<PAGE>
CBT GROUP PUBLIC LIMITED COMPANY
Filed Pursuant to Rule 424(b)(3) and (c)
File No. 333-84051
PROSPECTUS SUPPLEMENT NO. 1
(To Prospectus dated September 19, 1999)
This Prospectus Supplement, consisting of this cover page and the attached
quarterly report on Form 10-Q for the quarter ended September 30, 1999, relates
to the public offering, which is not being underwritten, and sale of up to
4,384,946 American Depositary Shares of CBT Group PLC, which may be offered and
sold from time to time by certain shareholders of the company. The company will
receive no part of the proceeds of such sales. This Prospectus Supplement should
be read in conjunction with the Prospectus dated September 19, 1999, and this
Prospectus Supplement is qualified by reference to the Prospectus except to the
extent that the information contained in this Prospectus Supplement supersedes
the information contained in the Prospectus.
In addition to the attached quarterly report on Form 10-Q for the quarter
ended September 30, 1999, the "Selling Shareholders" table on page 10 of the
Prospectus is hereby supplemented as follows: The numbers of shares
beneficially owned as of July 12, 1999 by William G. McCabe and Gregory M.
Priest are 3,452,868 and 584,432 (instead of 3,445,066 and 592,234),
respectively, and the numbers of shares which may be sold pursuant to the
prospectus are 3,083,986 and 349,594 (instead of 3,076,184 and 357,396),
respectively.
This prospectus supplement is dated November 16, 1999.
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20548
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, 1999
[_] 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)
900 CHESAPEAKE DRIVE
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices, including zip code)
(650) 817-5900
(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 ("ADSs") (issued or issuable in
exchange for Registrant's outstanding Ordinary Shares) outstanding as of
November 8, 1999 was 49,850,318.
<PAGE>
CBT GROUP PUBLIC LIMITED COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1998
and as of September 30, 1999 3
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 4. Matters Submitted to a Vote of the
Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 27
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CBT GROUP PLC
Condensed Consolidated Balance Sheets
( dollars in thousands)
December 31, September 30,
1998 1999
<S> <C> <C>
ASSETS
Current assets
Cash $ 65,648 $ 69,538
Short term investments 36,386 38,585
Accounts receivable, net 43,508 50,281
Inventories 247 187
Deferred tax assets, net 253 163
Prepaid expenses 5,777 12,155
-------- --------
Total current assets 151,819 170,909
Intangible assets 4,237 60,920
Property and equipment, net 17,636 20,672
Investment 550 850
Other assets 16,002 20,457
-------- --------
Total assets 190,244 273,808
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank overdraft - 89
Accounts payable 5,161 6,270
Accrued payroll and related expenses 6,790 6,531
Other accrued liabilities 20,023 25,875
Deferred revenues 3,004 2,935
-------- --------
Total current liabilities 34,978 41,700
Non Current Liabilities
Other accrued liabilities 82 143
Minority equity interest 383 383
-------- --------
Total non current liabilities 465 526
Shareholders' Equity
Ordinary shares, IR9.375p par value: 120,000,000 shares authorized at 6,725 7,387
December 31, 1998 and September 30, 1999; issued and outstanding:
44,412,808 and 44,387,039 shares at December 31, 1998 and 48,765,912 and
48,740,143 at September 30, 1999
Additional paid-in-capital 127,869 197,540
Accumulated profit 19,293 26,381
Capital redemption 231 231
Treasury stock, 25,769 shares at cost (2) (2)
Other comprehensive income 685 45
-------- --------
Total shareholders' equity 154,801 231,582
-------- --------
Total liabilities and shareholders' equity 190,244 273,808
======== ========
</TABLE>
See notes to condensed consolidated financial statements
Note: The balance sheet does not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements.
-3-
<PAGE>
CBT GROUP PLC
Condensed Consolidated Statements of Operations
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
------------------------------ --------------------------------
Ended September 30, Ended September 30,
------------------------------ --------------------------------
1998 1999 1998 1999
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $35,182 $50,188 $119,963 $137,632
Cost of revenues 5,998 7,436 18,639 21,294
------- ------- -------- --------
Gross profit 29,184 42,752 101,324 116,338
Operating expenses:
Research and development 5,762 8,915 18,756 23,856
Sales and marketing 17,684 22,246 53,174 64,861
General and administrative 4,179 4,033 10,987 12,972
Amortization of acquired intangibles -- 1,567 -- 1,724
Acquired research and development -- -- -- 5,900
Cost of acquisition -- -- 5,505 --
------- ------- -------- --------
Total operating expenses 27,625 36,761 88,422 109,313
------- ------- -------- --------
Income from operations 1,559 5,991 12,902 7,025
Other income, net 1,786 1,216 3,689 2,382
------- ------- -------- --------
Income before provision for income taxes 3,345 7,207 16,591 9,407
Provision for income taxes 468 1,081 2,273 2,319
------- ------- -------- --------
Net income $ 2,877 $ 6,126 $ 14,318 $ 7,088
======= ======= ======== ========
Net income per share (1) - Basic $0.07 $0.13 $0.33 $0.15
======= ======= ======== ========
Shares used in computing net income per 43,944 48,988 43,262 46,242
share - Basic ======= ======= ======== ========
Net income per share (1) - Diluted $0.06 $0.11 $0.31 $0.14
======= ======= ======== ========
Shares used in computing net income per 46,498 55,109 46,222 50,263
share - Diluted ======= ======= ======== ========
</TABLE>
See notes to condensed consolidated financial statements
(1) Net income per share gives effect to the two-for-one share split effected
in March 1998
-4-
<PAGE>
CBT GROUP PLC
Condensed Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1999
------------------- -----------------
Cash Flows from Operating Activities
<S> <C> <C>
Net income $ 14,318 $ 7,088
Adjustments to reconcile net income to net cash used
by operating activities:
Depreciation and amortization 4,306 7,893
Loss on disposal of assets 178 --
Accrued interest on short-term investments 347 199
Non cash acquired R&D expense -- 5,900
Compensation expense 112 --
Changes in operating assets and liabilities:
Accounts receivable (3,474) (6,820)
Inventories (62) 65
Deferred tax assets 201 97
Prepaid expenses and other assets (7,091) (13,312)
Accounts payable 1,211 61
Accrued payroll and related expenses and other accrued liabilities 1,651 2,891
Deferred revenues (2,606) (153)
-------- --------
Net cash provided by operating activities 9,091 3,909
-------- --------
Cash Flows from Investing Activities
Purchases of property and equipment (9,814) (7,961)
Cash acquired on purchase of Knowledge Well -- 768
Payments to acquire short term investments (78,980) (77,695)
Proceeds from sale and maturities of short-term investments 78,454 75,297
Payments to acquire investments (350) (300)
-------- --------
Net cash used in investing activities (10,690) (9,891)
-------- --------
Cash Flows from Financing Activities
Proceeds under bank overdraft facility 41 89
Proceeds from issuance of ordinary shares, net 28,870 10,161
-------- --------
Net cash provided by financing activities 28,911 10,250
-------- --------
Effect of exchange rate changes on cash and cash equivalents 269 (378)
-------- --------
Net increase in cash and cash equivalents 27,581 3,890
Cash and cash equivalents at beginning of period 35,505 65,648
-------- --------
Cash and cash equivalents at end of period $ 63,086 $ 69,538
======== ========
</TABLE>
See notes to condensed consolidated financial statements
-5-
<PAGE>
CBT GROUP PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 INTERIM CONSOLIDATED FINANCIAL STATEMENTS
These interim unaudited condensed and 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.
