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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 March 31, 1998
[_] 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
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(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 ninety (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 April
20, 1998 was 40,381,220. The number of Ordinary Shares outstanding as of April
20, 1998 was 10,188,983.
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CBT GROUP PUBLIC LIMITED COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets as of December 31, 3
1997 and as of March 31, 1998
Condensed Consolidated Statements of Operations for the 5
three
months ended March 31, 1997 and 1998
Condensed Consolidated Statements of Cash Flows for the 6
three
months ended March 31, 1997 and 1998
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
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ITEM 1. FINANCIAL STATEMENTS
CBT GROUP PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -----------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 28,877 $ 40,198
Short-term investments 36,038 35,946
Accounts receivable, net 38,985 37,349
Inventories 446 514
Deferred tax assets, net 140 207
Prepaid expenses 3,857 5,450
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Total current assets 108,343 119,664
Intangible assets 5,297 5,047
Property and equipment, net 9,140 10,644
Investment 200 200
Deferred tax assets, net 342 324
Other assets 7,999 9,940
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Total assets 131,321 145,819
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Borrowings under bank overdraft
facility and overdrafts 13 13
Accounts payable 4,107 4,488
Accrued payroll and related expenses 5,786 5,322
Other accrued liabilities 15,450 17,446
Deferred revenues 3,845 2,120
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Total current liabilities 29,201 29,389
NON-CURRENT LIABILITIES
Minority equity interest 622 622
Other Liabilities 519 510
----- -----
Total non-current liabilities 1,141 1,132
SHAREHOLDERS' EQUITY
Ordinary Shares, IR37.5p par value:
30,000,000 shares authorized
at December 31, 1997 and March 31,
1998; issued and outstanding:
9,910,664 shares at December 31,
1997 and 10,111,327 at March 31, 1998 6,058 6,179
Additional paid-in capital 74,958 82,825
Accumulated profit 19,383 25,697
Cumulative translation adjustment 580 597
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Total shareholders' equity 100,979 115,298
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Total liabilities and shareholders'
equity 131,321 145,819
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Note: The balance sheet does not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
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CBT GROUP PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months
ended March 31,
1997 1998
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(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $22,575 $34,026
Cost of revenues 3,798 5,492
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Gross profit 18,777 28,534
Operating expenses:
Research and development 3,743 5,930
Sales and marketing 9,435 13,519
General and administrative 1,707 2,544
Costs of acquisitions 926 -
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Total operating expenses 15,811 21,993
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Income from operations 2,966 6,541
Other income, net 488 887
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Income before provision for income taxes 3,454 7,428
Provision for income taxes (518) (1,114)
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Net income 2,936 6,314
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Net income per equivalent ADS - Basic (1) $0.08 $0.16
======= =======
ADS equivalents used in computing net income per
equivalent ADS 37,939 40,190
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Net income per equivalent ADS- Diluted (1) $0.07 $0.15
======= =======
ADS equivalents used in computing net income per
equivalent ADS 40,835 42,836
======= =======
</TABLE>
(1) Net Income per equivalent ADS, Basic and Diluted for the three months ended
March 31, 1997 have been restated to reflect the two-for-one split of the
ADSs which took effect on March 9, 1998.
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CBT GROUP PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1998
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(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,936 6,314
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 692 1,263
Accrued interest on short-term investments (222) 438
Changes in operating assets and liabilities:
Accounts receivable 148 1,668
Inventories (29) (77)
Deferred tax assets -- (67)
Prepaid expenses and other assets (2,359) (3,598)
Accounts payable 278 354
Accrued payroll and related expenses and other accrued liabilities 145 1,509
Deferred revenues (1,035) (1,758)
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Net cash provided by operating activities 554 6,046
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (972) (2,516)
Proceeds from sale of investments 732
Payments to acquire investments (248) (1,078)
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Net cash used in investing activities (1,220) (2,862)
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CASH FLOWS FROM FINANCING ACTIVITIES
Payment of notes payable (86)
Proceeds from issuance of ordinary shares, net 2,061 7,988
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Net cash provided by (used in) financing activities 1,975 7,988
Effect of exchange rate changes on cash (214) 149
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Net increase in cash and cash equivalents 1,095 11,321
Cash at beginning of period 11,037 28,877
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Cash at end of period $12,132 $40,198
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</TABLE>
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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 ACQUISITIONS OF ALA, BENELUX, SCHOLARS AND MIDEAST
On February 28, 1997, CBT 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 414,444 ADSs to the former shareholders of ALA and
Benelux in connection with the acquisitions. 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 IT certification training. The
Company issued a total of 9,408 Ordinary Shares to the sole shareholder of
Scholars in connection with the acquisition. On December 1, 1997, the Company
completed the acquisition of CBT Systems Middle East Limited, a company
organized under the laws of the Commonwealth of the Bahamas ("MidEast"). MidEast
had been the Company's exclusive distributor in the Middle East and a non-
exclusive distributor in India. The Company issued a total of 64,500 ordinary
shares to the former shareholders of MidEast in connection with the acquisition.
Each transaction was accounted for as a "pooling of interests" in accordance
with U.S. generally accepted accounting principles
NOTE 3 SHARE SPLIT
On March 9, 1998 the Company effected a two-for-one split of its issued and
outstanding ADSs. Subsequent thereto, the Company's shareholders approved a
proposal at the Company's 1998 Annual General Meeting to subdivide each of the
Ordinary Shares of IR37.5p into four Ordinary Shares of IR9.375p (the "Ordinary
Share Split"). As a consequence of the Ordinary Share Split, effective May 22,
1998 each ADS will represent and be exchangeable for one Ordinary Share (the
"Ratio Change"). Aside from the Ratio Change, the Ordinary Share Split will have
no effect on the ADSs. The Ordinary Share Split will have no effect on the
number of ADSs outstanding and, in and of itself, is not expected to have an
effect on the market price of the ADSs.
NOTE 4 CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This Statement requires
all items recognized under accounting standards as components of comprehensive
earnings be reported in an annual financial statement that is displayed with the
same prominence as other financial statements. This Statement also requires
that an entity classify items of other comprehensive earnings by their nature in
an annual financial statement. For example, other comprehensive income may
include foreign currency translation adjustments, minimum pension liability
adjustments, and other unrealized gains and losses on marketable securities
classified as available-for-sale. Annual financial statements for prior periods
will be reclassified, as required. The Company's total comprehensive earnings
were as follows:
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<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1998
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(dollars in thousands) (Unaudited) (Unaudited)
<S> <C> <C>
Net Income $2,936 $6,314
Other Comprehensive Income (214) 17
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Total Comprehensive Income 2,722 6,331
====== ======
</TABLE>
ITEM 2. 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 Group" or the "Company") is a leading provider of
interactive education software designed to meet the information technology
("IT") education and training needs of businesses and organizations worldwide.
The Company develops, publishes and markets a comprehensive library of 625
software titles covering a range of client/server, mainframe, Internet and
intranet technologies. CBT Group's products are used by 1,600 of the world's
leading corporations to train employees to develop and apply mission-critical
technologies in the workplace. CBT Group works with leading software companies,
including Cisco Systems, Inc. ("Cisco"), Informix Corporation ("Informix"),
Lotus Development Corporation ("Lotus"), Marimba, Inc. ("Marimba"), Microsoft
Corporation ("Microsoft"), Netscape Communications Corporation ("Netscape"),
Novell, Inc. ("Novell"), Oracle Corporation ("Oracle"), SAP America, Inc.
("SAP"), Sybase, Inc. ("Sybase") and the IBM-Netscape-Sun Microsystems,
collaborative Java education effort to develop and market vendor-specific
training. CBT Group has also formed the Internet Security Training Consortium
with Check Point Software Technologies, Inc. ("Check Point"), Cisco, IBM, Intel
Corporation, the Javasoft business unit of Sun Microsystems, Inc., Lotus,
Netscape, Network Associates, Inc. (formerly McAfee Associates, Inc.) ("Network
Associates"), RSA Data Security, Inc. ("RSA Data Security"), Security Dynamics
Technologies, Inc. ("Security Dynamics"), and VeriSign, Inc. ("VeriSign") to
address the Internet security training needs of enterprises worldwide.
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
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,
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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 The ForeFront Group, Inc.
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On March 16, 1998, the Company entered into a definitive agreement to acquire
The ForeFront Group, Inc., a Houston-based provider of high-quality, cost-
effective, computer-based training products and network utilities for technical
professionals ("ForeFront"). In the merger, each share of ForeFront common stock
will be exchanged for 0.3137 Ordinary Shares, and the Company will assume
outstanding ForeFront stock options, warrants and other rights to acquire
ForeFront common stock. As a result of the merger, the Company will issue
approximately 2.1 million ADSs and assume options, warrants and other rights
that may be converted into approximately 1.1 million ADSs. The transaction is
intended to be tax free to shareholders and is intended to be accounted for as a
pooling of interests. Consummation of the transaction is subject to expiration
or termination of the applicable Hart-Scott-Rodino waiting period, approval of
the merger by ForeFront stockholders and other customary closing conditions. The
Company received early termination of the applicable Harts-Scott-Rodino waiting
period on April 27, 1998. The merger is expected to be completed during the
second quarter of 1998. Consummation of the transaction is subject to a number
of risk factors, including those discussed below and under "Additional Risk
Factors that Could Affect Operating Results."
Uncertainty Relating to Integration. The successful combination of CBT Group
and ForeFront, including the successful operation of ForeFront as an autonomous
subsidiary of CBT Group, will require substantial effort from each company. The
diversion of the attention of management and any difficulties encountered in the
transition process could have an adverse impact on CBT Group's ability to
realize the full benefits of the merger. The successful combination of the two
companies will also require coordination of their research and development and
sales and marketing efforts. In addition, the process of combining the two
organizations could cause the interruption of, or a loss of momentum in,
ForeFront's activities.
Certain key executives of ForeFront will not continue with the combined company
over the long term following the merger. David Sikora, President and Chief
Executive Officer of ForeFront, and Michael Kaplan, President of ForeFront
Direct, Inc., will terminate their employment at the effective time of the
merger and Mr. Kaplan has agreed to continue as a consultant with CBT Group for
four months thereafter. There can be no assurance that the loss of these two
executives will not disrupt the integration of the two companies or prevent CBT
Group from realizing any of the anticipated benefits of the Merger. In addition,
options previously granted to other key executives of ForeFront will accelerate
at the effective time of the merger. There can be no assurance that CBT Group
will be able to retain these other key executives or ForeFront's
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key management, technical, sales and customer support personnel, or that it will
realize any of the anticipated benefits of the Merger.
Effect of Merger on Customers and Partners. Certain of ForeFront's existing
customers or strategic partners may view themselves as competitors of CBT
Group, and therefore determine that the Merger is competitively disadvantageous
to them. As a consequence, ForeFront's relationship with these customers or
strategic partners could be adversely affected. In addition, CBT Group's
relationships with certain of its customers that compete with ForeFront may be
adversely affected by the Merger, which could adversely affect the ability of
CBT Group to continue relationships with such customers after the Merger.
Share Split
- -----------
On March 9, 1998 the Company effected a two-for-one split of its issued and
outstanding ADSs. Subsequent thereto, the Company's shareholders approved a
proposal at the Company's 1998 Annual General Meeting to subdivide each of the
Ordinary Shares of IR37.5p into four Ordinary Shares of IR9.375p (the "Ordinary
Share Split"). As a consequence of the Ordinary Share Split, effective May 22,
1998 each ADS will represent and be exchangeable for one Ordinary Share (the
"Ratio Change"). Aside from the Ratio Change, the Ordinary Share Split will have
no effect on the ADSs. The Ordinary Share Split will have no effect on the
number of ADSs outstanding and, in and of itself, is not expected to have an
effect on the market price of the ADSs.
RESULTS OF OPERATIONS
The following table sets forth certain restated consolidated statements of
operations data as a percentage of revenues:
<TABLE>
<CAPTION>
Three months
ended March 31,
1997 1998
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<S> <C> <C>
Revenues 100% 100%
Cost of revenues 16.8 16.1
---- ----
Gross profit 83.2 83.9
Operating expenses:
Research and development 16.6 17.4
Sales and marketing 41.8 39.7
General and administrative 7.6 7.5
Costs of acquisitions 4.1 -
---- ----
Total operating expenses 70.1 64.6
---- ----
Income from operations 13.1 19.3
Other income, net 2.2 2.6
---- ----
Income before provision for income taxes 15.3 21.9
Provision for income taxes 2.3 3.3
---- ----
Net income 13.0 18.6
==== ====
</TABLE>
Revenues
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Revenues increased 51% to $34.0 million in the three months ended March 31, 1998
from $22.6 million in the three months ended March 31, 1997. The increase in
revenues during this period was primarily
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attributable to an increase in the number of available courses, a significant
increase in the number of sales personnel employed in the United States, strong
customer contract renewals and upgrades and expanded marketing and distribution
efforts.
Revenues in the United States for the three month period ended March 31, 1998
increased to $24.1 million (or 71% of revenues) from $16.8 million (or 74% of
revenues) for the three month period ended March 31, 1997.
Revenues in Europe for the three month period ended March 31, 1998 were $5.0
million (or 15% of revenues), compared to $3.2 million (or 14% of revenues) for
the three month period ended March 31, 1997. In addition, revenues from outside
the United States and Europe (principally from Australia and Canada) in the
three month period ended March 31, 1998 were $4.9 million (or 14% of revenues),
compared to $2.6 million (or 12% of revenues) for the three month period ended
March 31, 1997. 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 83.9% in the three month period ended March 31, 1998
from 83.2% in the three month period ended March 31, 1997. 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 Group 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 month period ended
March 31, 1998 to $5.9 million (or 17.4% of revenues) from $3.7 million (or
16.6% of revenues) in the three month period ended March 31, 1997. The increase
is primarily the result of the hiring of additional research and development
personnel required to expand and enhance the Company's library of software
products. 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.
Research and development costs associated with development alliances of $162,000
have been included in cost of sales in the period ended March 31, 1997. During
the quarter ended March 31, 1998, there were no costs associated with these
alliances.
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") 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 but declined as a percentage of revenues in the
three month period ended March 31, 1998 to $13.5 million (or 39.7% of
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revenues) from $9.4 million (or 41.8% of revenues) for the three month period
ended March 31, 1997. The increase in absolute terms was primarily attributable
to an increase in the number of sales 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 this period. The
decrease in sales and marketing expenses as a percentage of revenues during
these periods is due primarily to a more rapid increase in revenue 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
slightly as a percentage of revenues in the three month period ended March 31,
1998 to $2.5 million (or 7.5% of revenues) from $1.7 million (or 7.6% of
revenues) for the three month period ended March 31, 1997. The increase in
absolute terms was primarily the result of increased staffing to support
expanding operations. The decrease as a percentage of revenues was principally
due to a more rapid increase 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.
Costs of Acquisition
- --------------------
There were no costs of acquisition in the quarter ended March 31, 1998. However,
the Company expects that there will be significant non recurring costs in
respect of the acquisition of ForeFront, which will be recognized in the quarter
ended June 30, 1998.
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 $887,000 in the three month period ended March 31, 1998, as compared to other
income, net, of $488,000 for the comparable period of the prior year. Other
income during both periods was primarily attributable to interest on short-term
investments. Interest income for the first quarter of 1998 increased compared
with the first quarter of 1997 as a result of higher cash levels.
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.
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. One
Irish subsidiary currently qualifies for a 10% tax rate which, under current
legislation, is in force until 2010, and another 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
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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 rate for the three month periods ended March 31, 1997 and 1998
was 15%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments at March 31, 1998 increased to $76.1 million
from $64.9 million at December 31, 1997. Working capital increased to $90.3
million at March 31, 1998 from $79.1 million at December 31, 1997. These
increases were primarily the result of increased cash flow from operating
activities and the issuance of shares under the stock option plans, which was
partially offset by expenditures for property and equipment to support the
Company's expanded operations.
Net cash provided by operating activities was $6.0 Million in the three months
ended March 31, 1998 compared to net cash provided by operating activities of
$554,000 for the comparable period of the prior year. The increase in cash flow
from operations was primarily attributable to a significant increase in net
income which was partially offset by an increase in prepaid expenses, accrued
payroll, related expenses and other accrued liabilities and a decrease in
accounts receivable.
Capital expenditures were $2.5 million in the three months ended March 31, 1998
compared to $972,000 for the comparable period of the prior year. The increase
was primarily attributable to expenditures related to computer equipment and
computer infrastructure. Although the Company currently has no material capital
commitments, the Company expects to spend significantly more in 1998 than in
previous years, primarily as a result of improvements to its information systems
and capital expenditures associated with new offices in Redwood City, California
and the 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 1998.
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 may from time to time consider the acquisition of complementary
businesses, products or technologies, which may require additional financing.
NEW ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board issued SFAS No.132,
"Employers' Disclosures About Pensions and Other Post-Retirement Benefits."
This Statement revises employers' disclosures about pensions and other post-
retirement benefit plans. It does not, however, change the measurement of
recognition of those plans. This Statement standardizes the disclosure
requirements for pensions and other post-retirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. Restatement of disclosures for
earlier periods is required. This Statement is effective for the Company's
financial statements for the fiscal year ended December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Opinion ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". This SOP provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. This SOP states that entities are required to capitalize certain internal-
use software costs once certain criteria are met. Currently, the Company
generally expenses the costs of developing or obtaining internal-use software as
incurred. The Company is currently evaluating SOP 98-1, but does not expect it
to have a material impact on its consolidated financial statements. This SOP is
effective for financial
-13-
<PAGE>
statements for fiscal years beginning after December 15, 1998. Earlier
application is encouraged in fiscal years for which the annual financial
statements have not been issued.
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS
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 seventeen 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 quarter of 1998. This increase in employee expense could have a
negative impact on the Company's operating margins during 1998.
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
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 competitors as
IS managers demand more value for
-14-
<PAGE>
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 systems. Many of these new delivery 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 Group's future success will depend upon, among other
factors, the extent to which CBT Group 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.
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. It is expected that this factor will affect CBT
Group's operating margins in the second quarter of 1998, and to some extent, the
third quarter. 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. 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 the acquisitions of ALA, Benelux, Scholars
and MidEast in 1997, 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 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 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
-15-
<PAGE>
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.
Year 2000 Risk. The Company is aware of the issues associated with the
programming code in existing computer systems as the millennium (year 2000)
approaches. The "Year 2000" issue is pervasive and complex, as virtually every
computer operation will be effected in the same way by the rollover of the two
digit year value to 00. The issue is whether computer systems will properly
recognize date sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail.
The Company is assessing both the internal readiness of its computer systems and
the compliance of its software sold to customers for handling the year 2000. The
Company expects to implement successfully the systems and programming changes
necessary to address year 2000 issues, and does not believe that the cost of
such actions will have a material effect on the Company's results of operations
or financial condition. There can be no assurance, however, that there will not
be a delay in, or increased costs associated with, the implementation of such
changes, and the Company's inability to implement such changes could have an
adverse effect on future results of operations. With the exception of CBT
Group's DOS-based courseware and its Wintracs administrative tracking tool, the
Company is satisfied that the software it supplies to its customers is year 2000
compliant and it is not dependent on its customers implementing the systems and
programming changes necessary to handle the year 2000.
The company is utilizing both internal and external resources to identify,
correct or reprogram, and test the systems for year 2000 compliance. It is
anticipated that all reprogramming, except for CBT Group products which will no
longer be available beginning December 31, 1999, will be complete by June
30, 1999, allowing adequate time for testing. This process includes getting
confirmations from the Company's primary vendors that plans are being developed
or are already in place to address processing transactions in the year 2000.
However, there can be no assurance that the systems of other companies on which
the Company's systems rely will be timely converted or that any such failure to
convert by another company would not have an adverse effect on the Company's
system.
-16-
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
10.1 Consulting Agreement, dated January 30, 1998, between CBT
Systems USA Ltd. and Gregory M. Priest
11.1 Statement Regarding Computation of Net Income Per Ordinary
Share.
27.1 Financial Data Schedule (EDGAR version only)
--------------------
(b) Reports on Form 8-K
-------------------
The company did not file any reports on Form 8-K during the quarter
for which this report is filed.
-17-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CBT GROUP PLC
Date: May 13, 1998 By: /s/ James J. Buckley
--------------------
James J. Buckley
Chief Executive Officer and President
Date: May 13, 1998 By: /s/ Richard Y. Okumoto
----------------------
Richard Y. Okumoto
VP, Finance and Chief Financial Officer
-18-
<PAGE>
EXHIBIT 10.1
------------
CBT SYSTEMS USA LTD.
CONSULTING AGREEMENT
--------------------
This Consulting Agreement ("Agreement") is made and entered into as of the
30th day of January, 1998 by and between CBT Systems USA Ltd. (the "Company"),
and Gregroy M. Priest ("Consultant"). The Company desires to retain Consultant
as an independent contractor to perform consulting services for the Company and
Consultant is willing to perform such services, on terms set forth more fully
below. In consideration of the mutual promises contained herein, the parties
agree as follows:
1. SERVICES AND COMPENSATION
-------------------------
(a) Services. Consultant agrees to perform for the Company the
--------
services ("Services") described in Exhibit A, attached hereto.
(b) Compensation.
------------
(i) Company shall pay Consultant according to the following
schedule:
A. For the first ten (10) hours worked per month,
Company shall pay Consultant $100 per hour.
B. For all hours worked by Consultant per month in
excess of ten (10) up to twenty (20), Company shall
pay Consultant $50 per hour.
C. For all hours worked by Consultant in excess of
twenty (20) hours per month, Company shall pay
Consultant $25 per hour.
(ii) The Company shall reimburse Consultant for all reasonable
travel and living expenses incurred by Consultant in performing Services
pursuant to this Agreement, provided Consultant receives written consent from an
authorized agent of the Company prior to incurring such expenses.
(iii) Consultant shall submit all statements for services and
expenses in a form prescribed by the Company every two weeks and such statement
shall be approved by the contact person listed on Exhibit A or other designated
agent of the Company.
2. CONFIDENTIALITY
---------------
(a) Definition. "Confidential Information" means any Company
----------
proprietary information, technical data, trade secrets or know-how, including,
but not limited to, research, product plans, products, services, customers,
customer lists, markets, software, developments, inventions, processes,
formulas, technology, designs, drawings, engineering, hardware configuration
information, marketing, finances or other business information disclosed by the
Company either directly or indirectly in writing, orally or by drawings or
inspection of parts or equipment.
1
<PAGE>
(b) Non-Use and Non-Disclosure. Consultant will not, during or
--------------------------
subsequent to the term of this Agreement, use the Company's Confidential
Information for any purpose whatsoever other than the performance of the
Services on behalf of the Company or disclose the Company's Confidential
Information to any third party. It is understood that said Confidential
Information shall remain the sole property of the Company. Consultant further
agrees to take all reasonable precautions to prevent any unauthorized disclosure
of such Confidential Information including, but not limited to, having each
employee of Consultant, if any, with access to any Confidential Information,
execute a nondisclosure agreement containing provisions in the Company's favor
identical to Sections 2, 3 and 4 of this Agreement. Confidential Information
does not include information which (i) is known to Consultant at the time of
disclosure to Consultant by the Company as evidenced by written records of
Consultant, (ii) has become publicly known and made generally available through
no wrongful act of Consultant, or (iii) has been rightfully received by
Consultant from a third party who is authorized to make such disclosure. The
parties shall agree on any disclosure of the existence or the contents of this
Agreement. Consultant agrees not to make any disclosure of the existence or
contents of this Agreement which is inconsistent with the prior public
disclosure of the Company.
(c) Former Employer's Confidential Information. Consultant agrees
------------------------------------------
that Consultant will not, during the term of this Agreement, improperly use or
disclose any proprietary information or trade secrets of any former or current
employer or other person or entity with which Consultant has an agreement or
duty to keep in confidence information acquired by Consultant, if any, and that
Consultant will not bring onto the premises of the Company any unpublished
document or proprietary information belonging to such employer, person or entity
unless consented to in writing by such employer, person or entity. Consultant
will indemnify the Company and hold it harmless from and against all claims,
liabilities, damages and expenses, including reasonable attorneys fees and costs
of suit, arising out of or in connection with any violation or claimed violation
of a third party's rights resulting in whole or in part from the Company's use
of the work product of Consultant under this Agreement.
(d) Third Party Confidential Information. Consultant recognizes that
------------------------------------
the Company has received and in the future will receive from third parties their
confidential or proprietary information subject to a duty on the Company's part
to maintain the confidentiality of such information and to use it only for
certain limited purposes. Consultant agrees that Consultant owes the Company and
such third parties, during the term of this Agreement and thereafter, a duty to
hold all such confidential or proprietary information in the strictest
confidence and not to disclose it to any person, firm or corporation or to use
it except as necessary in carrying out the Services for the Company consistent
with the Company's agreement with such third party.
(e) Return of Materials. Upon the termination of this Agreement, or
-------------------
upon Company's earlier request, Consultant will deliver to the Company all of
the Company's property or Confidential Information that Consultant may have in
Consultant's possession or control.
3. OWNERSHIP
---------
(a) Assignment. Consultant agrees that all copyrightable material,
----------
notes, records, drawings, designs, inventions, improvements, developments,
discoveries and trade secrets (collectively, "Inventions") conceived, made or
discovered by Consultant, solely or in collaboration with others, during the
period of this Agreement and in the course of performing Services or services as
a director of the Company which relate in any manner to the business of the
Company that Consultant may be directed to undertake, investigate or experiment
with, or which Consultant may become associated with in work, investigation or
experimentation in the line of business of Company, are the sole property of the
Company. Consultant further agrees to assign (or cause to be assigned) and does
hereby assign fully to the Company all Inventions and any copyrights, patents,
mask work rights or other intellectual property rights relating thereto.
(b) Further Assurances. Consultant agrees to assist Company, or its
------------------
designee, at the Company's expense, in every proper way to secure the Company's
rights in the Inventions and any copyrights, patents, mask work rights or other
intellectual property rights relating thereto in any and all countries,
including the disclosure to the Company of all pertinent information and data
with respect thereto, the execution of all applications, specifications,
2
<PAGE>
oaths, assignments and all other instruments which the Company shall deem
necessary in order to apply for and obtain such rights and in order to assign
and convey to the Company, its successors, assigns and nominees the sole and
exclusive right, title and interest in and to such Inventions, and any
copyrights, patents, mask work rights or other intellectual property rights
relating thereto. Consultant further agrees that Consultant's obligation to
execute or cause to be executed, when it is in Consultant's power to do so, any
such instrument or papers shall continue after the termination of this
Agreement.
(c) Pre-Existing Materials. Consultant agrees that if in the course
----------------------
of performing the Services, Consultant incorporates into any Invention developed
hereunder any invention, improvement, development, concept, discovery or other
proprietary information owned by Consultant or in which Consultant has an
interest, (i) Consultant shall inform Company, in writing before incorporating
such invention, improvement, development, concept, discovery or other
proprietary information into any Invention; and (ii) the Company is hereby
granted and shall have a nonexclusive, royalty-free, perpetual, irrevocable,
worldwide license to make, have made, modify, use and sell such item as part of
or in connection with such Invention. Consultant shall not incorporate any
invention, improvement, development, concept, discovery or other proprietary
information owned by any third party into any Invention without Company's prior
written permission.
(d) Attorney in Fact. Consultant agrees that if the Company is unable
----------------
because of Consultant's unavailability, dissolution, mental or physical
incapacity, or for any other reason, to secure Consultant's signature to apply
for or to pursue any application for any United States or foreign patents or
mask work or copyright registrations covering the Inventions assigned to the
Company above, then Consultant hereby irrevocably designates and appoints the
Company and its duly authorized officers and agents as Consultant's agent and
attorney in fact, to act for and in Consultant's behalf and stead to execute and
file any such applications and to do all other lawfully permitted acts to
further the prosecution and issuance of patents, copyright and mask work
registrations thereon with the same legal force and effect as if executed by
Consultant.
4. CONFLICTING OBLIGATIONS
-----------------------
Consultant certifies that Consultant has no outstanding agreement or
obligation that is in conflict with any of the provisions of this Agreement, or
that would preclude Consultant from complying with the provisions hereof, and
further certifies that Consultant will not enter into any such conflicting
agreement during the term of this Agreement.
5. TERM AND TERMINATION
--------------------
(a) Term. This Agreement will commence on the date first written
----
above and will continue until the earlier of (i) July 31, 2001 or (ii)
termination as provided below.
(b) Termination. The Company may terminate this Agreement immediately
-----------
and without prior notice if Consultant either refuses to or is unable to perform
the Services or is in breach of any material provision of this Agreement and
Consultant fails to cure such non-performance or breach within thirty (30) days
after receiving written notice from the Company.
(c) Survival. Upon such termination all rights and duties of the
--------
parties toward each other shall cease except:
(i) that the Company shall be obliged to pay, within thirty (30)
days of the effective date of termination, all amounts owing to Consultant for
Services completed and accepted by the Company prior to the termination date and
related expenses, if any, in accordance with the provisions of Section 1
(Services and Compensation) hereof; and
3
<PAGE>
(ii) Sections 2 (Confidentiality), 3 (Ownership) and 7
(Independent Contractors) shall survive termination of this Agreement.
6. ASSIGNMENT; SUCCESSORS
----------------------
(a) Assignment. Neither this Agreement nor any right hereunder or
----------
interest herein may be assigned or transferred by Consultant without the express
written consent of the Company.
(b) Company's Successors. Any successor to the Company (whether
--------------------
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner and
to the same extent as the Company would be required to perform such obligations
in the absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and assets which
executes and delivers the assumption agreement described in this Section or
which becomes bound by the terms of this Agreement by operation of law.
(c) Consultant's Successors. The terms of this Agreement and all
-----------------------
rights of the Consultant hereunder shall inure to the benefit of, and be
enforceable by, the Consultant's legal representatives, executors,
administrators, successor, heirs, distributees, devisees or legatees.
7. INDEPENDENT CONTRACTOR
----------------------
It is the express intention of the parties that Consultant is an
independent contractor. Nothing in this Agreement shall in any way be construed
to constitute Consultant as an agent, employee or representative of the Company,
but Consultant shall perform the Services hereunder as an independent
contractor. Consultant agrees to furnish (or reimburse the Company for) all
tools and materials necessary to accomplish this contract, and shall incur all
expenses associated with performance, except as expressly provided on Exhibit A
of this Agreement. Consultant acknowledges and agrees that Consultant is
obligated to report as income all compensation received by Consultant pursuant
to this Agreement, and Consultant agrees to and acknowledges the obligation to
pay all self-employment and other taxes thereon. Consultant further agrees to
indemnify and hold harmless the Company and its directors, officers, and
employees from and against all taxes, losses, damages, liabilities, costs and
expenses, including attorney's fees and other legal expenses, arising directly
or indirectly from (i) any negligent, reckless or intentionally wrongful act of
Consultant or Consultant's assistants, employees or agents, (ii) a determination
by a court or agency that the Consultant is not an independent contractor, or
(iii) any breach by the Consultant or Consultant's assistants, employees or
agents of any of the covenants contained in this Agreement.
8. BENEFITS
--------
Except as otherwise provided herein, Consultant acknowledges and
agrees and it is the intent of the parties hereto that Consultant receive no
Company-sponsored benefits from the Company either as a Consultant or employee.
Such benefits include, but are not limited to, paid vacation, sick leave,
medical insurance, and 401(k) participation. If Consultant is reclassified by a
state or federal agency or court as an employee, Consultant will become a
reclassified employee and will receive no benefits except those mandated by
state or federal law, even if by the terms of the Company's benefit plans in
effect at the time of such reclassification Consultant would otherwise be
eligible for such benefits.
9. ARBITRATION AND EQUITABLE RELIEF
--------------------------------
(a) Disputes. Except as provided in Section 9(d) below, the Company
--------
and Consultant agree that any dispute or controversy arising out of, relating to
or in connection with the interpretation, validity, construction, performance,
breach or termination of this Agreement shall be settled by binding arbitration
to be held in San Francisco County, California, in accordance with the
Commercial Arbitration Rules, supplemented by the Supplemental
4
<PAGE>
Procedures for Large Complex Disputes, of the American Arbitration Association
as then in effect (the "Rules"). The arbitrator may grant injunctions or other
relief in such dispute or controversy. The decision of the arbitrator shall be
final, conclusive and binding on the parties to the arbitration. Judgment may be
entered on the arbitrator's decision in any court of competent jurisdiction.
(b) Consent to Personal Jurisdiction. The arbitrator(s) shall apply
--------------------------------
California law to the merits of any dispute or claim, without reference to
conflicts of law rules. Consultant hereby consents to the personal jurisdiction
of the state and federal courts located in California for any action or
proceeding arising from or relating to this Agreement or relating to any
arbitration in which the parties are participants.
(c) Costs. The Company and Consultant shall each pay one-half of the
-----
costs and expenses of such arbitration, and each shall separately pay its
counsel fees and expenses unless otherwise required by law.
(d) Equitable Relief. The parties may apply to any court of competent
----------------
jurisdiction for a temporary restraining order, preliminary injunction, or other
interim or conservatory relief, as necessary, without breach of this arbitration
agreement and without abridgment of the powers of the arbitrator.
(e) Acknowledgment. CONSULTANT HAS READ AND UNDERSTANDS SECTION 9,
--------------
WHICH DISCUSSES ARBITRATION. CONSULTANT UNDERSTANDS THAT BY SIGNING THIS
AGREEMENT, CONSULTANT AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO,
OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY,
CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF, TO BINDING
ARBITRATION, EXCEPT AS PROVIDED IN SECTION 9 (d), AND THAT THIS ARBITRATION
CLAUSE CONSTITUTES A WAIVER OF CONSULTANT'S RIGHT TO A JURY TRIAL AND RELATES TO
THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE RELATIONSHIP
BETWEEN THE PARTIES.
10. GOVERNING LAW
-------------
This Agreement shall be governed by the internal substantive laws, but
not the choice of law rules, of the State of California.
11. ENTIRE AGREEMENT
----------------
This Agreement and the Stock Option Agreements (as defined below)
contain the entire agreement of the parties and supersede any and all prior
agreements between them, whether written or oral, with respect to the subject
matter hereof, including, but not limited to, the Employment Agreement dated
January 2, 1996, and the Employment, Confidential Information and Invention
Assignment Agreement dated December 4, 1995. Stock Option Agreements mean: (i)
the Share Option Agreement dated November 1, 1995; (ii) the option certificate
dated August 28, 1996 reflecting an option granted April 12, 1996, and (iii) the
Share Option Agreement dated March 18, 1997. No waiver, alteration, or
modification of any of the provisions of this Agreement shall be binding unless
in writing and signed by duly authorized representatives of the parties hereto.
The unvested portion of all stock options held by Consultant under the Stock
Option Agreements at the date of Consultant's termination as an employee of the
Company (the "Unvested Options") shall continue to vest during the term of this
Agreement according to the vesting schedule set forth in each Unvested Option's
respective Option Agreement. Any vested stock options (including any Unvested
Options that vest pursuant hereto) held by Consultant shall remain exercisable
until 90 days after the termination of this Agreement.
12. ATTORNEY'S FEES
---------------
In any court action at law or equity which is brought by one of the
parties to enforce or interpret the provisions of this Agreement, the prevailing
party will be entitled to reasonable attorney's fees, in addition to any other
relief to which that party may be entitled.
5
<PAGE>
13. SEVERABILITY
------------
The invalidity or unenforceability of any provision of this Agreement,
or any terms thereof, shall not affect the validity of this Agreement as a
whole, which shall at all times remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
CONSULTANT
By: /s/ Gregory M. Priest
---------------------
Title: Consultant
----------
Address: 22831 Mercedes Road, Cupertino, CA 95014
------------------------------------------
CBT SYSTEMS USA LTD.
By: /s/ James J. Buckley
--------------------
Title: Chief Executive Officer and President
-------------------------------------
Address: 1005 Hamilton Court, Menlo Park, CA 94025
-----------------------------------------
6
<PAGE>
EXHIBIT A
---------
SERVICES AND COMPENSATION
-------------------------
1. Contact. Consultant's principal Company contact:
-------
Name: James Buckley
Title: Chief Executive Officer
2. Services. Consultant will render to the Company services on projects
--------
as identified by James Buckley, the Chief Executive Officer or his
designee. Such projects are initially contemplated to involve the
transition of a Chief Financial Officer into Consultant's former
position with the Company.
7
<PAGE>
EXHIBIT 11.1
------------
STATEMENT RE: COMPUTATION OF NET INCOME PER ORDINARY SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1998
---- ----
<S> <C> <C>
BASIC
Total weighted average ordinary and ordinary equivalent shares outstanding 9,485 10,047
======= =======
Net income $ 2,936 $ 6,314
======= =======
Net income per ordinary share(1) $ 0.31 $ 0.63
======= =======
DILUTED
Computation of ordinary and ordinary equivalent shares outstanding:
Weighted average ordinary shares outstanding 9,485 10,047
Dilutive equivalent ordinary shares issuable upon exercise of options 724 662
Total weighted average ordinary and ordinary equivalent shares outstanding 10,209 10,709
======= =======
Net income $ 2,936 $ 6,314
======= =======
Net income per ordinary share(1) $ 0.29 $ 0.59
======= =======
</TABLE>
1. Each Ordinary Share is represented by four American Depositary Shares
("ADSs"), which are the securities that are publicly traded. Net Income per
Ordinary Share is therefore within rounding, four times net income per
equivalent ADS.
Subsequent to March 31, 1998, the Company's shareholders approved a proposal
at the Company's 1998 Annual General meeting to subdivide each of the
Ordinary Shares of IR37.5p into four Ordinary Shares of IR9.375p (the
"Ordinary Share Split"). As a consequence of the Ordinary Share Split,
effective May 22, 1998 each ADS will represent and be exchangeable for one
Ordinary Share (the "Ratio Change"). Aside from the Ratio Change, the
Ordinary Share Split will have no effect on the ADSs. The Ordinary Share
Split will have no effect on the number of ADSs outstanding and, in and of
itself, is not expected to have an effect on the market price of the ADSs.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 40,198
<SECURITIES> 35,946
<RECEIVABLES> 38,249
<ALLOWANCES> (900)
<INVENTORY> 514
<CURRENT-ASSETS> 21,168
<PP&E> 18,312
<DEPRECIATION> (7,668)
<TOTAL-ASSETS> 145,819
<CURRENT-LIABILITIES> 30,521
<BONDS> 0
0
0
<COMMON> 6,179
<OTHER-SE> 109,119
<TOTAL-LIABILITY-AND-EQUITY> 145,819
<SALES> 34,026
<TOTAL-REVENUES> 34,026
<CGS> 5,492
<TOTAL-COSTS> 21,993
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (887)
<INCOME-PRETAX> 7,428
<INCOME-TAX> 1,114
<INCOME-CONTINUING> 6,314
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,314
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.59
</TABLE>
