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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2000
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 000-28823
SKILLSOFT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 02-0496115
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
20 INDUSTRIAL PARK DRIVE 03062
NASHUA, NEW HAMPSHIRE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 324-3000
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 [X] No [ ]
On December 1, 2000, the Registrant had outstanding 13,274,855 shares of common
stock, $.001 par value per share.
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SKILLSOFT CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of
October 31, 2000 and January 31, 2000 ......................................................... 3
Condensed Consolidated Statements of Operations
for the three and nine months ended October 31, 2000 and 1999 ................................. 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended October 31, 2000 and 1999 ........................................... 5
Notes to Condensed Consolidated Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................... 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 23
Item 2. Changes in Securities and Use of Proceeds...................................................... 23
Item 3. Defaults Upon Senior Securities................................................................ 23
Item 4. Submission of Matters to a Vote of Security Holders............................................ 23
Item 5. Other Information.............................................................................. 24
Item 6. Exhibits and Reports on Form 8-K............................................................... 24
SIGNATURES.............................................................................................. 25
EXHIBIT INDEX........................................................................................... 26
</TABLE>
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PART I
ITEM 1. - FINANCIAL STATEMENTS
SKILLSOFT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
As of October 31, As of January 31,
2000 2000
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,205,516 $ 734,595
Short-term investments 6,924,892 --
Accounts Receivable 2,245,965 422,713
Prepaid expenses and other current assets 2,234,435 1,397,028
------------ ------------
Total current assets 31,610,808 2,554,336
PROPERTY AND EQUIPMENT, NET 1,201,742 558,052
------------ ------------
$ 32,812,550 $ 3,112,388
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of Credit $ -- $ 4,513,209
Accounts payable 1,370,431 702,557
Accrued expenses 4,065,567 2,834,030
Deferred revenue 4,119,123 1,419,990
------------ ------------
Total current liabilities 9,555,121 9,469,786
STOCKHOLDERS' EQUITY(DEFICIT):
Preferred Stock -- 20,710,256
Class A common stock -- 2,848
Common stock 13,278 --
Additional paid-in capital 75,245,357 7,460,320
Warrants outstanding 319,228 319,228
Deferred compensation (1,894,910) (2,479,910)
Notes receivable from
stockholders (339,063) (339,063)
Accumulated deficit (50,047,234) (32,045,346)
Cumulative translation
adjustment (39,227) 14,269
------------ ------------
Total stockholders' equity
(deficit) 23,257,429 (6,357,398)
------------ ------------
$ 32,812,550 $ 3,112,388
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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SKILLSOFT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE $ 5,510,529 $ 1,282,978 $ 11,263,841 $ 2,371,202
COST OF REVENUE(1) 423,824 243,229 981,464 497,684
------------ ------------ ------------ ------------
Gross margin 5,086,705 1,039,749 10,282,377 1,873,518
OPERATING EXPENSES:
Research and development(1) 3,547,662 2,141,197 10,445,956 5,884,318
Selling and marketing(1) 5,577,826 2,319,837 14,616,412 5,169,223
General and administrative(1) 1,457,961 1,045,245 4,154,124 3,009,762
Amortization of deferred
stock-based compensation 195,000 150,943 585,000 189,288
------------ ------------ ------------ ------------
Total operating expenses 10,778,449 5,657,222 29,801,492 14,252,591
INTEREST INCOME, NET 566,445 26,186 1,517,227 145,872
------------ ------------ ------------ ------------
NET LOSS (5,125,299) (4,591,287) (18,001,888) (12,233,201)
Preferred Stock Dividend -- 3,765,000 -- 3,765,000
------------ ------------ ------------ ------------
Net loss attributable to Common
Shareholders $ (5,125,299) $ (8,356,287) $(18,001,888) $(15,998,201)
============ ============ ============ ============
NET LOSS PER SHARE
Basic and diluted loss per share $ (0.40) $ (4.23) $ (1.43) $ (8.65)
============ ============ ============ ============
Basic and diluted weighted average
shares outstanding (see note 8) 12,896,891 1,975,181 12,545,524 1,848,723
============ ============ ============ ============
Pro forma basic and diluted loss per share $ (0.54) $ (1.56)
============ ============
Pro forma basic and diluted weighted
average shares outstanding (see note 8) 8,569,971 7,850,898
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
(1) The following summarizes the departmental allocation of stock-based
compensation:
<TABLE>
<S> <C> <C> <C> <C>
Cost of revenue $ 26,983 $ 22,462 $ 80,949 $ 28,168
Research and development 91,828 76,919 275,484 96,460
Selling and marketing 75,150 50,688 225,450 63,565
General and administrative 1,039 874 3,117 1,095
-------- -------- -------- --------
Total stock-based compensation $195,000 $150,943 $585,000 $189,288
======== ======== ======== ========
</TABLE>
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SKILLSOFT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 31,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(18,001,888) $(12,233,201)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred compensation 585,000 189,288
Depreciation and amortization 288,642 151,213
Changes in current assets and liabilities:
Accounts receivable (1,849,238) (1,319,764)
Prepaid expenses and other current assets (862,328) (861,645)
Accounts payable 685,626 142,485
Accrued expenses 1,259,227 681,669
Deferred revenue 2,714,592 627,347
------------ ------------
Net cash used in operating activities (15,180,367) (12,622,608)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (939,588) (242,555)
Purchases of short-term investments (33,763,059) (9,868,310)
Maturity of short-term investments 26,838,166 13,210,012
------------ ------------
Net cash (provided by) used in investing activities (7,864,481) 3,099,147
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock in the initial public offering,
net 45,058,894 --
Issuance of common stock to Interim Services, Inc. 1,999,998 --
Issuance of Series B convertible preferred stock, net -- 4,999,894
Issuance of Series C convertible preferred stock, net -- 3,758,821
Issuance of Class A restricted common stock -- 155,437
Proceeds from exercise of stock options 26,319 8,543
Proceeds from Line of Credit -- 501,445
Payments on line of credit (4,500,000) --
------------ ------------
Net cash provided by financing activities 42,585,211 9,424,140
Effect of exchange rate changes on cash and cash
equivalents (69,442) 3,890
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19,470,921 (95,431)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 734,595 623,322
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,205,516 $ 527,891
------------ ------------
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING TRANSACTIONS:
Issuance of Class A restricted common stock for notes
receivable from stockholders $ -- $ 32,813
------------ ------------
Preferred stock dividend due to beneficial conversion
Feature of Series C convertible preferred stock $ -- $ 3,765,000
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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SKILLSOFT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OPERATIONS
SkillSoft Corporation (the "Company" or "SkillSoft") was incorporated
in Delaware on October 15, 1997. The Company commenced operations on January 8,
1998 in conjunction with its initial round of financing. The Company is a
provider of web-based training resources that cover a variety of professional
effectiveness and business topics.
