30, 2007 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II
ITEM 1. — LEGAL PROCEEDINGS
SEC Investigations
See Part I Item 3 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2007 for
a discussion of legal proceedings. There were no material developments in these proceedings during
the quarter ended April 30, 2007.
ITEM 1A. – RISK FACTORS
Investors should carefully consider the risks described below before making an investment decision
with respect to our shares.
While the following risk factors have been updated to reflect developments subsequent to the filing
of our Annual Report on Form 10-K for the fiscal year ended January 31, 2007, there have been no
material changes to the risk factors included in that report.
21
RISKS RELATED TO LEGAL PROCEEDINGS
WE ARE THE SUBJECT OF AN ONGOING INVESTIGATION BY THE SEC.
While preparing the closing balance sheet of SmartForce as at September 6, 2002, the date on which
we closed our merger with SkillSoft Corporation (the Merger), certain accounting matters were
identified relating to the historical financial statements of SmartForce (which, following the
Merger, are no longer our historical financial statements). On November 19, 2002, we announced our
intent to restate the SmartForce financial statements for 1999, 2000, 2001 and the first two
quarters of 2002. We have settled several class action lawsuits that were filed following the
announcement of the restatement.
We are the subject of a formal order of private investigation entered by the SEC relating to the
restatement. On June 2, 2005, the Boston District Office of the SEC informed us that it had made a
preliminary determination to recommend that the SEC bring a civil injunctive action against us.
Under the SEC’s rules, we are permitted to make a so-called Wells Submission in which we seek to
persuade the SEC that no such action should be commenced. In the event we are unable to resolve the
SEC’s potential claims by agreement, we intend to make such a submission.
The Boston District Office of the SEC informed us in January 2007 that we are the subject of an
informal investigation concerning options granting practices at SmartForce for the period beginning
April 12, 1996 through July 12, 2002, which was prior to the Merger. We have received a document
request from the SEC and are in the process of responding to the request. The SEC has also informed
us that the investigation relating to the restatement of historical SmartForce financial statements
cannot be concluded until the investigation relating to the option granting practices of SmartForce
has been completed.
We continue to cooperate with the SEC in these matters. At the present time, we are unable to
predict the outcome of these matters or their potential impact on our operating results or
financial position. However, we may incur substantial costs in connection with the SEC
investigations, and these investigations could cause a diversion of management time and attention.
In addition, we could be subject to penalties, fines or regulatory sanctions or claims by our
former officers, directors or employees for indemnification of costs they may incur in connection
with the SEC investigations. Any or all of those issues could adversely affect our business,
operating results and financial position.
CLAIMS THAT WE INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS COULD RESULT IN COSTLY
LITIGATION OR ROYALTY PAYMENTS TO THIRD PARTIES, OR REQUIRE US TO REENGINEER OR CEASE SALES OF OUR
PRODUCTS OR SERVICES.
Third parties have in the past and could in the future claim that our current or future products
infringe their intellectual property rights. Any claim, with or without merit, could result in
costly litigation or require us to reengineer or cease sales of our products or services, any of
which could have a material adverse effect on our business. Infringement claims could also result
in an injunction in the use of our products or require us to enter into royalty or licensing
agreements. Licensing agreements, if required, may not be available on terms acceptable to the
combined company or at all.
From time to time we learn of parties that claim broad intellectual property rights in the
e-learning area that might implicate our offerings. These parties or others could initiate actions
against us in the future.
WE COULD INCUR SUBSTANTIAL COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS RELATING TO OUR CUSTOMERS’
USE OF OUR PRODUCTS AND SERVICES.
Many of the business interactions supported by our products and services are critical to our
customers’ businesses. Any failure in a 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 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
22
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.
23
SOME OF OUR INTERNATIONAL SUBSIDIARIES HAVE NOT COMPLIED WITH REGULATORY REQUIREMENTS RELATING TO
THEIR FINANCIAL STATEMENTS AND TAX RETURNS.
We operate our business in various foreign countries through subsidiaries organized in those
countries. Due to our restatement of the historical SmartForce financial statements, some of our
subsidiaries have not filed their audited statutory financial statements and have been delayed in
filing their tax returns in their respective jurisdictions. As a result, some of these foreign
subsidiaries may be subject to regulatory restrictions, penalties and fines and additional taxes.
