SKILLSOFT CORP
10-Q, 2000-09-13
PREPACKAGED SOFTWARE
Previous: BROCKER TECHNOLOGY GROUP LTD, 6-K, EX-1.2, 2000-09-13
Next: SKILLSOFT CORP, 10-Q, EX-27, 2000-09-13



<PAGE>   1
                                  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 JULY 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 August 28, 2000, the Registrant had outstanding 13,250,980 shares of common
stock, $.001 par value per share.


<PAGE>   2


                              SKILLSOFT CORPORATION

                                    FORM 10-Q
                       FOR THE QUARTER ENDED JULY 31, 2000

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                        PAGE NO.

<S>                                                                                                     <C>
PART I - FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements:

         Condensed Consolidated Balance Sheets as of
         July 31, 2000 and January 31, 2000 ............................................................    3

         Condensed Consolidated Statements of Operations
         for the three and six months ended July 31, 2000 and 1999 .....................................    4

         Condensed Consolidated Statements of Cash Flows
         for the six months ended July 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.....................................................................................   10

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.....................................   23

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings..............................................................................   24

Item 2.  Changes in Securities and Use of Proceeds......................................................   24

Item 3.  Defaults Upon Senior Securities................................................................   25

Item 4.  Submission of Matters to a Vote of Security Holders............................................   25

Item 5.  Other Information..............................................................................   25

Item 6.  Exhibits and Reports on Form 8-K...............................................................   25

SIGNATURES..............................................................................................   27
</TABLE>


                                       2
<PAGE>   3


                                     PART I

ITEM 1. - FINANCIAL STATEMENTS

                              SKILLSOFT CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                          At July 31,         At January 31,
                                                                 2000                   2000
                                                          -----------         --------------
<S>                                                      <C>                  <C>
ASSETS
CURRENT ASSETS:
      Cash and cash equivalents                          $ 18,590,375           $    734,595
      Short-term investments                               12,999,463                     --
      Accounts Receivable                                   1,483,647                422,713
      Prepaid expenses and other current assets             2,019,652              1,397,028
                                                         ------------           ------------
        Total current assets                               35,093,137              2,554,336

PROPERTY AND EQUIPMENT, NET                                   966,987                558,052
                                                         ------------           ------------

                                                         $ 36,060,124           $  3,112,388
                                                         ============           ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
      Line of Credit                                     $         --           $  4,513,209
      Accounts payable                                      1,414,941                702,557
      Accrued expenses                                      2,912,140              2,834,030
      Deferred revenue                                      3,521,977              1,419,990
                                                         ------------           ------------
        Total current liabilities                           7,849,058              9,469,786

STOCKHOLDERS' EQUITY(DEFICIT):
      Preferred Stock                                              --             20,710,256
      Class A common stock                                         --                  2,848
      Common stock                                             13,262                     --
      Additional paid-in capital                           75,240,346              7,460,320
      Warrants outstanding                                    319,228                319,228
      Deferred compensation                                (2,089,910)            (2,479,910)
      Notes receivable from                                  (339,063)              (339,063)
          stockholders
      Accumulated deficit                                 (44,921,935)           (32,045,346)
      Cumulative translation
          adjustment                                          (10,862)                14,269
                                                         ------------           ------------
        Total stockholders' equity
          (deficit)                                        28,211,066             (6,357,398)
                                                         ------------           ------------

                                                         $ 36,060,124           $  3,112,388
                                                         ============           ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.


                                       3
<PAGE>   4


                              SKILLSOFT CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                            Three Months Ended                           Six Months Ended
                                                                 July 31,                                    July 31,
                                                        2000                  1999                  2000                  1999
                                                        ----                  ----                  ----                  ----
<S>                                                <C>                   <C>                   <C>                   <C>
REVENUE                                            $  3,638,955          $    890,402          $  5,753,312          $  1,088,224
COST OF REVENUE                                         332,920               127,676               557,640               254,455
                                                   ------------          ------------          ------------          ------------
     Gross margin                                     3,306,035               762,726             5,195,672               833,769

OPERATING EXPENSES:
     Research and development                         3,571,968             1,825,940             6,898,294             3,743,121
     Selling and marketing                            4,720,935             1,568,294             9,038,586             2,849,386
     General and administrative                       1,376,931               900,832             2,696,163             1,964,517
     Amortization of deferred
         stock-based compensation                       195,000                28,471               390,000                38,345
                                                   ------------          ------------          ------------          ------------

            Total operating expenses                  9,864,834             4,323,537            19,023,043             8,595,369

INTEREST INCOME, NET                                    617,475                55,208               950,782               119,686
                                                   ------------          ------------          ------------          ------------

