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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 0-25674
CBT GROUP PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
Republic of Ireland None
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
900 CHESAPEAKE DRIVE
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 817-5900
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
Title of each class on which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Ordinary Shares IR9.375p
Subscription Rights
(Title of class)
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 of time that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting shares held by non-affiliates of
Registrant was $553,309,875 as of March 12, 1999 (excludes 221,292 shares
which may be deemed to be held by directors, officers and affiliates of
Registrant as of March 12, 1999).
The number of Registrant's equivalent American Depositary Shares outstanding
as of March 12, 1999 was 44,486,082.
Portions of Registrant's definitive proxy statement to be delivered to
shareholders in connection with Registrant's annual general meeting of
shareholders to be held on or about May 13, 1999 in Dublin, Ireland, are
incorporated by reference into Part III of this Form 10-K to the extent stated
herein. Except with respect to information specifically incorporated by
reference to this Form 10-K, the proxy statement is not deemed to be filed as
a part hereof.
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CBT GROUP PLC
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
FROM JANUARY 1, 1998 TO DECEMBER 31, 1998
TABLE OF CONTENTS
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PART I
Item 1: Business.............................................................................. 1
Important note about forward looking statements.................................... 1
General............................................................................ 1
Recent Developments................................................................ 2
Industry Background................................................................ 5
The CBT Group Solution............................................................. 6
CBT Group's Strategy............................................................... 7
Products........................................................................... 8
Research and Development........................................................... 10
Development and Marketing Alliances................................................ 11
Customers.......................................................................... 11
Backlog............................................................................ 12
Intellectual Property and Licenses................................................. 12
Competition........................................................................ 12
Sales and Marketing................................................................ 13
Employees.......................................................................... 13
Non U.S. Operations................................................................ 14
Item 2. Properties............................................................................ 15
Item 3. Legal Proceedings..................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................................... 15
PART II
Item 5. Market for Registrants' Share Capital and Related Shareholder Matters................. 16
Item 6. Selected Consolidated Financial Data.................................................. 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.. 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 34
Item 8. Financial Statements and Supplementary Data........................................... 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 61
PART III
Item 10. Directors and Executive Officers of Registrant........................................ 61
Item 11. Executive Compensation................................................................ 61
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 61
Item 13. Certain Relationships and Related Transactions........................................ 61
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K...................... 61
Signatures............................................................................ 65
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PART I
ITEM 1. BUSINESS
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 and in Part II, Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations under the subheading "Additional
Risk Factors that Could Affect Operating Results."
General
CBT Group PLC ("CBT Group," "CBT" 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 837
software titles at the end of 1998 covering a range of client/server,
mainframe, Internet and intranet technologies. CBT Group's products are used
by almost 2,000 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"), Rational Software
("Rational"), Intel Corporation ("Intel"), Centra Software ("Centra"), Sybase,
Inc. ("Sybase") and the IBM-Netscape-Sun Microsystems, Inc. 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, 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"), the Hewlett Packard Company ("HP") and VeriSign, Inc.
("VeriSign") to address the Internet security training needs of enterprises
worldwide.
CBT Group, a public limited company incorporated under the laws of the
Republic of Ireland, was initially formed to act as a holding company for
investment purposes and acquired a controlling interest in a number of
companies in a variety of business areas. In November 1990, the Company
acquired its U.S. subsidiary, CBT Systems USA, Ltd. (effective as of April 3,
1995, CBT Systems USA, Ltd. was merged with and into its parent, Thornton
Holdings, Ltd., which subsequently changed its name to CBT Systems USA, Ltd.)
("CBT USA").
In September 1991, the Company acquired its Irish and U.K. subsidiaries,
including CBT Systems Limited ("CBT Ireland") and CBT Systems UK Limited ("CBT
UK") and sold or dissolved its other unrelated investment businesses. In
January 1994, the Company acquired CBT Systems Africa (Proprietary) Ltd. ("CBT
South Africa") for the purpose of establishing a direct sales presence in
Southern Africa. In August 1995, the Company incorporated CBT Finance Limited
("CBT Finance") under the laws of the Cayman Islands for the purpose of
investing certain of the Company's funds.
In November 1995, the Company completed a merger with Personal Training
Systems ("PTS"), a provider of end-user and consumer interactive educational
software, for an aggregate of 424,228 of its Ordinary Shares. On May 31, 1996,
the Company acquired CLS Consult, Gesellschaft fur Beratung, Management und
Beteiligung mbH, a German limited liability company ("CLS"), and New
Technology Training Ltd., an Ontario, Canada corporation ("NTT"). CLS was a
developer and marketer of interactive education software for SAP client/server
applications, and NTT's primary business had been to act as CBT Group's
exclusive distributor in Canada. The Company issued a total of 291,728
Ordinary Shares to the former shareholders of CLS and NTT in connection with
the acquisitions. On February 28, 1997, the Company completed the acquisitions
of Applied Learning
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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 Group'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 the equivalent of 414,444 Ordinary
Shares to the former shareholders of ALA and Benelux in connection with the
acquisitions. On August 31, 1997, CBT Group 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 37,632 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 258,000 Ordinary Shares to
the former shareholders of MidEast in connection with the acquisition. On May
29, 1998, the Company acquired The Forefront Group, Inc., a Delaware
corporation ("Forefront"), a Houston-based provider of high-quality, cost-
effective, computer-based training products and network utilities for
technical professionals. The Company issued 2,182,851 Ordinary Shares at the
date of acquisition to the former shareholders of Forefront pursuant to the
acquisition and assumed options, warrants, and other rights to acquire
Forefront common stock that could be exercised for approximately 1 million
Ordinary Shares.
The acquisition of each of PTS, CLS, NTT, Benelux, ALA, Scholars, MidEast
and Forefront was accounted for as a "pooling of interests" in accordance with
U.S. generally accepted accounting principles. In compliance with such
principles, the Company's operating results have been restated to include the
results of PTS, CLS, NTT, Benelux, ALA, Scholars, MidEast and Forefront as if
the acquisitions had occurred at the beginning of the first period presented.
Since September 1991, substantially all of the Company's revenues and
operating expenses have been attributable to developing and selling
interactive IT education and training software. Unless the context otherwise
requires, references to the "Company", "CBT" or to "CBT Group" are to CBT
Group PLC and its consolidated subsidiaries.
The Company was incorporated in the Republic of Ireland on August 8, 1989.
The Company's registered office is located at Belfield Office Park,
Clonskeagh, Dublin 4, Ireland, and its telephone number at that address from
the United States is (011) 353-1-218 1000. The address of CBT USA is 900
Chesapeake Drive, Redwood City, California 94063, USA, and its telephone
number at that address is (650) 817-5900.
For additional information about the Company's business, see the
consolidated financial statements and related notes thereto included herein.
Recent Developments
Proposed acquisition of Knowledge Well Ltd. and Knowledge Well Group Ltd.
On December 10, 1998 the Company announced that it had signed a definitive
agreement to acquire 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. This agreement has been amended and restated
on March 30, 1999 to reflect certain changes agreed upon on December 9, 1998
as a result of the decision to account for the acquisition under the purchase
method of accounting in accordance with U.S. generally accepted accounting
principles. The acquisition of Knowledge Well has been approved by an
Independent Committee of CBT Group's Board of Directors, in view of the fact
that certain members of the Board of Directors of CBT Group are shareholders
and/or former officers of
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Knowledge Well, and by the shareholders of Knowledge Well. The acquisition is
subject to specified closing conditions, including approval by the
disinterested shareholders of CBT Group and the receipt of required regulatory
approvals. The acquisition has been structured as a stock-for-stock exchange,
in which a total of approximately 4.0 million CBT Group shares will be issued
in exchange for all outstanding shares of Knowledge Well. CBT Group will also
assume options to acquire Knowledge Well stock exercisable for an issuance of
up to approximately 0.8 million CBT Group shares.
The successful combination of CBT Group and Knowledge Well, including the
successful operation of Knowledge Well 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 acquisition. 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 loss of momentum in,
Knowledge Well's activities. There can be no assurance that CBT Group 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.
Management Changes
On October 1, 1998, Mr. James J. Buckley, CBT's Chairman and Chief Executive
Officer and a member of the Board of Directors, and Mr. Richard Y. Okumoto,
CBT's Senior Vice President of Finance and Chief Financial Officer and also a
member of the Board of Directors, stepped down from their respective
positions. The decision was made jointly by the members of the Company's Board
of Directors, including Mr. Buckley and Mr. Okumoto. Upon resignation, the
Company entered into severance agreements and mutual releases with each of
Messrs. Buckley and Okumoto.
Messrs. Buckley and Okumoto were replaced on an interim basis by a newly
formed management committee, consisting of members of the Company's Board of
Directors. The members of the management committee were Mr. William G. McCabe,
CBT's former Chairman and Chief Executive Officer, Mr. Gregory M. Priest,
CBT's former Vice President of Finance and Chief Financial Officer, and Mr.
John M. Grillos, a member of CBT's Board of Directors. Effective December 10,
1998, the Company appointed Mr. McCabe as Chairman of the Board, Mr. Priest as
President and Chief Executive Officer and Mr. Grillos as Executive Vice
President and Chief Operating Officer. Messrs. Priest and Grillos also remain
members of the Board of Directors.
In December 1998, the Company also appointed Mr. William A. Beamish as
Executive Vice President, Product Strategy and Mr. Jeffrey N. Newton as
Executive Vice President, Global Channel Sales. Both of those individuals had
been executives of the Company and had left the employ of the Company earlier
in 1998. Also in December 1998, the Company promoted Mr. William B. Lewis to
Executive Vice President, Global Field Sales. Prior to the promotion, Mr.
Lewis was Vice President, North American Sales of the Company.
The Company believes based in part on the levels of employee attrition that
it has experienced since the end of the third quarter of 1998, that its recent
management changes have helped to restore the confidence of its employees. The
Company had sequential revenue growth of approximately 20% in the fourth
quarter of 1998, as compared to the third quarter of 1998. The Company
believes that this improvement demonstrates an improved level of confidence in
the customer base. There can be no assurance, however, that there will not be
material problems in the Company's relations with its employees or customers
in the future.
In connection with the proposed acquisition of Knowledge Well, the Company
will enter into Employment and Noncompetition Agreements with Messrs. McCabe,
Priest, Grillos, Beamish, Lewis and Newton prior to the closing of the
acquisition. In the event that the acquisition is not consummated for any
reason, some or all of the executives could choose not to execute the
agreements and to leave their full-time employment at CBT Group. This could
have a material adverse effect on CBT Group.
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Subscription Rights Declaration
On October 4, 1998 the Company's Board of Directors adopted a Subscription
Rights Declaration, pursuant to which one Subscription Right (a "Right") was
granted for each outstanding ordinary share of the Company. Each Right
entitles the registered holder to purchase from the Company one ordinary share
at a price of $65.00 per ordinary share, subject to adjustment. The Rights are
not currently exercisable, but would be exercisable if certain events occurred
related to a person or group acquiring or attempting to acquire beneficially
15% or more of the outstanding ordinary shares. The Rights expire on October
4, 2008, unless cancelled or exchanged earlier by the Company. The Rights have
certain anti-takeover effects. The Rights will cause substantial dilution to a
person or group that attempts to acquire the Company without conditioning the
offer on cancellation of the Rights or on a substantial number of the Rights
being acquired. Accordingly, the existence of the Rights may deter acquirors
from making takeover proposals and tender offers. Takeover proposals and
tender offers typically result in an increase in the trading price of the
stock of the target company. However, the Rights are designed to provide
additional protection against abusive takeover tactics such as offers for all
shares at less than full value or at an inappropriate time (in terms of
maximizing long-term shareholder value), partial tender offers and selective
open-market purchases. The Rights are intended to enhance the power of the
Company's Board of Directors to protect shareholders and the Company if
efforts are made to gain control of the Company in a manner that is not in the
best interests of the Company and its shareholders. The Rights should not
interfere with any merger or other business combination approved by the Board
of Directors of the Company.
Legal Proceedings
Since the end of the third quarter of 1998, purported class action lawsuits
were filed in the United States District Court for the Northern District of
California and the Superior Court of California for the County of San Mateo
against CBT Group PLC, its American operating subsidiary, CBT Systems USA Ltd.
and certain of its former and current officers and directors alleging
violations of the federal securities laws. The complaints allege that the
defendants misrepresented and/or omitted to state material facts regarding
CBT's business and financial condition and prospects during the class periods
in order to artificially inflate and maintain the price of the Company's
American Depositary Shares ("ADSs"), and misrepresented and/or omitted to
state material facts in the registration statement and prospectus issued in
connection with the merger with The ForeFront Group, Inc., 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.
During the period covered by this report, the previously disclosed possible
litigation involving the transfer of certain securities of Datacode
Electronics Ltd. was settled. All amounts paid in relation to the settlement
have been expensed.
Acquisition of The ForeFront Group Inc.
On May 29, 1998, the Company acquired The ForeFront Group, Inc., a Houston-
based provider of high-quality, cost-effective, computer-based training
products and network utilities for technical professionals. In the merger,
each share of ForeFront common stock was exchanged for 0.3137 ADSs, and the
Company assumed outstanding ForeFront stock options, warrants and other rights
to acquire ForeFront common stock. The
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Company issued 2,182,851 Ordinary Shares at the date of acquisition to the
former shareholders of ForeFront and assumed options, warrants and other
rights to acquire ForeFront common stock that could be exercised for
approximately 1.0 million Ordinary Shares. The transaction has been accounted
for as a "pooling of interests" in accordance with U.S. generally accepted
accounting principles.
The successful combination of CBT Group and ForeFront, including the
successful operation of ForeFront as an autonomous subsidiary of CBT Group,
has required and will continue to require substantial effort from each
company. The Company has experienced some difficulties in the integration of
ForeFront and CBT, in particular in connection with the integration of the two
companies' sales operations. These difficulties contributed to the Company's
failure to achieve its internal revenue expectations in the third quarter of
1998 and have continued to affect the Company since that time. These
difficulties could continue to have a negative effect on future results, which
could be material.
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 each (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.
Industry Background
Business organizations continue to be dependent upon computer systems in
order to remain competitive in their markets. This trend has resulted in
significant growth in IT education and training. According to International
Data Corporation ("IDC"), the 1997 global market for IT education and training
was approximately $16.7 billion compared to $11.0 billion in 1992. IDC has
stated that one of the most evident characteristics which define the IT
education and training market is that it is a market in transformation, where
the one primary constant appears to be growth. The transformation per IDC is
primarily due to expanding alternatives of how training can be delivered to
the customer, the widening number of service and product options coming to the
market and the evolving IT training value proposition being presented to the
customer. IDC has noted that there has been a number of identifiable trends
which have helped cause this market transformation, the most significant
being: (1) the shortage of IT skills as the worldwide demand is outstripping
the existing supply of IT professionals (2) a shift in the market towards
technology-based training due to corporations' growing time and budgetary
constraints, coupled with an expanding need to train people across a wide
number of geographic regions (3) global firms moving to use global suppliers
due to strategies which are worldwide in scope and implementation. These
trends are resulting in increased consolidation among suppliers in the market,
which changes the competitive nature of the market.
Traditionally, organizations have primarily fulfilled their requirements for
IT education and training through instructor-led training from external
vendors or internal training departments. Instructor-led training, however,
has a number of limitations. Instructor-led training typically requires
employees to leave their desks for prolonged periods, often to attend classes
at off-site locations. Such training is also difficult to tailor to
individuals' training needs, cannot be easily reviewed and assessed by
Information Service ("IS") managers and may not offer a cost-effective
training solution. The limitations of instructor-led training, combined with
constrained IS budgets, larger numbers of employees requiring training and the
greater breadth of training needed per employee, have prompted organizations
to consider alternative training methodologies. IDC estimates that the
instructor-led training market share has experienced a decline over the last
several years, although the majority of training continues to be instructor
led.
The proliferation of computers throughout organizations, the increasing
multimedia capabilities of computers and the emergence of a web infrastructure
in many companies are supporting the emergence of interactive IT education and
training software. According to IDC, the U.S. market for technology based IT
education and training, including multimedia software, distance learning and
electronic performance support
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systems, was $1.5 billion in 1997, compared to $1.1 billion in 1996,
representing a 36% annual growth rate. The Company believes that as businesses
seek out alternative methods of training employees, there is a significant
market opportunity for software that can meet businesses' needs for
productive, flexible and cost-effective IT education and training.
Although interactive IT education and training software programs have been
available for many years, they currently account for only a small portion of
the overall market for IT training. According to IDC, technology based IT
education and training in 1997 had a market share of 17.5% of the U.S. IT
education and training market, compared to 15.8% in 1996. The Company's future
success will depend upon, among other factors, the extent to which companies
continue to adopt interactive education and training programs. There can be no
assurance that the use of interactive education and training software programs
will become widespread or that the Company's products will achieve commercial
success.
The CBT Group Solution
CBT Group's solutions include a comprehensive library of 837 interactive
software titles at the end of 1998 designed to meet business' and
organizations' IT education and training needs. CBT Group's courseware may be
used on networked and standalone PCs and may be deployed over intranets via
CBT Group's intranet deployment products, CBTWebTM and CBT CampusTM, and the
Internet via CBT Group's Internet deployment product, CBTWeb PlusTM. The
courseware titles are organized into curricula and are designed to cover
specific aspects of client/server, mainframe, Internet and intranet
technologies. Each curriculum provides comprehensive training in an area of
technology such as client/server concepts, operating systems, networking,
graphical user interfaces and database design. In addition, the Company has
developed web-based administration and management tools designed to allow IS
and human resource managers to track employee usage and performance of CBT
Group courseware. In addition, to its own tools, the Company offers a third-
party solution for LAN based administration.
The Company has developed or is developing, both independently and through
development and marketing alliances, titles focused on vendor-specific
products including Microsoft Windows NT, Microsoft Windows 2000, Microsoft
Office 2000, Oracle Database Administrator 7.3 and 8.0 and Developer 2000,
SAP's R/3 3.0 and 4.x, Netscape Navigator, Javascript and LiveWire, IBM/Lotus
Notes, Informix Online Dynamic Server, Cisco Router Configuation curricula,
Novell NetWare, Sybase/Powersoft PowerBuilder, and Marimba Castanet. In
addition, CBT Group has developed courseware titles in conjunction with IBM,
Sun Microsystems and Netscape for the Java Education World Tour and has
developed or is developing generic titles for COBOL, Internet Security, C,
C++, UNIX, IT Core concepts, Project Management and Internetworking. CBT Group
has also formed the Internet Security Training Consortium with Check Point,
Cisco, IBM, Intel, the Javasoft business unit of Sun Microsystems, Inc.,
Lotus, Netscape, Network Associates, RSA Data Security, Security Dynamics, HP
and VeriSign to address the Internet security training needs of enterprises
worldwide.
The Company and Asymetrix Corporation, a leading provider of online learning
solutions, entered into a strategic partnership to provide organizations with
a powerful and easy-to-use tool for creating their own customized computer-
based courseware. The companies have developed Toolbook II for CBT Ireland,
which incorporates the CBT user interface, navigation, and overall look and
feel with the power and flexibility of ToolBook II. This allows companies to
create their own new customized courseware with the same look and feel that
distinguishes CBT Group library of interactive education software. As with CBT
Group's standard courseware, content developed using ToolBook II for CBT
Ireland can be deployed over LANs, WANs, intranets, the Internet or on stand-
alone personal computers.
The Company through its subsidiary, Scholars, also offers the services of
online mentors as a resource for students taking CBT Group courseware to help
them better learn the subjects covered by the courseware and/or pass vendor
certification exams. Scholars focuses on integrating Internet technologies
with proven learning methodologies to deliver Internet-based, certification-
level mentoring services to students worldwide. The company pairs certain
certification tracks covered by CBT Group's approved interactive courseware,
including Microsoft, Novell, Lotus Notes and Cisco, with a team of vendor-
certified mentors, known as Learning Advisors,
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to provide flexible, self-paced study via the Internet. This learning model
extends the advantages of online learning by having Learning Advisors
available to students twenty four hours a day, seven days a week. This
methodology enables students to receive personalized assistance when they need
it through online chats, email, and newsgroups.
The Company's solutions offer many advantages to both end-users and
administrators over traditional instructor-led training. CBT Group's
courseware allows employees to tailor training to their work schedules, begin
training at a level which is suitable to their needs, integrate training with
on-the-job practice, train in only those topics that are relevant to their
needs, and access training materials on an ongoing basis as reference tools.
CBT Group software is interactive, allowing users to practice and test skills
as they learn. The courseware also incorporates sophisticated graphics and
simulation technologies to demonstrate many of the concepts introduced.
In addition, the Company's products are designed to allow administrators to
leverage their training budgets by tailoring training programs to their
organization's needs and tracking training usage and effectiveness.
Organizations that invest in the CBT Group solution can offer CBT Group's
training software across a network, corporate intranet or the Internet to all
employees. CBT Group licenses its courseware primarily through one, two or
three year license agreements. The customer, depending on the individual
contract agreement with CBT Group, over the license term is provided access to
CBT Group's library of titles and allowed to build tailored training solutions
to suit their requirements. Under these license agreements, customers are able
to exchange, generally on the anniversary of the agreement, their courses as
their internal training needs evolve or as technologies advance. In addition,
using the Company's administrative software, IS and human resource
administrators can design and monitor individualized training programs.
CBT Group's Strategy
CBT Group has entered into alliances with Cisco, Informix, Intel, Lotus,
Microsoft, Netscape, Novell, Oracle, SAP, Marimba, Sybase, and the IBM/Sun
Microsystems/Netscape collaborative Java education effort to develop and
market product-specific training. In addition, CBT Group has developed
relationships with Checkpoint, Network Associates, RSA Data Security, Security
Dynamics, HP and VeriSign as a result of its formation of the Internet
Security Curriculum Consortium.
The Company markets its software to Fortune 3000 companies, governmental
entities, institutions of higher education and other major U.S. and
international organizations primarily through a direct sales force. The
Company has increased sales to smaller corporate and government customers
through distributors and its telesales organization.
The Company has almost 2,000 corporate and government customers worldwide,
including the following companies or their affiliates: Alcatel Business
Systems Corporation, American Management Systems, AT&T, The Bear Stearns
Companies, Inc., Bell Atlantic Corporation, Blue Cross Blue Shield Mutual of
Ohio, British Airways, Cambridge Technology Partners, Compaq Computer
Corporation, Computer Sciences Corporation, CTG, Dell Computer Corporation,
GTE Data Services, MCI Communications, Inc., Inc., Price Waterhouse Coopers
LLP, Reuters plc, Sprint Corporation, Tandem Computers, Unisys Corporation,
The University of California System, the United States Air Force and Wells
Fargo & Company.
CBT Group's objective is to maintain and expand its market position through
the following strategies:
Offer a Broad Library to its Customers. The Company offers its customers a
broad product library consisting of 837 software titles at the end of 1998
which it believes has created a competitive barrier to entry. As of
December 31, 1998, CBT Group has also delivered a total of 142 titles in
non english languages, including German, French, Spanish, Italian, Japanese
and Portuguese and plans to deliver additional translated titles in 1999.
(1) The Company's strategy is to continue to expand its product library
- --------
(1) 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 29 and
discussions elsewhere in this Annual Report on Form 10-K of the factors
that could affect future performance.
7
<PAGE>
to allow the Company to sign larger initial contracts and support
incremental sales to its customer base over time. The Company plans to
expand its interactive education offerings outside of the information
technology arena. (1) For example, through the pending acquisition of
Knowledge Well, the Company is establishing a position in the market for
distance learning business degrees being developed by Knowledge Well in
cooperation with Kansas State University.
Leverage Proprietary Development Technologies and Processes. The Company
has created a proprietary development engine and a streamlined development
process to assist the Company in bringing its products to market in a
relatively short time-frame and at a relatively low cost. In addition, the
Company's technology generally supports a common product architecture,
resulting in products that have a recognizable and consistent interface and
are easier to support. The Company plans to continue investing significant
resources in research and development to further enhance its underlying
development engine and to continue to grow its product library. (1)
Deepen Alliances with Key IT Vendors. The Company's strategy is to enter
into development and marketing alliances with key IT vendors to produce and
distribute vendor-specific authorized training programs. To date, the
Company has entered into alliances with Check Point, Cisco, Informix,
Intel, Lotus, Marimba, Microsoft, Netscape, Network Associates, Novell,
Oracle, RSA Data Security, SAP, Security Dynamics, Sybase, VeriSign, the
IBM/Sun Microsystems/Netscape collaborative Java education effort and HP.
The Company believes these alliances provide a number of competitive
advantages, including access to partners' product development plans, source
material and distribution channels. The Company will seek to deepen these
relationships where appropriate.
Expand Channels of Distribution. The Company has primarily targeted Fortune
3000 companies and other major U.S. and international organizations
primarily through its direct sales force. During 1997, CBT Group began
marketing its software to educational institutions and governmental
agencies through a direct sales force. The Company's strategy is to expand
its telesales organization and its channels of indirect sales in order to
reach organizations which could not otherwise be effectively targeted by
its direct sales force and to accelerate its market penetration worldwide.
The Company's indirect sales channels are currently comprised of
distributors, resellers and training organizations. The Company is also
exploring strategies for electronic distribution through on-line services,
the Internet and corporate intranets.
Capitalize on Multimedia Technologies. The Company's current products
include multimedia elements such as rich graphics, interactive text and
simulations, and can be delivered over the Internet or a corporate intranet
and on networked and standalone PCs. The Company's strategy is to enhance
its products over time as its customers adopt enterprise-wide systems which
have the capability to handle the requirements of more advanced multimedia
elements such as sound, video and complex animation.
Serve Emerging Internet/Intranet Market Opportunity. The Company believes
that Internet technologies, including the Internet itself and the use of
these technologies to create enterprise-wide intranets, is radically
altering the way certain critical computing activities are performed. As
the Internet and intranets emerge as a new computing platform, CBT Group
believes that new education and training needs will emerge as well. The
Company will seek to build upon its current activities in order to build a
franchise around Internet and intranet education opportunities.
Products
The Company's product library has grown from 44 titles at December 31, 1992
to 837 titles at December 31, 1998, encompassing over 3000 hours of IT
education and training. In general, CBT Group's courseware includes a
graphically sophisticated interface that leads students through the subject
software, simulating the technology
- --------
(1) 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 29 and
discussions elsewhere in this Annual Report on Form 10-K of the factors
that could affect future performance.
8
<PAGE>
and requiring students to respond actively to the course. CBT Group
interactive training typically provides the user with anywhere from 4 to 8
hours of instruction per individual title. Students may also use the courses
to pre-test their capabilities in order to position themselves properly within
the course and to train only in relevant areas. At the end of the course,
students may take a test to measure accurately their mastery of the course
content. The results of this test may be viewed by a central administrator
using CBT Group's administrative program or exported to a standard database or
spreadsheet.
CBT Group has developed its CBTCampus enterprise-wide network-based
administrative software program designed to allow a central administrator to
track the use of each course, track employee performance and create
specialized curricula for employees by granting access to selected courses.
CBT Group licenses its products primarily through license agreements under
which customers may use the delivered products for a period of one, two or
three years. The license agreement format generally allows customers to
exchange courses on each anniversary date where the agreement is for more than
one year. In order to increase the number of titles or gain access to the
library at a time other than the specified dates, the customer may enter into
a new license agreement or upgrade the existing license agreement. Volume and
multi-year discounts encourage customers to expand license agreements as their
needs grow and as they become more familiar with the Company's product
library. The Company's pricing varies primarily based on the number of users,
the number of titles selected and the length of the contract.
The Company's strategy is to develop comprehensive curricula, each of which
provides training in areas related to client/server, mainframe and Internet
and intranet technologies. The Company's courses are generally compatible with
the Wintel platform.
In addition to its continued support of traditional LAN environments, CBT
Group has developed a number of products that address the emerging Internet
and corporate intranet markets. CBTWeb is an intranet deployment system which
allows users to download CBT Group courseware titles across an intranet.
Access to these titles is gained through a standard browser. CBTWeb enables
customers to access and manage CBT Group courses over an intranet via
internally managed web servers. Using CBTWeb, learners can choose to either
download CBT Group courseware or interact with it in real time over an
intranet using CBT Systems' LivePlayTM capability. The downloaded courseware
contains a utility to send the student records back to a central administrator
so that the student progress may be monitored. CBTWeb Plus is a turnkey
training solution that enables customers to benefit from Internet-based
deployment of CBT Group's entire library of titles without the need to install
server-side software on their own network. CBTWeb Plus is an externally hosted
version of CBTWeb that allows customers to have their CBT Group courseware
managed over the Internet from an external site. CBTWeb Plus is designed to
relieve customers of any network infrastructure or security issues, and
minimizes human resource requirements, while providing a high level of
deployment flexibility since each student receives CBT Group's training from
his or her preferred location.
