form10-q.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 APRIL 30, 2009
|
|
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
|
None
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
Identification
No.)
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|
|
107
Northeastern Boulevard
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03062
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Nashua,
New Hampshire
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(Zip
Code)
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(Address
of Principal Executive Offices)
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|
|
|
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was require to submit
and post such files).
Yes £ 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 £
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Smaller
reporting company £
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|
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(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 June
5, 2009, the registrant had outstanding 96,491,668 Ordinary Shares (issued
or issuable in exchange for the registrant’s outstanding American Depositary
Shares).
SKILLSOFT
PLC
FORM
10-Q
FOR THE
QUARTER ENDED APRIL 30, 2009
SKILLSOFT
PLC AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
|
|
APRIL
30,
2009
(Unaudited)
|
|
|
JANUARY
31,
2009
|
|
ASSETS
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
76,789 |
|
|
$ |
37,853 |
|
Short-term
investments
|
|
|
599 |
|
|
|
1,099 |
|
Restricted
cash
|
|
|
3,828 |
|
|
|
3,790 |
|
Accounts
receivable, net
|
|
|
66,147 |
|
|
|
146,362 |
|
Prepaid
expenses and other current assets
|
|
|
17,387 |
|
|
|
18,286 |
|
Deferred
tax assets
|
|
|
27,076 |
|
|
|
26,444 |
|
Total
current assets
|
|
|
191,826 |
|
|
|
233,834 |
|
Property
and equipment, net
|
|
|
7,316 |
|
|
|
7,661 |
|
Intangible
assets
|
|
|
10,986 |
|
|
|
13,472 |
|
Goodwill
|
|
|
238,550 |
|
|
|
238,550 |
|
Deferred
tax assets
|
|
|
70,457 |
|
|
|
78,223 |
|
Other
assets
|
|
|
6,825 |
|
|
|
3,360 |
|
Total
assets
|
|
$ |
525,960 |
|
|
$ |
575,100 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
maturities of long term debt
|
|
$ |
1,070 |
|
|
$ |
1,253 |
|
Accounts
payable
|
|
|
2,190 |
|
|
|
5,648 |
|
Accrued
compensation
|
|
|
6,225 |
|
|
|
13,513 |
|
Accrued
expenses
|
|
|
18,190 |
|
|
|
23,760 |
|
Deferred
revenue
|
|
|
173,958 |
|
|
|
201,518 |
|
Total
current liabilities
|
|
|
201,633 |
|
|
|
245,692 |
|
|
|
|
|
|
|
|
|
|
Long
term debt
|
|
|
104,021 |
|
|
|
122,131 |
|
Other
long term liabilities
|
|
|
3,515 |
|
|
|
3,221 |
|
Total
long term liabilities
|
|
|
107,536 |
|
|
|
125,352 |
|
Commitments
and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Ordinary
shares, €0.11 par value: 250,000,000 shares authorized; 97,986,914 and
98,892,249 shares issued at April 30, 2009 and January 31, 2009,
respectively
|
|
|
10,467 |
|
|
|
10,600 |
|
Additional
paid-in capital
|
|
|
504,754 |
|
|
|
509,177 |
|
Treasury
stock, at cost, 941,054 and 830,802 ordinary shares at April 30, 2009 and
January 31, 2009, respectively
|
|
|
(7,102 |
) |
|
|
(5,317 |
) |
Accumulated
deficit
|
|
|
(292,095 |
) |
|
|
(310,874 |
) |
Accumulated
other comprehensive income
|
|
|
767 |
|
|
|
470 |
|
Total
shareholders’ equity
|
|
|
216,791 |
|
|
|
204,056 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
525,960 |
|
|
$ |
575,100 |
|
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
APRIL 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
76,439 |
|
|
$ |
81,643 |
|
Cost
of revenue (1)
|
|
|
7,473 |
|
|
|
8,808 |
|
Cost
of revenue – amortization of intangible assets
|
|
|
32 |
|
|
|
1,740 |
|
Gross
profit
|
|
|
68,934 |
|
|
|
71,095 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Research
and development (1)
|
|
|
8,998 |
|
|
|
13,480 |
|
Selling
and marketing (1)
|
|
|
22,411 |
|
|
|
29,700 |
|
General
and administrative (1)
|
|
|
7,757 |
|
|
|
8,892 |
|
Amortization
of intangible assets
|
|
|
2,455 |
|
|
|
2,997 |
|
Merger
and integration related expenses
|
|
|
— |
|
|
|
520 |
|
Restructuring
|
|
|
52 |
|
|
|
— |
|
SEC
investigation
|
|
|
— |
|
|
|
62 |
|
Total
operating expenses
|
|
|
41,673 |
|
|
|
55,651 |
|
Operating
income
|
|
|
27,261 |
|
|
|
15,444 |
|
Other
expense, net
|
|
|
(618 |
) |
|
|
(403 |
) |
Interest
income
|
|
|
70 |
|
|
|
617 |
|
Interest
expense
|
|
|
(2,445 |
) |
|
|
(3,986 |
) |
Income
before provision for income taxes from continuing
operations
|
|
|
24,268 |
|
|
|
11,672 |
|
Provision
for income taxes
|
|
|
5,489 |
|
|
|
4,506 |
|
Income
from continuing operations
|
|
$ |
18,779 |
|
|
$ |
7,166 |
|
Loss
from discontinued operations, net of income tax benefit of
$61
|
|
|
— |
|
|
|
(93 |
) |
Net
income
|
|
$ |
18,779 |
|
|
$ |
7,073 |
|
Net
income per share (Note 9):
|
|
|
|
|
|
|
|
|
Basic
– continuing operations
|
|
$ |
0.19 |
|
|
$ |
0.07 |
|
Basic
– discontinued operations
|
|
$ |
— |
|
|
$ |
— |
|
|
|
$ |
0.19 |
|
|
$ |
0.07 |
|
Basic
weighted average shares outstanding
|
|
|
97,740,295 |
|
|
|
105,290,444 |
|
Diluted
– continuing operations
|
|
$ |
0.19 |
|
|
$ |
0.07 |
|
Diluted
– discontinued operations
|
|
$ |
— |
|
|
$ |
— |
|
|
|
$ |
0.19 |
|
|
$ |
0.06 |
|
Diluted
weighted average shares outstanding
|
|
|
99,095,854 |
|
|
|
109,937,385 |
|
____________
(1)
|
Stock-based
compensation included in cost of revenue and operating
expenses:
|
|
|
THREE
MONTHS ENDED
APRIL 30,
|
|
|
|
2009
|
|
|
2008
|
|
Cost
of revenue
|
|
$ |
21 |
|
|
$ |
44 |
|
Research
and development
|
|
|
269 |
|
|
|
237 |
|
Selling
and marketing
|
|
|
635 |
|
|
|
578 |
|
General
and administrative
|
|
|
696 |
|
|
|
745 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SKILLSOFT
PLC AND SUBSIDIARIES
(UNAUDITED,
IN THOUSANDS)
|
|
THREE
MONTHS ENDED
APRIL 30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
18,779 |
|
|
$ |
7,073 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
1,621 |
|
|
|
1,604 |
|
Depreciation
and amortization
|
|
|
1,283 |
|
|
|
1,476 |
|
Amortization
of intangible assets
|
|
|
2,487 |
|
|
|
4,737 |
|
Recovery
of bad debts
|
|
|
(37 |
) |
|
|
(123 |
) |
Provision
for income tax — non-cash
|
|
|
3,288 |
|
|
|
3,565 |
|
Non-cash
interest expense
|
|
|
297 |
|
|
|
284 |
|
Tax
benefit related to exercise of non-qualified stock options
|
|
|
(5 |
) |
|
|
(173 |
) |
Changes
in current assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
81,169 |
|
|
|
71,508 |
|
Prepaid
expenses and other current assets
|
|
|
985 |
|
|
|
2,913 |
|
Accounts
payable
|
|
|
(3,429 |
) |
|
|
497 |
|
Accrued
expenses, including long-term
|
|
|
(12,271 |
) |
|
|
(12,806 |
) |
Deferred
revenue
|
|
|
(29,183 |
) |
|
|
(33,902 |
) |
Net
cash provided by operating activities
|
|
|
64,984 |
|
|
|
46,653 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(986 |
) |
|
|
(1,258 |
) |
Cash
paid for business acquisitions
|
|
|
— |
|
|
|
(250 |
) |
Purchases
of investments
|
|
|
(600 |
) |
|
|
(9,750 |
) |
Maturity
of investments
|
|
|
1,100 |
|
|
|
9,425 |
|
Increase
in restricted cash, net
|
|
|
(38 |
) |
|
|
(65 |
) |
Net
cash used in investing activities
|
|
|
(524 |
) |
|
|
(1,898 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
269 |
|
|
|
4,213 |
|
Proceeds
from employee stock purchase plan
|
|
|
1,164 |
|
|
|
2,012 |
|
Principal
payment on long term debt
|
|
|
(18,293 |
) |
|
|
(24,500 |
) |
Acquisition
of treasury stock
|
|
|
(9,399 |
) |
|
|
(12,153 |
) |
Tax
benefit related to exercise of non-qualified stock options
|
|
|
5 |
|
|
|
173 |
|
Net
cash used in financing activities
|
|
|
(26,254 |
) |
|
|
(30,255 |
) |
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
730 |
|
|
|
323 |
|
Net
increase in cash and cash equivalents
|
|
|
38,936 |
|
|
|
14,823 |
|
Cash
and cash equivalents, beginning of period
|
|
|
37,853 |
|
|
|
76,059 |
|
Cash
and cash equivalents, end of period
|
|
$ |
76,789 |
|
|
$ |
90,882 |
|
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).
