form10q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(MARK
ONE)
R
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
|
FOR
THE QUARTERLY PERIOD ENDED OCTOBER 31, 2008
|
|
|
OR |
|
|
£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
|
FOR
THE TRANSITION PERIOD FROM ________ TO
________ |
COMMISSION
FILE NUMBER 000-25674
SKILLSOFT
PUBLIC LIMITED COMPANY
(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
REPUBLIC
OF IRELAND
|
N/A
|
(STATE
OR OTHER JURISDICTION OF
|
(I.R.S.
EMPLOYER
|
INCORPORATION
OR ORGANIZATION)
|
IDENTIFICATION
NO.)
|
|
|
107
NORTHEASTERN BOULEVARD
|
|
NASHUA,
NEW HAMPSHIRE
|
03062
|
(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES)
|
(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 R No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large
accelerated filer R
|
Accelerated
filer £
|
|
|
Non-accelerated
filer £
|
Smaller
reporting company £
|
|
|
(Do
not check if a smaller reporting company) |
|
|
Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act). Yes £ No R
On
December 5, 2008, the registrant had outstanding 101,672,676 Ordinary Shares
(issued or issuable in exchange for the registrant’s outstanding American
Depositary Shares).
SKILLSOFT
PLC
FORM
10-Q
FOR THE
QUARTER ENDED OCTOBER 31, 2008
SKILLSOFT
PLC AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
|
|
OCTOBER
31, 2008 (Unaudited)
|
|
|
JANUARY
31, 2008
|
|
ASSETS
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
64,764 |
|
|
$ |
76,059 |
|
Short-term
investments
|
|
|
8,804 |
|
|
|
13,525 |
|
Restricted
cash
|
|
|
3,745 |
|
|
|
3,963 |
|
Accounts
receivable, net
|
|
|
72,546 |
|
|
|
171,708 |
|
Prepaid
expenses and other current assets
|
|
|
19,114 |
|
|
|
29,061 |
|
Deferred
tax assets
|
|
|
10,326 |
|
|
|
13,476 |
|
Total
current assets
|
|
|
179,299 |
|
|
|
307,792 |
|
Property
and equipment, net
|
|
|
7,914 |
|
|
|
7,210 |
|
Intangible
assets, net
|
|
|
16,242 |
|
|
|
29,887 |
|
Goodwill
|
|
|
256,606 |
|
|
|
256,196 |
|
Deferred
tax assets
|
|
|
75,005 |
|
|
|
87,866 |
|
Other
assets
|
|
|
3,702 |
|
|
|
7,730 |
|
Total
assets
|
|
$ |
538,768 |
|
|
$ |
696,681 |
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Current
maturities of long term debt
|
|
$ |
1,455 |
|
|
$ |
2,000 |
|
Accounts
payable
|
|
|
1,772 |
|
|
|
2,139 |
|
Accrued
compensation
|
|
|
7,952 |
|
|
|
24,577 |
|
Accrued
expenses
|
|
|
19,528 |
|
|
|
29,507 |
|
Deferred
revenue
|
|
|
142,642 |
|
|
|
219,161 |
|
Total
current liabilities
|
|
|
173,349 |
|
|
|
277,384 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
142,242 |
|
|
|
197,000 |
|
Other
long-term liabilities
|
|
|
5,932 |
|
|
|
9,209 |
|
Total
long-term liabilities
|
|
|
148,174 |
|
|
|
206,209 |
|
Commitments
and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Ordinary
shares, €0.11 par value: 250,000,000 shares authorized; 104,088,871 and
111,663,813 shares issued at October 31, 2008 and January 31, 2008,
respectively
|
|
|
11,342 |
|
|
|
12,397 |
|
Additional
paid-in capital
|
|
|
541,967 |
|
|
|
591,303 |
|
Treasury
stock, at cost, 657,100 and 6,533,884 ordinary shares at October 31, 2008
and January 31, 2008, respectively
|
|
|
(5,401 |
) |
|
|
(24,524 |
) |
Accumulated
deficit
|
|
|
(329,678 |
) |
|
|
(361,663 |
) |
Accumulated
other comprehensive loss
|
|
|
(985 |
) |
|
|
(4,425 |
) |
Total
stockholders' equity
|
|
|
217,245 |
|
|
|
213,088 |
|
Total
liabilities and stockholders' equity
|
|
$ |
538,768 |
|
|
$ |
696,681 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SKILLSOFT
PLC AND SUBSIDIARIES
(UNAUDITED,
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
|
|
THREE
MONTHS ENDED
|
|
|
NINE
MONTHS ENDED
|
|
|
|
OCTOBER
31,
|
|
|
OCTOBER
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$ |
83,064 |
|
|
$ |
75,124 |
|
|
$ |
248,039 |
|
|
$ |
203,733 |
|
Cost
of revenues (1)
|
|
|
9,374 |
|
|
|
8,282 |
|
|
|
28,013 |
|
|
|
23,827 |
|
Cost
of revenues - amortization of intangible assets
|
|
|
1,690 |
|
|
|
1,740 |
|
|
|
5,170 |
|
|
|
3,683 |
|
Gross
profit
|
|
|
72,000 |
|
|
|
65,102 |
|
|
|
214,856 |
|
|
|
176,223 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development (1)
|
|
|
12,138 |
|
|
|
13,710 |
|
|
|
38,136 |
|
|
|
35,315 |
|
Selling
and marketing (1)
|
|
|
26,387 |
|
|
|
25,227 |
|
|
|
82,185 |
|
|
|
71,489 |
|
General
and administrative (1)
|
|
|
9,130 |
|
|
|
9,449 |
|
|
|
27,454 |
|
|
|
25,572 |
|
Amortization
of intangible assets
|
|
|
2,738 |
|
|
|
3,634 |
|
|
|
8,475 |
|
|
|
7,955 |
|
Merger
and integration related expenses
|
|
|
- |
|
|
|
2,616 |
|
|
|
761 |
|
|
|
11,144 |
|
SEC
investigation
|
|
|
- |
|
|
|
105 |
|
|
|
49 |
|
|
|
1,328 |
|
Total
operating expenses
|
|
|
50,393 |
|
|
|
54,741 |
|
|
|
157,060 |
|
|
|
152,803 |
|
Operating
income
|
|
|
21,607 |
|
|
|
10,361 |
|
|
|
57,796 |
|
|
|
23,420 |
|
Other
income (expense), net
|
|
|
752 |
|
|
|
(642 |
) |
|
|
(282 |
) |
|
|
(1,026 |
) |
Interest
income
|
|
|
248 |
|
|
|
654 |
|
|
|
1,440 |
|
|
|
2,990 |
|
Interest
expense
|
|
|
(3,103 |
) |
|
|
(3,927 |
) |
|
|
(10,116 |
) |
|
|
(7,741 |
) |
Income
before provision (benefit) for income taxes from continuing
operations
|
|
|
19,504 |
|
|
|
6,446 |
|
|
|
48,838 |
|
|
|
17,643 |
|
Provision
(benefit) for income taxes
|
|
|
7,438 |
|
|
|
270 |
|
|
|
18,790 |
|
|
|
(7,886 |
) |
Income
from continuing operations
|
|
|
12,066 |
|
|
|
6,176 |
|
|
|
30,048 |
|
|
|
25,529 |
|
(Loss)
income from discontinued operations, net of income taxes
(2)
|
|
|
(37 |
) |
|
|
(351 |
) |
|
|
1,937 |
|
|
|
173 |
|
Net
income
|
|
$ |
12,029 |
|
|
$ |
5,825 |
|
|
$ |
31,985 |
|
|
$ |
25,702 |
|
Net
income per share (Note 10):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- continuing operations
|
|
$ |
0.12 |
|
|
$ |
0.06 |
|
|
$ |
0.29 |
|
|
$ |
0.25 |
|
Basic
- discontinued operations
|
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
0.02 |
|
|
$ |
0.00 |
|
|
|
$ |
0.12 |
|
|
$ |
0.06 |
|
|
$ |
0.31 |
|
|
$ |
0.25 |
|
Basic
weighted average common shares outstanding
|
|
|
104,182,736 |
|
|
|
104,789,720 |
|
|
|
104,779,876 |
|
|
|
104,165,555 |
|
Diluted
- continuing operations
|
|
$ |
0.11 |
|
|
$ |
0.06 |
|
|
$ |
0.28 |
|
|
$ |
0.24 |
|
Diluted
- discontinued operations
|
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
0.02 |
|
|
$ |
0.00 |
|
|
|
$ |
0.11 |
|
|
$ |
0.05 |
† |
|
$ |
0.29 |
† |
|
$ |
0.24 |
|
Diluted
weighted average common shares outstanding
|
|
|
107,500,272 |
|
|
|
108,552,456 |
|
|
|
108,656,388 |
|
|
|
108,018,673 |
|
________
† Does
not add due to rounding.
(1)
|
Share-based
compensation included in cost of revenues and operating
expenses:
|
|
|
THREE
MONTHS ENDED OCTOBER 31,
|
|
|
NINE
MONTHS ENDED OCTOBER 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Cost
of revenues
|
|
$ |
52 |
|
|
$ |
54 |
|
|
$ |
163 |
|
|
$ |
119 |
|
Research
and development
|
|
|
227 |
|
|
|
226 |
|
|
|
695 |
|
|
|
659 |
|
Selling
and marketing
|
|
|
412 |
|
|
|
442 |
|
|
|
1,434 |
|
|
|
1,309 |
|
General
and administrative
|
|
|
731 |
|
|
|
657 |
|
|
|
2,212 |
|
|
|
1,921 |
|
(2)
|
Discontinued
operations:
|
Income
tax (benefit) expense
|
|
$ |
(25 |
) |
|
$ |
(311 |
) |
|
$ |
1,306 |
|
|
$ |
76 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SKILLSOFT
PLC AND SUBSIDIARIES
(UNAUDITED,
IN THOUSANDS)
|
NINE
MONTHS ENDED
|
|
|
OCTOBER
31,
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities from continuing
operations:
|
|
|
|
|
|
Income
from continuing operations
|
$ |
30,048 |
|
|
$ |
25,529 |
|
Adjustments
to reconcile net income from continuing operations
|
|
|
|
|
|
|
|
to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
Share-based
compensation
|
|
4,504 |
|
|
|
4,008 |
|
Depreciation
and amortization
|
|
3,921 |
|
|
|
5,481 |
|
Amortization
of intangible assets
|
|
13,645 |
|
|
|
11,638 |
|
(Recovery
of) provision for bad debts
|
|
(187 |
) |
|
|
470 |
|
Provision
(benefit) for income taxes - non-cash
|
|
15,727 |
|
|
|
(8,986 |
) |
Non-cash
interest expense
|
|
898 |
|
|
|
481 |
|
Realized
loss on sale of assets, net
|
|
- |
|
|
|
(58 |
) |
Tax
benefit related to exercise of non-qualified stock options
|
|
(1,247 |
) |
|
|
- |
|
Changes
in current assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
92,756 |
|
|
|
36,344 |
|
Prepaid
expenses and other current assets
|
|
7,907 |
|
|
|
14,145 |
|
Accounts
payable
|
|
(858 |
) |
|
|
(1,313 |
) |
Accrued
expenses, including long-term
|
|
(23,395 |
) |
|
|
(45,563 |
) |
Deferred
revenue
|
|
(68,608 |
) |
|
|
(33,707 |
) |
Deferred
tax asset
|
|
306 |
|
|
|
- |
|
Net
cash provided by operating activities from continuing
operations
|
|
75,417 |
|
|
|
8,469 |
|
Cash
flows from investing activities from continuing
operations:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
(4,066 |
) |
|
|
(2,321 |
) |
Cash
used in purchase of business, net of cash acquired
|
|
(250 |
) |
|
|
(278,923 |
) |
Purchases
of investments
|
|
(18,545 |
) |
|
|
(9,575 |
) |
Maturities
of investments
|
|
23,337 |
|
|
|
48,378 |
|
Release
of restricted cash, net
|
|
218 |
|
|
|
16,183 |
|
Net
cash provided by (used in) investing activities from continuing
operations
|
|
694 |
|
|
|
(226,258 |
) |
Cash
flows from financing activities from continuing
operations:
|
|
|
|
|
|
|
|
Borrowings
under long term debt, net of debt financing costs
|
|
- |
|
|
|
194,133 |
|
Exercise
of stock options
|
|
16,412 |
|
|
|
8,280 |
|
Proceeds
from employee stock purchase plan
|
|
3,063 |
|
|
|
2,776 |
|
Principal
payment on long term debt
|
|
(55,303 |
) |
|
|
(500 |
) |
Acquisition
of treasury stock
|
|
(56,495 |
) |
|
|
- |
|
Tax
benefit related to exercise of non-qualified stock options
|
|
1,247 |
|
|
|
- |
|
Net
cash (used in) provided by financing activities from continuing
operations
|
|
(91,076 |
) |
|
|
204,689 |
|
Change
in cash from discontinued operations
|
|
6,880 |
|
|
|
(7,013 |
) |
Effect
of exchange rate changes on cash and cash equivalents
|
|
(3,210 |
) |
|
|
1,864 |
|
Net
increase in cash and cash equivalents
|
|
(11,295 |
) |
|
|
(18,249 |
) |
Cash
and cash equivalents, beginning of period
|
|
76,059 |
|
|
|
48,612 |
|
Cash
and cash equivalents, end of period
|
$ |
64,764 |
|
|
$ |
30,363 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SKILLSOFT
PLC AND SUBSIDIARIES
(UNAUDITED)
1. THE
COMPANY
SkillSoft
PLC (the Company or SkillSoft) was incorporated in Ireland on August 8, 1989.