In July 1997, CBT Group released CBTCampus, CBT Group's training management
and deployment architecture. Coupled with CBT Group's library of titles,
CBTCampus provides CBT Group's customers with a solution for delivering
sophisticated interactive technology training wherever and however it's
needed, running over an intranet. CBTCampus features a university campus
metaphor as an easy-to-navigate student interface, which can be accessed
either as a Windows client application or a web browser plug-in. Behind this
intuitive interface is a suite of sophisticated technologies that creates an
integrated learning environment for students and administrators. 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
9
<PAGE>
extent to which CBT Group is able to develop and implement products that
address these emerging market requirements. There can be no assurance that CBT
Group will be successful in meeting changing market needs. Failure to develop
and implement products that address these emerging market requirements could
have a material adverse affect on CBT Group's business and results of
operations.
Moreover, software products as complex as those offered by the Company may
contain undetected errors or fail when first introduced or upon release of new
versions of the Company's products. The Company has in the past experienced
problems in the introduction of software products, in particular the CBT
Campus deployment and management system. While the Company believes that the
critical problems have been addressed, the Company plans to introduce new
versions of the product to offer performance improvements and feature
enhancements. If the Company were to fail to introduce new versions of this
and other products, or to experience further problems in connection with the
introductions, the Company could suffer a material adverse effect on its
operating results. There can be no assurance that, despite testing by the
Company and by current and potential customers, errors will not be found in
new products after commencement of commercial shipments, resulting in a loss
of or delay in market acceptance.
The subject matter of the Company's courseware is influenced by rapidly
changing technology, evolving industry standards, changes in customer needs
and frequent introductions of new products by software vendors. Accordingly,
the Company believes that its future success will depend in large part upon
its ability to meet these changes by enhancing its existing courses and
developing and introducing new courses on a timely basis. There can be no
assurance that the Company will be successful in addressing the changing needs
of the marketplace by developing and marketing new products or enhancing its
existing products on a timely basis. If the Company were unable, due to
resource, technological or other constraints, to anticipate and respond
adequately to changes in customers' software technology and preferences, the
Company's business and results of operations would be materially adversely
affected.
Research and Development
CBT Group believes that the development of an effective training product
requires the convergence of source material, instructional design and computer
technology. The first step in developing a new training program is to obtain
content through subject matter experts, existing courses, including self-study
courses, and product reference materials, including product manuals. The CBT
Group development team then writes a script for the program which includes a
structure covering all of the relevant concepts, tasks to be completed,
interactive features and tests to measure achievement and to reinforce the
lesson. During the development of a script for a new program, the Company's
developers, working with animators, simulation programmers and graphic
designers, simultaneously plan and develop the course elements. These elements
are then integrated into a single program. The program is then tested to
ensure that each course delivers the desired education and training.
The core of CBT Group's product development is its product development
engine -- an environment comprising CBT Group proprietary software and off-
the-shelf tools -- which has been optimized for the creation of interactive
education software programs. The Company believes that its product development
engine provides a competitive advantage by allowing the Company to create
modular courses, identify and change portions of a course without rewriting
the entire course and enhance the multimedia content of its courses more
quickly and efficiently. The Company's technology generally supports a common
product architecture, resulting in products that have a recognizable and
consistent interface and are easier to support. The Company's goal is to
continue to enhance its product development engine to meet the Company's
future development needs, including ensuring that its courseware is able to
incorporate a wide variety of multimedia elements.
The Company performs substantially all of its research and development
activities and develops substantially all of its courses at its Dublin,
Ireland development facility. From time to time, the Company subcontracts
outside development services to develop portions of particular courses. All
products produced using these outside developers remain the sole property of
CBT Group. During 1996, 1997, and 1998 research and
10
<PAGE>
development expenses totaled $14.5 million, $20.9 million and $25.8 million,
respectively. During 1998, the Company's research and development staff grew
from 272 to 337 employees. The Company intends to continue to make substantial
investments in research and development.
Development and Marketing Alliances
The Company's strategy is to expand its position in the IT education and
training market by forming development and marketing alliances with leading IT
software vendors. CBT Group has entered into alliances with Cisco, Informix,
Intel, Lotus, Microsoft, Netscape, Novell, Oracle, SAP, Marimba, Sybase, and
the IBM/Sun Microsystems/Netscape collaborative Java education effort. CBT
Group has also formed the Internet Security Training Consortium with Check
Point, Cisco, IBM, Intel, the Javasoft business unit of Sun Microsystems,
Inc., Lotus, Netscape, Network Associates, RSA Data Security, Security
Dynamics, HP and VeriSign to address the Internet security training needs of
enterprises worldwide. The Company believes its development and marketing
alliances offer it a number of competitive advantages, including early access
to the vendor's software engineers and technical advisors for assistance in
developing courses on new products. With the approval of the development
partner, products developed under the relationship can be identified as
"authorized" by that software vendor, which the Company believes improves the
marketability of such courses. In addition, these alliances may result in
additional distribution channels for the Company, by allowing each party to
distribute courses to its respective customer base. In some of these
alliances, the software vendor has contributed financial resources toward the
development of specified courses. The Company has recognized the revenue from
such development payments on a percentage of completion basis as products are
produced or, where required in the contract, as the Company has met specified
milestones. The Company believes that these alliances also provide significant
benefits to the software vendors by allowing them to achieve additional market
penetration generated by increasing the base of trained users.
The Company believes that an increasing proportion of its revenues in the
future may be attributable to products developed through its alliances. (1)
There can be no assurance that any of these parties will continue to cooperate
with the Company, that the Company will be able to develop successfully
courses for its development and marketing alliances in a timely fashion or at
all, or that the Company will be able to negotiate additional alliances in the
future on acceptable terms or at all. There can be no assurance that the
marketing efforts of the Company's partners will not disrupt the Company's
direct sales efforts. In addition, the Company's development and marketing
partners could pursue their existing or alternative training programs in
preference to and in competition with those being developed with the Company.
In the event that the Company is not able to maintain or expand its current
development and marketing alliances or enter into new development and
marketing alliances, the Company's operating results and financial condition
could be materially adversely affected. Furthermore, the Company is required
to pay royalties to its development and marketing partners on products
developed with them, which reduces the Company's gross margins. 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. In addition, the
collaborative nature of the development process under these alliances may
result in longer development times and less control over the timing of product
introductions than for courses developed solely by the Company.
Customers
The Company primarily licenses its courses to Fortune 3000 companies and
other major U.S. and international organizations in a wide range of
industries, including manufacturing, transportation,
- --------
(1)This statement is a forward-looking statement reflecting current
expectations. The Company's actual future performance, including that
attributable to its alliances, 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 29 and discussions elsewhere in this Annual Report on Form 10-K of the
factors that could affect future performance.
11
<PAGE>
telecommunications, utilities, banking, healthcare, securities, computers and
insurance. CBT Group also licenses its courseware to educational institutions
and governmental agencies. The Company markets its courseware through its
direct sales organization to almost 2,000 corporate customers worldwide. The
Company also distributes its courses through a number of resellers. No
customer accounted for more than 5% of revenues in 1998, although a single
customer can account for a significantly higher percentage of the Company's
quarterly revenues. Accordingly, failure to achieve a forecasted sale on
schedule can have (and did have in the third quarter of 1998) a material
adverse effect on quarterly operating results.
Backlog
The Company generates a substantial portion of its revenue through multi-
year license agreements. The initial annual license fee is generally
recognized at the time of delivery of products. Subsequent annual license fees
are generally recognized on the anniversary date of such delivery, or if the
customer exchanges courses at the anniversary date, upon delivery of the
exchanged courses. Backlog at any given date represents the amount of all
license fees under current agreements which have not yet been recognized as
revenue. Although the Company's license agreements are generally
noncancellable by their terms, there can be no assurance that any customer
will fulfill the contractual obligations under its agreement. Cancellation,
reduction or delay in orders by or shipments to any of these customers could
have a material adverse effect on the Company's business and results of
operations.
The amount and timing of the recognition of revenue associated with this
backlog can vary depending on the timing of future deliveries of products and
amendments to customers' license agreements. The Company had backlog of
approximately $60 million, $110 million and $144 million as of December 31,
1996, 1997 and 1998, respectively. Approximately 35% of the Company's backlog
as of December 31, 1998 was concentrated among fifteen customers, compared to
35% among seven customers as of December 31, 1997.
Intellectual Property and Licenses
The Company regards its software as proprietary and relies primarily on a
combination of statutory and common law copyright, trademark and trade secret
laws, customer licensing agreements, employee and third-party nondisclosure
agreements and other methods to protect its proprietary rights. Despite these
precautions, it may be possible for a third-party to copy or otherwise obtain
and use the Company's courseware or technology without authorization, or to
develop similar courseware or technology independently. Furthermore, the laws
of certain countries in which the Company sells its products do not protect
the Company's software and intellectual property rights to the same extent as
do the laws of the United States. The Company generally does not include in
its software any mechanisms to prevent or inhibit unauthorized use, but
generally requires the execution of a license agreement which restricts
copying and use of the Company's products. If unauthorized copying or misuse
of the Company's products were to occur to any substantial degree, the
Company's business and results of operations could be materially adversely
affected. There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology.
There can be no assurance that third parties will not claim that the
Company's current or future products infringe on the proprietary rights of
others. The Company expects that software developers will increasingly be
subject to such claims as the number of products and competitors in the IT
education and training industry grows and the functionality of products in the
industry overlaps. Any such claim, with or without merit, could result in
costly litigation or might require the Company to enter into royalty or
licensing agreements. Such royalty or license agreements, if required, may not
be available on terms acceptable to the Company, or at all.
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 the IT
12
<PAGE>
education and training 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 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 may face increasing price pressures from competitors
as IS managers demand more value for their training budgets. Accordingly,
there can be no assurance that the Company will be able to provide products
that compare favorably with new instructor-led techniques or other interactive
training software or that competitive pressures will not require the Company
to reduce its prices significantly.
Sales and Marketing
Direct Sales and Marketing
At December 31, 1998, the Company employed 387 direct sales and marketing
people worldwide, of which 239 were located in the United States. The
Company's telesales organization employed 214 people worldwide, of whom 176
were located in the United States, as of December 31, 1998. The Company plans
to continue to build the telesales organization in 1999. (1)
Indirect Sales
In order to accelerate worldwide market penetration, the Company is
broadening its sales strategy by expanding its indirect sales channels, which
include resellers, development partners, and industry catalogs circulated by
leading IT distributors. The indirect sales channels give the Company access
to a more diverse client base, which the Company believes cannot be targeted
cost-effectively through its direct sales force. At December 31, 1998, the
Company employed 22 indirect sales channel personnel.
The Company's marketing partners also generally have the right to resell
products developed under their alliances with the Company.
Employees
As of December 31, 1998, the Company had a total of 1,187 full-time
employees, of whom 623 were engaged in sales and marketing, 154 in management,
administration and finance 73 in fulfilment and learning advisors and 337 in
product development. On December 31, 1998, 556 employees were located in the
United States, 419 in the Republic of Ireland, 51 in the United Kingdom, 56 in
Canada, 65 in Australia, 16 in the Benelux and Scandinavian countries, 5 in
Germany, 8 in the Middle East and 11 in South Africa. None of the
- --------
(1) 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 29 and discussions
elsewhere in this Annual Report on Form 10-K of the factors that could affect
future performance.
13
<PAGE>
Company's employees are subject to a collective bargaining agreement, and the
Company has not experienced any work stoppages. The Company believes that its
employee relations are good.
On October 1, 1998, Mr. James J. Buckley, the Company's Chairman and Chief
Executive Officer, and Mr. Richard Y. Okumoto, the Company's Senior Vice
President of Finance and Chief Financial Officer, stepped down from their
respective positions. Messrs. Buckley and Okumoto were replaced on an interim
basis by a newly formed management committee. Effective December 10, 1998 the
Company appointed Mr. William G. McCabe as Chairman of the Board and Mr.
Gregory M. Priest as President and Chief Executive Officer.
Both Mr. McCabe and Mr. Priest served on the interim management committee
that had managed the Company since October 1, 1998 and remain on the Board of
Directors. Failure to retain these and other 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 management, 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, IS
and accounting staff. However, there can be no assurance that the Company will
be successful in attracting, retaining or motivating key personnel. In
particular, the Company's recent adverse operating results, stock price
performance and management changes could create uncertainties that could have
a material adverse effect on the Company's ability to attract and retain key
personnel. Although the Company has repriced all stock options (other than
stock options held by the Company's directors) in an effort to retain and
reincent employees, there can be no assurance that this strategy will be
successful, and in any event, it will have a dilutive effect on future
earnings per share. 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.
Non U.S. Operations
In 1998, the Company's products were marketed in over 22 countries, and
sales outside the United States represented approximately 28%, 26% and 30% of
the Company's revenues in 1996, 1997 and 1998, respectively. The Company
expects that international operations will continue to account for a
significant portion of its revenues and intends to continue to expand its
operations outside of the United States. In addition, the Company's research
and development organization is located outside the United States. Operations
outside the United States are subject to inherent risks, including
fluctuations in exchange rates, difficulties or delays in developing and
supporting non-English language versions of the Company's products and
services, political and economic conditions in various jurisdictions,
unexpected changes in regulatory requirements, tariffs and other trade
barriers, difficulties in staffing and managing foreign subsidiary operations,
longer accounts receivable payment cycles and potentially adverse tax
consequences. There can be no assurance that such factors will not have a
material adverse effect on the Company's future operations outside of the
United States.
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 revenues,
costs and assets are denominated in currencies other than their respective
functional currencies. Fluctuations in exchange rates may have a material
adverse affect on the Company's results of operations, particularly its
operating margins, and could also result in exchange losses. As a result of
currency fluctuations, the Company recognized net exchange gains of $4,000,
$112,000 and $516,000 in 1996, 1997 and 1998 respectively. During 1998 the
Company undertook hedging transactions against the Irish pound because the
Company has substantial expenses denominated in that currency. 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.
14
<PAGE>
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 U.S. and in other countries in which the Company has operations.
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. 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 results of operations could be materially adversely affected.
ITEM 2. PROPERTIES
The Company conducts its operations primarily out of its facilities in
Dublin, Ireland, Redwood City, California, Scottsdale, Arizona, and
Clearwater, Florida. In Dublin, Ireland, the Company currently occupies two
properties, one of which comprises approximately 60,000 square feet and houses
the Company's main product development center, and the other comprises
approximately 8,000 square feet containing the Company's fulfillment
operations, including compact disk burning, disk duplication, packaging and
delivery. The Company has not yet entered into a lease on the property
occupied by its main product development center in Dublin, Ireland. The
Company currently leases approximately 41,000 square feet at its United States
headquarters in Redwood City, California, 46,000 square feet in Scottsdale,
Arizona, 25,648 square feet in Menlo Park, California and 19,239 square feet
in Clearwater, Florida. The Company uses the Scottsdale facility to house its
channel organizations and a number of its U.S. telesales personnel.
The Company also leases sales office space in a number of countries
including the United Kingdom, Australia, the Middle East, the Benelux
countries, Canada, Germany and South Africa and throughout the United States.
ITEM 3. 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, CBT USA 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.
During the period covered by this report, the previously disclosed possible
litigation involving the transfer of certain securities of Datacode
Electronics Ltd. was settled. All amounts paid in relation to the settlement
have been expensed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S SHARE CAPITAL AND RELATED SHAREHOLDER MATTERS
The Company's ADSs have been quoted in the Nasdaq National Market under the
symbol CBTSY since the Company's initial public offering on April 13, 1995.
Prior to the initial public offering, there was no public market for the
Company's securities.
The prices per ADS reflected in the table below represent the range of high
and low closing prices reported in the Nasdaq National Market for the periods
indicated and reflects both of the two-for-one splits of the Company's ADSs
effected on each of May 15, 1996 and March 9, 1998.
<TABLE>
<CAPTION>
Fiscal 1998 High Low
- ----------- ------ -----
<S> <C> <C>
Fourth quarter ended December 31.................................. $18.19 $6.69
Third quarter ended September 30.................................. 63.88 9.88
Second quarter ended June 30...................................... 57.00 39.00
First quarter ended March 31...................................... 52.25 33.88
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1997 High Low
- ----------- ------ ------
<S> <C> <C>
Fourth quarter ended December 31................................. $41.19 $30.25
Third quarter ended September 30................................. 40.13 28.63
Second quarter ended June 30..................................... 31.63 20.00
First quarter ended March 31..................................... 35.25 19.07
</TABLE>
As of March 12, 1999, there were 16 holders of Ordinary Shares of record of
the Company.
Dividends
CBT Group has never declared or paid any dividends on its ordinary shares.
CBT Group currently intends to retain all future earnings to finance future
operations and therefore does not anticipate paying any dividends in the
foreseeable future. Moreover, under the Companies Acts of the Republic of
Ireland, dividends may only be paid out of the profits of the Company legally
available for distribution.
Irish Stamp Duty
Stamp duty, which is a tax on certain documents, is payable on all transfers
of ordinary shares in companies registered in Ireland wherever the instrument
of transfer may be executed. In the case of a transfer on sale, stamp duty
will be charged at the rate of IR(Pounds)1 for every IR(Pounds)100 (or part
thereof) of the amount or value of the consideration (i.e., purchase price).
Where the consideration for the sale is expressed in a currency other than
Irish pounds, the duty will be charged on the Irish pound equivalent
calculated at the rate of exchange prevailing on the date of the transfer. In
the case of a transfer by way of gift (subject to certain exceptions) or for
considerations less than the market value of the shares transferred, stamp
duty will be charged at the above rate on such market value.
A transfer or issue of ordinary shares for deposit under the Deposit
Agreement (between CBT Group, The Bank of New York, as Depositary, and the
registered holders and the owners of a beneficial interest in book-entry ADRs)
in return for ADRs will be similarly chargeable with stamp duty as will a
transfer of ordinary shares from the Depositary or the Custodian upon
surrender of an ADR for the purpose of the withdrawal of the underlying
ordinary shares in accordance with the terms of the Deposit Agreement.
The Irish Revenue Commissioners have issued a ruling to the Company that
transfers of ADRs issued in respect of the Company's shares will not be
chargeable with Irish stamp duty for so long as the ADSs are dealt in and
quoted on the Nasdaq National Market. It has been confirmed in Section 207,
Finance Act 1992 that transfers of ADRs will be exempt from stamp duty where
the ADRs are dealt with in a recognized stock exchange. The Nasdaq National
Market is regarded by the Irish authorities as a recognized stock exchange.
16
<PAGE>
The person accountable for payment of stamp duty is the transferee or, in
the case of a transfer by way of gift or for a consideration less than the
market value, both parties to the transfer. Stamp duty is normally payable
within 30 days after the date of execution of the transfer. Late payment of
stamp duty will result in liability to interest, penalties and fines.
Volatility of Stock Price
The Company's initial public offering of the ADSs (the "IPO") was completed
in April 1995, and there can be no assurance that a viable public market for
the ADSs will be sustained. The market price of the ADSs has fluctuated
significantly since the IPO. The Company believes that factors such as
announcements of developments related to the Company's or its competitors'
business, announcements of new products or enhancements by the Company or its
competitors, sales of the ADSs into the public market, developments in the
Company's relationships with its customers, partners and distributors,
shortfalls or changes in revenues, gross margins, earnings or losses or other
financial results from public market expectations, regulatory developments,
fluctuations in results of operations and general conditions in the Company's
market or the markets served by the Company's customers or the economy could
cause the price of the ADSs to fluctuate, perhaps substantially. 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.
In addition, in recent years the stock market in general, and the market for
shares of technology stocks in particular, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. There can be no assurance that the market price of the
ADSs will not continue to experience significant fluctuations in the future,
including fluctuations that are unrelated to the Company's performance.
17
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the five
years in the period ended December 31, 1998 and at December 31, 1998, 1997,
1996, 1995 and 1994 should be read in conjunction with the consolidated
financial statements and related notes thereto in "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The results of
operations for each of the three years in the period ended December 31, 1998
and the balance sheets as at December 31, 1998 and 1997 are derived from the
audited consolidated financial statements of the Company, which have been
prepared in accordance with U.S. generally accepted accounting principles
("U.S. GAAP"). The data at December 31, 1994, 1995 and 1996 and for the years
ended December 1994 and 1995 is derived from audited consolidated financial
statements of the Company prepared in accordance with U.S. GAAP not included
herein. The consolidated statements of operations data for any particular
period are not necessarily indicative of the results of operations for any
future period, including the Company's fiscal year ending December 31, 1999.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues....................... $39,189 $55,395 $87,364 $137,047 $162,232
Cost of revenues............... 9,482 12,505 15,445 22,502 25,137
------- ------- ------- -------- --------
Gross profit................... 29,707 42,890 71,919 114,545 137,095
Operating expenses
Research and development..... 4,351 7,485 14,502 20,878 25,832
Sales and marketing.......... 17,372 23,528 39,288 59,160 75,395
General and administrative... 4,097 5,484 9,075 11,601 15,893
Amortization of acquired
intangibles................. 604 -- -- -- --
Acquired research and
development................. -- -- 2,799 4,097 --
Costs of acquisitions........ -- 198 2,155 1,534 5,505
------- ------- ------- -------- --------
Total operating expenses... 26,424 36,695 67,819 97,270 122,625
------- ------- ------- -------- --------
Income from operations......... 3,283 6,195 4,100 17,275 14,470
Other income (expense), net.... (503) 806 2,825 4,710 4,734
------- ------- ------- -------- --------
Income before provision for
income taxes.................. 2,780 7,001 6,925 21,985 19,204
Provision for income taxes..... (1,038) (1,424) (2,419) (3,916) (2,666)
------- ------- ------- -------- --------
Net income..................... $ 1,742 $ 5,577 $ 4,506 $ 18,069 $ 16,538
======= ======= ======= ======== ========
Net income per share--Diluted.. $ 0.06 $ 0.15 $ 0.11 $ 0.41 $ 0.36
======= ======= ======= ======== ========
Shares used in computing net
income per share amounts...... 31,079 36,610 42,012 44,128 45,979
======= ======= ======= ======== ========
<CAPTION>
December 31,
---------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
short-term investments........ $ 5,190 $53,365 $54,023 $ 71,543 $102,034
Working capital................ (1,544) 56,034 52,055 84,018 116,841
Total assets................... 20,140 82,716 96,662 141,329 190,244
Long-term debt, excluding
current portion............... 787 787 -- -- --
Redeemable convertible
preferred shares.............. 4,736 -- -- -- --
Shareholders' equity
(deficit)..................... (5,247) 59,085 68,248 107,679 154,801
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes thereto contained in Item 8 of this
Annual Report on Form 10-K, which have been restated to reflect the
acquisition of The ForeFront Group, Inc. ("ForeFront"), a Delaware
corporation.
Important Note About Forward Looking Statements
In addition to historical statements, this Annual Report on Form 10-K
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 Annual Report filed on
Form 10-K. 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." The following discussion and analysis
should be read in conjunction with, and is qualified by, the consolidated
financial statements, including the notes thereto, and selected consolidated
financial data included elsewhere in this Annual Report. Historical results
are not necessarily indicative of trends in operating results for any future
period.
Overview
CBT Group PLC ("CBT Group," "CBT" 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 over
837 software titles covering a range of client/server, mainframe, Internet and
intranet technologies. CBT Group's products are used by almost 2,000 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"), Rational Software ("Rational"), Intel
Corporation ("Intel"), Centra Software ("Centra"), 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, 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"), the
Hewlett Packard Company ("HP") and VeriSign, Inc. ("VeriSign") to address the
Internet security training needs of enterprises worldwide.
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 derives 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 CBT Group 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
19
<PAGE>
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 Vendor Specific Objective
Evidence exists to allocate the total fee to the undelivered elements 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.
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
On December 10, 1998 the Company announced that it had signed a definitive
agreement to acquire 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. This ageement has been amended and restated
on March 30, 1999, to reflect certain changes agreed upon December 9, 1998 as
a result of the decision to account for the acquisition under the purchase
method of accounting in accordance with U.S. generally accepted accounting
principles. The acquisition of Knowledge Well has been approved by an
Independent Committee of CBT Group's Board of Directors, in view of the fact
that certain members of the Board of Directors of CBT Group are shareholders
and/or former officers of Knowledge Well, and by the shareholders of Knowledge
Well. The acquisition is subject to specified closing conditions, including
approval by the disinterested shareholders of CBT Group and the receipt of
required regulatory approvals. The acquisition has been structured as a stock-
for-stock exchange, in which a total of approximately 4.0 million CBT Group
shares will be issued in exchange for all outstanding shares of Knowledge
Well. CBT Group will also assume options to acquire Knowledge Well stock
exercisable for an issuance of up to approximately 0.8 million CBT Group
shares.
The successful combination of CBT Group and Knowledge Well, including the
successful operation of Knowledge Well 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 acquisition. 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 loss of momentum in,
Knowledge Well's activities. There can be no assurance that CBT Group will be
able to retain Knowledge Well's technical, sales and customer support
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 acquisition may also increase the Company's revenue to the extent
Knowledge Well's products generate incremental revenue.
20
<PAGE>
The Company estimates that the negotiation and implementation of the
acquisition will result in aggregate pre-tax expenses of approximately $2.2
million, primarily relating to costs associated with combining the companies
and the fees of attorneys, accountants and the financial advisor to the
Company's Independent Committee. Although the Company does not believe that
the costs will significantly exceed the aforementioned amount, there can be no
assurance that the Company's estimate is correct or that unanticipated
contingencies that will substantially increase the costs of combining the
operations of the Company and Knowledge Well will not occur. In addition, the
Company intends to account for the acquisition of Knowledge Well under the
purchase method of accounting in accordance with generally accepted accounting
principles. Under this method of accounting, the purchase price will be
allocated to assets acquired and liabilities assumed based on their estimated
fair values at the time of the closing of the acquisition. The Company intends
to record a non-cash expense of approximately $5.4 million with respect to the
write-off of in-process research and development acquired. In any event, the
Company anticipates that costs associated with the acquisition of Knowledge
Well and the write-off of acquired in-process research and development and
goodwill amortization will negatively impact results of operations in the
quarter in which the acquisition closes. In addition, the amortization of
acquired intangible assets will negatively impact results of operations in
future quarters.(2)
Annual Results of Operations
The following table sets forth certain consolidated statement of operations
data as a percentage of revenues for the three years in the period ended
December 31, 1998:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues...................................................... 100% 100% 100%
Cost of revenues.............................................. 17.7 16.4 15.5
---- ---- ----
Gross profit.................................................. 82.3 83.6 84.5
Operating Expenses
Research and development.................................... 16.6 15.2 15.9
Sales and marketing......................................... 45.0 43.2 46.5
General and administrative.................................. 10.3 8.5 9.8
Acquired research and development........................... 3.2 3.0 --
Costs of acquisitions....................................... 2.5 1.1 3.4
---- ---- ----
Total operating expenses.................................. 77.6 71.0 75.6
---- ---- ----
Income from operations........................................ 4.7 12.6 8.9
Other income, net............................................. 3.2 3.4 2.9
---- ---- ----
Income before provision for income taxes...................... 7.9 16.0 11.8
Provision for income taxes.................................... (2.7) (2.8) (1.6)
---- ---- ----
Net income.................................................... 5.2% 13.2% 10.2%
==== ==== ====
</TABLE>
- --------
(2) This paragraph consists of forward-looking statements reflecting current
expectations. The amount of the expense to be recorded with respect to the
write-off of acquired in-process research and development is based on a
current intention, and the amount actually recorded may be reduced. If such
amount is reduced, the effect on the results of operations for the quarter in
which the acquisition closes will be correspondingly reduced, and the effect
of the amortization of acquired intangible assets on results of operations in
future quarters will be correspondingly increased. 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 29 and
discussions elsewhere in this Annual Report on Form 10-K of the factors that
could affect future performance.
21
<PAGE>
Revenues
Revenues increased from $87.4 million in 1996 to $137.0 million in 1997 and
to $162.2 million in 1998, increases of 57% and 18% in 1997 and 1998 compared
to the corresponding prior years of 1996 and 1997 respectively. The increases
in revenues during these periods were primarily attributable to an increase in
the number of available courses, customer contract renewals and upgrades and
expanded marketing and distribution efforts. During the three month periods
ended September 30, 1998 and December 31, 1998, the Company experienced a
slowdown in the historical quarterly revenue growth rate due in part to a
decline in contract renewals and upgrades and significant new contracts were
also impacted by the uncertainty surrounding the volatility of the Company's
stock price during the final weeks of September 1998. In addition some
contracts that were signed in the six month period ending December 31, 1998
generated less revenue than had historically been the case. Also, the
Company's "Channel" businesses, including the corporate telesales operations,
did not perform as well as had been anticipated. There can be no assurance
that the issues that adversely affected revenues in the third and fourth
quarters of 1998 will not continue to negatively affect the Company's revenues
in the future.