2. BASIS
OF PRESENTATION
The
accompanying, unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States have been condensed or
omitted pursuant to such SEC rules and regulations. In the opinion of
management, the condensed consolidated financial statements reflect all material
adjustments (consisting only of those of a normal and recurring nature) which
are necessary to present fairly the consolidated financial position of the
Company as of April 30, 2009 and the results of its operations and cash flows
for the three months ended April 30, 2009 and 2008. 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, 2009. The
results of operations for the interim period are not necessarily indicative of
the results of operations to be expected for the full fiscal year. Certain
presentational changes have been made to the prior year condensed consolidated
statements of cash flows related to discontinued operations to conform with the
current year presentation. Certain reclassifications have been made to the prior
year condensed consolidated income statements between interest expense and other
expense, net to conform with the current year presentation.
3. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND INVESTMENTS
The
Company considers all highly liquid investments with original maturities of 90
days or less at the time of purchase to be cash equivalents. At April 30,
2009, cash equivalents consisted mainly of commercial paper. At January 31,
2009, cash equivalents consisted mainly of commercial paper and federal
agency notes.
At April
30, 2009, the Company had approximately $3.8 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 an SEC
investigation and litigation related to the 2002 securities class action and
approximately $1.1 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 115). Under SFAS 115, securities
that the Company does not intend to hold to maturity or for trading purposes are
reported at market value, and are classified as available for sale. At April 30,
2009, the Company’s investments were classified as available for sale and had an
average maturity of approximately 10 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 (AICPA) 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 (SAB) No. 104 (SAB 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 sold separately 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 its
users.
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 as revenue 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.
SkillSoft
contracts often include an uptime guarantee for solutions hosted on the
Company’s servers whereby customers may be entitled to credits in the event of
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 condensed consolidated financial
statements.
5.
SHAREHOLDERS’ EQUITY
(a) ADS 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. As of April 30, 2009, 12,617,631 shares remain
available for repurchase, subject to certain limitations, under the shareholder
approved repurchase program.
During
the three months ended April 30, 2009, the Company repurchased a total of
1,285,054 shares for a total purchase price, including commissions, of $9.4
million. The Company retired 1,174,802 shares during the three months ended
April 30, 2009, including 830,802 shares repurchased in the prior fiscal year.
As of April 30, 2009, 941,054 of the repurchased shares had not yet been retired
or canceled and were held as treasury shares at cost. The Company retired
these shares in the second quarter of fiscal 2010.
(b) Share Based Compensation
The
Company has two 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 ten years. As of April 30, 2009, 2,029,826 ordinary
shares remain available for future grant under the Company’s share option plans.
Please see Note 9 of the Notes to the Consolidated Financial Statements in the
Company’s Annual Report on Form 10-K as filed with the SEC on April 1, 2009 for
a detailed description of the Company’s share option plans.
A summary
of share option activity under the Company’s plans during the three months ended
April 30, 2009 is as follows:
Share
Options
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value (in thousands)
|
|
Outstanding,
January 31, 2009
|
|
|
13,024,156 |
|
|
$ |
7.54 |
|
|
|
3.91 |
|
|
$ |
16,075 |
|
Granted
|
|
|
60,000 |
|
|
|
4.17 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(64,806 |
) |
|
|
4.15 |
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(22,917 |
) |
|
|
5.60 |
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(38,616 |
) |
|
|
12.09 |
|
|
|
|
|
|
|
|
|
Outstanding,
April 30, 2009
|
|
|
12,957,817 |
|
|
$ |
7.53 |
|
|
|
3.71 |
|
|
$ |
29,405 |
|
Exercisable,
April 30, 2009
|
|
|
10,236,555 |
|
|
$ |
7.97 |
|
|
|
3.48 |
|
|
$ |
22,295 |
|
Vested
and Expected to Vest, April 30, 2009 (1)
|
|
|
12,581,567 |
|
|
$ |
7.60 |
|
|
|
3.69 |
|
|
$ |
28,194 |
|
____________
(1)
|
Represents
the number of vested options as of April 30, 2009 plus the number of
unvested options as of April 30, 2009 that are expected to vest, adjusted
for an estimated forfeiture rate of 15.4%. 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 April
30, 2009 of $8.42 and the exercise price of each in-the-money option) that would
have been realized by the option holders had all option holders exercised their
options on April 30, 2009.
The total
intrinsic value of options exercised during the three months ended April 30,
2009 and 2008 was approximately $0.2 million and $5.7 million, respectively. The
weighted average grant date fair value of options granted as calculated by
Black-Scholes option pricing model during the three months ended April 30, 2009
and 2008 was $3.19 and $3.84 per share, respectively.
6.