RISKS RELATED TO THE OPERATION OF OUR BUSINESS
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. THIS LIMITS YOUR ABILITY TO EVALUATE
HISTORICAL FINANCIAL RESULTS AND INCREASES THE LIKELIHOOD THAT OUR RESULTS WILL FALL BELOW MARKET
ANALYSTS’ EXPECTATIONS, WHICH COULD CAUSE THE PRICE OF OUR ADSs TO DROP RAPIDLY AND SEVERELY.
We have in the past experienced fluctuations in our quarterly operating results, and we anticipate
that these fluctuations will continue. As a result, we believe that our quarterly revenue, expenses
and operating results are likely to vary significantly in the future. If in some future quarters
our results of operations are below the expectations of public market analysts and investors, this
could have a severe adverse effect on the market price of our ADSs.
Our operating results have historically fluctuated, and our operating results may in the future
continue to fluctuate, as a result of factors, which include (without limitation):
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• |
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the size and timing of new/renewal agreements and upgrades; |
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• |
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royalty rates; |
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• |
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the announcement, introduction and acceptance of new products, product enhancements and
technologies by us and our competitors; |
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• |
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the mix of sales between our field sales force, our other direct sales channels and our telesales channels; |
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general conditions in the U.S. or the international economy; |
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the loss of significant customers; |
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delays in availability of new products; |
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product or service quality problems; |
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seasonality — due to the budget and purchasing cycles of our customers, we expect our
revenue and operating results will generally be strongest in the second half of our fiscal
year and weakest in the first half of our fiscal year; |
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• |
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the spending patterns of our customers; |
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• |
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litigation costs and expenses, including the costs related to the restatement of the SmartForce financial statements; |
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• |
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non-recurring charges related to acquisitions; |
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• |
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growing competition that may result in price reductions; and |
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• |
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currency fluctuations. |
Most of our expenses, such as rent and most employee compensation, do not vary directly with
revenue and are difficult to adjust in the short-term. As a result, if revenue for a particular
quarter is below our expectations, we could not proportionately reduce operating expenses for that
quarter. Any such revenue shortfall would, therefore, have a disproportionate effect on our
expected operating results for that quarter.
24
PAST AND FUTURE ACQUISITIONS, INCLUDING THE RECENT ACQUISITION OF THOMSON NETG, MAY NOT PRODUCE THE
BENEFITS WE ANTICIPATE AND COULD HARM OUR CURRENT OPERATIONS.
One aspect of our business strategy is to pursue acquisitions of businesses or technologies that
will contribute to our future growth. On May 14, 2007, we acquired Thomson NETg from The Thomson
Corporation. However, we may not be successful in identifying or consummating future attractive
acquisition opportunities. Moreover, any acquisitions we do consummate, including the Thomson NETg
acquisition, may not produce benefits commensurate with the purchase price we pay or our
expectations for the acquisition. In addition, acquisitions, including the Thomson NETg
acquisition, involve numerous risks, including:
| |
• |
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Difficulties in integrating the technologies, operations, financial controls and personnel of the acquired company; |
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• |
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Difficulties in retaining or transitioning customers of the acquired company; |
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Diversion of management time and focus; |
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The incurrence of unanticipated expenses associated with the acquisition or the
assumption of unknown liabilities or unanticipated financial, accounting or other problems
of the acquired company; and |
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• |
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Accounting charges related to the acquisition, including restructuring charges,
write-offs of in-process research and development costs, and subsequent impairment charges
relating to goodwill or other intangible assets acquired in the transaction. |
WE HAVE EXPERIENCED NET LOSSES IN THE PAST, AND WE MAY BE UNABLE TO MAINTAIN PROFITABILITY.
We recorded a net loss of $20.1 million for the fiscal year ended January 31, 2005, net income of
$35.2 million for the fiscal year ended January 31, 2006 and net income of $24.2 million for the
fiscal year ended January 31, 2007. While we achieved profitability in the last two fiscal years,
we cannot guarantee that our business will sustain profitability in any future period.
DEMAND FOR OUR PRODUCTS AND SERVICES MAY BE ESPECIALLY SUSCEPTIBLE TO ADVERSE ECONOMIC CONDITIONS.
Our business and financial performance may be damaged by adverse financial conditions affecting our
target customers or by a general weakening of the economy. Companies may not view training products
and services as critical to the success of their businesses. If these companies experience
disappointing operating results, whether as a result of adverse economic conditions, competitive
issues or other factors, they may decrease or forego education and training expenditures before
limiting their other expenditures or in conjunction with lowering other expenses.
INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES, WHICH MAY
RESULT IN REDUCED REVENUE AND GROSS PROFITS AND LOSS OF MARKET SHARE.
The market for corporate education and training solutions is highly fragmented and competitive. We
expect the market to become increasingly competitive due to the lack of significant barriers to
entry. In addition to increased competition from new companies entering into the market,
established companies are entering into the market through acquisitions of smaller companies, which
directly compete with us, and this trend is expected to continue. We may also face competition from
publishing companies, vendors of application software and HR outsourcers, including those vendors
with whom we have formed development and marketing alliances.
25
Our primary sources of direct competition are:
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• |
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third-party suppliers of instructor-led information technology, business, management and
professional skills education and training; |
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• |
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technology companies that offer learning courses covering their own technology products; |
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• |
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suppliers of computer-based training and e-learning solutions; |
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• |
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internal education, training departments and HR outsourcers of potential customers; and |
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• |
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value-added resellers and network integrators. |
Growing competition may result in price reductions, reduced revenue and gross profits and loss of
market share, any one of which would have a material adverse effect on our business. Many of our
current and potential competitors have substantially greater financial, technical, sales, marketing
and other resources, as well as greater name recognition, and we expect to face increasing price
pressures from competitors as managers demand more value for their training budgets. Accordingly,
we may be unable to provide e-learning solutions that compare favorably with new instructor-led
techniques, other interactive training software or new e-learning solutions.
WE RELY ON A LIMITED NUMBER OF THIRD PARTIES TO PROVIDE US WITH EDUCATIONAL CONTENT FOR OUR COURSES
AND REFERENCEWARE, AND OUR ALLIANCES WITH THESE THIRD PARTIES MAY BE TERMINATED OR FAIL TO MEET OUR
REQUIREMENTS.
We rely on a limited number of independent third parties to provide us with the educational content
for a majority of our courses based on learning objectives and specific instructional design
templates that we provide to them. We do not have exclusive arrangements or long-term contracts
with any of these content providers. If one or more of our third party content providers were to
stop working with us, we would have to rely on other parties to develop our course content. In
addition, these providers may fail to develop new courses or existing courses on a timely basis. We
cannot predict whether new content or enhancements would be available from reliable alternative
sources on reasonable terms. In addition, our subsidiary, Books 24x7.com (Books) relies on third
party publishers to provide all of the content incorporated into its Referenceware products. If one
or more of these publishers were to terminate their license with us, we may not be able to find
substitute publishers for such content. In addition, we may be forced to pay increased royalties to
these publishers to continue our licenses with them.
In the event that we are unable to maintain or expand our current development alliances or enter
into new development alliances, our operating results and financial condition could be materially
adversely affected. Furthermore, we will be required to pay royalties to some of our development
partners on products developed with them, which could reduce our gross margins. We expect that cost
of revenues may fluctuate from period to period in the future based upon many factors, including
the revenue mix and the timing of expenses associated with development alliances. In addition, the
collaborative nature of the development process under these alliances may result in longer
development times and less control over the timing of product introductions than for e-learning
offerings developed solely by us. Our strategic alliance partners may from time to time renegotiate
the terms of their agreements with us, which could result in changes to the royalty or other
arrangements, adversely affecting our results of operations.
The independent third party strategic partners we rely on for educational content and product
marketing may compete with us, harming our results of operations. Our agreements with these third
parties generally do not restrict them from developing courses on similar topics for our
competitors or from competing directly with us. As a result, our competitors may be able to
duplicate some of our course content and gain a competitive advantage.
OUR SUCCESS DEPENDS ON OUR ABILITY TO MEET THE NEEDS OF THE RAPIDLY CHANGING MARKET.
The market for education and training software is characterized by rapidly changing technology,
evolving industry standards, changes in customer requirements and preferences and frequent
introductions of new products and services embodying new technologies. New methods of providing
interactive education in a technology-based format are being developed and offered in the
marketplace, including intranet and Internet offerings. In addition, multimedia and other product
functionality features are being added to educational software. Our future success will depend upon
the extent to which we are able to develop and implement products which address these emerging
market requirements on a cost effective and timely basis. Product development is risky because it
is difficult to
26
foresee developments in technology, coordinate technical personnel and identify and eliminate
design flaws. Any significant delay in releasing new products could have a material adverse effect
on the ultimate success of our products and could reduce sales of predecessor products. We may not
be successful in introducing new products on a timely basis. In addition, new products introduced
by us may fail to achieve a significant degree of market acceptance or, once accepted, may fail to
sustain viability in the market for any significant period. If we are unsuccessful in addressing
the changing needs of the marketplace due to resource, technological or other constraints, or in
anticipating and responding adequately to changes in customers’ software technology and
preferences, our business and results of operations would be materially adversely affected. We,
along with the rest of the industry, face a challenging and competitive market for IT spending that
has resulted in reduced contract value for our formal learning product lines. This pricing pressure
has a negative impact on revenue for these product lines and may have a continued or increased
adverse impact in the future.
THE E-LEARNING MARKET IS A DEVELOPING MARKET, AND OUR BUSINESS WILL SUFFER IF E-LEARNING IS NOT
WIDELY ACCEPTED.
The market for e-learning is a new and emerging market. Corporate training and education have
historically been conducted primarily through classroom instruction and have traditionally been
performed by a 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 may still choose to design, develop,
deliver or manage all or part of their education and training internally. If technology-based
learning does not become widespread, or if companies do not use the products and services of third
parties to develop, deliver or manage their training needs, then our products and service may not
achieve commercial success.
NEW PRODUCTS INTRODUCED BY US MAY NOT BE SUCCESSFUL.
An important part of our growth strategy is the development and introduction of new products that
open up new revenue streams for us. Despite our efforts, we cannot assure you that we will be
successful in developing and introducing new products, or that any new products we do introduce
will meet with commercial acceptance. The failure to successfully introduce new products will not
only hamper our growth prospects but may also adversely impact our net income due to the
development and marketing expenses associated with those new products.
THE SUCCESS OF OUR E-LEARNING STRATEGY DEPENDS ON THE RELIABILITY AND CONSISTENT PERFORMANCE OF OUR
INFORMATION SYSTEMS AND INTERNET INFRASTRUCTURE.
The success of our e-learning strategy is highly dependent on the consistent performance of our
information systems and Internet infrastructure. If our Web site fails for any reason or if it
experiences any unscheduled downtimes, even for only a short period, our business and reputation
could be materially harmed. We have in the past experienced performance problems and unscheduled
downtime, and these problems could recur. We currently rely on third parties for proper functioning
of computer infrastructure, delivery of our e-learning applications and the performance of our
destination site. Our systems and operations could be damaged or interrupted by fire, flood, power
loss, telecommunications failure, break-ins, earthquake, financial patterns of hosting providers
and similar events. Any system failures could adversely affect customer usage of our solutions and
user traffic results in any future quarters, which could adversely affect our revenue and operating
results and harm our reputation with corporate customers, subscribers and commerce partners.
Accordingly, the satisfactory performance, reliability and availability of our Web site and
computer infrastructure 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.
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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 our individual
customers’ networking infrastructures to alleviate overloading and congestion. If these
improvements are not made, and the quality of networks degrades, the ability of our customers to
use our products and services will be hindered and our revenue may suffer.
Additionally, a requirement for the continued growth of accessing e-learning solutions over the
Internet is the secure transmission of confidential information over public networks. Failure to
prevent security breaches into our products or our customers’ networks, or well-publicized security
breaches affecting the Internet in general could significantly harm our growth and revenue.
Advances in computer capabilities, new discoveries in the field of cryptography or other
developments may result in a compromise of technology we use to protect content and transactions,
our products or our customers’ proprietary information in our databases. Anyone who is able to
circumvent our security measures could misappropriate proprietary and confidential information or
could cause interruptions in our operations. We may be required to expend significant capital and
other resources to protect against such security breaches or to address problems caused by security
breaches. The privacy of users may also deter people from using the Internet to conduct
transactions that involve transmitting confidential information.
WE DEPEND ON A FEW KEY PERSONNEL TO MANAGE AND OPERATE THE BUSINESS AND MUST BE ABLE TO ATTRACT AND
RETAIN HIGHLY QUALIFIED EMPLOYEES.
Our success is largely dependent on the personal efforts and abilities of our senior management.
Failure to retain these executives, or the loss of certain additional senior management personnel
or other key employees, could have a material adverse effect on our business and future prospects.