Revenues in the United States increased from $63.1 million (or 72% of
revenues) in 1996 to $101.1 million (or 74% of revenues) in 1997 and to $113.6
million (or 70% of revenues) in 1998. The increases in 1997 and 1998 were
primarily the result of significant increases in the number of sales and
related personnel employed in the United States, an increase in the number of
available courses and an expansion of the Company's customer base. While
revenues in the United States increased significantly in absolute terms over
these periods, the Company's sales and marketing expenses and general and
administrative expenses in the United States also increased rapidly as the
Company hired and expanded its staff to support the U.S. sales growth.
Revenues in the United Kingdom were $9.8 million (or 11% of revenues) in
1996, $11.3 million (or 8% of revenues) in 1997, and $17.4 million (or 11% of
revenues) in 1998, respectively. Revenues in Ireland were $0.8 million (or 1%
of revenues) in 1996, $1.5 million (or 1% of revenues) in 1997 and $3.2
million (or 2% of revenues) in 1998, respectively.
Revenues from countries outside the United States, United Kingdom and
Ireland (principally from Australia, Europe (other than Ireland and the United
Kingdom), Canada, South Africa and MidEast in 1997) were $13.7 million (or 16%
of revenues) in 1996, $23.1 million (or 17% of revenues) in 1997, and $28.1
million (or 17% of revenues) in 1998, respectively. 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.
No customer accounted for more than 5% of revenues in 1996, 1997 or 1998,
although a single customer can account for a significantly higher percentage
of the Company's quarterly revenues. Accordingly, failure to achieve a
forecasted sale on schedule can have (and did have in the third quarter of
1998) a material adverse effect on quarterly operating results. Approximately
35% of the Company's backlog at December 31, 1998 was concentrated among 15
customers, compared to 35% among seven customers at December 31, 1997. Backlog
at any given date represents the amount of all license fees under current
agreements, which have not yet been recognized as revenues. 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, reduction or delay in orders by or shipments to
any of these or other customers could have a material adverse effect on the
Company's business and results of operations.
Cost of Revenues
Cost of revenues includes the cost of materials (such as compact discs,
diskettes, packaging and documentation), royalties to third parties, the
portion of development costs associated with funded development projects and
fulfillment costs.
Gross margins increased from 82.3% in 1996 to 83.6% in 1997 and to 84.5% in
1998. Gross margins have been increasing as a result of the inclusion in the
earlier periods of royalty payments by acquired companies to third party
providers, which were higher than the average royalty payments paid by CBT
Group. Products
22
<PAGE>
previously provided by such acquired companies are being replaced by CBT Group
product. 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, related overhead costs, travel expenses and fees paid to outside
consultants. Research and development expenses increased in absolute terms
from $14.5 million (or 16.6% of revenues) in 1996 to $20.9 million (or 15.2%
of revenues) in 1997 and to $25.8 million (or 15.9% of revenues) in 1998,
principally as a result of an increase in research and development personnel
employed to expand and enhance the Company's library of software products. The
Company delivered 279 new titles during 1998, which brought the Company's
library of titles to 837, representing a 50% increase over the number of
titles at the end of fiscal 1997. The increase in fiscal 1998 is attributable
to the expansion of the Company's Dublin development center, partially offset
by a reduction in the research and development expenses at ForeFront following
the merger in May 1998. The decrease in 1997 in the research and development
expenses as a percentage of revenues was a result of the reorganization of
ForeFront's research and development facility for Internet content management
products in April 1997 compared to 1996 when ForeFront made significant
investments in research and development efforts relating to Internet content
management products. In addition, approximately $803,000, $442,000 and
$596,000 of development expenses incurred in connection with development and
marketing alliances were charged to cost of revenues in 1996, 1997 and 1998,
respectively. The Company believes that significant investment in research and
development is required to remain competitive in the IT education and training
market, and the Company therefore expects research and development expenses to
continue to increase in future periods. (1)
Software development costs are accounted for in accordance with the
Financial Accounting Standards Board Statement No. 86, under which the Company
is required to capitalize software development costs after technological
feasibility has been established. To date, development costs after
establishment of technological feasibility have been immaterial, and all
software development costs have been expensed as incurred.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries and commissions,
travel expenses, advertising and promotional expenses and related overhead
costs. These expenses increased in absolute terms from $39.3 million (or 45.0%
of revenues) in 1996 to $59.2 million (or 43.2% of revenues) in 1997 and to
$75.4 million (or 46.5% of revenues) in 1998. The increases in sales and
marketing expenses are primarily attributable to an increase in the number of
sales and marketing personnel to accommodate the expected growth in operation
in the United States and to a lesser extent outside the United States.
Commission costs have also increased in absolute terms along with the
increases in revenues during these periods. In 1997 and 1998, the Company
increased significantly advertising and promotional expenses to market the
Company's expanded library of titles. The increase in sales and marketing
expenses as a percentage of revenues was negatively impacted by the less than
expected sequential revenue growth for the third and fourth quarters of 1998.
The Company expects to increase sales and marketing expenses in the future to
support expansion of its sales and marketing efforts. (1)
- --------
(1) 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 29 and discussions
elsewhere in this Annual Report on Form 10-K of the factors that could affect
future performance.
23
<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 increased in absolute terms from $9.1 million (or
10.3% of revenues) in 1996 to $11.6 million (or 8.5% of revenues) in 1997 and
to $15.9 million (or 9.8% of revenues) in 1998. The increases were primarily
due to increased staffing and infrastructure to support expanding operations.
The increase in general and administrative expenses as a percentage of
revenues in 1998 was due to the increase in staffing and infrastructure to
facilitate revenue growth, which was less than that which was anticipated. The
decrease as a percentage of revenues from 1996 to 1997 was due principally to
more rapid increases in revenues than in associated expenses during 1997. The
Company anticipates that general and administrative expenses will increase in
future periods due to increases in staffing and infrastructure. (1)
Acquired Research and Development
Acquired research and development expenses increased from $2.8 million (or
3.2% of revenues) in 1996 to $4.1 million (or 3.0% of revenues) in 1997 and
decreased to nil in 1998. The acquired research and development was incurred
by the acquisitions by ForeFront of Blue Squirrel Inc. in 1996, Lan
Professional Corporation and BookMaker Corporation in 1997. These amounts are
included in the Company's results under the pooling method of accounting rules
in accordance with the U.S. GAAP.
Costs of Acquisitions
Costs of acquisitions decreased from $2.2 million (or 2.5% of revenues) in
1996 to $1.5 million (or 1.1% of revenues) in 1997 and increased to $5.5
million (or 3.4% of revenues) in 1998. The acquisition expenses incurred in
1996 were due to the acquisitions of CLS and NTT by the Company and the
acquisition of Blue Squirrel, Inc. by ForeFront. The acquisition expenses
incurred in 1997 were due to the acquisitions of ALA, Benelux, Scholars and
Mid-East by the Company and the acquisitions of BookMaker Corporation, All
Micro, Inc. and Lan Professional Corporation by ForeFront. The acquisition
expenses incurred in 1998 related to the acquisition of ForeFront, accounted
for as a pooling of interests. These expenses consisted primarily of
professional fees, such as investment banking, legal and accounting, severance
costs, closure of offices, goodwill and other intangibles written off
following the closure of certain business segments and other related costs in
connection with the acquisitions. The Company may incur additional acquisition
expenses in the future should it undertake additional acquisitions.
Other Income, Net
Other income, net, comprises interest income, interest expense, gain or loss
on sale of assets and foreign currency exchange gains and losses. The Company
recognized other income, net, of approximately $2.8 million, $4.7 million and
$4.7 million in 1996, 1997 and 1998, respectively.
Included in other income, net in 1997 is a one-time gain on the sale by
ForeFront of Internet printing technology of $1.9 million. Excluding this one
time gain on sale of assets in 1997, the increase in other income, net was due
principally to an increase of $1.5 million in interest income in 1998 as
compared to 1997. This increase in interest income resulted from interest on
increased cashflows from financing and operations. In addition, the Company
recognized net exchange gains of $4,000, $112,000 and $516,000 in 1996, 1997
and 1998 respectively.
- --------
(1) 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 29 and discussions
elsewhere in this Annual Report on Form 10-K of the factors that could affect
future performance.
24
<PAGE>
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. The impact of future exchange
rate fluctuations on the Company's results of operations cannot be accurately
predicted.
The Company's subsidiaries in the United Kingdom, the Netherlands,
Australia, and Canada whose functional currencies are their local currencies,
had unhedged liabilities denominated in U.S. dollars payable to CBT Ireland at
December 31, 1998 of $11.3 million, $3.2 million, $2.7 million and $2.6
million respectively.
During 1998, the Company undertook hedging transactions against the Irish
pound because the Company has substantial expenses denominated in that
currency. 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 investments balances, interest rates,
foreign currency exchange rates and asset disposals.
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 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. The standard rate of Irish corporation tax on both trading and non-
trading income presently (from January 1, 1999) is 28%. The 10% incentive rate
referred to above applies in respect of income derived from certain activities
carried out in the Republic of Ireland. The incentive rate will continue up to
December 31, 2010. Commencing January 1, 2003, it has been confirmed by the
Government of Ireland in an announcement by the Irish Minister for Finance on
December 2, 1998, the corporation tax rate is expected to be 12.5% on trading
income and 25% on non-trading income. 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 Company's provision for income taxes was $2.4 million, $3.9 million and
$2.7 million for each of 1996, 1997 and 1998, respectively.
The effective tax rate for the Company was 34.9%, 17.8% and 13.9% in 1996,
1997 and 1998, respectively. The movement in the effective tax rate was
principally the result of losses incurred by pooled entities in both
25
<PAGE>
1996 and 1997, which were not available to offset taxable income earned in the
same or other jurisdictions pre or post the merger. In particular, ForeFront
had losses of $7.3 million in 1996 and $4.1 million in 1997, which could not
be offset, thus resulting in an increased overall tax rate for those years.
Quarterly Results of Operations
The following table sets forth certain unaudited statement of operations
data for each of the Company's last eight quarters. This unaudited quarterly
financial information has been prepared on a basis consistent with the annual
information presented elsewhere in this Annual Report and, in management's
opinion, reflects all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the information presented. The
operating results for any quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
Quarters Ended
----------------------------------------------------------------------
June Sept June Sept
Mar 31, 30, 30, Dec 31, Mar 31, 30, 30, Dec 31,
1997 1997 1997 1997 1998 1998 1998 1998
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $26,727 $29,755 $35,136 $45,429 $39,929 $44,852 $35,182 $42,269
Cost of revenues........ 4,683 5,173 5,657 6,989 5,944 6,697 5,998 6,498
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 22,044 24,582 29,479 38,440 33,985 38,155 29,184 35,771
Operating expenses
Research and
development.......... 4,431 4,731 5,105 6,611 6,390 6,604 5,762 7,076
Sales and marketing... 12,827 13,415 14,680 18,238 16,868 18,622 17,684 22,221
General and
administrative....... 2,349 3,616 2,624 3,012 3,214 3,594 4,179 4,906
Acquired research and
development.......... -- 447 3,650 -- -- -- -- --
Costs of
acquisitions......... 926 -- 242 366 -- 5,505 -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses........... 20,533 22,209 26,301 28,227 26,472 34,325 27,625 34,203
------- ------- ------- ------- ------- ------- ------- -------
Income from operations.. 1,511 2,373 3,178 10,213 7,513 3,830 1,559 1,568
Other income, net....... 554 665 2,599 892 967 936 1,786 1,045
------- ------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes....... 2,065 3,038 5,777 11,105 8,480 4,766 3,345 2,613
Provision for income
taxes.................. (517) (817) (1,043) (1,539) (1,138) (667) (468) (393)
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. 1,548 2,221 4,734 9,566 7,342 4,099 2,877 2,220
======= ======= ======= ======= ======= ======= ======= =======
Basic net income per
share(1)............... $ 0.04 $ 0.06 $ 0.12 $ 0.23 $ 0.17 $ 0.09 $ 0.07 $ 0.05
======= ======= ======= ======= ======= ======= ======= =======
Diluted net income per
share(1)............... $ 0.04 $ 0.05 $ 0.11 $ 0.21 $ 0.16 $ 0.09 $ 0.06 $ 0.05
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------
(1) Basic and diluted Net income per share gives effect to the two-for-one
split of Registrant's ADSs effected in March 1998 and the ordinary share
split in May 1998. Prior periods have been restated to give effect to such
split.
26
<PAGE>
The following table sets forth, as a percentage of revenues, certain line
items in the Company's statement of operations for the periods indicated.
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------------------------
Mar 31, June 30, Sept 30 Dec 31, Mar 31, June 30, Sept 30 Dec 31,
1997 1997 1997 1997 1998 1998 1998 1998
------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues........ 17.5 17.4 16.1 15.4 14.9 14.9 17.0 15.4
---- ---- ---- ---- ---- ---- ---- ----
Gross profit............ 82.5 82.6 83.9 84.6 85.1 85.1 83.0 84.6
Operating expenses
Research and
development.......... 16.6 15.9 14.5 14.6 16.0 14.7 16.4 16.7
Sales and marketing... 48.0 45.1 41.8 40.1 42.3 41.6 50.3 52.6
General and
administrative....... 8.8 12.1 7.5 6.6 8.0 8.0 11.9 11.6
Acquired research and
development.......... -- 1.5 10.4 -- -- -- -- --
Costs of
acquisitions......... 3.5 -- 0.7 0.8 -- 12.3 -- --
---- ---- ---- ---- ---- ---- ---- ----
Total operating
expenses........... 76.9 74.6 74.9 62.1 66.3 76.6 78.6 80.9
---- ---- ---- ---- ---- ---- ---- ----
Income from operations.. 5.6 8.0 9.0 22.5 18.8 8.5 4.4 3.7
Other income, net....... 2.1 2.2 7.4 1.9 2.4 2.1 5.1 2.5
---- ---- ---- ---- ---- ---- ---- ----
Income before provision
for income taxes....... 7.7 10.2 16.4 24.4 21.2 10.6 9.5 6.2
Provision for income
taxes.................. (1.9) (2.7) (2.9) (3.3) (2.8) (1.5) (1.3) (1.0)
---- ---- ---- ---- ---- ---- ---- ----
Net income.............. 5.8 % 7.5 % 13.5 % 21.1 % 18.4 9.1 % 8.2 % 5.2 %
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
The Company's growth in revenues over the last eight quarters has been
primarily attributable to an increase in the number of available courses in
the Company's library, an increase in the number of customers and increases in
sales to existing customers, as well as the Company's expanded marketing and
distribution efforts in the United States, and to a lesser extent, countries
outside the United States. During the three month periods ended September 30,
1998 and December 31, 1998, the Company experienced a slowdown in the
historical quarterly revenue growth rate due in part to a decline in contract
renewals and upgrades and significant new contracts were also impacted by the
uncertainty surrounding the volatility of the Company's stock price during the
final weeks of September, 1998. In addition some contracts that were signed in
the six month period ending December 31, 1998 generated less revenue than had
historically been the case. Also, the Company's "Channel" businesses,
including the corporate telesales operations, did not perform as well as had
been anticipated. There can be no assurance that the issues that adversely
affected revenues in the third and fourth quarters of 1998 will not continue
to negatively affect the Company's revenues in the future.
In 1998, the Company experienced a slowdown in the historical quarterly
revenue growth rate for the quarters ended September 30, and December 31,
1998. The Company's revenues historically have been highest in the fourth
quarter of each year. There can be no assurance that the issues that adversely
affected revenues in the third and fourth quarters of 1998 will not continue
to negatively affect the Company's net income in the future.
During 1998, the Company hired a number of employees, particularly sales and
marketing personnel, which resulted in an increase in sales and marketing
expenses for the year. The Company also added a significant number of
employees to research and development. As a result of these increases, as well
as continued hiring in other departments, the Company expects operating
expenses in future periods to be significantly higher than in prior periods.
27
<PAGE>
The Company anticipates that it will continue this hiring in the first half
of 1999, which will reduce operating margins, particularly in the first and
second quarters. (2)
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments were $54.0 million, $71.5
million and $102.0 million as of December 31, 1996, 1997 and 1998,
respectively. Working capital was $52.0 million, $84.0 million and $116.8
million as of December 31, 1996, 1997 and 1998 respectively.
The increases in cash, cash equivalents, short term investments and working
capital in 1997 and 1998 were due principally to net income and the proceeds
from the exercise of options, which were offset by investments in property and
equipment to support the Company's expanded operations.
Net cash provided by operating activities decreased from $6.2 million in
1996 to $4.1 million in 1997 and increased to $13.5 million in 1998. The
decrease in net cash provided by operating activities in 1997 was primarily
due to an increase in accounts receivable in 1997. At December 31, 1997
accounts receivable had increased by $19.2 million as compared with the
accounts receivable balance at December 31, 1996. This increase was due
primarily to the revenue earned in the quarter ended December 31, 1997 of
$45.4 million as compared to revenue of $27.8 million for the quarter ended
December 31, 1996. The increase in net cash provided by operating activities
in 1998 was primarily attributable to a significantly lower increase in
accounts receivable than in 1997. The accounts receivable balance at December
31, 1998 increased by $3.6 million from that at December 31, 1997. The
significantly lower increase in accounts receivable compared to the increase
in 1997, can be attributed to the revenue generated in the quarter ended
December 31, 1998 of $42.3 million compared to $45.4 in the corresponding
quarter of 1997. The increase in accounts receivable balance is primarily a
function of the revenue earned in the preceeding quarter and the timing of
payments in respect of receivables. Accounts receivable write-offs in an
accounting year to date have not been material and have been within the
amounts reserved.
Capital expenditures were approximately $7.4 million in 1996, $5.4 million
in 1997 and $12.6 million in 1998. The increases in 1998 were primarily
attributable to expenditures relating to computer equipment and infrastructure
as a result of investments in the Companys' information systems and capital
expenditures on new corporate headquarters in Redwood City, California, a new
facility in Scottsdale, Arizona and the new research and development
facilities in Dublin, Ireland. The Company expects that its capital
expenditure will increase in 1999, primarily as a result of continuing
investments in its information systems and expenditures on the new research
and development facility. (1)
The Company believes that its existing cash, cash equivalents and short-term
investments and cash to be generated from operations will be sufficient to
meet its expected working capital and capital expenditure 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.
- --------
(1) 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 29 and
discussions elsewhere in this Annual Report on Form 10-K of the factors
that could affect future performance.
(2) 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 29 and
discussions elsewhere in this Annual Report on Form 10-K 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 or presently unexpected uses of cash such as mergers and
acquisitions.
28
<PAGE>
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". The SOP requires
the capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use once certain
criteria are met. The Company adopted SOP 98-1 in fiscal 1998.
In February 1998, the Financial Accounting Standards Board ("FASB") 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. The Company has implemented the provisions of
SFAS 132 in 1998 for its defined contribution plan.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activity" ("SFAS 133") which is required to be adopted in years beginning
after June 15, 1999. The Company has yet to determine its date of adoption.
The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges of underlying
transactions must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. Management has not yet determined what the
effect of SFAS 133 will be on the Company's consolidated financial position,
results of operations or cash flows.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions" and
addresses software revenue recognition as it applies to certain multiple-
element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2" through fiscal years beginning on
or before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999.
Additional Risk Factors that Could Affect Operating Results
In addition to the other factors identified in this Annual 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. 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.
Although the Company was profitable in each of the last ten 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
29
<PAGE>
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,
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
and fourth quarters of 1998, where profit was dramatically negatively affected
by a shortfall in revenues as against management's expectations.
Dependence on Key Personnel
On October 1, 1998, Mr. James J. Buckley, the Company's Chairman and Chief
Executive Officer, and Mr. Richard Y. Okumoto, the Company's Senior Vice
President of Finance and Chief Financial Officer, stepped down from their
respective positions. Messrs. Buckley and Okumoto were replaced on an interim
basis by a newly formed management committee. Effective December 10, 1998 the
Company appointed Mr. William G. McCabe as Chairman of the Board and Mr.
Gregory M. Priest as President and Chief Executive Officer. Both Mr. McCabe
and Mr. Priest served on the interim management committee that had managed the
Company since October 1, 1998 and remain on the Board of Directors. Failure to
retain these and other 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, IS and accounting staff.
However, there can be no assurance that the Company will be successful in
attracting, retaining or motivating key personnel. In particular, the
Company's recent adverse operating results, stock price performance and
management changes could create uncertainties that could have a material
adverse effect on the Company's ability to attract and retain key personnel.
Although the Company has repriced all stock options (other than stock options
held by the Company's directors) in an effort to retain and reincent
employees, there can be no assurance that this strategy will be successful,
and in any event, it will have a dilutive effect on future earnings per share.
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 IT education and training market is highly fragmented and competitive,
and the Company expects this competition to increase. The Company expects that
because of the lack of significant barriers to entry into this market, new
competitors may enter the market in the future. In addition, larger companies
are competing with the Company in the IT education and training market, in
part through the acquisition of the Company's competitors, and the Company
expects this trend to continue. Such competitors may also include publishing
companies and vendors of application software, including those vendors with
whom the Company has formed development and marketing alliances.
The Company competes primarily with third-party suppliers of instructor-led
IT education and training and internal training departments and with other
suppliers of IT education and training, including several other
30
<PAGE>
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 their training budgets. Accordingly,
there can be no assurance that the Company will be able to provide products
that compare favorably with new instructor-led techniques or other interactive
training software or that competitive pressures will not require the Company
to reduce its prices significantly.
Developing Market
The market for IT education and training is rapidly evolving. New methods of
delivering interactive education software are being developed and offered in
the marketplace, including intranet and internet deployment and management
systems. Many of these new delivery and training management systems will
involve new and different business models and contracting mechanisms. In
addition, multimedia and other product functionality features are being added
to the educational software. Accordingly, CBT's future success will depend
upon, among other factors, the extent to which CBT is able to develop and
implement products which address these emerging market requirements. There can
be no assurance that CBT will be successful in meeting changing market needs.
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. Because of the issues affecting the Company's third
and fourth quarter results, which will continue to negatively affect the
Company for at least the next several quarters, the reduction in operating
margins is expected to continue for at least the next several quarters. 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.
31
<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 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.
On May 29, 1998, the Company acquired The ForeFront Group, Inc., a Houston
based provider of high quality, cost-effective, computer-based training
products and network utilities for technical professionals. The successful
combination of CBT and ForeFront, including the operation of ForeFront as an
autonomous subsidiary of CBT, has required and will continue to require
substantial effort from each company. The Company has experienced some
difficulties in the integration of ForeFront and CBT, in particular in
connection with the integration of the two companies' sales operations. These
difficulties contributed to the company's failure to achieve its internal
revenue expectations in the third quarter of 1998 and have continued to affect
the Company since that time. These difficulties could continue to have a
negative effect on future results, which could be material.
In addition to the pending acquisition of Knowledge Well, 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
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.
Euro Currency
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
32
<PAGE>
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
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 CBT's current software products and making appropriate
modifications to ensure that CBT'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 CBT'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 almost all of its current products that are
generally available and has determined that all such products are Year 2000
Ready, except for certain older products that the Company does not plan to
make Year 2000 Ready and for which there is presently relatively small demand
(such as DOS based products). The Company has not specifically tested software
obtained from third parties, which is incorporated in CBT's products, but
plans to seek assurances from these third parties that their software is Year
2000 Ready. 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 resources to identify, correct, replace or
reprogram, and test its internal systems, including both information
technology ("IT") and non-IT systems. The Company has not yet determined
whether any external resources will be required. The Company's Year 2000
internal readiness program primarily covers: taking inventory of hardware,
software and embedded systems, creating action plans to address known risks
associated with such systems, contacting vendors for assurances that their
systems are or shall be timely Year 2000 Ready, and contingency planning. The
Company has initiated an assessment of its material internal IT systems and
its non-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.
The Company has thus far 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. The Company estimates that costs
incurred through December 31, 1998 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
33
<PAGE>
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 stated 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 presently has 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 has not yet developed a contingency plan to address situations
that may result if it is unable to achieve Year 2000 Readiness of its critical
operations. The cost of developing or implementing such a plan may itself be
material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company did not directly or benefically own any market risk sensitive
instruments at the end of fiscal 1998 or fiscal 1997.
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Ernst & Young, Independent Auditors.......................... 36
Consolidated Balance Sheets............................................ 37
Consolidated Statements of Operations.................................. 38
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income.................................................. 39-41
Consolidated Statements of Cash Flows.................................. 42
Notes to Consolidated Financial Statements............................. 43-59
</TABLE>
35
<PAGE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors and Shareholders.
CBT Group PLC
We have audited the accompanying consolidated balance sheets of CBT Group
PLC as of December 31, 1997 and 1998 and the related consolidated statements
of operations, changes in shareholders' equity and comprehensive income, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits. We did not audit the financial statements of The
Forefront Group, Inc., a company acquired by the Company in a business
combination accounted for as a pooling-of-interests as described in note 4 to
the consolidated financial statements, which statements reflect total assets
of $10,008,111 as of December 31, 1997, and total revenues of $13,798,466 and
$18,407,770 for the years ended December 31, 1996 and 1997, respectively.
Those statements were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to data included for
The Forefront Group, Inc., is based solely on the report of the other
auditors.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits, and the report
of other auditors, provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of CBT Group PLC at December 31,
1997 and 1998, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with United States generally accepted accounting principles.