SPECIAL CHARGES
MERGER
AND EXIT COSTS
(a) Merger
and Exit Costs Recognized as Liabilities in Purchase Accounting
The
Company’s merger and exit liabilities, which include previous merger and
acquisition transactions, are recorded in accrued expenses (see Note 13) and
long-term liabilities. Activity in the three month period ended April 30, 2009
is as follows (in thousands):
|
|
CLOSEDOWN
OF
FACILITIES
|
|
|
OTHER
|
|
|
TOTAL
|
|
Merger
and exit accrual January 31, 2009
|
|
$ |
1,594 |
|
|
$ |
77 |
|
|
$ |
1,671 |
|
Payments
made
|
|
|
(51 |
) |
|
|
2 |
|
|
|
(49 |
) |
Merger
and exit accrual April 30, 2009
|
|
$ |
1,543 |
|
|
$ |
79 |
|
|
$ |
1,622 |
|
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, 2010 (remaining 9 months)
|
|
$ |
326 |
|
Year
Ended January 31, 2011
|
|
|
1,296 |
|
Total
|
|
$ |
1,622 |
|
(b) Discontinued
Operations
In
connection with the NETg acquisition, the Company decided to discontinue four
businesses acquired from NETg because the Company believed these 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 for the three months ended
April 30, 2008 is as follows (in thousands):
|
|
THREE
MONTHS ENDED APRIL 30,
2008
|
|
Revenue
from discontinued operations
|
|
$ |
181 |
|
Loss from
discontinued operations before income taxes
|
|
|
(154 |
) |
Income
tax benefit
|
|
|
(61 |
) |
Loss from
discontinued operations
|
|
$ |
(93 |
) |
(c) Restructuring
On
January 19, 2009, the Company committed to a reduction in force with respect to
a total of approximately 120 employees in the United States, Canada, Ireland and
the United Kingdom. The decision was based on a review of various cost savings
initiatives undertaken in connection with the development of the Company’s
budget and operating plan for fiscal 2010. The Company also recorded a $52
thousand restructuring charge for the three months ended April 30, 2009, which
is included in the statement of income as restructuring, related to a further
reduction in force of 6 employees in its Australia office, which was
communicated on March 4, 2009. Substantially all of this charge represents the
severance cost of terminated employees.
Activity
in the Company’s restructuring accrual was as follows (in
thousands):
Restructuring
accrual as of January 31, 2009
|
|
$ |
1,112 |
|
Payments
made
|
|
|
(1,137 |
) |
Restructuring
charges incurred
|
|
|
52 |
|
Restructuring
accrual as of April 30, 2009
|
|
$ |
27 |
|
The
Company anticipates that the remainder of the restructuring accrual will be paid
out in fiscal 2010.
7.
GOODWILL AND INTANGIBLE ASSETS
Intangible
assets are as follows (in thousands):
|
|
APRIL 30, 2009
|
|
|
JANUARY 31, 2009
|
|
|
|
GROSS
CARRYING
AMOUNT
|
|
|
ACCUMULATED
AMORTIZATION
|
|
|
NET
CARRYING
AMOUNT
|
|
|
GROSS
CARRYING
AMOUNT
|
|
|
ACCUMULATED
AMORTIZATION
|
|
|
NET
CARRYING
AMOUNT
|
|
Internally
developed software/courseware
|
|
$ |
38,717 |
|
|
$ |
38,493 |
|
|
$ |
224 |
|
|
$ |
38,717 |
|
|
$ |
38,462 |
|
|
$ |
255 |
|
Customer
contracts
|
|
|
36,848 |
|
|
|
28,366 |
|
|
|
8,482 |
|
|
|
36,848 |
|
|
|
26,938 |
|
|
|
9,910 |
|
Non-compete
agreement
|
|
|
6,900 |
|
|
|
5,520 |
|
|
|
1,380 |
|
|
|
6,900 |
|
|
|
4,830 |
|
|
|
2,070 |
|
Trademarks
and trade names
|
|
|
2,725 |
|
|
|
2,725 |
|
|
|
— |
|
|
|
2,725 |
|
|
|
2,388 |
|
|
|
337 |
|
Books
trademark
|
|
|
900 |
|
|
|
— |
|
|
|
900 |
|
|
|
900 |
|
|
|
— |
|
|
|
900 |
|
|
|
$ |
86,090 |
|
|
$ |
75,104 |
|
|
$ |
10,986 |
|
|
$ |
86,090 |
|
|
$ |
72,618 |
|
|
$ |
13,472 |
|
Trademarks
of $0.9 million relating to Books24X7 are considered indefinite-lived and
accordingly no amortization expense is recorded.
There was
no change in goodwill at April 30, 2009 from the amount recorded at January 31,
2009.
The
Company will be conducting its annual impairment test of goodwill for fiscal
2010 in the fourth quarter. There were no indicators of impairment in the first
quarter of fiscal 2010.
8.
COMPREHENSIVE INCOME
SFAS No.
130, “Reporting Comprehensive
Income,” requires disclosure of all components of comprehensive income on
an annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period resulting from transactions,
other events and circumstances related to non-owner sources. Comprehensive
income for the three months ended April 30, 2009 and 2008 was as follows (in
thousands):
|
|
THREE
MONTHS ENDED
APRIL 30,
|
|
|
|
2009
|
|
|
2008
|
|
Comprehensive
income:
|
|
|
|
|
|
|
Net
income
|
|
$ |
18,779 |
|
|
$ |
7,073 |
|
Other
comprehensive income/(loss):
|
|
|
|
|
|
|
|
|
Foreign
currency adjustment, net of tax
|
|
|
(80 |
) |
|
|
390 |
|
Change
in fair value of interest rate hedge, net of tax
|
|
|
377 |
|
|
|
370 |
|
Unrealized
losses on available-for-sale securities
|
|
|
— |
|
|
|
(15 |
) |
Comprehensive
income
|
|
$ |
19,076 |
|
|
$ |
7,818 |
|
9. NET
INCOME PER SHARE
Basic net
income per share was computed using the weighted average number of shares
outstanding during the period. Diluted net income per share was computed by
giving effect to all dilutive potential shares outstanding. The weighted average
number of shares outstanding used to compute basic net income per share and
diluted net income per share was as follows:
|
|
THREE
MONTHS ENDED
APRIL 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
97,740,295 |
|
|
|
105,290,444 |
|
Effect
of dilutive shares outstanding
|
|
|
1,355,559 |
|
|
|
4,646,941 |
|
Weighted
average common shares outstanding, as adjusted
|
|
|
99,095,854 |
|
|
|
109,937,385 |
|
The
following share equivalents have been excluded from the computation of diluted
weighted average shares outstanding for the three months ended April 30, 2009
and 2008, respectively, as they would be anti-dilutive:
|
|
THREE
MONTHS ENDED
APRIL 30,
|
|
|
|
2009
|
|
|
2008
|
|
Options
excluded
|
|
|
7,776,273 |
|
|
|
2,957,632 |
|
10.
INCOME TAXES
The
Company operates as a holding company with operating subsidiaries in several
countries, and each subsidiary is taxed based on the laws of the jurisdiction in
which it operates.
The
Company has significant net operating loss (NOL) carryforwards, some of which
are subject to potential limitations based upon the change in control provisions
of Section 382 of the United States Internal Revenue Code.
The
provision for income tax in the three months ended April 30, 2009 was $5.5
million, which consisted of a cash tax provision of $2.2 million and a non-cash
tax provision of $3.3 million. The non-cash tax provision of $3.3 million was
reduced by approximately $0.4 million due to an adjustment made to the Company’s
foreign based tax accruals. The non-cash tax provision relates to the expected
utilization of U.S. and Irish NOL carryforwards and other net deferred tax
assets in the current fiscal year.
At April
30, 2009, the Company’s unrecognized tax benefits and related interest and
penalties totaled $2.7 million, all of which, if recognized, would affect the
Company’s effective tax rate. As of April 30, 2009, the Company had
approximately $0.6 million of accrued interest related to uncertain tax
positions.