On February 4, 2000, the Company closed its initial public offering of
3,100,000 shares of common stock at a public offering price of $14 per share. On
February 15, 2000, in connection with the exercise of the underwriters'
over-allotment option, the Company issued an additional 465,000 shares of common
stock at the initial public offering price of $14 per share. Net proceeds to the
Company from the initial public offering and the exercise of the over-allotment
option were approximately $45,000,000.
Upon the closing of the initial public offering, all shares of Class A
common stock issued and outstanding were converted into a new single class of
common stock. In addition, all shares of Series A, Series B and Series C
convertible preferred stock were converted into 6,638,095 shares of common
stock.
2. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included
herein have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such SEC rules and regulations. Nevertheless, the management
of the Company believes that the disclosures herein are adequate to make the
information presented not misleading. In the opinion of management, the
condensed consolidated financial statements reflect all material adjustments (of
a normal and recurring nature) which are necessary to present fairly the
consolidated financial position of the Company as of October 31, 2000 and the
results of its operations and its cash flows for the three and nine months ended
October 31, 2000 and 1999. 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. The results of operations for the interim period are not necessarily
indicative of the results of operations for the full year.
3. CASH, CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investments with original
maturities of 90 days or less at the time of purchase to be cash equivalents. At
October 31, 2000 and January 31, 2000, cash equivalents consisted mainly of
money market funds. The Company accounts for its investments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Under SFAS No. 115,
securities that the Company has the positive intent and ability to hold to
maturity are reported at amortized cost, which approximates market value, and
are classified as held-to-maturity. At
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October 31, 2000, the Company's investments consisted of held-to-maturity
securities that are investments in high grade commercial paper instruments,
short-term notes and U.S. Treasury bills, which had an average maturity of 179
days. All of these investments are classified as current assets in the
accompanying consolidated balance sheets as they mature within one year.
4. REVENUE RECOGNITION
The Company follows the provisions of the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software
Revenue Recognition, as amended by SOP 98-4. The AICPA issued SOP 98-9, which
provides amendments to SOP 97-2, and was effective for transactions entered into
beginning January 1, 2000 The Company derives revenue primarily pursuant to
license agreements under which customers license usage of delivered products for
a period of one, two or three years. On each anniversary date during the term of
multi-year license agreements, customers are generally allowed to exchange any
or all of the licensed products for an equivalent number of alternative products
within the Company's course library.
The annual license fee for the first year is generally billed in
advance. Revenue is recognized either at the time of delivery of products or
over the term of the contract, depending on specific contract terms. In the
event that the customer initially specified the entire set of licensed courses
to be delivered and those courses are available and delivered, the license
revenue for the first year of the contract is recognized upon execution of the
contract. License fees for subsequent years of multiyear license agreements will
be generally billed on the anniversary date of the agreement and recognized in
the manner described above or, if the customer exchanges courses at the renewal
date, upon delivery of the exchanged courses. Revenue is recognized ratably over
the license period if the customer does not initially specify the entire set of
licensed courses or is given exchange privileges that are exercisable other than
on the contract anniversaries, or if the customer licenses all courses currently
available and to be developed during a particular term.
The Company also derives service revenue from installation and
technical support, extranet hosting and online mentoring services, which is
recognized as revenue as the service is performed. For the three and nine months
ended October 31, 2000, the Company recognized approximately $132,000 and
$293,000 of service revenue, respectively, compared to $39,500 and $51,270 of
service revenue recognized in the three and nine months ended October 31, 1999.
The Company may offer payment terms generally up to six months from the initial
shipment date or anniversary date for multi-year agreements to some of its
customers. The cost of satisfying any Post Contract Support (PCS) is accrued and
included in deferred revenue at the time revenue is recognized, as PCS fees are
included in the annual license fee. The estimated cost of providing PCS during
the agreements is insignificant and the Company does not offer it separately.
Unspecified upgrades or enhancements offered have been and are expected to be
minimal and infrequent. For multi-element agreements, vendor specific objective
evidence exists to allocate the total fee to the elements of the agreement.
Deferred revenue represents the unrecognized portion of the license fees and PCS
for which the Company has received payment and amounts that have been accrued
for PCS.
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5. COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of
all components of comprehensive income (loss) on an annual and interim basis.
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions, other events and circumstances
from nonowner sources. The components of comprehensive income (loss) for the
three and nine months ended October 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Comprehensive loss:
Net loss $ (5,125,299) $ (4,591,287) $(18,001,888) $(12,233,201)
Other comprehensive (loss)
Foreign currency Adjustment (28,365) 4,736 (53,496) 4,736
------------ ------------ ------------ ------------
Comprehensive loss $ (5,153,664) $ (4,586,551) $(18,055,384) $(12,228,465)
============ ============ ============ ============
</TABLE>
6. NET LOSS PER SHARE
Basic and diluted net loss per common share was determined by dividing
net loss applicable to common shareholders by the weighted average common shares
outstanding during the period, less shares subject to repurchase. Basic and
diluted net loss per share are the same, as outstanding unvested shares of
restricted common stock, common stock options and convertible preferred stock
are antidilutive because the Company has recorded a net loss for all periods
presented. Unvested shares of restricted common stock and common stock options
totaling 1,476,063 and 1,622,366 common shares have been excluded from the
computation of diluted weighted average shares outstanding for the three and
nine months ended October 31, 1999 and 2000, respectively. Warrants to purchase
60,606 shares of common stock outstanding at October 31, 2000, have also been
excluded from the computation of diluted weighted average shares outstanding for
the three and nine months ended October 31, 2000 as their effects are
antidilutive.
The calculation of pro forma net loss per common share for the three
and nine months ended October 31, 1999 assumes that all Series A and Series B
convertible preferred stock had been converted to common stock as of the
issuance date, and excludes the preferred stock dividend from the calculation of
the net loss.
7. SEGMENT REPORTING
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, in the fiscal year ended January 31, 1999.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions how to
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allocate resources and assess performance. The Company's chief operating
decision-makers, as defined under SFAS No. 131, are the Chief Executive Officer
and the Chief Financial Officer. To date, the Company has viewed its operations
and manages its business as principally one operating segment. As a result, the
financial information disclosed herein represents all of the material financial
information related to the Company's principal operating segment.
