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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 2000
REGISTRATION NO. 333-86815
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
SKILLSOFT CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 7372 02-0496115
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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SKILLSOFT CORPORATION
20 INDUSTRIAL PARK DRIVE
NASHUA, NEW HAMPSHIRE 03062
(603) 324-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CHARLES E. MORAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
20 INDUSTRIAL PARK DRIVE
NASHUA, NEW HAMPSHIRE 03062
(603) 324-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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PATRICK J. RONDEAU, ESQ. LAWRENCE D. LEVIN, ESQ.
HALE AND DORR LLP KATTEN MUCHIN ZAVIS
60 STATE STREET 525 WEST MONROE STREET, SUITE 1600
BOSTON, MASSACHUSETTS 02109 CHICAGO, ILLINOIS 60661
TELEPHONE: (617) 526-6000 TELEPHONE: (312) 902-5200
FACSIMILE: (617) 526-5000 FACSIMILE: (312) 902-1061
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement of
the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registrations statement
of the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 31, 2000
3,100,000 SHARES
[SKILLSOFT CORP. LOGO]
COMMON STOCK
------------------
SkillSoft Corporation is selling shares of its common stock. Prior to this
offering, there has been no public market for the common stock. The initial
public offering price is expected to be between $12.00 and $14.00 per share. We
have made application to list our common stock on the Nasdaq National Market
under the symbol "SKIL."
The underwriters have an option to purchase a maximum of 465,000 additional
shares to cover over-allotments of shares.
INVESTING IN THIS COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 6.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SKILLSOFT
PUBLIC COMMISSIONS CORPORATION
-------- ------------- -----------
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total........................................ $ $ $
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Delivery of the shares of common stock will be made on or about
, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
BANC OF AMERICA SECURITIES LLC
THOMAS WEISEL PARTNERS LLC
The date of this prospectus is , 2000
<PAGE> 3
[Graphics appearing on inside front cover: Picture of individuals using the
SkillSoft products against a backdrop stating "SkillSoft eLearning for the
Knowledge Economy."
[Graphics appearing on inside back cover: Picture of a globe in the center of a
spider's web with software program screens depicting the learning resources
offered by SkillSoft with the statement "SkillSoft eLearning for the Knowledge
Economy" in the bottom left corner.]
[Graphics appearing on gatefold following inside front cover: Picture of a globe
in the center of a spider's web with the SkillSoft logo in the center of the
globe and software program screens around the web depicting the learning
resources offered by SkillSoft. The upper left corner states "SkillSoft
eLearning for the Knowledge Economy."]
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.................... 2
RISK FACTORS.......................... 6
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS AND INDUSTRY
DATA................................ 14
USE OF PROCEEDS....................... 15
DIVIDEND POLICY....................... 15
CAPITALIZATION........................ 16
DILUTION.............................. 17
SELECTED FINANCIAL DATA............... 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 19
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PAGE
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BUSINESS.............................. 26
MANAGEMENT............................ 42
CERTAIN TRANSACTIONS.................. 49
PRINCIPAL STOCKHOLDERS................ 50
DESCRIPTION OF CAPITAL STOCK.......... 52
SHARES ELIGIBLE FOR FUTURE SALE....... 54
UNDERWRITING.......................... 56
NOTICE TO CANADIAN RESIDENTS.......... 59
LEGAL MATTERS......................... 60
EXPERTS............................... 60
WHERE YOU CAN FIND ADDITIONAL
INFORMATION......................... 60
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
-------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
-------------------------
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully.
We are a provider of training courses that are accessible by users through
corporate intranets or remotely through the internet. Our courses cover a
variety of professional effectiveness and business topics (commonly called "soft
skills"). All of our courses and support tools have been specifically designed
to take advantage of the benefits offered by the internet and the Web-based
environments of our customers and are accessible through standard Web browsers,
which are common software applications that allow users to access and interact
with Web sites. This enables users of our products to access the material they
need, with the specificity or breadth that they require, anytime or anywhere
that they may need it. Our customers receive comprehensive training and support
solutions for their employees, comprised of our library of courses and our job
performance support tools.
Our library of over 215 courses encompasses a wide array of professional
effectiveness skills, such as management, leadership, communication, project
management and customer service, as well as business topics such as finance,
marketing, sales and strategy. We develop all of our courses in cooperation with
outside organizations that provide course content or assemble the courses
according to our design models.
Our job performance support tools, which are accessible on demand through a
Web browser via computer networks or the internet, are designed to assist users
to improve their ability to perform job related tasks. These performance support
tools include:
- Search-and-Learn technology, which permits users to perform online
searches of their company's entire library of SkillSoft courses for a
specific training topic and to directly access only what they need;
- Online Mentoring, which enables users to interact via e-mail with experts
on a topic from any Web connection; and
- Online Job Aids, which consist of over 600 topical refreshers and
worksheets that are accessible online and designed to assist users with
job-related tasks.
Our training resources are designed to increase the competitive strength
and productivity of organizations by improving employee performance with
immediate, universally accessible skill enhancers and job support tools. We
believe that our courses appeal to a broader range of employees than do courses
on information technology and other specialized topics, and assist in improving
employee retention by sending a positive message to employees that they are
valued. We market our courses primarily to large businesses, governmental
organizations and educational institutions. As of December 31, 1999, we had 87
direct customers, including GTE.
There are a number of problems that make it increasingly difficult for
traditional classroom instruction to address the training needs of many larger
corporations, such as:
- travel costs;
- scheduling difficulties;
- the opportunity costs of employees' time; and
- the inability of classroom instruction to deliver training at the time
and place an employee most needs it -- right before the employee needs to
apply the skill in the workplace.
As a result, companies are increasingly utilizing technology-based training
solutions to meet the educational needs of their employees.
To date, companies have typically relied upon CD-ROMs and other
technology-based forms of instruction to alleviate the shortcomings of
instructor-led training. We believe, however, that our Web-based training
solution provides a number of significant advantages over other technology-based
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training products -- such as CD-ROMS, satellite broadcasts and client/server
applications -- including:
- more flexible and cost-efficient deployment of courses, enabling users to
access our training materials anywhere, anytime and only in the amounts
they need;
- job performance support tools that are accessible by using a Web browser
via a computer network or the internet, such as Search-and-Learn
technology, Online Mentoring and Online Job Aids; these tools allow users
to tailor our educational resources to their individual needs and pace
and to obtain specific, real-time assistance with job related tasks when
they need it most;
- easier to use products that incorporate features that allow users to
interact intuitively with our programs, without prior training or
instruction;
- improved means of product and user support through electronic
distribution of products and updates over the internet or corporate
intranets; and
- increased ability for users to track and bookmark their progress, and for
administrators to monitor use and effectiveness of courses.
Our Web-based products represent a new and emerging approach for the soft
skills training market. Our products apply new technological capabilities of the
internet, such as search engines, which allow a user to quickly locate and
access information without having to know where that information resides, and
hypertext links, which allow a user to use a computer mouse to click on
highlighted text in one electronic document to locate and display other
electronic documents. As a result, we believe that our training resources will
transform corporate training from a distinct event, often off-site and limited
in scope, to a process of continuous learning and improvement that will
inherently maximize time utilization and employee effectiveness.
Our goal is to be the leading global provider of high-quality, Web-based
learning and job performance support products. To achieve this objective, we are
continuing to expand our library of courses and to integrate new technologies
that address the needs of our customers and make our products easier to use and
more effective. We are also increasing our domestic sales force and developing
an international sales organization, while leveraging our client relationships
to deepen our penetration within those companies and in the market. Finally, we
are continuing to increase our reseller network and are expanding our strategic
alliances with educational institutions to further diversify our distribution
channels.
Our executive management team, led by our President and Chief Executive
Officer, Charles E. Moran, has over 70 years of combined experience in the
technology and education industries. We commenced operations in January 1998 and
commercially released our first product in March 1999. Our net loss for the nine
months ended October 31, 1999 was $12,233,201 and our accumulated deficit
through October 31, 1999 was $25,095,175.
OUR ADDRESS
Our principal executive offices are located at 20 Industrial Park Drive,
Nashua, New Hampshire 03062, and our telephone number at that location is (603)
324-3000. Our Web site is located at www.skillsoft.com. We were incorporated in
Delaware in October 1997.
SkillSoft has applied for federal registration of some of its trademarks,
including "NetPlay" and "NetUniversity" and "eLearning for the Knowledge
Economy." Other trademarks or service marks appearing in this prospectus are the
property of their respective holders.
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THE OFFERING
Common stock offered.......... 3,100,000 shares
Common stock to be outstanding
after the offering.......... 12,583,514 shares
Use of proceeds............... For general corporate purposes, including
working capital. See "Use of Proceeds."
Proposed Nasdaq National
Market symbol............... SKIL
The number of shares of common stock to be outstanding after the offering
is based on the number of shares outstanding on December 31, 1999. This number
does not include 720,080 shares of common stock issuable upon the exercise of
stock options outstanding on December 31, 1999.
Unless otherwise specified, all information in this prospectus:
- assumes no exercise of the underwriters' over-allotment option;
- reflects a two-for-three reverse split of our common stock that occurred
in December 1999;
- reflects the automatic conversion into common stock of all outstanding
shares of preferred stock that will occur upon the closing of this
offering; and
- reflects the reclassification of all outstanding shares of Class A common
stock into common stock that will occur prior to the closing of this
offering.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS)
You should read this summary information with the discussion in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and notes to those statements included
elsewhere in this prospectus.
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PERIOD FROM NINE MONTHS ENDED
INCORPORATION YEAR ENDED OCTOBER 31,
(OCTOBER 15, 1997) JANUARY 31, -------------------
TO JANUARY 31, 1998 1999 1998 1999
------------------------- ---------------- ------- --------
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STATEMENTS OF OPERATIONS
DATA:
Revenue.................... $ -- $ -- $ -- $ 2,371
Cost of revenue............ -- -- -- 497
----- ------- ------- --------
Gross profit............... -- -- -- 1,874
Total operating expenses... 827 8,609 4,977 14,253
Interest income, net....... 3 336 271 146
----- ------- ------- --------
Net loss................... $(824) $(8,273) $(4,706) $(12,233)
===== ======= ======= ========
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The following balance sheet table presents our balance sheet as of October
31, 1999 on an actual basis, on a pro forma basis giving effect to the
conversion of all outstanding convertible preferred stock into common stock, and
on a pro forma as adjusted basis giving effect to the sale of 3,100,000 shares
of common stock offered hereby at an assumed initial public offering price of
$13.00 per share, after deducting estimated underwriting discounts and
commissions and offering expenses.
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AS OF OCTOBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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BALANCE SHEETS DATA:
Cash, cash equivalents, and short-term
investments...................................... $ 528 $ 528 $37,232
Working capital (deficit)........................... (482) (482) 36,222
Total assets........................................ 3,385 3,385 40,089
Long-term liabilities............................... -- -- --
Convertible preferred stock......................... 20,710 -- --
Stockholders' equity................................ 79 79 36,783
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RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to invest in shares of our common stock.
RISKS RELATED TO OUR BUSINESS AND FINANCIAL PERFORMANCE
BECAUSE WE BEGAN OPERATIONS ONLY RECENTLY AND HAVE A LIMITED NUMBER OF CUSTOMERS
AND A LIMITED AMOUNT OF REVENUE, YOU COULD HAVE DIFFICULTY EVALUATING OUR
BUSINESS AND ITS FUTURE PROSPECTS
Your evaluation of the risks and uncertainties of our business will be
difficult because of our limited operating history and could cause you to
overpay for our common stock. We commenced operations in January 1998 and
commercially released our first product in March 1999. Although we do not
believe that our business will be dependent upon any one customer in the future,
one customer accounted for 29% of our limited revenue through October 31, 1999.
WE HAVE INCURRED SUBSTANTIAL LOSSES, AND EXPECT TO CONTINUE TO INCUR THEM IN THE
FUTURE, AND WE MAY NOT BE ABLE TO ACHIEVE OR MAINTAIN PROFITABILITY, WHICH MAY
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
Since we began operations in January 1998, we have incurred losses in every
fiscal period. Our accumulated deficit through October 31, 1999 was $25,095,175.
We expect to continue to incur substantial losses through at least the first
several quarters of the fiscal year ending January 31, 2002, and we cannot be
certain if or when we will become profitable. If we do not become profitable
within the timeframe expected by investors, the market price of our common stock
may be adversely affected. We have generated relatively small amounts of revenue
while increasing expenditures in all areas in order to develop our business. We
expect to continue to incur significant expenses, particularly in sales and
marketing, in an effort to develop our business. As a result, we will need to
generate significant revenue to achieve and maintain profitability. Even if we
do achieve profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future.
WE AND SEVERAL OF OUR 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 OUR MANAGEMENT AND MAY
ULTIMATELY RESTRICT OUR ABILITY TO DO BUSINESS
SkillSoft, several of our executives, two of our key employees and our
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 obligations to
NETg in connection with the organization and operation of SkillSoft,
misappropriated trade secrets from NETg, intentionally 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 and punitive damages in
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excess of $10 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, Warburg, Pincus Ventures, L.P., our largest investor,
and each partner of Warburg.
The lawsuit is still in discovery, and we are not yet able to assess the
potential liability of SkillSoft or the other defendants. Our failure to prevail
in this litigation could have any or all of the following significant adverse
effects on our business and financial performance:
- injunctive relief issued against SkillSoft and our officers, which could
restrict our ability to conduct our business;
- an adverse judgment against us for monetary damages;
- a settlement on unfavorable terms; or
- obligations we have to indemnify our employees for liabilities and
expenses they incur in connection with the lawsuit.
In addition, this litigation, regardless of its outcome, will continue to
result in significant expenses in defending the lawsuit and may divert the
efforts and attention of our management team from normal business operations.
See the description of this lawsuit set forth in "Business -- Legal Proceedings"
on page 40 of this prospectus.
OUR LIMITED OPERATING HISTORY DOES NOT AFFORD SIGNIFICANT FINANCIAL DATA UPON
WHICH TO FORECAST QUARTERLY REVENUE OR OPERATING RESULTS, AND OUR OPERATING
RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER DUE TO THE NATURE OF OUR BUSINESS,
WHICH COULD HAVE A NEGATIVE IMPACT ON THE PRICE OF OUR COMMON STOCK
As a result of our limited operating history, we do not have sufficient
historical financial data upon which to forecast quarterly revenue and operating
results. If our quarterly revenue or operating results fall below the
expectations of investors or securities analysts, the price of our common stock
could fall substantially. Our quarterly operating results may fluctuate as a
result of a variety of factors, including:
- the fact that we depend upon a relatively small number of customers for
our revenue, so that a delay in any particular customer order beyond a
fiscal quarter would have a significant impact on our revenue for that
quarter;
- seasonality -- due to the budget and purchasing cycles of our customers,
we expect our revenue and operating results will generally be strongest
in the fourth quarter of our fiscal year and weakest in the first
quarter; and
- the expenses we incur to support the anticipated growth of our business.
Most of our expenses, such as rent and most employee compensation, do not
vary directly with revenue and are difficult to adjust in the short term. As a
result, if revenue for a particular quarter is below our expectations, we could
not proportionately reduce operating expenses for that quarter. Any such revenue
shortfall would therefore have a disproportionate effect on our expected
operating results for that quarter. In addition, we expect that a
disproportionate amount of our 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 our operating results on a quarterly basis.
OUR BUSINESS WILL SUFFER IF WEB-BASED EDUCATION AND TRAINING PRODUCTS ARE NOT
WIDELY ADOPTED
Our Web-based products represent a new and emerging approach for the
corporate soft skills education and training market. Our success depends
substantially upon the widespread adoption of
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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 us 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 our business
and adversely affect our financial performance.
INTENSE COMPETITION FROM OTHER EDUCATION AND TRAINING COMPANIES COULD IMPAIR OUR
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 us to
lower prices. We expect that competition in this market will increase
substantially in the future for a number of reasons which are set forth in
"Business -- Competition" on page 38.
One source of competition for our products is the internal educational and
technological personnel of our potential customers. If an organization decides
to use external providers to supply some or all of its training, our 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 we can maintain or improve our competitive
position. Many of our current and potential competitors have longer operating
histories, greater name recognition and greater financial, technical, sales,
marketing, support and other resources than we do.
WE RELY ON A LIMITED NUMBER OF THIRD PARTIES TO PROVIDE US WITH EDUCATIONAL
CONTENT FOR OUR COURSES, AND THEY MAY NOT BE ABLE TO DEVELOP NEW COURSES OR
ENHANCE EXISTING COURSES ON A TIMELY BASIS
To be competitive, we must develop and introduce on a timely basis new
course offerings which meet the needs of companies seeking to use our education
and training products. In addition, some of our courses may need to be updated
due to changes in educational doctrines or the evolving requirements of
educational institutions and certification organizations. We rely on independent
third parties to provide us with the educational content for our courses based
on learning objectives and specific instructional design templates that we
provide to them. Our most important content provider, Institute for Performance
Excellence, Inc., is responsible for the development of more than half of our
courses. We do not have exclusive arrangements or long-term contracts with any
of these content providers. If one or more of our third-party content providers
were to stop working with us, we would have to rely on other parties to develop
our course content. We cannot predict whether new content or enhancements would
be available from reliable alternative sources on reasonable terms.
OUR COURSE CONTENT PROVIDERS SUPPLY US WITH THE EDUCATIONAL CONTENT OF OUR
COURSES AND ARE GENERALLY NOT RESTRICTED FROM DEVELOPING SIMILAR CONTENT FOR OUR
COMPETITORS, WHICH COULD MAKE IT EASIER FOR OUR COMPETITORS TO COMPETE WITH US
We rely on independent third parties to provide us with the educational
content for our courses based on learning objectives and specific instructional
design templates that we provide to them. Our agreements with these content
providers do not restrict them from developing courses on similar topics for our
competitors or from competing directly with us. As a result, our competitors may
be able to duplicate some of our course content and may, therefore, find it
easier to enter the market for soft skills education and training.
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OUR SUCCESS DEPENDS ON THE SERVICES OF CHARLES E. MORAN AND OUR OTHER EXECUTIVE
OFFICERS AND KEY EMPLOYEES
Our future success depends to a significant degree on the skills and
efforts of Charles E. Moran, our 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 our business and financial performance. We also
depend on the ability of our other executive officers and members of senior
management to work effectively as a team. The loss of one or more of our
executive officers or senior management members could result in less effective
development of our products and management of our business, which could have a
material adverse effect on our business and financial performance.
OUR FUTURE GROWTH DEPENDS ON SUCCESSFUL HIRING AND RETENTION, PARTICULARLY WITH
RESPECT TO SALES, MARKETING AND DEVELOPMENT PERSONNEL, AND WE MAY BE UNABLE TO
HIRE AND RETAIN THE SKILLED PERSONNEL WE NEED TO SUCCEED
Our failure to attract and retain sufficient skilled personnel may limit
the rate at which we can grow, may adversely affect the quality or availability
of our products and may result in less effective management of our business, any
of which may harm our business and financial performance. The growth of our
business and revenue depends in large part upon our 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 OUR PRODUCTS MAY MAKE OUR OPERATING RESULTS
UNPREDICTABLE AND VOLATILE
The period between our initial contact with a potential customer and the
purchase of our products by that customer typically ranges from three to 12
months. Factors which may contribute to our long sales cycle include:
- our need to educate potential customers about the benefits of our
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 we target large companies, which often take longer to make
purchasing decisions due to the size and complexity of the enterprise.
Our long sales cycle makes it difficult for us to predict if and when a
potential sale will actually occur. In addition, if a sale is delayed from the
quarter in which we expect it to occur, our operating results for that quarter
would be adversely affected.
OUR FINANCIAL PERFORMANCE DEPENDS IN PART ON OUR ABILITY TO DEVELOP BRAND
AWARENESS, AND WE MAY NOT BE SUCCESSFUL IN DOING SO
We believe that developing the SkillSoft brand within the corporate
training market is critical to achieving widespread acceptance of our products.
There are a number of factors which could prevent us from successfully
developing the SkillSoft brand, including the emergence of more successful
competitors, product performance problems or customer dissatisfaction, as well
as our failure to devote sufficient resources to marketing efforts.
9
<PAGE> 13
OUR FAILURE TO PROPERLY MANAGE OUR RECENT AND ANTICIPATED GROWTH COULD HAVE A
MATERIAL ADVERSE EFFECT ON THE QUALITY OF OUR PRODUCTS, OUR ABILITY TO RETAIN
KEY PERSONNEL AND THE EFFICIENCY OF OUR OPERATIONS
Our failure to properly manage our recent and anticipated growth could have
a material adverse effect on the quality of our products, our ability to retain
key personnel and the efficiency of our operations, any of which could have a
material adverse effect on our business and financial performance. Our revenue
increased 44% in the quarter ended October 31, 1999 from the quarter ended July
31, 1999. From January 1, 1999 to December 31, 1999, the number of our employees
increased from 45 to 120. This growth has strained, and our future growth may
continue to strain, our management, operational systems and other resources. To
manage our growth effectively, we must be able to maintain and enhance our
financial and accounting systems and controls, integrate new personnel and
manage expanded operations. There can be no assurance we will be able to do so.
BECAUSE MANY OF OUR COURSES AND TECHNOLOGIES ARE STILL UNDER DEVELOPMENT AND WE
EXPECT TO CONTINUE TO DEVELOP NEW COURSES AND ENHANCE OUR TECHNOLOGIES, OUR
BUSINESS WILL SUFFER IF WE ARE UNABLE TO INTRODUCE THESE NEW COURSES AND
TECHNOLOGIES ON A TIMELY BASIS OR IF NEW COURSES ARE UNSUCCESSFUL
Our future success will depend significantly on whether we are able to
introduce new courses and enhance our Web-based technologies as planned. While
we have new courses and technology features scheduled for commercial launch, we
cannot assure you that we will be successful in releasing them as scheduled, or
that they will meet with market acceptance. We may not have sufficient resources
to develop the new courses and technology enhancements necessary to maintain or
improve our competitive position.
BECAUSE OUR PRODUCTS AND SERVICES MAY NOT BE VIEWED BY OUR CUSTOMERS AS
ESSENTIAL TO THEIR BUSINESS, DEMAND FOR OUR PRODUCTS MAY BE ESPECIALLY
SUSCEPTIBLE TO ADVERSE ECONOMIC CONDITIONS
Our business and financial performance may be damaged, more so than most
companies, by adverse financial conditions affecting our 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.
WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS, AND OUR PRODUCTS MUST ADAPT TO
FREQUENT CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS, AND WE 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 our industry exacerbate these market characteristics. Our future
success will depend on our ability to adapt to rapidly changing technologies and
customer demands by continually improving the features and performance of our
products.
THE NATURE OF OUR PRODUCTS MAKES THEM PARTICULARLY VULNERABLE TO UNDETECTED
ERRORS, OR BUGS, WHICH COULD REDUCE OUR REVENUE, MARKET SHARE OR THE DEMAND FOR
OUR 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 our reputation, any of which could have a material
adverse effect on our business and financial performance. Software products such
as ours may contain undetected errors, or bugs, which result in product failures
or poor product performance. Our products may be particularly susceptible to
bugs or
10
<PAGE> 14
performance degradation because of the emerging nature of Web-based technologies
and the stress that may be placed on our products by the full deployment of our
products to thousands of users.
WE MAY NOT BE ABLE TO GENERATE ENOUGH REVENUE FROM OUR PLANNED INTERNATIONAL
EXPANSION TO OFFSET THE COSTS ASSOCIATED WITH ESTABLISHING AND MAINTAINING
FOREIGN OPERATIONS
A key component of our growth strategy is to expand our presence in foreign
markets. It will be costly to establish international operations, market our
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.
OUR PLANNED INTERNATIONAL BUSINESS WILL EXPOSE US TO RISKS WE HAVE NOT HAD TO
FACE IN THE PAST
If we are successful in establishing international operations, we will have
to confront and manage a number of risks that we have not had to address in our
U.S. operations. We cannot assure you that we 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 OUR COURSES ACCESS THEM OVER THE INTERNET, FACTORS
ADVERSELY AFFECTING THE USE OF THE INTERNET COULD HARM OUR BUSINESS
Some users access our 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 our 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 our courses, which would adversely effect customer satisfaction and
therefore our 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.
BECAUSE OUR PRODUCTS, AS WELL AS OUR OPERATIONS AND THOSE OF OUR CUSTOMERS,
DEPEND ON THE USE OF COMPUTER SOFTWARE AND HARDWARE, OUR BUSINESS COULD BE HURT
BY FAILURES OF OUR PRODUCTS OR SYSTEMS, OR THOSE OF OUR CUSTOMERS AND SUPPLIERS,
AS A RESULT OF THE YEAR 2000 TECHNOLOGY PROBLEMS
We may be affected by Year 2000 problems relating to our products, our
internal systems, the systems of our vendors and our customers' systems, any of
which could have a material adverse effect on our business and financial
performance as a result of costs incurred to fix our products and internal
11
<PAGE> 15
systems or delays in delivery or purchases of our products because of problems
experienced by our vendors and customers. Many existing software and computer
systems do not properly recognize dates after December 31, 1999. This Year 2000
problem could result in system failures, erroneous results, data corruption and
disruptions of operations.
We believe that all of our products and our internal systems are Year 2000
compliant. However, because this is a unique problem that cannot be fully
assessed in advance of the Year 2000, it is possible that our products or our
internal systems may experience Year 2000 problems.
We have not conducted a Year 2000 compliance review of our suppliers or
resellers. Year 2000 problems experienced by those parties could adversely
affect our business and financial performance.
Year 2000 problems experienced by our customers and potential
customers -- whether in connection with their internal systems or in connection
with other products that operate in conjunction with our products -- could
result in delays in purchasing, or reduced resources available for purchasing,
products such as ours. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Compliance" on page 23 of this
prospectus for detailed information on our state of readiness, potential risks
and contingency plans.
WE COULD BE SUBJECTED TO LEGAL ACTIONS BASED UPON THE CONTENT WE OBTAIN FROM
THIRD PARTIES OVER WHOM WE EXERT LIMITED CONTROL
It is possible that we could become subject to legal actions based upon
claims that our course content infringes the rights of others or is erroneous.
Any such claims, with or without merit, could subject us to costly litigation
and the diversion of our financial resources and management personnel. The risk
of such claims is exacerbated by the fact that our course content is provided by
third parties over whom we exert limited control. Further, if those claims are
successful, we may be required to alter the content, pay financial damages or
obtain content from others.
OUR PRODUCTS MAY BE SUSCEPTIBLE TO CLAIMS BY OTHER COMPANIES THAT OUR PRODUCTS
INFRINGE UPON THEIR COPYRIGHTS OR PATENTS, WHICH COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION
If any of our products violate the proprietary rights of third parties, we
may be required to reengineer our products or to obtain licenses to continue
offering our products without substantial reengineering. Any efforts to
reengineer our products or obtain licenses from third parties may not be
successful and, in any case, could have a material adverse effect on our
business and financial performance by substantially increasing our costs. We do
not conduct comprehensive patent searches to determine whether the technologies
used in our 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.
RISKS ASSOCIATED WITH THIS OFFERING
THE PRICE OF OUR COMMON STOCK AFTER THIS OFFERING MAY BE LOWER THAN THE PRICE
YOU PAY AND MAY BE EXTREMELY VOLATILE
The price of our common stock that will prevail in the market after this
offering may be higher or lower than the price you pay. After this offering, an
active trading market in our stock might not develop or continue. If you
purchase shares of our common stock in this offering, you will pay a price that
was negotiated by us with the representatives of the underwriters and not a
price that was established in a competitive market. See "Underwriting" on page
56 of this prospectus for more information regarding how the initial public
offering price was determined.
12
<PAGE> 16
The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
companies have been extremely volatile and have experienced fluctuations that
have often been unrelated or disproportionate to operating performance. These
broad market fluctuations could adversely affect the market price of our common
stock.
WE MAY HAVE LIABILITY ARISING OUT OF A POSSIBLE VIOLATION OF SECTION 5 OF THE
SECURITIES ACT OF 1933 IN CONNECTION WITH E-MAILS TO OUR EMPLOYEES WHO MAY
PARTICIPATE IN OUR DIRECTED SHARE PROGRAM
As part of this offering, the underwriters, at our request, reserved up to
155,000 shares of common stock for sale to our employees, directors and other
persons associated with us, of which 93,000 shares have been reserved for our
employees, at the initial public offering price. Following the filing of the
registration statement but prior to its effectiveness, a SkillSoft employee
communicated through e-mail with our employees (approximately 95 persons at that
time) informing them of the directed share program and soliciting indications of
interest for participation in that program. That communication may have
constituted a prospectus that does not meet the requirements of the Securities
Act of 1933. If so, the recipients of those e-mails who purchased shares in this
offering would have the right, for a period of one year from the date of their
purchase of those shares, to obtain recovery of the purchase price paid for
those shares or, if they have already sold those shares at a loss, to sue us for
damages resulting from their purchase of those shares. Assuming that our
employees purchased all of the shares reserved for them and suffered a total
loss of their investment during this period, and that all purchasers brought
claims and were successful, these refunds or damages could total approximately
$1.2 million, based on an assumed initial public offering price of $13.00 per
share, plus interest. If this were to occur, it would have an adverse effect on
our results of operations and financial condition.
THE SIGNIFICANT CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK WILL LIMIT YOUR
ABILITY TO INFLUENCE CORPORATE ACTIONS
The concentration of ownership of our common stock may have the effect of
delaying, preventing or deterring a change in control of SkillSoft, could
deprive our 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 our
common stock. Immediately following this offering, Warburg, Pincus Ventures,
L.P. will own 49% of our outstanding common stock and, together with our
executive officers and directors, will beneficially own approximately 71% of our
outstanding common stock. As a result, those stockholders, if they act together,
will be able to control all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions.
SOME PROVISIONS OF OUR 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 our 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 us or merging with us. See
"Description of Capital Stock -- Delaware Anti-Takeover Law and Certain Charter
and Bylaw Provisions" on page 53 of this prospectus for detailed information on
these provisions.
FUTURE SALES OF OUR COMMON STOCK BY EXISTING STOCKHOLDERS COULD DEPRESS THE
MARKET PRICE OF OUR COMMON STOCK
Once a trading market develops for our common stock, many of our
stockholders will have an opportunity to sell their common stock for the first
time. Sales of a substantial number of shares of
13
<PAGE> 17
common stock in the public market, or the threat that substantial sales might
occur, could cause the market price of the common stock to decrease
significantly. These factors could also make it difficult for us to raise
additional capital by selling stock. See "Shares Eligible for Future Sale" on
page 54 of this prospectus for further details regarding the number of shares
eligible for public sale after this offering.
WE WILL HAVE BROAD DISCRETION IN USING THE PROCEEDS FROM THIS OFFERING AND MAY
NOT USE THEM IN A MANNER STOCKHOLDERS WOULD PREFER
We have not identified specific uses for most of the proceeds from this
offering, and we will have broad discretion in how we use them. In addition, we
are unable to determine how much of the proceeds will be used for any identified
purpose because circumstances regarding our planned uses of the proceeds may
change. You will not have the opportunity to evaluate the economic, financial or
other information on which we base our decisions on how to use the proceeds. The
failure of our management to apply the funds effectively could have a material
adverse effect on our business and financial performance.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance, and are identified by terminology such as "may,"
"will," "should," "expects," "scheduled," "plans," "intends," "anticipates,"
"believes," "estimates," "potential," or "continue" or the negative of these
terms or other comparable terminology. These statements are only predictions and
involve known and unknown risks and uncertainties. Actual events or results may
differ materially from those indicated by such forward-looking statements. In
evaluating those statements, you should consider the inherent risks and
uncertainties involved, including the risks outlined under "Risk Factors."
Although we believe that the expectations reflected in those
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance, or achievements. Moreover, neither we nor any
other person assumes responsibility for updating any of those forward-looking
statements after the date of this prospectus.
This prospectus includes estimates made by independent parties relating to
market size and growth. Those estimates involve a number of assumptions and
limitations. We cannot assure you that those estimates of market size are
accurate or that those projections of market growth will be achieved.
14
<PAGE> 18
USE OF PROCEEDS
The net proceeds to SkillSoft from this sale of the 3,100,000 shares of
common stock are estimated to be approximately $36,704,000 at an assumed initial
public offering price of $13.00 per share, after deducting estimated
underwriting discounts and commissions and offering expenses payable by
SkillSoft. If the underwriters' over-allotment option is exercised in full,
SkillSoft will receive an additional $5,621,850. The principal purpose of this
offering is to raise money to fund our expansion and to create a public market
for our common stock. This public market will facilitate future access to the
public equity markets and enhance our ability to use our common stock as a means
of attracting and retaining key employees and as consideration for acquisitions.
SkillSoft intends to use the proceeds for general corporate purposes, including
expansion of its sales and marketing capabilities, product development,
expansion of its international operations and working capital. We have not
specifically allocated the proceeds of this offering to any of these purposes.
However, we currently plan to spend approximately $12,000,000 on research and
development, approximately $19,000,000 on sales and marketing and approximately
$5,000,000 on general and administrative expenses in the fiscal year ended
January 31, 2001. Nevertheless, our business plan, including the amount of these
expenditures, may change materially. These expenditures will be funded in part
by our revenue. Pending these uses, the proceeds of this offering will be
invested in short-term, interest-bearing, investment-grade securities,
certificates of deposit or direct or guaranteed obligations of the United
States.
DIVIDEND POLICY
SkillSoft has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends in the foreseeable future.
SkillSoft currently intends to retain future earnings, if any, to fund the
expansion and growth of its business. Payment of future dividends, if any, will
be at the discretion of SkillSoft's board of directors after taking into account
various factors, including SkillSoft's financial condition, operating results,
current and anticipated cash needs, plans for expansion and other factors that
the board deems relevant.
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<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of SkillSoft as of
October 31, 1999. Our capitalization is presented:
- on an actual basis;
- on a pro forma basis giving effect to the automatic conversion of all
outstanding shares of preferred stock which will occur upon the closing
of this offering into common stock and the reclassification of all
outstanding shares of Class A common stock into common stock; and
- on a pro forma as adjusted basis to reflect the sale by SkillSoft of
3,100,000 shares of common stock offered hereby at an assumed initial
public offering price of $13.00 per share, after deducting estimated
underwriting discounts and commissions and offering expenses.
This information should be read in conjunction with "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1999
----------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
-------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Stockholders' equity:
Convertible preferred stock, $.001 par value
Series A -- 4,000,000 shares issued and
outstanding actual; none issued and
outstanding pro forma and pro forma as
adjusted................................... $ 6,958 $ -- --
Series B -- 4,761,905 shares issued and
outstanding actual; none issued and
outstanding pro forma and pro forma as
adjusted................................... 9,994 -- --
Series C -- 1,195,238 shares issued and
outstanding actual; none issued and
outstanding pro forma and pro forma as
adjusted................................... 3,759 -- --
Class A common stock, 2,836,545 issued and
outstanding actual; none issued and
outstanding pro forma and pro forma as
adjusted...................................... 3 -- --
Common stock, $.001 par value; none issued and
outstanding actual; 9,474,640 shares issued
and outstanding pro forma; 12,574,640 shares
issued and outstanding pro forma as
adjusted...................................... -- 9 13
Additional paid-in capital...................... 7,481 28,186 64,886
Deferred compensation........................... (2,687) (2,687) (2,687)
Notes receivable from stockholders.............. (339) (339) (339)
Accumulated deficit............................. (25,095) (25,095) (25,095)
Cumulative translation adjustment............... 5 5 5
-------- ------------ --------
Total stockholders' equity.................... 79 79 36,783
-------- ------------ --------
Total capitalization.......................... $ 79 $ 79 $ 36,783
======== ============ ========
</TABLE>
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<PAGE> 20
DILUTION
The pro forma net tangible book value of the common stock at October 31,
1999 was $78,635, or $.01 per share. Pro forma net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the number of shares of common stock outstanding after giving effect to the
conversion of all shares of preferred stock. After giving effect to the sale of
3,100,000 shares of common stock offered hereby by SkillSoft at an assumed
initial public offering price of $13.00 per share and after deducting estimated
underwriting discounts and commissions and offering expenses, SkillSoft's pro
forma net tangible book value as of October 31, 1999 would have been
approximately $36,782,635, or $2.93 per share. This represents an immediate
increase in pro forma net tangible book value of $2.92 per share to existing
stockholders and an immediate dilution of $10.07 per share to new investors
purchasing shares of common stock in this offering. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Pro forma net tangible book value per share at October 31,
1999........................................................ $ .01
Increase attributable to the sale of common stock in this
offering.................................................. 2.92
-----
Adjusted pro forma net tangible book value per share after
this offering............................................. 2.93
------
Net tangible book value dilution per share to new investors
in this offering.......................................... $10.07
======
</TABLE>
If the underwriters' over-allotment option were exercised in full, the pro
forma net tangible book value per share after this offering would be $3.25 per
share, the increase in net tangible book value per share to existing
stockholders would be $3.24 per share and the dilution to individuals who
purchase shares in this offering would be $9.75 per share.
The following table summarizes, as of October 31, 1999, on the pro forma
basis described above, the total number of shares purchased, the consideration
paid to SkillSoft and the average price per share paid by the existing
stockholders and by new investors purchasing shares of common stock in this
offering at an assumed initial public offering price of $13.00 per share before
deducting the estimated underwriting discounts and commissions and offering
expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Shares owned by existing
stockholders...................... 9,474,640 75.3% $21,608,488 34.9% $ 2.28
Shares purchased in this offering... 3,100,000 24.7 40,300,000 65.1 $13.00
---------- ----- ----------- -------
Total..................... 12,574,640 100.0% $61,908,488 100.0%
========== ===== =========== =======
</TABLE>
These tables do not give effect to the exercise of options to purchase
common stock outstanding at October 31, 1999. At October 31, 1999, there were
694,288 shares of common stock issuable upon exercise of outstanding stock
options, at a weighted average exercise price of $1.11 per share. To the extent
that these options are exercised, there will be further dilution to new
investors.
17
<PAGE> 21
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with SkillSoft's financial statements and notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," appearing elsewhere
in this prospectus. The statement of operations data for the period from
incorporation (October 15, 1997) to January 31, 1998, for the fiscal year ended
January 31, 1999 and for the nine months ended October 31, 1999 and the balance
sheet data as of January 31, 1998, January 31, 1999 and October 31, 1999 are
derived from, and are qualified by reference to, audited financial statements
included elsewhere in this prospectus. The statement of operations data for the
nine months ended October 31, 1998 are derived from unaudited financial
statements of SkillSoft appearing elsewhere in this prospectus. The unaudited
financial statements have been prepared on the same basis as the audited
financial statements and, in the opinion of SkillSoft's management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information set forth therein. The historical results
of operations are not necessarily indicative of the operating results to be
expected in the future.
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION YEAR NINE MONTHS ENDED
(OCTOBER 15, 1997) ENDED OCTOBER 31,
TO JANUARY 31, JANUARY 31, -----------------------
1998 1999 1998 1999
------------------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue.................................. $ -- $ -- $ -- $ 2,371
Cost of revenue.......................... -- -- -- 497
-------- ---------- ---------- ----------
Gross profit........................... -- -- -- 1,874
Operating expenses:
Research and development............... 178 4,117 2,380 5,885
Selling and marketing.................. -- 1,671 708 5,169
General and administrative............. 649 2,821 1,889 3,010
Amortization of deferred
compensation........................ -- -- -- 189
-------- ---------- ---------- ----------
Total operating expenses....... 827 8,609 4,977 14,253
-------- ---------- ---------- ----------
Interest income, net..................... 3 336 271 146
-------- ---------- ---------- ----------
Net loss....................... $ (824) $ (8,273) $ (4,706) $ (12,233)
======== ========== ========== ==========
Net loss per share(1):
Basic and diluted...................... $ (1.28) $ (5.64) $ (3.33) $ (8.72)
======== ========== ========== ==========
Basic and diluted weighted average
common shares outstanding........... 645,185 1,466,085 1,413,962 1,834,841
======== ========== ========== ==========
Pro forma net loss per share(1):
Pro forma basic and diluted............ $ (1.70) $ (2.04)
========== ==========
Pro forma basic and diluted weighted
average common shares outstanding... 4,872,043 7,837,015
========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF JANUARY 31,
------------------ AS OF OCTOBER 31,
1998 1999 1999
------- ------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEETS DATA:
Cash, cash equivalents and short-term investments........ $7,022 $3,965 $ 528
Working capital.......................................... 6,319 2,726 (482)
Total assets............................................. 7,022 4,551 3,385
Long-term liabilities.................................... -- -- --
Stockholders' equity..................................... 6,319 3,195 79
</TABLE>
- ---------------
(1) See Note 2(f) of Notes to Consolidated Financial Statements of SkillSoft
included elsewhere in this prospectus for the determination of shares used
in computing basic and diluted net loss per common share and pro forma basic
and diluted net loss per common share.
18
<PAGE> 22
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 "Selected
Financial Data" and SkillSoft's financial statements and notes appearing
elsewhere in this prospectus. 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, but not limited to,
those set forth under "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We commenced operations in January 1998, and until March 1999, devoted
substantially all of our 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, we have devoted
substantial resources to sales and marketing activities as well as to continued
product development, and have recorded revenue, although we are not yet
profitable. We had an accumulated deficit of $25,095,175 as of October 31, 1999.
We expect 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 our 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 we continue to introduce new courses. Legal costs may also
increase due to the defense of a lawsuit filed against SkillSoft and certain of
our executives by NETg.
We derive revenue primarily from license agreements under which customers
license our 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 three-year license for 25 courses for 5,000
users would cost approximately $106,250 per year. Our license agreements 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. We
also derive revenue on a pay-for-use basis under which some customers are
charged based on the number of courses accessed by users.
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
course of the contract, depending on specific contract terms. In the event that
the customer does not initially specify the entire set of licensed courses to be
delivered or if some licensed courses are not immediately available for
delivery, the portion of the license revenue associated with those undelivered
courses is not recognized until those courses are delivered. 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 is given exchange privileges that are exercisable other than on
the contract anniversaries or flexible payment terms, or if the customer
licenses all courses currently available and to be developed during a particular
term. This license approach enables us to build a backlog of future revenue
streams. Revenue is recognized as billed monthly or quarterly under the
pay-for-use model. We also derive revenue from optional complementary services
such as extranet hosting and mentoring services, which have been minimal to
date. We may offer payment terms up to six months from the initial shipment date
or anniversary date for multi-year agreements.
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<PAGE> 23
Our backlog at any given time represents the amount of license fees which
are due to us 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
us and to future years of non-cancellable multi-year license agreements. Our
backlog as of October 31, 1999 was approximately $4,400,000. Our 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 our
license agreements. In particular, if customer or competitive pressures cause us
to change our business model from multi-year license agreements to one-year
license agreements, our backlog (although not necessarily our revenue) would
decrease. In addition, although we expect to develop all licensed courses, and
although our license agreements generally may not be canceled by our customers
unless we breach the agreement, there can be no assurance that all of our
backlog will be ultimately recognized as revenue. Accordingly, our backlog as of
any particular date should not be relied upon as an indication of our actual
revenue for any future period.
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 we intend 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.
We recorded deferred compensation of $2,876,056 in the nine months ended
October 31, 1999, representing the difference between the exercise price of
stock options granted and the sale price of restricted common stock and the fair
market value of the underlying common stock at the date of grant. No such
deferred compensation was recorded for the fiscal year ended January 31, 1999.
The difference is recorded as a reduction of stockholders' equity and is being
amortized over the vesting period of the applicable options and restricted
common stock, which is typically four years. Of the total deferred compensation
amount, $189,288 had been amortized as of October 31, 1999. The amortization of
deferred compensation is recorded as an operating expense. We currently expect
to amortize the remaining $2,686,768 of deferred compensation as of October 31,
1999 in the periods indicated, as follows:
<TABLE>
<S> <C>
November 1, 1999 - January 31, 2000......................... $ 195,007
February 1, 2000 - January 31, 2001......................... $ 780,027
February 1, 2001 - January 31, 2002......................... $ 780,027
February 1, 2002 - January 31, 2003......................... $ 656,145
February 1, 2003 - January 31, 2004......................... $ 275,563
----------
$2,686,768
==========
</TABLE>
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<PAGE> 24
RESULTS OF OPERATIONS
NINE MONTHS ENDED OCTOBER 31, 1999 VERSUS NINE MONTHS ENDED OCTOBER 31, 1998
Revenue for the nine months ended October 31, 1999 was $2,371,202 compared
to no revenue for the nine months ended October 31, 1998, as we did not begin
recognizing revenue until March 1999. This revenue was derived from fulfilling
product orders for the 52 customer license agreements signed during the nine
months ended October 31, 1999, of which one customer accounted for 29% of
revenue.
Cost of revenue was $497,684, or 21% of revenue, for the nine months ended
October 31, 1999, compared to $0 for the nine months ended October 31, 1998.
Research and development expenses were $5,884,318 for the nine months ended
October 31, 1999, compared to $2,379,531 for the nine months ended October 31,
1998. This increase was primarily due to increased personnel and course
development costs amounting to approximately $600,000 and $2,900,000,
respectively. Since our strategy includes offering the largest library of soft
skills courses in the industry, we believe that a significant investment in
research and development is necessary to remain competitive, and we therefore
expect research and development expenses to continue to increase.
Selling and marketing expenses were $5,169,223 for the nine months ended
October 31, 1999, compared to $708,404 for the nine months ended October 31,
1998. This increase was primarily due to increased personnel, commissions,
marketing, travel costs and facility costs amounting to $3,000,000, $261,000,
$425,000, $465,000 and $310,000, respectively. We believe that a significant
investment in selling and marketing to expand our distribution channel worldwide
is required to remain competitive, and we therefore expect selling and marketing
expenses to continue to increase.
General and administrative expenses were $3,009,762 for the nine months
ended October 31, 1999, compared to $1,889,520 for the nine months ended October
31, 1998. This increase was primarily due to increased legal fees incurred in
connection with the NETg lawsuit. We anticipate that general and administrative
expenses will continue to increase due to increases in headcount in management,
information services and accounting fees, additional expenses associated with
operating as a public company and the legal fees relating to the NETg lawsuit.
Interest income totaled $147,317 for the nine months ended October 31,
1999, compared to $271,172 for the nine months ended October 31, 1998. The
decrease was due to lower cash balances.
YEAR ENDED JANUARY 31, 1999 VERSUS PERIOD FROM INCORPORATION (OCTOBER 15, 1997)
TO JANUARY 31, 1998
We commenced operations in January 1998 and had no revenue until March
1999. We did not incur significant operating expenses during the year ended
January 31, 1998.
Research and development expenses were $4,117,187 for the year ended
January 31, 1999. We had 18 research and development personnel and had not yet
completed development of any courses as of January 31, 1999.
Selling and marketing expenses were $1,671,225 for the year ended January
31, 1999. We had 36 selling and marketing personnel as of January 31, 1999.
General and administrative expenses were $2,820,646 for the year ended
January 31, 1999. We had nine general and administrative personnel as of January
31, 1999.
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<PAGE> 25
QUARTERLY OPERATING RESULTS
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
APRIL 30, 1999 JULY 31, 1999 OCTOBER 31, 1999
--------------- -------------- -----------------
<S> <C> <C> <C>
Revenue..................... $ 197,822 $ 890,402 $ 1,282,978
Cost of revenue............. 126,779 127,676 243,229
----------- ----------- -----------
Gross profit.............. 71,043 762,726 1,039,749
----------- ----------- -----------
Operating expenses:
Research and
development............ 1,917,181 1,825,940 2,141,197
Selling and marketing..... 1,281,092 1,568,294 2,319,837
General and
administrative......... 1,063,685 900,832 1,045,245
Amortization of deferred
compensation........... 9,874 28,471 150,943
----------- ----------- -----------
Total operating
expenses............... $ 4,271,832 $ 4,323,537 $ 5,657,222
----------- ----------- -----------
Interest income, net........ 64,478 55,208 26,186
----------- ----------- -----------
Net loss............... $(4,136,311) $(3,505,603) $(4,591,287)
=========== =========== ===========
</TABLE>
During 1999, our quarterly revenue increased from $197,822 for the quarter
ended April 30, to $890,402 for the quarter ended July 31 and to $1,282,978 for
the quarter ended October 31. These increases in revenue were due to additional
new customers signed up during the period, as well as to an increase in the
average contract size resulting from our ability to offer a greater number of
courses from our growing library and growth in our average customer user base.
Over the first three quarters of fiscal 1999, research and development expenses
remained relatively consistent in actual dollars, since these costs are
primarily driven by course development, which has continued at a steady pace
throughout the year. Sales and marketing expenses increased quarter over
quarter, rising from $1,281,092 for the quarter ended April 30, 1999 to
$1,568,294 and $2,319,837 for the quarters ended July 31, 1999 and October 31,
1999, respectively. Increases in sales and marketing expenses reflect the
growing size of our sales force with corresponding increases in costs for
salaries, commissions, recruiting, travel and related expenses.
As a result of our limited operating history, we do not have sufficient
historical financial data upon which to forecast quarterly revenue and operating
results. Our quarterly operating results may fluctuate as a result of a variety
of factors. Please see "Risk Factors -- Our limited operating history does not
afford significant financial data upon which to forecast quarterly revenue or
operating results, and our operating results may fluctuate from quarter to
quarter due to the nature of our business, which could have a negative impact on
the price of our common stock" on page 7 of this prospectus for a detailed
description of the factors that may affect our operating results.
LIQUIDITY AND CAPITAL RESOURCES
From inception, we have been funded primarily through preferred stock
financings with Warburg Pincus and other minority investors. The net proceeds
from these financings through October 31, 1999 were approximately $20,710,000.
As of October 31, 1999, our principal source of liquidity was our cash and
cash equivalents and marketable securities balances, which totaled approximately
$528,000. As of the end of fiscal 1998 and 1999, our cash and cash equivalents
and marketable securities balances totaled approximately $7.0 million and $4.0
million, respectively. The overall increase in cash and cash equivalents and
marketable securities balances during fiscal 1998 was due to proceeds from the
issuance of Series A convertible preferred stock. The overall decrease in cash
and cash equivalents and marketable
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<PAGE> 26
securities during fiscal 1999 and during the nine months ended October 31, 1999
was due to the funding of operations, partially offset by proceeds from the
issuance of Series B and Series C convertible preferred stock.
We have a line of credit agreement with GreyRock Capital that permits
borrowings of up to $12.0 million. The line of credit is comprised of a $7.5
million term loan facility that matures on June 30, 2000 and a revolving credit
facility, with borrowings under the revolving facility limited to 80% of
eligible accounts receivable. In connection with an amendment to this agreement
in December 1999, we paid GreyRock a $70,000 fee and issued GreyRock warrants
for 60,606 shares of our common stock at an exercise price of $8.25 per share.
At October 31, 1999, there was $501,445 outstanding under this line of credit.
Our primary investing activities were purchases of property and equipment,
and purchases and maturation of marketable securities. Property and equipment
purchases were approximately $0, $555,000, and $243,000 in fiscal 1998, fiscal
1999 and the nine months ended October 31, 1999, respectively. Purchases and
maturation of marketable securities generated a net cash outflow of
approximately $4.4 million in fiscal 1998 compared to a net cash inflow of
approximately $1.0 million and $3.3 million in fiscal 1999 and the nine months
ended October 31, 1999, respectively.
Cash provided by financing activities was approximately $7.1 million, $5.1
million and $9.4 million in fiscal 1998, fiscal 1999 and the nine months ended
October 31, 1999, respectively. This consisted of proceeds from the issuance of
Series A, B and C convertible preferred stock, as well as sale of common stock.
Working capital (deficit) was approximately $6.3 million, $2.7 million and
$(0.5) million as of January 31, 1998, 1999 and October 31, 1999, respectively.
Total assets were approximately $7.0 million, $4.6 million and $3.4 million as
of January 31, 1998, 1999 and October 31, 1999, respectively. These decreases
were attributable to the funding of operations and product development.
We had cash, cash equivalents and short-term investments totalling
approximately $528,000 as of October 31, 1999. We believe that the net proceeds
of this offering, together with our current cash, cash equivalents and
short-term investments and our credit facility with GreyRock Capital, will be
sufficient to satisfy our funding needs for at least the next 18 months.
YEAR 2000 COMPLIANCE
The Year 2000 issue refers generally to the problems that some software and
computer systems may have in determining the correct century for the years after
1999. For example, software and computer systems with date-sensitive functions
that are not Year 2000 compliant may not be able to distinguish whether "00"
means 1900 or 2000, which may result in system failures or erroneous results.
We have defined "Year 2000 compliant" as the ability to:
- correctly handle date information after December 31, 1999;
- function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
- where appropriate, respond to two-digit date input in a way that resolves
the ambiguity as to century in a disclosed, defined, and predetermined
manner;
- if the date elements in interfaces and data storage specify the century,
store and provide output of date information in ways that are unambiguous
as to century; and
- recognize the year 2000 as a leap year.
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<PAGE> 27
We believe that we have four general areas of potential exposure with
respect to the Year 2000 problem:
- Our own products;
- Our internal information systems and equipment-related systems;
- The effects of compliance efforts of our suppliers, resellers and other
third parties; and
- Year 2000 problems experienced by our customers.
All of our current courses and software products are Year 2000 compliant.
Our courses are presented through the medium of Web browsers, which are software
programs that allow a user to access and interact with Web sites. Date
information is supplied to our programs by the Web browser and the user's
operating system. If the Web browser and the operating system are Year 2000
compliant and pass correct, unambiguous date information to our software, we
believe that our software will process it correctly.
Since we began our business in January 1998, we have implemented and will
continue to implement enterprise-wide business software. This software is
represented by its vendors as being fully Year 2000 compliant. We have completed
our assessment of all critical business systems, and have found that where
software updates are required, they have been provided by the vendors and will
be installed and tested by the middle of October 1999. Because we purchased all
software and hardware we use during 1998 and 1999, we do not believe there will
be any material problems or costs relating to such software or hardware
associated with the Year 2000 problem.
The third aspect of our Year 2000 compliance analysis involves evaluating
the Year 2000 efforts of third parties, including suppliers, resellers and
producers of software which interact with our programs. To date, we have not
conducted a Year 2000 compliance review of our suppliers or resellers. We are
currently evaluating the need to conduct a complete review of our suppliers' and
resellers' Year 2000 compliance issues. We are currently focusing all our Year
2000 efforts on our products and our internal business systems' Year 2000
readiness. If a supplier or reseller experiences a material Year 2000 compliance
problem, we plan to change suppliers and resellers. We cannot assure you that we
will be successful in finding alternatives and that our business will not incur
significant supplier transfer costs as well as lost revenue from our resellers.
With respect to third-party software which interacts with our programs, we have
identified several databases, Web servers and Web browsers which are Year 2000
compliant. If some of our customers do not use our programs with one of these
systems, it is possible that they may experience difficulties related to
third-party software, which may affect the performance of our products and lead
to adverse results such as an unusually high number of calls to our technical
support department or other unusual requests for information or assistance.
Responding to these requests may divert resources from pursuing our business
strategy. Furthermore, failure of third-party software or products used with our
products may reduce the value of our products, decrease or delay revenues,
tarnish our brand, give rise to breach of warranty claims or divert resources,
any of which could materially adversely affect our business, results of
operations and financial condition.
We have not evaluated and are not able to evaluate our customers' Year 2000
compliance strategies that might impact our business, such as an intranet
"lockdown" by any such customer, which could delay sales cycles or cause delays
in evaluations or decisions requiring the customer access to their intranet. Any
lockdowns could materially impact our revenue expectations during the periods in
which they occur.
We currently anticipate that the Year 2000 problem, insofar as it relates
to our products and internal systems, will not have a material adverse effect on
our financial position or results of our operations. We can give no assurance,
however, that the systems of other companies or government
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<PAGE> 28
entities, on which we rely for supplies, payments and future business, will be
Year 2000 compliant or that a failure to be Year 2000 compliant by another
company or government entity would not have a material adverse effect on our
business. If third party suppliers, service providers, resellers and customers
are impacted by Year 2000 compliance problems, our business may suffer.
Our most likely worst case Year 2000 scenario would be that products and
software from third parties fail in the Year 2000, resulting in a decreased
demand for our products and damage to our brand. In the event of a Year 2000
failure of our products or systems, we would devote resources to correct it. We
believe we will be able to respond promptly to any failures that occur. The
costs of a response and the diversion of resources, however, could have a
material adverse effect on our business, results of operation and financial
condition.
Because our products are, and our internal systems are or are soon expected
to be, Year 2000 compliant, we have not formulated any contingency plans with
regard to Year 2000 compliance. Furthermore, we have not expended a material
amount of capital resources on Year 2000 compliance and do not anticipate future
expenditures to be material to our business, results of operations and financial
condition. We have not hired additional personnel to address Year 2000
compliance issues specifically, and we do not expect to do so.
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<PAGE> 29
BUSINESS
COMPANY OVERVIEW
We are a provider of training courses that are accessible by users through
corporate intranets or remotely through the internet. Our courses are targeted
at large companies and cover a variety of professional effectiveness and
business topics (commonly called soft skills). All of our courses and support
tools have been specifically designed to take advantage of the benefits offered
by the internet and the Web-based environments of our customers and are
accessible through standard Web browsers, which are common software applications
that allow users to access and interact with Web sites. This enables the users
of our products to access the material they need, with the specificity or
breadth that they require, anytime or anywhere that they may need it. Our
customers receive comprehensive training and support solutions for their
employees, comprised of:
- our library of over 215 courses, which encompasses a wide array of
professional effectiveness skills and business topics; and
- our Web-based job performance support tools, such as Search-and-Learn
technology, Online Mentoring, and Online Job Aids.
We believe our Web-based training solution offers several advantages over
traditional instructor-led training, such as the elimination of travel and
scheduling difficulties and a reduction in lost employee time. In addition, we
provide a number of significant advantages over other technology-based training
products, including:
- more flexible and cost-efficient access to courses;
- job performance support tools;
- easier to use products;
- improved means of product and user support; and
- increased ability for administrators to monitor use and effectiveness of
courses.
In addition, all of our courses are developed using our Instructional Design
model, which is based on proven concepts for performance-oriented learning and
is designed to maximize learner attention and retention through the use of rich
color and graphics, audio, behavioral modelling, role-playing and substantial
user interaction.
MARKET OPPORTUNITY
The increasing acceptance of the internet and the proliferation of Web
browsers at work, at home and in laptop computers have dramatically changed many
businesses and business processes, creating exciting opportunities to serve
customers better, faster and more cost-effectively. We believe that new
technological capabilities of the internet, such as search engines, which allow
a user to quickly locate and access information without having to know where
that information resides, and hypertext links, which allow a user to use a
computer mouse to click on highlighted text in one electronic document to locate
and display other electronic documents, coupled with dramatically increased
connectivity for workers, have created an opportunity to comprehensively change
the way that organizations and their employees view and implement training and
education. By providing real-time accessibility and user-focused specificity, we
believe that Web-based training will change the training and education process
from a distinct event -- often off-site and limited in scope -- to a process of
continuous learning for employees. Given the rising needs for training in
increasingly complex working environments, we believe that a properly designed
and deployed Web-based training resource can effectively address the needs of
companies seeking a comprehensive, enterprise-wide training solution.
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The Corporate Training and Soft Skills Market
The corporate training market is large and growing. According to TRAINING
magazine, domestic corporations with over 100 employees budgeted approximately
$62.5 billion for training in 1999 (including the costs of internal training),
compared to $48.2 billion in 1993. We believe that a significant portion of the
corporate training market is comprised of soft skills training. We believe that
the growth in corporate training in general and soft skills training in
particular is being driven by:
- the evolution of our economy to a service-based and knowledge-based
economy, in which the skills of the workforce often represent the most
important corporate assets;
- the increasing recognition by businesses that it is imperative to
continually improve the skills of their employees in order to remain
competitive;
- the rapidly evolving business environment, which in turn necessitates
continual training and education of the employee base; and
- the increased competition in today's economy for skilled employees and
the recognition that effective training can be used to recruit and retain
employees.
The corporate training market is also characterized by an increasing use of
external providers to supplement or replace internal training efforts, in order
to obtain a more comprehensive and consistent training solution than is
available internally and in order to allow businesses to focus on their core
competencies. We believe that the corporate training industry is highly
fragmented, with a large number of smaller competitors but no dominant
competitor. Many companies within this industry serve niche markets or provide a
limited range of products and services that do not adequately address the
training needs of large organizations.
Technology-Based and Web-Based Training
Accompanying the trend toward increased training, largely through the use
of external training providers, has been an equally powerful trend toward the
use of technology-based training. Technology-based training includes CD-ROMs,
satellite broadcasts, client/server applications -- which allow personal
computers, called client computers, to exchange data with more powerful
computers, called servers, shared by multiple users -- and Web-based training.
We estimate, based on available market data, that technology-based training
accounted for 24% of the corporate training market in 1998, up from 19% in 1997.
We believe the growth in technology-based training is being driven by the
increased recognition by many companies that traditional classroom instruction
is inadequate to meet their enterprise-wide training needs. Among the problems
of classroom instruction that can be addressed by traditional technology-based
training solutions such as CD-ROMs, satellite broadcasts and client/server
applications are travel costs, scheduling difficulties and the opportunity costs
of employees' time.
However, traditional technology-based training addresses only some of the
shortcomings of classroom instruction. We believe that training products that
can be accessed via Web browsers and incorporate Web technologies can
dramatically alter the manner in which courses are deployed and used and can
provide a number of significant advantages over traditional instructor-based and
technology-based training. Web-based training products can be deployed more
flexibly and cost-effectively, enabling users to access the material they need
anytime or anywhere that they may need it in the exact amount they demand. In
addition, Web-based training products enable self-directed learning, which
refers to a training process in which individuals initiate their own training,
customize it to their own needs, and master material at their own pace. Other
advantages of Web-based training products are ease of use, improved means of
product and user support, and enhanced administrative capabilities. We believe
that a Web-based training solution, when properly designed and deployed, can
provide a comprehensive, enterprise-wide training solution that is more
flexible, effective and
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<PAGE> 31
cost-efficient than classroom instruction and traditional technology-based
training. We estimate, based on available market data, that the Web-based
component of non-information technology training will grow at an 123% compound
annual rate from 1998 to 2003.
THE SKILLSOFT ADVANTAGE
We address the enterprise-wide training needs of business organizations by
providing Web-based training resources that cover a variety of professional
effectiveness and business topics. We believe our courses and support tools
offer the following advantages:
Comprehensive Offering of High-Quality Products
We believe that a key advantage we offer our customers is the comprehensive
range of our training solutions. Our courses cover a wide range of professional
effectiveness and business expertise subjects, and we believe that our library
of over 215 courses represents the largest number of consistently designed
courses accessible via Web browsers in the soft skills training industry. We
believe that our courses appeal to a broader range of employees within an
organization than do courses on information technology and other specialized
topics. In addition, our courses are designed to be utilized without
customization across a wide range of industries, including technology, financial
services, telecommunications and manufacturing. See "-- Products" on page 32 of
this prospectus for a detailed description of our products.
Web-Based Performance Support
Our Web-based architecture and deployment strategy enables us to provide a
number of features designed to continuously support users in their working
environment, providing immediate, focused training solutions to improve employee
effectiveness. Our Web-based job performance support tools provide anywhere,
anytime accessibility to the thousands of topical lessons available in our
course library, as well as task-related refreshers and online feedback from
experts -- all at the level of detail specified by the user. Our
Search-and-Learn technology permits users to perform keyword-based, intelligent
searches for topics across their company's entire library of licensed SkillSoft
courses, in the same manner as one would use an internet search engine, so that
users can quickly locate and use instructional software that helps them with a
specific job-related task. We also offer Online Mentoring, which enables a user
to ask questions relating to course materials or subject matter and receive
e-mail responses from experts in the field. See "-- Products -- Web-Based
Performance Support" on page 33 of this prospectus for detailed description of
features of our products based on new Web technologies to support our users in
their training.
State-of-the-Art Web-Based Deployment Strategy
All of our courses are developed and deployed through an architecture built
entirely on new Web technologies and standards. Our software is specifically
designed to perform optimally when accessed via a Web browser through corporate
intranets or remotely through the internet and to scale well to support large
numbers of users. We believe that this Web-based architecture offers a number of
advantages over conventional instructor-led training as well as other
technology-based training media, including:
- More effective deployment -- Users of our courses can access them via a
Web browser while at work, at home or while travelling, and can access
them whenever they desire. Our courses can be accessed online through
intranets or remotely through the internet, and may be downloaded -- in
whole or in part -- for localized playing on laptops or other independent
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<PAGE> 32
computers. Our access technologies make it possible to scale up the use
of our products to address the expanding training needs of large
organizations.
- Advanced Web technologies -- Our products incorporate emerging Web
technologies that we believe substantially improve product performance.
For example, our products are designed to reduce the risk of technical
problems and enhance network security because they are designed to be
used without "plug-in" software, which is software written for specific
computer processors and operating systems and must be installed on the
user's computer for use in conjunction with a web browser. In addition,
our products employ advanced techniques to reduce the size of data files
and to retrieve and store quickly accessible copies of text, audio and
graphic files, which allows our products to deliver high-quality
performance within the limitations in the amount of data our customers'
corporate intranets and internet connections can handle at any given
time.
- Easier updating -- Because our courses generally reside on a centralized
server accessible by users connected to the network -- rather than
distributed on personal computers throughout the organization or on
multiple CD-ROMs -- updating or adding courses can be done more quickly
and cost-effectively. See "-- Products -- Web-Based Deployment" on page
34 of this prospectus for a detailed description of Web technologies
incorporated in our products.
Instructional Design Model
All SkillSoft courses are developed using our Instructional Design model,
which is based on proven concepts for performance-oriented learning. Our
Instructional Design model draws heavily from adult learning theory and
emphasizes motivation, topic relevance, self-management, problem solving,
mastery learning and role-playing. Users work at their own pace, learn by
observing and modeling the actions and attitudes of others and take tests to
assess their mastery of the selected skills. The learner remains actively
engaged through interactive instruction, practice, reinforcement and feedback.
We believe that our consistent use of this model in designing our courses not
only improves the efficacy of our courses, but also makes the development of
additional courses more efficient. See "-- Products -- The SkillSoft
Instructional Design Model" on page 32 of this prospectus for a detailed
description of components of our Instructional Design Model.
Customer-Focused Approach
We strive to maintain a customer-focused approach throughout all aspects of
our organization that is aimed at making it easy and productive for our
customers to do business with us. Our application engineers work with our
customers to help ensure optimal performance of our products on the customer's
network. We maintain an Advisory Board, which is comprised of senior executives
of several of our customers who meet with us two or three times per year to
discuss ways to improve our products. We have also recently introduced a broader
Client Advisory Forum to encourage direct customer input on our products,
services and marketing plans. A key component of our management philosophy is to
enable all of our employees to acquire SkillSoft common stock. We believe that
this helps instill a "co-owner" mindset in our employees and encourages a focus
on customer satisfaction, customer responsiveness, high-quality work,
innovation, integrity, respect for all our business partners and teamwork.
Experienced and Proven Management Team
Our executive management team, led by our President and Chief Executive
Officer, Charles E. Moran, has over 70 years of combined experience in the
technology and education industries. Mr. Moran's prior experience includes
National Education Training Group (NETg), where Mr. Moran served as President
and Chief Executive Officer from 1995 through 1997 following its sale
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<PAGE> 33
to Harcourt General, and Softdesk, Inc., a software company where Mr. Moran
served as Chief Operating Officer and Chief Financial Officer and helped lead
its initial public offering in February 1994. Other members of our management
team have prior experience at technology-based learning and other technology
companies such as SmartForce, Compaq, NETg and Motorola. We believe that our
management team and board of directors has proven itself to be exceptionally
skilled at responding quickly and effectively to changing market conditions,
which is especially important for technology-based companies offering Web-based
products or services. See "Management -- Executive Officers, Directors and Other
Key Employees" on page 42 of this prospectus for more information on the
experience of our management team.
SKILLSOFT GROWTH STRATEGY
Our objective is to be the leading global provider of high-quality
Web-based learning and performance support products that enable business
organizations to achieve competitive advantage through superior enterprise-wide
knowledge and skills. To achieve this objective, we are pursuing the following
strategies:
Expand Library of Courses
We plan to expand our library of over 215 courses to provide an even more
comprehensive educational solution for our customers. Our goal is to add over
200 new courses per year for the next several years. We believe that continuing
to expand and update our library will both enhance our appeal to a greater
number of customers within our target market and generate additional revenue
from existing customers through increases in the number of licensed courses
and/or licensed users within the organization. In addition to introducing new
courses within our current educational topics, we are considering the
development of courses specifically targeted at certain industries, such as
e-commerce, healthcare and financial services.
Enhance Web-Based Technologies
We believe that developing new technologies and incorporating emerging Web
technologies and standards will enable us to continue to increase our appeal to
a broader base of customers. We are focused on developing and incorporating new
technologies that address the needs of our customers and make our products
easier to use and more effective, which we believe will generate increased
revenue from both existing and new customers. Among the projects we have
targeted are:
- enhancing our Web-based job performance support tools, including
increasing the number of our Online Job Aids;
- extending the ability of our courses to interact and operate with
third-party learning management software;
- developing interfaces between administrative tools and third-party human
resource database software;
- continuing to improve course start-up times when used over low-speed
network connections; and
- developing new role play simulations and other interactive instructional
features.
Increase Domestic and International Sales and Marketing Efforts
We will continue to expand our direct sales force by hiring experienced
professionals with existing relationships at companies in our target market. We
had 47 sales professionals as of December 31, 1999, as well as one person
focusing on strategic relationships with educational
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institutions. We intend to continue to aggressively expand our sales and
marketing efforts by hiring additional professionals to increase penetration of
our target market of the largest 2000 companies around the world.
In addition to our domestic sales efforts, we also intend to expand into
selected international markets. To date, substantially all of our revenue has
been generated within the United States. We recently opened an office in the
United Kingdom, which will serve as the hub of our international operations, and
we plan to open an office in Australia by January 31, 2000. Although we expect
to employ a direct sales force in the United Kingdom and Australia, our strategy
is to address other international markets -- such as continental Europe and the
Far East -- primarily through resellers, with the goal of penetrating
English-speaking markets in those areas. We are in the process of developing a
version of some of our courses for use in the United Kingdom and other English-
speaking markets (such as Australia and South Africa) that is modified based on
the style of English spoken and local business customs in those markets.
Leverage and Expand Client Relationships
We have secured multiple-year contracts with a number of well-known
companies in our target market. Our customers currently include large and
successful companies such as Adobe, Citibank, Dayton Hudson, EMC, Ernst & Young,
GTE, IBM, Motorola, National Car Rental and PeopleSoft. We believe that we have
achieved this success both because of the high quality of our product offerings
and the relationships developed by our executive officers and sales personnel
with key decision-makers within these organizations. We believe that those
customer relationships provide us with significant credibility in establishing
ourselves as a leader in our market, and we intend to use those relationships in
marketing our products to other potential customers. In addition, we plan to
leverage our initial contacts and success within specific departments of an
organization, such as human resources or sales, in seeking to increase the
number of both licensed courses and licensed users within other departments of
that organization.
Expand Strategic Alliances
Our strategic partners are critical to our success because they permit us
to leverage our internal competencies with their expertise in complementary
areas. We have established strategic relationships with a number of resellers of
our products, including Click2Learn, KnowledgeSoft, Syscom and FirstClass
Systems. We have established and are developing reseller arrangements with
internet commerce sites focused on training and education, such as Headlight.com
and Fatbrain.com, as well as internet portals such as AltaVista. As of December
31, 1999, we had signed reseller agreements with 39 companies, and we plan to
increase our reseller network significantly over the next year.
In addition, our courses have received approvals from a number of
educational institutions and certification organizations for college degree
credit, continuing education requirements or professional certification. Many of
our courses are approved by the University of Phoenix for college degree credit,
and all of our courses are approved by George Mason University for continuing
education credit. We expect that our courses will be approved by additional
educational institutions for degree credit and continuing education credit in
the future. Some of our sales and marketing courses are expected to be approved
later this year as study materials for new ISO certifications relating to sales
and marketing personnel, and we intend to develop additional business expertise
courses that adhere to the certification standards of other professional
certification organizations, such as the Project Management Institute and the
National Association of State Boards of Accountancy. In addition, we have
recently established a strategic relationship with The Wharton School of the
University of
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Pennsylvania under which The Wharton School will contribute to our development
of a series of courses focusing on financial statements.
PRODUCTS
Courses
Our comprehensive library of Web-based courses encompasses a wide array of
professional effectiveness skills and business topics. We offer over 215 courses
which are currently divided into two categories: Professional Effectiveness and
Business Expertise. Within these categories, we offer courses on the following
curricula:
<TABLE>
<CAPTION>
PROFESSIONAL EFFECTIVENESS BUSINESS EXPERTISE
- -------------------------- --------------------
<S> <C>
Management Finance
Leadership Marketing
Team Building Sales
Communication Strategic Planning
Personal Development Human Resources
Customer Service Knowledge Management
Project Management Operations
</TABLE>
Each of these curricula includes a number of series of courses. For
example, within the Project Management curriculum are series entitled
"Professional Project Management," "Advanced Risk Assessment for Project
Management" and "Advanced Project Scope, Time and Cost Management." Each series
is in turn comprised of three to eight individual courses, which are generally
two to three hours in length. Courses cover a number of different lessons, and
each lesson encompasses a number of different topics. All of our courses are
organized in a modular format, allowing users to take the entire course, or only
those portions of it that are relevant to them.
Our courses are currently available in English. We are in the process of
developing a localized version of some of our courses for use in the United
Kingdom and other English-speaking markets (such as Australia and South Africa).
The SkillSoft Instructional Design Model
All SkillSoft courses are developed using our Instructional Design model,
which is based on proven concepts for performance-oriented learning. Our
Instructional Design model draws heavily from adult learning theory and
emphasizes motivation, topic relevance, self-management, problem solving,
mastery learning and role-playing. We believe that our consistent use of this
model in designing our courses not only improves the efficacy of our courses,
but also makes the development of additional courses more efficient.
The key components of our Instructional Design model are:
- Consistent, intuitive graphical user interface -- Our courses employ a
graphical user interface, consistent across all of our courses, that
emphasizes simplicity and clarity to help ensure that employees can take
our courses with minimal assistance. Our graphical user interface
incorporates features that allow users to interact easily and intuitively
with our programs and makes rich use of color, illustrations and
photographs.
- Variety of instructional media -- Our courses all include audio
instruction, which can increase attention and retention for many users.
Audio is especially important for our behavior modeling and RolePlay
simulations. Our courses also incorporate photographs, charts and
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other graphics where appropriate to support and clarify the instruction
and focus attention on key training points.
- Practice and interaction -- Our courses engage users by requiring them to
perform practice exercises and providing them with feedback on their
performance. Our courses also include self-evaluation strategies that
engage the learner with the course content on a more individualized
level.
- Integrated assessment strategy -- Our testing strategy includes both
pre-assessment and post-assessment components. Pre-assessment features
are placed at the beginning of each lesson and are designed to quickly
identify the content the learner already knows. Post-assessment, or
mastery, occurs at the end of each lesson and evaluates the learner's
mastery of the objectives after instruction.
- Behavior modeling -- We believe that observing and modeling the
behaviors, skills and attitudes of others is a key ingredient in learning
soft skills such as leadership and customer service. Our courses present
examples, or "models," of behaviors and then ask users to rehearse these
new behaviors through practice exercises and case studies.
- RolePlay simulations -- Our innovative RolePlay feature, which we
incorporate into some courses where behavioral practice is particularly
relevant, presents users with realistic interactive simulations of
everyday workplace situations. Each simulation has multiple possible
outcomes, depending upon the user's responses.
- Accelerated Path -- This feature enables users of our courses to create
an individualized learning sequence through the course content based on
their demonstrated mastery of topic objectives. This helps ensure that
users do not spend time on topics for which they do not need training.
- Performance-oriented instruction -- Our courses focus on achieving
defined outcomes that are stated in terms of cognitive and affective
objectives. Instructional strategies are chosen to support achievement of
those objectives and assessments are used to evaluate learner achievement
of those objectives.
Web-Based Performance Support
Our products include a number of features based on Web-enabled technologies
to support users in their learning. Examples include:
- Search-and-Learn technology, which adapts the concept of Web search
engines to our training resources. Using Search-and-Learn technology,
users can perform keyword-based, intelligent searches covering their
company's entire library of licensed SkillSoft courses. Our software
presents them with a list of the specific courses and topics that match
their identified training needs, enabling them to directly access that
information -- when and where they need it. This intelligent search
capability is designed to locate the relevant sections of course content
rather than every mention of the word in any course.
- Online Job Aids, which are primers or sample documents that are
accessible online and can be used both to supplement the basic course
content or as "refresher" materials. Our customers can easily modify our
Online Job Aids to customize them to meet the specific needs of the
customer or its employees by using word processors or editors that work
with Hyper Text Markup Language, referred to as HTML (a standard used by
Web browsers to render electronic documents on a computer screen).
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- Online Mentoring, which enables a user to ask questions relating to
either the course materials or the general subject matter of the course
and receive e-mail responses (generally within 24 hours) from experts in
the field.
- NetUniversity, which is a Web-based software application that permits
course users to access a wide variety of learning resources over the Web
and enables training administrators to control, monitor and generate
reports on the use of training courses -- either ours or those of other
vendors -- by employees throughout the enterprise.
Web-Based Deployment
Our products incorporate the latest Web technologies that we believe
substantially improve our product performance. Our courses and support tools are
developed using cross-platform technologies such as HTML and the computer
programming languages Java and JavaScript. To reduce the risk of technical
problems that would limit access to our training materials, our products do not
use "plug-in" software, which is software written for specific computer
processors and operating systems and must be installed on the user's computer
for use in conjunction with a web browser. In addition, our products employ
advanced techniques to reduce the size of data files and to retrieve and store
quickly accessible copies of text, audio and graphic files, which allows our
products to deliver high-quality performance within the limitations in the
amount of data our customers' corporate intranets and internet connections can
handle at any given time. Our technology enables us to provide these advantages
to all users, not just those with the most powerful computers, quickest modems
and highest resolution monitors.
We have created a number of different options for customers to make our
courses available throughout their organization, which are designed to address
the needs of a customer, regardless of its network structure or the location and
network access of its employees. Users of our courses can access them via a Web
browser while at work, at home or while traveling, and can access them whenever,
and for as long as, they desire. Our deployment technologies make it possible to
scale up the use of our products to address the expanding training needs of
large organizations. Deployment options include:
- NetPlay, for users with browser access over a corporate intranet.
- NetDownload, which allows users to select either an entire course, or
desired portions of it, download it to their personal computer and take
the course off-line.
- NetPlay with Local Player, which permits users to download our course
player and access the licensed library from their local computers outside
of their corporate network. These users access courses by connecting to
their company's Web servers via a dial-in connection or over the
internet, or by connecting via the internet to a Web server managed by
SkillSoft on behalf of their company. Local Player is designed to
optimize delivery for users with slower home internet connections while
also enabling those users to take advantage of our Web-based performance
support tools.
- CD-ROMs, for users without access to a network.
We also offer hosting services for companies who prefer to have users access our
courses from SkillSoft-managed servers via the internet rather than host the
courses on their own intranet. For many customers, this option can significantly
simplify and shorten the implementation process.
Course Content and Development
We develop all of our courses in cooperation with outside organizations
that provide content and assemble the courses. We generally work with three to
six outside content providers. These
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organizations supply the content of our courses based upon a jointly defined
outline and assemble courses using our course development toolkit and following
our Instructional Design model. The course development process is a
collaborative exercise between SkillSoft and our outside content providers, and
the development of a series of six courses typically takes 18 to 20 weeks.
We currently have agreements with seven content providers, pursuant to
which the content provider agrees to develop a number of courses, generally from
five to ten, at a set price per course. We also may engage the content provider
to supply additional courses. Under most of our agreements, the content provider
assigns all of its right, title and interest in the course and course materials
to us. Under two agreements, the content provider licenses the content to
SkillSoft in exchange for royalty payments.
Our course development software tools are a key element of our business
strategy. By requiring that our content providers use our own toolkit rather
than commercially available authoring and development software, we ensure that
all our courses -- even those being developed by different content
providers -- incorporate our Instructional Design model, our "look-and-feel"
standards and the Web-based deployment features that we require in our courses.
This toolkit also enables our content providers to develop courses more quickly,
which improves our speed-to-market and lowers our course development costs.
Owning our course development toolkit technology enables us to enhance our
toolkit whenever and however we see fit as we respond to large customer
opportunities, potential competitive threats and changing market conditions.
Product Pricing
The pricing for our courses 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 (generally one, two or three years). Our
license agreements permit customers to exchange course titles, generally on the
contract anniversary date. Some of our features, such as Online Mentoring and
extranet hosting, are separately licensed for an additional fee.
SERVICES AND SUPPORT
We offer a broad range of support and services to our customers through our
professional services organization. We believe that providing a high level of
customer service and technical support is necessary to achieve rapid product
implementation, customer satisfaction and continued revenue growth.
Installation support. We have application engineers available to assist
customers with the installation of our products. These engineers test the
software and courses within the customer's network to ensure that they run
successfully both on the network and at employees' computers.
Implementation consulting. We employ implementation consultants to assist
customers in planning and implementing their training programs. These
individuals offer expertise in establishing training success criteria, planning
internal marketing programs and communicating with course users. These
implementation consultants work in close coordination with our application
engineers and sales representatives and are an important component of our
efforts to monitor and ensure customer satisfaction.
Technical support. We also provide telephone support to our customers
through our technical support engineers. They are available to assist customers
seven days per week between the hours of 6:00 a.m. and midnight, Eastern time.
Given the nature of our product offerings, these services and support do
not require significant resources. As of December 31, 1999, our professional
services organization consisted of nine persons.
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SALES AND MARKETING
We use a multi-prong sales strategy, consisting of
- a direct sales force for larger accounts;
- a telesales force for smaller accounts and lead generation; and
- resellers for mid-sized accounts and some international markets.
We believe this strategy enables us to focus our resources on the largest sales
opportunities, while simultaneously leveraging the contacts and employees of our
resellers to address opportunities that may not be cost-effective for us to
pursue directly.
As of December 31, 1999, we employed 44 sales professionals who have
individual sales quotas. Each of our account executives reports to a regional
sales vice president who is responsible for revenue growth and expense control
for his or her area. We presently employ two regional sales vice presidents in
the United States, a Director of Channel Sales and a Vice President/Managing
Director of International Sales and Marketing, each of whom reports to our Vice
President, Worldwide Sales and Marketing. We also have a sales executive focused
exclusively on educational institutions. Our sales professionals have
backgrounds at companies such as SmartForce, NETg, Xebec, PeopleSoft and
Ziff-Davis, as well as extensive contacts at the corporate customers that we
target. Our goal is to increase the number of our quota-carrying sales persons
to approximately 50 by January 31, 2000. The sales process for an initial sale
to a large customer typically ranges from three to twelve months and often
involves a coordinated effort among a number of groups within our organization.
We use sophisticated salesforce automation software to track each prospect
and customer through a sales cycle covering the following seven stages:
prospect, qualify, discovery, evaluation, proposal, negotiate and close. Each
step of the sales cycle has certain exit criteria that must be satisfied before
the prospect can progress to the next stage. Our senior sales executives meet
once each quarter with our regional sales vice presidents and their account
executives to assess their 90-day forecast, 120-day pipeline development and
longer term territory strategy. Our regional sales vice presidents and their
account executives typically meet weekly throughout the quarter to review
progress toward quarterly goals and longer term business objectives and for
coaching sessions.
Our products are resold by a number of leading education technology
vendors, including Click2Learn, KnowledgeSoft, Syscom and FirstClass Systems. We
have established and are developing reseller arrangements with internet commerce
sites focused on training and education, such as Headlight.com and Fatbrain.com,
as well as internet portals such as AltaVista. We have also established a
reseller arrangement with Delmar, a division of Thomas Learning, under which
Delmar will resell our courses, principally to educational institutions such as
junior colleges, vocational schools and high schools.
To date, substantially all of our revenue has been generated within the
United States. We recently opened an office in the United Kingdom, which will
serve as the hub of our international operations, and we plan to open an office
in Australia by January 31, 2000. Although we expect to employ a direct sales
force in the United Kingdom and Australia, our strategy is to address other
international markets -- such as continental Europe and the Far
East -- primarily through resellers, with the goal of penetrating
English-speaking markets in those areas.
Our marketing organization utilizes a variety of programs to support our
sales team. As of December 31, 1999, our marketing organization consisted of
five employees. Our marketing programs include:
- telemarketing;
- product and strategy updates with industry analysts;
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- articles in the trade press;
- public relations activities and speaking engagements;
- printed promotional materials;
- promotional materials on our Web site;
- "roadshow" tours, seminars and trade shows; and
- monthly online discussions, using "chat room" technology, on subjects
such as the successful implementation of Web-based training programs.
CUSTOMERS
We market our courses primarily to large businesses, governmental
organizations and educational institutions. We believe the subject matter of our
courses has appeal across a wide range of business sectors, including
technology, financial services, telecommunications and manufacturing. The
following is a list of our some of our better known customers, each of which
generated at least 1.0% of our revenue and was among our 20 largest customers
during the nine months ended October 31, 1999. These customers generated, in the
aggregate, 57% of our revenue during the nine months ended October 31, 1999.
<TABLE>
<S> <C>
Adobe General American Life
Avnet GTE
Citibank Motorola
Dayton-Hudson National Car Rental
EMC PeopleSoft
Ernst & Young
</TABLE>
We have established and are developing reseller arrangements with internet
commerce sites focused on training and education and are developing reseller
arrangements with internet portals to reach markets beyond our target customer
base.
GTE accounted for 29% of our revenue for the nine months ended October 31,
1999. No other customer accounted for more than 10% of our revenue during that
period.
PRODUCT DEVELOPMENT
We devote substantial resources to the development of new and innovative
technologies that increase the effectiveness of our courses and that support
emerging Web standards. Our future success will depend in part on our ability to
anticipate and respond to changes in technologies and customer demands, enhance
the technological features of our courses, and develop and introduce new course
titles.
Our product development efforts are focused primarily on enhancing our
Web-based architecture and technologies and our Instructional Design model that
underlies the development and structure of all of our courses.
The content for our courses is supplied by outside parties working in
cooperation with our product development personnel. The course development
process is a collaborative exercise between SkillSoft and our outside content
providers, and the development of a series of six courses typically takes 18 to
20 weeks.
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As of December 31, 1999, we had 26 employees engaged in product development
and production activities. We also utilize independent contractors for some
product development work. Our research and development expenditures for the
fiscal year ended January 31, 1999 and the nine months ended October 31, 1999
were approximately $4,117,000 and $5,884,000, respectively. We expect to
continue to commit significant resources to research and development in the
future. To date, all research and development expenses have been expensed as
incurred.
COMPETITION
The market for soft skills education and training products is fragmented
and highly competitive. We expect that competition in this market will increase
substantially in the future for the following reasons:
- The expected growth of this market.
- The low barriers to entry. In particular, we do not believe that
proprietary technology is an important competitive factor in this market.
- Our course content providers are often not prohibited from developing
courses on similar topics for other companies.
- The fragmented nature of the competitive landscape, including many small
competitors in the technology-based segment of the market.
One source of competition for our products is the internal educational and
technological personnel of our potential customers. If an organization decides
to use external providers to supply some or all of its training, our 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 access via Web browsers.
- 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. Examples of competitors in
this group are Harcourt General (through subsidiaries such as Drake Beam
Morin, NETg and Knowledge Communications), SmartForce (through its
Knowledge Well and Tarragon businesses) and McGraw Hill (through its
Xebec subsidiary).
We believe that the principal competitive factors in the soft skills
training market include:
- the breadth and depth of the course content;
- performance support and other features of the training solution;
- adaptability, flexibility and scalability of the training products
offered;
- the deployment options offered to customers;
- customer service and support;
- price/value relationship;
- relationships with the customer; and
- corporate reputation.
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Although we believe that we currently compete favorably with respect to
those factors, there can be no assurance that we can maintain or improve our
competitive position. Many of our current and potential competitors have longer
operating histories, greater name recognition and greater financial, technical,
sales, marketing, support and other resources than we do. Increased competition
may result in lost sales and may force us to lower prices, which would adversely
affect our business and financial performance.
PROPRIETARY RIGHTS
We do not believe that proprietary technology forms an important or
valuable part of our product offerings. We believe that the creative skills of
our personnel in developing new products and technologies, our ability to
develop and introduce new products rapidly and our responsiveness to customer
demands are more important than the availability of legal protections for
proprietary rights.
We attempt to avoid infringing upon intellectual property and proprietary
rights of third parties in our product development efforts. However, we do not
conduct patent searches to determine whether the technology used in our products
infringes patents held by third parties. 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. If our products
violate third-party proprietary rights, we could be liable for substantial
damages. In addition, we may be required to reengineer our products or seek to
obtain licenses to continue offering the products, and there can be no assurance
that those efforts would be successful.
We currently license from Lucent Technologies Inc. and other third parties
some technology and some course content that we incorporate into our products.
There can be no assurance that this technology and content will continue to be
available to us on commercially reasonable terms, if at all. The loss of this
technology or content could result in delays in development and introduction of
new products or product enhancements, which could have a material adverse effect
on our business and financial performance. Moreover, we may face claims from
others that the third-party technology or content incorporated in our products
violates proprietary rights held by those claimants. We may also face claims for
indemnification from our customers resulting from infringement claims against
them based on the incorporation of third-party technology or content in our
products. Although we are generally indemnified against such claims, in some
cases the scope of that indemnification is limited. Even if we receive broad
indemnification, third party indemnitors are not always well capitalized and may
not be able to indemnify us in the event of infringement. In addition, such
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources in addition to potential product
redevelopment costs and delays, all of which could materially adversely affect
our business.
We have trademark applications pending in the United States for some of our
trademarks, including NetPlay and NetUniversity and "eLearning for the Knowledge
Economy."
EMPLOYEES
As of December 31, 1999, we had 120 employees, of whom 62 were engaged in
sales and marketing, nine were engaged in customer service and support, 24 were
engaged in product development, two were engaged in product production and 23
were engaged in executive management, finance and administration. None of our
employees is subject to a collective bargaining agreement. We believe that our
relations with our employees are good.
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FACILITIES
Our headquarters are located in approximately 15,500 square feet of office
space in Nashua, New Hampshire under a lease that expires in February 2001. We
also lease a sales office in the Dallas area and in the United Kingdom. We
believe that our existing facilities are adequate to meet our current needs and
that suitable additional or substitute space will be available on commercially
reasonable terms when needed.
LEGAL PROCEEDINGS
SkillSoft, several of our executives, two of our key employees and our
largest investor are named as defendants in a lawsuit pending in the Circuit
Court of Cook County, Illinois by National Education Training Group, Inc.
(NETg), the former employer of several of those individuals. Upon leaving the
employment of NETg, and after receiving letters from NETg expressing NETg's
dissatisfaction with their departure, these individuals filed an action on April
17, 1998 against NETg in the Superior Court for Hillsborough County, State of
New Hampshire, in which SkillSoft and Messrs. Moran and Townsend sought a
declaratory judgment that they were free to hire NETg employees who had no
post-employment covenant not-to-compete and that they otherwise had not breached
any duty to NETg. NETg subsequently brought this lawsuit in the State of
Illinois. The NETg lawsuit alleges in substance that:
- Charles E. Moran, as the former President of NETg, breached his fiduciary
obligations to NETg by usurping NETg's corporate opportunities, by
commencing a rival business while still employed by NETg and by
soliciting NETg personnel to join his rival business while still employed
by NETg;
- Jerald A. Nine, as the former Vice President of Sales and Marketing of
NETg, breached his fiduciary duty to NETg by assisting Mr. Moran in the
creation, commencement and operation of the rival concern prior to Mr.
Nine's resignation from NETg, by assisting Mr. Moran in the usurpation of
corporate opportunities, by failing to inform his superiors at NETg of
Mr. Moran's plans to form a rival business and by otherwise failing to
use his best efforts on behalf of NETg while still employed there;
- SkillSoft, Mr. Moran, Mr. Nine, Mark A. Townsend, Dennis E. Brown and Lee
A. Ritze misappropriated trade secrets of NETg, and SkillSoft, Mr. Moran
and Mr. Nine intentionally interfered with NETg's "prospective economic
advantage";
- SkillSoft and Mr. Ritze breached provisions of a license agreement with
NETg relating to the use of its software; and
- Warburg, Pincus Ventures, L.P., our largest investor, intentionally
interfered with NETg's employment relationships with "at-will" employees,
including Mr. Townsend, by offering those employees financial incentives
to leave NETg and join SkillSoft, engaged in unfair competition through
that same conduct and intentionally interfered with Mr. Moran's and Mr.
Nine's fiduciary duty to NETg.
NETg maintains that the trade secrets allegedly misappropriated by
SkillSoft and the other defendants includes:
- 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 products for use in a Web environment.
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The claims seek injunctive relief against SkillSoft and Messrs. Moran, Nine,
Townsend, Brown and Ritze 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 and punitive damages in excess of $10 million.
None of the defendants in this lawsuit were bound by written
non-competition or non-solicitation agreements with NETg. SkillSoft and the
other defendants are vigorously defending themselves against NETg's allegations,
and we believe that both SkillSoft and the other defendants have meritorious
defenses to the claims made in the lawsuit. On December 3, 1999, SkillSoft, the
individually named defendants and Warburg Pincus filed a motion to dismiss all
counts brought by NETg on various grounds. However, no ruling has been made with
respect to that motion and the lawsuit is still in discovery, so we are not yet
able to assess the potential liability of SkillSoft or the other defendants. Our
failure to prevail in this litigation could have any or all of the following
significant adverse effects on our business and financial performance:
- injunctive relief issued against SkillSoft and our officers, which could
restrict our ability to conduct our business;
- an adverse judgment against us for monetary damages;
- a settlement on unfavorable terms; or
- obligations we have to indemnify our employees for liabilities and
expenses they incur in connection with the lawsuit.
In addition, this litigation, regardless of its outcome, will continue to result
in significant expenses in defending the lawsuit and may divert the efforts and
attention of our management team from normal business operations.
We are not a party to any other material legal proceedings.
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<PAGE> 45
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
The directors and executive officers of SkillSoft are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Charles E. Moran.......................... 44 Chairman of the Board, President and Chief
Executive Officer
Thomas J. McDonald........................ 50 Chief Financial Officer, Vice President,
Operations, Treasurer and Secretary
Mark A. Townsend.......................... 46 Vice President, Product Development
Jerald A. Nine, Jr. ...................... 42 Vice President, Worldwide Sales and Marketing
James Adkisson*........................... 52 Director
C. Samantha Chen*......................... 30 Director
William T. Coleman III**.................. 52 Director
Stewart K.P. Gross**...................... 40 Director
- ---------------
* Member of the audit committee.
** Member of the compensation committee.
Other key employees of SkillSoft include:
Dennis E. Brown........................... 47 Director of Marketing Communications
Eric W. Ertel............................. 37 Director of Software Development
David L. Eubanks.......................... 43 Vice President of Western Regional Sales
Kristina E. Johnson....................... 37 Director of Creative Design
Charles D. King........................... 42 Vice President of Eastern Regional Sales
Steven A. Lichtman........................ 43 Director of Channel Sales
Lee A. Ritze.............................. 46 Senior Director of Marketing and Professional
Services
Sally H. Welsh............................ 48 Director of Instructional Design
Kevin T. Young............................ 46 Vice President/Managing Director of International
Sales and Marketing
</TABLE>
Directors and Executive Officers:
Charles E. Moran is a founder of SkillSoft and has served as its Chairman
of the Board, President and Chief Executive Officer since January 1998. Before
founding SkillSoft, Mr. Moran served as President and Chief Executive Officer of
National Education Training Group, Inc. (NETg), a computer-based information
technology training company, from May 1995 until November 1997. From July 1994
to May 1995, Mr. Moran was an independent consultant. From October 1993 until
July 1994, Mr. Moran served as Chief Financial Officer and Chief Operating
officer of Softdesk, Inc., a developer of computer-assisted design and drafting
software. Mr. Moran is also a director of Workgroup Technology Corporation.
Thomas J. McDonald is a founder of SkillSoft and has served as its Chief
Financial Officer and Vice President of Operations since February 1998. From
September 1994 to November 1997, Mr. McDonald served as Chief Financial Officer
and Vice President of Operations at NETg. From February 1990 to August 1994, Mr.
McDonald served as Chief Financial Officer and Vice President
42
<PAGE> 46
of Bear Automotive. He previously held senior financial and operational
positions with SPX Corporation, U.S. Industries and Cenco, Inc.
Mark A. Townsend is a founder of SkillSoft and has served as its Vice
President of Product Development since January 1998. From February 1996 to
December 1997, Mr. Townsend served as Vice President of Advanced Technology at
NETg. From March 1994 until February 1996, Mr. Townsend served as Vice President
of Engineering at Sytron Corporation, a software data storage management
company.
Jerald A. Nine, Jr. is a founder of SkillSoft and has served as its Vice
President of Worldwide Sales and Marketing since April 1998. From July 1995 to
February 1998, Mr. Nine served as the Vice President of Sales and Marketing at
NETg. From September 1992 until July 1995, Mr. Nine served as Vice President of
Sales and Marketing at Sytron Corporation.
James Adkisson has served as director of SkillSoft since January 1998.
Since 1992, Mr. Adkisson has been a Partner at Growth Resources International,
an investment advisory services company.
C. Samantha Chen has served as director of SkillSoft since June 1999. Ms.
Chen has been an associate at E.M. Warburg, Pincus & Co., LLC since September
1997. From April 1992 to June 1995, Ms. Chen served as an analyst at Bessemer
Venture Partners. From September 1995 to June 1997, Ms. Chen attended the
Stanford Graduate School of Business, where she obtained her MBA.
William T. Coleman III has served as director of SkillSoft since August
1999. Since January 1995, Mr. Coleman has served as Chairman of the Board and
Chief Executive Officer of BEA Systems Inc., a provider of software solutions
for enterprise electronic commerce applications. From December 1985 to January
1995, Mr. Coleman served as Vice President and General Manager and Vice
President of Software at Sun Microsystems. Mr. Coleman is also a director of
Portal Software, Inc.
Stewart K.P. Gross has served as director of SkillSoft since January 1998.
Mr. Gross is a Managing Director of E.M. Warburg, Pincus & Co., LLC, where he
has been employed since July 1987. Mr. Gross is a director of BEA Systems, Inc.,
Alysis Technologies, Inc. and several privately held companies.
Other Key Employees:
Dennis E. Brown joined SkillSoft in May 1998 as Director of Marketing
Communications. From March 1993 to May 1998, he served as Senior Director of
Product Development at NETg.
Eric W. Ertel joined SkillSoft in February 1998 as Director of Software
Development. From August 1995 to February 1998, Mr. Ertel served as Principal
Software Engineer at VideoServer. From January 1995 to July 1997, he served as
an engineer at Sytron Corporation, and, from April 1988 to January 1995, he
served as Principal Engineer at Digital Equipment Corporation.
David L. Eubanks joined SkillSoft in September 1998 as Vice President of
Western Regional Sales. From July 1990 to September 1998, Mr. Eubanks served as
Director of Educational Sales and Director of Business and Channel Development
at NETg.
Kristina E. Johnson joined SkillSoft in June 1998 as Director of Creative
Design. From November 1987 to June 1998, Ms. Johnson served as a Graphic
Designer at Digital Equipment Corporation.
Charles D. King joined SkillSoft in July 1998 as Vice President of Eastern
Regional Sales. From November 1994 to July 1998, Mr. King served in various
managerial sales and marketing positions at CBT Systems, Inc., including
Director of Global Markets, Vice President of Northeast Regional Sales and
Regional Vice President.
Steven A. Lichtman joined SkillSoft in March 1999 as Director of Channel
Sales. From August 1998 to March 1999, Mr. Lichtman served as National Sales
Manager at Xebec / McGraw-Hill. From October 1997 to August 1998, Mr. Lichtman
served as Vice President and Sales Manager for
43
<PAGE> 47
North America at Xebec Interactive Learning. From March 1992 to September 1997
he served as President and Director of Sales and Marketing at Best Restaurant
Publications.
Lee A. Ritze joined SkillSoft in February 1998 as Senior Director of
Marketing and Professional Services. From June 1985 to February 1999, Mr. Ritze
served as Product Marketing Director at NETg.
Sally H. Welch joined SkillSoft in February 1998 as Director of
Instructional Design. From August 1998 to January 1999, Ms. Welch served as
Senior Instructional Designer at Motorola University. From August 1995 to August
1997 she served as Director of Skill Builder Engineering at NETg. Ms. Welch
served as Instructor Developer II at M.D. Anderson Cancer Center from June 1989
to December 1994.
Kevin T. Young joined SkillSoft in July 1999 as Vice President and Managing
Director of International Sales and Marketing. From December 1998 to June 1999,
Mr. Young served as Sales Director, United Kingdom at CBT Systems. From January
1993 to December 1998, Mr. Young served in various sales positions at NETg,
including Regional Sales Manager, Sales Director of Key Accounts and Managing
Director of Pacific Operations.
In accordance with the terms of SkillSoft's certificate of incorporation,
the terms of office of the members of the board of directors are divided into
three classes. Messrs. Moran and Gross serve as Class I Directors (whose term
expires in 2000), Ms. Chen and Mr. Coleman serve as Class II Directors (whose
term expires in 2001) and Mr. Adkisson serves as a Class III Director (whose
term expires in 2002). At each annual meeting of stockholders, the successors to
directors whose terms then expire will be elected to serve from the time of
election and qualification until the third annual meeting following election.
Additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible, each
class will consist of one-third of the total number of directors. The
classification of the board of directors may have the effect of delaying or
preventing changes in control or management of SkillSoft.
Each officer is appointed by, and serves at the discretion of, the board of
directors. There are no family relationships among any of the directors,
officers or key employees of SkillSoft.
COMMITTEES OF THE BOARD OF DIRECTORS
The SkillSoft compensation committee consists of Messrs. Coleman and Gross.
It reviews and evaluates the salaries and incentive compensation of management
and key employees of SkillSoft and makes recommendations concerning these
matters to the board of directors. The SkillSoft compensation committee also
administers SkillSoft's stock option plans.
The SkillSoft audit committee consists of Mr. Adkisson and Ms. Chen. It
reviews the results and scope of audits and other services provided by
SkillSoft's independent public accountants and reviews SkillSoft's system of
internal accounting and financial controls. The SkillSoft audit committee also
reviews such other matters with respect to the accounting, auditing and
financial reporting practices and procedures of SkillSoft as it may find
appropriate or may be brought to its attention.
DIRECTOR COMPENSATION
Non-employee directors will be reimbursed for their reasonable
out-of-pocket expenses incurred in attending meetings of the board of directors.
No director will receive cash compensation for services rendered as a director.
Non-employee directors (other than those currently serving on the board of
directors) will also eligible for participation in SkillSoft's 1999 Non-Employee
Director Stock Option Plan. See "Management -- Stock Plans" on page 47 of this
prospectus for the terms of the 1999 Non-Employee Director Stock Option Plan.
44
<PAGE> 48
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the total compensation
paid or accrued for the year ended January 31, 1999 for each of the executive
officers of SkillSoft.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
---------------
AWARDS
ANNUAL COMPENSATION ---------------
-------------------- RESTRICTED
NAME AND PRINCIPAL POSITION SALARY BONUS STOCK AWARDS(1)
- --------------------------- -------- -------- ---------------
<S> <C> <C> <C>
Charles E. Moran, Chairman of the Board, President
and Chief Executive Officer..................... $250,000 -- $ --
Thomas J. McDonald, Chief Financial Officer, Vice
President, Operations and Treasurer............... $135,000 $100,000 $2,547,500
Mark A. Townsend, Vice President, Product
Development..................................... $145,000 -- $5,095,000
Jerald A. Nine, Jr., Vice President Worldwide
Sales and Marketing(2).......................... $117,115 -- $5,944,171
</TABLE>
- -------------------------
(1) Long term compensation consisted of restricted stock granted under
SkillSoft's 1998 Stock Incentive Plan and vests in 36 equal monthly
installments commencing the month following the date of grant. Amounts shown
above represent the value of the restricted stock award, based on the
midpoint of the estimated public offering price range ($13.00) less the
purchase price paid. The number of shares of restricted stock granted to
Messrs. Moran, McDonald, Townsend and Nine in the fiscal year ended January
31, 1999 was 0; 200,000; 400,000 and 466,667, respectively. The number of
shares of restricted stock held by each of the executive officers as of
January 31, 1999 and its value as of January 31, 1999, based on the midpoint
of the estimated public offering price range ($13.00), was as follows: Mr.
Moran: none; Mr. McDonald: 200,000 shares, $2,600,000; Mr. Townsend: 400,000
shares, $5,200,000; and Mr. Nine: 466,667 shares, $6,066,621. The holders of
those shares of restricted stock will be entitled to receive any dividends
paid by SkillSoft on its common stock.
(2) Mr. Nine joined SkillSoft in April 1998 and thus received compensation for
only part of the fiscal year.
OPTION GRANTS DURING FISCAL YEAR
SkillSoft did not grant any options or stock appreciation rights during the
fiscal year ended January 31, 1999 to any of its executive officers.
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
None of the executive officers of SkillSoft exercised any options to
purchase stock of SkillSoft during the fiscal year ended January 31, 1999 or
held any such options as of January 31, 1999.
EMPLOYMENT AGREEMENTS
SkillSoft is a party to an employment agreement with Mr. Moran entered into
in December 1997. Under the terms of this employment agreement, Mr. Moran is
entitled to receive an annual
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<PAGE> 49
base salary of $250,000, which may be increased in accordance with SkillSoft's
regular salary review practices. Mr. Moran is also entitled to be paid a signing
bonus of $600,000 upon the earliest of:
- the end of the second consecutive quarter that SkillSoft achieves
quarterly revenue in excess of $1,000,000,
- the fourth anniversary of the date of the employment agreement or
- a sale of SkillSoft following which SkillSoft's stockholders own less
than 50% of the equity securities of the surviving company.
Mr. Moran is also entitled to participate in any bonus plan that SkillSoft
may establish for its senior executives. Either SkillSoft or Mr. Moran may
terminate the employment agreement at will for any reason, upon three months'
prior notice in the case of termination by SkillSoft, or upon two months' prior
notice in the case of termination by Mr. Moran. If SkillSoft terminates Mr.
Moran's employment without cause, or if Mr. Moran terminates his employment for
good reason (as defined in the employment agreement), then SkillSoft will be
required to pay Mr. Moran his base salary and benefits for a period of twelve
months following termination. In addition, in the event of such a termination,
Mr. Moran's stock options will continue to vest and be exercisable if he
performs consulting services for SkillSoft of up to ten hours per month during
the twelve months following termination.
SkillSoft is a party to an employment agreement with Mr. McDonald, dated
February 2, 1998. Under the terms of the employment agreement, Mr. McDonald is
entitled to receive an annual base salary of $135,000, which may be increased in
accordance with SkillSoft's regular salary review practices. In addition,
SkillSoft agreed to sell Mr. McDonald 200,000 shares of its restricted common
stock, which vest in 36 equal monthly installments. Mr. McDonald is entitled to
participate in any bonus plan that SkillSoft may establish for its senior
executives. Either SkillSoft or Mr. McDonald may terminate the employment
agreement at will for any reason, upon three months' prior notice in the case of
termination by SkillSoft, or upon two months' prior notice in the case of
termination by Mr. McDonald. If SkillSoft terminates Mr. McDonald's employment
without cause, or if Mr. McDonald terminates his employment for good reason (as
defined in the employment agreement), then SkillSoft will be required to pay Mr.
McDonald his base salary and benefits for a period of six months following
termination. In addition, in the event of such a termination, Mr. McDonald's
stock options will continue to vest and be exercisable if he performs consulting
services for SkillSoft of up to ten hours per week during the six months
following termination.
SkillSoft is also a party to employment agreements with Messrs. Townsend
and Nine, dated January 12, 1998 and April 9, 1998, respectively. Under these
employment agreements, Messrs. Nine and Townsend are each entitled to receive a
base salary of $145,000, which may be increased in accordance with SkillSoft's
regular salary review practices. In addition, SkillSoft agreed to sell Messrs.
Townsend and Nine 400,000 and 466,667 shares, respectively, of its restricted
common stock, which vest in 36 equal monthly installments. Messrs. Townsend and
Nine are also entitled to participate in any bonus plans that SkillSoft may
establish for its senior executives. These employment agreements provide for the
same termination provisions and severance benefits as Mr. McDonald.
STOCK PLANS
1998 Stock Incentive Plan
General. SkillSoft's 1998 Stock Incentive Plan provides for the grant of
incentive stock options, nonstatutory stock options, restricted stock awards and
other awards. The Incentive Plan authorizes the issuance of a maximum of
3,126,667 shares of common stock. As of December 31, 1999, 1,505,420 shares had
been issued under the Incentive Plan and 720,080 shares were subject to
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<PAGE> 50
outstanding options under the Incentive Plan. The Incentive Plan is administered
by the board of directors and the compensation committee.
Eligibility to Receive Awards. Employees, directors and consultants of
SkillSoft and its subsidiaries are eligible to be granted awards under the
Incentive Plan. Under present law, however, incentive stock options qualifying
under Section 422 of the Internal Revenue Code may only be granted to employees.
Incentive Stock Options and Nonstatutory Stock Options. Stock options
entitle the holder to purchase a specified number of shares of common stock at a
specified option price, subject to the other terms and conditions contained in
the option grant. SkillSoft may grant options at an exercise price equal to or
greater than 85% of the fair market value of the common stock on the date of
grant. Under present law, however, incentive stock options and options intended
to qualify as performance-based compensation under Section 162(m) of the
Internal Revenue Code may not be granted at an exercise price less than the fair
market value of the common stock on the date of grant (or less than 110% of the
fair market value in the case of incentive stock options granted to optionees
holding more than 10% of the voting power of SkillSoft). Options may not be
granted for a term in excess of ten years. The board of directors or the
compensation committee determines:
- the number of shares subject to each option granted,
- the exercise price of the option,
- the vesting schedule of the option (generally over four years),
- the duration of the option (generally ten years, subject to earlier
termination in the event of the termination of the optionee's employment
or consulting arrangement), and
- the manner of payment of the exercise price of the option (including
payment by cash, check or promissory note or through a "cashless
exercise").
Restricted Stock Awards. Restricted stock awards entitle recipients to
acquire shares of common stock, subject to the right of SkillSoft to repurchase
all or part of such shares from the recipient in the event of the termination of
the recipient's employment or consulting arrangement prior to the end of the
vesting period for such award or if other conditions specified in the award are
not satisfied. The board of directors or the compensation committee determines:
- the number of shares subject to each restricted stock award granted,
- the purchase price of the restricted stock award,
- the vesting schedule of the restricted stock award (generally over three
years), and
- the manner of payment of the purchase price for the restricted stock
award (including payment by cash, check or promissory note).
Acquisition of SkillSoft. In the event of an acquisition of SkillSoft,
outstanding options, restricted stock and other awards under the Incentive Plan
will either be assumed by the acquiring company, accelerated in full or
terminated.
1999 Non-Employee Director Stock Option Plan
In September 1999, SkillSoft's board of directors adopted and SkillSoft's
stockholders approved the 1999 Non-Employee Director Stock Option Plan. The
Director Plan authorizes the grant of options to purchase up to 160,000 shares
of common stock to non-employee directors of SkillSoft. No options have been
granted to date under the Director Plan.
Under the Director Plan, each non-employee director of SkillSoft (other
than current directors) will be granted a stock option to purchase 40,000 shares
of common stock on the date he or she is
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<PAGE> 51
first elected to the board of directors. The exercise price for all options
granted under the Director Plan will be equal to the fair market value of the
common stock on the date of grant. The options granted will become exercisable
in four equal annual installments on each anniversary of the date of grant,
provided that the optionee remains a director, and will become exercisable in
full upon a change in control of SkillSoft. Each option will expire on the
earlier of ten years from the date of grant or on the first anniversary of the
date on which the optionee ceases to be a director of SkillSoft.
401(K) PLAN
SkillSoft maintains a 401(k) plan qualified under Section 401(k) of the
Internal Revenue Code. Under the 401(k) plan, a participant may contribute a
maximum of 20% of his or her pre-tax salary, commissions and bonuses through
payroll deductions, up to the statutorily prescribed annual limit of $10,000 in
calendar year 1999. The percentage elected by more highly compensated
participants may be required to be lower. In addition, at the discretion of the
board of directors, SkillSoft may make discretionary matching or profit-sharing
contributions into the 401(k) plan for all eligible employees. During the years
ended January 31, 1998 and 1999, SkillSoft made no matching or profit-sharing
contributions to the 401(k) plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the establishment of the compensation committee in September 1999,
compensation decisions were made by the board of directors, including Mr. Moran,
an executive officer of SkillSoft. Since its establishment, the compensation
committee, comprised of Messrs. Coleman and Gross, has been responsible for
executive compensation decisions. No executive officer of SkillSoft has served
as a director or member of the compensation committee of any other entity whose
executive officers served as a director or member of the SkillSoft compensation
committee.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
SkillSoft's certificate of incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that a
corporation's certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director for monetary damages for breach
of his or her fiduciary duties as a director, except for liability
- for any breach of their duty of loyalty to the corporation or its
stockholders,
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law or
- for any transaction from which the director derived an improper personal
benefit.
SkillSoft's certificate of incorporation provides that SkillSoft will
indemnify its directors and officers to the fullest extent permitted by law.
SkillSoft's certificate of incorporation permits SkillSoft to advance expenses
incurred by an indemnified director or officer in connection with the defense of
any action or proceeding arising out of such director's or officer's status or a
director or officer of SkillSoft upon an undertaking by such director or officer
to repay such advances if it is ultimately determined that the director or
officer is not entitled to such indemnification.
SkillSoft has also purchased directors and officers liability insurance.
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<PAGE> 52
CERTAIN TRANSACTIONS
SkillSoft has engaged in the following transactions with the following
directors, executive officers and stockholders who beneficially own more than 5%
of the outstanding capital stock of SkillSoft and affiliates of these directors,
executive officers and 5% stockholders.
On December 10, 1997, SkillSoft sold 1,266,667 shares of common stock, at a
purchase price of $.2625 per share, to Charles E. Moran in exchange for a cash
payment of $166,250 and a promissory note in the original principal amount of
$166,250. This promissory note bears interest at a rate of 6.2% per year and is
due and payable on the earlier of December 10, 2002 or the date on which Mr.
Moran ceases to be an employee of SkillSoft. Mr. Moran pledged 633,333 shares as
collateral for the promissory note.
On December 10, 1997, SkillSoft sold 66,667 shares of its common stock to
James Adkisson, a director of SkillSoft, at a purchase price of $.2625 per
share.
On January 8, 1998, SkillSoft sold an aggregate of 4,000,000 shares of its
Series A preferred stock to two purchasers at a purchase price of $1.75 per
share. Warburg, Pincus Ventures, L.P. purchased 3,600,000 of these shares. On
August 14, 1998 and February 16, 1999, SkillSoft issued and sold an aggregate of
4,761,905 shares of its Series B preferred stock to Warburg, Pincus Ventures,
L.P. at a purchase price of $2.10 per share. Mr. Gross and Ms. Chen, directors
of SkillSoft, are managing director and associate, respectively, of E.M.
Warburg, Pincus & Co., LLC, the manager of Warburg, Pincus Ventures, L.P.
On June 19, 1998, June 24, 1998 and June 26, 1998, SkillSoft sold 466,667,
200,000 and 400,000 shares of restricted common stock, at a purchase price of
$.2625 per share, to Messrs. Nine, McDonald and Townsend, respectively, in
exchange for cash payments of $61,250, $26,250, and $52,500, respectively, and
promissory notes in the original principal amounts of $61,250, $26,250, and
$52,500, respectively. These promissory notes bear interest at a rate of 5.77%
per year and are due and payable in June 2003. Messrs. Nine, McDonald and
Townsend each pledged half of the shares issued to them as collateral for the
promissory notes.
On March 13, 1999 and March 15, 1999, SkillSoft sold 33,333 and 66,667
shares of restricted common stock, at a purchase price of $.2625 per share, to
Messrs. Nine and McDonald, respectively, in exchange for cash payments of $4,375
and $8,750, respectively, and promissory notes in the principal amounts of
$4,375 and $8,750, respectively. These promissory notes bear interest at a rate
of 4.83% per year and are due and payable in March 2004. Messrs. Nine and
McDonald each pledged half of the shares issued to him as collateral for the
promissory notes.
On March 31, 1999, SkillSoft sold 100,000 and 33,333 shares of restricted
common stock, at a purchase price of $.2625 per share, to Messrs. Moran and
Townsend, respectively, in exchange for cash payments of $13,125 and $4,375,
respectively, and promissory notes in the principal amounts of $13,125 and
$4,375, respectively. These promissory notes bear interest at a rate of 4.83%
per year and are due and payable in March 2004. Messrs. Moran and Townsend each
pledged half of the shares issued to him as collateral for the promissory notes.
On August 5, 1999, SkillSoft issued and sold an aggregate of 1,195,238 of
its Series C preferred stock to five purchasers at a purchase price of $3.15 per
share. William Coleman III and James Adkisson, directors of SkillSoft, each
purchased 31,746 of these shares. Warburg, Pincus Ventures, L.P. purchased
952,381 of these shares.
On August 31, 1999 and September 1, 1999, SkillSoft sold 40,000 shares of
restricted common stock to each of Messrs. Coleman and Adkisson at a purchase
price of $1.50 per share pursuant to its 1998 stock incentive plan.
SkillSoft believes that all transactions set forth above were made on terms
no less favorable to it than it would have obtained from unaffiliated third
parties.
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<PAGE> 53
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of SkillSoft's common stock as of December 31, 1999, and as adjusted
to reflect the sale of the shares of common stock offered by this prospectus,
by:
- each person known by SkillSoft to be the beneficial owner of more than 5%
of its common stock;
- each executive officer;
- each of SkillSoft's directors; and
- all executive officers and directors of SkillSoft as a group.
Unless otherwise noted below, to the knowledge of SkillSoft, each person has
sole voting and investment power over the shares shown as beneficially owned
except to the extent authority is shared by spouses under applicable law and
except as set forth in the footnotes to the table. The number of shares of
common stock outstanding used in calculating the percentage ownership for each
person listed includes the shares of common stock underlying options held by
such person that are exercisable within 60 days after December 31, 1999, but
excludes shares of common stock underlying options held by any other person.
Percentage ownership is based on 9,483,514 shares of common stock outstanding as
of December 31, 1999, and an additional 3,100,000 shares of common stock to be
outstanding upon completion of this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK
OUTSTANDING
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Warburg, Pincus Ventures, L.P.(1)................... 6,209,524 65.5% 49.3%
Stewart K.P. Gross(2)............................... 6,209,524 65.5 49.3
Charles E. Moran(3)................................. 1,366,666 14.4 10.9
Jerald A. Nine(4)................................... 500,000 5.3 4.0
Mark A. Townsend.................................... 433,333 4.6 3.4
Thomas J. McDonald.................................. 266,666 2.8 2.1
James Adkisson...................................... 127,830 1.3 1.0
William T. Coleman III(5)........................... 61,164 * *
C. Samantha Chen(6)................................. -- -- --
All executive officers and directors as a group
(eight persons)(7)................................ 8,965,183 94.5 71.2
</TABLE>
- -------------------------
* Less than 1%.
(1) The address for Warburg, Pincus Ventures, L.P. is 466 Lexington Avenue, 10th
Floor, New York, New York 10017-3147.
(2) Consists of shares beneficially owned by Warburg, Pincus Ventures, L.P.
Warburg, Pincus & Co. is the sole general partner of Warburg, Pincus
Ventures, L.P. Warburg, Pincus Ventures, L.P. is managed by E.M. Warburg,
Pincus & Co., LLC. Lionel I. Pincus is the managing partner of Warburg
Pincus & Co. and the managing member of E.M. Warburg, Pincus & Co., LLC, and
may be deemed to control both entities. Mr. Gross, a director of SkillSoft,
is a managing director and member of E.M. Warburg, Pincus & Co., LLC and a
general partner of Warburg Pincus & Co. Mr. Gross disclaims beneficial
ownership of these shares. Mr. Gross' address is c/o
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<PAGE> 54
Warburg, Pincus Ventures L.P., 466 Lexington Avenue, 10th Floor, New York,
New York 10017-3147.
(3) Consists of 733,333 shares beneficially owned by Mr. Moran and a total of
633,333 shares of common stock beneficially owned by Mr. Moran's wife, as
trustee of various trusts for the benefit of Mr. Moran's children. Mr. Moran
disclaims beneficial ownership of the shares held in trust. Excluding these
shares, Mr. Moran beneficially owns a total of 733,333 shares of common
stock, or 7.7% of the outstanding common stock prior to this offering. Mr.
Moran's address is c/o SkillSoft Corporation, 20 Industrial Park Drive,
Nashua, New Hampshire 03062.
(4) Mr. Nine's address is c/o SkillSoft Corporation, 20 Industrial Park Drive,
Nashua, New Hampshire 03062.
(5) Consists of shares beneficially owned by the Coleman Family Trust, of which
Mr. Coleman is trustee.
(6) Excludes shares beneficially owned by Warburg, Pincus Ventures, L.P. Ms.
Chen is an associate of E.M. Warburg, Pincus & Co., LLC, the manager of
Warburg, Pincus Ventures, L.P.
(7) See Notes 2, 3, 5 and 6.
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<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of
SkillSoft will consist of 50,000,000 shares of common stock, $0.001 par value
per share, and 5,000,000 shares of preferred stock, $0.001 par value per share.
As of December 31, 1999, there were outstanding 9,483,514 shares of common stock
held by 39 stockholders of record, options to purchase an aggregate of 720,080
shares of common stock and warrants to purchase an aggregate of 60,606 shares of
common stock.
The following summary of certain provisions of our securities and various
provisions of our certificate of incorporation and bylaws is not intended to be
complete and reference is made to our certificate of incorporation and bylaws
included as exhibits to the registration statement of which this prospectus is a
part. See "Where You Can Find Additional Information."
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive
proportionately any dividends declared by the board of directors, subject to any
preferential dividend rights of outstanding preferred stock. Upon the
liquidation, dissolution or winding up of SkillSoft, the holders of common stock
are entitled to receive ratably the net assets of SkillSoft available after the
payment of all debts and other liabilities and subject to the prior rights of
any outstanding preferred stock. Holders of common stock have no preemptive,
subscription, redemption or conversion rights. The rights, preferences and
privileges of holders of common stock are subject to the rights of the holders
of shares of any series of preferred stock which SkillSoft may designate and
issue in the future. Certain holders of common stock have the right to require
SkillSoft to register their shares of common stock under the Securities Act in
certain circumstances. See "Shares Eligible for Future Sale" on page 54 of this
prospectus.
PREFERRED STOCK
Under the terms of our certificate of incorporation, the board of directors
is authorized to designate and issue shares of preferred stock in one or more
series without stockholder approval. The Board has discretion to determine the
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, of each series of preferred stock.
The purpose of authorizing the board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could make it more difficult for a third party to
acquire, or could discourage a third party from attempting to acquire, a
majority of the outstanding voting stock of SkillSoft. SkillSoft has no present
plans to issue any shares of preferred stock.
WARRANTS
SkillSoft has one outstanding warrant to purchase 60,606 shares of common
stock at an exercise price of $8.25 per share. The warrant is exercisable, in
whole or in part, at any time and from time to time on or after December 8,
2000.
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<PAGE> 56
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
SkillSoft is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved by the board of directors and/or stockholders
of SkillSoft in a prescribed manner. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of the corporation's voting stock.
SkillSoft's certification of incorporation and bylaws provide for the
division of the board of directors into three classes as nearly equal in size as
possible with staggered three-year terms. Any vacancy on the board of directors,
including a vacancy resulting from an enlargement of the board of directors, may
only be filled by vote of a majority of the directors then in office. The
classification of the board of directors and the limitation on filling of
vacancies could make it more difficult for a third party to acquire, or
discourage a third party from attempting to acquire, control of SkillSoft.
SkillSoft's bylaws also provide that any action required or permitted to be
taken by the stockholders of SkillSoft at an annual meeting or special meeting
of stockholders may only be taken if it is properly brought before such meeting
and may not be taken by written action in lieu of a meeting. The bylaws further
provide that special meetings of the stockholders may only be called by the
Chairman of the Board, the President or the board of directors. In order for any
matter to be considered "properly brought" before a meeting, a stockholder must
comply with certain requirements regarding advance notice and provide certain
information to SkillSoft. These provisions could have the effect of delaying
until the next stockholders meeting stockholder actions which are favored by the
holders of a majority of the outstanding voting securities of SkillSoft. These
provisions could also discourage a third party from making a tender offer for
the common stock, because even if it acquired a majority of the outstanding
voting securities of SkillSoft, it would be able to take action as a stockholder
(such as electing new directors or approving a merger) only at a duly called
stockholders' meeting and not by written consent.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services L.L.C.
53
<PAGE> 57
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for SkillSoft's common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect prevailing market prices from time to time. Furthermore,
because only a limited number of shares will be available for sale shortly after
this offering because of contractual and legal restrictions on resale described
below, sales of substantial amounts of common stock of SkillSoft in the public
market after the restrictions lapse could adversely affect the prevailing market
price and the ability of SkillSoft to raise equity capital in the future.
Based on shares outstanding at December 31, 1999, upon completion of this
offering SkillSoft will have outstanding an aggregate of 12,583,514 shares of
common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants. Of these shares, the
3,100,000 shares sold in this offering will be freely tradable without
restrictions or further registration under the Securities Act, unless the shares
are purchased by an existing affiliate of SkillSoft, as that term is defined in
Rule 144 under the Securities Act.
The remaining 9,483,514 shares of common stock held by existing
stockholders are restricted shares or are subject to the contractual
restrictions described below. Restricted shares may generally be sold in the
public market only if registered or if they qualify for an exception from
registration under Rule 144 promulgated under the Securities Act, which is
summarized below. Of these restricted shares, 8,566,602 shares will be available
for resale in the public market in reliance on Rule 144 and Rule 701 beginning
90 days following the closing of this offering. However, 8,561,102 of these
shares are subject to lock-up agreements. The remaining 916,912 shares become
eligible for resale in the public market at various dates thereafter, of which
889,822 shares are subject to lock-up agreements.
All of the officers and directors and some of the stockholders and
optionholders of SkillSoft are bound by lock-up agreements in favor of the
underwriters. As a result, these individuals and entities are not permitted to
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock or publicly disclose the intention
to make any such offer, sale, pledge or disposition for a period of 180 days
after the date of this prospectus, without the prior written consent of Credit
Suisse First Boston. Credit Suisse First Boston currently has no plans to
release any portion of the securities subject to lock-up agreements. When
determining whether or not to release shares from the lock-up agreements, Credit
Suisse First Boston will consider, among other factors, the stockholder's
reasons for requesting the release, the number of shares for which the release
is being requested and market conditions at the time.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year would be entitled to sell a number of shares within
any three-month period. That number of shares cannot exceed the greater of one
percent of the number of shares of common stock then outstanding, which will
equal approximately 125,835 shares immediately after this offering, or the
average weekly trading volume of the common stock on the Nasdaq National Market
during the four calendar weeks preceding the filing of a notice on Form 144 with
respect to such sale. Sales under Rule 144 are also subject to manner of sale
provisions, notice requirements and the availability of current public
information about SkillSoft. Rule 144 also provides that affiliates of SkillSoft
who are selling shares of common stock that are not restricted shares must
nonetheless comply with the same restrictions applicable to restricted shares
with the exception of the holding period requirement.
Under Rule 144(k), a person who is not deemed to have been an affiliate of
SkillSoft at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be
54
<PAGE> 58
sold for at least two years, is entitled to sell those shares without complying
with the manner of sale, public information, volume limitation or notice
provisions of Rule 144.
Rule 701 may be relied upon with respect to the resale of shares of common
stock originally purchased from SkillSoft under its stock option plan, so long
as the option was granted prior to the date of this prospectus. Shares issued in
reliance on Rule 701 are restricted shares and, subject to the lock-up
agreements described above, beginning 90 days after the date of this prospectus,
may be sold by persons other than affiliates, subject only to the manner of sale
provisions of Rule 144, and may be sold by affiliates under Rule 144 without
compliance with its one-year minimum holding period requirement.
SkillSoft has agreed not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of common stock or any securities convertible into or exercisable
or exchangeable for common stock, or publicly disclose the intention to make any
such offer, sale, pledge, disposition or filing, for a period of 180 days after
the date of this prospectus, without the prior written consent of Credit Suisse
First Boston, subject to limited exceptions such as issuances under its stock
plans or in connection with an acquisition of a business.
Following this offering, SkillSoft intends to file registration statements
under the Securities Act covering approximately 1,621,247 shares of common stock
issuable upon the exercise of stock options or reserved for issuance under
SkillSoft's 1998 Stock Incentive Plan and 1999 Non-Employee Director Stock
Option Plan. The shares registered under these registration statements will,
subject to Rule 144 provisions applicable to affiliates, be available for sale
in the open market, except to the extent that the shares are subject to
SkillSoft's vesting restrictions or the lock-up agreements described above. See
"Management -- Stock Plans" on page 46 of this prospectus.
In addition, following this offering, under specified conditions and
subject to customary exceptions, holders of 6,209,524 shares of common stock
will have demand registration rights with respect to their shares of common
stock, subject to the 180 day lock-up period described above, to require
SkillSoft to register their shares of common stock under the Securities Act, and
they will have the right to participate in future registrations of securities by
SkillSoft. SkillSoft is not required to effect a registration within six months
after the closing of this offering and it is not required to effect more than
three demand registrations on behalf of these holders. SkillSoft is generally
required to bear all of the expenses of all registrations. Registration of any
of the shares of common stock would result in these shares becoming freely
tradeable without restriction under the Securities Act upon effectiveness of the
registration statement.
55
<PAGE> 59
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Banc of America
Securities LLC and Thomas Weisel Partners LLC are acting as representatives, the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Banc of America Securities LLC..............................
Thomas Weisel Partners LLC..................................
---------
Total............................................. 3,100,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in this offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 465,000 additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------------- --------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us...... $ $ $ $
Expenses payable by us........ $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect sales to accounts
over which any underwriter exercises discretionary authority to exceed 5% of the
shares of common stock being offered.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 106 filed
public offerings of equity securities, of which 79 have been completed, and has
acted as a syndicate member in an additional 54 public offerings of equity
securities. Thomas Weisel Partners does not have any material relationship with
us or any of our officers, directors, or other controlling persons, except with
respect to its contractual relationship with us pursuant to the underwriting
agreement entered into in connection with this offering.
Credit Suise First Boston Corporation, one of the representatives of the
underwriters in this Offering, is an indirect subsidiary of Credit Suisse Group,
which indirectly holds a 19.9% passive
56
<PAGE> 60
minority interest in Warburg, Pincus & Co., the general partner of Warburg,
Pincus Ventures, L.P. Warburg, Pincus Ventures, L.P. is a stockholder of
SkillSoft.
We have a line of credit agreement with GreyRock Capital. GreyRock Capital
is a division of Banc of America Commercial Finance Corporation. Both Banc of
America Commercial Finance Corporation and Banc of America Securities LLC are
indirect, wholly-owned subsidiaries of Bank of America Corporation. In
connection with an amendment to the line of credit in December 1999, we issued
GreyRock warrants to purchase 60,606 shares of our common stock at an exercise
price of $8.25 per share. These warrants are considered underwriting
compensation and, as such, may not be sold, transferred, assigned, pledged or
hypothecated, with limited exceptions, for a period of one year from the
effective date of the registration statement of which this prospectus is a part.
We and each of our directors and officers and some of our stockholders and
optionholders have agreed not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
(the "Securities Act") relating to, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any of our common stock, or
publicly disclose the intention to make any such offer, sale, pledge,
disposition or filing, without the prior written consent of Credit Suisse First
Boston Corporation for a period of 180 days after the date of this prospectus
except, in our case, issuances pursuant to the exercise of employee stock
options outstanding on the date hereof or pursuant to our stock option plans.
The underwriters have reserved for sale, at the initial public offering
price, up to 155,000 shares of the common stock for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in the offering. The number of shares available for sale
to the general public in this offering will be reduced to the extent those
persons purchase reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the other
shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We will make application to list the shares of common stock on The Nasdaq
Stock Market's National Market.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the representatives. The principal factors considered in
determining the public offering price will include:
- the information set forth in this prospectus and otherwise available to
the representatives;
- the history of, and the prospects for, SkillSoft and the industry in
which it competes;
- an assessment of our management;
- the prospects for, and the timing of, future earnings of SkillSoft;
- the present state of SkillSoft's development and its current financial
condition;
- the general condition of the securities markets at the time of the
offering;
- the recent market prices of, and the demand for, publicly-traded common
stock of companies in businesses similar to those of SkillSoft;
- market conditions for initial public offerings; and
- other relevant factors.
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<PAGE> 61
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by that
syndicate member is purchased in a stabilizing transaction or in a
syndicate covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
58
<PAGE> 62
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchases are advised to seek legal advice prior to any resale of the
common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities law to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canada courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
59
<PAGE> 63
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for SkillSoft by Hale and Dorr LLP, Boston, Massachusetts. Certain legal
matters will be passed upon for the underwriters by Katten Muchin Zavis,
Chicago, Illinois.
EXPERTS
The financial statements of SkillSoft as of January 31, 1998 and 1999 and
October 31, 1999 and for each of the periods then ended, which are included in
this prospectus and registration statement, have been so included in reliance on
the report of Arthur Andersen LLP, independent public accountants, given on the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
SkillSoft has filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act with respect to the
common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement. For further information
with respect to SkillSoft and the common stock, reference is made to the
registration statement. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of the contract
or document filed as an exhibit to the registration statement. Copies of the
registration statement may be examined without charge at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and
World Trade Center, Thirteenth Floor, New York, New York 10048. Copies of all or
any portion of the registration statement may be obtained from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, or by calling the Commission at
1-800-SEC-0330, at prescribed rates. The Commission also maintains a web site at
http://www.sec.gov that contains reports, proxy, registration and information
statements and other information regarding registrants, such as SkillSoft, that
make electronic filings with the Commission.
SkillSoft intends to furnish to its stockholders annual reports containing
financial statements audited by an independent public accounting firm.
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<PAGE> 64
SKILLSOFT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of January 31, 1998 and 1999
and October 31, 1999...................................... F-3
Consolidated Statements of Operations for the Period from
Incorporation (October 15, 1997) to January 31, 1998, for
the Year Ended January 31, 1999, for the Nine Months Ended
October 31, 1998 (Unaudited) and for the Nine Months Ended
October 31, 1999.......................................... F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Loss for the Period from Incorporation
(October 15, 1997) to January 31, 1998, for the Year Ended
January 31, 1999 and for the Nine Months Ended October 31,
1999...................................................... F-5
Consolidated Statements of Cash Flows for the Period from
Incorporation (October 15, 1997) to January 31, 1998, for
the Year Ended January 31, 1999, for the Nine Months Ended
October 31, 1998 (Unaudited) and for the Nine Months Ended
October 31, 1999.......................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SkillSoft Corporation:
We have audited the accompanying consolidated balance sheets of SkillSoft
Corporation (a Delaware corporation) as of January 31, 1998 and 1999 and as of
October 31, 1999, and the related consolidated statements of operations,
stockholders' equity and comprehensive loss and cash flows for the period from
incorporation (October 15, 1997) to January 31, 1998, for the year ended January
31, 1999 and for the Nine Months Ended October 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SkillSoft Corporation as of
January 31, 1998 and 1999 and as of October 31, 1999, and the results of its
operations and its cash flows for the period from incorporation (October 15,
1997) to January 31, 1998, for the year ended January 31, 1999 and for the Nine
Months Ended October 31, 1999 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
December 16, 1999 (except with respect
to the matter discussed in Note 6(b)
as to which the
date is December 28, 1999)
F-2
<PAGE> 66
SKILLSOFT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31, 1999
------------------------ ---------------------------
PRO FORMA
1998 1999 ACTUAL (NOTE 2(C))
---------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $2,650,637 $ 623,322 $ 527,891 $ 527,891
Short-term investments................................. 4,371,333 3,341,702 -- --
Accounts receivable, less reserves of $25,000 at
October 31, 1999..................................... -- -- 1,319,531 1,319,531
Prepaid expenses and other current assets.............. -- 116,144 977,093 977,093
---------- ----------- ------------ ------------
Total current assets............................ 7,021,970 4,081,168 2,824,515 2,824,515
PROPERTY AND EQUIPMENT, AT COST:
Computer equipment..................................... -- 357,719 488,514 488,514
Furniture and fixtures................................. -- 173,456 256,302 256,302
Leasehold improvements................................. -- 23,944 52,448 52,448
---------- ----------- ------------ ------------
-- 555,119 797,264 797,264
Less -- Accumulated depreciation and amortization...... -- 85,726 236,939 236,939
---------- ----------- ------------ ------------
-- 469,393 560,325 560,325
---------- ----------- ------------ ------------
$7,021,970 $ 4,550,561 $ 3,384,840 $ 3,384,840
========== =========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of Credit......................................... -- -- 501,445 501,445
Accounts payable....................................... $ 78,537 $ 210,741 $ 352,907 $ 352,907
Accrued expenses....................................... 624,592 1,144,703 1,825,818 1,825,818
Deferred revenue....................................... -- -- 626,035 626,035
---------- ----------- ------------ ------------
Total current liabilities....................... 703,129 1,355,444 3,306,205 3,306,205
---------- ----------- ------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $.001 par
value --
Authorized, issued and outstanding -- 4,000,000
shares at January 31, 1998 and 1999 and October 31,
1999, no shares pro forma (liquidation preference
of $7,596,822 at January 31, 1999)................. 6,957,774 6,957,774 6,957,774 --
Series B convertible preferred stock, $.001 par
value --
Authorized -- 4,761,905 shares
Issued and outstanding -- 2,380,953 and 4,761,905
shares at January 31, 1999 and October 31, 1999,
respectively, no shares pro forma (liquidation
preference of $5,153,426 at January 31, 1999)...... -- 4,993,767 9,993,661 --
Series C convertible preferred stock, $.001 par
value --
Authorized -- 3,174,603 shares
Issued and outstanding -- 1,195,238 shares at October
31, 1999, no shares pro forma...................... -- -- 3,758,821 --
Class A common stock, $.001 par value --
Authorized -- 26,000,000 shares
Issued and outstanding -- 1,340,000, 2,464,000 and
2,836,545 shares at January 31, 1998 and 1999 and
October 31, 1999, respectively, no shares pro
forma.............................................. 1,340 2,464 2,837 --
Common stock, $.001 par value --
Issued and outstanding -- no shares at January 31,
1998 and 1999 and October 31, 1999, 9,474,640
shares pro forma (see Note 2(d))................... -- -- -- 9,475
Additional paid-in capital............................. 350,410 644,336 7,481,812 28,185,430
Deferred compensation.................................. -- -- (2,686,768) (2,686,768)
Notes receivable from stockholders..................... (166,250) (306,250) (339,063) (339,063)
Accumulated deficit.................................... (824,433) (9,096,974) (25,095,175) (25,095,175)
Cumulative translation adjustment...................... -- -- 4,736 4,736
---------- ----------- ------------ ------------
Total stockholders' equity...................... 6,318,841 3,195,117 78,635 78,635
---------- ----------- ------------ ------------
$7,021,970 $ 4,550,561 $ 3,384,840 $ 3,384,840
========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 67
SKILLSOFT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION
(OCTOBER 15, NINE MONTHS ENDED
1997) TO YEAR ENDED OCTOBER 31,
JANUARY 31, JANUARY 31, --------------------------
1998 1999 1998 1999
-------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE.............................. $ -- $ -- $ -- $ 2,371,202
COST OF REVENUE...................... -- -- -- 497,684
--------- ----------- ----------- ------------
Gross profit.................. -- -- -- 1,873,518
--------- ----------- ----------- ------------
OPERATING EXPENSES:
Research and development........... 177,836 4,117,187 2,379,531 5,884,318
Selling and marketing.............. -- 1,671,225 708,404 5,169,223
General and administrative......... 649,404 2,820,646 1,889,520 3,009,762
Amortization of deferred
compensation.................... -- -- -- 189,288
--------- ----------- ----------- ------------
Total operating expenses... 827,240 8,609,058 4,977,455 14,252,591
INTEREST INCOME...................... 2,807 336,517 271,172 147,317
INTEREST EXPENSE..................... -- -- -- 1,445
--------- ----------- ----------- ------------
Net loss...................... (824,433) (8,272,541) (4,706,283) (12,233,201)
Preferred Stock dividend............. -- -- -- 3,765,000
--------- ----------- ----------- ------------
Adjusted net loss attributable to
Common Shareholders................ $(824,433) $(8,272,541) $(4,706,283) $(15,998,201)
========= =========== =========== ============
NET LOSS PER SHARE (Note 2(f)):
Basic and diluted.................. $ (1.28) $ (5.64) $ (3.33) $ (8.72)
Basic and diluted weighted average
common shares outstanding....... 645,185 1,466,085 1,413,962 1,834,841
========= =========== =========== ============
PRO FORMA NET LOSS PER SHARE (Note
2(f)):
Pro forma basic and diluted........ $ (1.70) $ (2.04)
=========== ============
Pro forma basic and diluted
weighted average common shares
outstanding..................... 4,872,043 7,837,015
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 68
SKILLSOFT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
------------------------------------------------------------------------------ CLASS A
SERIES A SERIES B SERIES C COMMON STOCK
------------------------ ------------------------ ------------------------ ----------
NUMBER OF CARRYING NUMBER OF CARRYING NUMBER OF CARRYING NUMBER OF
SHARES VALUE SHARES VALUE SHARES VALUE SHARES
--------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCORPORATION (OCTOBER 15, 1997).... -- $ -- -- $ -- -- $ -- --
Initial capitalization.............. -- -- -- -- -- -- 1,340,000
Issuance of Series A convertible
preferred stock, net of issuance
costs of $42,226................. 4,000,000 6,957,774 -- -- -- -- --
Net loss........................... -- -- -- -- -- -- --
---------- ----------- ---------- ----------- ---------- ----------- ----------
Comprehensive net loss for the
period from Incorporation to
January 31, 1998...................
BALANCE, JANUARY 31, 1998........... 4,000,000 6,957,774 -- -- -- -- 1,340,000
Issuance of Class A restricted
common stock..................... -- -- -- -- -- -- 1,124,000
Issuance of Series B convertible
preferred stock, net of issuance
costs of $6,234.................. -- -- 2,380,953 4,993,767 -- -- --
Net loss........................... -- -- -- -- -- -- --
---------- ----------- ---------- ----------- ---------- ----------- ----------
Comprehensive net loss for the year
ended January 31, 1999.............
BALANCE, JANUARY 31, 1999........... 4,000,000 6,957,774 2,380,953 4,993,767 -- -- 2,464,000
Issuance of Class A restricted
common stock..................... -- -- -- -- -- -- 340,000
Issuance of Series B convertible
preferred stock, net of issuance
costs of $106.................... -- -- 2,380,952 4,999,894 -- -- --
Issuance of Series C convertible
preferred stock, net of issuance
costs of $6,179.................. -- -- -- -- 1,195,238 3,758,821 --
Deferred compensation related to
grants of stock options and
issuances of Class A restricted
common stock..................... -- -- -- -- -- -- --
Amortization of deferred
compensation..................... -- -- -- -- -- -- --
Exercise of stock options ......... -- -- -- -- -- -- 32,545
Translation adjustment............. -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- --
---------- ----------- ---------- ----------- ---------- ----------- ----------
Comprehensive net loss for the nine
months ended October 31, 1999......
BALANCE, OCTOBER 31, 1999........... 4,000,000 6,957,774 4,761,905 9,993,661 1,195,238 3,758,821 2,836,545
Conversion of Class A common stock
into common stock (unaudited).... -- -- -- -- -- -- (2,836,545)
Conversion of convertible preferred
stock into common stock
(unaudited)...................... (4,000,000) (6,957,774) (4,761,905) (9,993,661) (1,195,238) (3,758,821) --
---------- ----------- ---------- ----------- ---------- ----------- ----------
PRO FORMA BALANCE, OCTOBER 31, 1999
(UNAUDITED)...................... -- $ -- -- $ -- -- $ -- --
========== =========== ========== =========== ========== =========== ==========
<CAPTION>
CLASS A
COMMON STOCK NOTES
----------- ---------------------- ADDITIONAL RECEIVABLE
$.001 PAR NUMBER OF $.001 PAR PAID-IN DEFERRED FROM
VALUE SHARES VALUE CAPITAL COMPENSATION STOCKHOLDERS
--------- --------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCORPORATION (OCTOBER 15, 1997).... $ -- -- $ -- $ -- $ -- $ --
Initial capitalization.............. 1,340 -- -- 350,410 -- (166,250)
Issuance of Series A convertible
preferred stock, net of issuance
costs of $42,226................. -- -- -- -- -- --
Net loss........................... -- -- -- -- -- --
------- ---------- ------ ----------- ----------- ---------
Comprehensive net loss for the
period from Incorporation to
January 31, 1998...................
BALANCE, JANUARY 31, 1998........... 1,340 -- -- 350,410 -- (166,250)
Issuance of Class A restricted
common stock..................... 1,124 -- -- 293,926 -- (140,000)
Issuance of Series B convertible
preferred stock, net of issuance
costs of $6,234.................. -- -- -- -- -- --
Net loss........................... -- -- -- -- -- --
------- ---------- ------ ----------- ----------- ---------
Comprehensive net loss for the year
ended January 31, 1999.............
BALANCE, JANUARY 31, 1999........... 2,464 -- -- 644,336 -- (306,250)
Issuance of Class A restricted
common stock..................... 340 -- -- 187,910 -- (32,813)
Issuance of Series B convertible
preferred stock, net of issuance
costs of $106.................... -- -- -- -- -- --
Issuance of Series C convertible
preferred stock, net of issuance
costs of $6,179.................. -- -- -- 3,765,000 -- --
Deferred compensation related to
grants of stock options and
issuances of Class A restricted
common stock..................... -- -- -- 2,876,056 (2,876,056) --
Amortization of deferred
compensation..................... -- -- -- -- 189,288 --
Exercise of stock options ......... 33 -- -- 8,510 -- --
Translation adjustment............. -- -- -- -- -- --
Net loss........................... -- -- -- -- -- --
------- ---------- ------ ----------- ----------- ---------
Comprehensive net loss for the nine
months ended October 31, 1999......
BALANCE, OCTOBER 31, 1999........... 2,837 -- -- 7,481,812 (2,686,768) (339,063)
Conversion of Class A common stock
into common stock (unaudited).... (2,837) 2,836,545 2,837 -- -- --
Conversion of convertible preferred
stock into common stock
(unaudited)...................... -- 6,638,095 6,638 20,703,618 -- --
------- ---------- ------ ----------- ----------- ---------
PRO FORMA BALANCE, OCTOBER 31, 1999
(UNAUDITED)...................... $ -- 9,474,640 $9,475 $28,185,430 $(2,686,768) $(339,063)
======= ========== ====== =========== =========== =========
<CAPTION>
CUMULATIVE TOTAL
ACCUMULATED TRANSLATION STOCKHOLDERS' COMPREHENSIVE
DEFICIT ADJUSTMENT EQUITY LOSS
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
INCORPORATION (OCTOBER 15, 1997).... $ -- $ -- $ --
Initial capitalization.............. -- -- 185,500
Issuance of Series A convertible
preferred stock, net of issuance
costs of $42,226................. -- -- 6,957,774
Net loss........................... (824,433) -- (824,433) (824,433)
------------ ------ ----------- ------------
Comprehensive net loss for the
period from Incorporation to
January 31, 1998................... $ (824,433)
BALANCE, JANUARY 31, 1998........... (824,433) -- 6,318,841
Issuance of Class A restricted
common stock..................... -- -- 155,050
Issuance of Series B convertible
preferred stock, net of issuance
costs of $6,234.................. -- -- 4,993,767
Net loss........................... (8,272,541) -- (8,272,541) (8,272,541)
------------ ------ ----------- ------------
Comprehensive net loss for the year
ended January 31, 1999............. $ (8,272,541)
BALANCE, JANUARY 31, 1999........... (9,096,974) -- 3,195,117
Issuance of Class A restricted
common stock..................... -- -- 155,437
Issuance of Series B convertible
preferred stock, net of issuance
costs of $106.................... -- -- 4,999,894
Issuance of Series C convertible
preferred stock, net of issuance
costs of $6,179.................. (3,765,000) -- 3,758,821
Deferred compensation related to
grants of stock options and
issuances of Class A restricted
common stock..................... -- -- --
Amortization of deferred
compensation..................... -- -- 189,288
Exercise of stock options ......... -- -- 8,543
Translation adjustment............. -- 4,736 4,736 4,736
Net loss........................... (12,233,201) -- (12,233,201) (12,233,201)
------------ ------ ----------- ------------
Comprehensive net loss for the nine
months ended October 31, 1999...... $(12,228,465)
BALANCE, OCTOBER 31, 1999........... (25,095,175) 4,736 78,635
Conversion of Class A common stock
into common stock (unaudited).... -- -- --
Conversion of convertible preferred
stock into common stock
(unaudited)...................... -- -- --
------------ ------ -----------
PRO FORMA BALANCE, OCTOBER 31, 1999
(UNAUDITED)...................... $(25,095,175) $4,736 $ 78,635
============ ====== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 69
SKILLSOFT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION
(OCTOBER 15,
1997) TO YEAR ENDED NINE MONTHS ENDED OCTOBER 31,
JANUARY 31, JANUARY 31, -----------------------------
1998 1999 1998 1999
------------- ----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................... $ (824,433) $(8,272,541) $(4,706,283) $(12,233,201)
Adjustments to reconcile net loss to net
cash used in operating activities --
Amortization of deferred compensation.... -- -- -- 189,288
Depreciation and amortization............ -- 85,726 58,500 151,213
Provision for bad debts.................. -- -- -- 25,000
Changes in current assets and
liabilities --
Accounts receivable................... -- -- -- (1,344,764)
Prepaid expenses and other current
assets.............................. -- (116,144) (250,230) (861,645)
Accounts payable...................... 78,537 132,204 335,838 142,485
Accrued expenses...................... 624,592 520,111 155,816 681,669
Deferred revenue...................... -- -- -- 627,347
----------- ----------- ----------- ------------
Net cash used in operating
activities....................... (121,304) (7,650,644) (4,406,359) (12,622,608)
----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........ -- (555,119) (441,285) (242,555)
Purchases of short-term investments........ (4,371,333) (3,341,702) (6,075,183) (9,868,310)
Maturity of short-term investments......... -- 4,371,333 3,398,531 13,210,012
----------- ----------- ----------- ------------
Net cash (used in) provided by
investing activities............. (4,371,333) 474,512 (3,117,937) 3,099,147
----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Series A convertible preferred
stock, net of issuance costs............. 6,957,774 -- -- --
Issuance of Series B convertible preferred
stock, net of issuance costs............. -- 4,993,767 4,993,767 4,999,894
Issuance of Series C convertible preferred
stock, net of issuance costs............. -- -- -- 3,758,821
Issuance of Class A common stock........... 185,500 -- -- --
Issuance of Class A restricted common
stock.................................... -- 155,050 155,050 155,437
Exercise of stock options.................. -- -- -- 8,543
Proceeds from Line of Credit............... -- -- -- 501,445
----------- ----------- ----------- ------------
Net cash provided by financing
activities....................... 7,143,274 5,148,817 5,148,817 9,424,140
----------- ----------- ----------- ------------
Effect of exchange rate changes on cash.... -- -- -- 3,890
----------- ----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 2,650,637 (2,027,315) (2,375,479) (95,431)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD..................................... -- 2,650,637 2,650,637 623,322
----------- ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD..... $ 2,650,637 $ 623,322 $ 275,158 $ 527,891
=========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
TRANSACTIONS:
Issuance of Class A restricted common stock
for notes receivable from stockholders... $ 166,250 $ 140,000 $ 140,000 $ 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 consolidated financial
statements.
F-6
<PAGE> 70
SKILLSOFT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS
SkillSoft Corporation (the Company) 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All material intercompany
transactions and balances have been eliminated in consolidation.
(b) Management's Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Interim Financial Statements
The accompanying consolidated statements of operations and cash flows for
the nine months ended October 31, 1998 are unaudited, but in the opinion of
management, include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of results for these interim periods. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted, although management believes that the disclosures included are adequate
to make the information presented not misleading. The results of operations for
the nine months ended October 31, 1999 are not necessarily indicative of the
results to be expected for the entire fiscal year.
(d) Unaudited Pro Forma Presentation
Upon the closing of the Company's proposed initial public offering, the
Company will have a single class of common stock. All shares of Class A and
Class B common stock issued and outstanding will be converted into a new single
class of common stock in connection with this offering.
The unaudited pro forma balance sheet as of October 31, 1999 and the pro
forma net loss per share for the nine months ended October 31, 1999 reflect the
automatic conversion of all outstanding shares of Series A, Series B and Series
C convertible preferred stock into 6,638,095 shares of common stock, which will
occur upon the closing of the Company's proposed initial public offering.
(e) 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
F-7
<PAGE> 71
SKILLSOFT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) -- (CONTINUED)
SOP 98-4. 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 first year license fee is generally billed in
advance and recognized as revenue at the time of delivery of the products,
provided the Company's fees are fixed or determinable and collections of
accounts receivable are probable. In the event that the customer does not
initially specify the entire set of licensed courses to be delivered or if some
licensed courses are not immediately available for delivery, the portion of the
license revenue associated with those undelivered courses is not recognized
until those courses are delivered. Subsequent annual license fees for multi-year
agreements will be generally billed and revenue will be recognized on each
anniversary date or, if the customer exchanges courses at the renewal date, upon
delivery of the exchanged courses, provided the Company's fees are fixed or
determinable and collections of accounts receivable are probable. Revenue from
agreements providing for licenses of all courses currently available and to be
developed during a specified period is recognized ratably over the license 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 nine months ended October 31, 1999,
the Company recognized approximately $52,000 of service revenue. 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 undelivered elements of the agreement. Deferred
revenue represents the undelivered portion of first year license fees and PCS
for which the Company has received payment.
(f) 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. Basic
and diluted net loss per share are the same, as outstanding unvested shares of
Class A 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 Class A Restricted common stock and common
stock options totaling 0, 661,303, 521,612 and 1,388,638 weighted average common
shares have been excluded from the computation of diluted weighted average
shares outstanding for the period from incorporation (October 15, 1997) to
January 31, 1998, for the year ended January 31, 1999 and for the nine months
ended October 31, 1998 and 1999, respectively. Shares of common stock issuable
upon the conversion of outstanding convertible preferred stock have also been
excluded for all periods presented. In accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 98, Earnings Per Share in an Initial
Public Offering, there were no issuances of the Company's common stock at
nominal consideration prior to the Company's planned initial public offering.
The calculation of pro forma net loss per common share assumes that all
Series A and Series B convertible preferred stock had been converted to common
stock as of the issuance date.
F-8
<PAGE> 72
SKILLSOFT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) -- (CONTINUED)
(g) Cash, Cash Equivalents and Short-Term 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
January 31, 1998 and 1999 and October 31, 1999, 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 January 31, 1998 and 1999, 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. All of these investments are classified as current assets in the
accompanying consolidated balance sheets as they mature within one year.
(h) Prepaid Expenses and Other Current Assets
As of October 31, 1999, prepaid expenses and other current assets consisted
primarily of approximately $680,000 of prepaid commissions paid to the Company's
salespeople. This asset will be charged to expense as the related revenue is
recognized and the commissions are earned during the fiscal year.
(i) Depreciation and Amortization
The Company provides for depreciation and amortization by charges to
operations in amounts estimated to allocate the cost of property and equipment
over their estimated useful lives, on a straight-line basis, as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
-------------
<S> <C>
Computer equipment....................................... 2-3 years
Furniture and fixtures................................... 5 years
Leasehold improvements................................... Life of lease
</TABLE>
(j) Software Development Costs and Research and Development Expenses
SFAS No. 86, Accounting for the Costs of Computer Software To Be Sold,
Leased or Otherwise Marketed, requires the capitalization of certain computer
software development costs incurred after technological feasibility is
established. Once technological feasibility of a software product has been
established, the additional development costs incurred to bring the product to a
commercially acceptable level has not been and is not expected to be
significant. As a result, the Company has not capitalized software development
costs as of January 31, 1998 and 1999 and October 31, 1999.
The Company charges all research and development expenses, which include
course content development fees, to operations as incurred.
(k) Comprehensive Loss
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure of all
components of
F-9
<PAGE> 73
SKILLSOFT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) -- (CONTINUED)
comprehensive income on an annual and interim basis. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions, other events and circumstances from nonowner sources.
Comprehensive loss is disclosed in the accompanying consolidated statements of
stockholders' equity and comprehensive loss.
(l) Fair Value of Financial Instruments
Financial instruments consist mainly of cash and cash equivalents,
short-term investments accounts receivable and accounts payable. The carrying
amounts of these instruments approximate their fair value.
(m) Concentrations of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet concentration
of credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements. The Company's accounts receivable credit risk is
concentrated domestically, because for the nine months ended October 31, 1999
all revenue was derived from domestic customers. For the nine months ended and
at October 31, 1999, the Company had a customer that individually comprised 29%
and 42% of the Company's total revenue and accounts receivable, respectively. In
addition, another customer individually comprised 13% of the Company's total
accounts receivable at October 31, 1999.
(n) Disclosures About Segments of an Enterprise
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.
(o) Long-Lived Assets
The Company follows the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of.
SFAS No. 121 requires that long-lived assets be reviewed for impairment by
comparing the fair value of the assets with the carrying amount. Any write-downs
are to be treated as permanent reductions in the carrying amount of the assets.
The Company believes that the carrying value of these assets is realizable and
to date has not recorded any impairment charges.
F-10
<PAGE> 74
SKILLSOFT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) -- (CONTINUED)
(p) Recent Accounting Pronouncements
In March 1998, the AICPA issued SOP No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires
certain computer software costs associated with internal-use software to be
expensed as incurred until certain capitalization criteria are met. The Company
adopted SOP No. 98-1 beginning February 1, 1999. Adoption of this statement did
not have a material impact on the Company's financial position or results of
operations.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-up Activities, which requires that all nongovernmental entities expense
the costs of start-up activities, including organizational costs, as those costs
are incurred. The Company has recorded all such costs as expenses in the period
incurred.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for periods
beginning after June 15, 2000. SFAS No. 133 establishes methods of accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. Because the Company currently
holds no derivative financial instruments and does not currently engage in
hedging activities, the adoption of SFAS No. 133 is not expected to have a
material impact on the Company's financial condition or results of operations.
(3) NOTES RECEIVABLE FROM STOCKHOLDERS
In December 1997, the Company issued 633,333 shares of Class A common stock
to a founder of the Company in exchange for a note receivable equal to the fair
market value of the shares. The note receivable accrues interest at a rate of
6.2% per annum and the principal and all outstanding interest are due upon the
maturity of the note in December 2002. The balance on this note receivable is
$166,250 at January 31, 1998 and 1999 and October 31, 1999, and is included as a
reduction of stockholders' equity in the accompanying balance sheets and
statements of stockholders' equity.
During the fiscal year ended January 31, 1999, the Company issued a total
of 533,333 shares of Class A restricted common stock to three founders of the
Company in exchange for notes receivable equal to the fair market value of the
shares. The shares vest ratably on a monthly basis over three years (see Note
6(b)). The notes receivable accrue interest at a rate of 5.77% per annum and the
principal and all outstanding interest are due upon the maturity of the notes in
June 2003. The total balance of these notes receivable is $140,000 at January
31, 1999 and October 31, 1999 and is included as a reduction of stockholders'
equity in the accompanying balance sheets and statements of stockholders'
equity.
During February 1999, the Company issued a total of 125,000 shares of Class
A restricted common stock to several officers of the Company in exchange for
notes receivable equal to the fair market value of the shares. The shares vest
ratably on a monthly basis over three years (see Note 6(b)). The notes
receivable accrue interest at a rate of 4.83% per annum and the principal and
all outstanding interest are due upon the maturity of the notes in March 2004.
The total balance of these notes receivable is $32,813 at October 31, 1999 and
is included as a reduction of stockholders' equity in the accompanying balance
sheets and statements of stockholders' equity.
See Note 6(b) for the restrictions on the Class A Restricted Common Stock.
F-11
<PAGE> 75
SKILLSOFT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) -- (CONTINUED)
(4) INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. Under the liability
method specified by SFAS No. 109, a deferred tax asset or liability is
determined based on the difference between the financial statement and tax bases
of assets and liabilities, as measured by the enacted tax rates assumed to be in
effect when these differences are expected to reverse. A deferred tax valuation
allowance is required if it is more likely than not that all or a portion of the
recorded deferred tax assets will not be realized.
No provision for federal or state income taxes has been recorded, as the
Company incurred net operating losses for all periods presented. As of January
31, 1998 and 1999, the Company had net operating loss carryforwards of
approximately $164,000 and $3,741,000, respectively, available to reduce future
income taxes, if any. The Company also has available federal tax credit
carryforwards of approximately $120,000. If not utilized, these carryforwards
expire at various dates through the fiscal year ended January 31, 2019. If
substantial changes in the Company's ownership should occur, as defined by
Section 382 of the Internal Revenue Code (the Code), there could be annual
limitations on the amount of carryforwards which can be realized in future
periods. The Company has completed several financings since its inception and
has incurred ownership changes as defined under the Code. The Company does not
believe that these changes in ownership will have a material impact on its
ability to use its net operating loss and tax credit carryforwards.
Net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------
1998 1999
--------- -----------
<S> <C> <C>
Net operating loss carryforwards................ $ 56,000 $ 1,272,000
Nondeductible expenses and reserves............. 262,000 2,072,000
Tax credits..................................... -- 120,000
--------- -----------
318,000 3,464,000
Less--Valuation allowance....................... (318,000) (3,464,000)
--------- -----------
$ -- $ --
========= ===========
</TABLE>
Due to the Company's history of operating losses, there is significant
uncertainty surrounding the Company's ability to utilize its net operating loss
and tax credit carryforwards. Accordingly, the Company has provided a full
valuation allowance against its otherwise recognizable deferred tax assets as of
January 31, 1998 and 1999.
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
JANUARY 31,
--------------
1998 1999
----- -----
<S> <C> <C>
Income tax provision at federal statutory rate........ (34.0)% (34.0)%
Increase (decrease) in tax resulting from --
State tax provision, net of federal benefit......... (4.6) (4.6)
Increase in valuation allowance..................... 38.6 38.6
----- -----
Effective tax rate.................................... --% --%
===== =====
</TABLE>
F-12
<PAGE> 76
SKILLSOFT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) -- (CONTINUED)
(5) COMMITMENTS AND CONTINGENCIES
(a) Line-of-Credit with a Financial Institution
In June 1999, the Company entered into a working capital credit facility
agreement with a financial institution, which expires on June 30, 2000 and is
automatically renewable for additional one-year terms. Under the working capital
line-of-credit, the Company may borrow up to the lesser of $5,000,000 or the sum
of 80% of eligible accounts receivable, as defined, and $1,000,000. Borrowings
bear interest at the LIBOR rate (6.25% at October 31, 1999) plus 4.875%. The
working capital line-of-credit is collateralized by substantially all assets of
the Company. The agreement contains certain covenants, with which, as of October
31, 1999, the Company was in full compliance. As of October 31, 1999, there was
$501,445 outstanding under the working capital line-of-credit and approximately
$2,525,663 was available for borrowing.
Subsequent to October 31, 1999, the Company amended the agreement to
increase its line-of-credit to $12,000,000. In conjunction with this amendment,
the Company granted warrants to purchase 60,606 shares of Class A common stock
at an exercise price of $8.25 per share.
(b) Leases
The Company leases its facility and certain equipment and furniture under
operating lease agreements that expire at various dates through October 2001.
Included in the accompanying statements of operations is rent expense for the
leased facility and equipment of approximately $0, $55,000, $54,000 and $89,000
for the period from incorporation (October 15, 1997) to January 31, 1998, for
the year ended January 31, 1999 and for the nine months ended October 31, 1998
and 1999, respectively.
Future minimum lease payments under the operating lease agreements are
approximately as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
2000..................................... $328,000
2001..................................... 393,000
2002..................................... 55,000
--------
$776,000
========
</TABLE>
(c) Litigation
In May 1998, the former employer of three of the Company's executive
officers and one key employee filed a lawsuit against the Company, the three
executive officers and the key employee. The former employer claims in substance
that the Company's President and Chief Executive Officer breached his fiduciary
obligations to his former employer by misappropriating alleged trade secrets,
commencing a rival concern and interfering with employment relationships by
soliciting other employees to join the Company while employed by their former
employer; that the Company's Vice President, Worldwide Sales and Marketing
breached his fiduciary obligations to his former employer by assisting the
Company's President and Chief Executive Officer in these activities; that the
other individuals allegedly misappropriated alleged trade secrets; and that the
Company misappropriated alleged trade secrets and allegedly interfered with
employment relationships. The claims seek injunctive relief and compensatory
damages of $400,000,000, exemplary damages in the additional
F-13
<PAGE> 77
SKILLSOFT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) -- (CONTINUED)
amount of $400,000,000 and punitive damages in excess of $10,000,000. Management
denies all allegations and believes that it has meritorious defenses to all
claims and intends to vigorously defend its positions. It is not possible to
predict the outcome of this litigation. Regardless of the outcome, this
litigation will continue to 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. In connection with the defense of
this lawsuit, the Company has recorded as expense legal fees of $416,717, $0 and
$1,421,831 for the fiscal year ended January 31, 1999 and the nine months ended
October 31, 1998 and 1999, respectively, which is included in general and
administrative expenses in the accompanying statements of operations.
(6) STOCKHOLDERS' EQUITY
(a) Convertible Preferred Stock
The Company has authorized the issuance of 13,000,000 shares of convertible
preferred stock (the Preferred Stock), $.001 par value, of which 4,000,000,
4,761,905, and 3,174,603 shares have been designated as Series A, Series B and
Series C Preferred Stock, respectively. At July 31, 1999, 1,063,492 shares of
preferred stock are undesignated for a particular series.
In January 1998, the Company issued 4,000,000 shares of Series A
convertible preferred stock for gross proceeds of approximately $7,000,000. In
August 1998, the Company issued 2,380,953 shares of Series B convertible
preferred stock for gross proceeds of approximately $5,000,000. In February
1999, the Company issued the remaining 2,380,952 shares of Series B convertible
preferred stock for gross proceeds of approximately $5,000,000. In August 1999,
the Company issued 1,195,238 shares of Series C convertible preferred stock for
gross proceeds of approximately $3,765,000, and an amount of $3,765,000 was
allocated to the beneficial conversion feature in accordance with Emerging
Issues Task Force Issue No. 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingency Adjustable Conversion Ratios" and
was fully amortized through accumulated deficit on the date of issuance.
The rights, preferences and privileges of the Preferred Stock are as
follows:
VOTING RIGHTS
Each holder of outstanding shares of Preferred Stock shall be entitled
to the number of votes equal to the number of whole shares of Class A
common stock into which the shares of Series A, B and C Preferred Stock are
then convertible.
DIVIDENDS
The holders of the Series A, B and C Preferred Stock shall be entitled
to receive dividends of $0.14, $0.168 and $0.252 per share per annum,
respectively, payable when and if declared by the Board of Directors of the
Company. There were no dividends declared payable by the Board of Directors
during the fiscal years ended January 31, 1998 and 1999 or the nine months
ended October 31, 1999.
F-14
<PAGE> 78
SKILLSOFT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) -- (CONTINUED)
LIQUIDATION PREFERENCE
In the event of any voluntary or involuntary liquidation, winding up
or dissolution of the Company, the holders of the Company's Preferred Stock
then outstanding are entitled to be paid out of the assets of the Company
before any payment is made to common stockholders. The Series A, B and C
preferred stockholders are entitled to be paid at a rate of $1.75, $2.10
and $3.15 per share, respectively, plus any declared but unpaid dividends.
In addition, the preferred stockholders are entitled to a liquidation
dividend of an amount equal to 8% of the original issuance price for each
year that the shares have been outstanding.
After payment of all preferential amounts required to be paid to
holders of the Preferred Stock as set forth above, upon the involuntary
liquidation, winding up or dissolution of the Company, the remaining assets
and funds of the Company will be distributed solely to the holders of the
common stock.
CONVERSION
Each share of Series A, B and C Preferred Stock is convertible, at the
option of the holder, at any time into .67 shares of common stock, subject
to adjustment based on certain defined events.
Shares of Preferred Stock will convert into Class A common stock,
provided that the conversion shall not cause the holder to possess greater
than 49.9% of the total Class A common stock then outstanding and any
additional shares shall convert to Class B common stock.
In connection with the sale of shares of common stock in a public
offering, resulting in at least $20,000,000 of net proceeds to the Company
and a $9.45 per share price to the public, all outstanding shares of
Preferred Stock shall automatically be converted into shares of common
stock.
(b) Common Stock
The Company has authorized the issuance of up to 33,000,000 shares of
common stock, $.001 par value, of which 26,000,000 and 7,000,000 shares have
been designated as Class A and Class B, respectively. The voting, dividend and
liquidation rights of the holders of the common stock are subject to, and
qualified by, the rights of the holders of the Preferred Stock. The Company has
reserved 3,126,667 shares of common stock to be issued as either restricted
stock awards or stock options under the 1998 Stock Incentive Plan discussed in
Note 6(c). An additional 2,666,667, 3,174,603 and 2,116,402 shares of common
stock have been reserved for issuance upon the conversion of the Series A, B and
C Preferred Stock, respectively.
The holders of the Class A common stock shall be entitled to vote on all
corporate matters, and the holders of the Class B common stock shall not be
entitled to vote for any such matters except changes and amendments to the Class
B shareholder rights and preferences.
In connection with the Company's proposed initial public offering, all
issued and outstanding shares of Class A and Class B common stock will be
converted to a new single class of common stock.
The Company issued 1,340,000 shares of Class A common stock, which were not
part of the 1998 Stock Incentive Plan, to a founder of the Company and to
several private investors in
F-15
<PAGE> 79
SKILLSOFT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) -- (CONTINUED)
December 1997. Of these shares, 633,333 were issued to a founder of the Company
in exchange for a full recourse note receivable (see Note 3).
During the fiscal year ended January 31, 1999, the Company issued an
additional 1,124,000 shares of Class A restricted common stock pursuant to the
1998 Stock Incentive Plan. Of these shares, 533,333 were issued to three
founders of the Company in exchange for full recourse notes receivable (see Note
3). These shares all vest ratably on a monthly basis over a three-year period;
unvested shares are subject to the right of repurchase by the Company at the
original sales price of the shares. In addition, these shares are subject to a
restriction on transfer of ownership, and the Company holds a right of first
refusal option upon the sale of the shares.
During the nine months ended October 31, 1999, the Company issued an
additional 340,000 shares of Class A restricted common stock pursuant to the
1998 Stock Incentive Plan. Of these shares, 125,000 were issued to several
officers of the Company in exchange for full recourse notes receivable (see Note
3). These shares all vest over a three-year period; unvested shares are subject
to the right of repurchase by the Company at the original sales price of the
shares.
As of October 31, 1999, a total of 793,871 shares of Class A restricted
common stock are subject to the right of repurchase by the Company.
In December 1999, the Company effected a two-for-three reverse stock split
of common stock outstanding. Accordingly, the accompanying financial statements
and footnotes have been restated to reflect the stock split.
(c) Stock Option Plan
In February 1998, the Company adopted the 1998 Stock Incentive Plan (the
Plan), pursuant to which up to 3,126,667 shares of common stock may be issued
over a 10-year period. Under the Plan, the Company may grant both incentive
stock options and nonqualified stock options, as well as award or sell shares of
common stock to employees, directors or outside consultants of the Company. All
option grants, prices and vesting periods are determined by the Board of
Directors. Incentive stock options may be granted at a price not less than 100%
of the fair market value of the common stock on the date of grant and not less
than 110% of the fair market value for a stockholder holding more than 10% of
the Company's voting common stock.
All stock option activity under the Plan for the fiscal years ended January
31, 1998 and 1999 and for the nine months ended October 31, 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE PRICE
-------- -------------- --------------
<S> <C> <C> <C>
Granted.................................. 290,167 $ .263 $.263
-------- ------------ -----
Outstanding, January 31, 1999............ 290,167 .263 .263
Granted................................ 473,166 .263-10.50 1.52
Exercised.............................. (32,545) .263 .263
Canceled............................... (36,500) .263-1.50 .31
-------- ------------ -----
Outstanding, October 31, 1999............ 694,288 $ .263-10.50 $1.11
======== ============ =====
Exercisable, January 31, 1999............ -- $ -- $ --
======== ============ =====
Exercisable, October 31, 1999............ 19,399 $ .263 $.263
======== ============ =====
</TABLE>
F-16
<PAGE> 80
SKILLSOFT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) -- (CONTINUED)
During November 1999, the Company granted options for the purchase of
23,667 shares of common stock at an exercise price of $10.50 per share.
The following table summarizes certain information relating to the
outstanding and exercisable options as of October 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING
- ----------------------------------------------------
WEIGHTED EXERCISABLE
AVERAGE --------------------------
RANGE REMAINING WEIGHTED WEIGHTED
OF CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE NUMBER OF LIFE EXERCISE OF EXERCISE
PRICES SHARES (YEARS) PRICE SHARES PRICE
- -------- --------- ------------ -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ .263 420,621 9.1 $ .263 19,399 $.263
1.50 245,667 9.8 1.50 -- --
10.50 28,000 10.0 10.50 -- --
--------- ------
694,288 19,399
========= ======
</TABLE>
In connection with certain issuances of Class A restricted common stock and
stock option grants during the nine months ended October 31, 1999, the Company
recorded deferred compensation of $2,876,056, which represents the aggregate
difference between the exercise or sale price and the fair market value of the
common stock as determined for accounting purposes. The deferred compensation
will be recognized as an operating expense over the vesting period of the
restricted common stock and the underlying stock options. The Company recorded
compensation expense of $189,288 in the nine months ended October 31, 1999
related to these restricted shares and options.
(d) Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of stock
options to employees to be included in the statements of operations or disclosed
in the notes to financial statements. The Company accounts for stock-based
compensation for its employees under Accounting Principles Board (APB) Opinion
No. 25 and elected the disclosure-only alternative under SFAS No. 123, which
requires disclosure of the pro forma effects on earnings as if the
fair-value-based method of accounting under SFAS No. 123 had been adopted, as
well as certain other information.
F-17
<PAGE> 81
SKILLSOFT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) -- (CONTINUED)
The Company has computed the pro forma disclosures required under SFAS No.
123 for options granted in fiscal 1999 and the nine months ended October 31,
1998 and 1999 using the Black-Scholes option pricing model prescribed by SFAS
No. 123. The weighted average information and assumptions used for the grants is
as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31,
JANUARY 31, -----------------------
1999 1998 1999
----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Risk-free interest rates...................... 4.18-5.52% 4.18-5.52% 5.01-6.33%
Expected dividend yield....................... - - -
Volatility factor............................. - - -
Expected lives................................ 7 years 7 years 7 years
Weighted average fair value of options
granted..................................... $.08 $.08 $5.78
Weighted average remaining contractual life of
outstanding options......................... 9.6 years 9.7 years 9.51 years
</TABLE>
Had compensation expense for the Plan been determined consistent with SFAS
No. 123, the Company's net loss and basic and diluted net loss per share would
have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED OCTOBER 31,
JANUARY 31, -----------------------------
1999 1998 1999
----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Net loss --
As reported......................... $(8,272,541) $(4,706,283) $(12,233,201)
Pro forma........................... (8,274,806) (4,707,247) (12,432,597)
Basic and diluted net loss per
share --
As reported......................... (5.64) (3.33) (8.72)
Pro forma........................... (5.64) (3.33) (8.83)
</TABLE>
Because additional option grants are expected to be made in future periods,
the above pro forma disclosures may not be representative of pro forma effects
on results for future periods.
(7) ACCRUED EXPENSES
Accrued expenses in the accompanying consolidated balance sheets consist of
the following:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------- OCTOBER 31,
1998 1999 1999
-------- ---------- -----------
<S> <C> <C> <C>
Accrued compensation........................ $622,788 $ 654,430 $ 913,378
Professional fees........................... -- 380,449 461,486
Sales tax................................... -- -- 67,660
Other....................................... 1,804 109,824 383,294
-------- ---------- ----------
$624,592 $1,144,703 $1,825,818
======== ========== ==========
</TABLE>
F-18
<PAGE> 82
SKILLSOFT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) -- (CONTINUED)
(8) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan covering all employees of the Company who
have met certain eligibility requirements. Under the terms of the 401(k) plan,
the employees may elect to make tax-deferred contributions to the 401(k) plan.
In addition, the Company may match employee contributions, as determined by the
Board of Directors, and may make a discretionary contribution to the 401(k)
plan. No matching or discretionary contributions have been made to the 401(k)
plan in any period.
(9) VALUATION & QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
BALANCE AT ADDITION BALANCE AT
BEGINNING OF CHARGED TO END OF
PERIOD EXPENSE DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Period from Incorporation (October 15, 1997) to
January 31, 1998..................................... $ -- $ -- $ -- $ --
==== ======= ==== =======
Year ended January 31, 1999.......................... $ -- $ -- $ -- --
==== ======= ==== =======
Nine months ended October 31, 1999................... $ -- $25,000 $ -- $25,000
==== ======= ==== =======
</TABLE>
F-19
<PAGE> 83
[Skillsoft Corp. LOGO]
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the common stock offered hereby are as
follows:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 13,820
NASD filing fee............................................. 5,500
Nasdaq National Market listing fee.......................... 41,625
Printing and engraving expenses............................. 165,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 150,000
Transfer agent and registrar fees and expenses.............. 14,000
Miscellaneous............................................... 85,055
--------
Total............................................. $775,000
========
</TABLE>
SkillSoft will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law and SkillSoft's Certificate of
Incorporation provide for indemnification of SkillSoft's directors and officers
for liabilities and expenses that they may incur in such capacities. In general,
directors and officers are indemnified with respect to actions taken in good
faith in a manner reasonably believed to be in, or not opposed to, the best
interests of SkillSoft and, with respect to any criminal action or proceeding,
actions that the indemnitee had no reasonable cause to believe were unlawful.
The Underwriting Agreement provides that the underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of SkillSoft against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act").
In addition, SkillSoft has purchased a directors and officers liability
insurance policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement,
SkillSoft sold the securities listed below that were not registered under the
Securities Act. Exemption from registration under the Securities Act for each of
the following sales is claimed under Section 4(2) of the Securities Act because
these transactions were by an issuer net involving a public offering.
1. On December 10, 1997, SkillSoft issued and sold 1,266,667 shares of
its common stock to one accredited investor for an aggregate purchase price
of $332,500.
2. On December 10, 1997, SkillSoft issued and sold an aggregate of
73,333 shares of its common stock to two individuals, each of whom was an
accredited investor for an aggregate purchase price of $19,250.
3. On January 8, 1998, SkillSoft issued and sold an aggregate of
4,000,000 shares of its Series A preferred stock to two entities each of
which were accredited investors for an aggregate purchase price of
$7,000,000.
II-1
<PAGE> 85
4. On August 14, 1998 and February 16, 1999, SkillSoft issued and sold
an aggregate of 4,761,905 shares of its Series B preferred stock to one
accredited investor for an aggregate purchase price of $10,000,000.
5. On August 5, 1999, SkillSoft issued and sold an aggregate of
1,195,238 of its Series C preferred stock to five purchasers, each of whom
or which was an accredited investor, for an aggregate purchase price of
$3,765,000.
In addition, between June 19, 1998 and December 31, 1999, SkillSoft issued
a total of 1,505,420 shares of common stock to 28 individuals under its 1998
Stock Incentive Plan for purchase prices between $0.2625 and $1.50 per share.
These shares were issued in reliance upon the exemption from registration under
Rule 701 promulgated under the Securities Act.
No underwriters were involved in the foregoing sales of securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
No. EXHIBIT
- ------- -------
<C> <S>
1.01+ Form of Underwriting Agreement.
3.01+ Amended and Restated Certificate of Incorporation of
SkillSoft.
3.02+ Certificate of Amendment to Certificate of Incorporation of
SkillSoft (effecting reverse stock split).
3.03+ Form of Certificate of Amendment to Certificate of
Incorporation of SkillSoft (to be filed prior to closing of
the public offering).
3.04+ Form of Amended and Restated Certificate of Incorporation of
SkillSoft (to be filed following the closing of this public
offering).
3.05+ Amended and Restated By-Laws of SkillSoft.
4.01+ Specimen Certificate for shares of SkillSoft's Common Stock.
5.01+ Legal Opinion of Hale and Dorr LLP.
10.01+ 1998 Stock Incentive Plan, as amended.
10.02+ 1999 Non-Employee Director Stock Option Plan.
10.03+ Employment Agreement between SkillSoft and Charles E. Moran
10.04+ Security Agreement and Secured Promissory Note between
SkillSoft and Charles E. Moran, each dated December 10,
1997.
10.05+ Employment Agreement dated January 12, 1998 between
SkillSoft and Mark A. Townsend.
10.06+ Employment Agreement dated February 2, 1998 between
SkillSoft and Thomas J. McDonald.
10.07+ Employment Agreement dated April 9, 1998 between SkillSoft
and Jerald A. Nine.
10.08+ Amended and Restated Registration and Investor Rights
Agreement dated August 5, 1999 between SkillSoft and the
Investors named therein.
10.09+ Amendment No. 1 to Amended and Restated Registration and
Investor Rights Agreement.
10.10+ Lease dated February 18, 1998, as amended, between SkillSoft
and Five N Associates.
10.11+ Loan and Security Agreement dated June 18, 1999 between
SkillSoft and GreyRock Capital.
10.12+ Amendment to Loan Documents between SkillSoft and GreyRock
Capital dated December 8, 1999.
</TABLE>
II-2
<PAGE> 86
<TABLE>
<CAPTION>
Exhibit
No. EXHIBIT
- ------- -------
<C> <S>
10.13+ Restricted Stock Purchase Agreement dated March 13, 1999
between SkillSoft and Jerald A. Nine.
10.14+ Restricted Stock Purchase Agreement dated March 15, 1999
between SkillSoft and Thomas J. McDonald.
10.15+ Restricted Stock Purchase Agreement dated March 31, 1999
between SkillSoft and Charles E. Moran.
10.16+ Restricted Stock Purchase Agreement dated March 31, 1999
between SkillSoft and Mark A. Townsend.
10.17+ Restricted Stock Purchase Agreement dated August 30, 1999
between SkillSoft and James Adkisson.
10.18+ Restricted Stock Purchase Agreement dated September 1, 1999
between SkillSoft and William T. Coleman, Trustee of the
Coleman Family Trust.
10.19 Preferred Stock Purchase Agreement dated January 8, 1999
among SkillSoft, G-Fund L.L.C., Warburg, Pincus Ventures,
L.P. and the Purchasers.
11.01+ Computation of Net Loss Per Share.
21.01+ Subsidiaries.
23.01+ Consent of Hale and Dorr LLP (included in Exhibit 5.01).
23.02 Consent of Arthur Andersen LLP.
24.01+ Power of Attorney (included on Page II-4).
27.01+ Financial Data Schedule.
27.02+ Financial Data Schedule.
27.03+ Financial Data Schedule.
27.04+ Financial Data Schedule.
</TABLE>
- -------------------------
+ Previously filed.
* Replaces previously filed exhibit.
(b) FINANCIAL STATEMENT SCHEDULES.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE> 87
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser, (2) that for
purposes of determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497 (h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective; and (3) that for the purpose of determining any liability
under the Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 5 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Nashua, New Hampshire on January 31, 2000.
SKILLSOFT CORPORATION
By: /s/ CHARLES E. MORAN
------------------------------------
Charles E. Moran
President, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 5 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ CHARLES E. MORAN President, Chief Executive Officer January 31, 2000
- --------------------------------------------------- and Chairman of the Board
Charles E. Moran (Principal Executive Officer)
* Chief Financial Officer (Principal January 31, 2000
- --------------------------------------------------- Financial and Accounting Officer)
Thomas J. McDonald
* Director January 31, 2000
- ---------------------------------------------------
Stewart K.P. Gross
* Director January 31, 2000
- ---------------------------------------------------
C. Samantha Chen
* Director January 31, 2000
- ---------------------------------------------------
James Adkisson
* Director January 31, 2000
- ---------------------------------------------------
William T. Coleman III
*By: /s/ CHARLES E. MORAN
----------------------------------------------
Charles E. Moran
as Attorney-in-Fact
</TABLE>
II-5
<PAGE> 89
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. EXHIBIT
- ------- -------
<C> <S>
1.01+ Form of Underwriting Agreement.
3.01+ Amended and Restated Certificate of Incorporation of
SkillSoft.
3.02+ Certificate of Amendment to Certificate of Incorporation of
SkillSoft (effecting reverse stock split).
3.03+ Form of Certificate of Amendment to Certificate of
Incorporation of SkillSoft (to be filed prior to closing of
the public offering).
3.04+ Form of Amended and Restated Certificate of Incorporation of
SkillSoft (to be filed following the closing of this public
offering).
3.05+ Amended and Restated By-Laws of SkillSoft.
4.01+ Specimen Certificate for shares of SkillSoft's Common Stock.
5.01+ Legal Opinion of Hale and Dorr LLP.
10.01+ 1998 Stock Incentive Plan, as amended.
10.02+ 1999 Non-Employee Director Stock Option Plan.
10.03+ Employment Agreement between SkillSoft and Charles E. Moran
10.04+ Security Agreement and Secured Promissory Note between
SkillSoft and Charles E. Moran, each dated December 10,
1997.
10.05+ Employment Agreement dated January 12, 1998 between
SkillSoft and Mark A. Townsend.
10.06+ Employment Agreement dated February 2, 1998 between
SkillSoft and Thomas J. McDonald.
10.07+ Employment Agreement dated April 9, 1998 between SkillSoft
and Jerald A. Nine.
10.08+ Amended and Restated Registration and Investor Rights
Agreement dated August 5, 1999 between SkillSoft and the
Investors named therein.
10.09+ Amendment No. 1 to Amended and Restated Registration and
Investor Rights Agreement.
10.10+ Lease dated February 18, 1998, as amended, between SkillSoft
and Five N Associates.
10.11+ Loan and Security Agreement dated June 18, 1999 between
SkillSoft and GreyRock Capital.
10.12+ Amendment to Loan Documents between SkillSoft and GreyRock
Capital dated December 8, 1999.
10.13+ Restricted Stock Purchase Agreement dated March 13, 1999
between SkillSoft and Jerald A. Nine.
10.14+ Restricted Stock Purchase Agreement dated March 15, 1999
between SkillSoft and Thomas J. McDonald.
10.15+ Restricted Stock Purchase Agreement dated March 31, 1999
between SkillSoft and Charles E. Moran.
10.16+ Restricted Stock Purchase Agreement dated March 31, 1999
between SkillSoft and Mark A. Townsend.
10.17+ Restricted Stock Purchase Agreement dated August 30, 1999
between SkillSoft and James Adkisson.
</TABLE>
<PAGE> 90
<TABLE>
<CAPTION>
Exhibit
No. EXHIBIT
- ------- -------
<C> <S>
10.18+ Restricted Stock Purchase Agreement dated September 1, 1999
between SkillSoft and William T. Coleman, Trustee of the
Coleman Family Trust.
10.19 Preferred Stock Purchase Agreement dated January 8, 1998
among SkillSoft, G-Fund L.L.C., Warburg, Pincus Ventures,
L.P. and the purchasers.
11.01+ Computation of Net Loss Per Share.
21.01+ Subsidiaries.
23.01+ Consent of Hale and Dorr LLP (included in Exhibit 5.01).
23.02 Consent of Arthur Andersen LLP.
24.01+ Power of Attorney (included on Page II-4).
27.01+ Financial Data Schedule.
27.02+ Financial Data Schedule.
27.03+ Financial Data Schedule.
27.04+ Financial Data Schedule.
</TABLE>
- ------------------------
+ Previously filed.
* Replaces previously filed exhibit.
<PAGE> 1
Exhibit 10.19
SKILLSOFT CORPORATION
PREFERRED STOCK
PURCHASE AGREEMENT
This Agreement is made as of January 8th, 1998 among SkillSoft Corporation,
a Delaware corporation, (the "Company") G-Fund L.L.C., a Delaware limited
liability company ("Gartner"), Warburg, Pincus Ventures, L.P., a Delaware
limited partnership, ("Warburg") and Warburg and Gartner ("Purchasers").
In consideration of the mutual promises, conditions and covenants
hereinafter set forth, the parties hereto agree as follows:
SECTION 1
AUTHORIZATION AND SALE OF PREFERRED STOCK
1.1 AUTHORIZATION OF SERIES A, SERIES B AND SERIES C PREFERRED STOCK. On
or before the Series A Closing (as defined in Section 2.1 below), the Company
will authorize the sale and issuance of up to 4,000,000 shares (the "Series A
Shares") of its Series A Preferred Stock (the "Series A Preferred"), up to
2,857,143 shares (the "Series B Shares") of its Series B Preferred Stock (the
"Series B Preferred") and up to 3,174,603 shares (the "Series C Shares") of its
Series C Preferred Stock (the "Series C Preferred"), in each case in accordance
with the terms of this Agreement and with each such series having the rights,
preferences, privileges and restrictions as set forth in the Amended and
Restated Certificate of Incorporation (the "Restated Certificate") in the form
attached to this Agreement as EXHIBIT A.
1.2 SALE OF SERIES A SHARES. Subject to the terms and conditions hereof
and at the Series A Closing (as defined in Section 2.1), the Company will issue
and sell to the Purchasers, and the Purchasers will buy from the Company,
4,000,000 shares of Series A Preferred, at a purchase price of $1.75 per share.
1.3 SALE OF SERIES B SHARES. Subject to the terms and conditions herein,
the Company may elect to issue and sell to the Purchasers, and the Purchasers
will buy from the Company, up to an aggregate of 2,857,143 shares of Series B
Preferred at a price of $2.10 per Share, in the amounts for the aggregate prices
set forth opposite each Purchaser's name in the Schedule of Purchasers attached
hereto. The first Series B Closing must be for at least 1,430,000 shares of
Series B Preferred and any subsequent Series B Closing must be for the balance
of the Series B Shares unsold after the first Series B Closing (each such
closing a "Series B Closing"). The Company may elect to sell fewer than
2,857,143 shares of Series B Preferred to the Purchasers provided, however, any
shares sold must be sold in the increments described in the preceding sentence.
Warburg and Gartner will purchase 90% and 10%, respectively, of the shares to be
sold at each Series B Closing. In order to effect any sale of Series B Preferred
to the Purchasers, the Company must for each closing provide written notice to
the Purchasers of its intent to effect such sale at least 30 calendar days prior
to each proposed closing date (each such date a "Series B Closing Date") for
such sale and indicate in such notice the total number of shares to be issued
and sold
1
<PAGE> 2
(each such notice a "Series B Notice of Sale"). If the Company provides a Series
B Notice of Sale to the Purchasers, the obligations of Purchasers to purchase
the number of Series B Shares set forth in such notice at each Series B Closing
shall be subject to Warburg's current approval of the Company's operating
performance from the date hereof through each Series B Closing Date and its then
financial and business condition (the "Warburg Approval"), which Warburg
Approval shall not be unreasonably withheld. For the purposes of this Section
1.3, Warburg's ability to reasonably withhold Warburg's Approval shall include,
but not be limited to those situations where: (i) the Company's revenues or
expenses for the quarter preceding each proposed closing date are more than 10
percent below or above, respectively, the level proposed in the business plan
provided to Warburg and attached hereto as EXHIBIT B or as modified approved by
the Board of Directors of the Company (the "Business Plan"); or (ii) Warburg
reasonably believes that any currently proposed acquisition by the Company of
any business, products or technologies will materially affect the business,
financial condition or results of operations of the Company or prospects
therefor.
1.4 SALE OF SERIES C SHARES. Subject to the terms and conditions herein,
the Company MAY elect to issue and sell to the Purchasers, and the Purchasers
WILL buy from the Company, up to an aggregate of 3,174,603 shares of Series C
Preferred at a price of $3.15 per Share, in the amounts and for the aggregate
prices set forth opposite each Purchaser's name in the Schedule of Purchasers.
Such shares may be sold in up to three separate closings (each such closing a
"Series C Closing"). Each Series C Closing must be for the lesser of 1,000,000
shares or the balance of the Series C Shares unsold after any previous Series C
Closing. The Company may elect to sell fewer than 3,174,603 shares of Series C
Preferred to the Purchasers provided, however, any shares sold must be sold in
the increments described in the preceding sentence. Warburg and Gartner will
purchase 90% and 10%, respectively, of the shares to be sold at each Series C
Closing. In order to effect any sale of Series C Preferred to the Purchasers,
the Company must for each closing provide notice to the Purchasers of its intent
to effect such sale at least 15 business days prior to each proposed closing
date (each such date a "Series C Closing Date") for such sale and indicate in
such notice the total number of shares to be issued and sold (each such notice a
"Series C Notice of Sale"). If the Company provides a Series C Notice of Sale to
the Purchasers, the obligations of Purchasers to purchase the number of Series C
Shares set forth in such notice at each Series C Closing shall be subject to the
Warburg Approval, which Warburg Approval shall not be unreasonably withheld. For
the purposes of this Section 1.4, Warburg's ability to reasonably withhold
Warburg's Approval shall include, but not be limited to, those situations where:
(i) the Company's revenues or expenses for the quarter preceding each proposed
closing date are more than 10 percent below or above, respectively, the level
proposed in the Business Plan; or (ii) if Warburg reasonably believes that any
then currently proposed acquisition by the Company of any business, products or
technologies will materially adversely affect the business, financial condition
or results of operations of the Company or prospects therefor.
1.5 FINANCING PREFERENCE. Notwithstanding any other provision in this
Agreement, the Company may not seek any outside financing from third parties
through the sale of the Series B Preferred or Series C Preferred at a price
equal or greater than $2.10 or $3.15, respectively, or any other security of the
Company for which the consideration per share of such security is greater than
the conversion price per share of the most recent series of the Company's
preferred stock sold by the Company, until the Company has in good faith first
offered the entire tranche of Series B Shares and the Series C Shares to the
Purchasers pursuant to this Section 1, PROVIDED, HOWEVER,
2
<PAGE> 3
that after the Company has offered such shares to the Purchasers, each Purchaser
shall have 10 business days from the date such shares were offered to confirm to
the Company that it is its good faith intention to consummate, and that it has
no reason to believe that it will not consummate, the purchase in accordance
with the terms of this Agreement its entire pro rata portion of the shares
offered. Any Purchaser who fails to provide such confirmation within such 10-day
period shall forfeit its right to purchase shares under the terms of this
Agreement, and the Company shall be free to offer and sell to any third party
such Purchaser's shares unless the Purchasers agree that Warburg shall purchase
such Purchaser's entire pro rata portion.
SECTION 2
CLOSING DATES; DELIVERY
2.1. SERIES A CLOSING. The closing of the purchase and sale of the Series A
Preferred hereunder shall be held at the offices of Morrison & Foerster LLP, 755
Page Mill Road, Palo Alto, California at 2:00 p.m., local time, on January __,
1998 (the "Series A Closing") or at such other time and place upon which the
Company and the Purchasers shall agree. The date of the Series A Closing is
sometimes hereinafter referred to as the "Series A Closing Date," and the Series
A Closing Date, the Series B Closing Date and the Series C Closing Date are
sometimes hereinafter referred to together as the "Closing Dates." The Series A
Closings, Series B Closings and Series C Closings are sometimes hereinafter
referred to together as the "Closings" and individually as a "Closing."
2.2. SERIES B CLOSINGS. Subject to Section 1.3 above, each Series B Closing
shall occur on the first business day following the thirtieth calendar day after
the Company provides a notice of sale as described in Section 1.3 hereof or at
such other time and place as the Company and the Purchasers mutually agree upon
in writing.
2.3. SERIES C CLOSINGS. Subject to Section 1.4 above, each Series C Closing
shall occur on the first business day following the thirtieth calendar day after
the Company provides a notice of sale as described in Section 1.4 hereof or at
such other time and place as the Company and the Purchasers mutually agree upon
in writing.
2.4. DELIVERY. At each Closing, the Company shall deliver to each Purchaser
a certificate or certificates, registered in such Purchaser's name representing
the number of Series A Preferred, Series B Preferred or Series C Preferred to be
purchased by such Purchaser, against payment of the purchase price therefor, by
check payable to the Company or wire transfer per the Company's instructions.
SECTION 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the Schedule of Exceptions attached hereto as
EXHIBIT C ("Schedule of Exceptions"), which Schedule of Exceptions the Company
shall have the right to amend and restate in connection with each Closing
subsequent to the Series A Closing, the Company represents and warrants to each
Purchaser, as of the Series A Closing Date, each Series B Closing Date, and each
Series C Closing Date as applicable (subject to changes occurring
3
<PAGE> 4
in the normal and ordinary course of the Company's business that are not
materially adverse to the Company, its financial position or prospects) or as
otherwise contemplated herein or by the Business Plan, as follows:
3.1 ORGANIZATION AND STANDING. The Company is a corporation duly organized
and existing under, and by virtue of, the laws of the State of Delaware and is
in good standing under such laws. The Company has requisite corporate power and
authority to own and operate its properties and assets, and to carry on its
business as currently conducted and as proposed to be conducted. The Company is
duly qualified to transact business and is in good standing in each jurisdiction
in which the failure so to qualify would have a material adverse effect on its
business or properties. The Company has furnished copies of its Certificate of
Incorporation and By-Laws, as amended. Said copies are true, correct and
complete and contain all amendments through the Closing Dates, as applicable.
3.2 CORPORATE POWER. The Company has now, or will have at the Closing
Dates, as applicable, all requisite legal and corporate power and authority to
execute and deliver this Agreement, the Stockholders Agreement, the Investor
Rights Agreement in substantially the form attached hereto as EXHIBIT D (the
"Rights Agreement"), to sell and issue the Series A Shares, Series B and Shares
and Series C Shares hereunder, to issue the Common Stock issuable upon
conversion of the Series A Shares and Series B Shares ("Conversion Shares"), and
to carry out and perform all of its obligations under the terms of this
Agreement and such other agreements and instruments.
3.3 SUBSIDIARIES. The Company has no subsidiaries or affiliated companies
and does not otherwise control, directly or indirectly, or have any ownership
interest in any corporation, partnership, business trust, association or
business entity.
3.4 CAPITALIZATION. The authorized capital stock of the Company consists,
or will, upon the filing of the Restated Certificate, which will be filed prior
to the Series A Closing Date, consist of 30,000,000 shares of Common Stock,
$.001 par value per share, of which 24,000,000 shares will be designated "Class
A Common Stock" and 6,000,000 shares will be designated "Class B Common Stock,"
and 11,000,000 shares of Preferred Stock, $.001 par value per share, of which
4,000,000 shares will be designated "Series A Preferred", 2,857,143 shares will
be designated "Series B Preferred" and 3,174,603 shares will be designated
"Series C Preferred." Prior to the Series A Closing, 2,010,000 shares of Common
Stock were issued and outstanding and no shares of Preferred Stock will be
issued and outstanding. All outstanding shares have been duly authorized and
validly issued, are fully paid and nonassessable, were issued in compliance with
all federal and state securities laws, and were not issued in violation of any
preemptive rights. The Company has reserved 3,990,000 shares of its Common Stock
for issuance to employees, consultants, or directors under stock option plans,
stock purchase plans or arrangements approved by the Board of Directors. The
Series A Preferred, Series B Preferred and Series C Preferred shall have the
rights, preferences, privileges and restrictions set forth in the Restated
Certificate. Except as set forth above, there are no other authorized or
outstanding subscription, warrant, option or other rights or rights or
commitments (including, without limitation, preemptive rights or rights of first
refusal) to purchase or acquire from the Company any shares of any class of
capital stock of the Company or securities convertible into or exchangeable for
such capital stock. The Company is under no duty to redeem or to repurchase any
shares of any class or series of stock.
4
<PAGE> 5
3.5 AUTHORIZATION. All corporate action on the part of the Company, its
directors and stockholders necessary for the authorization, execution, delivery
and performance of this Agreement, the Stockholders Agreement and the Rights
Agreement by the Company, the authorization, sale, issuance and delivery of the
Series A Shares, the Series B Shares or the Series C Shares, as the case may be,
and the Conversion Shares and the performance of all of the Company's
obligations hereunder and thereunder has been taken or will be taken prior to
the Closings, as applicable. Each of this Agreement, the Stockholders Agreement
and the Rights Agreement, when each is executed and delivered by the Company,
shall constitute a valid and binding obligation of the Company, enforceable in
accordance with its terms, except this Agreement, the Stockholders Agreement and
the Rights Agreement may be limited by principles of public policy, and subject
to laws of general application relating to bankruptcy, insolvency and the relief
of debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies. The Series A Shares, Series B Shares and Series C
Shares, as the case may be, when issued in compliance with the provisions of
this Agreement, will be validly issued, fully paid and nonassessable, and will
have the rights, preferences, privileges and restrictions described in the
Restated Certificate. The Conversion Shares have been duly and validly reserved
and, when issued in compliance with the provisions of this Agreement and the
Restated Certificate, as the case may be, will be validly issued, fully paid and
nonassessable. The issuance and delivery of the Series A Shares, Series B Shares
and Series C Shares, as the case may be, and the Conversion Shares, as
applicable, are not subject to any preemptive rights or any liens or
encumbrances; provided, however, that the Series A Shares, Series B Shares,
Series C Shares and the Conversion Shares, as applicable, may be subject to
restrictions on transfer under state and/or federal securities laws as set forth
herein or in the Rights Agreement or in the Stockholders Agreement attached
hereto as EXHIBIT E (the "Stockholders Agreement").
3.6 FINANCIAL STATEMENTS. Prior to any Series B and Series C Closing, the
Company shall furnish to each Purchaser its unaudited balance sheet and the
related statements of operations, stockholders' equity and cash flows for the
most recently ended quarter (the "Financial Statements"). The Financial
Statements shall be prepared in accordance with generally accepted accounting
principles (except for the omission of footnotes) and fairly present the
financial position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended. Except for liabilities and
obligations that are accrued or reserved against in the Financial Statements,
the Company will have no material liabilities or obligations, absolute or
contingent (individually or in the aggregate), except liabilities and
obligations which are incurred in the ordinary course of business subsequent to
the end of such quarter which have not been, either in any case or in the
aggregate, materially adverse.
3.7 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. The Company has good and
marketable title to its properties and assets, and has good title to all its
leasehold interests, in each case subject to no mortgage, lien, or encumbrance,
other than the lien of current taxes not yet due and payable. All leases
pursuant to which the Company leases real or personal property are valid and
effective in accordance with their respective terms, and there exists no
material default on the part of the Company under any thereof.
3.8 COMPLIANCE WITH OTHER INSTRUMENTS, NONE BURDENSOME, ETC. The Company
is not in breach or violation of any term of its Certificate of Incorporation or
By-Laws, of any term or provision of any mortgage, deed of trust, indebtedness,
indenture, contract, agreement, instrument,
5
<PAGE> 6
judgment or decree, or any order, statute, rule or regulation, in each case
where such breach or violation would have a material adverse effect on the
Company. No event or failure of performance has occurred that, with the passage
of time or the giving of notice, would constitute such a breach or violation by
the Company. The execution, delivery and performance of and compliance with this
Agreement, the Stockholders Agreement and the Rights Agreement and the issuance,
sale and delivery of the Series A Shares, Series B Shares, Series C Shares and
the Conversion Shares, do not conflict with, and will not result in a breach or
violation of the terms, conditions or provisions of, or constitute a default (or
an event that, with the giving of notice or passage of time, or both, could
result in a default) under, or result in the creation or imposition of any lien
pursuant to the terms of, the Company's Certificate of Incorporation or Bylaws,
or any statute, law, rule or regulation, any state or federal order, judgment or
decree, or any indenture, mortgage, deed of trust, lease or other agreement or
instrument to which the Company, or any of its properties, is subject.
3.9 LITIGATION, ETC. There is no action, proceeding or investigation
pending or threatened against the Company or any of its properties or assets or
that questions the validity of this Agreement, the Stockholders Agreement or the
Rights Agreement or any action taken or to be taken in connection herewith. The
foregoing includes, without limitation, actions pending or threatened involving
the prior employment of any of the Company's employees, their use in connection
with the Company's business of any information or techniques allegedly
proprietary to any of their former employers, or their obligations under any
agreements with prior employers. The Company is not a party or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality. No action, suit or proceeding has been
instituted or is threatened by the Company.