In the
normal course of business, the Company is subject to examination by taxing
authorities in such major jurisdictions as Ireland, the United Kingdom, Germany,
Australia, Canada and the U.S. With few exceptions, the Company is no longer
subject to U.S. federal, state and local or non-U.S. income tax examinations for
years before fiscal 2004 in these major jurisdictions.
11.
COMMITMENTS AND CONTINGENCIES
In
January 2007, the Boston District Office of the SEC informed the Company that it
is 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 properly
in the merger, and believes that as a result of the merger accounting the
Company’s financial statements are not going to change even if the SEC concludes
that SmartForce did not properly account for its pre-merger option grants. When
SkillSoft Corporation and SmartForce merged on September 6, 2002, SkillSoft
Corporation was for accounting purposes deemed to have acquired
SmartForce. Accordingly, the pre-merger financial statements of SmartForce are
not included in the historical financial statements of the Company, and the
Company’s financial statements include results from what had been the business
of SmartForce only from the date of the merger.
Under
applicable accounting rules, the Company valued all of the outstanding
SmartForce stock options assumed in the merger at fair value upon consummation
of the merger.
Accordingly,
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.
12.
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 month
periods ended April 30, 2009 and 2008 were as follows (in
thousands):
|
|
THREE
MONTHS ENDED
APRIL 30,
|
|
|
|
2009
|
|
|
2008
|
|
Revenue:
|
|
|
|
|
|
|
United
States
|
|
$ |
58,712 |
|
|
$ |
59,052 |
|
United
Kingdom
|
|
|
8,588 |
|
|
|
11,832 |
|
Canada
|
|
|
2,693 |
|
|
|
3,492 |
|
Europe,
excluding United Kingdom
|
|
|
2,104 |
|
|
|
1,838 |
|
Australia/New
Zealand
|
|
|
2,751 |
|
|
|
3,883 |
|
Other
|
|
|
1,591 |
|
|
|
1,546 |
|
Total
revenue
|
|
$ |
76,439 |
|
|
$ |
81,643 |
|
Long-lived
tangible assets at non-US locations are not significant.
13.
ACCRUED EXPENSES
Accrued
expenses in the accompanying condensed combined balance sheets consisted of the
following (in thousands):
|
|
APRIL
30, 2009
|
|
|
JANUARY
31, 2009
|
|
Professional
fees
|
|
$ |
2,493 |
|
|
$ |
4,237 |
|
Sales
tax payable/VAT payable
|
|
|
1,252 |
|
|
|
3,806 |
|
Accrued
royalties
|
|
|
2,213 |
|
|
|
1,650 |
|
Interest
rate swap liability
|
|
|
953 |
|
|
|
1,581 |
|
Accrued
tax
|
|
|
2,866 |
|
|
|
854 |
|
Other
accrued liabilities
|
|
|
8,413 |
|
|
|
11,632 |
|
Total
accrued expenses
|
|
$ |
18,190 |
|
|
$ |
23,760 |
|
14. OTHER
ASSETS
Other
assets in the accompanying condensed consolidated balance sheets consist of the
following (in thousands):
|
|
APRIL 30, 2009
|
|
|
JANUARY 31, 2009
|
|
Debt
financing cost – long term (See Note 17)
|
|
|
2,927 |
|
|
|
3,211 |
|
Deferred
charge
|
|
|
3,734 |
|
|
|
— |
|
Other
|
|
|
164 |
|
|
|
149 |
|
Total
other assets
|
|
$ |
6,825 |
|
|
$ |
3,360 |
|
15. OTHER
LONG TERM LIABILITIES
Other
long term liabilities in the accompanying condensed consolidated balance sheets
consist of the following (in thousands):
|
|
APRIL 30, 2009
|
|
|
JANUARY 31, 2009
|
|
Merger
accrual – long term
|
|
|
1,296 |
|
|
|
1,189 |
|
Uncertain
tax positions including interest and penalties – long term
|
|
|
1,978 |
|
|
|
1,714 |
|
Other
|
|
|
241 |
|
|
|
318 |
|
Total
other long-term liabilities
|
|
$ |
3,515 |
|
|
$ |
3,221 |
|
16. FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
following table summarizes the Company’s fair value hierarchy in accordance with
SFAS 157, Fair Value
Measurements,” for its financial assets and liabilities measured at fair
value as of April 30, 2009 (in thousands):
|
|
April 30, 2009
|
|
|
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)
|
|
$ |
1,000 |
|
|
$ |
1,000 |
|
|
$ |
— |
|
|
$ |
— |
|
Available
for sale securities (2)
|
|
$ |
599 |
|
|
$ |
599 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap agreement (Note 18)
|
|
$ |
953 |
|
|
$ |
— |
|
|
$ |
953 |
|
|
$ |
— |
|
(1)
Consists of high-grade commercial paper notes with original and remaining
maturities of less than 90 days.
(2)
Consists of high-grade commercial paper with original maturities of 90 days
or more and remaining maturities of less than 365 days.
17.
CREDIT FACILITIES
The
Company has an agreement (the Credit Agreement), as amended, 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. There are no amounts outstanding under the revolving credit
facility.
The term
loan bears interest at a rate per annum equal to, at the Company’s
election, (i) a base rate (3.25% at April 30, 2009) plus a margin of 2.50% or
(ii) adjusted LIBOR (1.22% at April 30, 2009) plus a margin of 3.50%. The
Company is required to maintain certain financial covenants under the credit
facility, for which the Company was in compliance during the three months ended
April 30, 2009.
In
connection with the Credit Agreement and the amendment, the Company incurred
debt financing costs of $6.2 million 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 months ended April 30, 2009, the
Company paid approximately $1.6 million in interest. The Company recorded $0.3
million of amortized interest expense related to the capitalized debt financing
costs for both the three months ended April 30, 2009 and 2008. As of April 30,
2009, total unamortized debt financing costs of $1.0 million and $2.9 million
are recorded within prepaid expenses and other current assets and non-current
other assets, respectively, based on scheduled future amortization.
During
the three months ended April 30, 2009, the Company paid $18.3 million against
the term loan amount. As a result, the balance outstanding under the term loan
was $105.1 million at April 30, 2009, with a weighted average interest rate for
the three month period ended April 30, 2009 of 7.15%.
Future
scheduled minimum payments under this credit facility are as follows (in
thousands):
Fiscal
2010 (remaining 9 months)
|
|
$ |
802 |
|
Fiscal
2011
|
|
|
1,070 |
|
Fiscal
2012
|
|
|
1,070 |
|
Fiscal
2013
|
|
|
1,070 |
|
Thereafter
|
|
|
101,079 |
|
Total
|
|
$ |
105,091 |
|
18.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The
Company is exposed to certain risk arising from both its business operations and
economic conditions. The Company principally manages its exposures to a wide
variety of business and operational risks through management of its core
business activities. The Company manages economic risks, including interest
rate, liquidity, and credit risk primarily by managing the amount, sources, and
duration of its debt funding as well as the use of derivative financial
instruments. Specifically, the Company enters into derivative financial
instruments to manage exposures that arise from business activities that result
in the receipt or payment of future known and uncertain cash amounts, the value
of which are determined by interest rates. The Company’s derivative financial
instruments are used to manage differences in the amount, timing, and duration
of the Company’s known or expected cash receipts and its known or expected cash
payments principally related to the Company’s investments and
borrowings
Cash
Flow Hedges of Interest Rate Risk
The
Company’s objectives in using interest rate derivatives are to add stability to
interest expense and to manage its exposure to interest rate movements. To
accomplish these objectives, the Company primarily uses interest rate swaps as
part of its interest rate risk management strategy. Interest rate swaps
designated as cash flow hedges involve the receipt of variable-rate amounts from
a counterparty in exchange for the Company making fixed-rate payments over the
life of the agreements without exchange of the underlying notional
amount.