NET LOSS                                           $ (5,941,324)         $ (3,505,603)         $(12,876,589)         $ (7,641,914)
                                                   ============          ============          ============          ============

NET LOSS PER SHARE
     Basic and diluted loss per share              $      (0.47)         $      (1.90)         $      (1.04)         $      (4.28)
                                                   ============          ============          ============          ============
     Basic and diluted weighted average
     shares outstanding                              12,762,475             1,843,373            12,367,910             1,784,446
                                                   ============          ============          ============          ============

Pro forma basic and diluted loss per share                               $      (0.46)                               $      (1.02)
                                                                         ============                                ============

Pro forma basic and diluted weighted
average shares outstanding (see note 8)                                     7,684,643                                   7,485,402
                                                                         ============                                ============
</TABLE>


The accompanying notes are an integral part of these condensed consolidated
financial statements.


                                       4
<PAGE>   5


                              SKILLSOFT CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                             SIX MONTHS ENDED JULY 31,
                                                                            2000                   1999
                                                                            ----                   ----
<S>                                                                    <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net loss                                                         $(12,876,589)         $ (7,641,914)
      Adjustments to reconcile net loss to net cash used in
      operating activities:
         Amortization of deferred compensation                              390,000                38,345
         Depreciation and amortization                                      158,414                95,021
         Changes in current assets and liabilities:
             Accounts receivable                                         (1,071,826)             (887,368)
             Prepaid expenses and other current assets                     (635,443)             (583,551)
             Accounts payable                                               719,329               210,259
             Accrued expenses                                                81,346               110,714
             Deferred revenue                                             2,109,227               251,194
                                                                       ------------          ------------
                Net cash used in operating activities                   (11,125,542)           (8,407,300)

CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchases of property and equipment                                  (571,259)              (72,564)
      Purchases of short-term investments                               (31,742,276)           (9,868,310)
      Maturity of short-term investments                                 18,742,813            12,711,452
                                                                       ------------          ------------
         Net cash (used in) provided by investing activities            (13,570,722)            2,770,578

CASH FLOWS FROM FINANCING ACTIVITIES:
      Issuance of common stock in the initial public offering,           45,058,894                    --
      net
      Issuance of common stock to Interim Services, Inc.                  1,999,998                    --
      Issuance of Series B convertible preferred stock, net                      --             4,999,894
      Issuance of Class A restricted common stock                                --                35,437
      Proceeds from exercise of stock options                                21,292                 3,511
      Payments on line of credit                                         (4,500,000)                   --
                                                                       ------------          ------------
         Net cash provided by financing activities                       42,580,184             5,038,842
      Effect of exchange rate changes on cash and cash
      equivalents                                                           (28,140)                   --
                                                                       ------------          ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     17,855,780              (597,880)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                              734,595               623,322
                                                                       ------------          ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                               $ 18,590,375          $     25,442
                                                                       ------------          ------------

SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING TRANSACTIONS:
Issuance of Class A restricted common stock for notes
receivable from stockholders                                           $         --          $     32,813
                                                                       ------------          ------------
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.


                                       5
<PAGE>   6


                              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 July 31, 2000 and the
results of its operations and its cash flows for the three and six months ended
July 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
July 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,


                                       6
<PAGE>   7


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 July 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 191 days. All of these investments are classified as
current assets in the accompanying consolidated balance sheets as they mature
within one year.

4.   RELATED PARTY TRANSACTION

     In April 2000, the Company sold 142,857 shares of common stock to Interim
Services, Inc., at a price of $14 per share, which was in excess of the fair
market value at that date. In addition, the Company entered into a separate
license arrangement with Interim Services, Inc.

5.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition. This bulletin established guidelines for revenue recognition and is
effective for periods beginning after March 15, 2000. The Company does not
expect that the adoption of this guidance will have a material impact on its
financial condition or results of operations.

     In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation -- An Interpretation of APB
Opinion No. 25. The Interpretation clarifies the application of Opinion 25 in
certain situations, as defined. The Interpretation is effective as of July 1,
2000 but covers certain events having occurred after December 15, 1998. To the
extent that events covered by this Interpretation occur during the period after
December 15, 1998, but before the effective date of the Interpretation, the
effects of applying this Interpretation will be recognized on a prospective
basis from the effective date. Accordingly, upon initial application of the
Interpretation, (a) no adjustments will be made to financial statements for
periods before the effective date and (b) no expense will be recognized for any
additional compensation cost measured that is attributable to periods before the
effective date. The Company does not expect the adoption of this Interpretation
to have a material impact on the Company's financial condition or results of
operations.