However, CBT Group PLC, trading as SmartForce (the "Company" or "SmartForce")
believes that the disclosures are adequate to ensure that the information
presented is not misleading. The accompanying interim financial statements
should be read in conjunction with the financial statements and related notes
included in the Company's Annual Report to Shareholders, as amended on Form 10-
K/A, for the fiscal year ended December 31, 1998.
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 results of operations for the periods presented are not
necessarily indicative of the results expected for the full financial year or
for any future period.
NOTE 2 ACQUISITION OF KNOWLEDGE WELL
On June 18, 1999 the Company closed its acquisition of Knowledge Well Group
Limited and Knowledge Well Limited, two private companies formed under the laws
of Ireland (collectively "Knowledge Well"), pursuant to the terms of a Share
Purchase Agreement, dated as of November 30, 1998 as amended and restated as of
March 30, 1999 (the "Share Purchase Agreement"), among SmartForce, Knowledge
Well and the shareholders of Knowledge Well (the "Share Exchange"). Knowledge
Well provides business, management and professional education using interactive
learning technologies. The acquisition of Knowledge Well is being accounted for
under the purchase method of accounting in accordance with U.S generally
accepted accounting principles ("GAAP"). The consolidated financial statements
include the operating results of Knowledge Well from June 18, 1999.
The acquisition was structured as a stock-for-stock exchange, in which a total
of approximately 4.4 million SmartForce shares has been issued in exchange for
all outstanding shares of Knowledge Well. SmartForce has also assumed options to
acquire Knowledge Well stock exercisable for an issuance of up to approximately
0.4 million SmartForce shares.
Under generally accepted accounting principles, which require stock appreciation
in connection with the announcement of the Knowledge Well transaction to be
considered in calculating the purchase price, the purchase price of Knowledge
Well, is approximately $62.7 million. The Company recorded $5.9 million of
acquired in-process research and development expense in the nine months ended
September 30, 1999. The $5.9 million of acquired in-process research and
development expense represents management's estimate of the current fair value
of those specifically identified Knowledge Well research and development
projects for which technological feasibility had not been established and for
which alternative future uses did not exist. Goodwill, the excess of the
consideration paid over the estimated fair value of the net assets and the
identifiable intangible assets acquired, was approximately $23.8 million.
Goodwill is being amortized on a straight line basis over ten years. The Company
has also acquired other identifiable intangible assets of approximately $35.5
million. Other identifiable intangible assets are being amortized on a straight
line basis over periods not exceeding ten years.
-6-
<PAGE>
The following unaudited pro forma information combines the consolidated results
of operations of the Company with those of Knowledge Well as if the acquisition
had occurred at the beginning of each period presented. The pro forma results
give effect to certain purchase accounting adjustments, including additional
amortization expense from goodwill and other identifiable intangible assets and
related income tax effects.
Pro Forma Results of Operations
(unaudited, in millions except per share amounts)
<TABLE>
<CAPTION>
Nine Months Nine Months
------------------- -------------------
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998
------------------- -------------------
<S> <C> <C>
Revenues $137,804 $119,963
Net Income $ 5,231 $ 5,925
Net Income per share $ 0.10 $ 0.12
</TABLE>
NOTE 3 COMPUTATION OF NET INCOME PER SHARE
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 represents and is exchangeable for one Ordinary Share (the "Ratio
Change"). Aside from the Ratio Change, the Ordinary Share Split had no effect on
the ADSs and had no effect on the number of ADSs outstanding.
Basic net income per share is calculated using the weighted average number of
ordinary shares of the Company outstanding during the period including the
issuance of Company ordinary shares as a result of pooling of interests, at the
beginning of the earliest period presented or subsequent date of incorporation
of the pooled entity as applicable. Diluted net income per share is similarly
calculated using the combined weighted average number of ordinary and dilutive
potential ordinary shares, (as determined using the treasury stock method), such
as shares issuable pursuant to the exercise of options outstanding of the
Company including the issuance of Company ordinary and dilutive potential
ordinary shares as a result of pooling of interests.
-7-
<PAGE>
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
(dollars in thousands, except per share amounts)
Three Months Nine Months
-------------------------- -----------------------------
Ended September 30, Ended September 30,
-------------------------- -----------------------------
1998 1999 1998 1999
------------- ----------- -------------- -------------
Numerator:
- ----------
<S> <C> <C> <C> <C>
Numerator for basic and diluted net income $ 2,877 $ 6,126 $14,318 $ 7,088
per share - net income ======= ======= ======= =======
Denominator:
- ------------
Denominator for basic net income per share - 43,944 48,988 43,262 46,242
weighted average shares
Effect of dilutive securities:
Employee stock options 2,554 6,121 2,960 4,021
------- ------- ------- -------
Denominator for diluted net income per share 46,498 55,109 46,222 50,263
- adjusted weighted average shares and ======= ======= ======= =======
assumed conversion
Basic net income per share $ 0.07 $ 0.13 $ 0.33 $ 0.15
======= ======= ======= =======
Diluted net income per share $ 0.06 $ 0.11 $ 0.31 $ 0.14
======= ======= ======= =======
</TABLE>
NOTE 4. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting Standards Board
Statement No.130 ("SFAS 130"), "Reporting Comprehensive Income", which
established new rules for the reporting and display of comprehensive income and
its components. SFAS 130 requires foreign currency translation adjustments,
which prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income.
The following table sets forth the calculation of comprehensive income on an
interim basis:
Nine Months Ended
September 30,
(dollars in thousands) 1998 1999
----------- ------------
Net Income $14,318 $7,088
Other Comprehensive Income 370 (640)
------- ------
Total Comprehensive Income $14,688 $6,448
======= ======
-8-
<PAGE>
NOTE 5. COMMITMENTS AND CONTINGENCIES
Refer to Legal Proceedings in Part II, Item 1 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part I, Item 2
herein.
PART I. FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
SmartForce is a leading provider of e-Learning solutions to businesses and
individuals worldwide. The Company provides businesses and other organizations
with an e-business application that allows them to use internet technology to
redefine the corporate training process and develop a competitive workforce. The
Company has also established SmartForce.com, a leading destination site for
individuals seeking professional advancement. SmartForce learning solutions
allow students or "e-Learners" to immerse themselves in a dynamic, continuously
updated learning environment that provides access to a variety of learning
events and resources, including online seminars, mentoring, news, white papers
and peer to peer collaborations. E-Learning also allows e-Learners to access
SmartForce's industry-leading library of over 1,000 information technology
("IT") courseware titles as well as SmartForce's business and interpersonal
skills offerings. With SmartForce e-Learning, each e-Learner's learning
environment is personalized based on the e-Learner's interests, career
objectives and job profile using Broadvision's One-to-One mass customization
technology. Enterprises will also be able to leverage SmartForce's e-Learning
infrastructure to create their own, customized solutions based on their specific
business requirements.