8. LITIGATION
There have been no significant changes in the status of the outstanding
litigation as reported in SkillSoft's Annual Report on Form 10-K filed on May 1,
2000 as updated by the Quarterly Report on Form 10-Q filed on September 13,
2000.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of SkillSoft should be read in conjunction with
SkillSoft's financial statements and notes appearing elsewhere in this Quarterly
Report on Form 10-Q. This discussion and analysis contains forward-looking
statements that involve risks and uncertainties. SkillSoft's actual results may
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including but not limited to those set forth under
"Future Operating Results" below.
OVERVIEW
SkillSoft commenced operations in January 1998, and until March 1999,
devoted substantially all of its efforts to product development, establishing a
course content developer and supplier base, and building a direct sales and
support organization in the United States and a business application and network
infrastructure to support future growth. Since March 1999, SkillSoft has devoted
substantial resources to sales and marketing activities as well as to continued
product development, and have recorded revenue, although it is not yet
profitable. SkillSoft had an accumulated deficit of $50,047,234 as of October
31, 2000. SkillSoft expects to incur additional losses through at least the
first several quarters of the fiscal year ending January 31, 2002, due primarily
to substantial increases in sales and marketing expenditures related to
expanding its direct sales organization in North America, Europe and Australia
and to increased personnel-related costs
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and expenditures for travel, advertising, public relations, recruiting and other
activities. Research and development expenses will also contribute to losses
during this period as SkillSoft continues to introduce new courses. Legal costs
may also increase due to the defense of lawsuits filed against SkillSoft and
certain of its executives by NETg.
SkillSoft derives revenue primarily from license agreements under which
customers license its courses for periods of one, two or three years. The
pricing for licenses varies based upon the number of course titles licensed by a
customer, the number of users within the customer's organization and the length
of the license agreement. For example, a customer would pay SkillSoft
approximately $106,250 per year for a three-year license for 25 courses for
5,000 users. SkillSoft's license agreements may permit customers to exchange
courses, generally on the contract anniversary date. Customers may amend the
license agreements, for an additional fee, to gain access to additional courses
and/or to increase the size of the user base. SkillSoft also derives revenue on
a pay-for-use basis under which some customers are charged based on the number
of courses accessed by users. Revenue derived from pay-for-use contracts has
been minimal to date.
The annual license fee for the first year is generally billed in
advance. Revenue is recognized either at the time of delivery of products or
over the term of the contract, depending on specific contract terms. In the
event that the customer initially specifies the entire set of licensed courses
to be delivered and those courses are available and delivered, the license
revenue for the first year of the contract is recognized upon execution of the
contract. License fees for subsequent years of multi-year license agreements
will be generally billed on the anniversary date of the agreement and recognized
in the manner described above, or if the customer exchanges courses at the
renewal date, upon delivery of the exchanged courses. Revenue is recognized
ratably over the license period if the customer does not initially specify the
entire set of licensed courses or is given exchange privileges that are
exercisable other than on the contract anniversaries, or if the customer
licenses all courses currently available and to be developed during a particular
term. This revenue recognition practice results in the building of backlog of
future revenue streams. Revenue is recognized as billed monthly or quarterly
under the pay-for-use model. SkillSoft also derives revenue from optional
complementary services such as extranet hosting and mentoring services, which
have been minimal to date. SkillSoft may offer payment terms up to six months
from the initial shipment date or anniversary date for multi-year agreements.
SkillSoft's backlog at any given time represents the amount of license
fees which are due to SkillSoft under existing license agreements but which have
not yet been recognized as revenue. This amount is comprised of license fees
attributable to licensed courses that have not yet been selected by the customer
or delivered by SkillSoft and to future years of non-cancellable multi-year
license agreements. SkillSoft's backlog can vary based upon a number of factors,
including the timing of the execution of new license agreements, the timing of
product deliveries and the length of SkillSoft license agreements.
Cost of revenue includes the cost of materials (such as CD-ROM media),
packaging, duplication, custom library CD production, internet hosting services,
the cost of Online Mentoring services, royalties and certain infrastructure and
occupancy expenses. These costs of revenue are generally recognized as incurred.
Research and development expenses consist primarily of salaries and benefits,
certain infrastructure and occupancy expenses, fees to consultants and course
content development fees. Software development costs are accounted for
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in accordance with SFAS No. 86, which requires the capitalization of certain
computer software development costs incurred after technological feasibility is
established. To date, development costs after establishment of technological
feasibility have been immaterial, and all software development costs have been
expensed as incurred. Selling and marketing expenses consist primarily of
salaries, commissions and benefits, advertising and promotion, travel and
certain infrastructure and occupancy expenses. General and administrative
expenses consist primarily of salaries and benefits, consulting and service
expenses, legal expenses and certain infrastructure and occupancy expenses.
RESULTS OF OPERATIONS
Comparison of the three months ended October 31, 2000 and 1999
Revenue increased $4,227,551, or 330%, to $5,510,529 million in the
three months ended October 31, 2000 from $1,282,978 in the three months ended
October 31, 1999. This increase is due to continuing revenue from our existing
customers as well as new customers signed during the quarter ended October 31,
2000. One customer accounted for 9% of revenue for the three months ended
October 31, 2000.
Cost of revenue increased $180,595, or 74%, to $423,824 in the three
months ended October 31, 2000 from $243,229 in the three months ended October
31, 1999. Total cost of revenue as a percentage of total revenue decreased to 8%
in the three months ended October 31, 2000 from 19% in the three months ended
October 31, 1999. This decrease as a percentage of revenue was primarily due to
the spreading of these costs of revenue, many of which are fixed, over a
significantly larger revenue base.
Research and development expenses increased $1,406,465, or 66%, to
$3,547,662 in the three months ended October 31, 2000 from $2,141,197 in the
three months ended October 31, 1999. Research and development expenses as a
percentage of total revenue decreased to 64% in the three months ended October
31, 2000 from 167% in the three months ended October 31, 1999. Research and
development expenses increased due to increased personnel and courseware
development costs. Since SkillSoft's strategy includes offering the largest
library of critical business skill (soft skills) courses in the industry,
SkillSoft believes that a significant investment in research and development is
necessary to remain competitive, and SkillSoft therefore expects research and
development expenses to continue to increase.
Selling and marketing expenses increased $3,257,989, or 140%, to
$5,577,826 in the three months ended October 31, 2000 from $2,319,837 in the
three months ended October 31, 1999. Selling and marketing expenses as a
percentage of total revenue decreased to 101% in the three months ended October
31, 2000 from 181% in the three months ended October 31, 1999. Selling and
marketing expenses increased due to increased personnel, commissions, marketing,
and travel costs. SkillSoft believes that a significant investment in selling
and marketing to expand its distribution channel worldwide is required to remain
competitive, and SkillSoft therefore expects selling and marketing expenses to
continue to increase.