The
Company assesses the effectiveness of each hedging relationship by using a
regression analysis of the changes in fair value or cash flows of the derivative
hedging instrument and the changes in fair value or cash flows of the designated
hedged item or transaction. The effective portion of changes in the fair value
of derivatives designated as and that qualify as cash flow hedges is recorded in
Accumulated Other Comprehensive Income and is subsequently reclassified into
earnings in the period that the hedged forecasted transaction affects earnings.
During the three months ended April 30, 2009, such derivatives were used to
hedge the variable cash flows associated with existing variable-rate debt. The
ineffective portion of the change in fair value of the derivatives is recognized
directly in earnings. No hedge ineffectiveness on cash flow hedges was
recognized during the three months ended April 30, 2009.
Amounts
reported in accumulated other comprehensive income related to derivatives will
be reclassified to interest expense as interest payments are made on the
Company’s variable-rate debt. The current interest rate swap held by
the
Company matures on December 31, 2009. For the period from May 1, 2009 through
December 31, 2009, the Company estimates that an additional $1.0 million will be
recorded as an increase to interest expense.
As of
April 30, 2009, the Company had the following outstanding interest rate
derivatives that were designated as cash flow hedges of interest rate
risk:
Interest Rate Derivates
|
|
Notional
(in thousands)
|
|
Effective Date
|
|
Maturity Date
|
|
Index
|
|
Strike Rate
|
|
Interest
Rate Swap
|
|
$ |
59,600 |
|
May
14, 2007
|
|
December
31, 2009
|
|
3
Month LIBOR
|
|
|
5.1015 |
% |
The
following table summarizes the location of the fair value of the Company’s
derivative instruments within the condensed consolidated balance sheets as of
April 30, 2009, and January 31, 2009 (in thousands):
|
Balance Sheet
Location
|
|
April 30, 2009
|
|
|
January 30, 2009
|
|
Liabilities: |
|
|
|
|
|
|
|
Derivative
instruments designated as a cash flow instruments under SFAS
133:
|
|
|
|
|
|
|
|
Interest
rate swap contracts
|
Accrued
expenses
|
|
$ |
953 |
|
|
$ |
1,581 |
|
Total
assets |
|
|
$ |
953 |
|
|
$ |
1,581 |
|
The
tables below present the effect of the Company’s derivative financial
instruments on the Consolidated Statement of Income for the three months ended
April 30, 2009 (in thousands):
|
Location
of Gain (Loss) Reclassified from AOCI into
Net Income
|
|
Amount
of Gain(Loss) Recognized in
OCI
|
|
|
Amount
of Gain(Loss) Reclassified from AOCI
into Net
Income
|
|
Interest rate swap contracts
|
Interest
Expense
|
|
$ |
(46 |
) |
|
$ |
(673 |
) |
Total
|
|
|
$ |
(46 |
) |
|
$ |
(673 |
) |
As of
April 30, 2009, the fair value of derivatives in a net liability position, which
includes accrued interest but excludes any adjustment for nonperformance risk,
related to these instruments was $1.2 million. As of April 30, 2009, the Company
had not posted any collateral related to these instruments. If the Company had
breached any of these provisions at April 30, 2009, it would have been required
to settle its obligations under the instruments at their termination value of
$1.2 million.
19.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
141 (revised), “Business
Combinations” (SFAS 141(R)). SFAS 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. Adoption of SFAS 141(R) on February
1, 2009 did not have a material impact on the Company’s financial position or
results of operations. The adoption of SFAS 141(R) will have an impact on the
Company’s accounting for business combinations occurring on or after the
adoption date, but the effect will be dependent on the acquisitions at that
time.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS
160). SFAS 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 160 revises the
accounting for both increases and decreases in a parent’s controlling ownership
interest. Adoption of SFAS 160 on February 1, 2009 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 161). SFAS 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 133). SFAS 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. Adoption of SFAS 161 on February 1, 2009 did not have a material
impact on the Company’s financial position or results of
operations.
In April
2008, the FASB issued FASB Staff Position (FSP) No. 142-3, “Determination of the Useful Life of
Intangible Assets” (FSP 142-3). FSP 142-3 requires companies estimating
the useful life of a recognized intangible asset to consider their historical
experience in renewing or extending similar arrangements or, in the absence of
historical experience, to consider assumptions that market participants would
use about renewal or extension as adjusted for SFAS 142’s entity-specific
factors. FSP 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2009. Adoption of this statement is not expected to
have a material impact on the Company’s consolidated financial statements when
it becomes effective.
In May
2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted
Accounting Principles” (SFAS 162). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
U.S. SFAS 162 is effective 60 days following the SEC approval of Public Company
Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.” The Company
does not anticipate that SFAS 162 will have a material impact on the Company’s
financial statements.
From time
to time, including in this Quarterly Report on Form 10-Q, we may make
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, strategy, plans, regulatory, market and
industry trends, and similar matters. The Private Securities Litigation Reform
Act of 1995 and federal securities laws provides a safe harbor for
forward-looking statements. We note that a variety of factors, including known
and unknown risks and uncertainties as well as incorrect assumptions, could
cause our actual results and experience to differ materially from the
anticipated results or other expectations expressed in such forward-looking
statements. The factors that may affect the operations, performance, development
and results of our business include those discussed under Part II, Item 1A,
“Risk Factors” of this Quarterly Report on Form 10-Q.
As used
in this Form 10-Q, “we”, “us”, “our”, “SkillSoft” and “the Company” refer to
SkillSoft Public Limited Company and its subsidiaries; and references to our
fiscal year refer to the fiscal year ended on January 31 of that year (e.g.,
fiscal 2009 is the fiscal year ended January 31, 2009).
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 sold separately for an additional
fee.
Cost of
revenue 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 revenue is amortization expense related to capitalized
software development costs and intangible assets related to developed software
and courseware acquired in business combinations.
We
account for software development costs in accordance with Statement of Financial
Accounting Standards (SFAS) No. 86, “Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed” (SFAS 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 months ended April 30, 2009 met the requirements
for capitalization in accordance with SFAS 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.
Restructuring
expenses primarily consist of charges associated with our recent reduction in
force as described in our Form 8-K filed with the SEC on January 20,
2009.
SEC
investigation expenses primarily consist of legal and consulting fees incurred
in connection with the SEC investigation relating to the restatement of
SmartForce’s financial statements for 1999, 2000, 2001 and the first two
quarters of 2002, and more recently, the SEC’s review of SmartForce’s option
granting practices prior to the SmartForce Merger.
BUSINESS
OUTLOOK
In the
three months ended April 30, 2009, we generated revenue of $76.4 million as
compared to $81.6 million in the three months ended April 30, 2008. We reported
operating income in the three months ended April 30, 2009 of $27.3 million as
compared to $15.4 million in the three months ended April 30, 2008. We reported
net income in the three
months ended April 30, 2009 of $18.8 million as compared to $7.1 million in the
three months ended April 30, 2008.