6.   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. This pronouncement has not materially impacted the
Company's revenue recognition practices. 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.


                                       7
<PAGE>   8


     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 six months ended July 31,
2000, the Company recognized approximately $88,000 and $160,000 of service
revenue, respectively, compared to $12,000 of service revenue recognized in the
three and six months ended July 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.

7.   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 six months ended July 31, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED                            SIX MONTHS ENDED
                                                   ------------------                            ----------------
                                                        JULY 31,                                     JULY 31,
                                                        --------                                     --------
                                              2000                   1999                   2000                   1999
                                              ----                   ----                   ----                   ----
<S>                                      <C>                    <C>                    <C>                    <C>
Comprehensive loss:
      Net loss                           $ (5,941,324)          $ (3,505,603)          $(12,876,589)          $ (7,641,914)
      Other comprehensive loss
           Foreign currency
             adjustment                        (2,373)                    --                (25,131)                    --
                                         ------------           ------------           ------------           ------------
           Comprehensive loss            $ (5,943,697)          $ (3,505,603)          $(12,901,720)          $ (7,641,914)
                                         ============           ============           ============           ============
</TABLE>


                                       8
<PAGE>   9


8.   NET LOSS PER SHARE

     Basic and diluted net loss per common share was determined by dividing net
loss 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 1,378,166 and 1,661,932 common
shares have been excluded from the computation of diluted weighted average
shares outstanding for the three and six months ended July 31, 1999 and 2000,
respectively. Warrants to purchase 60,606 shares of common stock outstanding at
July 31, 2000, have also been excluded from the computation of diluted weighted
average shares outstanding for the three and six months ended July 31, 2000.
Shares of common stock issuable upon the conversion of outstanding convertible
preferred stock have also been excluded for the three and six months ended July
31, 1999.

     The calculation of pro forma net loss per common share for the three and
six months ended July 31, 1999 assumes that all Series A and Series B
convertible preferred stock had been converted to common stock as of the
issuance date.

9.   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 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.

10.  LITIGATION

     On July 26, 2000, National Education Training Group, Inc. (NETg) filed suit
against SkillSoft in the United States District Court for the Northern District
of Illinois alleging that SkillSoft's educational and training software products
infringe United States Patent No. 6,039,575, which was issued to NETg on March
21, 2000. The complaint seeks both monetary damages and injunctive relief.
SkillSoft filed its answer and a counterclaim for a declaration of invalidity of
the NETg patent on August 17, 2000.

     SkillSoft is vigorously defending itself against NETg's allegations and
believes that it has meritorious defenses to the claims made in the lawsuit. It
is not possible to predict the outcome


                                       9
<PAGE>   10


of this litigation. Regardless of the outcome, this litigation will result in
significant expenses and may divert the efforts and attention of the Company's
management from normal business operations and may have a material adverse
impact on the Company's business, financial condition or results of operations.

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 has recorded revenue, although it is not yet
profitable. SkillSoft had an accumulated deficit of $44,921,935 as of July 31,
2000. SkillSoft expects to incur additional losses through at least the fiscal
year ending January 31, 2001, 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 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


                                       10
<PAGE>   11


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 a 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 and certain infrastructure and occupancy
expenses. In the future, cost of revenue is expected to include content
royalties, although SkillSoft intends to minimize the use of such arrangements.
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 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 and six months ended July 31, 2000 and 1999

     Revenues for the three months ended July 31, 2000 were $3,638,955, an
increase of 309% over revenues of $890,402 for the three months ended July 31,
1999. Revenues for the six months ended July 31, 2000 were $5,753,312, an
increase of $4,665,088, or 429% over revenues


                                       11
<PAGE>   12


of $1,088,224 for the six months ended July 31, 1999. These increases are due to
continuing revenue from our existing customers as well as new customers signed
during the quarter ended July 31, 2000. One customer accounted for 11% of
revenue for the three and six months ended July 31, 2000, and another customer
accounted for 11% of revenue for the three months ended July 31, 2000.