General and administrative expenses increased $412,716, or 39%, to
$1,457,961 in the three months ended October 31, 2000 from $1,045,245 in the
three months ended October 31, 1999. General and administrative expenses as a
percentage of total revenue decreased to 26% in the three months ended October
31, 2000 from 81% in the three months ended October 31, 1999.
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General and administrative expenses increased due to increased personnel
expenses and additional operating expenses associated with operating as a public
company. SkillSoft anticipates that general and administrative expenses will
continue to increase due to increases in information services and additional
expenses associated with operating as a public company.
Stock-based compensation expense increased $44,057, or 29%, to $195,000
in the three months ended October 31, 2000 from $150,943 in the three months
ended October 31, 1999. The expense is the result of awards to employees at
exercise prices below the fair market value of the stock during fiscal 2000.
Interest income increased $540,259 to $566,445 in the three months
ended October 31, 2000 from $26,186 in the three months ended October 31, 1999.
This increase was due to higher cash balances as the result of proceeds from the
initial public offering.
Comparison of the nine months ended October 31, 2000 and 1999
Revenue increased $8,892,639, or 375%, to $11,263,841 million in the
nine months ended October 31, 2000 from $2,371,202 in the nine months ended
October 31, 1999. This increase is due to continuing revenue from our existing
customers as well as new customers signed during the quarter ended October 31,
2000. One customer accounted for 8% of revenue for the nine months ended October
31, 2000.
Cost of revenue increased $483,780, or 97%, to $981,464 in the nine
months ended October 31, 2000 from $497,684 in the nine months ended October 31,
1999. Total cost of revenue as a percentage of total revenue decreased to 9% in
the nine months ended October 31, 2000 from 21% in the nine months ended October
31, 1999. This decrease as a percentage of revenue was primarily due to the
spreading of these costs of revenue, many of which are fixed over a
significantly larger revenue base.
Research and development expenses increased $4,561,638, or 78%, to
$10,445,956 in the nine months ended October 31, 2000 from $5,884,318 in the
nine months ended October 31, 1999. Research and development expenses as a
percentage of total revenue decreased to 93% in the nine months ended October
31, 2000 from 248% in the nine months ended October 31, 1999. Research and
development expenses increased due to increased personnel and courseware
development costs.
Selling and marketing expenses increased $9,447,189, or 183%, to
$14,616,412 in the nine months ended October 31, 2000 from $5,169,223 in the
nine months ended October 31, 1999. Selling and marketing expenses as a
percentage of total revenue decreased to 130% in the nine months ended October
31, 2000 from 218% in the nine months ended October 31, 1999. Selling and
marketing expenses increased due to increased personnel, commissions, marketing,
and travel costs.
General and administrative expenses increased $1,144,362, or 38%, to
$4,154,124 in the nine months ended October 31, 2000 from $3,009,762 in the nine
months ended October 31, 1999. General and administrative expenses as a
percentage of total revenue decreased to 37% in the nine months ended October
31, 2000 from 127% in the nine months ended October 31, 1999. General and
administrative expenses increased due to increased personnel expenses and
additional operating expenses associated with operating as a public company.
Stock-based
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compensation expense increased $395,712, or 209%, to $585,000 in the nine months
ended October 31, 2000 from $189,288 in the nine months ended October 31, 1999.
Stock-based compensation expense increased $395,712, or 209%, to
$585,000 in the nine months ended October 31, 2000 from $189,288 in the nine
months ended October 31, 1999. The expense is the result of awards to employees
at exercise prices below the fair market value of the stock during fiscal
2000.Interest income increased $1,371,355 to $1,517,227 in the nine months ended
October 31, 2000 from $145,872 in the nine months ended October 31, 1999. This
increase was due to higher cash balances as the result of proceeds from the
initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
From inception through January 31, 2000, SkillSoft was funded primarily
through preferred stock financings with Warburg, Pincus and other minority
investors. The net proceeds from these financings through January 31, 2000 were
approximately $20,710,000. In February 2000, SkillSoft received net proceeds
totaling $45,058,894 from the sale of 3,565,000 shares of common stock in its
initial public offering.
As of October 31, 2000, SkillSoft's principal source of liquidity was
its cash and cash equivalents and marketable securities balances, which totaled
$27,130,408.
SkillSoft's primary investing activities during the nine months ended
October 31, 2000 were purchases of property and equipment, and purchases and
maturation of marketable securities. Property and equipment purchases for the
nine months ended October 31, 2000 and October 31, 1999 were approximately
$939,600 and $242,600, respectively. Purchases and maturation of marketable
securities generated a net cash outflow of approximately $7,900,000 in the nine
months ended October 31, 2000 compared to a net cash inflow of approximately
$3,100,000 in the nine months ended October 31, 1999.
Cash provided by financing activities for the nine month period ended
October 31, 2000 was approximately $42,600,000, which primarily consisted of net
proceeds from the sale of common stock in the initial public offering of
approximately $45,100,000 and proceeds from the sale of common stock to Interim
Services, Inc. of $2,000,000, partially offset by the payment of $4,500,000 on
the line of credit with Greyrock Capital. This was an increase from $9,400,000
in the nine months ended October 31, 1999, which primarily consisted of proceeds
from the issuance of Series B convertible preferred stock.
Working capital (deficit) was approximately $22,100,000 and
$(6,900,000) as of October 31, 2000 and January 31, 2000, respectively. Total
assets were approximately $32,800,000 and $3,100,000 as of October 31, 2000 and
January 31, 2000, respectively. These increases were primarily attributable to
the proceeds from the initial public offering, offset by the funding of
operations.
SkillSoft believes that its current cash, cash equivalents and
short-term investments will be sufficient to satisfy its funding needs for at
least the next 18 months.
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FUTURE OPERATING RESULTS
BECAUSE SKILLSOFT BEGAN OPERATIONS ONLY RECENTLY AND HAS A LIMITED NUMBER OF
CUSTOMERS AND A LIMITED AMOUNT OF REVENUE, INVESTORS COULD HAVE DIFFICULTY
EVALUATING SKILLSOFT'S BUSINESS AND ITS FUTURE PROSPECTS
An evaluation of the risks and uncertainties of SkillSoft's business
will be difficult because of SkillSoft's limited operating history. SkillSoft
commenced operations in January 1998 and commercially released its first product
in March 1999.
SKILLSOFT HAS INCURRED SUBSTANTIAL LOSSES, AND EXPECTS TO CONTINUE TO INCUR THEM
IN THE FUTURE, AND SKILLSOFT MAY NOT BE ABLE TO ACHIEVE OR MAINTAIN
PROFITABILITY, WHICH MAY ADVERSELY AFFECT THE MARKET PRICE OF SKILLSOFT'S COMMON
STOCK
Since SkillSoft began operations in January 1998, it has incurred
losses in every fiscal period. SkillSoft's accumulated deficit through the
quarter ended October 31, 2000 was $50,047,234. SkillSoft expects to continue to
incur substantial losses through at least the first several quarters of the
fiscal year ending January 31, 2002, and SkillSoft cannot be certain if or when
it will become profitable. If SkillSoft does not become profitable within the
timeframe expected by investors, the market price of our common stock may be
adversely affected. SkillSoft has generated relatively small amounts of revenue
while increasing expenditures in all areas in order to develop its business.
SkillSoft expects to continue to incur significant expenses, particularly in
sales and marketing, in an effort to develop our business. As a result,
SkillSoft will need to generate significant revenue to achieve and maintain
profitability. Even if SkillSoft does achieve profitability, it may not be able
to sustain or increase profitability on a quarterly or annual basis in the
future.
SKILLSOFT AND SEVERAL OF SKILLSOFT'S EXECUTIVES ARE INVOLVED IN LITIGATION WITH
NETG WHICH ALLEGES, AMONG OTHER THINGS, MISAPPROPRIATION OF TRADE SECRETS; THIS
LITIGATION WILL CONTINUE TO BE COSTLY AND DIVERT THE EFFORTS OF SKILLSOFT'S
MANAGEMENT AND MAY ULTIMATELY RESTRICT SKILLSOFT'S ABILITY TO DO BUSINESS
SkillSoft, several of SkillSoft's executives, three of SkillSoft's key
employees and SkillSoft's largest investor are involved in a lawsuit brought by
National Education Training Group, Inc. (NETg), the former employer of these
individuals. NETg alleges in substance that the defendants breached their
fiduciary and contractual obligations to NETg in connection with the
organization and operation of SkillSoft, misappropriated trade secrets from
NETg, tortiously interfered with NETg's business and employees and breached
provisions of a license agreement with NETg relating to the use of its software.
NETg maintains that the trade secrets allegedly misappropriated by SkillSoft and
the other defendants include:
- various aspects of the design and functionality of its education and
training software products;
- customer lists and information;
- relationships with service providers; and
- NETg's soft skills product line business plan
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The claims seek injunctive relief against the defendants demanding the
return, and no future use by these defendants, of the alleged trade secrets. The
claim for alleged misappropriation of trade secrets seeks compensatory damages
of $400 million and exemplary damages in the additional amount of $400 million.
The other claims seek recovery of compensatory, incidental and consequential
damages in an unspecified amount and punitive damages against various defendants
totaling in excess of $70 million. Named as defendants in the lawsuit, in
addition to SkillSoft, are Charles E. Moran, Jerald A. Nine, Jr., Mark A.
Townsend, Lee A. Ritze, Dennis E. Brown, Sally H. Welsh, Warburg, Pincus
Ventures, L.P., SkillSoft's largest investor, and each partner of Warburg.
In addition, NETg also filed suit against SkillSoft in July 2000
alleging that SkillSoft's educational and training software products infringe a
patent allegedly owned by NETg. The complaint seeks both monetary damages and
injunctive relief. SkillSoft has filed an answer and a counterclaim for a
declaration of invalidity of the NETg patent.
These lawsuits are still in discovery, and SkillSoft can not yet assess
the potential liability of SkillSoft or the other defendants. SkillSoft's
failure to prevail in these cases could have any or all of the following
significant adverse effects on SkillSoft's business and financial performance:
- injunctive relief against SkillSoft and SkillSoft's officers and
employees, which could restrict SkillSoft's ability to conduct its
business;
- an adverse judgment against SkillSoft for monetary damages;
- a settlement on unfavorable terms; or
- obligations SkillSoft has to indemnify SkillSoft's employees for
liabilities and expenses they incur in connection with the lawsuits; or
- obligations to customers for breach of SkillSoft's warranty of
noninfringement.
In addition, these cases, regardless of their outcome, will continue to
result in significant expenses in defending the lawsuits and may divert the
efforts and attention of SkillSoft's management team from normal business
operations.
SKILLSOFT'S LIMITED OPERATING HISTORY DOES NOT AFFORD SIGNIFICANT FINANCIAL DATA
UPON WHICH TO FORECAST QUARTERLY REVENUE OR OPERATING RESULTS, AND SKILLSOFT'S
OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER DUE TO THE NATURE OF
SKILLSOFT'S BUSINESS, WHICH COULD HAVE A NEGATIVE IMPACT ON THE PRICE OF
SKILLSOFT'S COMMON STOCK
As a result of SkillSoft's limited operating history, SkillSoft does
not have sufficient historical financial data upon which to forecast quarterly
revenue and operating results. If SkillSoft's quarterly revenue or operating
results falls below the expectations of investors or securities analysts; the
price of SkillSoft's common stock could fall substantially. SkillSoft's
quarterly operating results may fluctuate as a result of a variety of factors,
including:
- the fact that SkillSoft depends upon a relatively small number of
customers for its revenue, so that a delay in any particular customer
order beyond a fiscal quarter would have a significant impact on
SkillSoft's revenue for that quarter;
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- seasonality -- due to the budget and purchasing cycles of SkillSoft's
customers, SkillSoft expects its revenue and operating results will
generally be strongest in the fourth quarter of SkillSoft's fiscal year
and weakest in the first quarter; and
- the expenses SkillSoft incurs to support the anticipated growth of its
business.
Most of SkillSoft's 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
SkillSoft's expectations, SkillSoft could not proportionately reduce operating
expenses for that quarter. Any such revenue shortfall would therefore have a
disproportionate effect on SkillSoft's expected operating results for that
quarter. In addition, SkillSoft expects that a disproportionate amount of its
revenue each quarter will be recognized in the final weeks of that quarter. As a
result, any delays in receiving orders or signing contracts may defer the
associated revenue to the following quarter, which would adversely affect
SkillSoft's operating results on a quarterly basis.