3.10 REGISTRATION RIGHTS. Except as set forth in the Rights Agreement, the
Company is not under any contractual obligation to register (as defined in
Section 1 of the Rights Agreement) any of its currently outstanding securities
or any of its securities which hereafter may be issued.
3.11 CERTAIN TRANSACTIONS. Neither the Company nor, to the Company's
knowledge, any of its officers or directors has any interest (other than as
holders of less than 1% of the voting securities of a publicly-traded company),
either directly or indirectly, in any entity that currently (i) provides any
services or designs, produces or sells any products or product lines that are
the same, similar to or competitive with any activity or business in which the
Company is engaged or proposes to engage; (ii) is a supplier, customer, or
creditor of the Company; or (iii) has any direct or indirect interest in any
asset or property, real or personal, tangible or intangible, of the Company or
any property, real or personal, tangible or intangible, that is necessary for
the Company's business as currently conducted or proposed to be conducted. No
employee, stockholder, officer or director of the Company, or their spouses or
children, is indebted to the Company in any amount in excess of $5,000, nor is
the Company indebted to any of them other than for payment of salary for
services rendered and reasonable expenses.
3.12 INTANGIBLE PROPERTY. The Company has taken all appropriate security
measures to protect the secrecy, confidentiality and value of all trade secrets,
know-how, inventions, designs, masks, processes and technical data required to
conduct its business. The Company has not received any communication alleging
that the Company has violated any third party's patent, maskwork right, moral
right, trademark, trade secret, trade name or copyright. The Company owns
6
<PAGE> 7
and possesses or has sufficient license to (or is able to obtain on reasonable
terms and terms not materially adverse to the financial condition of the Company
sufficient license to) all patents, patent applications, licenses, trademarks,
service marks, trade names, inventions, processes and copyrights necessary for
the operation of its business as currently conducted or proposed to be
conducted. None of the Company's officers or employees has improperly used or is
making improper use of any confidential information or trade secrets of others,
including those of any former employer of such officer or employee. The Company
is not aware of any violation by a third party of any of its patents, licenses,
trademarks, trade names, service marks, copyrights, trade secrets or other
proprietary rights.
3.13 EMPLOYEES. The Company does not have any collective bargaining
agreements with any of its employees, and no labor union organizing activity is
pending or threatened with respect to the Company. No employee is obligated
under any agreement or judgment that would conflict with such employee's
obligation to use his or her best efforts to promote the interests of the
Company or that would conflict with the Company's business as currently
conducted or proposed to be conducted. No employee is in violation of any term
of any employment agreement, proprietary information agreement, non-competition
agreement or any other agreement relating to such employee's relationship with
any previous employer. Neither the execution nor delivery of this Agreement, the
Stockholders Agreement or the Rights Agreement nor the carrying on of the
Company's business by the employees of the Company, nor the conduct of the
Company's business as proposed, will conflict with or result in a breach of the
terms, conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employee is now obligated. The
Company does not believe it is or will be necessary to utilize any inventions of
any of its employees (or people it currently intends to hire) made prior to
their employment by the Company. The Company is not a party to or bound by any
currently effective employment contract, deferred compensation agreement, bonus
plan, incentive plan, profit sharing plan, retirement agreement or other
employee compensation agreement, except as included in the Schedule of
Exceptions. The Company is not aware that any officer or key employee, or that
any group of key employees, intends to terminate their employment with the
Company, nor does the Company have a present intention to terminate the
employment of any of the foregoing. Subject to general principles related to
wrongful termination of employees, the employment of each officer and employee
of the Company is terminable at the will of the Company except as otherwise
provided in any employment contract listed in the Schedule of Exceptions.
3.14 INSURANCE. The Company has fire, casualty and liability insurance
policies sufficient in amount to allow it to replace any of its tangible
properties that might be damaged or destroyed and adequate to protect the
Company and its financial condition against the risks involved in the business
of the Company.
3.15 SECURITIES LAWS; GOVERNMENTAL CONSENT. Based in part on the accuracy
of the Purchaser' representations and warranties set forth in Section 4, the
offer, sale and issuance of the Shares as provided in this Agreement are and
will be exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933 as amended (the "Securities Act"), and have been
qualified (or are exempt from qualification) under all applicable state
securities qualification requirements. Except for the filing of (a) Restated
Certificate with the Secretary of State of the State of Delaware, and (b)
notices required or permitted to be filed after each Closing Date with certain
United States federal and state securities commissions, which notices the
Company will file
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on a timely basis, no consent, approval or authorization of, or designation,
declaration or filing with, any governmental authority on the part of the
Company is required in connection with the valid execution, delivery and
performance of this Agreement, the Stockholders Agreement, or the Rights
Agreement, the offer, sale or issuance of the Series A Shares, the Series B
Shares and the Series C Shares (and the issuance of the Common Stock issuable
upon conversion of the Shares), or the consummation of any other transaction
contemplated hereby or by the Rights Agreement.
3.16 CONTRACTS AND OTHER COMMITMENTS. The Company is not a party to any:
(a) agreement for the purchase of fixed assets that involves an
expenditure by the Company in excess of $10,000 or for the purchase of
materials, supplies or equipment in excess of that amount;
(b) lease or agreement under which the Company is lessee of or holds
or operates any property, real or personal, owned by any other person under
which payments to such person exceed $10,000 per year; or
(c) agreement or other commitment or arrangement with any person
continuing for a period of more than three months from each applicable Closing
Date which involves an expenditure or receipt by the Company in excess of
$10,000.
3.17 DISCLOSURE. The Company has fully provided each Purchaser with all the
information that such Purchaser has requested for deciding whether to purchase
the Series A Shares, Series B Shares and Series C Shares. This Agreement with
the Exhibits hereto, when taken as a whole, does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements contained herein not misleading.
3.18 ENVIRONMENTAL AND SAFETY LAWS. The Company is not in violation of any
applicable statute, law, or regulation relating to the environment or
occupational health and safety, and no material expenditures are or will be
required in order to comply with any such existing statute, law, or regulation.
3.19 MANUFACTURING AND MARKETING RIGHTS. The Company has not granted rights
to manufacture, produce, assemble, license, market, or sell its products to any
other person and is not bound by any agreement that affects the Company's
exclusive right to develop, manufacture, assemble, distribute, market, or sell
its products.
3.20 SECTION 83(b) ELECTIONS. To the best of the Company's knowledge, all
elections and notices required by Section 83(b) of the Internal Revenue Code and
any analogous provisions of applicable state tax laws have been timely filed by
all individuals who have purchased shares of the Company's Common Stock.
3.21 QUALIFIED SMALL BUSINESS STOCK. So long as the shares of Series A,
Series B or Series C Preferred Stock are held by a Purchaser (or a transferee)
in whose hands the Series A or Series B Shares are eligible to qualify as
"qualified small business stock" ("Small Business Stock"), within the meaning of
Section 1202(c) of the Internal Revenue Code of 1986, as amended (the "Code")),
(i) the Company will use its best efforts not to cause it to lose its status as
a "qualified small business" (provided it has such status), as defined in
Section 1202(d) of the Code;
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and (ii) the Company agrees not to repurchase any stock of the Company if such
repurchase would cause the shares of Series A, Series B or Series C Preferred
Stock not to be treated as Small Business Stock. Notwithstanding anything to the
contrary in this Section 3.20, the Company shall not be obligated to take any
action or refrain from taking any action which the Company has determined, in
good faith, is not in its best commercial interests.
3.22 PERMITS. The Company has all franchises, permits, licenses and any
similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company, and
believes it can obtain, without undue burden or expense, any similar authority
for the conduct of its business as presently planned to be conducted. The
Company is not in default in any material respect under any of such franchises,
permits, licenses or other similar authority.
3.23 NO FINANCIAL STATEMENT AND NEWLY INCORPORATED. The Company was
incorporated on October 15, 1997 (the "Inception Date"). Since the Inception
Date, the Company has not engaged in active operations and the Company does not
have any material assets or liabilities, except as disclosed on the Schedule of
Exceptions. Except as disclosed on the Schedule the Exceptions, the Company has
not entered into any agreements (written or verbal) with any third parties,
including employees and consultants. The Company has not prepared any financial
statements for the interim period from the Inception Date to the date of this
Agreement .
3.24 CHANGES. Since the Inception Date, there has not been, except as duly
approved by the Board of Directors:
(a) any damage, destruction or loss, whether or not covered by
insurance. materially and adversely affecting the business, properties,
prospects, assets, liabilities or financial condition of the Company (as such
business is presently conducted and as it is presently proposed to be
conducted);
(b) any waiver or compromise by the Company of a material right or of
material debt owed to it;
(c) any sale, assignment, or transfer by the Company of any patents,
trademarks, copyrights, trade secrets, or other intangible assets;
(d) except as disclosed on the Schedule of Exceptions, any
resignation or termination of employment of any key officer of the Company,
including but not limited to Charles E. Moran, and the Company, to the best of
its knowledge, does not know of the impending resignation or termination of
employment of any such officer;
(e) any material mortgage, pledge, transfer of a security interest
in, or lien, created by the Company with respect to any of its material
properties or assets, except liens for taxes not yet due or payable;
(f) any material loans or guarantees made by the Company to or for
the benefit of its employees, stockholders, officers, or directors, or any
members of their immediate families, other than travel advances and other
advances made in the ordinary course of its business;
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(g) any declaration, setting aside, or payment of any dividend or
other distribution of the Company's capital stock, or any material direct or
indirect redemption, purchase, or other acquisition of any of such stock by the
Company;
(h) any material adverse change in the business, property, assets,
liabilities, financial condition or results of operations of the Company, except
as disclosed on the Schedule of Exceptions;
(i) any change or changes that are individually or in the aggregate
material and not in the ordinary course of business in the contingent
obligations of the Company by way of guarantee, endorsement, indemnity, warranty
or otherwise;
(j) except as disclosed on the Schedule of Exceptions, any material
change in the compensation arrangement of any of the Company's employees,
officers or directors; or
(k) any other event or condition of any character that has materially
and adversely affected the business, properties, prospects, or financial
condition of the Company (as such business is presently conducted and as it is
presently proposed to be conducted).
3.25 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS. Each employee and
officer of the Company has executed a Proprietary Information and Inventions
Agreement substantially in the form or forms which are attached as Exhibit E and
have been delivered to the special counsels to the Purchasers. Each consultant
to the Company has executed a Consulting Agreement containing confidentiality
and assignment of inventions provisions similar to those included in the
Proprietary Information and Inventions Agreement.
3.26 TAX RETURNS, PAYMENTS, AND ELECTIONS. The Company has timely filed all
tax returns and reports (federal, state and local) as required by law. These
returns and reports are true and correct in all material respects. The Company
has paid all taxes and other assessments due, except those contested by it in
good faith. The Company has not elected pursuant to the Internal Revenue Code of
1986, as amended ("Code"), to be treated as an S corporation or a collapsible
corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has
it made any other elections pursuant to the Code (other than elections that
relate solely to methods of accounting, depreciation or amortization) that would
have a material effect on the business, properties, prospects or financial
condition of the Company. The Company has never had any tax deficiency proposed
or assessed against it and has not executed any waiver of any statute of
limitation son the assessment or collection of any tax or governmental charge.
None of the Company's federal income tax returns and none of its state income of
franchise tax or sales or use tax returns has ever been audited by governmental
authorities.
SECTION 4
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASERS
Each Purchaser hereby represents and warrants severally and not
jointly, and Warburg with respect to Section 4.8 hereby covenants to the Company
with respect to the purchase of the Series A Shares, Series B Shares and Series
C Shares as follows:
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4.1 INVESTMENT EXPERIENCE. It is aware of the Company's business affairs
and financial condition and has acquired sufficient information about the
Company to reach an informed and knowledgeable decision to acquire the Series A
Shares, Series B Shares, Series C Shares and the underlying Common Stock.
4.2 INVESTMENT INTENT. It is acquiring the Series A Shares, Series B
Shares, Series C Shares and the underlying Common Stock for investment only for
its own account, and not with the view to, or for resale in connection with, any
distribution thereof. It understands that the Series A Shares, Series B Shares
and Series C Shares to be purchased and the underlying Common Stock have not
been, and will not be, registered under the Securities Act by reason of a
specific exemption from the registration provisions of the Securities Act, the
availability of which depends upon, among other things, the bona fide nature of
the investment intent of the Purchaser as expressed herein.
4.3 RULE 144. It acknowledges that the Series A Shares, Series B Shares,
Series C Shares and the underlying Common Stock must be held indefinitely unless
subsequently registered under the Securities Act or unless an exemption from
such registration is available. It is aware of the provisions of Rule 144
promulgated under the Securities Act which permit limited resale of shares
purchased in a private placement subject to the satisfaction of certain
conditions, including, among other things, the existence of a public market for
the shares, the availability of certain current public information about the
Company, the resale occurring not less than one year after the security was last
held by the Company or an affiliate of the Company, the sale being effected
through a "broker's transaction" or in transactions directly with a "market
maker" and the number of shares being sold during any three-month period not
exceeding specified limitations.
4.4 NO PUBLIC MARKET. It understands that no public market now exists for
any of the securities issued by the Company, and that the Company has made no
assurances that a public market will ever exist for the Company's securities.
4.5 ACCESS TO DATA. It has had an opportunity to discuss the Company's
business, management and financial affairs with the Company's management and the
opportunity to review the Company's facilities. It has also had an opportunity
to ask questions of officers of the Company.
4.6 AUTHORIZATION. Each of this Agreement, the Rights Agreement and the
Stockholders Agreement when executed and delivered by the Purchaser will
constitute a valid and legally binding obligation of the Purchaser, enforceable
in accordance with its terms, except as the indemnification provisions of
Section 5.6 of the Rights Agreement may be limited by principles of public
policy, and subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of law governing specific
performance, injunctive relief or other equitable remedies.
4.7 LEGEND.
(a) Each certificate representing (i) the Series A Shares, Series B
and Series C Shares purchased hereunder, (ii) the Conversion Shares and (iii)
any other securities issued in respect of the Series A Shares, Series B Shares
or Series C Shares upon any stock split, stock
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dividend, recapitalization, merger or similar event (unless no longer required
in the opinion of counsel for the Company) shall be stamped or otherwise
imprinted with a legend substantially in the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED
FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE
OR DISTRIBUTION THEREOF. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION UNLESS THE COMPANY RECEIVES AN
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE
OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SAID ACT."
(b) Such certificates shall also bear any legend required by the
applicable laws of any state.
4.8 VOTING LIMITATIONS. Notwithstanding any provision of the Restated
Certificate, Warburg covenants that it shall only vote such number of shares of
Series A Preferred Stock, Series B Preferred, Series C Preferred Stock and Class
A Common Stock issuable upon conversion of the Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock as would equal up to 49.9% of the
Voting Shares (as defined in the Restated Certificate) then issued and
outstanding and shall abstain from voting any additional shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Class A
Common Stock issuable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock that it would otherwise be entitled
to vote under the Restated Certificate in excess of such 49.9% of the Voting
Shares.
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SECTION 5
CONDITIONS TO CLOSING
5.1 CONDITIONS TO BOTH THE PURCHASERS' AND THE COMPANY'S OBLIGATIONS. The
obligations of each Purchaser to purchase and of the Company to issue and sell
the Series A Shares, Series B Shares and Series C Shares are subject to the
fulfillment, on or prior to each Closing Date, of all of the following
conditions, any of which may be waived in whole or in part by mutual agreement
of the Purchasers and the Company:
(a) The Company shall have obtained all consents, permits and waivers
necessary or appropriate on the part of the Company for consummation of the
transactions contemplated by this Agreement, the Rights Agreement and the
Stockholders Agreement. Except for the notices required to be filed after each
Closing Date with certain federal and state securities commissions, which
notices the Company will file on a timely basis, the Company shall have obtained
all approvals of any federal or state governmental authority or regulatory body
that are required on the part of the Company in connection with the lawful sale
and issuance of the Series A Shares, Series B Shares, Series C Shares and the
Common Stock issuable upon conversion of the Series A Shares, Series B Shares
and Series C Shares.
(b) At each Closing, the purchase of the Series A Shares, Series B
Shares and Series C Shares by the Purchasers hereunder shall be legally
permitted by all laws and regulations to which the Purchasers or the Company is
subject.
(c) The Restated Certificate shall have been filed with the Secretary
of State of the State of Delaware.
(d) The Company and the Purchasers shall have entered into the Rights
Agreement.
(e) The Purchasers, the Company and the Existing Stockholders (as
defined in the Stockholder Agreement) shall have entered into the Stockholder
Agreement.
5.2 ADDITIONAL CONDITIONS TO THE PURCHASERS' OBLIGATIONS AT THE SERIES A
CLOSING. In addition to the conditions set forth in Section 5.1 hereof, the
Purchasers' obligation to purchase the Series A Shares is subject to the
fulfillment, on or prior to the Series A Closing Date, of all of the following
conditions (except as otherwise provided below), any of which may be waived in
whole or in part by the Purchasers:
(a) The representations and warranties made by the Company in Section
3 hereof shall be true and correct when made, and shall be true and correct on
the Series A Closing Date with the same force and effect as if they had been
made on and as of the same date.
(b) The Company shall have performed all obligations and conditions
herein required to be performed or observed by it on or prior to the Series A
Closing Date.
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(c) The Purchasers shall have received from Morrison & Foerster LLP,
counsel to the Company, an opinion letter addressed to them, dated the Series A
Closing Date and in substantially the form attached hereto as EXHIBIT F.
(d) The Company shall have delivered to the Purchasers a certificate,
executed by the President of the Company and dated the Series A Closing Date,
certifying to the fulfillment of the conditions specified in Sections 5.1(a),
5.2(a) and 5.2(b).
5.3 ADDITIONAL CONDITION TO OBLIGATIONS OF THE COMPANY AT THE SERIES A
CLOSING. In addition to the conditions set forth in Section 5.1 hereof, the
Company's obligation to issue and sell the Series A Shares to the Purchasers is
subject to the fulfillment to the Company's satisfaction, on or prior to the
Series A Closing Date, of the conditions, which may be waived in whole or in
part by the Company:
(a) The representations and warranties made by the Purchasers in
Section 4 hereof shall be true and correct when made, and shall be true and
correct on the Series A Closing Date with the same force and effect as if they
had been made on and as of the same date.
(b) The Purchasers shall have performed all obligations and
conditions herein required to be performed or observed by them on or prior to
the Series A Closing Date.
(c) The Purchasers shall have paid the consideration for the Series A
Shares to be sold to the Purchasers as set forth in Section 1.2 hereof.
5.4 ADDITIONAL CONDITIONS TO THE PURCHASERS' OBLIGATIONS AT THE SERIES B
CLOSINGS. In addition to the conditions set forth in Section 5.1 hereof, the
Purchasers' obligation to purchase the Series B Shares is subject to the
fulfillment, on or prior to each Series B Closing Date, of all of the following
conditions (except as otherwise provided below), any of which may be waived in
whole or in part by the Purchasers:
(a) The representations and warranties made by the Company in Section
3 hereof shall be true and correct when made, and shall be true and correct on
the subject Series B Closing Date with the same force and effect as if they had
been made on and as of the same date, subject to changes occurring in the normal
and ordinary course of the Company's business that are not materially adverse to
the Company, its financial position or prospects or as otherwise contemplated
herein.
(b) The Company shall have performed all obligations and conditions
herein required to be performed or observed by it on or prior to the subject
Series B Closing Date.
(c) The Company shall have delivered to the Purchasers a certificate,
executed by the President of the Company and dated the subject Series B Closing
Date, certifying to the fulfillment of the conditions specified in Sections
5.1(a), 5.4(a) and 5.4(b).
(d) The Purchasers shall have received from Morrison & Foerster LLP,
counsel to the Company, an opinion letter addressed to them, dated the Series B
Closing Date and in substantially the form attached hereto as EXHIBIT F.
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5.5 ADDITIONAL CONDITION TO OBLIGATIONS OF THE COMPANY AT SERIES B
CLOSINGS. In addition to the conditions set forth in Section 5.1 hereof, the
Company's obligation to issue and sell the Series B Shares to the Purchasers is
subject to the fulfillment to the Company's satisfaction, on or prior to each
Series B Closing Date, of the following conditions, which may be waived in whole
or in part by the Company:
(a) The representations and warranties made by the Purchasers in
Section 4 hereof shall be true and correct when made, and shall be true and
correct on the subject Series B Closing Date with the same force and effect as
if they had been made on and as of the same date.
(b) The Purchasers shall have performed all obligations and
conditions herein required to be performed or observed by them on or prior to
the subject Series B Closing Date.
(c) The Purchasers shall have paid the consideration for the Series B
Shares to be sold to the Purchasers as set forth in the subject Series B Notice
of Sale.
5.6 ADDITIONAL CONDITIONS TO THE PURCHASERS' OBLIGATIONS AT THE SERIES C
CLOSINGS. In addition to the conditions set forth in Section 5.1 hereof, the
Purchasers' obligation to purchase the Series C Shares is subject to the
fulfillment, on or prior to each Series C Closing Date, of all of the following
conditions (except as otherwise provided below), any of which may be waived in
whole or in part by the Purchasers:
(a) The representations and warranties made by the Company in Section
3 hereof shall be true and correct when made, and shall be true and correct on
the subject Series C Closing Date with the same force and effect as if they had
been made on and as of the same date, subject to changes occurring in the normal
and ordinary course of the Company's business that are not materially adverse to
the Company, its financial position or prospects or as otherwise contemplated
herein.
(b) The Company shall have performed all obligations and conditions
herein required to be performed or observed by it on or prior to the subject
Series C Closing Date.
(c) The Company shall have delivered to the Purchasers a certificate,
executed by the President of the Company and dated the subject Series C Closing
Date, certifying to the fulfillment of the conditions specified in Sections
5.1(a), 5.4(a) and 5.4(b).
(d) The Purchasers shall have received from Morrison & Foerster LLP,
counsel to the Company, an opinion letter addressed to them, dated the Series C
Closing Date and in substantially the form attached hereto as EXHIBIT F.
5.7 ADDITIONAL CONDITION TO OBLIGATIONS OF THE COMPANY AT SERIES C
CLOSINGS. In addition to the conditions set forth in Section 5.1 hereof, the
Company's obligation to issue and sell the Series C Shares to the Purchasers is
subject to the fulfillment to the Company's satisfaction, on or prior to each
Series C Closing Date, of the following conditions, which may be waived in whole
or in part by the Company:
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(a) The representations and warranties made by the Purchasers in
Section 4 hereof shall be true and correct when made, and shall be true and
correct on the subject Series C Closing Date with the same force and effect as
if they had been made on and as of the same date.
(b) The Purchasers shall have performed all obligations and
conditions herein required to be performed or observed by them on or prior to
the subject Series C Closing Date.
(c) The Purchasers shall have paid the consideration for the Series C
Shares to be sold to the Purchasers as set forth in the subject Series C Notice
of Sale.
SECTION 6
MISCELLANEOUS
6.1 GOVERNING LAW. This Agreement shall be governed in all respects by the
laws of the State of Delaware as such laws are applied to agreements between
Delaware residents entered into and to be performed entirely within Delaware.
6.2 SURVIVAL. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by any Purchasers and the
closing of the transactions contemplated hereby. All statements as to factual
matters contained in any certificate or other instrument delivered by or on
behalf of the Company pursuant hereto or in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder as of the date of such certificate or instrument.
6.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successor and assigns of the parties hereto.
6.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
Neither this Agreement nor any provision hereof may be amended, changed, waived,
discharged or terminated other than by a written instrument signed by the party
against who enforcement of any such amendment, change, waiver, discharge or
termination is sought. Any amendment or waiver effected in accordance with this
section shall be binding upon the holder of any securities purchased under this
Agreement at the time outstanding (including securities into which such
securities have been converted), each future holder of all such securities and
the Company.
6.5 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be effective upon receipt and shall be in writing and
may be delivered in person, by telecopy, electronic mail, express delivery
service or U.S. mail, in which event it may be mailed by first-class, certified
or registered, postage prepaid, addressed (a) if to Warburg, at 466 Lexington
Avenue, 11th Floor, New York, New York 10017, facsimile: (212) 878-9359,
Attention: Stewart Gross or at such other address as Warburg shall have
furnished the Company in writing, with a copy to Wilson, Sonsini, Goodrich &
Rosati Professional Corporation ("WSGR"), 650 Page Mill Road, Palo Alto, CA
94304; (b) if to Gartner, at 56 Topgallant Road, Stanford, Connecticut
06904-2212; (c) if to the Company, at 9 Chicadee Court, Bedford, New Hampshire
03110, or at
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such other address as the Company shall have furnished to the Purchasers in
writing, with a copy to Michael C. Phillips, Esq., Morrison & Foerster LLP, 755
Page Mill Road, Palo Alto, California 94304, facsimile (650) 494-0792.
6.6 SEVERABILITY. If any provision of this Agreement shall be judicially
determined to be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
6.7 FINDER'S FEES.
(a) The Company (i) represents and warrants that it has retained no
finder or broker in connection with the transactions contemplated by this
Agreement and (ii) hereby agrees to indemnify and to hold the Purchasers
harmless of and from any liability for commission or compensation in the nature
of a finder's fee to any broker or other person or firm (and the costs and
expenses of defending against such liability or asserted liability) for which
the Company, or any of its employees or representatives, is responsible.
(b) Each Purchaser (i) represents and warrants that it has retained
no finder or broker in connection with the transactions contemplated by this
Agreement and (ii) hereby agrees to indemnify and to hold the Company harmless
of and from any liability for commission or compensation in the nature of a
finder's fee to any broker or other person or firm (and the costs and expenses
of defending against such liability or asserted liability) for which such
Purchaser, or any of its employees or representatives, is responsible.
6.8 TITLES AND SUBTITLES. The titles of the Restated Certificate and
Sections of this Agreement are for convenience of reference only and in no way
define, limit, extend, or describe the scope of this Agreement or the intent of
any of its provisions.
6.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
6.10 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party upon any breach or
default of any other party under this Agreement shall impair any such right,
power or remedy, nor shall it be construed to be a waiver of any such breach or
default, or any acquiescence therein, or of any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. It is further agreed that any waiver, permit, consent or approval of
any kind or character of any breach or default under this Agreement, or any
waiver of any provisions or conditions of this Agreement must be in writing and
shall be effective only to the extent specifically set forth in writing, and
that all remedies, either under this Agreement, by law or otherwise, shall be
cumulative and not alternative.
6.11 CONSENTS. Any permission, consent, or approval of any kind or
character under this Agreement shall be in writing or detrimentally relied upon
and proved by clear and convincing evidence (other than alleged reliance) and
shall be effective only to the extent specifically set forth in such writing or
proved.
17
<PAGE> 18
6.12 PAYMENT OF FEES AND EXPENSES. Each party shall be responsible for
paying its own fees, costs and expenses in connection with this Agreement and
the transactions herein contemplated; provided however, that if the Series A
Closing is effected, the Company agrees to pay the reasonable fees and expenses
of special counsel to the Warburg in an amount not to exceed $20,000.
6.13 CONSTRUCTION OF AGREEMENT. No provision of this Agreement shall be
construed against either party as the drafter thereof.
6.14 SECTION REFERENCES. Unless otherwise stated, any reference contained
herein to a Section or subsection refers to the provisions of this Agreement.
6.15 VARIATIONS OF PRONOUNS. All pronouns and all variations thereof shall
be deemed to refer to the masculine, feminine, or neuter, singular or plural, as
the context in which they are used may require.
6.16 EXHIBITS. All Exhibits and attachments hereto shall be deemed to be a
part of this Agreement and are fully incorporated herein by this reference.
18
<PAGE> 19
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
Number Aggregate
Purchaser of Shares Consideration
--------- --------- -------------
<S> <C> <C> <C>
SERIES A Warburg, Pincus Ventures, L.P. 3,600,000 $6,300,000.00
CLOSING G-Fund L.L.C. 400,000 700,000.00
--------- -------------
TOTAL 4,000,000 $7,000,000.00
SERIES B Warburg, Pincus Ventures, L.P. 2,571,429 $5,400,000.90
CLOSING G-Fund L.L.C. 285,714 599,999.40
--------- -------------
TOTAL 2,857,143 $6,000,000.30
SERIES C Warburg, Pincus Ventures, L.P. 2,857,143 $9,000,000.40
CLOSING G-Fund L.L.C. 317,460 999,999.00
--------- -------------
TOTAL 3,174,603 $9,999,999.40
</TABLE>
19
<PAGE> 20
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first written above.
"COMPANY" "PURCHASERS"
SkillSoft Corporation, Warburg, Pincus Ventures, L.P.
a Delaware corporation
By: Warburg, Pincus & Co.
Its: General Partner
By: /s/ Charles E. Moran By: /s/ Stewart Gross
---------------------------------- ----------------------------
Title: President and Chief Executive Title: Partner
Officer
-------------------------------
G-Fund L.L.C.
a Delaware limited liability
company
By: /s/ [illegible]
----------------------------
Title: Manager
-------------------------
20
<PAGE> 1
Exhibit 23.02
Consent of Independent Public Accountants
As Independent Public Accountants, we hereby consent to the use of our
Report (and to all references to our Firm) included in or made a part of this
Amendment No. 5 to S-1 Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 28, 2000