SmartForce's courseware is used by over 2,000 of the world's leading
corporations to train employees on mission-critical technical, business and
interpersonal skills in the workplace. SmartForce works with leading software
companies, including Cisco Systems, Inc., Informix Corporation, Lotus
Development Corporation, Marimba, Inc., Microsoft Corporation, Netscape
Communications Corporation, Novell, Inc., Oracle Corporation, SAP America, Inc.
, Rational Software, Intel Corporation, Sybase, Inc. and the IBM-Netscape-Sun
Microsystems, collaborative Java education effort to develop and market vendor-
specific training. SmartForce has also formed the Internet Security Training
Consortium with Check Point Software Technologies, Inc., Cisco, IBM, Intel, the
Javasoft business unit of Sun Microsystems, Inc., Lotus, Netscape, Network
Associates, Inc. , RSA Data Security, Inc., Security Dynamics Technologies,
Inc., the Hewlett-Packard Company and VeriSign, Inc. to address the Internet
security training needs of enterprises worldwide. SmartForce business and
interpersonal skills offerings are also developed in conjunction with leading
subject matter experts, including Kansas State University.
-9-
<PAGE>
Beginning in fiscal 1998, the Company adopted Statement of Position 97-2
"Software Revenue Recognition" as amended by Statement of Position 98-4. The
effect of adoption did not have a material impact on the Company's results of
operations. The Company has historically derived its revenues primarily pursuant
to license agreements under which customers license usage of delivered products
for a period of one, two or three years. On each anniversary date during the
term of multi-year license agreements, customers are generally allowed to
exchange any or all of the licensed products for an equivalent number of
alternative products within the SmartForce library. The first year license fee
is generally recognized as revenue at the time of delivery of all products,
provided the Company's fees are fixed or determinable and collections of
accounts receivable are probable. Subsequent annual license fees are recognized
on each anniversary date, provided the Company's fees are fixed or determinable
and collections of accounts receivable are probable. The cost of satisfying any
Post Contract Support ("PCS") is accrued at the time revenue is recognized, as
PCS fees are included in the annual license fee. The estimated cost of providing
PCS during the agreements is insignificant and unspecified upgrades or
enhancements offered have been and are expected to be minimal and infrequent.
For multi-element agreements where Vendor Specific Objective Evidence exists to
allocate the total fee among the various elements of the agreement each element
is recognized as appropriate. Where no such Vendor Specific Objective Evidence
exists revenue is recognized ratably over the life of the agreement. In
addition, the Company derives revenues from sales of its products, which is
recognized upon shipment, net of allowances for estimated future returns and for
excess quantities in distribution channels, provided the Company's fees are
fixed or determinable and collections of accounts receivable are probable.
The Company recently announced the introduction of SmartForce e-Learning, a
fully integrated, Internet-based learning solution. In connection with this
initiative, the Company is moving from a software license model, where the
Company sells a license to a specified list of software titles which may
generally only be exchanged for other titles on an annual basis, to an Internet
rental model where the Company rents to its customers access to a constantly
evolving Internet environment. As a consequence, revenue under e-Learning rental
agreements will generally be deferred and recognized ratably over the term of
the agreement rather than annually in advance under the historical licensing
structure. The Company anticipates that it will migrate the majority of its new
and existing customers to the e-Learning solution by the end of the year 2000.
This migration will result in the deferral of a significant portion of revenues
from 2000 into future periods, and, accordingly, a decrease in reported revenues
for each quarter during the year 2000 as compared to that which would be
expected under the software license model. (1)
In addition, the Company intends to make significant investments in its e-
Learning infrastructure and in building the SmartForce brand. In particular, the
Company anticipates that it will incur at least $30 million in incremental
research and development expenses and capital expenditures through 2001 to build
out its e-Learning infrastructure, and at least $15 million in incremental
marketing expenses through 2000 to build the SmartForce brand. As a result of
the deferral of revenue under e-Learning agreements and these incremental
expenses, the Company expects to record a net loss for each quarter during the
year 2000. These losses could continue beyond that time. (1)
_______________________________________________________________________________
Footnote:
- ---------
(1) This paragraph consists of forward-looking statements reflecting current
expectations. In addition, the Company's actual future performance may not
meet the Company's current expectations. Investors are strongly encouraged
to review the section entitled "Additional Risk Factors That Could Affect
Operating Results" commencing on page 19 and discussions elsewhere in this
Quarterly Report on Form 10-Q of the factors that could affect future
performance.
-10-
<PAGE>
The Company's e-Learning agreements may have other accounting and operating
model consequences that are materially different from the operating model
consequences of the Company's traditional software licensing structure. For
example, the Company recently entered into an agreement with a major customer to
provide an outsourced virtual university for technical education to the
customer. Under the contract, the customer has licensed educational software
from the Company, as well as contracting for professional services, management
fees, on-line mentoring services and certain other items. In addition, the
agreement provides for the Company to resell third parties' instructor led
training to the customer. Revenues from the non-software licenses portion of
this agreement, which represent a substantial majority of the firmly contracted
amount with the customer and all of the potential incremental revenues over the
firmly contracted amount, will generally be recognized ratably as services are
performed, which will have the effect of deferring revenue. Moreover, the gross
margins associated with the non-software license components (and in particular
the resale of third-party instructor-led training) are expected to be
substantially lower than the gross margins typically associated with the
Company's software license agreements.
The Company may not be successful in its efforts to migrate its customers to its
e-Learning solutions and the economic terms of any arrangements that might be
expected may not be as favorable as the traditional licensing agreements. The
Company believes that a lack of success in this regard could have a material
negative effect on the Company. Moreover, to the extent that the Company is
successful in its efforts to enter into e-Learning agreements with its
customers, those arrangements are expected to have accounting and operating
model consequences that would also be materially different from the consequences
of the Company's traditional software licensing model.
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. The Company does not expect funding from
development partners to contribute significantly to revenues in future years.
Recent Developments
Acquisition of Knowledge Well
- -----------------------------
On June 18, 1999, SmartForce closed its acquisition of Knowledge Well Ltd. and
Knowledge Well Group Ltd. (collectively, "Knowledge Well"), providers of
business, management and professional education using interactive learning
technologies. Knowledge Well's software titles are delivered using advanced
interactive learning methodologies, while requiring that the student only have
access to basic, industry-standard computing platforms. Knowledge Well's
strategy is to provide a self-paced education and training solution, allowing
individuals to obtain degrees and/or other credentials.
The successful combination of SmartForce and Knowledge Well 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 SmartForce's ability to realize the full benefits of the
acquisition. The
-11-
<PAGE>
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 loss of momentum in, Knowledge Well's activities. There can be no assurance
that SmartForce will be able to retain Knowledge Well's technical, sales and
marketing personnel, or that it will realize any of the anticipated benefits of
the acquisition.
The acquisition of Knowledge Well will result in an increase of the Company's
research and development, general and administrative and other expenses as a
result of combining the operations of the Company and Knowledge Well. The
amortization of the acquired intangible assets will negatively impact the
results of operations in future quarters. The acquisition may also increase the
Company's revenue to the extent Knowledge Well's products generate incremental
revenue. (1) There can be no assurance that unanticipated contingencies that
would substantially increase the costs of combining the operations of the
Company and Knowledge Well will not occur.