While we
have achieved increased operating income and net income from last fiscal year’s
comparable period, we have experienced during the last nine months a
significantly more cautious customer spending 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 these challenges, our core business so far this
fiscal year has performed in accordance with our expectations. We currently
expect our revenue to decline approximately 5% to 9% this fiscal year as
compared to last fiscal year primarily due to recent changes in foreign exchange
rates and the negative effect they have on our international subsidiaries’
revenue when converted to U.S. dollars. However, given the volatility of foreign
exchange rates, our forward-looking estimates, which are based on January 31,
2009 rates, could change materially. Despite the expected decrease in revenue,
we anticipate an increase in our operating income and net income this fiscal
year as compared to last fiscal year, primarily due to a number of actions
we took in the fourth quarter of fiscal 2009 to reduce our cost structure. These
cost-saving initiatives allow us flexibility to manage our costs in light of the
difficult economic conditions we are facing. Despite these cost-savings
initiatives, we have recently added, and will continue to add, additional sales
resources in response to the cautious customer spending environment, including
our telesales business unit to continue pursuing the small and medium-sized
business markets.
In fiscal
2010 we will continue to focus on revenue and earnings growth primarily
by:
|
●
|
cross
selling and up selling;
|
|
|
carefully
managing our spending
|
|
|
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 and income taxes. We believe these accounting policies are
particularly important to the portrayal and understanding of our financial
position and results of operations and require application of significant
judgment by our management. In applying these policies, management uses its
judgment in making certain assumptions and estimates. Our critical accounting
policies are more fully described under the heading “Summary of Significant
Accounting Policies” in Note 2 of the Notes to the Consolidated Financial
Statements and under “Management’s Discussion and Analysis of Financial
Conditions and Results of Operations – Critical Accounting Policies” in our
Annual Report on Form 10-K as filed with the SEC on April 1, 2009. The policies
set forth in our Form 10-K have not changed.
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED APRIL 30, 2009 VERSUS THREE MONTHS ENDED APRIL 30,
2008
Revenue
|
THREE
MONTHS ENDED
APRIL
30,
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
PERCENT
CHANGE
|
|
2009
|
|
2008
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
76,439
|
|
|
$
|
81,643
|
|
|
$
|
(5,204
|
)
|
|
|
(6
|
)%
|
Operating
income
|
|
|
27,261
|
|
|
|
15,444
|
|
|
|
11,817
|
|
|
|
77
|
%
|
The
decrease in revenue for the three months ended April 30, 2009 versus April 30,
2008 was primarily due to the negative effect foreign exchange rates had on our
international subsidiaries’ revenue when converted to U.S. dollars.
|
THREE
MONTHS ENDED
APRIL
30,
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
PERCENT
CHANGE
|
|
2009
|
|
2008
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
58,712
|
|
|
$
|
59,052
|
|
|
$
|
(340
|
)
|
|
|
(1
|
)%
|
International
|
|
|
17,727
|
|
|
|
22,591
|
|
|
|
(4,864
|
)
|
|
|
(22
|
)%
|
Total
|
|
|
76,439
|
|
|
|
81,643
|
|
|
|
(5,204
|
)
|
|
|
(6
|
)%
|
The
decrease in revenue internationally for the three months ended April 30, 2009
versus April 30, 2008 was primarily the result of the negative effect of foreign
exchange rates as described above.
Costs
and Expenses
|
THREE
MONTHS ENDED
APRIL
30,
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
PERCENT
CHANGE
|
|
2009
|
|
2008
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
$
|
7,473
|
|
|
$
|
8,808
|
|
|
$
|
(1,335
|
)
|
|
|
(15
|
)%
|
As
a percentage of revenue
|
|
|
10
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
Cost
of revenue – amortization of intangible assets
|
|
|
32
|
|
|
|
1,740
|
|
|
|
(1,708
|
)
|
|
|
(98
|
)%
|
As
a percentage of revenue
|
|
|
—
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
The
decrease in cost of revenue in the three months ended April 30, 2009 versus the
three months ended April 30, 2008 was primarily due to a reduction in personnel
as a result of our recent cost-saving initiatives carried out in the fourth
quarter of fiscal 2009. In addition we had a reduction in outside contractor
costs and maintenance fees primarily due to the completion during fiscal 2009 of
certain NETg integration initiatives in the three months ended April 30,
2008.
The
decrease in cost of revenue - amortization of intangible assets in the three
months ended April 30, 2009 versus the three months ended April 30, 2008 was
primarily due to certain intangible assets becoming fully amortized during
fiscal 2009.
|
THREE
MONTHS ENDED
APRIL
30,
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
PERCENT
CHANGE
|
|
2009
|
|
2008
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
8,998
|
|
|
$
|
13,480
|
|
|
$
|
(4,482
|
)
|
|
|
(33
|
)%
|
As
a percentage of revenue
|
|
|
12
|
%
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
The
decrease in research and development expense in the three months ended April 30,
2009 versus the three months ended April 30, 2008 was primarily due to a
reduction in outsourced development fees of $2.9 million as well as a decrease
in compensation and benefits expense of $1.1 million primarily due to our recent
the cost-saving initiatives instituted in the fourth quarter of fiscal 2009
and that continued into the current fiscal year. The reduction in professional
fees was also due to the three months ended April 30, 2008 including costs
attributable to the NETg acquisition, which included maintaining multiple
platforms and product commitments assumed prior to the completion of the
integration.
|
THREE
MONTHS ENDED
APRIL
30,
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
PERCENT
CHANGE
|
|
2009
|
|
2008
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
$
|
22,411
|
|
|
$
|
29,700
|
|
|
$
|
(7,289
|
)
|
|
|
(25
|
)%
|
As
a percentage of revenue
|
|
|
29
|
%
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
The
decrease in selling and marketing expense in the three months ended April 30,
2009 versus the three months ended April 30, 2008 was primarily due to a
decrease in compensation and benefits expense of $4.7 million. This decrease was
primarily the result of a reduction in our field support personnel as part of
our cost-saving initiatives as well as a reduction in commission expense which
was primarily due to when certain commissions were earned as a result of changes
to the structure of our compensation plan. We also had a reduction in marketing
expense related to demand generation of $0.3 million and a reduction in travel
expenses of $0.6 million as a result of our cost-saving initiatives. In
addition, a major customer event which occurred during the first quarter of our
last fiscal year will not occur until the second quarter of this fiscal year,
and this resulted in a $1.0 million reduction in expenses for the three months
ended April 30, 2009 versus the three months ended April 30, 2008.
|
THREE
MONTHS ENDED
APRIL
30,
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
PERCENT
CHANGE
|
|
2009
|
|
2008
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$
|
7,757
|
|
|
$
|
8,892
|
|
|
$
|
(1,135
|
)
|
|
|
(13
|
)%
|
As
a percentage of revenue
|
|
|
10
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
The
decrease in general and administrative expense in the three months ended April
30, 2009 versus the three months ended April 30, 2008 was primarily due to a
reduction of $0.8 million in legal and professional fees. This was primarily due
to the feasibility analysis related to our business realignment strategy
becoming substantially complete during fiscal 2009 as well as a reduction in tax
and accounting fees related to our ongoing operations. In addition, we had a
decrease in compensation and benefits expense of $0.2 million as a result of a
reduction in personnel as part of our cost-saving initiatives.
|
THREE
MONTHS ENDED
APRIL
30,
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
PERCENT
CHANGE
|
|
2009
|
|
2008
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
$
|
2,455
|
|
|
$
|
2,997
|
|
|
$
|
(542
|
)
|
|
|
(18
|
)%
|
As
a percentage of revenue
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
Merger
and integration related expenses
|
|
|
—
|
|
|
$
|
520
|
|
|
|
(520
|
)
|
|
|
(100
|
)%
|
As
a percentage of revenue
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
52
|
|
|
$
|
—
|
|
|
|
52
|
|
|
|
*
|
|
As
a percentage of revenue
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
SEC
investigation
|
|
|
—
|
|
|
$
|
62
|
|
|
|
(62
|
)
|
|
|
(100
|
)%
|
As
a percentage of revenue
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
____________
* Not
meaningful
The
decrease in amortization of intangible assets for the three months ended April
30, 2009 versus April 30, 2008 was primarily due to certain assets becoming
fully amortized during fiscal 2009.
During
the three months ended April 30, 2009, we incurred merger and integration
expenses related to the NETg acquisition. We completed our efforts to integrate
NETg’s operations during fiscal 2009.
|
THREE
MONTHS ENDED
APRIL
30,
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
PERCENT
CHANGE
|
|
2009
|
|
2008
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
$
|
(618
|
)
|
|
$
|
(403
|
)
|
|
$
|
(215
|
)
|
|
|
53
|
%
|
As
a percentage of revenue
|
|
|
(1
|
)%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
70
|
|
|
$
|
617
|
|
|
|
(547
|
)
|
|
|
(89
|
)%
|
As
a percentage of revenue
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(2,445
|
)
|
|
$
|
(3,986
|
)
|
|
|
1,541
|
|
|
|
(39
|
)%
|
As
a percentage of revenue
|
|
|
(3
|
)%
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
____________
The
increase in other expense, net in the three months ended April 30, 2009 versus
the three months ended April 30, 2008 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.
The
reduction in interest income in the three months ended April 30, 2009 versus the
three months ended April 30, 2008 was primarily due to a reduction in our
short-term investments attributed to our share buyback program and our
significant long term debt repayments as well as lower interest
rates.
The
decrease in interest expense in the three months ended April 30, 2009 versus the
three months ended April 30, 2008 was primarily due to a reduction of our long
term debt as a result of $69.4 million in principal debt repayments made since
April 30, 2008.
Provision
for Income Taxes
|
THREE
MONTHS ENDED
APRIL
30,
|
|
DOLLAR
INCREASE/(DECREASE)
|
|
PERCENT
CHANGE
|
|
2009
|
|
2008
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$
|
5,489
|
|
|
$
|
4,506
|
|
|
$
|
983
|
|
|
|
22
|
%
|
As
a percentage of revenue
|
|
|
7
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
For the
three months ended April 30, 2009 and 2008, our effective tax rates, exclusive
of any discrete charges, were 24.3% and 35.9% respectively. The decrease in the
current year effective tax rate is primarily due to a change in the geographical
distribution of worldwide earnings, reflecting our business realignment
strategy. For the three months ended April 30, 2009 and 2008, the effective tax
rate was higher than the Irish statutory rate of 12.5% due primarily to earnings
in higher tax jurisdictions outside of Ireland.
LIQUIDITY
AND CAPITAL RESOURCES
As of
April 30, 2009, our principal source of liquidity was our cash and cash
equivalents and short-term investments, which totaled $77.4 million. This
compares to $39.0 million at January 31, 2009.
Net cash
provided by operating activities of $65.0 million for the three months ended
April 30, 2009 was primarily due to a decrease in accounts receivable of $81.2
million. Net cash provided by operating activities was also a result of net
income from continuing operations of $18.8 million, which included the impact of
non-cash expenses for depreciation and amortization and amortization of
intangible assets of $3.8 million, non-cash provision for income taxes of $3.3
million and share-based compensation expense of $1.6 million. These amounts were
partially offset by a decrease in accrued expenses of $12.3 million and deferred
revenue of $29.2 million as well as a decrease in accounts payable of $3.4
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. During the three months ended April 30, 2009
the decrease in accounts receivable was $81.2 million as compared to $71.5
million during the three months April 30, 2008. This change is primarily due to
the timing of collections.
Net cash
used in investing activities was $0.5 million for the three months ended April
30, 2009, which includes the purchases of capital assets of approximately $1.0
million. This was partially offset by the maturity of investments, net of
purchases, generating a cash inflow of approximately $0.5 million.
Net cash
used in financing activities was $26.3 million for the three months ended April
30, 2009. During this period, we made principal payments on our debt of $18.3
million and purchased our own shares having a value of $9.4 million under our
shareholder-approved share repurchase program. These uses of cash were partially
offset by proceeds of $1.4 million received from the exercise of share options
under our various share option programs, including the related tax benefit, and
share purchases made under our 2004 Employee Share Purchase Plan.
We had a
working capital deficit of approximately $9.8 million as of April 30, 2009 and
approximately $11.9 million as of January 31, 2008. The increase in working
capital was primarily due to net income from continuing operations of $18.8
million, which includes non-cash charges for depreciation and amortization of
$3.8 million, share-based compensation expense of $1.6 million and a non-cash
tax charge of $3.3 million. Additionally, we received proceeds of $1.4 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. This was
partially offset by principal debt payments of $18.3 million and the purchase of
treasury shares having a value of $9.4 million under our shareholder-approved
share repurchase program.
As of
January 31, 2009, we had U.S. federal NOL carryforwards of $214.2 million. These
NOL carryforwards represent the gross carrying value of the operating loss
carryforwards and are available to reduce future taxable income, if any, through
2025. We completed several financings since our inception and have incurred
ownership changes as defined under Section 382 of the Internal Revenue Code. We
completed an analysis of these changes and do not believe that the changes will
have a material impact on our ability to use these net operating loss
carryforwards. Included in the $214.2 million of U.S. federal NOL carryforwards
is $114.7 million of U.S. NOL carryforwards that were acquired in the SmartForce
Merger and the purchase of Books24X7, $55.4 million of NOL carryforwards
resulting from disqualifying dispositions and $44.1 million of U.S. NOL
carryforwards that relate to our operations. We will realize the benefit of the
disqualifying disposition losses through increases to shareholders' equity in
the periods in which the losses are utilized to reduce tax payments.
Additionally, we have $190.2 million of Irish NOL carryforwards. These NOL
carryforwards represent the gross carrying value of the operating loss
carryforwards. Included in the $190.2 million are $149.8 million of NOL
carryforwards which were acquired in the SmartForce Merger and $40.4 million of
NOL carryforwards that relate to our Irish operations. We also had U.S. federal
tax credit carryforwards of approximately $3.9 million at January 31,
2009.
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
|
|
$
|
13,096
|
|
|
$
|
4,056
|
|
|
$
|
5,772
|
|
|
$
|
3,176
|
|
|
$
|
92
|
|
Debt
Obligations
|
|
|
105,091
|
|
|
|
1,070
|
|
|
|
2,140
|
|
|
|
101,881
|
|
|
|
-
|
|
Total
Obligations
|
|
$
|
118,187
|
|
|
$
|
5,126
|
|
|
$
|
7,912
|
|
|
$
|
105,057
|
|
|
$
|
92
|
|
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 Credit Suisse and 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
Amendment”). The primary purpose of the Amendment was to expand our and our
subsidiaries’ ability to make additional repurchases of our 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 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 were not, however, required in connection
with the first $24.0 million of repurchases made from and after July 7, 2008.
The Amendment also provides for an increase in the annual interest rate on the
term loan to, at our election, (i) base rate plus a margin of 2.5% or (ii)
adjusted LIBOR plus margin of 3.5%.
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 April 1, 2009 for a detailed
description of the credit agreement, as amended.