     Cost of revenue for the three months ended July 31, 2000 was $332,920, or
9% of revenues, an increase of 161%, as compared to cost of revenue of $127,676,
or 14% of revenues, for the three months ended July 31, 1999. Cost of revenue
for the six months ended July 31, 2000 was $577,640, or 10% of revenue, an
increase of 127%, as compared to cost of revenue of $254,455, or 23% of
revenues, for the six months ended July 31, 1999. These decreases as a
percentage of revenue were 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 for the three months ended July 31, 2000
was $3,571,968, an increase of 96% over research and development expenses of
$1,825,940 for the three months ended July 31, 1999. Research and development
expenses for the six months ended July 31, 2000 were $6,898,294, an increase of
84% over these research and development expenses of $3,743,121 for the six
months ended July 31, 1999. These increases were primarily due to increased
personnel and courseware development costs amounting to approximately $260,000
and $1,375,000, respectively, for the three months ended July 31, 1999 and 2000
and $372,500 and $2,600,000, respectively, for the six months ended July 31,
1999 and 2000. 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 for the three months ended July 31, 2000
were $4,720,935, an increase of 201% over selling and marketing expenses of
$1,568,294 for the three months ended July 31, 1999. Selling and marketing
expenses for the six months ended July 31, 2000 were $9,038,585, an increase of
217% over selling and marketing expenses of $2,849,386 for the six months ended
July 31, 1999. These increases were primarily due to increased personnel,
commissions, marketing, and travel costs amounting to $2,088,000, $541,000,
$161,000 and $362,000 respectively for the three months ended July 31, 2000 and
$3,822,500, $805,500, $765,500 and $795,000, respectively, for the six months
ended July 31, 2000. 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 for the three months ended July 31,
2000 were $1,376,931, an increase of 53% over general and administrative
expenses of $900,832 for the three months ended July 31, 1999. General and
administrative expenses for the six months ended July 31, 2000 were $2,696,163,
an increase of 37% over general and administrative expenses of $1,964,517 for
the six months ended July 31, 1999. These increases were primarily due to
increased personnel and investor relations costs amounting to $277,000 and
$100,000, respectively for the three months ended July 31, 2000 and $600,000 and
$130,000, respectively, for the six months ended July 31, 2000. SkillSoft
anticipates that general and administrative


                                       12
<PAGE>   13


expenses will continue to increase due to increases in information services and
additional expenses associated with operating as a public company.

     Interest income for the three months ended July 31, 2000 was $617,475, an
increase of 1018% over interest income of $55,208 for the three months ended
July 31, 1999. Interest income for the six months ended July 31, 2000 was
$950,782, an increase of 694% over interest income of $119,686 for the six
months ended July 31, 1999. These increases were 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 July 31, 2000, SkillSoft's principal source of liquidity was its cash
and cash equivalents and marketable securities balances, which totaled
$31,589,838.

     SkillSoft's primary investing activities during the six months ended July
31, 2000 were purchases of property and equipment, and purchases and maturation
of marketable securities. Property and equipment purchases for the six months
ended July 31, 2000 and July 31, 1999 were approximately $571,300 and $72,600
respectively. Purchases and maturation of marketable securities generated a net
cash outflow of approximately $13,000,000 in the six months ended July 31, 2000
compared to a net cash outflow of approximately $9,900,000 in the six months
ended July 31, 1999.

     Cash provided by financing activities for the six month period ended July
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 a
line of credit with Greyrock Capital. This was an increase from $5,000,000 in
the six months ended July 31, 1999, which primarily consisted of proceeds from
the issuance of Series B convertible preferred stock.

     Working capital (deficit) was approximately $27,200,000 and $(6,900,000) as
of July 31, 2000 and January 31, 2000, respectively. Total assets were
approximately $36,100,000 and $3,100,000 as of July 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.



                                       13
<PAGE>   14

     RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition. This bulletin established guidelines for revenue recognition and is
effective for periods beginning after March 15, 2000. SkillSoft does not expect
that the adoption of this guidance will have a material impact on its financial
condition or results of operations.

     In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation -- An Interpretation of APB
Opinion No. 25. The Interpretation clarifies the application of Opinion 25 in
certain situations, as defined. The Interpretation is effective as of July 1,
2000 but covers certain events having occurred after December 15, 1998. To the
extent that events covered by this Interpretation occur during the period after
December 15, 1998, but before the effective date of the Interpretation, the
effects of applying this Interpretation will be recognized on a prospective
basis from the effective date. Accordingly, upon initial application of the
Interpretation, (a) no adjustments will be made to financial statements for
periods before the effective date and (b) no expense will be recognized for any
additional compensation cost measured that is attributable to periods before the
effective date. SkillSoft does not expect the adoption of this Interpretation to
have a material impact on the SkillSoft's financial condition or results of
operations.

     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
July 31, 2000 was $44,921,935. 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


                                       14
<PAGE>   15


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;

     -    distribution channels and relationships with course developers and
          other service providers; and

     -    the business plan to develop soft skills products for use in a Web
          environment.