SKILLSOFT'S BUSINESS WILL SUFFER IF WEB-BASED EDUCATION AND TRAINING PRODUCTS
ARE NOT WIDELY ADOPTED
SkillSoft's Web-based products represent a new and emerging approach
for the corporate soft skills education and training market. SkillSoft's success
depends substantially upon the widespread adoption of Web-based products for
education and training. The early stage of development of the market for
Web-based education and training makes it difficult for SkillSoft to predict
customer demand accurately. The failure of this market to develop, or a delay in
the development of this market -- whether due to technological, competitive or
other reasons -- would severely limit the growth of SkillSoft's business and
adversely affect SkillSoft's financial performance.
INTENSE COMPETITION FROM OTHER EDUCATION AND TRAINING COMPANIES COULD IMPAIR
SKILLSOFT'S ABILITY TO GROW AND TO ACHIEVE PROFITABILITY
The market for soft skills education and training is fragmented and
highly competitive. Increased competition may result in lost sales and may force
SkillSoft to lower prices. SkillSoft expects that competition in this market
will increase substantially in the future for a number of reasons.
One source of competition for SkillSoft's products is the internal
educational and technological personnel of potential customers. If an
organization decides to use external providers to supply some or all of its
training, SkillSoft's principal sources of competition are:
- Providers of traditional classroom instruction. Many of the companies
in this category are attempting to adapt their courses to a
non-instructor-led format suitable for deployment over the internet and
corporate intranets.
- Providers of CD-ROM training courses.
- Suppliers of online information technology training courses that are
attempting to take advantage of their current technology and customer
base and expand into the soft skills market.
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There can be no assurance that SkillSoft can maintain or improve its
competitive position. Many of SkillSoft's current and potential competitors have
longer operating histories, greater name recognition and greater financial,
technical, sales, marketing, support and other resources than SkillSoft does.
SKILLSOFT RELIES ON A LIMITED NUMBER OF THIRD PARTIES TO PROVIDE SKILLSOFT WITH
EDUCATIONAL CONTENT FOR ITS COURSES, AND THEY MAY NOT BE ABLE TO DEVELOP NEW
COURSES OR ENHANCE EXISTING COURSES ON A TIMELY BASIS
To be competitive, SkillSoft must develop and introduce on a timely
basis new course offerings which meet the needs of companies seeking to use
SkillSoft's education and training products. In addition, some of SkillSoft's
courses may need to be updated due to changes in educational doctrines or the
evolving requirements of educational institutions and certification
organizations. SkillSoft relies on independent third parties to provide it with
the educational content for its courses based on learning objectives and
specific instructional design templates that SkillSoft provides to them.
SkillSoft's most important content provider, Frontline Group Technology Center,
formerly Institute for Performance Excellence, Inc., is responsible for the
development of more than half of SkillSoft's courses. SkillSoft does not have
exclusive arrangements or long-term contracts with any of these content
providers. If one or more of SkillSoft's third party content providers were to
stop working with SkillSoft, SkillSoft would have to rely on other parties to
develop SkillSoft course content. SkillSoft cannot predict whether new content
or enhancements would be available from reliable alternative sources on
reasonable terms.
SKILLSOFT COURSE CONTENT PROVIDERS SUPPLY SKILLSOFT WITH THE EDUCATIONAL CONTENT
OF ITS COURSES AND ARE GENERALLY NOT RESTRICTED FROM DEVELOPING SIMILAR CONTENT
FOR SKILLSOFT'S COMPETITORS, WHICH COULD MAKE IT EASIER FOR SKILLSOFT
COMPETITORS TO COMPETE WITH SKILLSOFT
SkillSoft relies on independent third parties to provide SkillSoft with
the educational content for its courses based on learning objectives and
specific instructional design templates that SkillSoft provides to them.
SkillSoft's agreements with these content providers do not restrict them from
developing courses on similar topics for SkillSoft's competitors or from
competing directly with SkillSoft. As a result, SkillSoft's competitors may be
able to duplicate some of SkillSoft's course content and may, therefore, find it
easier to enter the market for soft skills education and training.
SKILLSOFT'S SUCCESS DEPENDS ON THE SERVICES OF CHARLES E. MORAN AND SKILLSOFT'S
OTHER EXECUTIVE OFFICERS AND KEY EMPLOYEES
SkillSoft's future success depends to a significant degree on the
skills and efforts of Charles E. Moran, SkillSoft's founder, Chairman of the
Board, President and Chief Executive Officer. The loss of the services of Mr.
Moran could have a material adverse effect on SkillSoft's business and financial
performance. SkillSoft also depends on the ability of SkillSoft's other
executive officers and members of senior management to work effectively as a
team. The loss of one or more of SkillSoft's executive officers or senior
management members could result in less effective development of SkillSoft's
products and management of its business, which could have a material adverse
effect on SkillSoft's business and financial performance.
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SKILLSOFT'S FUTURE GROWTH DEPENDS ON SUCCESSFUL HIRING AND RETENTION,
PARTICULARLY WITH RESPECT TO SALES, MARKETING AND DEVELOPMENT PERSONNEL, AND
SKILLSOFT MAY BE UNABLE TO HIRE AND RETAIN THE SKILLED PERSONNEL SKILLSOFT NEEDS
TO SUCCEED
SkillSoft's failure to attract and retain sufficient skilled personnel
may limit the rate at which SkillSoft can grow, may adversely affect the quality
or availability of SkillSoft's products and may result in less effective
management of SkillSoft's business, any of which may harm SkillSoft's business
and financial performance. The growth of SkillSoft's business and revenue
depends in large part upon SkillSoft's ability to attract and retain sufficient
numbers of highly skilled employees, particularly sales and marketing personnel
and product development personnel. Qualified personnel are in great demand
throughout the software industry. The demand for qualified personnel is
particularly acute in the New England area due to the large number of software
companies and the low unemployment rate in the region.
THE LENGTHY SALES CYCLE FOR SKILLSOFT'S PRODUCTS MAY MAKE ITS OPERATING RESULTS
UNPREDICTABLE AND VOLATILE
The period between SkillSoft's initial contact with a potential
customer and the purchase of SkillSoft's products by that customer typically
ranges from three to 12 months. Factors, which may contribute to SkillSoft's
long sales cycle, include:
- SkillSoft's need to educate potential customers about the benefits of
its products;
- competitive evaluations by customers;
- the customers' internal budgeting and approval processes;
- the fact that some customers view training products, as discretionary
spending, rather than purchases essential to their business; and
- the fact that SkillSoft targets large companies, which often take
longer to make purchasing decisions due to the size and complexity of
the enterprise.
SkillSoft's long sales cycle makes it difficult for SkillSoft to
predict if and when a potential sale will actually occur. In addition, if a sale
is delayed from the quarter in which SkillSoft expects it to occur, SkillSoft's
operating results for that quarter would be adversely affected.