/s/ Ernst & Young
_________________________________
ERNST & YOUNG
Dublin, Ireland
Date: January 19, 1999
36
<PAGE>
CBT GROUP PLC
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
At December 31
------------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................. $ 35,505 $ 65,648
Short term investments..................................... 36,038 36,386
Accounts receivable, net................................... 40,031 43,508
Inventories................................................ 615 247
Deferred tax assets, net................................... 140 253
Prepaid expenses........................................... 4,198 5,777
-------- --------
Total current assets..................................... 116,527 151,819
Intangible assets.......................................... 5,956 4,237
Property and equipment, net................................ 10,207 17,636
Investments................................................ 200 550
Deferred tax assets, net................................... 342 --
Other assets............................................... 8,097 16,002
-------- --------
Total assets............................................. $141,329 $190,244
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under bank overdraft facility and overdrafts.... 13 --
Accounts payable........................................... 4,820 5,161
Accrued payroll and related expenses....................... 6,411 6,790
Other accrued liabilities.................................. 16,715 20,023
Deferred revenues.......................................... 4,550 3,004
-------- --------
Total current liabilities................................ 32,509 34,978
Non Current Liabilities
Minority equity interest................................... 622 383
Other liabilities.......................................... 519 82
-------- --------
Total non current liabilities............................ 1,141 465
Shareholders' equity
Ordinary shares, IR9.375p par value: 120,000,000 shares
authorized at December 31, 1997 and 1998; issued and
outstanding 41,763,452 and 41,706,273 at December 31, 1997
and 44,412,808 and 44,387,039 shares at December 31, 1998.. 6,369 6,725
Additional paid-in capital................................. 97,870 127,869
Accumulated profit......................................... 2,986 19,293
Capital redemption......................................... -- 231
Deferred compensation...................................... (112) --
Other comprehensive income................................. 568 685
Treasury stock, 25,769 shares at cost...................... (2) (2)
-------- --------
Total shareholders' equity................................. 107,679 154,801
-------- --------
Total liabilities and shareholders' equity............... $141,329 $190,244
======== ========
</TABLE>
(see accompanying notes)
37
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Revenues........................................... $87,364 $137,047 $162,232
Cost of revenues................................... 15,445 22,502 25,137
------- -------- --------
Gross profit....................................... 71,919 114,545 137,095
Operating expenses:
Research and development......................... 14,502 20,878 25,832
Sales and marketing.............................. 39,288 59,160 75,395
General and administrative....................... 9,075 11,601 15,893
Acquired research and development................ 2,799 4,097 --
Costs of acquisitions............................ 2,155 1,534 5,505
------- -------- --------
Total operating expenses....................... 67,819 97,270 122,625
------- -------- --------
Income from operations............................. 4,100 17,275 14,470
Interest income, net............................... 2,821 2,729 4,218
Gain on sale of assets............................. -- 1,869 --
Net exchange gain.................................. 4 112 516
------- -------- --------
Income before provision for income taxes........... 6,925 21,985 19,204
Provision for income taxes......................... (2,419) (3,916) (2,666)
------- -------- --------
Net Income......................................... $ 4,506 $ 18,069 $ 16,538
======= ======== ========
Net income per share--Basic........................ $ 0.12 $ 0.45 $ 0.38
======= ======== ========
Net income per share--Diluted...................... $ 0.11 $ 0.41 $ 0.36
======= ======== ========
</TABLE>
(see accompanying notes)
38
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Additional Accumulated Receivable Other Total
Ordinary paid-in profit Capital Deferred from comprehensive Treasury shareholders'
shares capital (deficit) redemption compensation shareholders income stock equity
-------- ---------- ----------- ---------- ------------ ------------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1995........... $5,530 $72,412 $(18,196) $ -- $(586) $(190) $ 1 $ (2) $58,969
Issuance of
37,632 ordinary
shares as a
result of
pooling
Scholars.com... 5 (5) -- -- -- -- -- -- --
Issuance of
39,212 ordinary
shares as a
result of the
acquisition of
Blue Squirrel.. 6 392 -- -- -- -- -- -- 398
Issuance of
70,124 ordinary
shares as a
result of the
acquisition of
BookMaker...... 10 2,405 -- -- -- -- -- -- 2,415
Issuance of
1,572,456
ordinary shares
as a result of
option
exercises and
139,580 from
employee
purchase plan.. 257 2,459 -- -- -- -- -- -- 2,716
Amortization of
deferred
compensation... -- (16) -- -- 217 -- -- -- 201
Received from
shareholders... -- -- -- -- -- 190 -- -- 190
Distributions to
stockholders... -- -- (1,505) -- -- -- -- -- (1,505)
Comprehensive
Income:
Net income...... -- -- 4,506 -- -- -- -- -- 4,506
Translation
adjustment..... -- -- -- -- -- -- 358 -- 358
-------
Comprehensive
Income......... 4,864
------ ------- -------- ----- ----- ----- ----- ----- -------
Balance at
December 31,
1996........... $5,808 $77,647 $(15,195) $ -- $(369) $ -- $ 359 $ (2) $68,248
</TABLE>
(see accompanying notes)
39
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Additional Accumulated Receivable Other Total
Ordinary paid-in profit Capital Deferred from comprehensive Treasury shareholders'
shares capital (deficit) redemption compensation shareholders income stock equity
-------- ---------- ----------- ---------- ------------ ------------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996........... $5,808 $77,647 $(15,195) $ -- $ (369) $ -- $ 359 $ (2) $ 68,248
Issuance of
258,000
ordinary shares
as a result of
pooling
MidEast........ 37 370 -- -- -- -- -- -- 407
Issuance of
3,229,864
ordinary shares
as a result of
option
exercises and
91,492 from
employee share
purchase plan.. 522 16,438 -- -- -- -- -- -- 16,960
Issuance of
7,791 ordinary
shares as a
result of the
acquisition of
BookMaker...... 2 214 -- -- -- -- -- -- 216
Issuance of
ordinary shares
as a result of
the acquisition
of Lantec...... -- 2,552 -- -- -- -- -- -- 2,552
Taxation credit
as a result of
disqualifying
dispositions... -- 825 -- -- -- -- -- -- 825
Amortization of
deferred
compensation... -- (176) -- -- 257 -- -- -- 81
Adjustment to
record the
overlap in
accounting for
ALA's net loss
from January 1,
1997 to June
30, 1997....... -- -- 112 -- -- -- -- -- 112
Comprehensive
Income:
Net income...... -- -- 18,069 -- -- -- -- -- 18,069
Translation
adjustment..... -- -- -- -- -- -- 209 -- 209
--------
Comprehensive
Income......... -- -- -- -- -- -- -- -- 18,278
------ ------- -------- ----- ------ ----- ----- ----- --------
Balance at
December 31,
1997........... $6,369 $97,870 $ 2,986 $ -- $(112) $ -- $ 568 $ (2) $107,679
</TABLE>
(see accompanying notes)
40
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Additional Accumulated Receivable Other Total
Ordinary paid-in profit Capital Deferred from comprehensive Treasury shareholders'
shares capital (deficit) redemption compensation shareholders income stock equity
-------- ---------- ----------- ---------- ------------ ------------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1997........... $6,369 $ 97,870 $ 2,986 $ -- $(112) $ -- $ 568 $ (2) $107,679
Issuance of
2,314,200
ordinary shares
as a result of
option
exercises,
194,734 from
employee share
purchase plan
and 7,016 from
the exercise of
warrants....... 334 29,493 -- -- -- -- -- -- 29,827
Release of
31,410 Escrow
shares in
respect of
BookMaker
acquisition.... 4 303 -- -- -- -- -- -- 307
Issue of
exchangable
shares in
respect of
LanTec
acquisition.... 18 (18) -- -- -- -- -- -- --
Amortization of
deferred
compensation... -- -- -- -- 112 -- -- -- 112
Capital
redemption
reserve........ -- -- (231) 231 -- -- -- -- --
Tax credit on
disqualifying
dispositions... -- 221 -- -- -- -- -- -- 221
Comprehensive
Income:
Net income...... -- -- 16,538 -- -- -- -- -- 16,538
Translation
adjustment..... -- -- -- -- -- -- 117 -- 117
--------
Comprehensive
Income......... 16,655
------ -------- ------- ----- ----- ----- ----- ----- --------
Balance at
December 31,
1998........... $6,725 $127,869 $19,293 $ 231 $ -- $ -- $ 685 $ (2) $154,801
====== ======== ======= ===== ===== ===== ===== ===== ========
</TABLE>
(see accompanying notes)
41
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
( dollars in thousands)
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Years ended December
31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................... $ 4,506 $18,069 $16,538
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 2,437 3,582 6,689
Non cash acquired research and development......... 2,799 4,097 --
Taxation credit from disqualifying dispositions.... -- 825 221
(Gain)/ loss on disposal of assets................. -- (1,869) 318
Overlap in accounting for ALA net loss, excluding
depreciation...................................... -- (67) --
Accrued interest on short-term investments......... 221 (465) 241
Changes in operating assets and liabilities:
Accounts receivable................................ (5,910) (19,199) (3,636)
Inventories........................................ (116) 2 367
Deferred tax assets................................ (132) 49 215
Prepaid expenses and other assets.................. (4,260) (5,375) (9,527)
Accounts payable................................... 1,822 168 406
Accrued payroll and related expenses and other
accrued liabilities............................... 2,780 7,175 3,118
Deferred revenue................................... 2,096 (2,855) (1,485)
------- ------- -------
Net cash provided by operating activities.......... 6,243 4,137 13,465
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of intangible assets..................... -- (5,297) --
Purchases of property and equipment................ (7,378) (5,410) (12,634)
Payments to acquire short-term investments......... (1,334) (2,291) (93,673)
Payments to acquire Blue Squirrel, LanTec.......... (128) (1,803) --
Proceeds from acquisition of BookMaker............. 77 -- --
Proceeds from short-term investments............... 12,998 3,500 93,085
Proceeds from investments.......................... -- 4,997 --
Proceeds from sale of assets....................... -- 1,869 --
Payments to acquire investments.................... (4,997) (200) (350)
------- ------- -------
Net cash used in investing activities.............. (762) (4,635) (13,572)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable......................... (79) -- --
Repayments under bank overdraft facility........... (1,381) (140) (13)
Repayments of bank loan............................ (742) -- --
Payment of receivables from shareholders........... 190 -- --
Proceeds from issuance of preferred shares in
subsidiary........................................ -- 606 --
Proceeds from issuance of ordinary shares, net..... 2,716 17,367 30,124
Dividend distributions............................. (1,505) -- --
------- ------- -------
Net cash provided (used) by financing activities... (801) 17,833 30,111
------- ------- -------
Effect of exchange rate changes on cash and cash
equivalents....................................... (135) 929 139
------- ------- -------
Net increase in cash and cash equivalents.......... 4,545 18,264 30,143
Cash and cash equivalents at beginning of period... 12,696 17,241 35,505
------- ------- -------
Cash and cash equivalents at end of period......... $17,241 $35,505 $65,648
======= ======= =======
Supplemental disclosure of cash flow information:
Interest paid...................................... $ 108 $ 43 $ 30
Taxes paid......................................... $ 847 $ 994 $ 2,283
</TABLE>
(see accompanying notes)
42
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
CBT Group PLC is organized as a public limited company under the laws of the
Republic of Ireland. CBT Group PLC and its subsidiaries (collectively, the
"Company" or "CBT") develops and markets interactive information technology
("IT") education and training software. The principal market for the Company's
products comprises major U.S. national and multinational organizations.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States and include the
Company and its subsidiaries in the United States, United Kingdom, Ireland,
South Africa, Canada, Germany, Australia, the Netherlands, Sweden, Norway,
Denmark, the Commonwealth of the Bahamas and Grand Cayman after eliminating
all material inter-company accounts and transactions. All acquisitions have
been accounted for under the purchase accounting method, except for the
mergers with Personal Training Systems ("PTS"), CBT Systems Canada Limited (
formerly known as New Technology Training Limited ) ("NTT"), CLS Consult
Gessellschaft fur Beratung, Management und Beteiligung mbH ("CLS"), CBT
Systems Benelux B.V. ("Benelux"), Applied Learning Limited ("ALA"), Ben Watson
& Associates Limited ("Scholars.com"), CBT Systems Middle East Limited
("MidEast"), and The ForeFront Group, Inc ("ForeFront"), which have been
included in the consolidated financial statements under the pooling of
interests method (see note 4).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Translation of Financial Statements of Foreign Entities
The reporting currency for the Company is the U.S. dollar ("dollar"). The
functional currency of the Company's subsidiaries in the United States, United
Kingdom, Republic of South Africa, Canada, Germany, Australia, the
Netherlands, Sweden, Norway and Denmark are the currencies of those countries.
The functional currency of the Company's subsidiaries in Ireland, the
Commonwealth of the Bahamas and Grand Cayman is the dollar.
Balance sheet amounts are translated to the dollar from the local functional
currency at year-end exchange rates, while statements of operations amounts in
local functional currency are translated using average exchange rates.
Translation gains or losses are recorded in other comprehensive income.
Currency gains or losses on transactions denominated in a currency other than
an entity's functional currency are recorded in the results of the operations.
The Company has not undertaken hedging transactions to cover its currency
exposures.
Revenue Recognition
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 derives 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
43
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Organization and Summary of Significant Accounting Policies (continued)
multiyear license agreements, customers are allowed to exchange any or all of
the licensed products for an equivalent number of alternative products within
the CBT 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 Vendor Specific Objective Evidence exists to allocate the
total fee to the undelivered elements 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.
Revenues from product development arrangements are generally recognized on a
percentage of completion basis as milestones are completed or products
produced under the arrangement.
Revenues from license agreements providing product exchange rights other
than annually during the term of the agreement are deferred and recognized
ratably over the contract period. Such amounts, together with unearned
development and license revenues, are recorded as deferred revenues in the
consolidated financial statements.
Cost of Revenues
Cost of revenues include materials (such as diskettes, compact discs,
packaging and documentation), royalties paid to third parties, the portion of
development costs associated with product co-development arrangements,
fulfillment costs and the amortization of the cost of purchased products.
Approximately $803,000, $442,000 and $596,000 of development expenses incurred
in connection with development and marketing alliances were charged to cost of
revenues in 1996, 1997 and 1998, respectively.
Inventories
Inventories are stated at the lower of cost (first in, first out) or net
realizable value and consist principally of compact discs, diskettes and
manuals. Net realizable value is the estimated selling price less all
applicable selling costs.
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of a working model. Development costs incurred by the Company between
completion of the working model and the point at which the product is ready
for general release have been insignificant. Through December 31, 1998, all
research and development costs have been expensed as incurred.
Intangible Fixed Assets
In December 1997 the Company and Street Technologies, Inc. ("Street") a
developer of technology to "stream" multimedia and other large data files to
permit real-time delivery over local and wide area networks,
44
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Organization and Summary of Significant Accounting Policies (continued)
corporate intranets and the Internet, entered into an agreement pursuant to
which Street granted to the Company a perpetual license to its software in
return for a once off payment of $5,297,000. As part of the agreement the
Company disposed of its investment in Street for $4,997,000, which was the
cost of its original investment. The Company commenced amortizing this asset,
using the straight line method, over a period of five years on January 1,
1998. Also included in intangible assets are goodwill and other intangibles
relating to the acquisition of Lantec (see note 4). These intangibles were
amortized in full at December 31, 1998. Accumulated amortization at December
31, 1997 and 1998 was $13,000 and $1,732,000 respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of two to
five years. Leasehold improvements are amortized over the lesser of the term
of the lease or the estimated useful life of the asset.
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 (see
note 4), 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.
Defined Contribution Plan
The Company sponsors and contributes to a defined contribution plan for
certain employees and directors. Contribution amounts by the Company are
determined by management and allocated to employees on a pro rata basis based
on the employees' contribution. The Company contributed approximately
$232,000, $270,000 and $350,000 to the Plan in the years ended December 31,
1996, 1997 and 1998, respectively.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock -
Based Compensation" encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25. "Accounting for Stock Issued to Employees" ("APB25"), and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. This cost is deferred and charged to expense ratably over the
vesting period, generally four years. Where shares are issued at less than the
deemed value for accounting
45
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Organization and Summary of Significant Accounting Policies (continued)
purposes, the excess of the deemed value for accounting purposes over the
amount the employee must pay to acquire the shares is charged to expense as
stock compensation and credited to additional paid-in capital in the period of
transfer. The Company has recognized compensation expense of $201,050, $81,100
and $112,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
Advertising Costs
Costs incurred for producing and communicating advertising are expensed when
incurred. Advertising expenses amounted to $3.6 million, $9.3 million and
$11.4 million for the years ended December 31, 1996, 1997 and 1998
respectively.
Gain on sale of assets
In September 1997, ForeFront sold certain of its Internet printing
technologies under development to Hewlett-Packard Company and licensed
additional technologies to be used in connection with ongoing development
efforts of Hewlett-Packard, and recorded an one-time gain of $1.87 million
(net of closing costs). The sale proceeds consisted entirely of cash which was
received by the Company in September 1997.
Government Grants
Applications for payment under the grant agreement are made on a quarterly
basis. The application is matched with the relevant expenditure for the period
and, once approved by the grant authority, the grant is recognized and offset
against the relevant expense in the statement of operations.
Employment Grants are payable in two equal annual installments. The first
installment is due when the employee is made permanent and the second on the
anniversary thereof. Rent grants are payable quarterly equal to 40% of the
rent of the Company's Irish premises, subject to a maximum amount. Management
development grants are payable quarterly for 50% of the eligible costs of
employing five members of management, subject to a maximum amount.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consists principally of cash investments and trade receivables.
The Company invests its excess cash in deposits with major banks, in U.S.
Treasury and U.S. agency obligations and in debt securities of corporations
with strong credit ratings. The Company performs periodic evaluations of the
relative credit standing of all the financial institutions dealt with by the
Company, and considers the related credit risk to be minimal.
The principal market for the Company's products comprises major U.S.
national and multi-national organizations. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential credit
losses. To date such losses have been within management's expectations. The
Company had an allowance for doubtful accounts of $1,219,500 and $1,142,800 at
December 31, 1997 and 1998, respectively. The Company generally requires no
collateral from its customers.
Accounting for Income Taxes
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes",
which uses the liability method to calculate deferred income taxes.
46
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents consist of cash on deposit with banks, money
market instruments, and certificates of deposit with maturities of 90 days or
less when acquired.
Short-term investments at December 31, 1997 and 1998 comprise debt
securities issued by the U.S. Treasury, U.S. agency obligations and debt
securities of corporations with strong credit ratings with a maturity of less
than six months but greater than three months at the date of acquisition by
the Company. These are included at cost plus accrued interest, which
approximates the fair market value of the securities. At December 31, 1997 and
1998 $36,038,000 and $36,386,000 respectively (inclusive of accrued interest
of $713,000 and $472,000 respectively) was held in short-term investments. The
Company classifies available for sale securities as short-term investments.
Other Assets
Other assets at December 31, 1997 and 1998 consist primarily of deferred
sales commissions. Deferred sales commissions are charged to expense when the
related revenue is recognized.
2. Net Income Per Share
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
(dollars in thousands,
except per share
amounts)
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted net income per
share--income available to common shareholders...... $ 4,506 $18,069 $16,538
======= ======= =======
Denominator:
Denominator for basic net income per share--weighted
average shares...................................... 37,276 40,292 43,630
Effect of dilutive securities:
Employee stock options............................... 4,736 3,836 2,349
------- ------- -------
Denominator for diluted net income per share--
adjusted weighted average shares and assumed
conversion.......................................... 42,012 44,128 45,979
======= ======= =======
Basic net income per share............................. $ 0.12 $ 0.45 $ 0.38
======= ======= =======
Diluted net income per share........................... $ 0.11 $ 0.41 $ 0.36
======= ======= =======
</TABLE>
3. 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; however, adoption in 1998 had no impact on the Company's
net income or shareholders' equity. SFAS 130 requires foreign currency
translation adjustments, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS 130.
47
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Acquisitions and Mergers
On May 31, 1996, a merger occurred between the Company and CLS, a
distributor of multimedia training and education software based in Germany,
under which the Company issued 145,604 ordinary shares for all the outstanding
stock of CLS. On the same date a merger occurred between the Company and NTT,
the Company's Canadian distributor, under which the Company issued 146,124
ordinary shares for all the outstanding stock of NTT.
On February 28, 1997, a merger occurred between the Company and ALA, a
distributor of multimedia training and education software based in Australia,
under which the Company issued 343,084 ordinary shares for all the outstanding
stock of ALA. On the same date a merger occurred between the Company and
Benelux, the Company's Benelux distributor, under which the Company issued
71,360 ordinary shares for all the outstanding stock of Benelux.
On August 31, 1997, a merger occurred between the Company and Scholars.com,
a provider of online mentoring, under which the Company issued 37,632 ordinary
shares for all the outstanding stock of Scholars.com.
On December 1, 1997, a merger occurred between the Company and MidEast, the
Company's Middle Eastern distributor, under which the Company issued 258,000
ordinary shares for all the outstanding stock of MidEast. On May 28, 1998, a
merger occurred between the Company and ForeFront, under which the Company
issued 2,182,851 ordinary shares for all outstanding stock of ForeFront. The
financial results of the Company, CLS, NTT, ALA, Benelux, Scholars.com,
MidEast and ForeFront have been accounted for using the "pooling-of-interests"
method. The "pooling-of-interests" method gives effect to the mergers as if
they had occurred at the beginning of the earliest period presented or
subsequent date of incorporation of the pooled entity as applicable. The
consolidated financial statements as presented are based on the Company's
historical consolidated financial statements and CLS's, NTT's ALA's,
Benelux's, Scholars.com's, MidEast's and ForeFront's historical financial
statements.
The consolidated financial information for the year ended December 31, 1997
and 1998 includes the results of the Company and CLS, NTT, ALA, Benelux,
Scholars.com, MidEast (from the date of its incorporation) and ForeFront for
these periods and the assets and liabilities of the Company and CLS, NTT, ALA,
Benelux, Scholars.com, MidEast and ForeFront as at December 31, 1997 and 1998,
respectively. The comparative figures for the year ended December 31, 1996
comprise the results of the Company and CLS, NTT, Benelux, Scholars.com and
ForeFront for that period combined with the results of ALA for the year ended
June 30, 1997. ALA and Benelux, in the two month period ended February 28,
1997 had net revenues of $1,094,315 and $374,390 respectively. Net income in
that period was $123,642 and $21,190, respectively.
Scholars. com, in the eight month period ended August 31, 1997 had net
revenues of $1,293,518. Net income in that period was $111,418.
MidEast was established in April 1997 and in the period to December 1, 1997
had net revenues of $225,171. The net loss in the period was $532,046.
ForeFront in the six month period ended June 30, 1998 had net revenues of
$12.1 million. The net loss for the six month period ended June 30, 1998 was
$3.1 million.
ALA's results of operations for the six month period ended June 30, 1997
which reflected net revenues of $2,991,712, expenses of $3,104,193 and a net
loss of $112,481 have been duplicated in the accompanying 1997 Financial
Statements to conform operating results to the Company's fiscal year end. The
duplicate periods have been adjusted by including the net loss as an increase
to the Company's accumulated profit as of December 31,1997.
48
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Acquisitions and Mergers (continued)
The results of the operations for the enterprise acquired in 1998 and the
combined amounts presented in the consolidated financial statements are
summarized below (dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Revenues:
CBT Group PLC.................................... $73,566 $118,639 $139,919
ForeFront........................................ 13,798 18,408 22,313
------- -------- --------
Combined....................................... $87,364 $137,047 $162,232
======= ======== ========
Net income:
CBT Group PLC.................................... $11,839 $ 22,197 $ 21,891
ForeFront........................................ (7,333) (4,128) (5,353)
------- -------- --------
Combined....................................... $ 4,506 $ 18,069 $ 16,538
======= ======== ========
</TABLE>
ForeFront Acquisitions
On March 8, 1996 ForeFront acquired Blue Squirrel, Inc., for a consideration
comprising 39,212 equivalent CBT ordinary shares and $100,000 in cash to
retire debt assumed by ForeFront. On June 12, 1996, ForeFront acquired
BookMaker Corporation, and issued 81,968 equivalent CBT ordinary shares. On
July 22, 1996, a merger occurred between ForeFront and AllMicro Inc. under
which the stockholders of AllMicro received 331,315 equivalent CBT ordinary
shares. On September 29, 1997, ForeFront acquired Lan Professional, Inc.
"LanTec", in exchange for $1.8 million and 174,860 equivalent CBT ordinary
shares, which are issuable upon exchange of an equivalent number of
Exchangeable Shares of LanTec retained by the LanTec shareholders at closing.
The acquisitions of Blue Squirrel, Inc., BookMaker Corporation and LanTec have
been accounted for under the "purchase method" and accordingly, the operating
results are included in the operating results since the date of acquisition.
The merger with AllMicro has been accounted for using the "pooling of
interests" method.
5. Property and Equipment
Property and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
1997 1998
------- -------
(dollars in
thousands)
<S> <C> <C>
Office and computer equipment.................................. $13,993 $22,781
Furniture, fixtures and others................................. 3,547 6,431
------- -------
Total property and equipment................................... 17,540 29,212
Accumulated depreciation....................................... 7,333 11,576
------- -------
Property and equipment, net.................................... $10,207 $17,636
======= =======
</TABLE>
Depreciation of property and equipment amounted to $2,236,503, $3,488,104
and $4,858,399 for the years ended December 31, 1996, 1997 and 1998,
respectively.
49
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Other Accrued Liabilities
Other accrued liabilities consist of the following at December 31 (dollars
in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Royalties...................................................... $ 3,305 $ 4,756
Income and other taxes payable................................. 6,484 7,363
Other.......................................................... 6,926 7,904
------- -------
$16,715 $20,023
======= =======
</TABLE>
7. Operating Lease Commitments
The Company leases various facilities, automobiles and equipment under non-
cancellable operating lease arrangements. The major facilities leases are for
terms of 2 to 5 years, (except for CBT Systems Limited's new premises which
has a non-cancellable lease term of 11 years) and generally provide renewal
options for terms of up to 3 additional years. Rent expense under all
operating leases was approximately $2,245,000, $2,694,000 and $3,696,000 in
1996, 1997 and 1998, respectively. Future minimum lease payments under these
non-cancellable operating leases as of December 31, 1998 are as follows
(dollars in thousands):
<TABLE>
<S> <C>
1999................................. $ 5,018
2000................................. 4,644
2001................................. 4,161
2002................................. 3,722
2003................................. 2,700
Thereafter........................... 3,755
-------
Total minimum lease payments....... $24,000
=======
</TABLE>
8. Contingencies
During 1998, the previously disclosed litigation involving the transfer of
certain securities of Datacode Electronics Ltd. was settled. All amounts paid
in relation to the settlement have been expensed.
Since the end of the third quarter of 1998 purported class action lawsuits
were filed in the United States District Court for the Northern District of
California, the United States District Court for the Southern District of New
York and the Superior Court of California for the County of San Mateo against
CBT Group PLC, its American operating subsidiary, CBT Systems USA Ltd. and
certain of its former and current officers and directors alleging violations
of the federal securities laws. The complaints allege that the defendants
misrepresented and/or omitted to state material facts regarding CBT'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 The
ForeFront Group, Inc., 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.
50
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Contingencies (continued)
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.
In addition, certain other claims and litigation have arisen against the
Company in the ordinary course of its business. The Company believes that all
such claims and lawsuits against the Company are without merit, and the
Company intends to vigorously contest such disputes. In the opinion of
management, the outcome of such disputes will not have a material effect on
its financial position, results of operations or liquidity, as reported in
these financial statements.
Depending on the amount and timing of any unfavorable resolution of these
matters, it is possible that the Company's future results of operations or
cash flows could be materially affected in a particular period.
9. Shareholders' Equity
Dividends may only be declared and paid out of profits available for
distribution determined in accordance with accounting principles generally
accepted in Ireland and applicable Irish Company Law. Any dividends, if and
when declared, will be declared and paid in dollars.
In 1995, the Company issued warrants to purchase 11,699 ordinary shares to
holders of previously outstanding preferred stock. Warrants to purchase 15,173
ordinary shares were also issued to the holders of previously outstanding
senior convertible notes. The warrants to purchase ordinary shares at $8.99
per share have a five-year term.
Share Option Plans
The Company has elected to follow Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options because, as discussed
below, the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options generally equals the market price of the
underlying stock on the date of grant, no compensation expense is generally
recognized.
However, for certain options granted by ForeFront in August and September
1995, ForeFront recognized deferred compensation for the excess of the deemed
value for accounting purposes of the common stock on the date the options were
granted ($8.99 per share) over the $3.60 exercise price of such options.
Aggregate deferred compensation of $726,375 resulted from the issuance of
these options, and compensation expense is recognized ratably over the vesting
period of each option, generally four years. ForeFront recognized $201,050,
$81,100 and $112,000 of this amount as compensation expense for the years
ended December 31, 1996, 1997 and 1998, respectively.
The Company has six share option plans, the 1990 Share Option Scheme (the
"1990 Plan"), the 1994 Share Option Plan (the "1994 Plan"), the Supplemental
Share Option Scheme (the "1996 Plan"), the 1992 ForeFront
51
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Shareholders' Equity (continued)
Stock Option Plan (the "FF92 Plan"), the 1996 ForeFront Non-Qualified Stock
Option Plan (the "FF96 Plan") and the 1996 ForeFront Non-Employee Directors'
Stock Option Plan (the "FF Directors' 1996 Plan"), (collectively the "Plans")
Under the 1990 Plan, options to acquire ordinary shares in the Company may
be granted to any director or employee of the Company. Under the 1994 Plan,
all employees and directors of the Company and any independent contractor who
performs services for the Company are eligible to receive grants of non
statutory options ("NSO"). Employees are also eligible to receive grants of
incentive share options ("ISO") which are intended to qualify under section
422 of the United States Internal Revenue Code of 1986, as amended. Under the
1996 Plan all employees, with the exception of directors and executive
officers, are eligible to receive grants of NSO's. Under the FF92 Plan, non-
qualified and/or incentive options to acquire shares of common stock in
ForeFront were granted to any employee or director of ForeFront. Under the FF
96 Plan, non-qualified options to acquire shares of common stock in ForeFront
were granted to employees and directors of ForeFront. Under the FF Directors'
1996 Plan, non-employee directors were eligible to receive grants of options
to acquire common stock of ForeFront upon election to the Board of Directors
and each subsequent year thereafter.
As of December 31, 1998, 4,700,000, 7,243,004, 4,500,000 (which includes an
increase in the number of shares reserved for issuance under the 1994 Plan and
1996 Plan respectively of 1,000,000, authorized by a resolution passed at the
Annual General Meeting of the Company on April 28, 1998 and 3,500,000
respectively), 470,550, 627,400 and 47,055 ordinary shares have been reserved
for issuance under the 1990 Plan, the 1994 Plan, 1996 Plan, FF92 Plan, FF96
Plan and FF Directors' 1996 Plan, respectively. The Plans are administered by
the Stock Option Committee (the "Committee").
The terms of the options granted are generally determined by the Committee.
The exercise price of options granted under the 1990 Plan and ISO's granted
under the 1994 Plan cannot be less than the fair market value of ordinary
shares on the date of grant. In the case of ISO's granted to holders of more
than 10% of the voting power of the Company the exercise price cannot be less
than 110% of such fair market value. Under the 1994 Plan, the exercise price
of NSO's is set by the Committee at its discretion. The term of an option
under the 1994, 1996, FF92, FF96 Plans cannot exceed ten years and, generally,
the terms of an option under the 1990 Plan and FF Directors' 1996 Plan cannot
exceed ten years. The term of an ISO granted to a holder of more than 10% of
the voting power of the Company cannot exceed five years. An option may not be
exercised unless the option holder is at the date of exercise, or within three
months of the date of exercise has been, a director, employee or contractor of
the Company. There are certain exceptions for exercises following retirement
or death. Options under the Plans generally expire not later than 90 days
following termination of employment or service or six months following an
optionees' death or disability.
In the event that options under the Plans terminate or expire without having
been exercised in full, the shares subject to those options are available for
additional option grants. Vesting periods of the options are determined by the
Committee and are currently for periods of up to four years. Under the 1990,
1994, 1996, FF92, FF96 and FF Directors 1996 Plans, options to purchase
103,410, 434,689, 135,312, 39,829, 126,267 and 7,842 shares respectively were
exercisable as of December 31, 1998. As of December 31, 1998, 2,412,906
options are available for grant under the plans.
In November 1996, the Compensation Committee of the ForeFront Board of
Directors approved the repricing of substantially all of ForeFront's
oustanding options held by the existing employees to the then current fair
market value in order to incentivize the Company's employees. In October 1998,
the Compensation Committee of the Board of Directors approved the repricing of
all of the Company's outstanding options held by the existing employees,
except for director stock options, to the then current market value of $6.9375
per share
52
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Shareholders' Equity (continued)
(the closing price on the date of such repricing) in an effort to retain and
reincent employees. Under the terms of the repricing, the repriced options
maintain the same vesting and expiration terms.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996, 1997 and 1998; risk-free interest rates of approximately
6%, 6%, and 5% respectively; dividend yields of 0%; volatility factors of the
expected market price of the Company's ordinary shares of .37, .45 and 1.26
respectively; and a weighted-average expected life of the option of five
years.
The Black-Scholes option model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the management's
opinion, the existing models do not provide a reliable single measure of the
fair value of its stock options.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
Pro forma net income/(loss) for the years ended December 31, 1996, 1997 and
1998 was $(2.2) million, $9.2 million and $(5.4) million respectively. Pro
forma basic net income/(loss) per share was $(0.06), $0.23 and $(0.12) for the
years ended December 31, 1996, 1997 and 1998, respectively. Pro forma diluted
net income/(loss) per share was $(0.05), $0.21 and $(0.12) for the years ended
December 31, 1996, 1997 and 1998, respectively. Because options vest over
several years and additional grants are expected, the effects of these
hypothetical calculations are not likely to be representative of similar
future calculations.
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1996, 1997 and 1998 follows:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------
Weighted
Number of Price per Average
Shares Share Exercise Price
---------- ------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1995........... 5,066,796 $ 0.15--11.28 $ 2.54
Granted in 1996...................... 4,067,404 $11.31--29.00 $15.82
Exercised in 1996.................... (1,572,456) $ 0.15--27.50 $ 1.00
Cancelled in 1996.................... (631,864) $ 0.51--27.50 $15.32
---------- ------------- ------
Balance at December 31, 1996........... 6,929,880 $ 0.15--29.00 $ 9.52
Granted in 1997...................... 1,899,275 $20.25--34.75 $21.68
Exercised in 1997.................... (3,223,948) $ 0.15--28.56 $ 4.73
Cancelled in 1997.................... (343,651) $ 2.68--25.63 $13.53
---------- ------------- ------
Balance at December 31, 1997........... 5,261,556 $ 0.40--34.75 $16.64
Granted in 1998...................... 9,203,529 $ 6.69--57.37 $32.87
Exercised in 1998.................... (2,196,200) $ 0.40--31.28 $12.52
Cancelled in 1998.................... (4,354,017) $ 0.15--57.37 $25.61
---------- ------------- ------
Balance at December 31, 1998........... 7,914,868 $ 1.41--36.00 $ 9.52
---------- ------------- ------
</TABLE>
The previously described repricing of the Company's stock options in October
1998 is included in the above summary within the amounts cancelled and granted
in 1998.
53
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Shareholders' Equity (continued)
<TABLE>
<CAPTION>
Options Outstanding At December 31, 1998 Options Exercisable
-------------------------------------------------- ------------------------
Range of Weighted Average Number
Exercise Shares Remaining Contractual Weighted Average of Weighted Average
Prices Outstanding Life Exercise Price Shares Exercise Price
- -------- ----------- --------------------- ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$
1.41--
6.69 104,616 6.19 $ 3.52 44,853 $ 2.70
$
6.94--
6.94 3,065,067 8.48 $ 6.94 492,187 $ 6.94
$
9.76--
9.94 4,136,137 9.94 $ 9.94 3,137 $ 9.76
$
11.00--
25.63 497,186 7.59 $17.55 297,310 $18.67
$
27.49--
36.00 111,862 8.88 $35.04 9,862 $28.66
- -------- --------- ---- ------ ------- ------
$
1.41--
36.00 7,914,868 9.16 $ 9.52 847,349 $11.09
- -------- --------- ---- ------ ------- ------
</TABLE>
At December 31, 1996 and 1997 there were 2,964,960 and 1,623,866 options
exercisable, respectively, at a weighted average exercise price of $3.84 and
$11.89 respectively. The weighted average fair value of options granted during
the years ended December 31, 1996, 1997 and 1998 was $9.00, $11.61 and $15.13,
respectively.
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------
Number of Price per Weighted Average
Shares Share Exercise Price
--------- --------- ----------------
<S> <C> <C> <C>
Other Options
Granted in 1994........................... 186,664 $0.40 $0.40
Exercised in 1996......................... (26,664) $0.40 $0.40
Cancelled in 1996......................... (52,000) $0.40 $0.40
Exercised in 1998......................... (108,000) $0.40 $0.40
-------- ----- -----
Balance at December 31, 1998.............. -- -- --
-------- ----- -----
</TABLE>
In November 1996, the Company granted to Forbairt, in conjunction with their
approval of an employment grant, a rent reduction grant and a management
development grant, an option to purchase 10,000 ordinary shares with an
exercise price equal to the fair market value at the date of grant. The option
was exercised in July 1998.
54
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Income Taxes
Income before provision for income taxes consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997 1998
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Ireland.............................................. $12,264 $22,579 $23,872
Rest of world........................................ (5,339) (594) (4,668)
------- ------- -------
Total.............................................. $ 6,925 $21,985 $19,204
======= ======= =======
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<S> <C> <C> <C>
Current................................................... $2,161 $3,916 $2,666
Deferred.................................................. 258 -- --
------ ------ ------
Total provision for income tax.......................... $2,419 $3,916 $2,666
====== ====== ======
</TABLE>
The current provision for 1998 relates predominantly to provision for income
taxes in Ireland
The provision for income taxes differs from the amount computed by applying
the statutory income tax rate to income before taxes. The sources and tax
effects of the difference are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997 1998
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Income taxes computed at the Irish statutory income
tax rate of 38% for 1996, 36.5% for 1997 and 32%
for 1998........................................... $ 2,632 $ 8,025 $ 6,145
Income from Irish manufacturing operations taxed at
lower rates........................................ (3,815) (7,143) (6,318)
Income subject to higher rate of tax................ 1,099 1,780 474
Operating losses not utilized....................... 3,703 1,598 2,475
Operating losses utilized........................... (554) (876) (348)
Intangible asset amortization and other non-
deductible expenses................................ (461) 662 1,155
Change in valuation allowance....................... 586 657 --
Profits arising not subject to tax.................. (771) (787) (917)
------- ------- -------
$ 2,419 $ 3,916 $ 2,666
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
EPS for tax holiday
-------------------
<S> <C> <C> <C>
Basic.................................................. $0.10 $0.18 $0.14
===== ===== =====
Diluted................................................ $0.09 $0.16 $0.14
===== ===== =====
</TABLE>
55
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Income Taxes (continued)
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred taxes consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
(dollars in
thousands)
Deferred tax assets
- -------------------
<S> <C> <C>
Net operating loss carry forwards........................... $ 17,349 $ 25,200
Research and Development tax credit carry forwards.......... 171 307
Non Compete................................................. -- 71
-------- --------
Allowance for returns, deferred revenue, depreciation....... 493 --
-------- --------
18,013 25,578
Valuation allowance......................................... (17,531) (25,325)
-------- --------
Net deferred tax assets..................................... $ 482 $ 253
======== ========
</TABLE>
At January 1, 1997 the valuation allowance was $5,213,381.
At December 31, 1998, the Company had net operating loss carry forwards in
its UK subsidiary of approximately $661,000. The utilization of these net
operating loss carry forwards is limited to the future profitable operations
of the Company in the UK tax jurisdiction where such carry forwards arose.
These losses carry forward indefinitely.
At December 31, 1998, the Company has a net operating loss carry forward of
approximately $72.0 million for U.S. federal income tax purposes which will
expire in the tax years 2007 through 2012 if not previously utilized.
Utilization of the U.S. net operating loss carry forward may be subject to an
annual limitation due to the change in ownership rules provided by the
Internal Revenue Code of 1986. This limitation and other restrictions provided
by the Internal Revenue Code of 1986 may reduce the net operating loss carry
forward such that it would not be available to offset future taxable income of
the U.S. subsidiary.
At December 31, 1998, approximately $69.0 million of the net operating loss
carry forwards in the United States result from disqualifying dispositions.
The tax value of the disqualifying dispositions has not been recognized in the
tax reconciliation note as it is not expected that it will reverse. At
December 31, 1998, $25.2 million of the valuation allowance related to such
disqualifying dispositions.
11. Segment, Geographic and Customer Information
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standard No. 131 "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). The new rules establish revised standards for
public companies relating to the reporting of financial information about
operating segments. The adoption of SFAS 131 did not have a material effect on
the Company's primary consolidated financial statements but did affect the
Company's segment information disclosures.
Segment Information
Upon adoption of SFAS 131, the Company has presented financial information
for its three reportable operating segments: Americas, Europe Middle East Asia
("EMEA") and Ireland. The Americas and EMEA segments are sales operations and
Ireland is the Company's Research and Development operation.
The Company and its subsidiaries operate in one industry segment, the
development and marketing of interactive education and training software.
Operations outside of Ireland consist principally of sales and marketing.
56
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Segment, Geographic and Customer Information (continued)
The Company's Chief Operating Decision Maker ("CODM"), the Company's
President and CEO allocates resources and evaluates performance based on a
measure of segment profit or loss from operations. The accounting policies of
the reportable segments are the same as described in the summary of
significant accounting policies. The Company's CODM does not view segment
results below operating profit (loss), therefore, net interest income, other
income and the provision for income taxes are not broken out by segment below.
The Company does not account for nor report to the CODM its assets or capital
expenditures by segment, thus asset information is not provided on a segment
basis.
A summary of the segment financial information reported to the CODM is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
------------------------------------------------
All Consolidated
Americas EMEA Ireland Other Total
-------- ------- ------- ------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues--External........... $121,382 $27,262 $ 6,293 $ 7,295 $162,232
Inter segment Revenues....... -- -- 69,994 -- 69,994
Depreciation and
Amortization................ 3,285 502 2,745 157 6,689
Segment Operating Income..... (7,728) (1,108) 26,231 (2,925) 14,470
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
------------------------------------------------
All Consolidated
Americas EMEA Ireland Other Total
-------- ------- ------- ------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues--External........... $108,865 $20,676 $ 1,079 $ 6,427 $137,047
Inter segment Revenues....... -- -- 57,708 -- 57,708
Depreciation and
Amortization................ 1,641 385 1,150 406 3,582
Segment Operating Income..... (4,393) (439) 24,653 (2,546) 17,275
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
------------------------------------------------
All Consolidated
Americas EMEA Ireland Other Total
-------- ------- ------- ------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues--External........... $67,210 $12,809 $ 774 $ 6,571 $87,364
Inter segment Revenues....... -- -- 31,732 -- 31,732
Depreciation and
Amortization................ 1,223 274 595 345 2,437
Segment Operating Income..... (6,319) (544) 14,000 (3,037) 4,100
</TABLE>
Revenues from external customers, based on the location of the customer, are
categorized by geographical areas as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1996 1997 1998
------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Revenues
Ireland............................................... $ 774 $ 1,463 $ 3,210
United States......................................... 63,111 101,141 113,552
United Kingdom........................................ 9,771 11,296 17,411
Other countries....................................... 13,708 23,147 28,059
------- -------- --------
Total............................................... $87,364 $137,047 $162,232
------- -------- --------
</TABLE>
57
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Segment, Geographic and Customer Information (continued)
Long-Lived assets are those assets that can be directly associated with a
particular geographic area. These assets are categorized by geographical areas
as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------- -------
(dollars in
thousands)
<S> <C> <C>
Long-Lived Assets
Ireland......................................................... $ 8,567 $ 7,753
United States................................................... 12,931 25,800
Other countries................................................. 2,962 4,872
------- -------
Total......................................................... $24,460 $38,425
======= =======
</TABLE>
The Company regards its products and services, IT Training, as homogenous
products and services.
12. Government Grants
Under agreements between the Company and Forbairt, the Company has offset
against related salary and rent expense amounts of $598,000, $1,021,000 and
$1,040,000 in the years ended December 31, 1996, 1997 and 1998, respectively.
Under the terms of the agreement between the Company and Forbairt, these
grants may be revoked in certain circumstances, principally failure to
maintain the related jobs for a period of five years from the payment of the
first installment of the related grant. The Company has complied with the
terms of the grant agreements through December 31, 1998.
13. Related Party Transactions
Ownership of CBT Technology
Approximately 9% of the outstanding share capital of CBT (Technology)
Limited ("CBT T"), one of the Company's Irish subsidiaries, representing a
special non-voting class, is owned by Stargazer Productions ("Stargazer"), an
unlimited company which is wholly-owned by certain key employees of CBT Group
PLC. All of the voting securities of CBT T are owned by CBT Group PLC and,
except for the securities owned by CBT Group PLC and Stargazer, there are no
other outstanding securities of CBT T. CBT T has in the past and may in the
future declare and pay dividends to Stargazer, and Stargazer may pay dividends
to its shareholders out of such amounts. Except for the fact that Stargazer is
wholly owned by certain key employees of CBT Group PLC, there is no
relationship between the Group and Stargazer.
Loan to Director
In February 1996, Mr. Priest, a director, President and Chief Executive
Officer of the Company, received an interest free loan from the Group in the
amount of US$125,000 repayable in four equal annual installments. At December
31, 1997 and 1998 the balance outstanding on this loan was $93,750 and nil,
respectively.
ForeFront
In May 1997, ForeFront issued a letter of credit for $75,000 to its landlord
secured by a certificate of deposit maturing in August 1998 for the benefit of
an unrelated corporation (which is owned in part by a stockholder of
ForeFront), in exchange for the corporation assuming the balance of the lease
for ForeFront's former office space in Houston, Texas. The letter of credit
expired in June 1998. ForeFront also executed a note receivable totaling
$54,078 and maturing June 1, 2001 from this unrelated corporation for its
purchase of certain furniture and equipment of ForeFront.
Receivables also include $45,000 loaned to two officers of ForeFront. The
notes are due March 31, 2000, are unsecured and bear interest at 6.1%.
58
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Recent Development
On December 10, 1998 the Company announced that it had signed a definitive
agreement to acquire 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. This agreement has been amended and restated
on March 30, 1999 to reflect certain changes agreed upon on December 9, 1998
as a result of the decision to account for the acquisition under the purchase
method of accounting in accordance with U.S. generally accepted accounting
principles. The acquisition of Knowledge Well has been approved by an
Independent Committee of CBT's Board of Directors, in view of the fact that
certain members of the Board of Directors of CBT are shareholders and/or
former officers of Knowledge Well, and by the shareholders of Knowledge Well.
The acquisition is subject to specified closing conditions, including approval
by the disinterested shareholders of CBT and the receipt of required
regulatory approvals. The acquisition has been structured as a stock-for-stock
exchange, in which a total of approximately 4.0 million CBT shares will be
issued in exchange for all outstanding shares of Knowledge Well. CBT will
assume options to acquire Knowledge Well stock exercisable for an issuance of
approximately 0.8 million CBT Shares.
15. Effects of Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". The SOP requires
the capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use once certain
criteria are met. The Company adopted SOP 98-1 in fiscal 1998.
In February 1998, the Financial Accounting Standards Board ("FASB") 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. The Company has implemented the provisions of
SFAS 132 in 1998 for its defined contribution plan.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activity" ("SFAS 133") which is required to be adopted in years beginning
after June 15, 1999. The Company has yet to determine its date of adoption.
The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges of underlying
transactions must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. Management has not yet determined what the
effect of SFAS 133 will be on the Company's consolidated financial position,
results of operations or cash flows.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions" and
addresses software revenue recognition as it applies to certain multiple-
element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2" through fiscal years beginning on
or before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999.
59
<PAGE>
ERNST & YOUNG
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors and Shareholders,
CBT Group PLC
We have audited the consolidated balance sheets of CBT Group PLC as of
December 31, 1997 and 1998 and the related consolidated statements of
operations, changes in shareholders' equity and comprehensive income and cash
flows for each of the three years in the period ended December 31, 1998, and
have issued our report thereon dated January 19, 1999. Our audits also
included the financial statement schedule of the Company listed in Item 14(a).
This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. We did not audit
the financial statements of The Forefront Group, Inc., a company acquired by
the Company in a business combination accounted for as a pooling of interests
as described in note 4 to the consolidated financial statements, which
statements reflect total assets of $10,008,111 as of December 31, 1997, and
total revenues of $13,798,466 and $18,407,770 for the years ended December 31,
1996 and 1997, respectively. We have been furnished with the report of other
auditors with respect to Schedule II of The Forefront Group, Inc.
In our opinion, based on our audits and the report of other auditors, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ Ernst & Young
_____________________
ERNST & YOUNG
Dublin, Ireland
Date: January 19, 1999
60
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Company's definitive Proxy Statement will be filed with the Securities
and Exchange Commission in connection with the solicitation of proxies for the
Company's Annual General Meeting to be held on or about May 13, 1999 (the
"Proxy Statement"). Information required by this item is incorporated by
reference from the information contained in the Proxy Statement under the
captions "Election of Directors" and "Executive Compensation and Other
Matters."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Proxy
Statement under the caption "Executive Compensation" and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners
and Management" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Proxy
Statement under the caption "Certain Transactions" and is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Form 10-K.
(1)Financial Statements. The following CBT Group PLC
Consolidated Financial Statements Prepared in Accordance with US GAAP are
incorporated herein by reference to Item 8 of this Form 10-K.
Consolidated Balance Sheets--December 31, 1997 and 1998.
Consolidated Statements of Operations--December 31, 1996, 1997 and 1998.
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income. -
Consolidated Statements of Cash Flows--December 31, 1996, 1997, and 1998.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
(2) Financial Statement Schedule. The following financial statement schedule
of CBT Group PLC for the fiscal years ended December 31, 1996, 1997 and
1998 is filed as part of this Form 10-K and should be read in conjunction
with the Company's Consolidated Financial Statements included in Item 8 of
this Form 10-K.
61
<PAGE>
<TABLE>
<CAPTION>
Schedule Page #
-------- ------
<C> <S> <C>
II Valuation and Qualifying Accounts S-1
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes
thereto.
(3) Exhibits. See Exhibit Index at page 65-67 of this Form 10-K.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K dated October 1, 1998 with the
Securities and Exchange Commission attaching a press release announcing
high level management changes, preliminary third quarter financial results,
and the Board's decision to a adopt a shareholders' rights plan.
The Company filed a report on Form 8-K dated October 4, 1998 with the
Securities and Exchange Commission describing the Board's adoption of a
Subscription Rights Declaration.
The Company filed a report on Form 8-K dated December 10, 1998 with the
Securities and Exchange Commission attaching a press release announcing the
Company's definitive agreement to acquire Knowledge Well and the
appointment of the Company's executive management team.
(d) Exhibits.
EXHIBIT INDEX
<TABLE>
<C> <S>
2.1 Amended and Restated Agreement and Plan of Reorganization dated November
29, 1995 among the Company, CBT Acquisition Subsidiary, a Delaware
corporation, and Personal Training Systems, Inc., a California
corporation. (Incorporated by reference to exhibit 2.1 to the Company's
Current Report on Form 8-K dated December 13, 1995).
2.2 Implementation Deed dated as of November 26, 1996, as amended, among the
Company, Applied Learning Limited and Arie Baalbergen, James Josephson,
Geoffrey Bransbury and Brian Hacker (including schedules thereto)
(Incorporated by reference to exhibit 2.1 to the Company's Current Report
on Form 8-K dated March 14, 1997).
2.3 Agreement and Plan of Reorganization, dated as of March 16, 1998, among
the Company, Rockets Acquisition Corp. and The Forefront Group, Inc.
(Incorporated by reference to exhibit 2.1 to the Company's Registration
Statement on Form S-4 filed with the Securities and Exchange Commission
on April 27, 1998 (File No. 333-51159)).
2.4* Share Purchase Agreement dated as of November 30, 1998, as amended and
restated March 30, 1999, among the Company, Knowledge Well Limited
("KWL"), Knowledge Well Group Limited ("KWGL") and the shareholders of
KWL and KWGL.
3.1 Memorandum of Association of the Company as amended on March 24, 1992,
March 31, 1995 and April 28, 1998 (Incorporated by reference to exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1998 as filed with the Securities and Exchange Commission
on August 14, 1998).
3.2 Articles of Association of the Company as amended on July 6, 1995, and
April 28, 1998, (Incorporated by reference to exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1998 as filed with the Securities and Exchange Commission on August
14, 1998).
4.1 Specimen certificate representing the ordinary shares (Incorporated by
reference to exhibit 4.1 to the Company's Registration Statement on Form
F-1 declared effective with the Securities and Exchange Commission on
April 13, 1995 (File No. 33-89904)).
</TABLE>
62
<PAGE>
<TABLE>
<C> <S>
4.2 Amended and Restated Deposit Agreement (including the form of American
Depositary Receipt), dated as of April 13, 1995 as amended and restated
as of May 22, 1998, among the Company, The Bank of New York, as
Depositary, and each Owner and Beneficial Owner from time to time of
American Depositary Receipts issued thereunder (Incorporated by
reference to [Exhibit (a) to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form F-6
(File No. 333-8380] ).
4.3 Amended and Restated Restricted Deposit Agreement (including the form
of American Depositary Receipt), dated as of November 30, 1995 and
amended and restated as of May 22, 1998, among the Company, The Bank of
New York, as Depositary, and each Owner and Beneficial Owner from time
to time of American Depositary Receipts issued thereunder (Incorporated
by reference to exhibit 4.2 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1998 as filed with the
Securities and Exchange Commission on August 13, 1998).
4.4 Declaration of Subscription Rights dated as of October 4, 1998
(Incorporated by reference to exhibit 4.1 to the Company's Report on
Form 8-A filed with the Securities and Exchange Commission on October
5, 1998).
10.1** 1990 Share Option Scheme (Incorporated by reference to exhibit 10.1 to
the Company's Registration Statement on Form F-1 declared effective
with the Securities and Exchange Commission on
April 13, 1995 (File No. 33-89904)).
10.2** 1994 Share Option Plan (Incorporated be reference to exhibit 10.2 to
the Company's Registration Statement on Form F-1 declared effective
with the Securities and Exchange Commission on
April 13, 1995 (File No. 33-89904)).
10.3** 1995 Employee Share Purchase Plan (Incorporated by reference to exhibit
10.3 to the Company's Registration Statement on Form F-1 declared
effective with the Securities and Exchange Commission on April 13, 1995
(File No. 33-89904)).
10.4** Form of Indemnification Agreement between CBT Systems USA, Ltd.
(formerly, Thornton Holdings, Ltd.) and its directors and officers
dated as of April, 1995 (Incorporated by reference to exhibit 10.5 to
the Company's Registration Statement on Form F-1 declared effective
with the Securities and Exchange Commission on April 13, 1995 (File No.
33-89904)).
10.5 Supplemental Agreement among Hoskyns, the Company and CBT Systems
Limited dated as of
March 31, 1995 (Incorporated by reference to exhibit 10.9 to the
Company's Registration Statement on Form F-1 declared effective with
the Securities and Exchange Commission on April 13, 1995
(File No. 33-89904)).
10.6 Share Purchase Agreement between CBT Systems Limited and the Company
dated as of
March 31, 1995 (Incorporated by reference to exhibit 10.10 to the
Company's Registration Statement on Form F-1 declared effective with
the Securities and Exchange Commission on April 13, 1995
(File No. 33-89904)).
10.7 Distribution and License Agreement between the Company and CBT Systems
Limited dated as of March 14, 1995 (including form of Amendment No. 1)
(Incorporated by reference to exhibit 10.11 to the Company's
Registration Statement on Form F-1 declared effective with the
Securities and Exchange Commission on April 13, 1995 (File No. 33-
89904).
10.8 License Agreement dated June 7, 1994 between CBT (Technology) Limited
and CBT Systems Limited (Incorporated by reference to exhibit 10.20 to
the Company's Registration Statement on Form F-1 declared effective
with the Securities and Exchange Commission on April 13, 1995
(File No. 33-89904).
10.9 Cost Sharing Agreement dated January 4, 1994 between CBT (Technology)
Limited and CBT Systems Limited (Incorporated by reference to exhibit
10.21 to the Company's Registration Statement on Form F-1 declared
effective with the Securities and Exchange Commission on April 13, 1995
(File No. 33-89904).
</TABLE>
63
<PAGE>
<TABLE>
<C> <S>
10.10** Agreement between the Company and Patrick J. McDonagh dated April 9,
1995 (Incorporated by reference to exhibit 10.22 to the Company's
Registration Statement on Form F-1 declared effective with the
Securities and Exchange Commission on April 13, 1995 (File No. 33-
89904).
10.11** Personal Training Systems, Inc. 1991 Stock Plan (Incorporated be
reference to exhibit 4.1 to the Company's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on January
21, 1996 (File No. 333-504).
10.13** 1996 Supplemental Stock Plan (Incorporated by reference to exhibit
10.16 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 as filed with the Securities and Exchange
Commission on March 30, 1997 (File No. 0-25674)).
10.14** Letter Agreement between CBT Systems USA, Ltd. and William B. Lewis
(Incorporated by reference to exhibit 10.18 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 as
filed with the Securities and Exchange Commission on March 30, 1997
(File No. 0-25674)).
10.15 Applied Learning Limited Executive Option Plan (Incorporated by
reference to exhibit 4.1 to the Company's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on April
16, 1997 (File No. 333-25245).
10.16** Agreement dated November 21, 1997 between CBT Systems Limited 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)).
10.17 Lease Agreement dated April 6, 1998 between CBT Systems USA, Ltd. and
the Company, as tenants, and Seaport Centre Associates, LLC, as
landlord, for the facility located at 900 Chesapeake Drive, Redwood
City, California 94063 (Incorporated by reference to exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1998 as filed with the Securities and Exchange
Commission on November 11, 1998).
10.18 Consulting Agreement dated January 30, 1998 between CBT Systems USA,
Ltd. and Gregory M. Priest (Incorporated by reference to exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1998 as filed with the Securities and Exchange
Commission on May 13, 1998).
10.20 Agreement and Mutual Release dated June 3, 1998 between the Company.
and Jeffrey N. Newton (Incorporated by reference to exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1998 as filed with the Securities and Exchange
Commission on August 13, 1998).
10.21* Agreement and Mutual Release dated February 11, 1998 between the
Company and William A. Beamish.
21.1* List of Significant Subsidiaries.
23.1* Consent of Ernst & Young, Independent Auditors.
23.2* Consent of Arthur Andersen, Independent Auditors.
24.1 Power of Attorney (see page 65).
27.1* Financial Data Schedule.
</TABLE>
- --------
*Filed Herewith
** Denotes management or compensatory plan or arrangement required to be filed
by Registrant pursuant to Item 14(c) of this report on Form 10-K.
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Company has duly caused this Form 10-K Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 30th day of
March, 1999.
CBT Group Public Limited Company
By /s/ Gregory M. Priest
_____________________________________
Gregory M. Priest
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gregory M. Priest and Patrick E. Murphy jointly
and severally, his attorneys-in-fact, each with full power of substitution,
for him in any and all capacities, to sign any amendments to this Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William G. McCabe Chairman of the Board March 30, 1999
____________________________________
William G. McCabe
/s/ Gregory M. Priest President, Chief Executive Officer March 30, 1999
____________________________________ and Director (Principal Executive
Gregory M. Priest Officer)
/s/ John M. Grillos Executive Vice President, March 30, 1999
____________________________________ Chief Operating Officer and
John M. Grillos Director
/s/ John P. Hayes Vice President, Finance and March 30, 1999
____________________________________ Director (Principal Accounting
John P. Hayes Officer)
</TABLE>
65
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Patrick E. Murphy Vice President, Finance March 30, 1999
____________________________________ (Principal Financial
Patrick E. Murphy Officer)
/s/ James S. Krzywicki Director March 30, 1999
____________________________________
James S. Krzywicki
/s/ Patrick J. McDonagh Director March 30, 1999
____________________________________
Patrick J. McDonagh
</TABLE>
66
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1997 and 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Year Accounts Accounts Deductions Year
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996
Deducted from asset
accounts
Allowance for doubtful
accounts............... 550 177 -- -- 727
===== === === === =====
Year ended December 31,
1997
Deducted from asset
accounts
Allowance for doubtful
accounts............... 727 580 -- 87 1,220
===== === === === =====
Year ended December 31,
1998
Deducted from asset
accounts
Allowance for doubtful
accounts............... 1,220 400 -- 477 1,143
===== === === === =====
</TABLE>
S-1
<PAGE>
EXHIBIT 2.4
AMENDED AND RESTATED
SHARE PURCHASE AGREEMENT
BY AND AMONG
CBT GROUP PLC,
KNOWLEDGE WELL LIMITED,
KNOWLEDGE WELL GROUP LIMITED,
SHAREHOLDERS OF KNOWLEDGE WELL LIMITED,
AND
SHAREHOLDERS OF KNOWLEDGE WELL GROUP LIMITED
DATED AS OF MARCH 30, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - PURCHASE AND SALE OF SHARES.................................... 1
1.1 Purchase and Sale................................................... 1
1.2 Acquisition Price................................................... 1
1.3 Share Exchange...................................................... 2
1.4 Closing Mechanics................................................... 2
1.5 Payment of Acquisition Price........................................ 5
1.6 No Further Ownership Rights in KnowledgeWell Shares................. 6
1.7 Lost, Stolen or Destroyed KnowledgeWell Certificates................ 6
1.8 Stock Options....................................................... 6
1.9 Taking of Necessary Action; Further Action.......................... 7
1.10 Tax-Free Reorganization............................................. 7
1.11 Termination of the Prior Share Purchase Agreement................... 7
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS............ 7
2.1 Organization of KnowledgeWell....................................... 7
2.2 KnowledgeWell Capital Structure..................................... 8
2.3 Subsidiaries........................................................ 9
2.4 Authority........................................................... 9
2.5 KnowledgeWell Financial Statements.................................. 9
2.6 No Undisclosed Liabilities.......................................... 11
2.7 No Changes.......................................................... 12
2.8 Tax and Other Returns and Reports................................... 13
2.9 Restrictions on Business Activities................................. 22
2.10 Title to Properties; Absence of Liens and Encumbrances.............. 22
2.11 Intellectual Property............................................... 22
2.12 Agreements, Contracts and Commitments............................... 26
2.13 Interested Party Transactions....................................... 28
2.14 Compliance with Laws................................................ 28
2.15 Litigation.......................................................... 28
2.16 Insurance........................................................... 28
2.17 Minute Books........................................................ 29
2.18 Environmental Matters............................................... 29
2.19 Brokers' and Finders' Fees; Third Party Expenses.................... 30
2.20 United States Employee Matters and Benefit Plans.................... 30
2.21 Ireland Employee Matters and Benefits Plans......................... 33
2.22 Borrowed Moneys..................................................... 37
2.23 Grants, etc. Not Repayable.......................................... 37
2.24 Oral Contracts...................................................... 37
2.25 Returns Up-to-Date.................................................. 37
2.26 Insolvency.......................................................... 37
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
2.27 Stamp Duty and Capital Duty......................................... 38
2.28 VAT................................................................. 39
2.29 Shelf Registration Statement Information............................ 40
2.30 Representations Complete............................................ 40
2.31 Proxy Statements Complete........................................... 40
ARTICLE III - ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE
SHAREHOLDERS............................................................. 40
3.1 Authority........................................................... 40
3.2 Conflicts........................................................... 41
3.3 Consents............................................................ 41
3.4 Title............................................................... 41
3.5 Taxes............................................................... 41
3.6 Sufficient Assets................................................... 41
3.7 Release of Liabilities.............................................. 41
3.8 Investment Experience............................................... 41
3.9 Investment.......................................................... 42
3.10 Rule 144............................................................ 42
3.11 Nature of Solicitation; Access to Data.............................. 42
3.12 Accredited Shareholder.............................................. 42
3.13 Shelf Registration Statement Information............................ 42
3.14 Representations Complete............................................ 43
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF CBT......................... 43
4.1 Organization, Standing and Power.................................... 43
4.2 Authority........................................................... 43
4.3 No Conflict......................................................... 43
4.4 Consents............................................................ 44
4.5 Capital Structure................................................... 44
4.6 SEC Documents; CBT Financial Statements............................. 45
4.7 Broker's and Finder's Fees.......................................... 45
ARTICLE V - CONDUCT PRIOR TO THE CLOSING DATE.............................. 46
5.1 Conduct of Business of KnowledgeWell................................ 46
5.2 No Solicitation..................................................... 48
ARTICLE VI - ADDITIONAL AGREEMENTS......................................... 49
6.1 Proxy Statement; Shareholder Meetings............................... 49
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
6.2 Access to Information............................................... 49
6.3 Expenses............................................................ 49
6.4 Public Disclosure................................................... 50
6.5 Consents............................................................ 50
6.6 FIRPTA Compliance................................................... 50
6.7 Reasonable Efforts.................................................. 50
6.8 Notification of Certain Matters..................................... 50
6.9 Affiliate Agreements................................................ 50
6.10 Additional Documents and Further Assurances......................... 51
6.11 NMS Listing......................................................... 51
6.12 Form S-8............................................................ 51
6.13 Repurchase of "C" Ordinary Shares................................... 51
6.14 Tax-Free Reorganization............................................. 51
6.15 Resale Registration Statement....................................... 51
6.16 Restricted ADR Facility............................................. 52
ARTICLE VII - CONDITIONS TO THE SHARE EXCHANGE............................. 52
7.1 Conditions to Obligations of Each Party to Effect the
Share Exchange...................................................... 52
7.2 Additional Conditions to Obligations of Shareholders................. 52
7.3 Additional Conditions to the Obligations of CBT...................... 53
7.4 No Additional Conditions............................................. 54
ARTICLE VIII - SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW;
INDEMNITY.............................................................. 55
8.1 Survival of Representations, Warranties and Covenants................ 55
8.2 Agreement to Indemnify............................................... 55
8.3 Escrow Arrangements; Limits of Liability............................. 55
8.4 Survival of Indemnity; Indemnification Procedures; Time
Limits.............................................................. 56
8.5 Representative; Power of Attorney.................................... 57
ARTICLE IX - TERMINATION, AMENDMENT AND WAIVER............................. 58
9.1 Termination.......................................................... 58
9.2 Effect of Termination................................................ 59
9.3 Amendment............................................................ 59
9.4 Extension; Waiver.................................................... 59
ARTICLE X - GENERAL PROVISIONS............................................. 60
10.1 Notices............................................................. 60
</TABLE>
-iii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
10.2 Interpretation...................................................... 61
10.3 Counterparts........................................................ 61
10.4 Entire Agreement; Successors; Assignment............................ 61
10.5 Severability........................................................ 62
10.6 Other Remedies...................................................... 62
10.7 Governing Law; Jurisdiction......................................... 62
10.8 Rules of Construction............................................... 62
10.9 Specific Performance................................................ 62
10.10 Share Legends....................................................... 63
10.11 California Corporate Securities Law................................. 63
</TABLE>
-iv-
<PAGE>
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
Exhibit A List of Shareholders
Exhibit B Registration Rights Declaration
Exhibit C Form of KnowledgeWell Affiliates Agreement
Exhibit D Form of Lock-up Agreement
Exhibit E Form of Escrow Agreement
<PAGE>
AMENDED AND RESTATED SHARE PURCHASE AGREEMENT
This AMENDED AND RESTATED SHARE PURCHASE AGREEMENT (this "Agreement") is
---------
made and entered into as of March 30, 1999 by and among CBT Group PLC, a public
limited company formed under the laws of Ireland ("CBT"), Knowledge Well
---
Limited, a private limited company formed under the laws of Ireland ("KW
--
Limited"), Knowledge Well Group Limited, a private limited company formed under
- -------
the laws of Ireland ("KW Group" and, collectively with KW Limited,
--------
"KnowledgeWell"), and the shareholders of KW Limited and KW Group listed on
- --------------
Exhibit A hereto (collectively, "Shareholders," and individually, a
- --------- ------------
"Shareholder").
-----------
RECITALS
WHEREAS, the Shareholders will at Closing (as hereinafter defined) own all
of the issued shares in the capital of each of KW Limited and KW Group.
WHEREAS, CBT desires to acquire from the Shareholders, and the Shareholders
desire to sell to CBT, the KnowledgeWell Shares (as hereinafter defined) owned
by the Shareholders (the "Share Exchange"), in exchange for the consideration
--------------
specified herein and subject to the terms and conditions hereof.
WHEREAS, the parties hereto desire to amend and restate that certain Share
Purchase Agreement (the "Prior Share Purchase Agreement") entered into as of
------------------------------
November 30, 1998 by and among CBT, KnowledgeWell and the Shareholders.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
ARTICLE I
---------
PURCHASE AND SALE OF KNOWLEDGEWELL SHARES
-----------------------------------------
1.1 Purchase and Sale. Subject to the terms and conditions set forth in
-----------------
this Agreement, at the Share Exchange, CBT shall purchase from the Shareholders,
and the Shareholders, as beneficial owners, shall sell, assign, transfer and
deliver to CBT, the KnowledgeWell Shares free and clear of any pledge, lien,
charge, security interest, encumbrance, claim or other equitable or third-party
interest ("Liens").
-----
1.2 Acquisition Price.
-----------------
(a) In reliance on the representations, warranties and covenants of
the Shareholders contained herein, and in consideration of the aforesaid sale,
assignment, transfer and
<PAGE>
delivery of the KnowledgeWell Shares, CBT shall pay to each Shareholder, in full
payment for each KnowledgeWell Share so sold, assigned, transferred and
delivered by such Shareholder and the agreements of such Shareholder made in
connection with the transactions contemplated hereby, the following: such number
of CBT American Depositary Shares ("ADSs") (or, in the event that a Restricted
----
ADR Facility is not arranged prior to the Closing Date as contemplated in
Section 6.16 of this Agreement, such number of Ordinary Shares of IR9.375p in
the capital of CBT ("CBT Ordinary Shares")) as is equal to the Exchange Ratio.
-------------------
For purposes of this Agreement, the "Exchange Ratio" shall mean the quotient
--------------
(rounded to the nearest 1/10,000th) obtained by dividing (x) 4,837,209 by (y)
the sum of (i) the total number of KnowledgeWell Shares in issue immediately
prior to the Closing plus (ii) the total number of shares in of any class
issuable upon exercise of all options, warrants and similar rights outstanding
immediately prior to the Closing. For purposes of this Agreement, "Acquisition
------------
Price" shall mean the 4,837,209 Ordinary Shares or ADSs, as the case may be,
- -----
issuable pursuant to this Agreement.
(b) For purposes of this Agreement, "KnowledgeWell Shares" shall mean
--------------------
(i) all of the issued "A" Ordinary Shares of US$0.25 each and "C" Ordinary
Shares of IR25p each in the capital of KW Limited and (ii) all of the issued
Ordinary Shares of US$0.01 each and the convertible preference shares of US$0.01
each in the capital of KW Group.
(c) The Exchange Ratio shall be appropriately adjusted to reflect
fully the effect of any stock split, reverse split, stock dividend (including
any dividend or distribution of securities convertible into CBT Ordinary Shares
or ADSs), reorganization, recapitalization or other like change with respect to
CBT Ordinary Shares or ADSs occurring after the date hereof and prior to the
Closing Date (as hereinafter defined).
(d) No fraction of an Ordinary Share or ADS will be issued, but in
lieu thereof, each Shareholder who would otherwise be entitled to a fraction of
an Ordinary Share or ADS (after aggregating all fractional Ordinary Shares or
ADSs to be received by such Shareholder) shall be entitled to receive from CBT
an amount of cash (rounded to the nearest whole cent) equal to the product of
(i) such fraction, multiplied by (ii) the closing price of an ADS on November
27, 1998, as reported on the Nasdaq National Market.
1.3 Share Exchange. Unless this Agreement is earlier terminated pursuant
--------------
to Section 9.1, the closing of the Share Exchange (the "Closing") will take
-------
place as promptly as practicable, but no later than five (5) business days,
following satisfaction or waiver of the conditions set forth in Article VII, at
the offices of Binchys' Solicitors, 43 Fitzwilliam Place, Dublin 2, Ireland,
unless another place or time is agreed to by CBT and the Shareholders. The date
upon which the Closing occurs is herein referred to as the "Closing Date". The
------------
signing of this Agreement by a Shareholder shall constitute a waiver of all pre-
emption rights in relation to his, her or its KnowledgeWell Shares being
transferred pursuant to this Agreement.
1.4 Closing Mechanics. At Closing the following business shall be
-----------------
transacted and the following documents shall be signed and delivered.
-2-
<PAGE>
(a) The Shareholders shall deliver or procure to be delivered to CBT
or its legal counsel:
(i) duly executed and completed transfers in favor of CBT (or as
it shall direct) in respect of the KnowledgeWell Shares together with the
relative certificates therefor (the "KnowledgeWell Certificates");
--------------------------
(ii) duly executed and completed transfers into the names of such
persons as CBT may direct in respect of any shares in KnowledgeWell Inc. (the
"Subsidiary") not registered in the name of KW Group together with the share
----------
certificates for the whole of the issued share capital of the "Subsidiary";
(iii) any other documents which may be required to give good
title to the KnowledgeWell Shares (including any power of attorney under which
any document required to be delivered under this Section has been executed or
signed) or which may be necessary to enable CBT to procure the registration of
the same in the name of CBT or its nominee;
(iv) all the title deeds and documents relating to the properties
at Block 1, Blackrock Business Park, Blackrock, County Dublin, Ireland and 1701
Directors Boulevard, Suite 920, Austin, Texas 78764, USA occupied by
KnowledgeWell and the Subsidiary (together the "Properties");
----------
(v) the Certificate of Incorporation, statutory books and Common
Seals of each of KW Limited and KW Group and the Subsidiary and all prints of
the Memorandum and Articles of Association or Bylaws thereof in the possession
or under the control of the Shareholders;
(vi) at the offices of KnowledgeWell and the Subsidiary all the
records of KnowledgeWell and the Subsidiary together with all securities, deeds,
documents of title, insurance policies, check books and other books, papers and
documents relating to KnowledgeWell and the Subsidiary which are in the
Shareholders possession or under their control;
(vii) a letter of resignation in such form as CBT may require of
Jim Middleton and Martin Scully resigning as directors and of Molyneux
Secretarial Services Limited resigning as the Secretary of KW Limited and KW
Group and from any other office or employment that said persons may hold with
either of those companies and acknowledging that he or it has no outstanding
claims against either of those companies whether for compensation for loss of
office or otherwise whatsoever;
(viii) a letter of resignation in such form as CBT may require of
Caplin Meehan of 3 College Green, Dublin 2, Ireland resigning as Accountants for
and Auditors of KW Limited and KW Group and acknowledging that they have no
outstanding claims against either of those companies whether for compensation
for loss of office or otherwise whatsoever, with the exception of fees
outstanding at the date of resignation (whether billed or not) and containing
the statement referred to in sub-section 185(2)(a) of the Companies Act, 1990 of
Ireland;
-3-
<PAGE>
(ix) a letter of resignation in such form as CBT may require of
Hays & Co. resigning as Accountants for and Auditors of the Subsidiary and
acknowledging that they have no outstanding claims against the Subsidiary
whether for compensation for loss of office or otherwise whatsoever;
(x) instruments in such form as CBT may require duly executed by
all of the members of KW Limited and KW Group and all the members (other than KW
Group) of the Subsidiary waiving any pre-emption or other similar rights which
they may have either under the Articles of Association of KW Limited or KW Group
or Bylaws of the Subsidiary or otherwise in relation to the KnowledgeWell Shares
or any of them or in relation to any shares in the Subsidiary.
(b) The Shareholders shall procure a meeting of the Board of Directors
of each of KW Limited and KW Group to be held at which the following business
shall be transacted:
(i) the appointment of Bill Beamish as an additional director of
each of those companies;
(ii) the acceptance of the resignations of the directors,
secretary and auditors of each of these companies as referred to in sub-clauses
1.4 (vii) and (viii) above and the appointment as secretary and auditors of each
of those companies of such persons or firms as CBT may nominate;
(iii) the situation of the registered office of each of those
companies shall be changed to Belfield Office Park, Clonskeagh, Dublin 4,
Ireland;
(iv) the registration of CBT or its nominees as holder of the
KnowledgeWell Shares subject to the submission of duly stamped and completed
transfers of the KnowledgeWell Shares;
(v) the adoption of Bank Mandates in forms satisfactory to CBT in
substitution for and to the exclusion of the existing mandates; and
(vi) the accounting reference date of each of KW Group and KW
Limited shall be changed to December 31.
(c) The Shareholders shall procure a meeting of the Board of Directors
of the Subsidiary to be held at which the following business shall be
transacted:
(i) the appointment of Eric Murphy as an additional director of
the Subsidiary;
(ii) the acceptance of the resignation of the auditors of the
Subsidiary referred to in sub-clauses 1.4 (ix) above and the appointment as
auditors of the Subsidiary of such persons or firms as CBT may nominate;
-4-
<PAGE>
(iii) the registration of CBT or its nominees as the holder of
those shares in the Subsidiary not registered in the name of KW Group; and
(iv) the adoption of Bank Mandates in a form satisfactory to CBT
in substitution for and to the exclusion of the existing mandates.
(d) Each of the Shareholders shall repay and procure the repayment of
all sums owed to KnowledgeWell or the Subsidiary by him, her or it or any
connected person of his, hers or its or any company controlled by him, her or
it. For the purposes of the foregoing, each Shareholder (with the intention of
binding not only himself, herself or itself, but also his, her or its successors
and assigns and (in the case of an individual) his or her estate after his or
her death) hereby severally and not jointly represents and warrants to CBT that
no monies are owed to KnowledgeWell or the Subsidiary by such Shareholder or any
connected person of his, her or it or any company controlled by him, her or it
as at November 30, 1998. For purposes of this Section 1.4(d), the term
"connected person" and "control" shall have the meanings ascribed to those terms
by Sections 16(3) and 16(1), respectively, of the Finance (Miscellaneous
Provisions) Act 1968 of Ireland.
1.5 Payment of Acquisition Price.
----------------------------
(a) Upon Closing, CBT shall make available to each Shareholder as
payment of such Shareholder's part of the Acquisition Price in accordance with
this Article I Ordinary Shares of CBT in the name of such Shareholder; provided,
however, that CBT shall cause 402,000 Ordinary Shares to be issued pursuant to
Section 1.2(a) (the "Escrow Amount") to be deposited into an escrow account
-------------
pursuant to Section 8.3 below.
(b) Notwithstanding Section 1.5(a), in the event that a Restricted ADR
Facility (the "Restricted ADR Facility") has been arranged with The Bank of New
-----------------------
York prior to Closing as contemplated by Section 6.16, then upon Closing, CBT
shall make available to each Shareholder as payment of such Shareholder's part
of the Acquisition Price in accordance with this Article I Restricted American
Depositary Receipts ("ADRs") of CBT in the name of such Shareholder issued in
----
accordance with a Restricted Deposit Agreement among CBT, The Bank of New York,
as depository (the "Depository"), and all owners and beneficial owners of such
----------
ADRs (the "Deposit Agreement"), which ADRs shall represent that number of ADSs
-----------------
to be issued to that Shareholder as payment of such Shareholder's part of the
Acquisition Price in accordance with Section 1.2(a). Prior to or concurrent
with the Share Exchange, CBT shall deliver or cause to be delivered to the
Custodian (as defined in the Deposit Agreement), in accordance with the Deposit
Agreement, the Ordinary Shares represented by the ADSs to be issued in
connection with the Share Exchange, with instructions to the Depository to
create and deliver the ADRs representing the ADSs to each Shareholder as
provided above; provided, however, that CBT shall cause the ADRs representing
402,000 ADSs to be issued pursuant to Section 1.2(a) (the "Escrow Amount") to be
-------------
deposited into an escrow account pursuant to Section 8.3 below.
-5-
<PAGE>
(c) If any ADR or Ordinary Share, as the case may be, is to be issued
in a name other than that of the Shareholder entitled thereto pursuant to the
Share Exchange, it will be a condition of the issuance thereof that the person
requesting such exchange will have paid to CBT or any agent designated by it any
transfer or other taxes required by reason of the issuance of an ADR or Ordinary
Share in any name other than that of the registered holder of the KnowledgeWell
Certificate surrendered, or established to the satisfaction of CBT or any agent
designated by it that such tax has been paid or is not payable.
1.6 No Further Ownership Rights in KnowledgeWell Shares. All ADSs or
---------------------------------------------------
Ordinary Shares, as the case may be, issued in exchange for KnowledgeWell Shares
in accordance with the terms of this Agreement (including any cash paid in
respect of fractional shares) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such KnowledgeWell Shares.
1.7 Lost, Stolen or Destroyed KnowledgeWell Certificates. In the event
----------------------------------------------------
any KnowledgeWell Certificates evidencing KnowledgeWell Shares shall have been
lost, stolen or destroyed, then upon Closing, the holder thereof shall be
required to deliver an indemnity in such form as CBT may require in respect of
such lost, stolen or destroyed certificate and CBT may in its sole discretion
require the owner of any such lost, stolen or destroyed KnowledgeWell
Certificates to deliver a bond in such sum as CBT may reasonably direct as part
of any such indemnity against any claim that may be made against CBT with
respect to the KnowledgeWell Certificates alleged to have been lost, stolen or
destroyed.
1.8 Stock Options. At the Closing, all options to purchase shares in
-------------
KnowledgeWell then outstanding and unexercised under the KnowledgeWell Limited
1998 Share Option Plan or the KnowledgeWell Group Limited 1998 Share Option Plan
(collectively, the "KnowledgeWell Option Plans") shall be assumed by CBT in
--------------------------
accordance with provisions described below.
(a) At the Closing, each outstanding unexercised option to purchase
"A" Ordinary Shares of US$0.25 each in the capital of KW Limited ("KW Limited
----------
Options") or Ordinary Shares of US$0.01 each in the capital of KW Group ("KW
- ------- --
Group Options" and, collectively with KW Limited Options, "KnowledgeWell
- ------------- -------------
Options")) under the KnowledgeWell Option Plans, whether vested or unvested,
shall be, in connection with the Share Exchange, assumed by CBT. Each
KnowledgeWell Option so assumed by CBT under this Agreement shall continue to
have, and be subject to, the same terms and conditions set forth in the
KnowledgeWell Option Plans and/or as provided in the respective option
agreements governing such KnowledgeWell Option immediately prior to the
Closing, except that (A) such KnowledgeWell Option shall be exercisable for that
number of whole CBT Ordinary Shares equal to the product of the number of shares
of KnowledgeWell that were issuable upon exercise of such KnowledgeWell Option
immediately prior to the Closing multiplied by the Exchange Ratio rounded down
to the nearest whole number of CBT Ordinary Shares and (B) the per share
exercise price for the CBT Ordinary Shares issuable upon exercise of such
assumed KnowledgeWell Option shall be equal to the quotient determined by
dividing the exercise price per share at which such KnowledgeWell Option was
exercisable immediately prior to the Closing by the Exchange Ratio, rounded up
to the nearest whole cent.
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<PAGE>
(b) It is the intention of the parties that KnowledgeWell Options
assumed by CBT qualify following the Closing as incentive stock options as
defined in Section 422 of the Code to the extent KnowledgeWell Options qualified
as incentive stock options immediately prior to the Closing.
(c) Promptly following the Closing, CBT will issue to each holder of
an outstanding KnowledgeWell Option a document evidencing the foregoing
assumption of such KnowledgeWell Option by CBT.
1.9 Taking of Necessary Action; Further Action. If, at any time after
------------------------------------------
the Share Exchange, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest CBT with full right, title and
possession to the KnowledgeWell Shares, the Shareholders will take all such
lawful and necessary action.
1.10 Tax-Free Reorganization. The parties hereto intend that the Share
-----------------------
Exchange shall constitute a reorganization within the meaning of Section 368 of
the United States Internal Revenue Code of 1986 (the "Code"). The parties
----
hereto adopt this Agreement as a "plan of reorganization" within the meaning of
Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations.
1.11 Termination of the Prior Share Purchase Agreement. The parties
-------------------------------------------------
hereto agree that all rights and obligations under the Prior Share Purchase
Agreement shall be terminated in their entirety and shall be superseded and
governed by this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
The Shareholders, jointly and severally, represent and warrant to CBT as of
November 30, 1998, subject to matters fairly and accurately disclosed in the
disclosure letter supplied by KnowledgeWell to CBT (the "KnowledgeWell
-------------
Disclosure Letter") and dated as of November 30, 1998, as follows (for the
- -----------------
purposes of the following warranties and representations (i) unless otherwise
indicated, the term "KnowledgeWell" shall be deemed to include where relevant
-------------
having regard to the context each of KW Limited, KW Group and the Subsidiary,
and (ii) subject to matters fairly and accurately disclosed in the KnowledgeWell
Disclosure Letter, no other information relating to KnowledgeWell of which CBT
has knowledge (actual or constructive) shall prejudice any claim made by CBT
under such warranties or representations or operate to reduce any amount
recoverable):
2.1 Organization of KnowledgeWell.
-----------------------------
(a) Each of KW Limited and KW Group is a corporation duly
incorporated under the laws of Ireland and has complied in all respects with the
filing requirements of the Companies Acts, 1963 to 1990 of Ireland. Each of KW
Limited and KW Group has the corporate power to own its properties and to carry
on its business as now being conducted. Each of KW Limited and KW Group is
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<PAGE>
duly qualified to do business and in good standing as a foreign corporation in
each jurisdiction in which the failure to be so qualified would have a material
adverse effect on the business, assets (including intangible assets), financial
condition or results of operations of KnowledgeWell (herein after referred to as
a "Material Adverse Effect").
-----------------------
2.2 KnowledgeWell Capital Structure.
-------------------------------
(a) The authorized share capital of KW Limited consists of
US$5,000,000 divided into 19,872,000 "A" Ordinary Shares of US$0.25 each, of
which 9,658,813 are issued and outstanding, 1,289,000 "B" Ordinary Shares of
US$0.025 each, none of which are issued or outstanding, and IR(Pounds)1,000,000
divided into 4,000,000 "C" Ordinary Shares of IR25p each, of which 2,428,376 are
issued and outstanding. The authorized share capital of KW Group consists of
US$250,000 divided into 23,000,000 Ordinary Shares of US$0.01 each, of which
8,023,320 are issued and outstanding, and 2,000,000 Convertible Preference
Shares of US$0.01 each ("KW Preferred"), of which 1,635,493 are issued and
------------
outstanding. The issued shares of KW Limited and KW Group (collectively,
"KnowledgeWell Share Capital") are held by the persons, with the domicile
- ----------------------------
addresses and in the amounts set forth in Schedule 2.2(a) of the KnowledgeWell
Disclosure Letter. All of the issued shares of KnowledgeWell Share Capital are
duly authorized, validly issued, fully paid and non-assessable and not subject
to preemptive rights created by statute, the Articles of Association or Bylaws
of KnowledgeWell or any agreement to which KnowledgeWell is a party or by which
it is bound. Subject to the stock transfer forms being represented duly stamped
and the register of members being completed, as a result of the Share Exchange,
CBT will be the record and sole beneficial owner of all KnowledgeWell Share
Capital and rights to acquire or receive KnowledgeWell Share Capital. The
copies of the Memorandum and Articles of Association of each of KW Limited and
KW Group delivered by KnowledgeWell to CBT are true, complete and accurate and
have embodied therein or annexed thereto a copy of every such resolution or
agreement as is referred to in section 143(2) of the Companies Act, 1963 of
Ireland. The copy of the Bylaws of the Subsidiary delivered by KnowledgeWell to
CBT are true, complete and accurate;
(b) KW Limited has reserved 3,000,000 "A" Ordinary Shares of US$0.25
each for issuance to employees and consultants pursuant to the KnowledgeWell
Limited 1998 Share Option Plan, of which 2,706,566 shares are subject to
outstanding, unexercised options. KW Group has reserved 3,000,000 Ordinary
Shares of US$0.01 each for issuance to employees and consultants pursuant to the
KnowledgeWell Group Limited 1998 Share Option Plan, of which 2,706,566 shares
are subject to outstanding, unexercised options. Schedule 2.2(b) of the
KnowledgeWell Disclosure Letter sets forth for each outstanding KnowledgeWell
Option: the name of the company which has granted the option, the name of the
holder of such option, the domicile address of such holder, the number of
ordinary shares of the relevant company subject to such option, the exercise
price of such option and the vesting schedule for such option, including the
extent vested to date and whether the exercisability of such option will be
accelerated and become exercisable by the transactions contemplated by this
Agreement. Except for KnowledgeWell Options described in Schedule 2.2(b) of the
KnowledgeWell Disclosure Letter, there are no options, warrants, calls, rights,
commitments or agreements of any character, written or oral, to which
KnowledgeWell is a party or by which it is bound obligating KnowledgeWell to
issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered,
sold,
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<PAGE>
repurchased or redeemed, any shares in the capital of KnowledgeWell. Except for
KnowledgeWell Options described in Schedule 2.2(b) of the KnowledgeWell
Disclosure Letter, there are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which KnowledgeWell is a party
or by which it is bound obligating KnowledgeWell to grant, extend, accelerate
the vesting of, change the price of, otherwise amend or enter into any such
option, warrant, call, right, commitment or agreement.
2.3 Subsidiaries. KW Limited does not have and has never had any
------------
subsidiaries and does not otherwise own and has never otherwise owned any shares
of capital stock or any interest in, or control, directly or indirectly, any
other corporation, partnership, association, joint venture or other business
entity. Except for the Subsidiary, KW Group does not have and has never had any
subsidiaries and does not otherwise own and has never otherwise owned any shares
of capital stock or any interest in, or control, directly or indirectly, any
other corporation, partnership, association, joint venture or other business
entity.
2.4 Authority. KnowledgeWell has all requisite corporate power and
---------
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of KnowledgeWell. KW Limited's
and KW Group's Boards of Directors have unanimously approved the Share Exchange
and this Agreement. This Agreement has been duly executed and delivered by
KnowledgeWell and constitutes the valid and binding obligation of KnowledgeWell,
enforceable in accordance with its terms. Except as set forth in Schedule 2.4
of the KnowledgeWell Disclosure Letter, the execution and delivery of this
Agreement by KnowledgeWell does not, and the consummation of the transactions
contemplated hereby will not, conflict with, or result in any violation of, or
default under (with or without notice or lapse of time, or both), or give rise
to a right of termination, cancellation or acceleration of any obligation or
loss of any benefit under (any such event, a "Conflict") (i) any provision of
--------
the Memorandum and Articles of Association of KW Limited or KW Group or (ii) any
mortgage, indenture, lease, contract or other agreement or instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to KnowledgeWell or its properties or
assets. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") or any
-------------------
third party (so as not to trigger any Conflict), is required by or with respect
to KnowledgeWell in connection with the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby, except for (i) such
consents, waivers, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and state
securities laws, (ii) such other consents, waivers, authorizations, filings,
approvals and registrations which are set forth in Schedule 2.4 of the
KnowledgeWell Disclosure Letter and (iii) such consents, waivers,
authorizations, filings, approvals and registrations which would not
individually or in the aggregate, have a material adverse effect on the ability
of KnowledgeWell to consummate the transactions contemplated hereby.
-9-
<PAGE>
2.5 KnowledgeWell Financial Statements.
----------------------------------
(a) Schedule 2.5 of the KnowledgeWell Disclosure Letter sets forth
(i) KW Limited's audited balance sheet as of October 31, 1997 and the related
audited statements of operations and cash flows for the period then ended, (ii)
KW Limited's unaudited balance sheet as of October 31, 1998 (the "KW Limited
----------
Balance Sheet") and the related unaudited statements of operations and cash
- -------------
flows for the twelve-month period then ended, (iii) KW Group's unaudited
consolidated balance sheet as of October 31, 1998 (the "KW Group Balance Sheet"
----------------------
and, collectively with the KW Limited Balance Sheet, the "Balance Sheets") and
--------------
the related unaudited consolidated statements of operations and cash flows for
the period from incorporation (collectively, the "KnowledgeWell Financial
-----------------------
Statements"). The accounting reference date of each of KW Limited, KW Group and
- ----------
the Subsidiary is 31 October.
(b) The audited KnowledgeWell Financial Statements:
(i) give a true and fair view of KnowledgeWell in all
respects as at October 31, 1998 (the "Accounts Date");
-------------
(ii) comply with the requirements of the Companies Acts,
1963 to 1990 of Ireland and all regulations to be construed as one with those
Acts;
(iii) have been prepared in accordance with the best
generally accepted and adopted accounting principles in Ireland and all
applicable Statements of Standard Accounting Practice ("SSAP");
----
(c) The audited and unaudited KnowledgeWell Financial Statements:
(i) have been prepared on a basis consistent with that
adopted for preceding accounting periods;
(ii) are not affected by any unusual, extraordinary,
exceptional or non-recurring items or by any other factor rendering the results
thereof (or any of them) unusually better or worse than they (or any of them)
might otherwise be or have been;
(iii) are true, complete and accurate and properly reflect
the financial position of KnowledgeWell as at the Accounts Date and of its
results for the accounting period ending on that date;
(iv) correctly and accurately disclose all the assets and
liabilities (whether ascertained, contingent, deferred or otherwise and whether
or not quantified or disputed) of KnowledgeWell as at the Accounts Date and make
full provision and/or reserve for all such liabilities and for all capital
commitments of KnowledgeWell up to the Accounts Date;
-10-
<PAGE>
(v) make full provision for any foreseeable losses which may
arise on Closing and/or on realization of stock and work-in-progress and/or on
completion of any existing or proposed contract;
(vi) make adequate provision for all bad and doubtful debts
of KnowledgeWell and for depreciation of the fixed assets of KnowledgeWell
having regard to their original cost and estimated useful life;
(vii) correctly and accurately disclose all financial
commitments in existence as at the Accounts Date; and
(viii) include all such reserves and provisions for Tax as
are necessary to cover all liabilities for Tax (whether or not assessed) of
KnowledgeWell up to the Accounts Date and, in particular, but without prejudice
to the generality of the foregoing attributable to profits, gains, income,
receipts, and loans and distributions made to participators and associates and
payments from which Tax is deductible.
(d) The KnowledgeWell Financial Statements do not include any
intangible assets and the value attributed to each fixed asset of KnowledgeWell
does not exceed the current market value thereof as at the Accounts Date. The
basis of valuing such fixed assets has not been changed during the period since
incorporation and nor has there been any revaluation of fixed assets during such
period.
(e) The rate of depreciation applied in respect of each fixed asset
has been consistently applied over the period since incorporation and is
adequate to write down the value of such fixed assets to its net realizable
value as at the end of its useful working life and the fixed assets have been
depreciated in accordance with the relevant SSAP for the relevant financial
year.
(f) All the accounts, books, ledgers and financial and other records
of whatsoever kind of KnowledgeWell have at November 30, 1998 been fully,
properly and accurately maintained and contain true and accurate records of all
matters required to be entered therein under the Companies Acts, 1963 to 1990
and any other relevant statutes or regulations and will, pending Closing,
continue to be so maintained and there are at November 30, 1998 and will pending
Closing be no material inaccuracies or discrepancies of any kind contained or
reflected therein or in any of them. At November 30, 1998 they give and reflect
and at Closing will give and reflect a true and fair view of the financial,
contractual and trading position of KnowledgeWell and of its plant and
machinery, fixed and current assets and liabilities (actual and contingent),
debtors and creditors and stock-in-trade and work-in-progress.
2.6 No Undisclosed Liabilities. Except as set forth in Schedule 2.6 of
--------------------------
the KnowledgeWell Disclosure Letter, KnowledgeWell does not have any material
liability, indebtedness, obligation, expense, claim, deficiency, guaranty or
endorsement of any type, whether accrued, absolute, contingent, matured,
unmatured or other (whether or not required to be reflected in financial
statements in accordance with generally accepted accounting principles), which
individually or in the aggregate,
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<PAGE>
(i) has not been reflected in the Balance Sheets, or (ii) has not arisen in the
ordinary course of KnowledgeWell's business since October 31, 1998, consistent
with past practices.
2.7 No Changes. Except as set forth in Schedule 2.7 of the KnowledgeWell
----------
Disclosure Letter, since October 31, 1998, there has not been, occurred or
arisen any:
(a) transaction by KnowledgeWell except in the ordinary course of
business as conducted on that date and consistent with past practices;
(b) amendments or changes to the Memorandum and Articles of
Association of KW Limited or KW Group;
(c) capital expenditure or commitment by KnowledgeWell of US$25,000
in any individual case or US$100,000 in the aggregate.
(d) destruction of, damage to or loss of any material assets,
business or customer of KnowledgeWell (whether or not covered by insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(f) change in accounting methods or practices (including any change
in depreciation or amortization policies or rates) by KnowledgeWell;
(g) revaluation by KnowledgeWell of any of its assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the share capital of KnowledgeWell, or any direct
or indirect redemption, purchase or other acquisition by KnowledgeWell of any of
its share capital;
(i) increase in the salary or other compensation payable or to become
payable by KnowledgeWell to any of its officers, directors, employees or
advisors, or the declaration, payment or commitment or obligation of any kind
for the payment, by KnowledgeWell, of a bonus or other additional salary or
compensation to any such person except as otherwise contemplated by this
Agreement;
(j) sale, lease, license or other disposition of any of the assets or
properties of KnowledgeWell, except in the ordinary course of business as
conducted on that date and consistent with past practices;
(k) amendment or termination of any material contract, agreement or
license to which KnowledgeWell is a party or by which it is bound;
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<PAGE>
(l) loan by KnowledgeWell to any person or entity, incurring by
KnowledgeWell of any material indebtedness, guaranteeing by KnowledgeWell of any
material indebtedness, issuance or sale of any debt securities of KnowledgeWell
or guaranteeing of any debt securities of others except for advances to
employees for travel and business expenses in the ordinary course of business,
consistent with past practices;
(m) waiver or release of any material right or material claim of
KnowledgeWell, including any material write-off or other material compromise of
any account receivable of KnowledgeWell;
(n) to KnowledgeWell's knowledge, commencement or notice or threat of
commencement of any lawsuit or proceeding against or investigation of
KnowledgeWell or its affairs;
(o) notice of any claim of ownership by a third party of the
Intellectual Property of KnowledgeWell (as defined in Section 2.11 below) or of
infringement by KnowledgeWell of any third party's Intellectual Property rights;
(p) issuance or sale by KnowledgeWell of any of its share capital, or
securities exchangeable, convertible or exercisable therefor, or of any other of
its securities;
(q) change in pricing or royalties set or charged by KnowledgeWell to
its customers or licensees except in the ordinary course of business, or in
pricing or royalties set or charged by persons who have licensed Intellectual
Property to KnowledgeWell except in the ordinary course of business;
(r) event or condition of any character that has or could be
reasonably expected to have a Material Adverse Effect on KnowledgeWell; or
(s) negotiation or agreement by KnowledgeWell or any officer or
employees thereof to do any of the things described in the preceding clauses (a)
through (r) (other than negotiations with CBT and its representatives regarding
the transactions contemplated by this Agreement).
2.8 Tax and Other Returns and Reports.
---------------------------------
(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
------------------- ---
or, collectively, "Taxes", means any and all national, federal, state, local and
-----
foreign taxes, assessments and other governmental charges, duties, impositions,
levies and liabilities, whenever imposed, including without limitation taxes
based upon or measured by gross receipts, income, profits, sales, capital gain,
use and occupation, and value added, ad valorem, transfer, franchise,
withholding, payroll, recapture, employment, excise and property taxes, together
with all interest, penalties and additions imposed with respect to such amounts
and any obligations under any agreements or arrangements with any other person
with respect to such amounts and including any liability for taxes of a
predecessor entity.
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<PAGE>
(b) Tax Returns and Audits. Except as set forth in Schedule 2.8 of
----------------------
the KnowledgeWell Disclosure Letter:
(i) KnowledgeWell as of the Closing Date will have prepared and
filed all required national, U.S. federal, U.S. state, U.S. local and non-U.S.
returns, estimates, information statements and reports ("Returns") relating to
-------
any and all Taxes concerning or attributable to KnowledgeWell or its operations
and such Returns are true and correct in all material respects and have been
completed in accordance with applicable law.
(ii) KnowledgeWell as of the Closing Date: (A) will have paid or
accrued all Taxes it is required to pay or accrue and (B) will have withheld
with respect to its employees all U.S. federal and U.S. state income taxes,
FICA, FUTA and other Taxes required to be withheld.
(iii) KnowledgeWell has not been delinquent in the payment of any
Tax nor is there any Tax deficiency outstanding, proposed or assessed against
KnowledgeWell, nor has KnowledgeWell executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of any
Tax.
(iv) No audit or other examination of any Return of KnowledgeWell
is presently in progress, nor has KnowledgeWell been notified of any request for
such an audit or other examination.
(v) KnowledgeWell does not have any liabilities for unpaid U.S.
federal, state, U.S. local or non-U.S. Taxes which have not been accrued or
reserved against in accordance with GAAP on the Balance Sheets, whether asserted
or unasserted, contingent or otherwise, and KnowledgeWell has no knowledge of
any basis for the assertion of any such liability attributable to KnowledgeWell,
its assets or operations.
(vi) KnowledgeWell has provided to CBT copies of all U.S. federal
and U.S. state income and all U.S. state sales and use Tax Returns for all
periods since the date of KnowledgeWell's incorporation.
(vii) There are (and as of immediately following the Closing
there will be) no Liens on the assets of KnowledgeWell relating to or
attributable to Taxes.
(viii) KnowledgeWell has no knowledge of any basis for the
assertion of any claim relating or attributable to Taxes which, if adversely
determined, would result in any Lien on the assets of KnowledgeWell.
(ix) None of KnowledgeWell's assets are treated as "tax-exempt
use property" within the meaning of Section 168(h) of the Code.
(x) As of the Closing Date, there will not be any contract,
agreement, plan or arrangement, including but not limited to the provisions of
this Agreement, covering any employee or
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<PAGE>
former employee of KnowledgeWell that, individually or collectively, will, or
would reasonably be expected to, give rise to the payment of any amount that
would not be deductible pursuant to Section 280G or 162 of the Code.
(xi) KnowledgeWell is not a party to a tax sharing or allocation
agreement nor does KnowledgeWell owe any amount under any such agreement.
(c) General
-------
(i) All returns, computations, notices and items of information
which are, or have been, required to be made or given by KnowledgeWell for any
Tax purpose have been made or given within the requisite periods and on a proper
basis and are up-to-date and correct, and none of them is, or is likely to be,
the subject of any dispute with the Irish Revenue Commissioners (the "Revenue
-------
Commissioners") or other Tax authorities.
- -------------
(ii) All Tax, including amounts required by statute to be
deducted by KnowledgeWell in respect of payments made by it, which KnowledgeWell
is liable to pay prior to Closing has been or will be so paid prior to Closing.
(iii) KnowledgeWell has not paid, or become liable to pay, any
fine, penalty or interest charged by virtue of the Taxes Consolidation Act, 1997
("TCA"), the Value Added Tax Act, 1972, of Ireland or any other statutory
---
provision relating to Tax, and it has not committed any act or made any omission
which might constitute an offense under section 1078 of the TCA.
(iv) Schedule 2.8(c)(iv) of the KnowledgeWell Disclosure Letter
sets out full particulars of any agreement or arrangement between KnowledgeWell
and the Revenue Commissioners or other Tax authorities pursuant to which
KnowledgeWell is authorized not to comply with a requirement which, but for such
agreement or arrangement, would be its statutory obligation, and KnowledgeWell
has not taken any action which has had, or will have, the result of altering,
prejudicing or in any way disturbing any arrangement or agreement which it has
previously had with the Revenue Commissioners or other Tax authorities.
(v) The KnowledgeWell Disclosure Letter contains full and
accurate particulars of all transactions effected otherwise than in the ordinary
course of business since the Accounts Date in respect of which KnowledgeWell is
required to make a specific return to the relevant Tax authorities and in
respect of which the time for making such return will expire on or after
Closing.
(vi) No transaction has been effected by KnowledgeWell in respect
of which any consent or clearance from the Revenue Commissioners or other Tax
authorities was required:
(1) without such consent or clearance having been validly
obtained before the transaction was effected;
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<PAGE>
(2) otherwise than in accordance with the terms of, and so
as to satisfy any conditions attached to, such consent or clearance; or
(3) otherwise than at a time when, and in circumstances in
which, such consent or clearance was valid and effective,
and, in any case where such consent or clearance was required, no circumstances
have arisen which might reasonably be expected to cause such consent or
clearance to be or become invalid or to be withdrawn by the Tax authority
concerned.
(vii) All particulars furnished to the Revenue Commissioners or
other Tax authorities in connection with the application for any consent or
clearance by KnowledgeWell made since the Accounts Date fully and accurately
disclosed all facts and circumstances material to the decision of the Revenue
Commissioners or such other authorities.
(viii) KnowledgeWell is not and will not become liable to pay, or
make reimbursement or indemnity in respect of, any Tax (or amounts corresponding
thereto) in consequence of the failure by any other person to discharge that Tax
within any specified period or otherwise, where such Tax relates to a profit,
income or gain, transaction, event, omission or circumstance arising, occurring
or deemed to arise or occur whether wholly or partly prior to Closing.
(ix) The KnowledgeWell Disclosure Letter includes a correct and
complete list and full particulars with express reference to this clause (c)(ix)
of all matters relating to Tax in respect of which KnowledgeWell (either alone
or jointly with any other person) has, or at Closing will have, an outstanding
entitlement:
(1) to make any claim for relief under the TCA or any other
statutory provision relating to Tax;
(2) to make any election for one type of relief, or one
basis, system or method of Tax, as opposed to another;
(3) to make any appeal (including a further appeal) against
an assessment to Tax;
(4) to make any application for the postponement, or
payment by instalment of, Tax; or
(5) to disclaim any allowance or relief
such particulars being reasonably sufficient to enable CBT to procure that
any time limit to such entitlement expiring within six months after Closing
can be met.
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<PAGE>
(x) No notice of attachment has been served on KnowledgeWell
under section 1002 of the TCA.
(xi) KnowledgeWell has not received, nor will it prior to
Closing earn, deposit interest subject to retention of Tax under section 257 of
the TCA.
(xii) KnowledgeWell has not since its incorporation taken a
fixed charge on the book debts of any company, nor will it take any such fixed
charge prior to Closing.
(xiii) KnowledgeWell has never been, nor is it now, assessable to
tax under section 1034 or 1035 of the TCA.
(xiv) KnowledgeWell has not received any notice under section
811(6) of the TCA or engaged in, or been a party to, a tax avoidance transaction
within the meaning of section 811(2) of the TCA or any other transaction or
series of transactions or scheme or arrangement of which the main purpose, or
one of the main purposes, was or could be said to be the avoidance or deferral
of, or a reduction in the liability to, Tax.
(xv) KnowledgeWell has properly operated the pay as you earn
and social welfare contribution systems (including levies), deducting and
accounting for Tax and maintaining records as required by law, and it has not
suffered any PAYE audit by the Revenue Commissioners since the Accounts Date nor
has it been notified that any such audit will or is expected to be made.
(d) Corporation Tax
---------------
(i) Neither KW Limited nor KW Group is, or has at any stage
since its incorporation been resident for Tax purposes in a country other than
Ireland.
(ii) Schedule 2.8(d)(ii) of the KnowledgeWell Disclosure Letter
includes a correct and complete list and full particulars of any liability to
Tax in a country other than Ireland.
(iii) (1) Schedule 2.8(d)(iii) of the KnowledgeWell Disclosure
Letter includes a statement of all distributable reserves of KnowledgeWell which
carry a reduced tax credit.
(2) Where relief under chapter 1 of part 14 of the TCA
has been claimed by either KW Limited or KW Group, such relief was claimed, and
is being claimed, on a correct and proper basis.
(iv) No relief (whether by way of deduction, reduction, set-
off, exemption, repayment, allowance or otherwise) from, against or in respect
of any tax has been claimed or given to KnowledgeWell which could or might be
effectively withdrawn, postponed, restricted or otherwise lost as a result of
any act, omission, event or circumstance arising or occurring at or at any time
before, Closing, and KnowledgeWell has not at any time claimed any relief from
Tax under part 10 of the TCA.
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<PAGE>
(v) Nothing has been done and no event or series of events has
occurred or will as a result of any contract, agreement or arrangement entered
into before Closing occur, which might when taken together with the entry into
or Closing of this Agreement cause or contribute to the disallowance to either
KW Limited or KW Group of the carry forward of any losses or excess charges on
income or surplus advance corporation tax.
(vi) The use of losses incurred by, or charges paid by, either
of KW Limited or KW Group is not restricted by section 454, 455 or 456 of the
TCA.
(vii) (1) Neither KW Limited, KW Group nor the Subsidiary
incurred a loss on the disposal or deemed disposal of an asset (other than
trading stock) in relation to which their ability to set the whole of that loss
against any chargeable gain arising in the same or later accounting period is or
may be restricted or excluded.
(2) Neither KW Limited nor KW Group has made, nor are
they entitled to make, a claim under section 538 of the TCA.
(viii) None of KW Limited, KW Group or the Subsidiary has made a
claim for capital allowances in respect of any asset which is leased to or from,
or hired to or from, any of the other of them, and since the Accounts Date,
KnowledgeWell has not done, or omitted to do, or agreed to do or permitted to be
done, any act, or suffered any occurrence, as a result of which any balancing
charge has arisen or may arise under sections 274 or 288 of the TCA, nor has
there been or might there be any disallowance of excess relief by virtue of
section 403 of the TCA.
(ix) (1) If each of the assets (other than trading stock) of
KnowledgeWell was disposed of for a consideration equal to the book value of
that asset shown in or adopted for the purpose of the KnowledgeWell Financial
Statements, no liability to corporation tax on chargeable gains or balancing
charges under section 274 or 288 of the TCA not fully provided for in the
KnowledgeWell Financial Statements would arise.
(2) For the purpose of determining the liability to
corporation tax on chargeable gains, there shall be disregarded any reliefs and
allowances available to KnowledgeWell other than amounts falling to be deducted
under chapter 2 of part 19 of the TCA.
(3) KnowledgeWell has not since the Accounts Date
acquired any asset (other than trading stock) in circumstances such that
sections 584, 585, 586 or 587 of the TCA applied to its acquisition.
(x) The KnowledgeWell Disclosure Letter includes a correct and
complete list and full particulars of all dividends paid since the date of
incorporation of KnowledgeWell out of patent income disregarded for the purposes
of corporation tax by virtue of section 234 of the TCA.
(xi) Each of KW Limited and KW Group are regarded as close
companies for Irish tax purposes. Except as disclosed in the Schedule 2.8(d)(xi)
of the KnowledgeWell Disclosure
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<PAGE>
Letter none of the said companies has any liability to Tax pursuant to part 13
of the TCA or will incur any such liability in respect of any accounting period
prior to Closing.
(xii) Each of KW Limited, KW Group and the Subsidiary at
November 30, 1998, carried on an activity which is a trade for the purposes of
Tax and has not ceased, and will not as a result of any contract, agreement or
arrangement entered into before Closing cease, to carry on such activity.
(xiii) KnowledgeWell has never received nor become entitled to
any income which is particular income within the meaning of section 1004 of the
TCA nor any particular gains to which section 1005 of the TCA could apply.
(xiv) KnowledgeWell:
(1) does not own nor has it agreed to acquire any asset,
nor has it received or agreed to receive any services or facilities (including
without limitation the benefit of any licences or agreements), the consideration
for the acquisition or provision of which was or will be in excess of its market
value, or otherwise than on an arm's length basis;
(2) does not own nor has it agreed to dispose of any
asset, nor has it provided or agreed to provide any services or facilities
(including without limitation the benefit of any licences or agreements), the
consideration for the disposal or provision of which was or will be less than
its market value, or otherwise than on an arm's length basis;
(3) has not disposed of or acquired any asset in such
circumstances that the provisions of section 547 of the TCA applied or could
apply thereto; and
(4) has not since the Accounts Date appropriated any
asset owned by it to or from trading stock.
(xv) None of KW Limited, KW Group or the Subsidiary has since
the respective date of its incorporation:
(1) repaid or agreed to repay, or redeemed or agreed to
redeem, or purchased or agreed to purchase, any of its share capital; or
(2) capitalized or agreed to capitalize in the form of
debentures or redeemable shares any profits or reserves of any class or
description.
(xvi) No rents, interest, annual payments, emoluments or other
sums of an income nature paid or payable by KnowledgeWell or which KnowledgeWell
is under an obligation to pay in the future are, or (under the law as presently
in force) may be, wholly or partially disallowable as deductions or charges in
computing profits for the purpose of corporation tax by reason of any statutory
provision relating to Tax.
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<PAGE>
(xvii) No securities, within the meaning of section 135(8) of
the TCA issued by KnowledgeWell and remaining in issue at November 30, 1998 were
issued in such circumstances that any interest or other distribution out of
assets in respect thereof falls to be treated as a distribution under section
130(2)(d) of the TCA, nor has KnowledgeWell agreed to issue securities (within
that meaning) in such circumstances.
(xviii) Section 138 of the TCA does not apply to dividends paid
or received by any of KW Limited, KW Group or the Subsidiary.
(xix) No asset owned by KnowledgeWell has at any time since its
acquisition by KnowledgeWell been subjected to a reduction in value such that
any allowable loss arising on its disposal is likely to be reduced or eliminated
or any chargeable gain arising on its disposal is likely to be increased.
(xxi) KnowledgeWell has not entered into any transaction to
which the provisions of section 98, 99 or 199 of the TCA have been or could be
applied.
(xx) KnowledgeWell has not since the Accounts Date received
any payment to which section 782 of the TCA is applicable.
(xxi) (1) There is set out in Schedule 2.8(d)(xxii) of the
KnowledgeWell Disclosure Letter details of all share schemes established by
KnowledgeWell and approved pursuant to Part 17 of the TCA.
(2) None of KW Limited, KW Group or the Subsidiary has
been a qualifying research and development company or a qualifying sponsoring
company within the meaning of Chapter III of Part I of the Finance Act, 1986, of
Ireland.
(xxiii) (1) Schedule 2.8(d)(xxiii)(1) of the KnowledgeWell
Disclosure Letter includes a correct and complete list and full particulars of
all arrangements and agreements relating to group relief (as described in
Chapter 5 of Part 2 of the TCA) to which any of KW Limited, KW Group or the
Subsidiary are or have been a party since the respective date of its
incorporation.
(2) All claims made by KW Limited, KW Group or the
Subsidiary for group relief were, when made, valid and have been or will be
allowed by way of relief from corporation tax.
(3) Except as disclosed in Schedule 2.8(d)(xxiii)(3)
of the KnowledgeWell Financial Statements, none of KW Limited, KW Group or the
Subsidiary has since the Accounts Date made, nor are they liable to make, any
payment under any such arrangement or agreement.
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<PAGE>
(4) Each of KW Limit ed, KW Group and the Subsidiary
has received any payments due to it under any such arrangements or agreement for
surrender of group relief made by it.
(xxiv) (1) Schedule 2.8(d)(xxiv)(1) of the KnowledgeWell
Disclosure Letter includes a correct and complete list and full particulars of
all arrangements and agreements relating to the surrender of advance corporation
tax (as described in section 166 of the TCA) to which any of KW Limited, KW
Group or the Subsidiary are or have been a party in the period since their
respective incorporation.
(2) All claims made by any of KW Limited, KW Group or
the Subsidiary for the surrender of advance corporation tax were, when made,
valid and have been or will be allowed by way of relief from corporation tax
payable by the particular company to whom the advance corporation tax was
surrendered.
(3) Except as disclosed in Schedule 2.8(d)(xxiv)(3) of
the KnowledgeWell Disclosure Letter none of KW Limited, KW Group or the
Subsidiary has since the Accounts Date paid, or is liable to pay, any advance
corporation tax which is or may become incapable of set-off against its
liability to corporation tax.
(4) Each of KW Limited, KW Group or the Subsidiary has
received all payments due to it under any such arrangements or agreements for
the surrender of advance corporation tax.
(xxv) Schedule 2.8(d)(xxv) of the KnowledgeWell Disclosure
Letter includes a correct and complete list and full particulars of all
elections made by any of KW Limited, KW Group or the Subsidiary under section
165 of the TCA.
(xxvi) The entry into or Closing of this Agreement will not
result in any profit or gain being deemed to accrue to any of KW Limited, KW
Group or the Subsidiary for Tax purposes, whether pursuant to section 623 of the
TCA or otherwise.
(xxvii) KnowledgeWell has not purchased an asset subject to a
claim made under section 620 of the TCA, nor has it made any other claim which
would affect the amount of the chargeable gain or allowable loss which would,
but for such claim, have arisen on a disposal of any of its assets.
(xxviii) KnowledgeWell has not entered into any transaction as a
result of which it could be assessed to Tax under Chapter 1 Part 22 of the TCA.
(e) Capital Acquisitions Tax.
------------------------
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<PAGE>
(i) There is no outstanding charge for unpaid capital
acquisitions tax over any asset of KnowledgeWell or in relation to any shares in
the capital of any of KW Limited, KW Group or the Subsidiary.
(ii) There are not in existence any circumstances whereby any
such power as is mentioned in section 35(8) of the Capital Acquisitions Tax Act,
1976, of Ireland could be exercised in relation to any shares, securities or
other assets of or owned by KnowledgeWell.
(iii) Since the Accounts Date, no taxable gift (as defined by
section 6 of the Capital Acquisitions Tax Act, 1976, of Ireland) or taxable
inheritance (as defined by section 12 of the same Act) has been received by any
of KW Limited, KW Group or the Subsidiary, nor have any of KW Limited, KW Group
or the Subsidiary been disponers (as defined by section 2 of the same Act) for
the purposes of capital acquisitions tax.
2.9 Restrictions on Business Activities. There is no agreement
-----------------------------------
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which KnowledgeWell is a party or otherwise binding upon KnowledgeWell which has
or reasonably could be expected to have the effect of prohibiting or impairing
any business practice of KnowledgeWell, any acquisition of property (tangible or
intangible) by KnowledgeWell or the conduct of business by KnowledgeWell.
Without limiting the foregoing, KnowledgeWell has not entered into any agreement
under which KnowledgeWell is restricted from selling, licensing or otherwise
distributing any of its products to any class of customers, in any geographic
area, during any period of time or in any segment of the market.
2.10 Title to Properties; Absence of Liens and Encumbrances.
------------------------------------------------------
(a) KnowledgeWell owns no real property, nor has it ever owned any
real property. Schedule 2.10(a) of the KnowledgeWell Disclosure Letter sets
forth a list of all real property currently, or at any time in the past, leased
by KnowledgeWell, the name of the lessor and the date of the lease and each
amendment thereto and, with respect to any current lease, the aggregate annual
rental and/or other fees payable under any such lease. All such current leases
are in full force and effect, are valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
material default or event of material default (or event which with notice or
lapse of time, or both, would constitute a material default).