We are also dependent on the continued service of our key sales, content development and
operational personnel and on our ability to attract, train, motivate and retain highly qualified
employees. In addition, we depend on writers, programmers, Web designers and graphic artists. We
may be unsuccessful in attracting, training, retaining or motivating key personnel. The inability
to hire, train and retain qualified personnel or the loss of the services of key personnel could
have a material adverse effect upon our business, new product development efforts and future
business prospects.
OUR BUSINESS IS SUBJECT TO CURRENCY FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Due to our multinational operations, our operating results are subject to fluctuations based upon
changes in the exchange rates between the currencies in which revenue is collected or expenses are
paid. In particular, the value of the U.S. dollar against the euro and related currencies will
impact our operating results. Our expenses will not necessarily be incurred in the currency in
which revenue is generated, and, as a result, we will be required from time to time to convert
currencies to meet our obligations. These currency conversions are subject to exchange rate
fluctuations, and changes to the value of the euro, pound sterling and other currencies relative to
the U.S. dollar could adversely affect our business and results of operations.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS. UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY
MAY RESULT IN DEVELOPMENT OF PRODUCTS OR SERVICES THAT COMPETE WITH OURS.
Our success depends to a degree upon the protection of our rights in intellectual property. We rely
upon a combination of patent, copyright, and trademark laws to protect our proprietary rights. We
have also entered into, and will continue to enter into, confidentiality agreements with our
employees, consultants and third parties to seek to limit and protect the distribution of
confidential information. However, we have not signed protective agreements in every case.
Although we have taken steps to protect our proprietary rights, these steps may be inadequate.
Existing patent, copyright, and trademark laws offer only limited protection. Moreover, the laws of
other countries in which we market our products may afford little or no effective protection of our
intellectual property. Additionally, unauthorized parties may copy aspects of our products,
services or technology or obtain and use information that we regard as proprietary. Other parties
may also breach protective contracts we have executed or will in the future execute. We may not
become aware of, or have adequate remedies in the event of, a breach. Litigation may be necessary
in the future to enforce or to determine the validity and scope of our intellectual property rights
or to determine the
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validity and scope of the proprietary rights of others. Even if we were to prevail, such litigation
could result in substantial costs and diversion of management and technical resources.
OUR NON-U.S. OPERATIONS ARE SUBJECT TO RISKS WHICH COULD NEGATIVELY IMPACT OUR FUTURE OPERATING
RESULTS.
We expect that international operations will continue to account for a significant portion of our
revenues Operations outside of the United States are subject to inherent risks, including:
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difficulties or delays in developing and supporting non-English language versions of our products and services; |
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political and economic conditions in various jurisdictions; |
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difficulties in staffing and managing foreign subsidiary operations; |
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longer sales cycles and account receivable payment cycles; |
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multiple, conflicting and changing governmental laws and regulations; |
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foreign currency exchange rate fluctuations; |
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protectionist laws and business practices that may favor local competitors; |
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difficulties in finding and managing local resellers; |
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potential adverse tax consequences; and |
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the absence or significant lack of legal protection for intellectual property rights. |
Any of these factors could have a material adverse effect on our future operations outside of the
United States, which could negatively impact our future operating results.
OUR SALES CYCLE MAY MAKE IT DIFFICULT TO PREDICT OUR OPERATING RESULTS.
The period between our initial contact with a potential customer and the purchase of our products
by that customer typically ranges from three to twelve months or more. Factors that contribute to
our long sales cycle, include:
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our need to educate potential customers about the benefits of our products; |
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competitive evaluations by customers; |
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the customers’ internal budgeting and approval processes; |
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the fact that many customers view training products as discretionary spending, rather
than purchases essential to their business; and |
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the fact that we target large companies, which often take longer to make purchasing
decisions due to the size and complexity of the enterprise. |
These long sales cycles make it difficult to predict the quarter in which sales may occur. Delays
in sales could cause significant variability in our revenue and operating results for any
particular period.
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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 revenue, loss of market
share, diversion of product development resources, injury to reputation or damage to efforts to
build brand awareness, any of which could have a material adverse effect on our business, operating
results and financial condition.
RISKS RELATED TO OUR ADSs
THE MARKET PRICE OF OUR ADSs MAY FLUCTUATE AND MAY NOT BE SUSTAINABLE.
The market price of our ADSs has fluctuated significantly since our initial public offering and is
likely to continue to be volatile. In addition, in recent years the stock market in general, and
the market for shares of technology stocks in particular, have experienced extreme price and volume
fluctuations, which have often been unrelated to the operating performance of affected companies.
The market price of our ADSs may continue to experience significant fluctuations in the future,
including fluctuations that are unrelated to our performance. As a result of these fluctuations in
the price of our ADSs, it is difficult to predict what the price of our ADSs will be at any point
in the future, and you may not be able to sell your ADSs at or above the price that you paid for
them.
SALES OF LARGE BLOCKS OF OUR ADSs COULD CAUSE THE MARKET PRICE OF OUR ADSs TO DROP SIGNIFICANTLY,
EVEN IF OUR BUSINESS IS DOING WELL.
Some shareholders own 5% or more of our outstanding shares. We cannot predict the effect, if any,
that public sales of these shares will have on the market price of our ADSs. If our significant
shareholders, or our directors and officers, sell substantial amounts of our ADSs in the public
market, or if the public perceives that such sales could occur, this could have an adverse impact
on the market price of our ADSs, even if there is no relationship between such sales and the
performance of our business.
ITEM 2. — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. — DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. — OTHER INFORMATION
The Company filed Form 10-K/A with the Securities and Exchange Commission on May 31, 2007. Under
Item 14 “Principal Accountant Fees and Services” the Company had stated tax fees to be $625,283 for
the fiscal year ended January 31, 2007. The Company has subsequently revised its tax fees to be
$713,023 for the fiscal year ended January 31, 2007. As a result the previously stated total fees
of $2,517,993 are now $2,605,733.
ITEM 6. — EXHIBITS
See the Exhibit Index attached hereto.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SKILLSOFT PUBLIC LIMITED COMPANY |
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Date: June 8, 2007
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By:
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/s/ Thomas J. McDonald |
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Thomas J. McDonald |
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Chief Financial Officer |
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EXHIBIT INDEX
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2.2
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Side Letter to Purchase Agreement, dated as of May 14, 2007, by and
among SkillSoft Public Limited Company, SkillSoft Corporation,
Thompson Learning Inc., Thomson Global Resources, T.N.H. France
SARL, T.N.H. Holdings GmbH, The Thomson Corporation (Australia) Pty
Ltd., and Thomson Information & Solutions Limited. (incorporated by
reference to Exhibit 2.2 of SkillSoft PLC’s Current Report on Form
8-K as filed with the Securities and Exchange Commission on May 14,
2007 (File No. 000-25674)). |
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10.1
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Credit Agreement, dated May 14, 2007, among the Company, SkillSoft
Corporation, as borrower, Credit Suisse, as administrative agent and
collateral agent, Credit Suisse Securities (USA) LLC, as sole
bookrunner and sole lead arranger, Keybank National Association, as
syndication agent, Silicon Valley Bank, as documentation agent, and
the lenders party thereto. (incorporated by reference to Exhibit
10.1 of SkillSoft PLC’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on May 14, 2007 (File No.
000-25674)). |
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10.2
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Guarantee and Collateral Agreement, dated May 14, 2007, among the
Company and the subsidiary guarantors party thereto. (incorporated
by reference to Exhibit 10.2 of SkillSoft PLC’s Current Report on
Form 8-K as filed with the Securities and Exchange Commission on May
14, 2007 (File No. 000-25674)). |
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10.3
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Summary of Fiscal 2008 Executive Cash Incentive Compensation Program
(incorporated by reference to Exhibit 99.1 to SkillSoft PLC’s
Current Report on Form 8-K as filed with the Securities and Exchange
Commission on May 25, 2007 (File No. 000-25674)). |
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31.1†
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Certification of SkillSoft PLC’s Chief Executive Officer pursuant to
Rule 13a-14(a)/Rule 15(d)-14(a) under the Securities Exchange Act of
1934. |
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31.2†
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Certification of SkillSoft PLC’s Chief Financial Officer pursuant to
Rule 13a-14(a)/Rule 15(d)-14(a) under the Securities Exchange Act of
1934. |
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32.1†
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Certification of SkillSoft PLC’s Chief Executive Officer pursuant to
Rule 13a-14(b)/Rule 15d-14(b) under the Securities Exchange Act of
1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
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32.2†
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Certification of SkillSoft PLC’s Chief Financial Officer pursuant to
Rule 13a-14(b)/Rule 15d-14(b) under the Securities Exchange Act of
1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
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