SKILLSOFT'S FINANCIAL PERFORMANCE DEPENDS IN PART ON ITS ABILITY TO DEVELOP
BRAND AWARENESS, AND SKILLSOFT MAY NOT BE SUCCESSFUL IN DOING SO
SkillSoft believes that developing the SkillSoft brand within the
corporate training market is critical to achieving widespread acceptance of its
products. There are a number of factors which could prevent SkillSoft from
successfully developing the SkillSoft brand, including the emergence of more
successful competitors, product performance problems or customer
dissatisfaction, as well as SkillSoft's failure to devote sufficient resources
to marketing efforts.
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SKILLSOFT'S FAILURE TO PROPERLY MANAGE ITS RECENT AND ANTICIPATED GROWTH COULD
HAVE A MATERIAL ADVERSE EFFECT ON THE QUALITY OF SKILLSOFT'S PRODUCTS, ITS
ABILITY TO RETAIN KEY PERSONNEL AND THE EFFICIENCY OF ITS OPERATIONS
SkillSoft's failure to properly manage its recent and anticipated
growth could have a material adverse effect on the quality of its products, its
ability to retain key personnel and the efficiency of its operations, any of
which could have a material adverse effect on its business and financial
performance. From January 1, 1999 to October 31, 2000, the number of SkillSoft's
employees increased from 45 to 204. This growth has strained, and SkillSoft's
future growth may continue to strain, its management, operational systems and
other resources. To manage its growth effectively, SkillSoft must be able to
maintain and enhance its financial and accounting systems and controls,
integrate new personnel and manage expanded operations. There can be no
assurance SkillSoft will be able to do so.
BECAUSE MANY OF SKILLSOFT'S COURSES AND TECHNOLOGIES ARE STILL UNDER DEVELOPMENT
AND SKILLSOFT EXPECTS TO CONTINUE TO DEVELOP NEW COURSES AND ENHANCE ITS
TECHNOLOGIES, SKILLSOFT'S BUSINESS WILL SUFFER IF IT IS UNABLE TO INTRODUCE
THESE NEW COURSES AND TECHNOLOGIES ON A TIMELY BASIS OR IF NEW COURSES ARE
UNSUCCESSFUL
SkillSoft's future success will depend significantly on whether it is
able to introduce new courses and enhance its Web-based technologies as planned.
While SkillSoft has new courses and technology features scheduled for commercial
launch, SkillSoft cannot assure investors that it will be successful in
releasing them as scheduled, or that they will meet with market acceptance.
SkillSoft may not have sufficient resources to develop the new courses and
technology enhancements necessary to maintain or improve SkillSoft's competitive
position.
BECAUSE SKILLSOFT'S PRODUCTS AND SERVICES MAY NOT BE VIEWED BY SKILLSOFT'S
CUSTOMERS AS ESSENTIAL TO THEIR BUSINESS, DEMAND FOR SKILLSOFT'S PRODUCTS MAY BE
ESPECIALLY SUSCEPTIBLE TO ADVERSE ECONOMIC CONDITIONS
SkillSoft's business and financial performance may be damaged, more so
than most companies, by adverse financial conditions affecting SkillSoft's
target customers or by a general weakening of the economy. Some companies may
not view training products as critical to the success of their business. If
these companies experience disappointing operating results, whether as a result
of adverse economic conditions, competitive issues or other factors, they may
decrease or forego education and training expenditures before limiting their
other expenditures.
SKILLSOFT MUST CONTINUALLY INTRODUCE NEW PRODUCTS, AND ITS PRODUCTS MUST ADAPT
TO FREQUENT CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS, AND SKILLSOFT MAY HAVE
DIFFICULTY INTRODUCING NEW PRODUCTS OR KEEPING UP WITH THESE CHANGES
The market for education and training products is characterized by
rapidly changing technologies, frequent new product and service introductions
and evolving industry standards. The growth in the use of the Web and intense
competition in SkillSoft's industry exacerbate these market characteristics.
SkillSoft's future success will depend on its ability to adapt to rapidly
changing technologies and customer demands by continually improving the features
and performance of SkillSoft's products.
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THE NATURE OF SKILLSOFT'S PRODUCTS MAKES THEM PARTICULARLY VULNERABLE TO
UNDETECTED ERRORS, OR BUGS, WHICH COULD REDUCE SKILLSOFT'S REVENUE, MARKET SHARE
OR THE DEMAND FOR ITS PRODUCTS
Product performance problems could result in lost or delayed revenue,
loss of market share, failure to achieve market acceptance, diversion of
development resources or injury to SkillSoft's reputation, any of which could
have a material adverse effect on SkillSoft's business and financial
performance. Software products such as SkillSoft's may contain undetected
errors, or bugs, which result in product failures or poor product performance.
SkillSoft's products may be particularly susceptible to bugs or performance
degradation because of the emerging nature of Web-based technologies and the
stress that may be placed on SkillSoft's products by the full deployment of its
products to thousands of users.
SKILLSOFT MAY NOT BE ABLE TO GENERATE ENOUGH REVENUE FROM ITS PLANNED
INTERNATIONAL EXPANSION TO OFFSET THE COSTS ASSOCIATED WITH ESTABLISHING AND
MAINTAINING FOREIGN OPERATIONS
A key component of SkillSoft's growth strategy is to expand its
presence in foreign markets. It will be costly to establish international
operations, market SkillSoft's products internationally and support and manage
geographically dispersed operations. Revenue from international operations is
not likely to offset the expense of establishing and maintaining these foreign
operations in the foreseeable future.
SKILLSOFT'S PLANNED INTERNATIONAL BUSINESS WILL EXPOSE IT TO RISKS IT HAS NOT
HAD TO FACE IN THE PAST
If SkillSoft is successful in establishing international operations,
SkillSoft will have to confront and manage a number of risks that it has not had
to address in its U.S. operations. SkillSoft cannot assure investors that
SkillSoft will be successful in managing these risks. These risks include:
- expenses associated with customizing products for foreign countries;
- challenges and costs inherent in managing geographically dispersed
operations;
- protectionist laws and business practices that favor local competitors;
- economic or political instability in some international markets;
- difficulties in finding and managing local resellers;
- multiple, conflicting and changing governmental laws and regulations;
and
- foreign currency exchange rate fluctuations.
BECAUSE MANY USERS OF SKILLSOFT'S COURSES ACCESS THEM OVER THE INTERNET, FACTORS
ADVERSELY AFFECTING THE USE OF THE INTERNET COULD HARM SKILLSOFT'S BUSINESS
Some users access SkillSoft's courses over the public internet.
Examples include users who access courses from their company's intranet via
remote access and employees of
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companies that utilize SkillSoft's hosting services and who therefore access
courses from SkillSoft-managed servers via the internet. Any factors that
adversely affect internet usage could disrupt the ability of those users to
access SkillSoft's courses, which would adversely affect customer satisfaction
and therefore SkillSoft's business. Among the factors that could disrupt
internet usage is:
- slow access and download times;
- security concerns;
- network problems or service disruptions that prevent users from
accessing an internet server; and
- delays in, or disputes concerning, the development and adoption of
industry-wide internet standards and protocols.
SKILLSOFT COULD BE SUBJECTED TO LEGAL ACTIONS BASED UPON THE CONTENT SKILLSOFT
OBTAINS FROM THIRD PARTIES OVER WHOM IT EXERTS LIMITED CONTROL
It is possible that SkillSoft could become subject to legal actions
based upon claims that SkillSoft's course content infringes the rights of others
or is erroneous. Any such claims, with or without merit, could subject SkillSoft
to costly litigation and the diversion of its financial resources and management
personnel. The risk of such claims is exacerbated by the fact that SkillSoft's
course content is provided by third parties over whom SkillSoft exert limited
control. Further, if those claims are successful, SkillSoft may be required to
alter the content, pay financial damages or obtain content from others.
SKILLSOFT'S PRODUCTS MAY BE SUSCEPTIBLE TO CLAIMS BY OTHER COMPANIES THAT
SKILLSOFT'S PRODUCTS INFRINGE UPON THEIR INTELLECTUAL PROPERTY, WHICH COULD
ADVERSELY AFFECT SKILLSOFT'S FINANCIAL CONDITION
If any of SkillSoft's products violate the proprietary rights of third
parties, SkillSoft may be required to reengineer its products or to obtain
licenses to continue offering SkillSoft's products without substantial
reengineering. Any efforts to reengineer SkillSoft's products or obtain licenses
from third parties may not be successful and, in any case, could have a material
adverse effect on SkillSoft's business and financial performance by
substantially increasing its costs. SkillSoft does not conduct comprehensive
patent searches to determine whether the technologies used in SkillSoft's
products infringe upon patents held by others. In addition, product development
is inherently uncertain in a rapidly evolving technological environment in which
there may be numerous patent applications pending; many of, which are
confidential when, filed, with regard to similar technologies.
THE SIGNIFICANT CONCENTRATION OF OWNERSHIP OF SKILLSOFT'S COMMON STOCK WILL
LIMIT INVESTORS ABILITY TO INFLUENCE CORPORATE ACTIONS
The concentration of ownership of SkillSoft's common stock may have the
effect of delaying, preventing or deterring a change in control of SkillSoft,
could deprive SkillSoft's stockholders of an opportunity to receive a premium
for their common stock as part of a sale of SkillSoft and might affect the
market price of SkillSoft's common stock. Warburg, Pincus Ventures, L.P. owns
approximately 47% of SkillSoft's outstanding common stock and, together
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with SkillSoft's executive officers and directors, will beneficially own
approximately 67% of SkillSoft's outstanding common stock. As a result, those
stockholders, if they act together, are able to control all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions.
SOME PROVISIONS OF SKILLSOFT'S CHARTER AND BY-LAWS MAY DELAY OR PREVENT
TRANSACTIONS THAT MANY STOCKHOLDERS MAY FAVOR
Some provisions of our certificate of incorporation and by-laws may
discourage, delay or prevent a merger or acquisition that SkillSoft's
stockholders may consider favorable, including transactions in which
stockholders might otherwise receive a premium for their shares. Some provisions
of Delaware law may also discourage, delay or prevent someone from acquiring
SkillSoft or merging with SkillSoft.
ITEM 3. -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of October 31, 2000, SkillSoft did not use derivative financial
instruments for speculative or trading purposes.
INTEREST RATE RISK
SkillSoft invests its excess cash in high quality securities with
maturities not exceeding ninety days and therefore would not expect its
operating results or cash flows to be affected to any significant degree by the
effect of a sudden change in market interest rates.
FOREIGN CURRENCY EXCHANGE RISK
To date, SkillSoft has not generated significant revenues originating
outside the United States, and therefore, foreign currency fluctuations have not
had a material effect on SkillSoft's operating results.
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PART II
ITEM 1. - LEGAL PROCEEDINGS
The information under Item 3 entitled "Legal Proceedings" from the
Annual Report on Form 10-K filed on May 1, 2000 and the information under Item 1
of Part II from the Quarterly Report on Form 10-Q filed on September 13, 2000,
are hereby incorporated by reference.
SkillSoft is not a party to any other material legal proceedings.
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS FROM RECENT SALES OF
UNREGISTERED SECURITIES
Changes in Securities
Not applicable.
Use of Proceeds from Registered Securities
In connection with SkillSoft's initial public offering in February
2000, SkillSoft received net proceeds of approximately $45,058,300, reflecting
gross proceeds of $49,910,000 (inclusive of the overallotment option) net of
underwriter commissions of approximately $3,493,700 and other estimated offering
costs of approximately $1,358,000. On January 31, 2000, the Securities and
Exchange Commission declared SkillSoft's Registration Statement on Form S-1 (SEC
File No. 333-86815) effective.
The following table sets forth SkillSofts' cumulative use of proceeds
as of October 31, 2000:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Construction of plant, building and facilities --
Purchase and installation of machinery and equipment $ 939,588
Purchases of real estate --
Acquisition of other businesses --
Repayment of indebtedness $ 4,500,000
Working capital $12,488,304
Temporary investments (cash and cash equivalents) $27,130,408
All other purposes --
</TABLE>
The foregoing use of net offering proceeds does not represent a
material change in the use of proceeds described in SkillSoft's Registration
Statement on Form S-1.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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ITEM 5. - OTHER INFORMATION.
Not applicable.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits
See the Exhibit Index attached hereto.
(B) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended October 31, 2000.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SKILLSOFT CORPORATION
(Registrant)
By /s/ Thomas J. McDonald
---------------------------
Thomas J. McDonald, Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date: December 15, 2000
25
<PAGE> 26
EXHIBIT INDEX
3.01+ Amended and Restated Certificate of Incorporation of SkillSoft.
3.02+ Amended and Restated By-Laws of SkillSoft.
4.01+ Specimen Stock Certificate representing Common Stock.
27.1 Financial Data Schedule
---------------
+ Incorporated by reference to the Registration Statement on Form S-1 (File No.
333-86815).