     The claims seek injunctive relief against the defendants demanding the
return, and no future use by these defendants, of the alleged trade secrets. The
claims also seek compensatory damages of $400 million, exemplary damages in the
additional amount of $400 million additional compensatory, incidental and
consequential damages in an unspecified amount and punitive damages 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
issued to 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 this litigation could have any or all of the following significant
adverse effects on SkillSoft's business and financial performance:

     -    injunctive relief issued against SkillSoft and SkillSoft's officers,
          which could restrict SkillSoft's ability to conduct its business;

     -    an adverse judgment against SkillSoft for monetary damages;

     -    a settlement on unfavorable terms; or


                                       15
<PAGE>   16


     -    obligations SkillSoft has to indemnify SkillSoft's employees for
          liabilities and expenses they incur in connection with the lawsuit
          (trade secret case only); or

     -    obligations to customers for breach of SkillSoft's warranty of
          noninfringement (patent case only).

     In addition, these lawsuits, 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 fall 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;

     -    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


                                       16
<PAGE>   17


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.

     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


                                       17
<PAGE>   18


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.

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:


                                       18
<PAGE>   19


     -    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.

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 July 31, 2000, the number of SkillSoft's employees increased
from 45 to 193. 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


                                       19
<PAGE>   20


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.

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


                                       20
<PAGE>   21


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 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 are:

     -    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


                                       21
<PAGE>   22


     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 COPYRIGHTS OR PATENTS, 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
46.9% of SkillSoft's outstanding common stock and, together with SkillSoft's
executive officers and directors, will beneficially own approximately 68.8% 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.


                                       22
<PAGE>   23

ITEM 3. -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As of July 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.


                                       23
<PAGE>   24


                                     PART II

ITEM 1. - LEGAL PROCEEDINGS

     The information under Item 3 entitled "Legal Proceedings" from the Annual
Report on Form 10-K, is hereby incorporated by reference.

     In addition, on July 26, 2000, NETg filed suit against SkillSoft in the
United States District Court for the Northern District of Illinois alleging that
SkillSoft's educational and training software products infringe United States
Patent No. 6,039,575, which was issued to NETg on March 21, 2000. The complaint
seeks both monetary damages and injunctive relief. SkillSoft filed its answer
and a counterclaim for a declaration of invalidity of the NETg patent on August
17, 2000.

     SkillSoft is vigorously defending itself against NETg's allegations and
believes that it has meritorious defenses to the claims made in the lawsuit.
Nonetheless, SkillSoft's failure to prevail in this litigation could have any or
all of the following significant adverse effects on SkillSoft's business and
financial performance:

     -    injunctive relief issues against SkillSoft, which could restrict
          SkillSoft's ability to conduct is business;

     -    an adverse judgment against SkillSoft for monetary damages;

     -    a settlement on unfavorable terms; or

     -    obligations to customers for breach of SkillSoft's warranty of
          noninfringement.

     In addition, this litigation, regardless of its outcome, may result in
significant expenses in defending the lawsuit and may divert the efforts and
attention of SkillSoft's management team from normal business operations.

     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,


                                       24
<PAGE>   25


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
July 31, 2000:

<TABLE>
<CAPTION>
                                                             (In thousands)
<S>                                                          <C>
Construction of plant, building and facilities                         --
Purchase and installation of machinery and equipment          $   571,259
Purchases of real estate                                               --
Acquisition of other businesses                                        --
Repayment of indebtedness                                     $ 4,500,000
Working capital                                               $ 8,397,041
Temporary investments (cash and cash equivalents)             $31,590,000
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.

     SkillSoft's Annual Meeting of Stockholders was held on June 9, 2000. The
following proposals were adopted by the vote specified below:

<TABLE>
<CAPTION>
                  PROPOSAL                          FOR            AGAINST/WITHHELD          ABSTAIN
                  --------                          ---            ----------------          -------
<S>                                              <C>               <C>                       <C>
To elect two Class I directors to
serve until the 2003 Annual
Meeting of Stockholders:

     Stewart K.P. Gross                          12,288,333             187,920                   0
     Charles E. Moran                            12,289,343             186,910

To ratify the selection of Arthur
Andersen LLP as SkillSoft's
independent public accountants
for the current year                             12,475,453                 300                 500
</TABLE>


ITEM 5. - OTHER INFORMATION.

     Not applicable.

ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K.


                                       25
<PAGE>   26


     (A)  Exhibits

          The exhibit filed as a part of this Form 10-Q is the following:

          Exhibit 27.1: Financial Data Schedule

     (B)  Reports on Form 8-K

          The Company did not file any reports on Form 8-K during the quarter
          ended July 31, 2000.


                                       26
<PAGE>   27


                                   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: September 13, 2000


                                       27


© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission