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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from ________ to ________
Commission File Number: 0-25674
CBT GROUP PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
Republic of Ireland Not Applicable
------------------- --------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1005 HAMILTON COURT
MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices, including zip code)
(650) 614-5900
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [_]
The number of American Depositary Shares (issued or issuable in exchange for
Registrant's issued and outstanding Ordinary Shares) outstanding as of October
31, 1997 was 19,649,652. The number of Ordinary Shares outstanding as of October
31, 1997 was 9,824,826.
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CBT GROUP PUBLIC LIMITED COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1996 3
and as of September 30, 1997
Condensed Consolidated Statements of Operations for the three 4
and nine month periods ended September 30, 1996 and 1997
Condensed Consolidated Statements of Cash Flows for the nine 5
month periods ended September 30, 1996 and 1997
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
PART II. OTHER INFORMATION
Item 2(c) Changes in Securities - Sales of Unregistered Securities 15
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
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CBT GROUP PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------- ---------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $11,356 $ 21,787
Short-term investments 36,782 37,979
Accounts receivable, net 20,883 28,885
Inventories 302 477
Deferred tax assets, net 140 140
Prepaid expenses 3,986 3,939
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Total current assets 73,449 93,207
Property and equipment, net 6,990 8,277
Investment 4,997 5,197
Deferred tax asset 428 381
Other assets 2,798 6,577
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Total assets 88,662 113,639
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Borrowings under bank overdraft facility and overdrafts 152 14
Accounts payable 3,433 3,938
Accrued payroll and related expenses 3,301 3,860
Other accrued liabilities 12,448 14,140
Deferred revenues 6,993 4,594
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Total current liabilities 26,327 26,546
NON-CURRENT LIABILITIES
Borrowings under bank loan facility 794 -
Accrued payroll and related expenses 143 142
Other accrued liabilities - 461
Deferred tax liability 112 112
Minority equity interest 16 622
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Total non-current liabilities 1,065 1,337
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SHAREHOLDERS' EQUITY
Ordinary Shares, IR37.5p par value: 30,000,000 shares authorized at
December 31, 1996 and September 30, 1997; issued and outstanding:
9,043,943 shares at December 31, 1996 and 9,663,632 at September 30, 1997
5,511 5,916
Additional paid-in capital 58,287 68,460
Accumulated (deficit) surplus (2,809) 11,025
Cumulative translation adjustment 281 355
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Total shareholders' equity 61,270 85,756
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Total liabilities and shareholders' equity 88,662 113,639
======= ========
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1996 has been
derived from the audited financial statements at that date and has been restated
to reflect the acquisitions of ALA, Benelux and Scholars.com (each as defined in
the Notes below). In addition, the balance sheet does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
3
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CBT GROUP PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
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Ended September 30 Ended September 30
------------------ ------------------
1996 1997 1996 1997
---------------- ---------------- ---------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues $19,007 $30,412 $50,566 $78,516
Cost of revenues 3,200 4,862 9,160 13,011
------- ------- ------- -------
Gross profit 15,807 25,550 41,406 65,505
Operating expenses:
Research and development 2,932 4,941 7,974 12,911
Sales and marketing 7,755 11,881 21,463 31,462
General and administrative 1,513 1,984 4,134 5,462
Costs of acquisitions - 242 596 1,168
------- ------- ------- -------
Total operating expenses 12,200 19,048 34,167 51,003
------- ------- ------- -------
Income from operations 3,607 6,502 7,239 14,502
Other income, net 571 680 1,576 1,773
------- ------- ------- -------
Income before provision for income taxes 4,178 7,182 8,815 16,275
Provision for income taxes (731) (1,077) (1,546) (2,441)
------- ------- ------- -------
Net income 3,447 6,105 7,269 13,834
======= ======= ======= =======
Net income per equivalent ADS(1) $ 0.17 $ 0.29 $ 0.37 $ 0.67
======= ======= ======= =======
Shares used in computing net income per 20,088 21,003 19,845 20,686
equivalent ADS(1) ======= ======= ======= =======
</TABLE>
___________________________________________________
(1) Net income per equivalent ADS gives effect to the two-for-one share split
of the Registrant's ADSs effected in May 1996. Net income per Ordinary
Share was $0.34 and $0.58 for three months ended September 30, 1996 and
1997, respectively and $0.73 and $1.34 for the nine months ended September
30, 1996 and 1997, respectively. Shares used in computing net income per
Ordinary Share were 10.044 million and 10.502 million for three months
ended September 30, 1996 and 1997, respectively and 9.923 million and
10.343 million for the nine months ended September 30, 1996 and 1997,
respectively.
4
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CBT GROUP PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1997
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(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,269 $13,834
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 850 2,703
Accrued interest on short-term investments 134 193
Changes in operating assets and liabilities:
Accounts receivable (1,838) (8,395)
Inventories 226 (214)
Deferred tax assets 27 -
Prepaid expenses and other assets (2,879) (3,808)
Accounts payable 639 631
Accrued payroll and related expenses and other accrued liabilities 1,847 3,053
Deferred revenues (793) (2,194)
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Net cash provided by operating activities 5,482 5,803
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (4,106) (3,990)
Payments to acquire short-term investments (1,311) (1,390)
Payment to acquire investment - (200)
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Net cash used in investing activities (5,417) (5,580)
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CASH FLOWS FROM FINANCING ACTIVITIES
Payments of notes payable (79) -
Repayment of bank loans - (794)
Repayments under bank overdraft facility (1,346) (138)
Proceeds receivable from shareholders 11 -
Proceeds from issuance of preferred shares in subsidiary - 605
Proceeds from issuance of ordinary shares, net 986 10,578
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Net cash provided by (used in) financing activities (428) 10,251
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Effect of exchange rate changes on cash 36 (43)
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Net increase (decrease) in cash (327) 10,431
Cash at beginning of period 7,142 11,356
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Cash at end of period $ 6,815 $21,787
======= =======
</TABLE>
5
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CBT GROUP PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 INTERIM CONSOLIDATED FINANCIAL STATEMENTS
These interim consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals),
considered necessary for a fair presentation of financial position, results of
operations and cash flows at the dates and for the periods presented have been
included. The interim financial information herein is not necessarily
indicative of results for any future period.
NOTE 2 ACQUISITION OF BEN WATSON ASSOCIATES LTD.
On August 31, 1997, CBT Group PLC ("CBT," or the "Company") completed the
acquisition of Ben Watson Associates Ltd., a New Brunswick, Canada corporation
carrying on business under the registered business name scholars.com
("Scholars"). Scholars is a provider of online IT certification training.
The Company issued a total of 9,408 Ordinary Shares to the sole shareholder of
Scholars in connection with the acquisition. The transaction is being
accounted for as a "pooling of interests" in accordance with U.S. generally
accepted accounting principles.
NOTE 3 ACQUISITIONS OF ALA AND BENELUX
On February 28, 1997, the Company completed the acquisitions of Applied
Learning Limited, a company organized under the laws of Tasmania, Australia
("ALA") and CBT Systems Benelux B.V., a Netherlands limited liability company
("Benelux"). ALA was an Australian distributor of interactive education
software and had been CBT's exclusive distributor in Australia and New
Zealand, and Benelux had been the Company's exclusive distributor in the
Netherlands, Belgium, and Luxembourg.
The Company issued a total of 207,222 equivalent ADSs to the former
shareholders of ALA and Benelux in connection with the acquisitions. Each
transaction is being accounted for as a "pooling of interests" in accordance
with U.S. generally accepted accounting principles.
NOTE 4 AMERICAN DEPOSITARY SHARE SPLIT
On May 15, 1996, the Company effected a two-for-one split of its issued and
outstanding ADSs whereby each issued and outstanding ADS is now represented by
one-half of one Ordinary Share and each issued and outstanding Ordinary Share
that is deposited with The Bank of New York, as Depositary, will be
represented by two ADSs. American Depositary Receipts ("ADRs") reflecting the
additional ADSs were distributed on May 20, 1996 to holders of record on May
15, 1996.
NOTE 5 EARNINGS PER EQUIVALENT ADS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact of such
requirements is expected to result in a restated primary earnings per share
for the three month periods ended September 30, 1996 and 1997 of $0.19 and
$0.32 per equivalent ADS, respectively, and for the nine month periods ended
September 30, 1996 and 1997 of $0.41 and $0.73 per equivalent ADS,
respectively.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS
The following discussion contains forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Predictions of future events are
inherently uncertain. Actual events could differ materially from those
predicted in the forward looking statements as a result of the risks set forth
in the following discussion, and in particular, the risks discussed below under
the caption "Additional Risk Factors that Could Affect Operating Results."
OVERVIEW
CBT Group PLC ("CBT," or the "Company") is a leading provider of interactive
software designed to meet the information technology ("IT") education and
training needs of businesses and organizations worldwide. The Company develops,
publishes and markets a broad library of more than 494 software titles covering
a comprehensive range of client/server, Internet and corporate intranet
technologies and are delivered on networked and standalone PCs and over
corporate intranets.
The Company derives revenues primarily from license agreements under which
customers license the Company's titles for periods of one, two or three years.
The license agreement format generally allows the customer to exchange titles
for other titles in the Company's library on an annual basis if the agreement is
for more than one year. The initial annual license fee is generally recognized
as revenue at the time of delivery of products, and subsequent annual license
fees are generally recognized on the anniversary of each delivery date.
Although in general the Company's license agreements are noncancellable by their
terms, there can be no assurance that any customer will fulfill the contractual
obligations under its agreement. Cancellation, reduction or delay in orders by
or shipments to any of these customers could have a material adverse effect on
the Company's business and results of operations. In addition, the Company
derives revenues from sales of its courses, primarily through its direct sales
and telesales organizations and resellers.
In recent years, the Company has entered into several development and marketing
alliances with key vendors of client/server software under which the Company
develops titles for training on specific products. Under certain of its
development and marketing alliances, the Company's partners have agreed to fund
certain product development costs. The Company recognizes such funding as
revenues on a percentage of completion basis, and the costs associated with such
revenues are reflected as cost of revenues. These agreements have the effect of
shifting expenses associated with developing certain new products from research
and development to cost of revenues. The Company expects that cost of revenues
may fluctuate from period to period in the future based upon many factors,
including, but not limited to, the timing of expenses associated with
development and marketing alliances.
RECENT DEVELOPMENTS
Acquisition of Scholars
- -----------------------
On August 31, 1997, CBT completed the acquisition of Ben Watson Associates Ltd.,
a New Brunswick, Canada corporation carrying on business under the registered
business name scholars.com ("Scholars"). Scholars is a provider of online
certification training. The Company issued a total of 9,408 Ordinary Shares to
the sole shareholder of Scholars in connection with the
7
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acquisition. The transaction is being accounted for as a "pooling of interests"
in accordance with U.S. generally accepted accounting principles.
Acquisitions of ALA and Benelux
- -------------------------------
On February 28, 1997, CBT completed the acquisition of Applied Learning Limited,
a company organized under the laws of Tasmania, Australia ("ALA"). ALA is an
Australian distributor of interactive education software and had been CBT's
exclusive distributor in Australia and New Zealand. Approximately half of ALA's
revenue for the year ended December 31, 1996 was attributable to sales of
products supplied by National Education Training Group ("NETG"), a division of
National Education Corporation, a competitor of the Company.
Earlier this year, the Company and ALA received correspondence from NETG
threatening legal action with respect to matters related to the acquisition and
the alleged breach by ALA of a distributorship agreement between ALA and NETG.
The parties have settled their dispute. As part of the settlement, CBT will
cease distribution of NETG products as of December 31, 1997, and revenues
attributable to sales of NETG products will therefore reduce to zero effective
January 1, 1998.
CBT evaluated the proposed acquisition of ALA on the assumption that NETG might
seek to terminate its business relationship with ALA following the acquisition
and that revenue attributable to sales of NETG products might therefore not
continue in future periods. CBT's management concluded that even if such event
were to occur, the acquisition continued to be in the best interests of the
Company.
On February 28, 1997, CBT completed the acquisition of CBT Systems Benelux B.V.,
a Netherlands limited liability company ("Benelux"). Benelux had been the
Company's exclusive distributor in the Netherlands, Belgium, and Luxembourg.
The Company issued a total of 207,222 equivalent ADSs to the former shareholders
of ALA and Benelux in connection with the acquisitions. Each transaction is
being accounted for as a "pooling of interests" in accordance with U.S.
generally accepted accounting principles.
8
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RESULTS OF OPERATIONS
The following table sets forth certain restated consolidated statements of
operations data as a percentage of revenues:
<TABLE>
<CAPTION>
Three Months Nine Months
------------ -----------
Ended September 30 Ended September 30
------------------ ------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Cost of revenues 16.8 16.0 18.1 16.6
---- ---- ---- ----
Gross profit 83.2 84.0 81.9 83.4
Operating expenses:
Research and development 15.4 16.2 15.8 16.4
Sales and marketing 40.8 39.1 42.4 40.1
General and administrative 8.0 6.5 8.2 7.0
Costs of acquisitions -- 0.8 1.2 1.5
---- ---- ---- ----
Total operating expenses 64.2 62.6 67.6 65.0
---- ---- ---- ----
Income from operations 19.0 21.4 14.3 18.4
Other income, net 3.0 2.2 3.1 2.3
---- ---- ---- ----
Income before provision for income taxes 22.0 23.6 17.4 20.7
Provision for income taxes 3.9 3.5 3.0 3.1
---- ---- ---- ----
Net income 18.1% 20.1% 14.4% 17.6%
==== ==== ==== ====
</TABLE>
Revenues
Revenues increased 60% to $30.4 million in the three months ended September 30,
1997 from $19.0 million in the three months ended September 30, 1996, and 55% to
$78.5 million in the nine months ended September 30, 1997 from $50.6 million in
the nine months ended September 30, 1996. The increases in revenues during
these periods were primarily attributable to an increase in the number of
available courses, strong customer contract renewals and upgrades and expanded
marketing and distribution efforts.
Revenues in the United States for the three and nine month periods ended
September 30, 1997 increased to $21.4 million (or 70% of revenues) and $56.6
million (or 72% of revenues), respectively, from $12.3 million (or 65% of
revenues) and $33.6 million (or 66% of revenues) for the three and nine month
periods ended September 30, 1996, respectively. These increases were primarily
the result of a significant increase in the number of sales and related
personnel employed in the United States, an increase in the number of available
courses and an expansion of the Company's customer base. The increases in U.S.
revenues as a percentage of total revenues are primarily attributable to the
inclusion in the 1996 periods of substantial revenues from ALA attributable to
sales of competitive NETG products, which reduced significantly in the 1997
periods, resulting in a lower consolidated percentage growth rate
internationally than in the United States.
Revenues in Europe for the three and nine month periods ended September 30, 1997
were $5.0 million (or 16% of revenues) and $12.6 million (or 16% of revenues),
respectively, compared to $3.8 million (or 20% of revenues) and $9.5 million (or
19% of revenues) for the same periods in
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1996. Revenues from outside the United States and Europe (principally from
Australia and Canada) in the three and nine month periods ended September 30,
1997 were 14% and 12%, respectively, compared to 15% and 15% for the same
periods in 1996. Because a significant portion of the Company's business is
conducted outside the United States, the Company is subject to numerous risks of
doing business in other countries, including risks related to currency
fluctuations.
Cost of Revenues
Cost of revenues includes the cost of materials (such as CD-ROMs, diskettes,
packaging and documentation), royalties to third parties, the portion of
development costs associated with funded development projects and fulfillment
costs.
Gross margins increased to 84.0% and 83.4% in the three and nine month periods
ended September 30, 1997, respectively, from 83.2% and 81.9% in the three and
nine month periods ended September 30, 1996, respectively. The lower gross
margins during the three and nine month periods ended September 30, 1996 were
primarily due to the restatement of these periods for the acquisition of ALA,
whose royalty payments to third party providers during such periods were higher
than the average royalty payments paid by CBT. The Company expects that cost of
revenues may fluctuate from period to period in the future based upon many
factors, including the mix of titles licensed (between titles developed
exclusively by CBT and royalty-bearing titles developed pursuant to development
and marketing alliances) and the timing of expenses associated with development
and marketing alliances.
Research and Development Expenses
Research and development expenses consist primarily of salaries and benefits,
occupancy expenses, travel expenses and fees paid to outside consultants.
Research and development expenses increased in the three and nine month periods
ended September 30, 1997 to $4.9 million (or 16.2% of revenues) and $12.9
million (or 16.4% of revenues), respectively, from $2.9 million (or 15.4% of
revenues) and $7.9 million (or 15.8% of revenues) in the comparable periods of
the prior year. These increases are primarily the result of the hiring of
additional research and development personnel required to expand and enhance the
Company's library of software products and the development of CBT Campus, the
Company's next-generation education deployment and management system. The
Company believes that significant investment in research and development is
required to remain competitive in the information technology education and
training market, and the Company therefore expects research and development
expenses to continue to increase in absolute terms in future periods.
Software development costs are accounted for in accordance with Financial
Accounting Standards Board Statement No. 86, under which the Company is required
to capitalize software development costs after technological feasibility has
been established. To date, development costs after establishment of
technological feasibility have been immaterial, and all software development
costs have been expensed.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries and commissions,
advertising and promotional expenses and related overhead costs. These expenses
increased in absolute terms in the three and nine month periods ended September
30, 1997 to $11.9 million (or 39.1% of revenues) and $31.5 million (or 40.1% of
revenues), respectively, from $7.8 million (or 40.8% of revenues) and $21.5
million (or 42.4% of revenues) for the comparable periods of the prior year.
The increases in absolute terms were primarily attributable to an increase in
the number of sales
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and sales related personnel in the United States and, to a lesser extent,
outside the United States. Commission costs have also increased in absolute
terms along with the increase in revenues during these periods. The decreases in
sales and marketing expenses as a percentage of revenues during these periods
were due primarily to more rapid increases in revenues than in associated
expenses. The Company expects to increase sales and marketing expenses in the
future to support an increase in its sales force and expansion of its marketing
efforts.
General and Administrative Expenses
General and administrative expenses increased in absolute terms and declined as
a percentage of revenues in the three and nine month periods ended September 30,
1997 to $2.0 million (or 6.5% of revenues) and $5.5 million (or 7.0% of
revenues), respectively, from $1.5 million (or 8.0% of revenues) and $4.1
million (or 8.2% of revenues) for the comparable periods of the prior year. The
increases in absolute terms were primarily the result of increased staffing to
support expanding operations. The decreases as a percentage of revenues were
principally due to more rapid increases in revenues than in associated expenses.
The Company anticipates that general and administrative expenses will increase
in future periods due to increases in staffing and infrastructure.
Other Income, Net
Other income, net, comprises interest expense, interest income and foreign
currency exchange gains and losses. The Company recognized other income, net,
of $680,000 and $1.8 million in the three and nine month periods ended September
30, 1997, respectively, as compared to other income, net, of $571,000 and $1.6
million for the comparable periods of the prior year. The increases in other
income during such periods were primarily attributable to interest on cash and
short-term investments.
The Company's consolidated financial statements are prepared in dollars,
although several of the Company's subsidiaries have functional currencies other
than the dollar, and a significant portion of the Company's and its
subsidiaries' revenues, costs and assets are denominated in currencies other
than their respective functional currencies. Fluctuations in exchange rates may
have a material adverse effect on the Company's results of operations,
particularly its operating margins, and could result in exchange losses. The
impact of future exchange rate fluctuations on the Company's results of
operations cannot be accurately predicted. To date, the Company has not sought
to hedge the risks associated with fluctuations in the exchange rate, but may
undertake certain transactions to hedge specific currency risks in the future.
There can be no assurance that any hedging techniques implemented by the Company
would be successful in eliminating or reducing the effects of currency
fluctuations.
Provision for Income Taxes
CBT Group PLC operates as a holding company with operating subsidiaries in
several countries, and each subsidiary is taxed based on the laws of the
jurisdiction in which it operates. Because taxes are incurred at the subsidiary
level, and one subsidiary's tax losses cannot be used to offset the taxable
income of subsidiaries in other tax jurisdictions, the Company's consolidated
effective tax rate may increase to the extent that the Company reports tax
losses in some subsidiaries and taxable income in others.
The Company has significant operations and generates a majority of its taxable
income in the Republic of Ireland, and certain of the Company's Irish operating
subsidiaries are taxed at rates substantially lower than U.S. tax rates. The
Company's largest Irish subsidiary currently qualifies for a 10% tax rate which,
under current legislation, is in force until 2010, and another
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Irish subsidiary is income tax exempt. If such subsidiaries were no longer to
qualify for such tax rates or if the tax laws were rescinded or changed, the
Company's operating results could be materially adversely affected. Moreover,
because the Company incurs income tax in several countries, an increase in the
profitability of the Company in one or more of these countries could result in a
higher overall tax rate. In addition, if tax authorities were to challenge
successfully the manner in which profits are recognized among the Company's
subsidiaries, the Company's taxes could increase and its cash flow and net
income could be materially adversely affected.
The effective tax rates for the three and nine month periods ended September 30,
1997 were 15.0% and 15.0%, compared to 17.5% and 17.5% for the same periods in
1996. The higher tax rates for the three and nine month periods ended September
30, 1996 were primarily the result of losses incurred by the Company's German
subsidiary and Benelux, which losses were not available to offset taxable income
earned in other jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments of $59.8 million at September 30, 1997 increased
from $48.1 million at December 31, 1996. Working capital increased to $66.7
million at September 30, 1997 from $47.1 million at December 31, 1996. The
increases in cash and short-term investments and working capital were primarily
the result of increased net income and receipts from the issuance of shares upon
exercise of employee share options, which were partially offset by the repayment
of bank loans and expenditures for property and equipment to support the
Company's expanded operations.
Net cash provided by operating activities was $5.8 million in the nine months
ended September 30, 1997 compared to net cash provided by operating activities
of $5.5 million for the comparable period of the prior year. The increase was
primarily the result of increases in accounts receivable, prepaid commissions
and decreased deferred revenues, which were partially offset by increases in
accrued liabilities.
Capital expenditures were $4.0 million in the nine months ended September 30,
1997 compared to $4.1 million for the comparable period of the prior year. The
decrease was primarily attributable to the completion of the Company's new
fulfillment and development centers in Dublin and the relatively higher capital
expenditures in the 1996 period due to the relocation of the Company's U.S.
corporate headquarters to Menlo Park, California in the first half of 1996.
Although the Company currently has no material capital commitments, the Company
expects to spend significantly more in 1997 than in previous years, primarily as
a result of improvements to its information systems and capital expenditures
associated with its new research and development and fulfillment facilities in
Dublin, Ireland. The Company expects to make significant additional investments
in these areas during the remainder of 1997 and in 1998. In addition, growth in
the Company's headquarters staff and the staff at the Dublin development center
will require significant additional space in both locations, including potential
relocation of both offices, which would likely result in significant incremental
expenses and cash expenditures.
The Company believes that its existing cash and short-term investments will be
sufficient to meet its cash requirements for at least the next twelve months.
The Company from time to time considers the acquisition of complementary
businesses, products or technologies, which may require additional financing.
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS
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In addition to the other factors identified in this report, the following risk
factors could materially and adversely affect the Company's future operating
results and could cause actual events to differ materially from those predicted
in the Company's forward looking statements relating to its business.
Fluctuations in Operating Results. The Company has in the past experienced
fluctuations in its quarterly operating results and anticipates that such
fluctuations will continue and could intensify in the future. Fluctuations in
operating results may result in volatility in the price of the Company's ADSs.
Although the Company was profitable in each of the last fifteen quarters, there
can be no assurance that such profitability will continue in the future or that
the levels of profitability will not vary significantly among quarterly periods.
The Company's operating results may fluctuate as a result of many factors,
including size and timing of orders and shipments, mix of sales between products
developed solely by the Company and products developed through development and
marketing alliances, royalty rates, the announcement, introduction and
acceptance of new products, product enhancements and technologies by the Company
and its competitors, mix of sales between the Company's field sales force, its
other direct sales channels and its indirect sales channels, competitive
conditions in the industry, loss of significant customers, delays in
availability of existing or new products, spending patterns of the Company's
customers, currency fluctuations and general economic conditions.
The Company's expense levels are based in significant part on its expectations
regarding future revenues and are fixed to a large extent in the short term.
Accordingly, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Any significant revenue
shortfall would therefore have a material adverse effect on the Company's
results of operations. In addition, the Company hired additional employees in
the first nine months of 1997. This increase in employee expense could have a
negative impact on the Company's operating margins during 1997.
Competition. The IT education and training market is highly fragmented and
competitive, and the Company expects this competition to increase. The Company
expects that because of the lack of significant barriers to entry into this
market, new competitors may enter the market in the future. In addition, larger
companies are competing with the Company in the IT education and training
market, in part through the acquisition of the Company's competitors, and the
Company expects this trend to continue. Such competitors may also include
publishing companies and vendors of application software, including those
vendors with whom the Company has formed development and marketing alliances.
The Company competes primarily with third-party suppliers of instructor-led IT
education and training and internal training departments and with other
suppliers of IT education and training, including several other companies that
produce interactive software training. To a lesser extent, the Company also
competes with consultants, value-added resellers and network integrators.
Certain of these value-added resellers also market products competitive with
those of the Company. The Company expects that as organizations increase their
dependence on outside suppliers of training, the Company will face increasing
competition from these other suppliers as IT education and training managers
more frequently compare training products provided by outside suppliers.
Many of the Company's current and potential competitors have substantially
greater financial, technical, sales, marketing and other resources, as well as
greater name recognition, than the Company. In addition, the IT education and
training market is characterized by significant price competition, and the
Company expects that it will face increasing price pressures from
13
<PAGE>
competitors as IS managers demand more value for their training budgets.
Accordingly, there can be no assurance that the Company will be able to provide
products that compare favorably with new instructor-led techniques or other
interactive training software or that competitive pressures will not require the
Company to reduce its prices significantly.
Developing Market. The market for IT education and training is rapidly evolving.
New methods of delivering interactive education software are being developed and
offered in the marketplace, including intranet and Internet deployment and
management systems. Many of these new delivery and training management systems
will involve new and different business models and contracting mechanisms. In
addition, multimedia and other product functionality features are being added to
the educational software. Accordingly, CBT's future success will depend upon,
among other factors, the extent to which CBT is able to develop and implement
products which address these emerging market requirements. There can be no
assurance that CBT will be successful in meeting changing market needs. In
particular, CBT has announced and will ship in 1997 its next generation
education deployment and management system, CBT Campus. If CBT Campus were to
fail to secure market acceptance, sales of CBT courseware, and CBT's operating
results, could be materially adversely affected. There can be no assurance that
CBT will successfully launch CBT Campus.
Seasonality. The software industry generally, and the Company in particular,
are subject to seasonal revenue fluctuations, based in part on customers' annual
budgetary cycles and in part on the annual nature of sales quotas. These
seasonal trends have in the past caused, and in the future are expected to
continue to cause, revenues in the first quarter of a year to be less, perhaps
substantially so, than revenues for the immediately preceding fourth quarter.
In addition, the Company has in past years added significant headcount in the
sales and marketing and research and development functions in the first quarter,
and to a lesser extent, the second quarter. Because these headcount additions
do not immediately contribute significant revenues, the Company's operating
margins in the earlier part of the year tend to be significantly lower than in
the later parts of the year. There can be no assurance, however, that operating
margins in the fourth quarter will meet the Company's expectations. Many
software companies also experience a seasonal downturn in demand during the
summer months. There can be no assurance that these or other seasonal trends
will not have a material adverse effect on the Company's results of operations.
Management of Expanding Operations and Acquisitions. The Company has recently
experienced rapid expansion of its operations, which has placed, and is expected
to continue to place, significant demands on the Company's administrative,
operational and financial personnel and systems. The Company's future operating
results will substantially depend on the ability of its officers and key
employees to manage changing business conditions and to implement and improve
its operational, financial control and reporting systems. In particular, the
Company requires significant improvement in its order entry and fulfillment and
management information systems in order to support its expanded operations. If
the Company is unable to respond to and manage changing business conditions, its
business and results of operations could be materially adversely affected.
As a result of the consummation of a number of acquisitions, the Company's
operating expenses have increased. There can be no assurance that the
integration of these businesses can be successfully completed in a timely
fashion, or at all, or that the revenues from the acquired businesses will be
sufficient to support the costs associated with those businesses, without
adversely affecting the Company's operating margins. Any failure to
successfully complete the
14
<PAGE>
integration in a timely fashion or to generate sufficient revenues from the
acquired businesses could have a material adverse effect on the Company's
business and results of operations.
The Company regularly evaluates acquisition opportunities and is likely to make
acquisitions in the future. Future acquisitions by the Company could result in
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization of expenses related to goodwill and
other intangible assets, which could materially adversely affect the Company's
results of operations. Product and technology acquisitions entail numerous
risks, including difficulties in the assimilation of acquired operations,
technologies and products, diversion of management's attention to other business
concerns, risks of entering markets in which the Company has no or limited prior
experience and potential loss of key employees of acquired companies. The
Company's management has had limited experience in assimilating acquired
organizations and products into the Company's operations. No assurance can be
given as to the ability of the Company to integrate successfully any operations,
personnel or products that have been acquired or that might be acquired in the
future, and the failure of the Company to do so could have a material adverse
effect on the Company's results of operations.
Dependence on Key Personnel. The Company's future success depends, in large
part, on the continued service of its key management, sales, product development
and operational personnel and on its ability to attract, motivate and retain
highly qualified employees, including management personnel. In particular, the
loss of certain senior management personnel or other key employees could have a
material adverse effect on the Company's business. In addition, the Company
depends on writers, programmers and graphic artists, as well as third-party
content providers. The Company expects to continue to hire additional product
development, sales and marketing, IS and accounting staff. However, there can
be no assurance that the Company will be successful in attracting, retaining or
motivating key personnel. The inability to hire and retain qualified personnel
or the loss of the services of key personnel could have a material adverse
effect upon the Company's current business, new product development efforts and
future business prospects.
Risk of Increasing Taxes. Certain of the Company's subsidiaries have
significant operations and generate significant taxable income in Ireland, and
certain of the Company's Irish subsidiaries are taxed at rates substantially
lower than tax rates in effect in the United States and in other countries in
which the Company has operations. The extent of the tax benefit could vary from
period to period, and there can be no assurance that the Company's tax situation
will not change.
PART II. OTHER INFORMATION
ITEM 2(c). CHANGES IN SECURITIES - SALES OF UNREGISTERED SECURITIES
On August 31, 1997 (the "Closing Date"), CBT acquired all of the
outstanding common shares of Scholars. The acquisition of Scholars (the
"Acquisition") was consummated pursuant to a Share Purchase Agreement dated as
of August 4, 1997 (the "Purchase Agreement"), made and entered into by and among
CBT, Scholars and Ben Watson, the sole shareholder of Scholars ("Watson"). In
the Acquisition, CBT received all of the outstanding common shares of Scholars
in exchange for 9,408 ordinary shares, par value IR37.5p, of CBT (the "CBT
Ordinary Shares"). As a result of the Acquisition, Scholars became a wholly-
owned subsidiary of CBT.
There were no underwriters or placement agents involved in the Acquisition.
All of the CBT Ordinary Shares were issued to Watson.
As described above, CBT received all of the common shares of Scholars in
exchange for
15
<PAGE>
the CBT Ordinary Shares. The amount of consideration was determined based on
arms' length negotiations between CBT, Scholars and Watson and took into account
various factors concerning the valuation of the business of Scholars.
In connection with the issuance of the CBT Ordinary Shares in the
Acquisition, CBT relied upon the exemptions contained in Regulation S and
Section 4(2) under the Securities Act of 1933, as amended (the "Act"). The
acquisition consisted of the offer and sale of the CBT Ordinary Shares to
Watson, a resident of Fredericton, New Brunswick, Canada, and a non-U.S.
citizen. Without limiting the generality of the foregoing, the offer and sale
of the CBT Ordinary Shares were made in an "offshore transaction" as defined in
Rule 902(i) of the Act) to a non "U.S. person" (as defined in Rule 902(o) of the
Act) in the absence of any "directed selling efforts" (as defined in Rule 902(b)
of the Act). In addition, CBT structured the Acquisition to fall within the
exemption contained in Section 4(2) of the Act. The fair market value of the
CBT Ordinary Shares as of the date of the Acquisition was approximately
US$1,210,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
11.1 Statement Regarding Computation of Net Income Per Ordinary Share.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
The Company filed a report on Form 8-K with the Securities and
Exchange Commission on September 10, 1997 reporting under Item 9 the
Company's acquisition of Scholars on August 31, 1997.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CBT GROUP PLC
Date: November 14, 1997 By: /s/ James J. Buckley
-----------------------------
James J. Buckley
Chief Executive Officer and President
Date: November 14, 1997 By: /s/ Gregory M. Priest
-----------------------------
Gregory M. Priest
VP, Finance and Chief Financial Officer
17
<PAGE>
EXHIBIT 11.1
------------
STATEMENT RE: COMPUTATION OF NET INCOME PER ORDINARY SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1997 1996 1997
-------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
PRIMARY
Computation of ordinary and ordinary equivalent shares
outstanding:
Weighted average shares outstanding 8,879 9,613 8,807 9,415
Dilutive equivalent share issuable upon exercise of options 1,128 871 1,079 910
Incremental shares per applicable Staff Accounting Bulletins 37 18 37 18
------- ------- ------- -------
Total weighted average ordinary and ordinary equivalent
shares outstanding 10,044 10,502 9,923 10,343
======= ======= ======= =======
Net income 3,447 6,105 7,269 13,834
======= ======= ======= =======
Net income per Ordinary Share (1) $ 0.34 $ 0.58 $ 0.73 $ 1.34
======= ======= ======= =======
FULLY DILUTED
Computation of ordinary and ordinary equivalent shares
outstanding:
Weighted average shares outstanding 8,879 9,613 8,807 9,415
Dilutive equivalent share issuable upon exercise of options 1,138 935 1,162 1,047
Incremental shares per applicable Staff Accounting Bulletins 37 18 37 18
------- ------- ------- -------
Total weighted average ordinary and ordinary equivalent
shares outstanding 10,054 10,566 10,006 10,480
======= ======= ======= =======
Net income 3,447 6,105 7,269 13,834
======= ======= ======= =======
Net income per Ordinary Share (1) $ 0.34 $ 0.58 $ 0.73 $ 1.34
======= ======= ======= =======
</TABLE>
(1) Each Ordinary Share is represented by two American Depositary Shares
("ADSs"), which are the securities that are publicly traded. Net income per
Ordinary Share is therefore, within rounding, two times net income per
equivalent ADS.
__________________________________________
NOTE: Fully diluted net income per ordinary share is presented on the face of
the Consolidated Statements of Operations since it is not materially different
from primary net income per ordinary share.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 21,787
<SECURITIES> 37,979
<RECEIVABLES> 29,473
<ALLOWANCES> 588
<INVENTORY> 477
<CURRENT-ASSETS> 93,207
<PP&E> 15,412
<DEPRECIATION> 7,135
<TOTAL-ASSETS> 113,639
<CURRENT-LIABILITIES> 26,546
<BONDS> 0
0
0
<COMMON> 5,916
<OTHER-SE> 79,840
<TOTAL-LIABILITY-AND-EQUITY> 113,639
<SALES> 78,516
<TOTAL-REVENUES> 78,516
<CGS> 13,011
<TOTAL-COSTS> 64,014
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,773)
<INCOME-PRETAX> 16,275
<INCOME-TAX> 2,441
<INCOME-CONTINUING> 13,834
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,834
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.34
</TABLE>