The Company is a leading software as a service (SaaS) provider of on-demand
e-learning and performance support solutions for global enterprises, government,
education and small to medium-sized businesses. SkillSoft helps companies to
maximize business performance through a combination of content, online
information resources, flexible technologies and support services. SkillSoft is
the surviving corporation in a merger between SmartForce PLC and SkillSoft
Corporation on September 6, 2002 (the SmartForce Merger). On May 14, 2007, the
Company acquired NETg from The Thomson Corporation for approximately $254.7
million in cash (see Note 6).
2. BASIS
OF PRESENTATION
The
accompanying, unaudited condensed consolidated financial statements included
herein have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission (the SEC). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States
have been condensed or omitted pursuant to such SEC rules and regulations. In
the opinion of management, the condensed consolidated financial statements
reflect all material adjustments (consisting only of those of a normal and
recurring nature) which are necessary to present fairly the consolidated
financial position of the Company as of October 31, 2008, the results of its
operations for the three and nine months ended October 31, 2008 and 2007 and
cash flows for the nine months ended October 31, 2008 and 2007. 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, 2008. The results of operations for the interim periods are not
necessarily indicative of the results of operations to be expected for the full
fiscal year.
3. CASH,
CASH EQUIVALENTS, RESTRICTED CASH AND INVESTMENTS
The
Company considers all highly liquid investments with original maturities of 90
days or less at the time of purchase to be cash equivalents. At October 31, 2008
and January 31, 2008, cash equivalents consisted mainly of commercial paper,
federal agency notes and treasury bills.
At
October 31, 2008, the Company had approximately $3.7 million of restricted cash:
approximately $2.7 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 in certificates of deposits with a commercial
bank pursuant to terms of certain facilities lease agreements.
The
Company accounts for certain investments in commercial paper, corporate debt
securities, certificates of deposit and federal agency notes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments
in Debt and Equity Securities” (SFAS No. 115). Under SFAS No. 115,
securities that the Company does not intend to hold to maturity or for trading
purposes are reported at market value, and are classified as available for sale.
At October 31, 2008, the Company’s investments were classified as available for
sale and had an average maturity of approximately 26 days.
4.
REVENUE RECOGNITION
The
Company generates revenue primarily from the license of its products, the
provision of professional services and from the provision of hosting/application
service provider (ASP) services.
The
Company follows the provisions of the American Institute of Certified Public
Accountants Statement of Position (SOP) 97-2, “Software Revenue
Recognition,” as amended by SOP 98-4 and SOP 98-9, as well as Emerging
Issues Task Force (EITF) Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables” and SEC Staff Accounting Bulletin No. 104, “Revenue Recognition,” 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 content offering selected by a customer, the
number of users within the customer’s organization and the term of the license
agreement (generally one, two or three years). License agreements permit
customers to exchange course titles, generally on the contract anniversary date.
Hosting services are separately licensed for an additional fee. 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 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 which is
recognized on a straight-line basis over the period the services are provided.
Upfront fees are recorded over the contract period.
The
Company generally bills the annual license fee for the first year of a
multi-year license agreement in advance and license fees for subsequent years of
multi-year license arrangements are billed on the anniversary date of the
agreement. Occasionally, the Company bills customers on a quarterly basis. In
some circumstances, the Company offers payment terms of up to six months from
the initial shipment date or anniversary date for multi-year license agreements
to its customers. To the extent that a customer is given extended payment terms
(defined by the Company as greater than six months), revenue is recognized as
payments become due, assuming all of the other elements of revenue recognition
have been satisfied.
The
Company typically recognizes revenue from resellers when both the sale to the
end user has occurred and the collectibility of cash from the reseller is
probable. With respect to reseller agreements with minimum commitments, the
Company recognizes revenue related to the portion of the minimum commitment that
exceeds the end user sales at the expiration of the commitment period provided
the Company has received payment. If a definitive service period can be
determined, revenue is recognized ratably over the term of the minimum
commitment period, provided that payment has been received or collectibility is
probable.
The
Company provides professional services, including instructor led training,
customized content development, website development/hosting 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 EITF Issue No. 01-14,
“Income Statement
Characterization of Reimbursements Received for “Out-of-Pocket” Expenses
Incurred.”
The
Company records revenue net of applicable sales tax collected. Taxes collected
from customers are recorded as part of accrued expenses on the balance sheet and
are remitted to state and local taxing jurisdictions based on the filing
requirements of each jurisdiction.
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.
The
Company’s contracts often include an uptime guarantee for solutions hosted on
its servers whereby customers may be entitled to credits in the event of
non-performance. 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 these costs become 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 October 31, 2008, 2,363,263
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
March 31, 2008 for a detailed description of the Company’s share option
plans.
A summary
of share option activity under the Company’s plans during the nine months ended
October 31, 2008 is as follows:
Share
Options
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value (in thousands)
|
|
Outstanding,
January 31, 2008
|
|
|
16,630,763 |
|
|
$ |
7.05 |
|
|
|
4.76 |
|
|
|
|
Granted
|
|
|
50,000 |
|
|
|
10.81 |
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,636,058 |
) |
|
|
4.51 |
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(69,420 |
) |
|
|
15.01 |
|
|
|
|
|
|
|
|
Outstanding,
October 31, 2008
|
|
|
12,975,285 |
|
|
$ |
7.74 |
|
|
|
4.13 |
|
|
$ |
20,240 |
|
Exercisable,
October 31, 2008
|
|
|
9,757,981 |
|
|
$ |
8.10 |
|
|
|
3.77 |
|
|
$ |
16,255 |
|
Vested
and Expected to Vest, October 31, 2008 (1)
|
|
|
12,564,616 |
|
|
$ |
7.77 |
|
|
|
4.09 |
|
|
$ |
19,731 |
|
___________
(1)
|
Represents
the number of vested options as of October 31, 2008 plus the number of
unvested options as of October 31, 2008 that are expected to vest adjusted
for an estimated forfeiture rate of 12.9%. The Company recognizes expense
incurred under SFAS No. 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
October 31, 2008 of $7.70 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 October 31, 2008.
The total
intrinsic value of options exercised during the three months ended October 31,
2008 and 2007 was approximately $10.8 million and $0.6 million, respectively.
The total intrinsic value of options exercised during the nine months ended
October 31, 2008 and 2007 was approximately $21.7 million and $6.3 million,
respectively.
6.
ACQUISITION
On May
14, 2007, the Company acquired NETg from The Thomson Corporation for
approximately $254.7 million in cash. The combined entity offers a more robust
multi-modal solution that includes online courses, simulations, digitized books
and an on-line video library as well as complementary learning technologies. The
acquisition supports SkillSoft’s mission to deliver comprehensive and high
quality learning solutions and positions the Company to serve the demands of
this growing marketplace.
The
acquisition of NETg was accounted for as a business combination under SFAS No.
141, “Business Combinations”
(SFAS No. 141), using the purchase
method. Accordingly, the results of NETg have been included in the Company’s
consolidated financial statements since the date of acquisition.
SUPPLEMENTAL
PRO-FORMA INFORMATION
The
Company concluded that the NETg acquisition represented a material business
combination. The following are unaudited pro forma results of operations of the
Company and NETg assuming the NETg acquisition occurred on February 1, 2007,
with pro forma adjustments to give effect to amortization of intangible assets,
an increase in interest expense on acquisition financing and certain other
adjustments:
|
|
NINE
MONTHS ENDED OCTOBER 31, 2007
|
|
|
|
|
|
Revenue
|
|
$ |
266,233 |
|
Net
income (loss)
|
|
|
(18,800 |
) |
Net
income (loss) per share - basic
|
|
$ |
(0.18 |
) |
Net
income (loss) per share - diluted
|
|
$ |
(0.17 |
) |
The
unaudited pro forma results above are not necessarily indicative of results of
operations that may have actually occurred had the acquisition of NETg occurred
on the date noted.
7.
SPECIAL CHARGES
MERGER
AND EXIT COSTS
(a) Merger
and Exit Costs Recognized as Liabilities in Purchase Accounting
In
connection with the closing of the NETg acquisition on May 14, 2007, the
Company’s management effected an acquisition integration effort to eliminate
redundant facilities and employees and to reduce the overall cost structure of
the acquired business to better align the Company’s operating expenses with
existing economic conditions, business requirements and the Company’s operating
model. Pursuant to this restructuring, the Company recorded $11.6 million of
costs related to severance and related benefits, costs to vacate leased
facilities and other pre-Acquisition liabilities. These costs were accounted for
under EITF Issue No. 95-3, “Recognition of Liabilities in
Connection with Purchase Business Combinations.” These costs, which were
recognized as a liability assumed in the purchase business combination, were
included in the allocation of the purchase price.
The
reductions in employee headcount totaled approximately 360 employees from the
administrative, sales, marketing and development functions, and amounted to a
liability of approximately $8.9 million, which was paid against the exit plan
accrual through October 31, 2008.
In
connection with the exit plan, the Company abandoned certain leased facilities
and has a remaining facilities consolidation liability of $0.1 million as of
October 31, 2008, consisting of lease termination costs, broker commissions and
other facility costs. As part of the plan, two larger sites and a number of
small locations were vacated. The fair value of the lease termination costs was
calculated with certain assumptions related to the Company’s estimated cost
recovery efforts from subleasing vacated space, including (i) the time period
over which the property will remain vacant, (ii) the sublease terms and (iii)
the sublease rates.
The
Company’s merger and exit liabilities which include previous merger and
acquisition transactions are recorded in accrued expenses and long-term
liabilities (see Note 16). Activity in the nine month period ended October 31,
2008 is as follows (in thousands):
|
|
EMPLOYEE
SEVERANCE AND RELATED COSTS
|
|
|
CLOSEDOWN
OF FACILITIES
|
|
|
OTHER
|
|
|
TOTAL
|
|
Merger
and exit accrual January 31, 2008
|
|
$ |
1,646 |
|
|
$ |
3,224 |
|
|
$ |
1,370 |
|
|
$ |
6,240 |
|
Adjustment
to provision for merger and exit costs in connection with the acquisition
of NETg
|
|
|
212 |
|
|
|
(139 |
) |
|
|
(971 |
) |
|
|
(898 |
) |
Adjustment
to provision for merger and exit costs in connection with the acquisition
of SmartForce
|
|
|
(899 |
) |
|
|
266 |
|
|
|
- |
|
|
|
(633 |
) |
Payments
made during the nine months ended October 31, 2008
|
|
|
(959 |
) |
|
|
(1,723 |
) |
|
|
(164 |
) |
|
|
(2,846 |
) |
Merger
and exit accrual October 31, 2008
|
|
$ |
- |
|
|
$ |
1,628 |
|
|
$ |
235 |
|
|
$ |
1,863 |
|
The
Company anticipates that the remainder of the merger and exit accrual will be
paid by October 2011 as follows (in thousands):
Year
Ended January 31,
|
|
|
|
2009
(remaining 3 months)
|
|
$ |
409 |
|
2010
|
|
|
452 |
|
2011
|
|
|
1,002 |
|
Total
|
|
$ |
1,863 |
|
In
accordance with SFAS No. 146, “Accounting for Costs Associated with
Exit or Disposal Activities,” the costs of continued employment of
certain former NETg employees during the transition period were expensed as
incurred and are included in merger and integration related expenses in the
accompanying statements of income.
(b) Discontinued
Operations
In
connection with the NETg acquisition, the Company discontinued four businesses
acquired from NETg because the Company believed those product offerings did not
represent areas that could grow in a manner consistent with the Company’s
operating model or be consistent with the Company’s profit model or strategic
initiatives. The businesses that were identified as discontinued operations were
Financial Campus, NETg Press, Interact Now and Wave.
Summarized
results of operations for discontinued operations, which includes a gain of $2.0
million, net of income tax resulting from proceeds received during the second
quarter of fiscal 2009 from the Company’s sale of the assets related to the NETg
Press business in October 2007, are as follows (in thousands):
|
|
THREE
MONTHS ENDED
|
|
|
NINE
MONTHS ENDED
|
|
|
|
OCTOBER
31,
|
|
|
OCTOBER
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from discontinued operations
|
|
$ |
(64 |
) |
|
$ |
3,134 |
|
|
$ |
224 |
|
|
$ |
6,760 |
|
(Loss)
gain from discontinued operations before income tax
|
|
|
(62 |
) |
|
|
(662 |
) |
|
|
3,243 |
|
|
|
249 |
|
Income
tax (benefit) provision
|
|
|
(25 |
) |
|
|
(311 |
) |
|
|
1,306 |
|
|
|
76 |
|
(Loss)
gain from discontinued operations
|
|
$ |
(37 |
) |
|
$ |
(351 |
) |
|
$ |
1,937 |
|
|
$ |
173 |
|
(c) Restructuring
Activity
in the Company’s restructuring accrual was as follows (in
thousands):
Total
restructuring accrual as of January 31, 2008
|
|
$ |
961 |
|
Payments
made during the nine months ended October 31, 2008
|
|
|
(464 |
) |
Restructuring
charges incurred during the nine months ended October 31,
2008
|
|
|
- |
|
Total
restructuring accrual as of October 31, 2008
|
|
$ |
497 |
|
The
Company anticipates that the remainder of the restructuring accrual will be paid
out in fiscal 2009.
8.
GOODWILL AND INTANGIBLE ASSETS
Intangible
assets are as follows (in thousands):
|
OCTOBER
31, 2008
|
|
JANUARY
31, 2008
|
|
|
GROSS
|
|
|
|
NET
|
|
GROSS
|
|
|
|
NET
|
|
|
CARRYING
|
|
ACCUMULATED
|
|
CARRYING
|
|
CARRYING
|
|
ACCUMULATED
|
|
CARRYING
|
|
|
AMOUNT
|
|
AMORTIZATION
|
|
AMOUNT
|
|
AMOUNT
|
|
AMORTIZATION
|
|
AMOUNT
|
|
Internally
developed software/ courseware
|
|
$ |
38,717 |
|
|
$ |
38,430 |
|
|
$ |
287 |
|
|
$ |
38,717 |
|
|
$ |
33,259 |
|
|
$ |
5,458 |
|
Customer
contracts
|
|
|
36,848 |
|
|
|
25,231 |
|
|
|
11,617 |
|
|
|
36,848 |
|
|
|
19,846 |
|
|
|
17,002 |
|
Non-compete
|
|
|
6,900 |
|
|
|
4,140 |
|
|
|
2,760 |
|
|
|
6,900 |
|
|
|
2,070 |
|
|
|
4,830 |
|
Trademarks
and trade names
|
|
|
2,725 |
|
|
|
2,047 |
|
|
|
678 |
|
|
|
2,725 |
|
|
|
1,028 |
|
|
|
1,697 |
|
Books
trademark
|
|
|
900 |
|
|
|
- |
|
|
|
900 |
|
|
|
900 |
|
|
|
- |
|
|
|
900 |
|
|
|
$ |
86,090 |
|
|
$ |
69,848 |
|
|
$ |
16,242 |
|
|
$ |
86,090 |
|
|
$ |
56,203 |
|
|
$ |
29,887 |
|
$900,000
of intangible assets within trademarks of our Books24x7 business unit are
considered indefinite-lived and accordingly, no amortization expense is
recorded.
The change in goodwill at October 31, 2008 from the amount recorded
at January 31, 2008 is as follows:
|
|
|
|
Gross
carrying amount of goodwill, January 31, 2008
|
|
$ |
256,196 |
|
Payment
of contingent purchase price of Targeted Learning
Corporation
|
|
|
250 |
|
Adjustments
to allocation of purchase price for NETg acquisition
|
|
|
953 |
|
Utilization
of acquired tax benefit
|
|
|
(793 |
) |
Gross
carrying amount of goodwill, October 31, 2008
|
|
$ |
256,606 |
|
The
Company will be conducting its annual impairment test of goodwill for fiscal
2009 in the fourth quarter.
9.
COMPREHENSIVE INCOME
SFAS No.
130, “Reporting Comprehensive
Income,” requires disclosure of all components of comprehensive income on
an annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period resulting from transactions,
other events and circumstances related to non-owner sources. Comprehensive
income for the three and nine months ended October 31, 2008 and 2007 was as
follows (in thousands):
|
|
THREE
MONTHS ENDED
|
|
|
NINE
MONTHS ENDED
|
|
|
|
OCTOBER
31,
|
|
|
OCTOBER
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
12,029 |
|
|
$ |
5,825 |
|
|
$ |
31,985 |
|
|
$ |
25,702 |
|
Other
comprehensive income (loss) — Foreign currency adjustment
|
|
|
2,013 |
|
|
|
(701 |
) |
|
|
2,309 |
|
|
|
(1,116 |
) |
Change
in fair value of interest rate hedge, net of tax
|
|
|
260 |
|
|
|
(842 |
) |
|
|
1,155 |
|
|
|
(1,074 |
) |
Unrealized
losses on available-for-sale securities
|
|
|
- |
|
|
|
22 |
|
|
|
(24 |
) |
|
|
(65 |
) |
Comprehensive
income
|
|
$ |
14,302 |
|
|
$ |
4,304 |
|
|
$ |
35,425 |
|
|
$ |
23,447 |
|
Accumulated
other comprehensive income as of October 31, 2008 and January 31, 2008 was as
follows (in thousands):
|
|
NINE
MONTHS ENDED OCTOBER 31, 2008
|
|
|
YEAR
ENDED JANUARY 31, 2008
|
|
Unrealized
(loss) gains on available-for-sale securities
|
|
$ |
(2 |
) |
|
$ |
22 |
|
Change
in fair value of interest rate hedge
|
|
|
(925 |
) |
|
|
(2,080 |
) |
Foreign
currency adjustment
|
|
|
(58 |
) |
|
|
(2,367 |
) |
Total
accumulated other comprehensive loss
|
|
$ |
(985 |
) |
|
$ |
(4,425 |
) |
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:
|
|
THREE
MONTHS ENDED
|
|
|
NINE
MONTHS ENDED
|
|
|
|
OCTOBER
31,
|
|
|
OCTOBER
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Basic
weighted average shares outstanding
|
|
|
104,182,736 |
|
|
|
104,789,720 |
|
|
|
104,779,876 |
|
|
|
104,165,555 |
|
Effect
of dilutive shares outstanding
|
|
|
3,317,536 |
|
|
|
3,762,736 |
|
|
|
3,876,512 |
|
|
|
3,853,118 |
|
Weighted
average shares outstanding, as adjusted
|
|
|
107,500,272 |
|
|
|
108,552,456 |
|
|
|
108,656,388 |
|
|
|
108,018,673 |
|
The
following share equivalents have been excluded from the computation of diluted
weighted average shares outstanding for the three and nine months ended October
31, 2008 and 2007, respectively, as they would be
anti-dilutive:
|
|
THREE
MONTHS ENDED
|
|
|
NINE
MONTHS ENDED
|
|
|
|
OCTOBER
31,
|
|
|
OCTOBER
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Options
to purchase shares
|
|
|
2,907,621 |
|
|
|
8,540,503 |
|
|
|
2,936,591 |
|
|
|
9,009,160 |
|
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.
For the
nine months ended October 31, 2008 and 2007, the Company’s effective tax rates
were 38.5% and (44.3%), respectively. For the nine month period ended October
31, 2008, the provision for income taxes consisted of a cash tax provision of
$3.1 million and a non-cash tax provision of $15.7 million. Included in the
non-cash tax provision of $15.7 million is a $1.1 million provision related to
tax return positions not likely to be sustained under audit. For the nine month
period ended October 31, 2007, the tax benefit of $7.9 million (44.3%) consisted
of a cash tax provision of $1.1 million and a non-cash tax benefit of $9.0
million. The non-cash tax benefit of $9.0 million was primarily the result of a
$25 million reduction in the Company’s U.S. deferred tax valuation allowance on
NOL carryforwards which was partially offset by the Company’s projected non-cash
provision for income taxes and the impact of certain tax adjustments required in
purchase accounting for the NETg acquisition.
At
October 31, 2008, the Company had $3.1 million of unrecognized tax benefits. If
recognized, $2.4 million would lower the Company’s effective tax rate. However,
upon the adoption of SFAS No. 141 (revised), “Business Combinations” (SFAS
No. 141(R)), changes in unrecognized tax benefits following an acquisition
generally will affect income tax expense, including any changes associated with
acquisitions that occurred prior to the effective date of SFAS No. 141(R). The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits as income tax expense. As of October 31, 2008, the Company had
approximately $0.9 million of accrued interest and penalties 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 2003.
12.
COMMITMENTS AND CONTINGENCIES
In
January 2007, the Boston District Office of the SEC informed the Company that it
was the subject of an informal investigation concerning option granting
practices at SmartForce for the period beginning April 12, 1996 through July 12,
2002 (the Option Granting Investigation). These grants were made prior to the
September 6, 2002 merger with
SmartForce PLC. The Company has produced documents in response to requests from
the SEC. The SEC staff has informed the Company that the staff has not
determined whether to close the Option Granting Investigation.
The
Company believes that it accounted for SmartForce stock option grants
appropriately in the merger. When SkillSoft Corporation and SmartForce merged on
September 6, 2002, SkillSoft Corporation was for accounting purposes deemed to
have acquired SmartForce. Accordingly, the pre-merger financial statements of
SmartForce are not included in the historical financial statements of the
Company, and the Company’s financial statements include the results of
SmartForce only from the date of the merger. Under applicable accounting rules,
the Company valued all of the outstanding SmartForce stock options assumed in
the merger at fair value upon consummation of the merger. Accordingly, the
Company believes that its accounting for SmartForce stock options will not be
affected by any error that SmartForce may have made in its own accounting for
stock option grants and that that the Option Granting Investigation should not
require any change in the Company’s financial statements.
The
Company has cooperated with the SEC in the Option Granting Investigation. At the
present time, the Company is unable to predict the outcome of the Option
Granting Investigation or its potential impact on its operating results or
financial position.
From time
to time, the Company is a party to or may be threatened with other litigation in
the ordinary course of its business. The Company regularly analyzes current
information, including, as applicable, the Company’s defenses and insurance
coverage and, as necessary, provides accruals for probable and estimable
liabilities for the eventual disposition of these matters. The Company is not a
party to any material legal proceedings.
13.
GEOGRAPHICAL DISTRIBUTION OF REVENUE
The
Company attributes revenue to different geographical areas on the basis of the
location of the customer. Revenues by geographical area for the three and nine
month periods ended October 31, 2008 and 2007 were as follows (in
thousands):
|
|
THREE
MONTHS ENDED
|
|
|
NINE
MONTHS ENDED
|
|
|
|
OCTOBER
31,
|
|
|
OCTOBER
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
61,998 |
|
|
$ |
59,076 |
|
|
$ |
181,807 |
|
|
$ |
160,161 |
|
United
Kingdom (UK)
|
|
|
11,358 |
|
|
|
8,234 |
|
|
|
34,980 |
|
|
|
22,493 |
|
Canada
|
|
|
3,047 |
|
|
|
2,726 |
|
|
|
9,831 |
|
|
|
7,855 |
|
Europe,
excluding UK
|
|
|
1,758 |
|
|
|
1,036 |
|
|
|
5,438 |
|
|
|
2,055 |
|
Australia/New
Zealand
|
|
|
3,343 |
|
|
|
3,290 |
|
|
|
11,306 |
|
|
|
9,128 |
|
Other
|
|
|
1,560 |
|
|
|
762 |
|
|
|
4,677 |
|
|
|
2,041 |
|
Total
revenue
|
|
$ |
83,064 |
|
|
$ |
75,124 |
|
|
$ |
248,039 |
|
|
$ |
203,733 |
|
14.
ACCRUED EXPENSES
Accrued
expenses in the accompanying condensed combined balance sheets consist of the
following (in thousands):
|
|
OCTOBER
31, 2008
|
|
|
JANUARY
31, 2008
|
|
Professional
fees
|
|
|
3,555 |
|
|
|
5,308 |
|
Sales
tax payable/VAT payable
|
|
|
1,324 |
|
|
|
4,366 |
|
Accrued
royalties
|
|
|
2,246 |
|
|
|
6,892 |
|
Other
accrued liabilities
|
|
|
12,403 |
|
|
|
12,941 |
|
Total
accrued expenses
|
|
$ |
19,528 |
|
|
$ |
29,507 |
|
15. OTHER
ASSETS
Other
assets in the accompanying condensed consolidated balance sheets consist of the
following (in thousands):
|
|
OCTOBER
31, 2008
|
|
|
JANUARY
31, 2008
|
|
Note
receivable – long term
|
|
|
- |
|
|
|
3,507 |
|
Debt
financing cost – long term (See Note 18)
|
|
|
3,498 |
|
|
|
4,126 |
|
Other
|
|
|
204 |
|
|
|
97 |
|
Total
other assets
|
|
$ |
3,702 |
|
|
$ |
7,730 |
|
16. OTHER
LONG TERM LIABILITIES
Other
long term liabilities in the accompanying condensed consolidated balance sheets
consist of the following (in thousands):
|
|
OCTOBER
31, 2008
|
|
|
JANUARY
31, 2008
|
|
Merger
accrual – long term
|
|
|
1,597 |
|
|
|
2,914 |
|
Interest
rate swap liability (See Note 19)
|
|
|
1,542 |
|
|
|
3,467 |
|
Other
|
|
|
2,793 |
|
|
|
2,828 |
|
Total
other long-term liabilities
|
|
$ |
5,932 |
|
|
$ |
9,209 |
|
In Note
17 of “Notes to Consolidated Financial Statements” presented in the Company’s
Annual Report on Form 10-K for the fiscal year ended January 31, 2008, the
Company had unintentionally included approximately $2.5 million in “Merger
accrual – long term” instead of “Other”. Such amount has been reclassified above
to reflect the correct presentation.
17. FAIR
VALUE OF FINANCIAL INSTRUMENTS
In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.
157, “Fair Value
Measurements,” which defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles
and expands disclosures about fair value measurements. As defined in SFAS No.
157, fair value is the amount that would be received if an asset was sold or a
liability transferred in an orderly transaction between market participants at
the measurement date.
Effective
February 1, 2008, the Company adopted the provision of SFAS No. 157 with respect
to its financial assets and liabilities that are measured at fair value within
the condensed consolidated financial statements. The adoption of SFAS No. 157
did not have a material impact on the Company’s financial position, results of
operations or cash flows.
In
February 2008, the FASB issued FASB Staff Position (FSP) SFAS No. 157-1, “Application of FASB Statement No.
157 to FASB Statement No. 13 and Its Related Interpretive Accounting
Pronouncements That Address Leasing Transactions” (FSP SFAS No. 157-1),
and FSP SFAS No. 157-2, “Effective Date of FASB Statement No.
157” (FSP SFAS No. 157-2). FSP SFAS No. 157-1 removes leasing from the
scope of SFAS No. 157, “Fair
Value Measurements.” FSP SFAS No. 157-2 delays the effective date of SFAS
No. 157 from 2008 to 2009 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The adoption of
FSP SFAS No. 157-1, effective February 1, 2008, did not impact the Company’s
financial position, results of operations or cash flows. The Company has
deferred the application of the provisions of this statement to its
non-financial assets and liabilities in accordance with FSP SFAS No. 157-2. The
Company does not expect that its adoption of the provisions of FSP SFAS 157-2
will have a material impact on its financial position, results of operations or
cash flows.
SFAS No.
157 establishes a fair value hierarchy that prioritizes the inputs used to
measure fair value that maximizes the use of observable inputs and minimizes the
use of unobservable inputs. Observable inputs are inputs that reflect the
assumptions that market participants would use in pricing the asset or liability
developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company’s assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the best information available in the
circumstances.
The three
levels of the fair value hierarchy established by SFAS No. 157 in order of
priority are as follows:
·
|
Level
1: Quoted prices in active markets for identical assets as of the
reporting date.
|
·
|
Level
2: Pricing inputs other than quoted prices in active markets included in
Level 1, which are either directly or indirectly observable as of the
reporting date. These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or similar
assets or liabilities in markets that are not
active.
|
·
|
Level
3: Unobservable inputs that reflect the Company’s assumptions about the
assumptions that market participants would use in pricing the asset or
liability. Unobservable inputs shall be used to measure fair value to the
extent that observable inputs are not
available.
|
The
Company’s commercial paper, corporate debt securities, certificates of deposit,
federal agency notes and treasury bills are classified as cash equivalents or
available for sale securities based on the original maturity period and carried
at fair value. These assets, except for federal agency notes and treasury bills,
are generally classified within Level 1 of the fair value hierarchy because they
are valued using quoted market prices. The Company classifies federal agency
notes and treasury bills within Level 2 of the fair value hierarchy because they
are valued using pricing inputs other than quoted prices in active markets
included in Level 1, which are either directly or indirectly observable as of
the reporting date.
The
Company recognizes all derivative financial instruments in its consolidated
financial statements at fair value in accordance with FASB Statement No. 133,
“Accounting for Derivative
Instruments and Hedging Activities.” The Company determines the fair
value of these instruments using the framework prescribed by SFAS No. 157 by
considering the estimated amount the Company would receive to terminate these
agreements at the reporting date and by taking into account current interest
rates and the creditworthiness of the counterparty. In certain instances, the
Company may utilize financial models to measure fair value. Generally, the
Company uses inputs that include quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, other observable inputs for the asset or
liability and inputs derived principally from, or corroborated by, observable
market data by correlation or other means. The Company has classified its
derivative liability within Level 2 of the fair value hierarchy because these
observable inputs are available for substantially the full term of the
derivative instrument.
The
following table summarizes the Company’s fair value hierarchy for its financial
assets and liabilities measured at fair value on a recurring basis as of October
31, 2008 (in thousands):
|
|
October
31, 2008
|
|
|
Quoted
Prices in Active Markets for Identical Assets Level 1
|
|
|
Significant
Other Observable Inputs Level 2
|
|
|
Significant
Unobservable Inputs Level 3
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents (1)
|
|
|
30,821 |
|
|
$ |
15,625 |
|
|
$ |
15,196 |
|
|
$ |
- |
|
Available
for sale securities (2)
|
|
|
8,804 |
|
|
$ |
6,505 |
|
|
$ |
2,299 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap agreement (Note 19)
|
|
|
1,542 |
|
|
$ |
- |
|
|
$ |
1,542 |
|
|
$ |
- |
|
(1)
Consists of high-grade commercial paper and federal agency notes with original
and remaining maturities of less than 90 days.
(2)
Consists of high-grade commercial paper, corporate debt securities and
certificates of deposit with original maturities of 90 days or more and
remaining maturities of less than 365 days.
18. LINE
OF CREDIT
The
Company has an agreement (the Credit Agreement) with certain lenders (the
Lenders) providing for a $225 million senior secured credit facility comprised
of a $200 million term loan facility and a $25 million revolving credit
facility. The term loan was used to finance the NETg acquisition and the
revolving credit facility may be used for general corporate
purposes.
On July
7, 2008, the Company entered into an amendment (Amendment No. 1) to the Credit
Agreement, and the related Guarantee and Collateral Agreement, dated May 14,
2007. The primary purpose of Amendment No. 1 was to expand the ability of the
Company and its subsidiaries to make repurchases of the Company’s Ordinary
Shares. The Company’s expanded repurchase ability under Amendment No. 1 is
conditioned on the absence of an event of default and a requirement that (i) the
leverage ratio shall be no greater than 2.75:1.0 as of the most recently
completed fiscal quarter ending prior to the date of such repurchase and (ii)
that the Company make a prepayment of the term loan under the Credit Agreement
in an amount equal to the dollar amount of any such repurchase. Such term loan
prepayments will not, however, be required in connection with the first $24.0
million of repurchases made from and after July 7, 2008.
Amendment
No. 1 also provides for an increase in the interest rate on the term loan
outstanding under the Credit Agreement and the payment of additional fees to the
Lenders upon execution of Amendment No. 1. Pursuant to Amendment No. 1, the term
loan will bear interest at a rate per annum equal to, at the Company’s election,
(i) a base rate plus a margin of 2.50% (increased from 1.75%) or (ii) adjusted
LIBOR plus a margin of 3.50% (increased from 2.75%).
In
connection with the Credit Agreement and Amendment No. 1, the Company incurred
debt financing costs of $5.9 million and $0.3 million, respectively, which were
capitalized and are being amortized as additional interest expense over the term
of the loans using the effective-interest method. During the three and nine
months ended October 31, 2008, the Company paid approximately $2.3 million and
$8.6 million, respectively, in interest. The Company recorded $0.3 million and
$0.9 million of amortized interest expense related to the capitalized debt
financing costs for the three and nine months ended October 31, 2008,
respectively. As of October 31, 2008, total unamortized debt financing costs of
$1.0 million and $3.5 million are recorded within prepaid expenses and other
current assets and non-current other assets, respectively, based on scheduled
future amortization.
During
the three and nine months ended October 31, 2008, the Company paid $0.4 million
and $55.3 million, respectively, against the term loan amount. As a result, the
balance outstanding under the term loan was $143.7 million at October 31, 2008,
with a weighted average interest rate for the three month period ended October
31, 2008 of 8.21%.
Future
scheduled minimum payments under this credit facility are as follows (in
thousands):
Fiscal
2009 (remaining 3 months)
|
|
$ |
364 |
|
Fiscal
2010
|
|
|
1,455 |
|
Fiscal
2011
|
|
|
1,455 |
|
Fiscal
2012
|
|
|
1,455 |
|
Fiscal
2013
|
|
|
1,455 |
|
Thereafter
|
|
|
137,513 |
|
Total
|
|
$ |
143,697 |
|
19.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The
Company has an interest rate swap to hedge the variable cash flows associated
with existing variable-rate debt. As of October 31, 2008 and 2007, the notional
amount on the interest rate swap was $100.4 million and $159.6 million,
respectively.
At
October 31, 2008 and 2007, the interest rate swap had a fair value of $(1.5)
million and $(1.1) million, respectively, which was included in other long-term
liabilities. No hedge ineffectiveness was recognized during the nine months
ended October 31, 2008 and 2007. For the three months ended October 31, 2008 and
2007, the change in net unrealized gains (losses) on the interest rate swap
designated as a cash flow hedge and reported as a component of comprehensive
income was a $0.3 million net gain and a $0.8 million net loss, respectively.
For the nine months ended October 31, 2008 and 2007, the change in net
unrealized gains (losses) on the interest rate swap designated as a cash flow
hedge and reported as a component of comprehensive income was a $1.2 million net
gain and a $1.1 million net loss, respectively.
Amounts
reported in accumulated other comprehensive income related to derivatives will
be incurred as interest expense as payments are made on the Company’s
variable-rate debt. The change in net unrealized gains (losses) on cash flow
hedges reflects a reclassification of $0.6 million of net unrealized losses and
$0.1 million of net unrealized gains from accumulated other comprehensive income
to interest expense for the three months ended October 31, 2008 and 2007,
respectively. The change in net unrealized gains (losses) on cash flow hedges
reflects a reclassification of $1.8 million of net unrealized losses and $0.2
million of net unrealized gains from accumulated other comprehensive income to
interest expense for the nine months ended October 31, 2008 and 2007,
respectively. During the twelve month period ending October 31, 2009, the
Company estimates that it will incur an additional $1.5 million of interest
expense relating to the interest rate swap.
20. SHARE
REPURCHASE PROGRAM
On April
8, 2008, the Company’s shareholders approved a program for the repurchase by the
Company of up to an aggregate of 10,000,000 ADSs. On September 24, 2008, the
Company’s shareholders approved an increase in the number of shares that may be
repurchased under the program to 25,000,000 and an extension of the repurchase
program until March 23, 2010. During the three and nine months ended October 31,
2008, the Company repurchased a total of 2,985,680 and 5,709,399 shares,
respectively, for a total purchase price, including commissions, of $29.3
million and $56.5 million, respectively. The Company retired 11,586,183 shares
during the three months ended October 31, 2008, including 6,533,884 shares
repurchased in prior fiscal years. As of October 31, 2008, 657,100 of the
repurchased shares have not been retired or canceled and are held as treasury
stock at cost; the Company intends to retire these shares in the near future. As
of October 31, 2008, 19,290,601 shares remain available for repurchase, subject
to certain limitations, under the shareholder approved repurchase
program.
21.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In
February 2007, the 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), which 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. The Company
adopted SFAS No. 159 on February 1, 2008 and elected not to measure any
additional financial instruments or other items at fair value. Adoption of SFAS
No. 159 did not have a material impact on the Company’s financial position or
results of operations.
In
December 2007, the FASB issued SFAS No. 141 (revised), “Business Combinations” (SFAS
No. 141(R)). SFAS No. 141(R) changes the accounting for business combinations
including the measurement of acquirer shares issued in consideration for a
business combination, the recognition of contingent consideration, the
accounting for pre-acquisition gain and loss contingencies, the recognition of
capitalized in-process research and development, the accounting for
acquisition-related restructuring cost accruals, the treatment of acquisition
related transaction costs and the recognition of changes in the acquirer’s
income tax valuation allowance. SFAS No. 141(R) is effective for the Company for
any business combinations for which the acquisition date is on or after February
1, 2009, with early adoption prohibited.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS
No. 160). SFAS No. 160 changes the accounting for noncontrolling (minority)
interests in consolidated financial statements including the requirements to
classify noncontrolling interests as a component of consolidated stockholders’
equity, and the elimination of “minority interest” accounting in results of
operations with earnings attributable to noncontrolling interests reported as
part of consolidated earnings. Additionally, SFAS No. 160 revises the accounting
for both increases and decreases in a parent’s controlling ownership interest.
SFAS No. 160 is effective for the Company in fiscal 2009, with early adoption
prohibited. Adoption of SFAS No. 160 did not have a material impact on the
Company’s financial position or results of operations.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133”
(SFAS No. 161). SFAS No. 161 applies to all derivative instruments and
nonderivative instruments that are designated and qualify as hedging instruments
pursuant to paragraphs 37 and 42 of Statement 133 and related hedged items
accounted for under FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (SFAS No. 133). SFAS No. 161 requires
entities to provide greater transparency through additional disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, results of operations, and
cash flows. SFAS No. 161 is effective for the Company on February 1, 2009. The
Company is currently analyzing the effect, SFAS No. 161 will have on
its disclosures related to the Company’s interest rate swap
agreement.
Any
statement in this Quarterly Report on Form 10-Q about our future expectations,
plans and prospects, including statements containing the words “believes,”
“anticipates,” “plans,” “expects,” “will” and similar expressions, constitute
forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995. Actual results may differ materially from those
indicated by such forward-looking statements as a result of various important
factors, including those set forth under Part II, Item 1A, “Risk
Factors.”
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and notes
appearing elsewhere in this Quarterly Report on Form 10-Q.
OVERVIEW
We are a
leading Software as a Service (SaaS) provider of on-demand e-learning and
performance support solutions for global enterprises, government, education and
small to medium-sized businesses. We enable business organizations to maximize
business 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 our
in-depth content resources, learning management system, virtual classroom
technology and support services.
We
generate revenue primarily from the license of our products, the provision of
professional services as well as from the provision of hosting and application
services. The pricing for our courses varies based upon the content offering
selected 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. Hosting services are separately licensed for an additional
fee.
Cost of
revenues includes the cost of materials (such as storage media), packaging,
shipping and handling, CD duplication, custom content development and hosting
services, royalties and certain infrastructure and occupancy expenses and
share-based compensation. We generally recognize these costs as incurred. Also
included in cost of revenues is amortization expense related to capitalized
software development costs and intangible assets related to developed software
and courseware acquired in business combinations.
We
account for software development costs in accordance with Statement of Financial
Accounting Standards (SFAS) No. 86, “Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed” (SFAS No. 86), which
requires the capitalization of certain computer software development costs
incurred after technological feasibility is established. No software development
costs incurred during the three and nine months of ended October 31, 2008 met
the requirements for capitalization in accordance with SFAS No. 86.
Research
and development expenses consist primarily of salaries and benefits, share-based
compensation, certain infrastructure and occupancy expenses, fees to consultants
and course content development fees. Selling and marketing expenses consist
primarily of salaries and benefits, share-based compensation, commissions,
advertising and promotion expenses, travel expenses and certain infrastructure
and occupancy expenses. General and administrative expenses consist primarily of
salaries and benefits, share-based compensation, consulting and service
expenses, legal expenses, audit and tax preparation costs, regulatory compliance
costs and certain infrastructure and occupancy expenses.
Amortization
of intangible assets represents the amortization of customer value, non-compete
agreements, trademarks and tradenames from our acquisitions of NETg, Targeted
Learning Corporation (TLC), Books24x7 and GoTrain Corp. and our merger with
SkillSoft Corporation (the SmartForce Merger).
Merger
and integration related expenses primarily consist of salaries paid to NETg
employees for transitional work assignments, facilities, systems and process
integration activities.
SEC
investigation expenses primarily consist of legal and consulting fees incurred
related to the SEC’s review of SmartForce’s option granting practices prior to
the SmartForce Merger, and historically, the SEC investigation relating to the
restatement of SmartForce’s financial statements for 1999, 2000, 2001 and the
first two quarters of 2002.
BUSINESS
OUTLOOK
In the
three and nine months ended October 31, 2008, we generated revenues of $83.1
million and $248.0 million, respectively, as compared to $75.1 million and
$203.7 million in the three and nine months ended October 31, 2007,
respectively. We reported net income in the three and nine months ended October
31, 2008 of $12.0 million and $32.0 million, respectively, as compared to $5.8
million and $25.7 million in the three and nine months ended October 31, 2007,
respectively.
While we
have achieved increased revenues and profitability from last fiscal year’s
comparable periods, we have experienced a more cautious customer environment due
to the current challenging global economic climate. In addition, we continue to
find ourselves in a challenging business environment due to (i) budgetary
constraints on information technology (IT) spending by our current and potential
customers, (ii) price competition and value-based competitive offerings from a
broad array of competitors in the learning market and (iii) the relatively slow
overall market adoption rate for e-learning solutions. In recent months the
challenging U.S. and global economic environment has put additional pressure on
potential budgetary constraints on IT and spending by our current and potential
customers. While we have seen some customers put spending on hold, we
have seen others increase spending and utilize e-learning as a cost effective
alternative to traditional learning. Despite the challenges, our core
business has performed predominately in accordance with our expectations. Our
recent revenue growth, as compared to last fiscal year, was primarily the result
of the realization of additional revenue from the increased customer base
associated with the NETg acquisition, third party resellers of our product and
international sales. Our growth prospects are strongest in developing our
expanded core business, which leverages our various product lines in a strategy
of bundled product offerings, as well as continued distribution partnerships
with third party resellers and international distribution growth. As a result,
we have increased our sales and marketing investment related to these areas to
help capitalize on the recent growth and potential continued growth. We have
also invested aggressively in research and development in those areas to
accelerate the time by which our planned new products will be available to our
customers. In order to pursue the small and medium-sized business markets, we
continue to invest in our telesales business unit; however, we have not seen
results in line with our expectations and as a result we have made and will
continue to make organizational changes as needed to achieve our expected
growth. We plan to continue to invest in our new business direct field sales
team and lead generator organizations.
In the
nine months ended October 31, 2008 and for the remainder of fiscal 2009, we have
and will continue to focus on revenue and earnings growth, excluding normal and
anticipated acquisition and integration related expenses, primarily
by:
•
|
evaluating
our current operating cost structure to determine where we can realize
cost efficiencies;
|
•
|
cross
selling and up selling;
|
•
|
looking
at new markets, which may include expanding or investing
internationally;
|
•
|
acquiring
new customers through our core sales team as well as through the recently
formed New Business Field Sales
team;
|
•
|
continuing
to execute on our new product and telesales distribution initiatives;
and
|
•
|
continuing
to evaluate merger and acquisition and possible partnership opportunities
that could contribute to our long-term
objectives.
|
CRITICAL
ACCOUNTING POLICIES
We
believe that our critical accounting policies are those related to revenue
recognition, amortization of intangible assets and impairment of goodwill,
share-based compensation, deferral of commissions, restructuring charges, legal
contingencies, income taxes and valuation of business combinations. We believe
these accounting policies are particularly important to the portrayal and
understanding of our financial position and results of operations and require
application of significant judgment by our management. In applying these
policies, management uses its judgment in making certain assumptions and
estimates. Our critical accounting policies are more fully described under the
heading “Critical Accounting Policies” in Note 2 of the Notes to the
Consolidated Financial Statements and under “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 March 31,
2008. The policies set forth in our Form 10-K have not changed.
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED OCTOBER 31, 2008 VERSUS THREE MONTHS ENDED OCTOBER 31,
2007
Revenue
|
THREE
MONTHS ENDED OCTOBER 31, 2008
|
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
|
PERCENT
CHANGE
|
|
2008
|
|
2007
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$ |
83,064 |
|
$ |
75,124 |
|
|
$ |
7,940 |
|
|
|
11 |
% |
Operating
income
|
|
21,607 |
|
|
10,361 |
|
|
|
11,246 |
|
|
|
109 |
% |
Revenue
increased primarily due to the realization of additional revenue resulting from
an increased customer base associated with the NETg acquisition in May 2007 as
well as from continued additional revenue earned under agreements with third
party resellers of our products. We expect revenue growth to continue through
the fourth quarter of fiscal 2009 compared to the fourth quarter of fiscal
2008.
|
|
THREE
MONTHS ENDED OCTOBER 31,
|
|
|
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
CHANGE
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
61,998 |
|
|
$ |
59,076 |
|
|
$ |
2,922 |
|
International
|
|
|
21,066 |
|
|
|
16,048 |
|
|
|
5,018 |
|
Total
|
|
$ |
83,064 |
|
|
$ |
75,124 |
|
|
$ |
7,940 |
|
Revenue
increased by 5% and 31% in the United States and internationally, respectively,
in the three months ended October 31, 2008 as compared to the three months ended
October 31, 2007 as a result of increased revenue generated from the NETg
acquisition and from existing customers and new business.
We exited
the fiscal year ended January 31, 2008 with non-cancelable backlog of
approximately $255 million compared to $181 million at January 31, 2007. 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 the
upcoming fiscal year. The amount scheduled to amortize into revenue during
fiscal 2009 is disclosed as “backlog” as of January 31, 2008. Amounts to be
added to deferred revenue during fiscal 2009 include subsequent installment
billings for ongoing contract periods as well as billings for committed contract
renewals. We have included this non-GAAP disclosure as 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 2009 revenue.
Costs
and Expenses
|
THREE
MONTHS ENDED OCTOBER 31, 2008
|
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
|
PERCENT
CHANGE
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
$ |
9,374 |
|
|
$ |
8,282 |
|
|
$ |
1,092 |
|
|
|
13 |
% |
As
a percentage of revenue
|
|
11 |
% |
|
|
11 |
% |
|
|
|
|
|
|
|
|
Cost
of revenues - amortization of intangible assets
|
|
1,690 |
|
|
|
1,740 |
|
|
|
(50 |
) |
|
|
(3 |
)% |
As
a percentage of revenue
|
|
2 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
The
increase in cost of revenue in the three months ended October 31, 2008 versus
the three months ended October 31, 2007 was primarily due to increased
revenues.
|
THREE
MONTHS ENDED OCTOBER 31, 2008
|
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
|
PERCENT
CHANGE
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
$ |
12,138 |
|
|
$ |
13,710 |
|
|
$ |
(1,572 |
) |
|
|
(11 |
)% |
As
a percentage of revenue
|
|
15 |
% |
|
|
18 |
% |
|
|
|
|
|
|
|
|
The
decrease in research and development expense in the three months ended October
31, 2008 versus the three months ended October 31, 2007 was primarily due to a
reduction in professional fees of $0.8 million as a result of last year’s third
fiscal quarter incurring costs attributable to the acquisition of NETg and the
subsequent integration initiatives, which were materially completed by July 31,
2008. This included maintaining multiple platforms and fulfilling obligations of
acquired customer contracts and product commitments assumed in the acquisition
of NETg. In addition, there was a decrease in compensation and benefits expense
of $0.2 million primarily due to performance bonuses being paid in the third
quarter of last fiscal year which were related to the acquisition of NETg and
the integration efforts of our employees. There was also a decrease
in facility charges of $0.4 million for the three months ended October 31, 2008
due to a reduction in redundant leased space assumed in the acquisition of
NETg.
|
THREE
MONTHS ENDED OCTOBER 31, 2008
|
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
|
PERCENT
CHANGE
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
$ |
26,387 |
|
|
$ |
25,227 |
|
|
$ |
1,160 |
|
|
|
5 |
% |
As
a percentage of revenue
|
|
32 |
% |
|
|
34 |
% |
|
|
|
|
|
|
|
|
The
increase in selling and marketing expense in the three months ended October 31,
2008 versus the three months ended October 31, 2007 was primarily due to an
increase in compensation and benefits of $1.1 million as a result of an increase
in sales and marketing headcount, which includes additional direct sales,
telesales and field support personnel required to service our increased customer
base as a result of the NETg acquisition, as well as incremental commissions
resulting from increased order intake and billings from our larger base business
and from the acquired NETg customer base. The decrease in selling and marketing
expense as a percentage of revenue in the three months ended October 31, 2008
versus the three months ended October 31, 2007 reflects the growth of revenue
partially offset by the aforementioned factors.
|
THREE
MONTHS ENDED OCTOBER 31, 2008
|
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
|
PERCENT
CHANGE
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
$ |
9,130 |
|
|
$ |
9,449 |
|
|
$ |
(319 |
) |
|
|
(3 |
)% |
As
a percentage of revenue
|
|
11 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
|
The
decrease in general and administrative expense in the three months ended October
31, 2008 versus the three months ended October 31, 2007 was primarily due to a
reduction in bad debt expense of $0.5 million resulting from an improvement in
collection efforts on accounts receivable as compared to the third quarter of
fiscal 2008, as well as a reduction in depreciation of fixed assets of $0.3
million and lower facility charges of $0.2 million. This was partially offset by
an increase of $0.6 million in professional fees, primarily related to an
on-going feasibility analysis related to our business realignment
strategy.
Amortization
of intangible assets decreased $0.9 million, or 25%, to $2.7 million in the
three months ended October 31, 2008 from $3.6 million in the three months ended
October 31, 2007. This decrease was primarily due to certain assets becoming
fully amortized during fiscal 2009.
In the
three months ended October 31, 2008, we did not incur material merger and
integration related expenses as compared to the $2.6 million in the three months
ended October 31, 2007. The significant charges in last year’s third quarter
were primarily due to the NETg acquisition. We do not expect to incur any
significant additional merger-related expenses related to the NETg acquisition
in future periods.
|
THREE
MONTHS ENDED OCTOBER 31, 2008
|
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
|
PERCENT
CHANGE
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
$ |
752 |
|
|
$ |
(642 |
) |
|
$ |
1,394 |
|
|
|
* |
|
As
a percentage of revenue
|
|
1 |
% |
|
|
(1 |
)% |
|
|
|
|
|
|
|
|
Interest
income
|
|
248 |
|
|
|
654 |
|
|
|
(406 |
) |
|
|
(62 |
)% |
As
a percentage of revenue
|
|
0 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
Interest
expense
|
|
(3,103 |
) |
|
|
(3,927 |
) |
|
|
(824 |
) |
|
|
(21 |
)% |
As
a percentage of revenue
|
|
(4 |
)% |
|
|
(5 |
)% |
|
|
|
|
|
|
|
|
____________
* Not
meaningful
Other
Income (Expense), Net
The
increase in other income (expense), net in the three months ended October 31,
2008 versus the three months ended October 31, 2007 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. During the three months ended October 31, 2008
the strengthening of the U.S. dollar in relation to certain other foreign
currencies resulted in significant gains, whereas in the same period of the
prior year, the U.S. dollar declined in relation to foreign
currencies.
Interest
Income
The
reduction in interest income in the three months ended October 31, 2008 versus
the three months ended October 31, 2007 was primarily due to a reduction in our
short-term investments and lower interest rates.
Interest
Expense
The
decrease in interest expense in the three months ended October 31, 2008 versus
the three months ended October 31, 2007 was primarily due to a reduction of our
debt as a result of $55.3 million in principal debt repayments made in the first
half of fiscal 2009.
Provision
for Income Taxes
|
THREE
MONTHS ENDED OCTOBER 31, 2008
|
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
|
PERCENT
CHANGE
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for income taxes
|
$ |
7,438 |
|
|
$ |
270 |
|
|
$ |
7,168 |
|
|
|
2,655 |
% |
As
a percentage of revenue
|
|
9 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
For the
three months ended October 31, 2008, the effective tax rate of 38.5% was higher
than the Irish statutory rate of 12.5% primarily due to earnings realized in
higher tax jurisdictions outside of Ireland. The tax benefit for the three
months ended October 31, 2007 was influenced significantly by certain purchase
accounting tax adjustments as a result of the NETg acquisition and the release
of $49.1 million of our valuation allowance primarily related to U.S. net
operating loss (NOL) carryforwards. Approximately $25 million of this valuation
allowance was recorded through reductions to tax expense and $24.1 million was
recorded through adjustments to goodwill.
Discontinued
Operations
In
connection with the NETg acquisition, we decided to discontinue four product
lines that were acquired from NETg because we believed these product offerings
did not represent businesses that could grow or produce operating results
consistent with our profit model. The product lines that have been identified as
discontinued operations are Wave, NETg Press, Interact Now and Financial Campus.
We recorded a loss from discontinued operations, net of tax, of $37
thousand in the three months ended October 31, 2008 versus a loss, net of
tax, of $0.4 million in the three months ended October 31, 2007. This was
primarily due to NETg Press and Financial Campus being sold in the three months
ended October 31, 2007. In addition, we exited the Wave business in the three
months ended October 31, 2007. We do not anticipate operations from discontinued
operation to materially affect our liquidity, financial condition or results of
operations going forward.
NINE
MONTHS ENDED OCTOBER 31, 2008 VERSUS NINE MONTHS ENDED OCTOBER 31,
2007
Revenue
|
NINE
MONTHS ENDED OCTOBER 31, 2008
|
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
|
PERCENT
CHANGE
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$ |
248,039 |
|
|
$ |
203,733 |
|
|
$ |
44,306 |
|
|
|
22 |
% |
Operating
income
|
|
57,796 |
|
|
|
23,420 |
|
|
|
34,376 |
|
|
|
147 |
% |
Revenue
increased primarily due to the realization of additional revenue resulting from
an increased customer base associated with the acquisition of NETg in May 2007
as well as from continued additional revenue earned under agreements with third
party resellers of our products.
|
|
NINE
MONTHS ENDED OCTOBER 31,
|
|
|
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
CHANGE
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
181,807 |
|
|
$ |
160,161 |
|
|
$ |
21,646 |
|
International
|
|
|
66,232 |
|
|
|
43,572 |
|
|
|
22,660 |
|
Total
|
|
$ |
248,039 |
|
|
$ |
203,733 |
|
|
$ |
44,306 |
|
Revenue
increased by 14% and 52% in the United States and internationally, respectively,
in the nine months ended October 31, 2008 as compared to the nine months ended
October 31, 2007 as a result of increased revenue generated from the NETg
acquisition and from existing customers and new business as well as from
continued additional revenue earned under agreements with third party resellers
of our products.
Costs
and Expenses
|
NINE
MONTHS ENDED OCTOBER 31, 2008
|
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
|
PERCENT
CHANGE
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
$ |
28,013 |
|
|
$ |
23,827 |
|
|
$ |
4,186 |
|
|
|
18 |
% |
As
a percentage of revenue
|
|
11 |
% |
|
|
12 |
% |
|
|
|
|
|
|
|
|
Cost
of revenues - amortization of intangible assets
|
|
5,170 |
|
|
|
3,683 |
|
|
|
1,487 |
|
|
|
40 |
% |
As
a percentage of revenue
|
|
2 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
The
increase in cost of revenue in the nine months ended October 31, 2008 versus the
nine months ended October 31, 2007 was primarily due to increased revenue. Gross
margin remained consistent during these periods.
The
increase in cost of revenue — amortization of intangible assets in the nine
months ended October 31, 2008 versus the nine months ended October 31, 2007 was
primarily due to the amortization of the intangible assets acquired in the
acquisition of NETg being included for the entire nine month period of fiscal
2009 versus less than six months in fiscal 2008, partially offset by certain
intangible assets becoming fully amortized since October 31, 2007.
|
NINE
MONTHS ENDED OCTOBER 31, 2008
|
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
|
PERCENT
CHANGE
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
$ |
38,136 |
|
|
$ |
35,315 |
|
|
$ |
2,821 |
|
|
|
8 |
% |
As
a percentage of revenue
|
|
15 |
% |
|
|
17 |
% |
|
|
|
|
|
|
|
|
The
increase in research and development expense in the nine months ended October
31, 2008 versus the nine months ended October 31, 2007 was primarily due to
additional contractor and outsource partner costs of $1.4 million to support
expanded product and software development initiatives resulting from our larger
customer base. A portion of these incremental costs are attributable to NETg
integration initiatives, which include maintaining multiple platforms,
fulfilling obligations of acquired customer contracts and product commitments
assumed in the acquisition of NETg. In addition, we incurred an increase in
compensation and benefits expense of $1.8 million as a result of an increase in
our research and development headcount. The decrease in research and development
expense as a percentage of revenue in the nine months ended October 31, 2008
versus the nine months ended October 31, 2007 reflects the growth of revenue
partially offset by the aforementioned factors.
|
NINE
MONTHS ENDED OCTOBER 31, 2008
|
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
|
PERCENT
CHANGE
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
$ |
82,185 |
|
|
$ |
71,489 |
|
|
$ |
10,696 |
|
|
|
15 |
% |
As
a percentage of revenue
|
|
33 |
% |
|
|
35 |
% |
|
|
|
|
|
|
|
|
The
increase in selling and marketing expense in the nine months ended October 31,
2008 versus the nine months ended October 31, 2007 was primarily due to an
increase in compensation and benefits of $8.6 million as a result of an increase
in our sales and marketing headcount, which includes additional direct sales,
telesales and field support personnel required to service our increased customer
base as a result of the NETg acquisition, as well as incremental commissions
resulting from increased order intake and billings from our larger base business
and from the acquired NETg customer base. In addition, we incurred incremental
marketing costs of $1.2 million to support our larger customer base, which
includes the expense associated with our efforts to retain customers acquired in
the NETg acquisition. The decrease in selling and marketing expense as a
percentage of revenue in the nine months ended October 31, 2008 versus the nine
months ended October 31, 2007 reflects the growth of revenue partially offset by
the aforementioned factors.
|
NINE
MONTHS ENDED OCTOBER 31, 2008
|
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
|
PERCENT
CHANGE
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
$ |
27,454 |
|
|
$ |
25,572 |
|
|
$ |
1,882 |
|
|
|
7 |
% |
As
a percentage of revenue
|
|
11 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
|
The
increase in general and administrative expense in the nine months ended October
31, 2008 versus the nine months ended October 31, 2007 was primarily due to an
increase of $3.4 million of professional fees primarily related to our share
capital reduction initiative aimed at increasing distributable profits in our
Irish parent entity as well as a feasibility analysis related to our business
realignment strategy. This was partially offset by a reduction in bad debt
expense of $0.5 million resulting from improved collection efforts on accounts
receivable balances compared to the fiscal 2008 third quarter, as well as a
reduction in depreciation of fixed assets of $0.7 million, which was due
primarily to certain fixed assets related to the NETg acquisition becoming fully
depreciated by the end of fiscal 2008 and lower facility charges of $0.3
million. The decrease in general and administrative expense as a percentage of
revenue in the nine months ended October 31, 2008 versus the nine months ended
October 31, 2007 reflects the growth of revenue partially offset by the
aforementioned factors.
Amortization
of intangible assets increased $0.5 million, or 7%, to $8.5 million in the nine
months ended October 31, 2008 from $8.0 million in the nine months ended October
31, 2007. This was primarily due to the amortization of the intangible assets
acquired in the acquisition of NETg being included for the entire nine month
period of fiscal 2009 versus less than six months in fiscal 2008, partially
offset by certain intangible assets becoming fully amortized since October 31,
2007.
Merger
and integration related expenses decreased $10.3 million, or 93%, to $0.8
million in the nine months ended October 31, 2008 from $11.1 in the nine months
ended October 31, 2007. This was primarily due to the significant charges in
last year’s second and third quarter when the NETg acquisition was consummated,
and the near completion of efforts undertaken to integrate NETg’s operations
into ours during fiscal 2009.
In the
nine months ended October 31, 2008, we did not incur material SEC investigation
expenses as compared to the $1.3 million in the nine months ended October 31,
2007. This is due to a decrease in legal activities related to the SEC’s
informal inquiry into the pre-merger option granting practices at
SmartForce.
|
|
NINE
MONTHS ENDED OCTOBER 31, 2008
|
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
|
PERCENT
CHANGE
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
$ |
(282 |
) |
|
$ |
(1,026 |
) |
|
$ |
(744 |
) |
|
|
(73 |
)% |
As
a percentage of revenue
|
|
|
(0 |
)% |
|
|
(1 |
)% |
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,440 |
|
|
|
2,990 |
|
|
|
(1,550 |
) |
|
|
(52 |
)% |
As
a percentage of revenue
|
|
|
1 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(10,116 |
) |
|
|
(7,741 |
) |
|
|
2,375 |
|
|
|
31 |
% |
As
a percentage of revenue
|
|
|
(4 |
)% |
|
|
(4 |
)% |
|
|
|
|
|
|
|
|
Other
Expense, Net
The
change in other expense, net in the nine months ended October 31, 2008 versus
the nine months ended October 31, 2007 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
reduction of interest income in the nine months ended October 31, 2008 versus
the nine months ended October 31, 2007 was primarily due to a reduction in our
short-term investments and lower interest rates.
Interest
Expense
The
increase in interest expense in the nine months ended October 31, 2008 versus
the nine months ended October 31, 2007 was primarily due to the interest expense
on the debt incurred for the acquisition of NETg being incurred for the full
nine months through October 31, 2008 versus only six months through October 31,
2007. This was partially offset by $55.3 million in prepayments made during
fiscal 2009 to reduce debt.
Provision
for Income Taxes
|
NINE
MONTHS ENDED OCTOBER 31, 2008
|
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
|
PERCENT
CHANGE
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for income taxes
|
$ |
18,790 |
|
|
$ |
(7,886 |
) |
|
$ |
26,676 |
|
|
|
(338 |
)% |
As
a percentage of revenue
|
|
8 |
% |
|
|
(4 |
)% |
|
|
|
|
|
|
|
|
For the
nine months ended October 31, 2008, the effective tax rate of 38.5% was higher
than the Irish statutory rate of 12.5% primarily due to earnings realized in
higher tax jurisdictions outside of Ireland. For the nine month period ended
October 31, 2007, the $8.2 million tax benefit was comprised of a $25 million
deferred tax benefit related to the reduction in our deferred tax asset
valuation allowance, which was partially offset by the effects of certain
purchase accounting tax adjustments related to the NETg
acquisition.
Discontinued
Operations
Income
from discontinued operations was $1.9 million in the nine months ended October
31, 2008 versus $0.2 million during the nine months ended October 31,
2007. This increase was primarily due to the acquirer of our former
NETg Press business prepaying the remaining portion of the purchase price for
the NETg Press business during the nine months ended October 31, 2008, which
resulted in a gain from the disposal of $2.0 million, net of income
tax.
LIQUIDITY
AND CAPITAL RESOURCES
As of
October 31, 2008, our principal source of liquidity was our cash and cash
equivalents and short-term investments, which totaled $73.6 million. This
compares to $89.6 million at January 31, 2008.
Net cash
provided by operating activities of $75.4 million for the nine months ended
October 31, 2008 was primarily due to a decrease in accounts receivable of $92.8
million. Net cash provided by operating activities was also a result of net
income from continuing operations of $30.0 million, which included the impact of
non-cash expenses for depreciation and amortization and amortization of
intangible assets of $17.6 million, non-cash provision for income taxes of $15.7
million and share-based compensation expense of $4.5 million. These amounts were
partially offset by a decrease in accrued expenses of $23.4 million as well as a
decrease in deferred revenue of $68.6 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, including order intake and
billing.
Net cash
provided by investing activities was $0.7 million for the nine months ended
October 31, 2008, which includes the maturities of investments, net of
purchases, generating a cash inflow of approximately $4.8 million. This was
partially offset by the purchases of capital assets of approximately $4.1
million.
Net cash
used in financing activities was $91.1 million for the nine months ended October
31, 2008. During this period, we made principal payments on our debt of $55.3
million and purchased shares having a value of $56.5 million under our
shareholder-approved share repurchase program. These uses of cash were partially
offset by proceeds of $19.5 million received from the exercise of share options
under our various share option programs and share purchases made under our 2004
Employee Share Purchase Plan.
Cash
provided from discontinued operations for the nine months ended October 31, 2008
included the gross proceeds of $6.9 million from the sale of NETg
Press.
We had
working capital of approximately $6.0 million as of October 31, 2008 and
approximately $30.4 million as of January 31, 2008. The decrease in working
capital was primarily due to principal debt payments of $55.3 million and the
purchase of treasury shares having a value of $56.5 million under our
shareholder-approved share repurchase program. This was partially offset by net
income from continuing operations of $30.0 million, which includes non-cash
charges for depreciation and amortization of $17.6 million, share-based
compensation expense of $4.5 million and a non-cash tax charge of $15.7 million.
Additionally, we received proceeds of $19.5 million from the exercise of share
options under our various share option programs and from share purchases made
under our 2004 Employee Share Purchase Plan.
As of
January 31, 2008, we had U.S. NOL carryforwards of approximately $258.3 million.
These NOLs represent the gross carrying value of operating loss carryforwards.
The 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
$258.3 million of U.S. NOL carryforwards is approximately $121.3 million of U.S.
NOL carryforwards that were acquired in the SmartForce Merger and the purchase
of Book 24x7. Also included in the $258.3 million at January 31, 2008 is
approximately $36.3 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
utilized to reduce tax payments. Additionally, we had approximately $193.0
million of NOL carryforwards in jurisdictions outside of the U.S. Included in
the $193.0 million is approximately $142.2 million of NOL carryforwards, which were
acquired in the SmartForce Merger, the purchase of Books24x7 and the purchase of
NETg foreign entities. We will realize the benefits of these acquired NOL
carryforwards through reductions to goodwill and non-goodwill intangible assets
during the period that the losses are utilized. We also had U.S. federal tax
credit carryforwards of approximately $2.5 million at January 31,
2008.
We lease
certain of our facilities and certain equipment and furniture under operating
lease agreements that expire at various dates through 2023. In addition, we have
a term loan which will be paid out over the next 5 years. Future minimum lease
payments, net of estimated sub-rentals, under these agreements and the debt
repayments schedule are as follows (in thousands):
|
|
Payments
Due By Period
|
|
|
|
|
|
|
Less
Than
|
|
|
1
- 3
|
|
|
3
- 5
|
|
|
More
Than
|
Contractual
Obligations
|
|
Total
|
|
|
1
Year
|
|
|
Years |
|
|
Years |
|
|
5
Years
|
|
Operating
Lease Obligations
|
|
$ |
13,185 |
|
|
$ |
4,442 |
|
|
$ |
5,504 |
|
|
$ |
3,239 |
|
|
$ |
- |
|
Debt
Obligations
|
|
|
143,697 |
|
|
|
1,455 |
|
|
|
2,910 |
|
|
|
139,332 |
|
|
|
- |
|
Total
Obligations
|
|
$ |
156,882 |
|
|
$ |
5,897 |
|
|
$ |
8,414 |
|
|
$ |
142,571 |
|
|
$ |
- |
|
We do not
have any off-balance sheet arrangements, as defined under SEC rules, such as
relationships with unconsolidated entities or financial partnerships, which are
often referred to as structured finance or special purpose entities, established
for the purpose of facilitating transactions that are not required to be
reflected on our balance sheet.
In May
2007, we entered into a credit agreement with certain lenders providing for a
$225.0 million senior credit facility comprised of a $200 million term loan
facility and a $25.0 million revolving credit facility. On July 7,
2008, we entered into an amendment to the credit agreement. The primary purpose
of the amendment was to expand our ability to make additional repurchases of
shares. The expanded repurchase ability under the amendment is conditioned on
the absence of an event of default and a requirement that (i) the leverage ratio
shall be no greater than 2.75:1.0 as of the most recently completed fiscal
quarter ending prior to the date of such repurchase and (ii) that we make a
prepayment of the term loan under the credit agreement in an amount equal to the
dollar amount of any such repurchase. Such term loan prepayments will not,
however, be required in connection with the first $24.0 million of repurchases
made from and after July 7, 2008.
Please
see Note 10 of The Notes to the Consolidated Financial Statements in our Annual
Report on Form 10-K as filed with the SEC on March 31, 2008 and our 8-K filed
July 11, 2008, for a detailed description of the credit agreement, as
amended.
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 ended January 31, 2009 are
expected to be approximately $5.0 million to $7.0 million.
We expect
that the principal sources of funding for our operating expenses, capital
expenditures, debt payment obligations and other liquidity needs will be a
combination of our available cash and cash equivalents and short-term
investments, and funds generated from future cash flows from operating
activities. We believe our current funds and expected cash flows from operating
activities will be sufficient to fund our operations, including our debt
repayment obligations, 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 the marketplace for our products in general or
significant acquisitions (in addition to and including NETg). The amount of cash
generated from operations will be dependent upon the successful execution of our
business plan. Although we do not foresee the need to raise additional capital,
any unanticipated economic or business events could require us to raise
additional capital to support our operations.
EXPLANATION
OF USE OF NON-GAAP FINANCIAL RESULTS
In
addition to our audited and unaudited 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) and merger and
integration related expenses, 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
unusual 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.
In
addition, certain covenants in our credit agreement are based on non-GAAP
financial measures, such as adjusted EBITDA, and evaluating and presenting these
measures allows us and our investors to assess our compliance with the covenants
in our credit agreement and thus our liquidity situation.
We intend
to continue to assess the potential value of reporting non-GAAP results
consistent with applicable rules and regulations.
As of
October 31, 2008, we did not use derivative financial instruments for
speculative or trading purposes.
INTEREST
RATE RISK
Our
general investing policy is to limit the risk of principal loss and to ensure
the safety of invested funds by limiting market and credit risk. We currently
use a registered investment manager to place our investments in highly liquid
money market accounts and government-backed securities. All highly liquid
investments with original maturities of three months or less are considered to
be cash equivalents. Interest income is sensitive to changes in the general
level of U.S. interest rates. Based on the short-term nature of our investments,
we have concluded that there is no significant market risk
exposure.
In order
to limit our exposure to interest rate changes associated with our term loan, we
entered into an interest rate swap agreement with an initial notional amount of
$160 million which amortizes over a period consistent with our anticipated
payment schedule. This strategy uses an interest rate swap to effectively
convert $160 million in variable rate borrowings into fixed rate
liabilities at a 5.1015% effective interest rate. The interest rate swap is
considered to be a hedge against changes in the amount of future cash flows
associated with interest payments on a variable rate loan.
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
with respect to changes in 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 our results of
operations. During the nine months ended October 31, 2008 and 2007, we incurred
a foreign currency exchange gain of $0.3 million and a foreign currency exchange
loss of $0.5 million, respectively.
Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of October 31, 2008. 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 October
31, 2008, our chief executive officer and chief financial officer concluded
that, as of such date, our disclosure controls and procedures were effective at
the reasonable assurance level.
No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
October 31, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
See Part
I Item 3 of our Annual Report on Form 10-K for the fiscal year ended January 31,
2008 for a discussion of legal proceedings. There were no material developments
in these proceedings during the quarter ended October 31, 2008.
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, 2008, there have been no
material changes to the risk factors included in that report.
RISKS
RELATED TO THE OPERATION OF OUR BUSINESS
OUR
QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, LIMITING YOUR ABILITY
TO EVALUATE HISTORICAL FINANCIAL RESULTS AND INCREASING THE LIKELIHOOD THAT OUR
RESULTS WILL FALL BELOW MARKET ANALYSTS’ EXPECTATIONS, WHICH COULD CAUSE THE
PRICE OF OUR ADSs TO DROP RAPIDLY AND SEVERELY.
We have
in the past experienced fluctuations in our quarterly operating results, and we
anticipate that these fluctuations will continue. As a result, we believe that
our quarterly revenue, expenses and operating results are likely to vary
significantly in the future. If in some future quarters our results of
operations are below the expectations of public market analysts and investors,
this could have a severe adverse effect on the market price of our
ADSs.
Our
operating results have historically fluctuated, and our operating results may in
the future continue to fluctuate, as a result of factors, which include, without
limitation:
|
•
|
the
size and timing of new/renewal agreements and
upgrades;
|
|
•
|
the
announcement, introduction and acceptance of new products, product
enhancements and technologies by us and our
competitors;
|
|
•
|
the
mix of sales between our field sales force, our other direct sales
channels and our telesales
channels;
|
|
•
|
general
conditions in the U.S. or the international
economy;
|
|
•
|
the
loss of significant customers;
|
|
•
|
delays
in availability of new products;
|
|
•
|
product
or service quality problems;
|
|
•
|
seasonality
— due to the budget and purchasing cycles of our customers, we expect our
revenue and operating results will generally be strongest in the second
half of our fiscal year and weakest in the first half of our fiscal
year;
|
|
•
|
the
spending patterns of our customers;
|
|
•
|
litigation
costs and expenses;
|
|
•
|
non-recurring
charges related to acquisitions;
|
|
•
|
growing
competition that may result in price reductions;
and
|
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.