We expect
that the principal sources of funding for our operating expenses, capital
expenditures, debt payment obligations, share repurchases 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. 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 reporting our audited and unaudited financial results in accordance
with United States generally accepted accounting principles (GAAP), to assist
investors we 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 unusual 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 our results on a
more consistent basis to the results of other companies in our industry. By
excluding charges such as merger and integration related expenses and one-time
or infrequent charges 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
April 30, 2009, 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 multinational operations, our business is subject to fluctuations based upon
changes in the exchange rates between the currencies in which we collect revenue
or pay expenses and the U.S. dollar. Our expenses are not necessarily incurred
in the currency in which revenue is generated, and, as a result, we are required
from time to time to convert currencies to meet our obligations. These currency
conversions are subject to exchange rate fluctuations, in particular changes to
the value of the Euro, Canadian dollar, Australian dollar, New Zealand dollar,
Singapore dollar, and pound sterling relative to the U.S. dollar, which could
adversely affect our business and our results of operations. During the three
months ended April 30, 2009 and 2008, we incurred foreign currency exchange
losses of $0.7 million and $0.6 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 April 30, 2009. The term “disclosure controls and procedures,”
as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (the “Exchange Act”), means controls and other procedures of a company that
are designed to ensure that information required to be disclosed by a company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SEC’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. Our
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of April 30, 2009, our
chief executive officer and chief financial officer concluded that, as of such
date, our disclosure controls and procedures were effective at the reasonable
assurance level.
No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
April 30, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Not
applicable.
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, 2009, 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.
In the
past we have 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 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. However, we may not be
successful in identifying or consummating 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;
|
|
|
the
incurrence of unanticipated expenses associated with the acquisition or
the assumption of unknown liabilities or unanticipated financial,
accounting or other problems of the acquired company;
and
|
|
|
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 IS ESPECIALLY SUSCEPTIBLE TO GENERAL GLOBAL MARKET
AND ECONOMIC CONDITIONS.
Weakness
in the United States and/or worldwide economy has had and could continue to have
a negative effect on demand for our products and our results of operations.
Companies may not view training products and services as critical to the success
of their businesses. If these companies continue 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. In addition, during economic downturns, customers
may slow the rate at which they pay vendors or may become unable to pay their
debts as they become due, which would have a negative effect on our
results.
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 human resources outsourcers of
potential customers; and
|
|
|
value-added
resellers and network
integrators.
|
Growing
competition may result in price reductions, reduced revenue and gross profits
and loss of market share, any one of which would have a material adverse effect
on our business. Many of our current and potential competitors have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition, and we expect to face increasing
price pressures from competitors as managers demand more value for their
training budgets. Accordingly, we may be unable to provide e-learning solutions
that compare favorably with new instructor-led techniques, other interactive
training software or new e-learning solutions.
WE RELY
ON A LIMITED NUMBER OF THIRD PARTIES TO PROVIDE US WITH EDUCATIONAL CONTENT FOR
OUR COURSES AND REFERENCEWARE, AND OUR ALLIANCES WITH THESE THIRD PARTIES MAY BE
TERMINATED OR FAIL TO MEET OUR REQUIREMENTS.
We rely
on a limited number of independent third parties to provide us with the
educational content for a majority of our courses based on learning objectives
and specific instructional design templates that we provide to them. We do not
have exclusive arrangements or long-term contracts with any of these content
providers. If one or more of our third party content providers were to stop
working with us, we would have to rely on other parties to develop our course
content. In addition, these providers may fail to develop new courses or
existing courses on a timely basis. We cannot predict whether new content or
enhancements would be available from reliable alternative sources on reasonable
terms. In addition, 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 HAVE, AND COULD CONTINUE TO,
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 have and
could continue to adversely affect our business and results of
operations.
LEGISLATION
HAS RECENTLY BEEN INTRODUCED IN THE UNITED STATES CONGRESS THAT COULD, IF
ENACTED IN ITS CURRENT FORM, SUBJECT US TO TAXATION AS A U.S. CORPORATION, WHICH
COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We are
aware of two bills recently proposed in Congress that seek to prevent U.S.
companies from taking advantage of tax shelters in foreign jurisdictions. One of
these proposed bills would, if enacted in its current form, tax a foreign
corporation as domestic if it is publicly traded and managed and controlled in
the U.S. At this point, it is impossible to tell whether any of the proposed
bills will be enacted into law, or whether the provisions of any enacted bill
would apply to SkillSoft. In addition, we believe that if any such bill
does become law, it would not take effect for several years. If any tax
legislation of this nature is ultimately adopted, we would assess its impact on
us and take steps, where appropriate, to mitigate such impact. However, it is
possible that we could become subject to additional taxes as a result of the
adoption of such legislation.
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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difficulties
or delays in developing and supporting non-English language versions of
our products and services;
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political
and economic conditions in various
jurisdictions;
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difficulties
in staffing and managing foreign subsidiary
operations;
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longer
sales cycles and account receivable payment
cycles;
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multiple,
conflicting and changing governmental laws and
regulations;
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foreign
currency exchange rate
fluctuations;
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protectionist
laws and business practices that may favor local
competitors;
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difficulties
in finding and managing local
resellers;
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potential
adverse tax consequences; and
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the
absence or significant lack of legal protection for intellectual property
rights.
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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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our
need to educate potential customers about the benefits of our
products;
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competitive
evaluations by customers;
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the
customers’ internal budgeting and approval
processes;
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the
fact that many customers view training products as discretionary spending,
rather than purchases essential to their business;
and
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the
fact that we target large companies, which often take longer to make
purchasing decisions due to the size and complexity of the
enterprise.
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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 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.
IN PRIOR
YEARS, 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 been delayed in the filing
of 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, has declined significantly in recent months 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 April 30, 2009, certain of our subsidiaries repurchased
our ADSs as follows:
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Period
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(a)
Total
Number of Shares Purchased (1)
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(b)
Average
Price Paid per Share $
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(c)
Total
Number of Shares Purchased as Part of Publicly Announced or Program
(2)
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(d)
Maximum
Number of Shares that May Yet Be Purchased Under the
Program
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February
1, 2009 – February 28, 2009
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210,000 |
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$ |
7.24 |
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210,000 |
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13,692,685 |
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March
1, 2009 – March 31, 2009
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355,200 |
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6.22 |
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355,200 |
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13,337,485 |
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April
1, 2009 – April 30, 2009
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719,854 |
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7.82 |
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719,854 |
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12,617,631 |
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Total
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1,285,054 |
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$ |
7.28 |
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1,285,054 |
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12,617,631 |
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____________
(1)
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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.
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(2)
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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.
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Not
applicable.
Not
applicable.
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.
SKILLSOFT PUBLIC LIMITED
COMPANY
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Date:
June 9, 2009
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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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10.1 |
Lease
agreement, dated June 9, 2004, as amended, by and between
Hewlett-Packard Company and SkillSoft
Corporation.
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31.1
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Certification
of SkillSoft PLC’s Chief Executive Officer pursuant to Rule 13a-14(a)/Rule
15(d)-14(a) under the Securities Exchange Act of 1934.
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31.2
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Certification
of SkillSoft PLC’s Chief Financial Officer pursuant to Rule 13a-14(a)/Rule
15(d)-14(a) under the Securities Exchange Act of 1934.
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32.1
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Certification
of SkillSoft PLC’s Chief Executive Officer pursuant to Rule 13a-14(b)/Rule
15d-14(b) under the Securities Exchange Act of 1934, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification
of SkillSoft PLC’s Chief Financial Officer pursuant to Rule 13a-14(b)/Rule
15d-14(b) under the Securities Exchange Act of 1934, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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