_______________________________________________________________________________
Footnote:
- ---------
(1) This paragraph consists of forward-looking statements reflecting current
expectations. In addition, the Company's actual future performance may not
meet the Company's current expectations. Investors are strongly encouraged
to review the section entitled "Additional Risk Factors That Could Affect
Operating Results" commencing on page 19 and discussions elsewhere in this
Quarterly Report on Form 10-Q of the factors that could affect future
performance.
-12-
<PAGE>
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 Sept. 30, Nine Months Ended Sept. 30,
1998 1999 1998 1999
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Cost of revenues 17.0 14.9 15.7 15.5
---- ---- ---- ----
Gross profit 83.0 85.1 84.5 84.5
Operating expenses:
Research and development 16.4 17.7 15.7 17.3
Sales and marketing 50.3 44.2 44.3 47.2
General and administrative 11.9 8.0 9.2 9.4
Amortization of acquired intangibles -- 3.2 -- 1.2
Acquired research and development -- -- -- 4.3
Costs of acquisition -- -- 4.6 --
---- ---- ---- ----
Total operating expenses 78.6 73.1 73.8 79.4
---- ---- ---- ----
Income from operations 4.4 12.0 10.7 5.1
Other income, net 5.1 2.4 3.1 1.7
---- ---- ---- ----
Income before provision for income taxes 9.5 14.4 13.8 6.8
Provision for income taxes 1.3 2.2 1.9 1.7
---- ---- ---- ----
Net income 8.2% 12.2% 11.9% 5.1%
==== ==== ==== ====
</TABLE>
Revenues
- --------
Revenues increased to $50.2 million in the three months ended September 30, 1999
from $35.2 million in the three months ended September 30, 1998, and increased
to $137.6 million in the nine months ended September 30, 1999 from $120.0
million in the nine months ended September 30, 1998. Since the third quarter of
1998 the Company has experienced a slowdown in the historical quarterly revenue
growth rate due in part to a decline in contract renewals and upgrades and some
contracts generating less revenue than they had historically. The Company's
revenue performance has progressively improved over the last four quarters with
the reversal in the decline of contract renewals and upgrades and increasing
average contract value. Revenues in the first quarter of 1999 increased on a
year over year basis for the first time since the second quarter of 1998.
Revenues in the second and third quarters of 1999 also increased on a year over
year basis.
As noted previously, in connection with its recently announced e-Learning
initiative, the Company is moving from a software licensing model to an Internet
rental model under which revenues under e-Learning rental agreements will
generally be deferred. See "Overview."
Revenues in the United States for the three and nine months ended September 30,
1999 increased to $35.1 million (or 70% of revenues) and $97.9 million (or 71%
of revenues), respectively, from $24.6 million (or 70% of revenues) and $85.7
million (or 71% of revenues) for the three and nine month periods ended
September 30, 1998, respectively.
-13-
<PAGE>
Revenues in the United Kingdom for the three and nine months ended September 30,
1999 increased to $7.4 million (or 15% of revenues) and $18.9 million (or 14% of
revenues), respectively, from $5.0 million (or 14% of revenues) and $13.0
million (or 11% of revenues) for the three and nine months ended September 30,
1998, respectively. Revenues in Ireland for the three and nine months ended
September 30, 1999 were $1.0 million (or 2% of revenues) and $2.1 million (or 1%
of revenues) compared to $0.5 million (or 1% of revenues) and $2.7 million (or
2% of revenues) for the nine months ended September 30, 1998.
In addition, revenues from outside the United States, United Kingdom and Ireland
(principally from Australia, Europe (other than the United Kingdom and Ireland),
Canada, South Africa and the Middle East) in the three and nine months ended
September 30, 1999 were $6.7 million (or 13% of revenues) and $18.7 million (or
14% of revenues), compared to $5.1 million (or 15% of revenues) and $18.6
million (or 16% of revenues) for the three and nine months ended September 30,
1998.
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 compact disks,
diskettes, packaging and documentation), royalties to third parties, third party
instructor led training, the portion of development costs associated with funded
development projects and fulfillment costs.
Gross margins for the three and nine months ended September 30, 1999 were 85.1%
and 84.5% respectively compared to 83.0% and 84.5% for the three and nine months
ended September 30, 1998. The Company expects that cost of revenues may
fluctuate from period to period in the future based upon many factors, including
the rate at which the Company is able to migrate its customers to its e-Learning
solutions, mix of courseware provided to customers (between titles developed
exclusively by SmartForce and royalty-bearing titles developed pursuant to
development and marketing alliances) and the timing of expenses associated with
development and marketing alliances.
Operating Expenses
- ------------------
Throughout the first three quarters of 1998, the Company grew its cost base to
support the expected growth in operations. However, in the third quarter of 1998
the Company's revenue performance was substantially lower than the expectations
on which the Company had built its cost base. Management decided in October 1998
not to drastically reduce the cost base but to hold it relatively constant.
Management believed that the risks of overly-aggressive reductions in the cost
base out-weighed the risks of maintaining the cost base in support of future
operations. The decision not to reduce the cost base has, as management
expected, had the effect of significantly increasing operating expenses as a
percentage of revenues in the first and second quarters of 1999 and effectively
the nine months ended September 30, 1999, over levels experienced in the first
and second quarters of 1998 and the nine months ended September 30, 1998.
-14-
<PAGE>
Research and Development Expenses
- ----------------------------------
Research and development expenses consist primarily of salaries and benefits,
related overhead costs, travel expenses and fees paid to outside consultants.
Research and development expenses increased in absolute terms and as a
percentage of revenues in the three and nine months ended September 30, 1999 to
$8.9 million (or 17.7% of revenues) and $23.8 million (or 17.3% of revenues),
respectively, from $5.8 million (or 16.4% of revenues) and $18.8 million (or
15.7% of revenues) in the three and nine months ended September 30, 1998. These
increases in absolute dollars and percentage terms are primarily the result of
hiring additional research and development personnel and the expansion of the
Company's Dublin development center, both of which were required to develop the
e-Learning infrastructure and also to expand and enhance the Company's library
of software products. In the third quarter of 1999 the Company delivered 76 new
interactive IT education software titles bringing the total for the nine months
ended September 30, 1999 to 226 IT titles. The company's library currently
comprises 1,063 IT titles. As discussed under "Operating Expenses" above, the
decision by management not to significantly reduce the Company's cost base, from
the levels established at the end of the third quarter of 1998, has also
contributed to the growth in research and development expenses as a percentage
of revenues in the three and nine months ended September 30, 1999 compared to
the three and nine months ended September 30, 1998. The Company believes that
significant investment in research and development is required to build-out its
e-Learning infrastructure and thus to remain competitive in the information
technology education and training market, and the Company therefore expects
research and development expenses to significantly increase in future periods.
(1)
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 months ended September 30, 1999 to $22.3 million (or 44.2% of revenues) as
compared to $17.7 million (or 50.3% of revenues) for the three months ended
September 30, 1998 and increased in absolute terms and as a percentage of
revenues for the nine months ended September 30, 1999 to $64.9 million (or 47.2%
of revenues), as compared to $53.2 million (or 44.3% of revenues) for the nine
months ended September 30, 1998. The increases in absolute terms were primarily
attributable to an increase in the number of sales 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 this period. The decrease in sales and marketing expenses as
a percentage of revenue in the three months ended September 30, 1999 as compared
to the three months ended September 30, 1998 was the result of the significant
increase in revenues during the three months ended September 30, 1999 as
compared to the three months ended September 30, 1998. As discussed under
"Operating Expenses" above, the decision by management not to significantly
reduce the Company's cost base, from the levels established at the end of the
third quarter of 1998, has been a primary contributor to the growth in sales and
marketing expenses as a percentage of revenues in the nine months ended
September 30, 1999 as compared to the nine months ended September 30, 1998. As
previously discussed, the Company intends to invest at least $15 million through
the year 2000 in building the SmartForce brand. As a result of this investment,
as well as increases in the sales force to support future growth, the Company
expects to continue to increase sales and marketing expenses in the future. (1)
________________________________________________________________________________
Footnote
(1) This paragraph consists of forward-looking statements reflecting current
expectations. The Company's actual future performance may not meet the
Company's current expectations or its current plans may change. Investors
are strongly encouraged to review the section entitled "Additional Risk
Factors That Could Affect Operating Results" commencing on page 19 and
discussions elsewhere in this Quarterly Report on Form 10-Q of the factors
that could affect future performance.
-15-
<PAGE>
General and Administrative Expenses
- -----------------------------------
General and administrative expenses consist primarily of salaries and benefits,
travel expenses, legal, accounting and consulting fees and related overhead
costs for administrative officers and support personnel. General and
administrative expenses decreased in absolute terms and as a percentage of
revenues in the three months ended September 30, 1999 to $4.0 million (or 8.0%
of revenues) as compared to $4.2 million (or 11.9% of revenues) for the three
months ended September 30, 1998 and increased in absolute terms and as a
percentage of revenues for the nine months ended September 30, 1999 to $13.0
million (or 9.4% of revenues) as compared to $11.0 million (or 9.2% of revenues)
for the nine months ended September 30, 1998. As discussed under "Operating
Expenses" above, the decision by management not to significantly reduce the
Company's cost base, from the levels established at the end of the third quarter
of 1998, has been a primary contributor to the growth in general and
administrative expenses as a percentage of revenues in the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998.The
Company anticipates that general and administrative expenses will increase in
future periods due to increases in staffing and infrastructure. (1)
Amortization of Acquired Intangibles
- ------------------------------------
As a result of the acquisition of Knowledge Well, the Company recorded
identifiable intangible assets of $35.5 million and goodwill of $23.8 million.
Goodwill and the identifiable intangible assets will be amortized on a straight-
line basis over periods not exceeding 10 years. The Company recorded an
amortization charge for goodwill and identifiable intangibles for the three and
nine months ended September 30, 1999 of $1.6 million and $1.7 million,
respectively.
Acquired Research and Development
- ---------------------------------
The Company expensed $5.9 million of acquired in-process research and
development in the nine months ended September 30, 1999. The $5.9 million of
acquired in-process research and development expense represents management's
estimate of the current fair value of those specifically identified Knowledge
Well research and development projects for which technological feasibility had
not been established and for which alternative future uses did not exist.
Cost of Acquisitions
- --------------------
There were no costs of acquisitions expensed in the three or nine months ended
September 30, 1999. The non-recurring costs estimated in respect of the
acquisition of Knowledge Well, approximately $2.5 million, have been capitalized
under the purchase method of accounting in accordance with U.S. GAAP. The
acquisition costs recorded during the three and nine months ended September 30,
1998 were non recurring costs related to the acquisition of The ForeFront Group,
Inc. on May 29, 1998, which was accounted for under the pooling method of
accounting in accordance with U.S. GAAP.
________________________________________________________________________________
Footnote
(1) This paragraph consists of forward-looking statements reflecting current
expectations. The Company's actual future performance may not meet the
Company's current expectations or its current plans may change. Investors
are strongly encouraged to review the section entitled "Additional Risk
Factors That Could Affect Operating Results" commencing on page 19 and
discussions elsewhere in this Quarterly Report on Form 10-Q of the factors
that could affect future performance.
-16-
<PAGE>
Other Income, Net
- ------------------
Other income, net, comprises interest income, interest expense and foreign
currency exchange gains and losses. The Company recognized other income, net, of
$1.2 million and $2.4 million in the three and nine months ended September 30,
1999, respectively, as compared to other income, net, of $1.8 million and $3.7
million in the three and nine months ended September 30, 1998. Other income was
primarily attributable to interest on short-term investments. Included in other
income, net, was a net exchange gain of $211,000 for the three months ended
September 30, 1999 and a net exchange loss of $500,000 for the nine months ended
September 30, 1999, as compared to net exchange gains of $618,000 and $528,000
for the three and nine months ended September 30, 1998. The net exchange loss
incurred for the nine months ended September 30, 1999 was primarily attributable
to the weakening of the Euro and related currencies, in particular the Irish
pound, against the U.S. Dollar during the nine months ended September 30, 1999.
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. The Company has significant
subsidiaries in the United Kingdom, Australia, the Netherlands, Canada and
Germany whose functional currencies are their local currencies and the majority
of whose sales and operating expenses other than cost of goods sold are
denominated in their respective local currencies. In addition, the Company's
Irish subsidiaries, whose functional currency is the U.S. dollar, incur
substantial operating expenses denominated in Irish pounds. 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 as had occurred in the six months ended June 30, 1999. The impact of
future exchange rate fluctuations on the Company's results of operations cannot
be accurately predicted.
The Company's subsidiaries in Canada, the Netherlands and Australia whose
functional currencies are their local currencies, had unhedged liabilities
denominated in U.S. dollars payable to SmartForce Ireland Ltd. ("SmartForce
Ireland") at September 30, 1999 of $4.6 million, $4.5 million, and $4.1 million
respectively.
During the nine months ended September 30, 1999, the Company undertook hedging
transactions against the Irish pound because the Company has substantial
expenses denominated in that currency. The hedging transactions consisted of $20
million in foreign currency forward exchange contracts maturing in monthly
installments from April 1999 to July 1999. To date, the Company has not sought
to hedge the risks associated with fluctuations in the exchange rates of other
currencies against the U.S Dollar, but may undertake such transactions 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.
Other income, net may fluctuate in future periods as a result of movements in
cash, cash equivalents and short-term investment balances, interest rates,
foreign currency exchange rates and asset disposals.
Provision for Income Taxes
- ---------------------------
SmartForce 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.
-17-
<PAGE>
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 tax rates in effect in
the United States and other countries in which the Company has operations. One
Irish subsidiary currently qualifies for a 10% tax rate 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 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 estimated effective tax rate for the three and nine months ended September
30, 1999 was 12% and 14% respectively. The rate at which the Company is accruing
taxes has been reduced based on management's expectations of reduced taxable
income in higher tax jurisdictions due to expected incremental expenses in
respect of the e-Learning initiative. (2)
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments at September 30, 1999 were $108.1 million as
compared to $102.0 million as at December 31, 1998. Working capital increased to
$129.2 million at September 30, 1999 from $116.8 million at December 31, 1998.
Net cash provided by operating activities was $3.9 million in the nine months
ended September 30, 1999 as compared to $9.1 million for the nine months ended
September 30, 1998. The decrease in cash provided by operations was primarily
due to an increase in accounts receivable, prepaid expenses and other assets, as
well as reduced net income, for the nine months ended September 30, 1999 as
compared to the nine months ended September 30, 1998.
Capital expenditures were $8.0 million in the nine months ended September 30,
1999 compared to $9.8 million for the nine months ended September 30, 1998. The
Company expects to make significant investments to its information systems and
other capital expenditure projects over the next two years, primarily as a
result of building the infrastructure for e-Learning. (2)
Proceeds from the issuance of ordinary shares in the nine months ended September
30, 1999 was $10.2 million compared to $28.9 million for the nine months ended
September 30, 1998. This decrease in proceeds from the issue of ordinary shares
is primarily attributable to reduced employee stock option exercises following
the substantial decline in the Company's stock price during the period September
to December 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.
(3) The Company may from time to time consider the acquisition of complementary
businesses, products or technologies, which may require additional financing, or
pursue other strategic capital raising.
________________________________________________________________________________
Footnote:
- ---------
(2) This statement is a forward-looking statement reflecting current
expectations. The Company's actual future performance may not meet the
Company's current expectations or its current plans may change. Investors
are strongly encouraged to review the section entitled "Additional Risk
Factors That Could Affect Operating Results" commencing on page 19 and
discussions elsewhere in this Quarterly Report on Form 10-Q of the factors
that could affect future performance.
(3)This is a forward-looking statement, and actual results may differ materially
depending on a variety of factors, including variable operating results,
investment in the e-Learning infrastructure or in brand building, or presently
unexpected uses of cash such as mergers and acquisitions.
-18-
<PAGE>
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS
Important Note About Forward Looking Statements
In addition to historical statements, this Quarterly Report on Form 10-Q
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. Words such as "anticipates", "expects", "intends",
"plans", "believes", "seeks", "estimates" and similar expressions identify such
forward looking statements. These forward looking statements are not guarantees
of future performance and are subject to certain risks and uncertainties that
could cause actual results to differ materially from those expressed or
forecasted. Actual results may vary because of factors such as product ship
schedules, life cycles, terms and conditions, product mix, competitive products
and pricing, customer demand, technological shifts, litigation and other issues
discussed elsewhere in this Quarterly Report and in the Company's most recent
annual report, as amended on Form 10-K/A, for the fiscal year ended December 31,
1998. These forward-looking statements reflect management's opinions only as of
the date hereof, and the Company assumes no obligation unless required by law to
revise or publicly release the results of any revision to these forward-looking
statements. Risks and uncertainties include, but are not limited to, those
discussed in the section entitled "Additional Risk Factors That Could Affect
Operating Results." Other risks and uncertainties are disclosed in the Company's
SEC filings, including the Company's Annual Report, as amended on Form 10-K/A,
for the fiscal year ended December 31, 1998. Historical results are not
necessarily indicative of trends in operating results for any future period.
In addition to the other factors identified in this Quarterly Report on Form 10-
Q, 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; Anticipated Losses
- ------------------------------------------------------
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. For example, the Company's revenue for the quarter
ended September 30, 1998 did not increase at a rate comparable to prior
quarters. As a direct result, the trading price of the Company's ADSs decreased
rapidly and significantly, having an extreme adverse effect on the value of an
investment in the Company's securities.
The Company has been profitable (before one-time acquisition charges and
amortization of acquired intangibles) for each of the last twenty-three
quarters. There can be no assurance, however, that the Company will be
profitable in the future or that the levels of profitability will not vary
significantly among quarterly periods. The Company recently announced the
introduction of SmartForce e-Learning, a fully integrated, Internet-based
learning solution. In connection with this initiative, the Company is moving
from a software license model, where the Company sells a license to a specified
list of software titles, to an Internet rental model where the Company provides
its customers with access to a constantly evolving Internet environment. As a
consequence, revenue under e-Learning rental agreements will generally be
deferred and recognized ratably over the term of the agreement rather than
annually in advance under the historical licensing structure. The Company
anticipates that it will migrate the majority of its new and existing customers
to the e-Learning solution by the end of the year 2000. This migration will
result in the deferral of a significant portion of revenues from 2000 into
future periods, and, accordingly, a decrease in reported revenues for each
quarter during the year 2000 as compared to that which would be expected under
the software license model.
-19-
<PAGE>
In addition, the Company intends to make significant investments in its e-
Learning infrastructure and in building the SmartForce brand. In particular, the
Company anticipates that it will incur at least $30 million in incremental
research and development expenses and capital expenditures through 2001 to build
out its e-Learning infrastructure, and at least $15 million in incremental
marketing expenses through 2000 to build the SmartForce brand. As a result of
the deferral of revenue under e-Learning agreements and these incremental
expenses, the Company expects to record a net loss for each quarter during the
year 2000. These losses could continue beyond that time.
The Company's operating results may also fluctuate as a result of many factors,
including size and timing of orders and shipments, the rate at which the Company
migrates its customers to its e-Learning solutions, the number and size of
outsourced virtual university agreements or other agreements providing for
professional services or the resale of instructor-led training, mix of sales
between courseware developed solely by the Company and courseware 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, litigation costs and expenses, 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. This risk materialized in the third quarter of 1998,
where profit was dramatically negatively affected by a shortfall in revenues as
against management's expectations. Profit has been negatively affected since
that time by the Company's strategic decision not to significantly reduce its
cost base.
Risks Associated with Internet Initiative
- -----------------------------------------
The Company recently announced a new strategic initiative based on SmartForce e-
Learning, an Internet based learning solution. The success of this initiative
will depend, among other things, on the Company's ability to build-out and
maintain its e-Learning infrastructure, to market and sell the new e-Learning
solution to existing and prospective customers, to create a significant
subscriber base for its e-Learning destination site and to attract and retain
key management and technical personnel. The Company has limited experience with
an Internet model, and the Company's historical results may be of limited value
in predicting the potential success of this initiative.
Risk of System Failure
- ----------------------
The success of the Company's e-Learning strategy is highly dependent on the
consistent performance of its information systems and Internet infrastructure.
If the Company's website fails for any reason, even for only a short period of
time, the Company's business and reputation would be materially harmed.
SmartForce relies on third parties for proper functioning of its computer
infrastructure, delivery of its e-Learning application and the performance of
its destination site. The Company's systems and operations could be damaged or
interrupted by fire, flood, power loss, telecommunications failure, break-ins,
earthquake and similar events. Any system failures could adversely affect
customer usage of the Company's solution and user traffic results in any future
-20-
<PAGE>
quarters, which could adversely affect the Company's revenues and operating
results and harm its reputation with corporate customers, subscribers and
commerce partners. A key element of SmartForce's strategy is to generate a high
volume of traffic to the website and create a significant subscriber base.
Accordingly, the satisfactory performance, reliability and availability of the
Company's website and computer infrastructure is critical to the Company's
reputation and ability to attract and retain corporate customers, subscribers
and commerce partners. SmartForce cannot accurately project the rate or timing
of any increases in traffic to its website and, therefore, the integration and
timing of any upgrades or enhancements required to facilitate any significant
traffic increase to the website are uncertain. The failure to expand and upgrade
the website or any system error or failure could materially harm the Company's
business, reputation, financial condition or results of operations.
Need to Build SmartForce Brand
- ------------------------------
The Company believes that establishing and maintaining the SmartForce brand will
be critical to the success of its e-Learning strategy and that the importance of
brand recognition will increase due to the growing number of education-oriented
Internet sites. Successful promotion and marketing of the SmartForce brand will
depend on providing compelling educational content, community and commerce, and
we intend to significantly increase our marketing and branding expenditures in
our effort to increase our brand awareness. If our brand building strategy is
unsuccessful, these expenses may never be recovered, and our business could be
materially harmed.
Dependence on Key Personnel
- ---------------------------
The Company is dependent on the services of certain key executives. Failure to
retain these executives, or the loss of certain additional senior management
personnel or other key employees, could have a material adverse effect on the
Company's business and future business prospects.
The Company's future success also depends on the continued service of its key
sales, product development and additional operational personnel and on its
ability to attract, motivate and retain highly qualified employees. 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, information systems 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.
Competition
- -----------
The interactive 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 interactive 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
education and training and internal training departments and with other
suppliers of 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 education and training managers more
frequently compare training products provided by outside suppliers.
-21-
<PAGE>
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 interactive
education and training market is characterized by significant price competition,
and the Company expects that it will face increasing price pressures from
competitors as 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.
New and Evolving Markets
- ------------------------
With the acquisition of Knowledge Well, the Company made a strategic decision to
invest in, allocate resources to, the development, sale and marketing of
business, management and professional education software. The market for this
software is new and rapidly evolving. Accordingly, the future prospects for
business, management and professional educational software products, as well as
the Company's ability to realize a return on its existing and future investment
in this business, will depend upon whether a robust market for these products
develops and is sustained and on the Company's ability to develop and implement
products that address emerging market requirements.
Developing Market
- -----------------
The market for interactive education and training is rapidly evolving. New
methods of providing interactive education in a technology based format are
being developed and offered in the marketplace, including intranet and internet
offerings. Many of these new offerings 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, the Company's future success will depend upon, among other factors,
the extent to which the Company is able to develop and implement products which
address these emerging market requirements. There can be no assurance that the
Company 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. 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.
Economic Conditions
- -------------------
The revenue growth and profitability of the Company's business depends on the
overall demand for computer software and services as well as new developments
within the IT industry. The demand for computer software and services is
dependent on general economic and business conditions. Thus, a weakening of the
global economy could result in decreased revenues or decelerating growth rates.
-22-
<PAGE>
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 executive, 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 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.
In addition in June 1999, the Company acquired Knowledge Well. Knowledge Well
provides interactive software that delivers business, management and
professional education skills and/or courses. Although, the software delivery
systems are similar, the Company and Knowledge Well developed distinct
architectures for their respective products. Successful integration of these
architectures will require substantial effort. Difficulties in combining the
companies, products and technologies could have an adverse impact on the
Company's ability to fully benefit from its existing and future investment in
this business and on the future prospects for the business, management and
professional education software products.
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 the 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.
Risk of Increasing Taxes
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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.
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Euro Currency
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The participating members of the European Union adopted the Euro as the common
legal currency on January 1, 1999. On that same date they established the fixed
conversion rates between the existing sovereign currencies and the Euro. The
Company's research and development operation, as well as a number of sales
operations, are based in Europe. The Company does not believe that the Euro
Conversion will have a material impact on its business and financial condition.
However the Company is unable to determine with certainty if the Euro conversion
will have a material adverse impact on the Company's business and financial
condition.
Year 2000
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In the past, many information technology products were designed with two digit
year codes that are unable to determine the correct century for a particular
year. As a result, these hardware and software products may not function or may
give incorrect results in and beyond the Year 1999. This problem has been
generally referred to as the "Year 2000" problem.
The Company has established a Year 2000 Task Force in its Dublin Development
Centre (the "Dublin Task Force") and a Year 2000 Task Force in its corporate
headquarters in Redwood City, California (the "US Task Force") to together
identify and resolve Year 2000 issues. The Dublin Task Force is testing the Year
2000 readiness of SmartForce's current software products and making appropriate
modifications to ensure that SmartForce's software will function appropriately
in 1999, the Year 2000, and throughout the next century. The Dublin Task Force
is also testing the Company's internal systems in Ireland. The US Task Force is
coordinating testing and preparation of the Company' internal systems throughout
the world that are material to SmartForce's operations. The Company has defined
"Year 2000 Ready" to mean that neither performance nor functionality of the
hardware or software product will be negatively affected by four digit dates
prior to, during, and after the Year 2000 in a material manner provided that all
other products (whether hardware or software) used in or in combination with the
product properly exchange data with it.
The Company is utilizing internal resources to identify, test and as necessary
correct or reprogram its products and services for Year 2000 Readiness. The
Company has tested its current products. The Company has determined that all
such products are Year 2000 Ready, except for certain older products for which
there is presently small demand (such as DOS based products) and for which the
Company does not plan to make Year 2000 Ready and CBT Reporter, an
administrative tracking tool. CBT Reporter will function properly provided that
it is used under the conditions specified in the Year 2000 Disclosure section of
the Company's website. In addition, a Year 2000 Ready version of CBT Reporter
has been developed and is scheduled to be released during the fourth quarter of
1999. Despite the Company's testing or assurances from third party software
providers, there can be no assurances that the Company's products do not contain
undetected errors or defects associated with Year 2000 date functions which may
result in delay or loss of revenue, diversion of development resources, damage
to the Company's reputation, costs for third party damage claims, or increased
service costs any of which could impair the Company's finances or business
prospects.
The Company is utilizing internal and external resources to identify, correct,
replace or reprogram, and test its internal systems, including both information
technology ("IT") and non-IT systems. In connection with the Company's Year
2000 internal readiness program, the Company has taken inventory of hardware and
software systems and is continuing to add newly added systems to the inventory,
reviewed third party vendor disclosures regarding their Year 2000 Readiness,
created action plans based upon such disclosures, and is in the process of
implementing such plans. The Company is in the process of completing an
assessment of its material internal IT systems. There can be no assurance that
the Company's internal systems or the systems of other companies on which the
Company's systems rely will be timely Year 2000 Ready and that such failure to
achieve Year 2000 Readiness will not have a material adverse effect on the
Company's systems.
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<PAGE>
The Company has funded its Year 2000 Readiness plan from operating cash flows
and in the past has not separately accounted for these costs. These costs have
principally been the related payroll costs for personnel in the development and
information systems group and costs for third party consultants that have
assisted the Company in this effort. The Company estimates that costs incurred
through September 30, 1999 in connection with the Year 2000 Readiness program
have not been material to the Company. In connection with the Company's internal
system Year 2000 readiness plan, the Company will incur additional costs which
may be material for internal and possibly external administrative personnel to
manage the project and for new (or upgrades to) internal use software, hardware
and related engineering costs.
Although the Company expects to implement successfully the systems and
programming changes necessary to adequately address issues confronting the
Company raised by the Year 2000 problem, there can be no assurance, however,
that problems will not arise with respect to Year 2000 Readiness that the
Company fails to identify or address timely. The Company's inability to timely
implement such changes could have a material adverse effect on future results of
operations.
Some commentators have predicted that a significant amount of litigation will
arise out of Year 2000 readiness issues, and the Company is aware of lawsuits
against other software vendors. In addition, the Company could be affected by
Year 2000 litigation against its software development partners. Because of the
unprecedented nature of such litigation and unknown impact of the Year 2000
problem, it is uncertain to what extent the Company may be affected by such
litigation.
The Company has obtained only minimal information concerning the Year 2000
Readiness status of its customers. If the Company's current or future customers
fail to achieve Year 2000 Readiness or if they divert or delay technology
expenditures to focus on or in connection with preparing their business for the
Year 2000, capital expenditure, software investment and training budgets may be
delayed or spent on remediation efforts rather than information technology
training. Such a delay in software investment or diversion of software
investment or training funds could reduce the demand for the Company's products
both (a) directly, if current and potential customers allocate less funds to
information technology training, and (b) indirectly, by delaying the purchase
and implementation of new systems. This could adversely affect the Company's
future revenues, although the impact is not known at this time.
The Company has facilities, operations, and customers located throughout the
world. Some commentators have reported that some countries, and organizations
within those countries, are not acting intensively to remediate their Year 2000
issues. To the extent that the businesses and governments in countries where the
Company does business do not work intensively at remediation of their Year 2000
issues, the Company may suffer significant interruptions or delays in its
operations and business. This could have a material adverse effect on the
Company's future results of operations.
The Company is also subject to external forces that might affect industry and
commerce generally, such as Year 2000 Readiness failures at utility,
transportation, telecommunication, and Internet provider companies and related
service interruptions. In addition, because the Company has facilities,
operations, and customers located throughout the world, the Company's operations
and financial results may be impacted more severely than those of other
businesses by the failure of its internal network or by the temporary loss of
telecommunication systems or the Internet generally.
The Company does not currently intend to develop a contingency plan to address
situations that may result if it is unable to achieve Year 2000 Readiness of its
critical operations. In the event, the Company decides to develop or implement
such a plan, the cost of doing so may itself be material.
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<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company did not directly or beneficially own any market risk sensitive
instruments at September 30, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since the end of the third quarter of 1998, purported class action lawsuits were
filed in United States District Court for the Northern District of California
and the Superior Court of California for the County of San Mateo against the
Company, SmartForce and certain of the Company's former and current officers and
directors alleging violation of the federal securities laws. The complaints
allege that the defendants misrepresented and/or omitted to state material facts
regarding the Company's business and financial condition and prospects during
the class periods in order to artificially inflate and maintain the price of the
Company's ADSs, and misrepresented and/or omitted to state material facts in the
registration statement and prospectus issued in connection with the merger with
ForeFront, artificially inflating the price of the Company's ADSs.
The Company believes that these actions are without merit and intends to
vigorously defend itself against these claims. Although the outcome of these
actions cannot presently be determined, an adverse resolution of these matters
could have a material adverse effect on the Company's financial position and
results of operations.
On October 29, 1998, a derivative complaint was filed in the Superior Court of
California for the County of San Mateo against several present and former
officers and directors of the Company alleging that these persons violated
various duties to the Company. The derivative complaint also names the Company
as a nominal defendant. The derivative complaint is predicated on the factual
allegations contained in the class action complaints discussed above. No demand
was previously made to the Company's Board of Directors or shareholders
concerning the allegations of the derivative complaint, which seeks an
unspecified amount of damages.
On June 17, 1999, Datatask Pty, Ltd ("Datatask") and Interskill Services, Inc.
("Interskill") filed a complaint against the Company in the Superior Court of
the State of Delaware. Datatask and Interskill alleged breach of contract and
breach of implied covenant of good faith and fair dealing by the Company under
the terms of a distribution agreement. Datatask and Interskill alleged that they
suffered financial harm of approximately $5 million as a result of such
purported breach. The Company believes that the claim is without merit and
intends to vigorously defend itself against the claim.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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10.1* Employment Agreement effective as of June 18, 1999 between CBT Group
PLC, CBT Systems USA, Ltd. and William G. McCabe. In addition to this
employment agreement, Mr. McCabe provides certain other services to the
Company under a consulting agreement between CBT Systems Ltd. and
Clarion Worldwide Limited (Incorporated by reference to exhibit 10.21
to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 as filed with the Securities and Exchange Commission
on March 18, 1998 (File No. 0-25674)). Under this employment agreement
and the consulting agreement, Mr. McCabe's remuneration for services
provided is $250,000 per annum.
10.2* Employment Agreement effective as of June 18, 1999 between CBT Group
PLC, CBT Systems USA, Ltd. and Gregory M. Priest.
10.3* Employment Agreement effective as of June 18, 1999 between CBT Group
PLC, CBT Systems USA, Ltd. and William A. Beamish. In addition to this
employment agreement, Mr. Beamish provides certain other services to
the Company under a consulting agreement between CBT Systems Ltd. and
Clarion Worldwide Limited (Incorporated by reference to exhibit 10.21
to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 as filed with the Securities and Exchange Commission
on March 18, 1998 (File No. 0-25674)). Under this employment agreement
and the consulting agreement, Mr. Beamish's remuneration for services
provided includes a base salary of $200,000 per annum and an annual
performance bonus at 100% achievement of $100,000 per annum at the
discretion of the board.
10.4* Employment Agreement effective as of June 18, 1999 between CBT Group
PLC, CBT Systems USA, Ltd. and William B. Lewis.
10.5* Employment Agreement effective as of June 18, 1999 between CBT Group
PLC, CBT Systems USA, Ltd. and Jeffrey N. Newton.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
------------------------
On July 19, 1999 the Company filed an amendment to the Form 8-K (Form 8-
K/A) dated June 18, 1999, to provide the Financial Statements and Pro Forma
Financial Information as required under Item 7.
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* Denotes management compensatory plan or arrangement
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBT GROUP PLC
Date: November 12, 1999 By: /s/ Gregory M. Priest
---------------------
Gregory M. Priest
President and Chief Executive Officer
Date: November 12, 1999 By: /s/ David C. Drummond
---------------------
David C. Drummond
Executive Vice President of Finance and
Chief Financial Officer
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INDEX TO EXHIBITS
10.1 Employment Agreement effective as of June 18, 1999 between CBT Group
PLC, CBT Systems USA, Ltd. and William G. McCabe.
10.2 Employment Agreement effective as of June 18, 1999 between CBT Group
PLC, CBT Systems USA, Ltd. and Gregory M. Priest.
10.3 Employment Agreement effective as of June 18, 1999 between CBT Group
PLC, CBT Systems USA, Ltd. and William A. Beamish.
10.4 Employment Agreement effective as of June 18, 1999 between CBT Group
PLC, CBT Systems USA, Ltd. and William B. Lewis.
10.5 Employment Agreement effective as of June 18, 1999 between CBT Group
PLC, CBT Systems USA, Ltd. and Jeffrey N. Newton.
27.1 Financial Data Schedule.
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