PAST AND
FUTURE ACQUISITIONS, INCLUDING OUR ACQUISITION OF NETG, MAY NOT PRODUCE THE
BENEFITS WE ANTICIPATE AND COULD HARM OUR CURRENT OPERATIONS.
One
aspect of our business strategy is to pursue acquisitions of businesses or
technologies that will contribute to our future growth. On May 14, 2007, we
acquired NETg from The Thomson Corporation. However, we may not be successful in
identifying or consummating future attractive acquisition opportunities.
Moreover, any acquisitions we do consummate, may not produce benefits
commensurate with the purchase price we pay or our expectations for the
acquisition. In addition, acquisitions involve numerous risks,
including:
|
•
|
difficulties
in integrating the technologies, operations, financial controls and
personnel of the acquired company;
|
|
•
|
difficulties
in retaining or transitioning customers and employees of the acquired
company;
|
|
•
|
diversion
of management time and focus;
|
|
•
|
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
|
|
•
|
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.
|
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 human resource
outsourcers, including those vendors with whom we have formed development and
marketing alliances.
Our
primary sources of direct competition are:
|
•
|
third-party
suppliers of instructor-led information technology, business, management
and professional skills education and
training;
|
|
•
|
technology
companies that offer learning courses covering their own technology
products;
|
|
•
|
suppliers
of computer-based training and e-learning
solutions;
|
|
•
|
internal
education, training departments and HR outsourcers of potential customers;
and
|
|
•
|
value-added
resellers and network integrators.
|
Growing
competition may result in price reductions, reduced revenue and gross profits
and loss of market share, any one of which would have a material adverse effect
on our business. Many of our current and potential competitors have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition, and we expect to face increasing
pricing pressure 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, Books24x7 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 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 are critical to our reputation and ability to attract and retain
corporate customers, subscribers and commerce partners. We cannot accurately
project the rate or timing of any increases in traffic to our Web site and,
therefore, the integration and timing of any upgrades or enhancements required
to facilitate any significant traffic increase to the Web site are uncertain. We
have in the past experienced difficulties in upgrading our Web site
infrastructure to handle increased traffic, and these difficulties could recur.
The failure to expand and upgrade our Web site or any system error, failure or
extended down time could materially harm our business, reputation, financial
condition or results of operations.
BECAUSE
MANY USERS OF OUR E-LEARNING SOLUTIONS WILL ACCESS THEM OVER THE INTERNET,
FACTORS ADVERSELY AFFECTING THE USE OF THE INTERNET OR OUR CUSTOMERS’ NETWORKING
INFRASTRUCTURES COULD HARM OUR BUSINESS.
Many of
our 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, pound sterling, Canadian dollar, Australian dollar, New
Zealand dollar, Singapore dollar 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 these currencies and other currencies relative to the U.S. dollar could
adversely affect our business and results of operations.
WE MAY BE
UNABLE TO PROTECT OUR PROPRIETARY RIGHTS. UNAUTHORIZED USE OF OUR INTELLECTUAL
PROPERTY MAY RESULT IN DEVELOPMENT OF PRODUCTS OR SERVICES THAT COMPETE WITH
OURS.
Our
success depends to a degree upon the protection of our rights in intellectual
property. We rely upon a combination of patent, copyright, and trademark laws to
protect our proprietary rights. We have also entered into, and will continue to
enter into, confidentiality agreements with our employees, consultants and third
parties to seek to limit and protect the distribution of confidential
information. However, we have not signed protective agreements in every
case.
Although
we have taken steps to protect our proprietary rights, these steps may be
inadequate. Existing patent, copyright, and trademark laws offer only limited
protection. Moreover, the laws of other countries in which we market our
products may afford little or no effective protection of our intellectual
property. Additionally, unauthorized parties may copy aspects of our products,
services or technology or obtain and use information that we regard as
proprietary. Other parties may also breach protective contracts we have executed
or will in the future execute. We may not become aware of, or have adequate
remedies in the event of, a breach. Litigation may be necessary in the future to
enforce or to determine the validity and scope of our intellectual property
rights or to determine the validity and scope of the proprietary rights of
others. Even if we were to prevail, such litigation could result in substantial
costs and diversion of management and technical resources.
OUR
WORLDWIDE 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 and are subject to inherent risks, including:
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•
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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;
|
|
•
|
difficulties
in staffing and managing foreign subsidiary
operations;
|
|
•
|
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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•
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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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•
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potential
adverse tax consequences; and
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•
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the
absence or significant lack of legal protection for intellectual property
rights.
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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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•
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our
need to educate potential customers about the benefits of our
products;
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•
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competitive
evaluations by customers;
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•
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the
customers’ internal budgeting and approval
processes;
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•
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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.
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These
long sales cycles make it difficult to predict the quarter in which sales may
occur. Delays in sales could cause significant variability in our revenue and
operating results for any particular period.
OUR
BUSINESS COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS CONTAIN
ERRORS.
Software
products as complex as ours contain known and undetected errors or “bugs” that
result in product failures. The existence of bugs could result in loss of or
delay in revenue, loss of market share, diversion of product development
resources, injury to reputation or damage to efforts to build brand awareness,
any of which could have a material adverse effect on our business, operating
results and financial condition.
RISKS
RELATED TO LEGAL PROCEEDINGS
WE ARE
THE SUBJECT OF AN INVESTIGATION BY THE SEC.
The
Boston District Office of the States Securities and Exchange Commission (“SEC”)
informed us in January 2007 that we are the subject of an informal investigation
concerning option granting practices at SmartForce for the period beginning
April 12, 1996 through July 12, 2002. These grants were made prior to the
September 6, 2002 merger of SkillSoft Corporation and SmartForce PLC. We have
produced documents in response to requests from the SEC.
We have
cooperated with the SEC in this matter. At the present time, we are unable to
predict the outcome of this matter or its potential impact on our operating
results or financial position. However, we may incur substantial costs in
connection with the SEC option granting practices investigation, and this
investigation could cause a diversion of management time and attention. In
addition, we could be subject to penalties, fines or regulatory sanctions or
claims by our former officers, directors or employees for indemnification of
costs they may incur in connection with the SEC investigation. Any or all of
those issues could adversely affect our business, operating results and
financial position.
CLAIMS
THAT WE INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS COULD RESULT IN
COSTLY LITIGATION OR ROYALTY PAYMENTS TO THIRD PARTIES, OR REQUIRE US TO
REENGINEER OR CEASE SALES OF OUR PRODUCTS OR SERVICES.
Third
parties have in the past and could in the future claim that our current or
future products infringe their intellectual property rights. Any claim, with or
without merit, could result in costly litigation or require us to reengineer or
cease sales of our products or services, any of which could have a material
adverse effect on our business. Infringement claims could also result in an
injunction barring the sale 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 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.
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 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.
On April
8, 2008, our shareholders approved the repurchase of up to 10,000,000 of our
ADSs. On September 24, 2008 our shareholders approved an increase in the number
of shares that may be repurchased to 25,000,000. Under the approved share
purchase program, we entered into a share purchase agreement, pursuant to which
we and certain of our subsidiaries are entitled to purchase our ADSs. ADSs that
are repurchased by us or our subsidiaries under the share purchase program
shall, at the option of our Board of Directors, be either cancelled upon their
purchase or held as treasury shares.
During
the three months ended October 31, 2008, certain of our subsidiaries repurchased
our ADSs as follows:
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(d)
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Maximum
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|
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Number
of
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(a)
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Shares
that
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Total
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(b)
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|
May
Yet Be
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|
Number
of
|
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|
Average
|
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|
|
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|
Purchased
|
|
|
|
Shares
|
|
|
Price
Paid
|
|
|
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Under
the
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Period
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|
Purchased
(1)
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Per
Share $
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|
|
or
Program (2)
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|
|
Program
|
|
August
1, 2008 - August 31, 2008
|
|
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985,680 |
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$ |
10.18 |
|
|
|
985,680 |
|
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|
6,290,601 |
|
September
1, 2008 - September 30, 2008
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|
|
1,000,000 |
|
|
|
10.40 |
|
|
|
1,000,000 |
|
|
|
20,290,601 |
|
October
1, 2008 - October 31, 2008
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|
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1,000,000 |
|
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8.60 |
|
|
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1,000,000 |
|
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19,290,601 |
|
Total
|
|
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2,985,680 |
|
|
$ |
9.73 |
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|
2,985,680 |
|
|
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19,290,601 |
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(1) We
repurchased ADSs pursuant to a share repurchase program that was approved by our
shareholders on April 8, 2008 and amended on September 24, 2008.
(2) Our
shareholders approved the repurchase by us of up to 25,000,000 ADSs at a per
share purchase price which complies with the requirements of Rule 10b-18.
Unless terminated earlier by resolution of our Board of Directors, the
repurchase program will expire on March 23, 2010 or when we have repurchased all
shares authorized for repurchase thereunder.
ITEM 3. —
DEFAULTS UPON SENIOR SECURITIES
Not
applicable.
We held
our 2008 annual general meeting of shareholders (the “AGM”) on
September 24, 2008. Under the terms of our arrangements with The Bank of
New York, The Bank of New York is entitled to vote or cause to be voted all of
our ordinary shares represented by ADSs on behalf of, and in accordance with the
instructions received from, the ADS holders. There were no broker non-votes or
votes withheld with respect to any matter submitted to a vote of the ordinary
shareholders at the AGM.
The following is a brief description of
each matter submitted to a vote of the ordinary shareholders and a summary of
the votes tabulated with respect to each such matter at the AGM, as well as a
summary of the votes cast by The Bank of New York based on the ADR
facility:
|
(1)
|
Receipt
and consolidation of the consolidated financial statements for the fiscal
year ended January 31, 2008 and the Report of Directors and Auditors
thereon.
|
|
|
Votes
“FOR”
|
|
|
“AGAINST”
|
|
|
“ABSTAIN”
|
|
Ordinary
Shareholders
|
|
|
4 |
|
|
|
0 |
|
|
|
0 |
|
ADS
Holders
|
|
|
115,152,262 |
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|
|
646 |
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41,158 |
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(2A) Re-election
of Mr. Charles E. Moran, who retired by rotation, as a director.
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Votes
“FOR”
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|
|
“AGAINST”
|
|
|
“ABSTAIN”
|
|
Ordinary
Shareholders
|
|
|
4 |
|
|
|
0 |
|
|
|
0 |
|
ADS
Holders
|
|
|
114,701,478 |
|
|
|
477,706 |
|
|
|
14,882 |
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(2B) Re-election
of Dr. Ferdinand von Prondzynski, who retired by rotation, as a
director.
|
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Votes
“FOR”
|
|
|
“AGAINST”
|
|
|
“ABSTAIN”
|
|
Ordinary
Shareholders
|
|
|
4 |
|
|
|
0 |
|
|
|
0 |
|
ADS
Holders
|
|
|
114,824,744 |
|
|
|
355,760 |
|
|
|
13,562 |
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The term
of office for each of P. Howard Edelstein, Stewart K.P. Gross, James S. Krzwicki
and William F. Meagher, Jr. continued after the AGM.
(3) Authorization
of the Audit Committee of the Board of Directors to fix the remuneration of our
auditor for the fiscal year ending January 31, 2009.
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Votes
“FOR”
|
|
|
“AGAINST”
|
|
|
“ABSTAIN”
|
|
Ordinary
Shareholders
|
|
|
4 |
|
|
|
0 |
|
|
|
0 |
|
ADS
Holders
|
|
|
115,048,481 |
|
|
|
140,108 |
|
|
|
5,477 |
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(4) Amendment of the share
purchase agreement, dated as of April 9, 2008, among SkillSoft Public
Limited Company, CBT (Technology) Limited, SkillSoft Finance Limited, SkillSoft
Corporation and Credit Suisse Securities (USA) LLC.
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Votes
“FOR”
|
|
|
“AGAINST”
|
|
|
“ABSTAIN”
|
|
Ordinary
Shareholders
|
|
|
4 |
|
|
|
0 |
|
|
|
0 |
|
ADS
Holders
|
|
|
114,997,249 |
|
|
|
22,799 |
|
|
|
174,018 |
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ITEM 5. —
OTHER INFORMATION
Not
applicable.
See the
Exhibit Index attached hereto.
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:
December 9, 2008
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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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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
|
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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