(b) KnowledgeWell has good and valid title to, or, in the case of
leased properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens, except as reflected in the KnowledgeWell
Financial Statements or in Schedule 2.10(b) of the KnowledgeWell Disclosure
Letter and except for liens for taxes not yet due and payable and such
imperfections of title and encumbrances, if any, which are not material in
character, amount or extent, and which do not materially detract from the value,
or materially interfere with the present use, of the property subject thereto or
affected thereby. The buildings on the Properties have been properly and
soundly constructed and are in a good and substantial state of repair and
condition and no high alumina cement, woodwool, calcium chloride, sea dredged
aggregates or asbestos material was used in the construction
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<PAGE>
thereof and KnowledgeWell has no outstanding claims or liabilities in respect of
the construction of the buildings of the Properties.
(c) Notwithstanding the foregoing paragraphs (a) and (b), no
representation or warranty made in such paragraphs relate to the property at
Block 1, Blackrock Industrial Estate, Blackrock, County Dublin as such property
is dealt with by way of a certificate of title furnished to CBT by Binchys
Solicitors at November 30, 1998.
2.11 Intellectual Property.
---------------------
(a) For the purposes of this Agreement, the following terms have the
following definitions:
"Intellectual Property" shall mean any or all of the following and
---------------------
all rights in, arising out of, or associated therewith: (i) all Irish, United
States and foreign patents and applications therefor and all reissues,
divisions, renewals, extensions, provisionals, continuations and continuations-
in-part thereof; (ii) all inventions (whether patentable or not), invention
disclosures, improvements, trade secrets, proprietary information, know how,
technology, technical data and customer lists, and all documentation relating to
any of the foregoing; (iii) all copyrights, copyrights registrations and
applications therefor, and all other rights corresponding thereto throughout the
world; (iv) all mask works, mask work registrations and applications therefor,
and all other rights corresponding thereto throughout the world; (v) all
industrial designs and any registrations and applications therefor throughout
the world; (vi) all trade names, logos, common law trademarks and service marks;
trademark and service mark registrations and applications therefor throughout
the world; (vii) all databases and data collections and all rights therein
throughout the world; and (vii) all computer software including all source code,
object code, firmware, development tools, files, records and data, all media on
which any of the foregoing is recorded, and all documentation related to any of
the foregoing throughout the world.
"Intellectual Property of KnowledgeWell" shall mean any Intellectual
--------------------------------------
Property that is owned by or exclusively licensed to KnowledgeWell.
"currently" means, as used in this section, the period beginning six
---------
years prior to the Closing Date and ending on such date.
(b) Schedule 2.11(b) of the KnowledgeWell Disclosure Letter lists all
of KnowledgeWell's Irish and United States and foreign: (i) patents, patent
applications (including provisional applications); (ii) registered trademarks,
applications to register trademarks, intent-to-use applications, or other
registrations related to trademarks; (iii) registered copyrights and
applications for copyright registration; (iv) mask work registrations and
applications to register mask works; and (v) any other Intellectual Property of
KnowledgeWell that is the subject of an application, certificate or registration
issued by or recorded by any state, government or other public legal authority,
all of the foregoing, the "Registered Intellectual Property".
--------------------------------
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<PAGE>
(c) Schedule 2.11(c) of the KnowledgeWell Disclosure Letter lists any
proceedings or actions before any court, tribunal (including the Irish Patents
Office ("IPO") and the United States Patent Office ("PTO") or equivalent
--- ---
authority anywhere else in the world) related to any of the Registered
Intellectual Property.
(d) KnowledgeWell has complied with all applicable disclosure
requirements and has not committed any fraudulent act in the application for and
maintenance of any patent, trademark or copyright of KnowledgeWell.
(e) Each item of Registered Intellectual Property is valid and
subsisting, all necessary registration, maintenance and renewal fees in
connection with such Registered Intellectual Property have been made or paid and
all necessary documents and certificates in connection with such Registered
Intellectual Property have been filed with the relevant patent, copyright,
trademark or other authorities in Ireland, the United States or foreign
jurisdictions, as the case may be, for the purposes of maintaining such
Registered Intellectual Property. Schedule 2.11(e) of the KnowledgeWell
Disclosure Letter lists all actions and payments that must be made in the six
month period following the Closing Date in connection with the preservation or
maintenance of the Registered Intellectual Property.
(f) KnowledgeWell is not barred from seeking patents on material
potentially patentable inventions of KnowledgeWell by "on-sale" or similar bars
to patentability or by failure to apply for a patent on such inventions within
the time required.
(g) The contracts, licenses and agreements listed in Schedule 2.11(g)
of the KnowledgeWell Disclosure Letter include all contracts, licenses and
agreements, to which KnowledgeWell is a party with respect to any Intellectual
Property with a potential value or cost in excess of US$20,000.
(h) The contracts, licenses and agreements listed in Schedule 2.11(g)
of the KnowledgeWell Disclosure Letter are in full force and effect. The
consummation of the transactions contemplated by this Agreement will neither
violate nor result in the breach, modification, cancellation, termination, or
suspension of the contracts, licenses and agreements listed in Schedule 2.11(g)
of the KnowledgeWell Disclosure Letter. KnowledgeWell is in compliance with,
and has not breached any term of, the contracts, licenses and agreements listed
in Schedule 2.11(g) of the KnowledgeWell Disclosure Letter, and, to the
knowledge of KnowledgeWell, all other parties to the contracts, licenses and
agreements listed in Schedule 2.11(g) of the KnowledgeWell Disclosure Letter
are, in compliance with, and have not breached any term of, such contracts,
licenses and agreements.
(i) Except as set forth in Schedule 2.11(i) of the KnowledgeWell
Disclosure Letter: (i) no person has any rights to use any of the Intellectual
Property of KnowledgeWell; and (ii) KnowledgeWell has not granted to any Person,
nor authorized any Person to retain, any rights in the Intellectual Property of
KnowledgeWell.
(j) Except as set forth in Schedule 2.11(j) of the KnowledgeWell
Disclosure Letter: (i) KnowledgeWell owns and has good and exclusive title to
each item of Intellectual Property of
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<PAGE>
KnowledgeWell, including all Registered Intellectual Property listed in Schedule
2.11(b) of the KnowledgeWell Disclosure Letter, free and clear of any lien or
encumbrance; (ii) KnowledgeWell owns, or has the right, pursuant to a valid
Contract to use or operate under, all other Intellectual Property of
KnowledgeWell; and (iii) KnowledgeWell is the exclusive owner of all trademarks
and trade names used in connection with the operation or conduct of the business
of KnowledgeWell, including the sale of any products or the provision of any
services by KnowledgeWell.
(k) The operation of the business of KnowledgeWell as such business
currently is conducted, or is reasonably is contemplated to be conducted,
including KnowledgeWell's design, development, manufacture, marketing and sale
of the products or services of KnowledgeWell (including with respect to products
currently under development) has not, does not and will not infringe or
misappropriate the Intellectual Property of any other Person or constitute
unfair competition or trade practices under the laws of any jurisdiction
(l) KnowledgeWell has not received notice from any person that the
operation of the business of KnowledgeWell, including its design, development,
manufacture and sale of its products (including with respect to products
currently under development) and provision of its services, infringes or
misappropriates the Intellectual Property of any Person or constitutes unfair
competition or trade practices under the laws of any jurisdiction.
(m) KnowledgeWell owns or has the right to all Intellectual Property
necessary to the conduct of its business as it currently is conducted or is
reasonably contemplated to be conducted, including, without limitation, the
design, development, manufacture and sale of all products currently manufactured
or sold by KnowledgeWell or under development by KnowledgeWell and the
performance of all services provided or contemplated to be provided by
KnowledgeWell.
(n) Schedule 2.11(n) of the KnowledgeWell Disclosure Letter lists all
contracts, licenses and agreements between KnowledgeWell and any other Person
wherein or whereby KnowledgeWell has agreed to, or assumed, any obligation or
duty to warrant, indemnify, hold harmless or otherwise assume or incur any
obligation or liability with respect to the infringement or misappropriation by
KnowledgeWell or such other Person of the Intellectual Property of any other
Person.
(o) Except as listed in Schedule 2.11(o) of the KnowledgeWell
Disclosure Letter, there are no contracts, licenses and agreements between
KnowledgeWell and any other person with respect to the Intellectual Property of
KnowledgeWell under which there is any dispute known to KnowledgeWell regarding
the scope of such agreement, or performance under such agreement including with
respect to any payments to be made or received by KnowledgeWell thereunder.
(p) Except as listed in Schedule 2.11(p) of the KnowledgeWell
Disclosure Letter, to the knowledge of KnowledgeWell, no person has or is
infringing or misappropriating any of the Intellectual Property of
KnowledgeWell.
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<PAGE>
(q) Except as listed in Schedule 2.11(q) of the KnowledgeWell
Disclosure Letter, there have been, and are, no claims asserted against
KnowledgeWell or against any customer of KnowledgeWell, related to any product
or service of KnowledgeWell.
(r) No Intellectual Property of KnowledgeWell, or product or service
of KnowledgeWell is subject to any proceeding or outstanding decree, order,
judgment, or stipulation restricting in any manner the use or licensing thereof
by KnowledgeWell, or which may affect the validity, use or enforceability of
such Intellectual Property of KnowledgeWell.
(s) KnowledgeWell has taken all steps that are reasonably required to
protect KnowledgeWell's rights in KnowledgeWell's confidential information and
trade secrets or any trade secrets or confidential information of third parties
provided to KnowledgeWell, and, without limiting the foregoing, KnowledgeWell
has and enforces a policy requiring each employee and contractor to execute
proprietary information and confidentiality agreements substantially in
KnowledgeWell's standard forms and all current and former employees and
contractors of KnowledgeWell have executed such an agreement.
(t) KnowledgeWell owns exclusively and has good title to all
copyrighted works that are KnowledgeWell products or which KnowledgeWell
otherwise purports to own, except for those copyrighted works licensed to
KnowledgeWell listed in Schedule 2.11(t) of the KnowledgeWell Disclosure Letter.
(u) To the extent that any work, invention, or material has been
developed or created by a third party for KnowledgeWell, KnowledgeWell has a
written agreement with such third party with respect thereto and KnowledgeWell
thereby has obtained ownership of, and is the exclusive owner of, all
Intellectual Property in such work, material or invention by operation of law or
by valid assignment.
(v) Notwithstanding any other provision of this Agreement, it is
understood and agreed that KnowledgeWell will not be deemed to be in violation
of any representation, warranty, covenant or agreement under this Agreement,
including without limitation any representation, warranty, covenant or agreement
relating to Intellectual Property, due to any matter that relates to the
Intellectual Property licensed from CBT pursuant to the Software License
Agreement dated October 22, 1997 between KW Limited and CBT, as amended.
2.12 (a) Agreements, Contracts and Commitments. Except as set forth in
-------------------------------------
Schedule 2.12(a) of the KnowledgeWell Disclosure Letter, KnowledgeWell does not
have, is not a party to nor is it bound by:
(i) any collective bargaining agreements,
(ii) any agreements or arrangements that contain any severance
pay or post-employment liabilities or obligations,
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<PAGE>
(iii) any bonus, deferred compensation, pension, profit sharing
or retirement plans, or any other employee benefit plans or arrangements,
(iv) any employment or consulting agreement with an employee or
individual consultant or salesperson or consulting or sales agreement with a
firm or other organization,
(v) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement,
(vi) any fidelity or surety bond or completion bond,
(vii) any lease of personal property having a value individually
in excess of US$5,000,
(viii) any agreement of indemnification or guaranty,
(ix) any agreement containing any covenant limiting the freedom
of KnowledgeWell or its present and future affiliated entities to engage in any
line of business or to compete with any person,
(x) any agreement relating to capital expenditures and
involving future payments in excess of US$20,000,
(xi) any agreement relating to the disposition or acquisition
of assets or any interest in any business enterprise outside the ordinary course
of KnowledgeWell's business,
(xii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit, including guaranties referred to in clause
(viii) hereof,
(xiii) any purchase order or contract for the purchase of raw
materials involving US$20,000 or more,
(xiv) any construction contracts,
(xv) any distribution, joint marketing or development
agreement,
(xvi) any agreement pursuant to which KnowledgeWell has granted
or may grant in the future, to any party a source-code license or option or
other right to use or acquire source-code, or
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<PAGE>
(xvii) any other agreement that involves US$20,000 or more or is
not cancelable without penalty within thirty (30) days.
(b) Except for such alleged breaches, violations and defaults, and
events that would constitute a breach, violation or default with the lapse of
time, giving of notice, or both, as are all noted in Schedule 2.12(b) of the
KnowledgeWell Disclosure Letter, KnowledgeWell has not materially breached,
violated or defaulted under, or received notice that it has breached, violated
or defaulted under, and there are no circumstances reasonably likely to give
rise to any material breach, violation or default under any of the terms or
conditions of any agreement, contract or commitment required to be set forth in
Schedule 2.12(a) or 2.11(b) of the KnowledgeWell Disclosure Letter (any such
agreement, contract or commitment, a "Contract"). Each Contract is in full
--------
force and effect and, except as otherwise disclosed in Schedule 2.12(b) of the
KnowledgeWell Disclosure Letter, is not subject to any material default
thereunder of which KnowledgeWell has knowledge by any party obligated to
KnowledgeWell pursuant thereto.
2.13 Interested Party Transactions. Except as set forth in Schedule 2.13
-----------------------------
of the KnowledgeWell Disclosure Letter, to KnowledgeWell's knowledge, no
officer, director or shareholder of KnowledgeWell (nor any ancestor, sibling,
descendant or spouse of any of such persons, or any trust, partnership or
corporation in which any of such persons has or has had a material economic
interest), has or has had, directly or indirectly, (i) an economic interest in
any entity which furnished or sold, or furnishes or sells, services or products
that KnowledgeWell furnishes or sells, or proposes to furnish or sell, (ii) an
economic interest in any entity that purchases from, or sells or furnishes to,
KnowledgeWell, any goods or services or (iii) a beneficial interest in any
contract or agreement set forth in Schedule 2.12(a) or 2.12(b) of the
KnowledgeWell Disclosure Letter; provided, that (x) ownership of no more than
one percent (1%) of the outstanding voting stock of a publicly traded
corporation and no more than ten percent (10%) of the outstanding equity of any
other entity shall not be deemed an "economic interest in any entity" for
purposes of this Section 2.13 and (y) this provision shall only apply if the
terms and conditions applicable to the subject relationship are materially less
favorable to KnowledgeWell than the terms and conditions that could be obtained
in an arms-length relationship.
2.14 Compliance with Laws. To KnowledgeWell's knowledge, KnowledgeWell
--------------------
and its officers and employees have complied in all material respects with, are
not in material violation of, and have not received any notices of violation
with respect to, any foreign, federal, state or local statute, law or
regulation.
2.15 Litigation. Except as set forth in Schedule 2.15 of the
----------
KnowledgeWell Disclosure Letter, KnowledgeWell is not engaged in nor is there
any action, suit or proceeding of any nature pending or, to KnowledgeWell's
knowledge threatened, against KnowledgeWell, its properties or any of its
officers or directors, in their respective capacities as such or any person for
whose acts or defaults KnowledgeWell is or may be vicariously liable. Except as
set forth in Schedule 2.15 of the KnowledgeWell Disclosure Letter, to
KnowledgeWell's knowledge, there is no investigation pending or threatened
against KnowledgeWell, its properties or any of its officers or directors by or
before any governmental entity. Schedule 2.15 of the KnowledgeWell Disclosure
Letter sets forth, with respect
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<PAGE>
to any pending or threatened action, suit, proceeding or investigation, the
forum, the parties thereto, the subject matter thereof and the amount of damages
claimed or other remedy requested. No governmental entity has at any time
challenged or questioned the legal right of KnowledgeWell to manufacture, offer
or sell any of its products in the present manner or style thereof.
2.16 Insurance.
---------
(a) All material assets of KnowledgeWell of an insurable nature have
at all material times been and are at November 30, 1998 insured in amounts
representing their full replacement or reinstatement value against fire and
other risks (including without limiting the generality of the foregoing loss of
profit) normally insured against by persons carrying on the same classes of
business as those carried on by KnowledgeWell and KnowledgeWell has at all
material times been and is at November 30, 1998 adequately covered against
accident, damage, injury, third party public liability (including products
liability and defamation liability) loss of profits and other risks normally
insured against by persons carrying on the same classes of business as those
carried on by KnowledgeWell. All such policies are and will at Closing be in
full force and effect and nothing has been done or omitted to be done which
would make any policy of insurance void or voidable or which is likely to result
in an increase in premium. All of such insurance policies have been disclosed
to CBT and are listed in Schedule 2.16(a) of the KnowledgeWell Disclosure
Letter.
(b) With respect to the insurance policies and fidelity bonds
covering the assets, business, equipment, properties, operations, employees,
officers and directors of KnowledgeWell, there is no claim by KnowledgeWell
pending under any of such policies or bonds as to which coverage has been
questioned, denied or disputed by the underwriters of such policies or bonds.
All premiums due and payable under all such policies and bonds have been paid
and KnowledgeWell is otherwise in material compliance with the terms of such
policies and bonds (or other policies and bonds providing substantially similar
insurance coverage). To KnowledgeWell's knowledge, there is no threatened
termination of, or material premium increase with respect to, any of such
policies.
2.17 Minute Books. The minute books of KnowledgeWell provided to counsel
------------
for CBT are the only minute books of KnowledgeWell and contain a reasonably
accurate summary of all meetings of directors (or committees thereof) and
shareholders or actions by written consent since the time of incorporation of
KnowledgeWell.
2.18 Environmental Matters.
---------------------
(a) Hazardous Material. KnowledgeWell has not: (i) operated any
------------------
underground storage tanks at any property that KnowledgeWell has at any time
owned, operated, occupied or leased; or (ii) illegally released any material
amount of any substance that has been designated by any Governmental Entity or
by applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without limitation,
PCBs, asbestos, petroleum, urea-formaldehyde and all substances listed as
hazardous substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a hazardous
waste pursuant to the United States Resource Conservation and Recovery Act
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<PAGE>
of 1976, as amended, and the regulations promulgated pursuant to said laws, (a
"Hazardous Material"), but excluding office and janitorial supplies properly and
------------------
safely maintained. No Hazardous Materials are present, as a result of the
deliberate actions of KnowledgeWell, or, to KnowledgeWell's knowledge, as a
result of any actions of any third party or otherwise, in, on or under any
property, including the land and the improvements, ground water and surface
water thereof, that KnowledgeWell has at any time owned, operated, occupied or
leased.
(b) Hazardous Materials Activities. KnowledgeWell has not
------------------------------
transported, stored, used, manufactured, disposed of, released or exposed its
employees or others to Hazardous Materials in violation of any law in effect on
or before the Closing Date, nor has KnowledgeWell disposed of, transported,
sold, or manufactured any product containing a Hazardous Material (any or all of
the foregoing being collectively referred to as "Hazardous Materials
-------------------
Activities") in violation of any rule, regulation, treaty or statute promulgated
- ----------
by any Governmental Entity in effect prior to or as of November 30, 1998 to
prohibit, regulate or control Hazardous Materials or any Hazardous Material
Activity.
(c) Permits. KnowledgeWell currently holds all environmental
-------
approvals, permits, licenses, clearances and consents (the "Environmental
-------------
Permits") necessary for the conduct of KnowledgeWell's Hazardous Material
- -------
Activities and other businesses of KnowledgeWell as such activities and
businesses are currently being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
-------------------------
proceeding, amendment procedure, writ, injunction or claim is pending, or to
KnowledgeWell's knowledge, threatened concerning any Environmental Permit,
Hazardous Material or any Hazardous Materials Activities of KnowledgeWell.
KnowledgeWell is not aware of any fact or circumstance which could involve
KnowledgeWell in any environmental litigation or impose upon KnowledgeWell any
environmental liability.
2.19 Brokers' and Finders' Fees; Third Party Expenses. KnowledgeWell has
------------------------------------------------
not incurred, nor will it incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
2.20 United States Employee Matters and Benefit Plans.
------------------------------------------------
(a) Definitions. With the exception of the definition of "Affiliate"
-----------
set forth in Section 2.20(a)(i) below (such definition shall only apply to this
Section 2.20), for purposes of this Agreement, the following terms shall have
the meanings set forth below:
(i) "Affiliate" shall mean any other person or entity under
common control with KnowledgeWell within the meaning of Section 414(b), (c), (m)
or (o) of the Code and the regulations thereunder;
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(ii) "ERISA" shall mean the Employee Retirement Income Security
-----
Act of 1974, as amended;
(iii) "KnowledgeWell Employee Plan" shall refer to any plan,
---------------------------
program, policy, practice, contract, agreement or other arrangement providing
for compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or remuneration
of any kind, whether formal or informal, funded or unfunded, including without
limitation, each "employee benefit plan", within the meaning of Section 3(3) of
ERISA which is or has been maintained, contributed to, or required to be
contributed to, by KnowledgeWell or any Affiliate for the benefit of any
"Employee" (as defined below), and pursuant to which KnowledgeWell or any
Affiliate has or may have any material liability contingent or otherwise;
(iv) "Employee" shall mean any current, former, or retired
--------
employee, officer, or director of KnowledgeWell or any Affiliate;
(v) "Employee Agreement" shall refer to each management,
------------------
employment, severance, consulting, relocation, repatriation, expatriation, visa,
work permit or similar agreement or contract between KnowledgeWell or any
Affiliate and any Employee or consultant;
(vi) "IRS" shall mean the Internal Revenue Service;
---
(vii) "Multiemployer Plan" shall mean any "Pension Plan" (as
------------------
defined below) which is a "multiemployer plan", as defined in Section 3(37) of
ERISA; and
(viii) "Pension Plan" shall refer to each KnowledgeWell Employee
------------
Plan which is an "employee pension benefit plan", within the meaning of Section
3(2) of ERISA.
(b) Schedule. Schedule 2.20(b) of the KnowledgeWell Disclosure Letter
--------
contains an accurate and complete list of each KnowledgeWell Employee Plan and
each Employee Agreement, together with a schedule of all liabilities, whether or
not accrued, under each such KnowledgeWell Employee Plan or Employee Agreement.
KnowledgeWell does not have any plan or commitment to establish any new
KnowledgeWell Employee Plan or Employee Agreement, to modify any KnowledgeWell
Employee Plan or Employee Agreement (except to the extent required by law or to
conform any such KnowledgeWell Employee Plan or Employee Agreement to the
requirements of any applicable law, or as required by this Agreement), or to
enter into any KnowledgeWell Employee Plan or Employee Agreement, nor does it
have any intention or commitment to do any of the foregoing.
(c) Documents. KnowledgeWell has provided to CBT (i) correct and
---------
complete copies of all documents embodying or relating to each KnowledgeWell
Employee Plan and each Employee Agreement including all amendments thereto and
written interpretations thereof; (ii) the most recent annual actuarial
valuations, if any, prepared for each KnowledgeWell Employee Plan; (iii) the
three most recent annual reports (Series 5500 and all schedules thereto), if
any, required under ERISA or the Code in connection with each KnowledgeWell
Employee Plan or related trust; (iv) if a KnowledgeWell Employee Plan is funded,
the most recent annual and periodic accounting of that
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<PAGE>
KnowledgeWell Employee Plan's assets; (v) the most recent summary plan
description together with the most recent summary of material modifications, if
any, required under ERISA with respect to each KnowledgeWell Employee Plan; (vi)
all IRS determination letters and rulings relating to KnowledgeWell Employee
Plans and copies of all applications and correspondence to or from the IRS or
the Department of Labor ("DOL") with respect to any KnowledgeWell Employee Plan;
---
(vii) all communications material to any Employee or Employees relating to any
KnowledgeWell Employee Plan and any proposed KnowledgeWell Employee Plans, in
each case, relating to any amendments, terminations, establishments, increases
or decreases in benefits, acceleration of payments or vesting schedules or other
events which would result in any material liability to KnowledgeWell; and (viii)
all registration statements and prospectuses prepared in connection with each
KnowledgeWell Employee Plan.
(d) Employee Plan Compliance. Except as set forth in Schedule 2.20(d)
------------------------
of the KnowledgeWell Disclosure Letter, (i) KnowledgeWell has performed in all
material respects all obligations required to be performed by it under each
KnowledgeWell Employee Plan and each KnowledgeWell Employee Plan has been
established and maintained in all material respects in accordance with its terms
and in compliance with all applicable laws, statutes, orders, rules and
regulations, including but not limited to ERISA or the Code; (ii) no "prohibited
transaction", within the meaning of Section 4975 of the Code or Section 406 of
ERISA, has occurred with respect to any KnowledgeWell Employee Plan; (iii) there
are no actions, suits or claims pending, or, to the knowledge of KnowledgeWell,
threatened or anticipated (other than routine claims for benefits) against any
KnowledgeWell Employee Plan or against the assets of any KnowledgeWell Employee
Plan; and (iv) each KnowledgeWell Employee Plan can be amended, terminated or
otherwise discontinued after the Closing Date in accordance with its terms,
without liability to KnowledgeWell, CBT or any of its Affiliates (other than
ordinary administration expenses typically incurred in a termination event); (v)
there are no inquiries or proceedings pending or, to the knowledge of
KnowledgeWell or any affiliates, threatened by the IRS or DOL with respect to
any KnowledgeWell Employee Plan; and (vi) neither KnowledgeWell nor any
Affiliate is subject to any penalty or tax with respect to any KnowledgeWell
Employee Plan under Section 402(i) of ERISA or Section 4975 through 4980 of the
Code.
(e) Pension Plans. KnowledgeWell does not now, nor has it ever,
-------------
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has KnowledgeWell contributed to
-------------------
or been requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. Except as set forth in Schedule
------------------------------
2.20(g) of the KnowledgeWell Disclosure Letter, no KnowledgeWell Employee Plan
provides, or has any liability to provide, life insurance, medical or other
employee benefits to any Employee upon his or her retirement or termination of
employment for any reason, except as may be required by statute, and
KnowledgeWell has never represented, promised or contracted (whether in oral or
written form) to any Employee (either individually or to Employees as a group)
that such Employee(s) would be provided
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<PAGE>
with life insurance, medical or other employee welfare benefits upon their
retirement or termination of employment, except to the extent required by
statute.
(h) Effect of Transaction.
---------------------
(i) Except as provided in Section 1.8 of this Agreement or
as set forth in Schedule 2.20(h)(i) of the KnowledgeWell Disclosure Letter, the
execution of this Agreement and the consummation of the transactions
contemplated hereby will not (either alone or upon the occurrence of any
additional or subsequent events) constitute an event under any KnowledgeWell
Employee Plan, Employee Agreement, trust or loan that will or may result in any
payment (whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any Employee.
(ii) Except as set forth in Schedule 2.20(h)(ii) of the
KnowledgeWell Disclosure Letter, no payment or benefit which will or may be made
by KnowledgeWell or CBT or any of their respective Affiliates with respect to
any Employee will be characterized as an "excess parachute payment", within the
meaning of Section 280G(b)(1) of the Code.
(i) Employment Matters. KnowledgeWell (i) is in compliance in all
------------------
material respects with all applicable foreign, federal, state and local laws,
rules and regulations respecting employment, employment practices, terms and
conditions of employment and wages and hours, in each case, with respect to
Employees; (ii) has withheld all amounts required by law or by agreement to be
withheld from the wages, salaries and other payments to Employees; (iii) is not
liable for any arrears of wages or any taxes or any penalty for failure to
comply with any of the foregoing; and (iv) is not liable for any payment to any
trust or other fund or to any governmental or administrative authority, with
respect to unemployment compensation benefits, social security or other benefits
or obligations for Employees (other than routine payments to be made in the
normal course of business and consistent with past practice).
(j) Labor. No work stoppage or labor strike against KnowledgeWell is
-----
pending or, to the knowledge of KnowledgeWell, threatened. Except as set forth
in Schedule 2.20(j) of the KnowledgeWell Disclosure Letter, KnowledgeWell is not
involved in or, to the knowledge of KnowledgeWell, threatened with, any labor
dispute, grievance, or litigation relating to labor, safety or discrimination
matters involving any Employee, including, without limitation, charges of unfair
labor practices or discrimination complaints, which, if adversely determined,
would, individually or in the aggregate have a Material Adverse Effect on
KnowledgeWell. Neither KnowledgeWell nor any of its subsidiaries has engaged in
any unfair labor practices within the meaning of the National Labor Relations
Act which would, individually or in the aggregate, directly or indirectly result
in a liability to KnowledgeWell. Except as set forth in Schedule 2.20(j) of the
KnowledgeWell Disclosure Letter, KnowledgeWell is not presently, nor has it been
in the past, a party to, or bound by, any collective bargaining agreement or
union contract with respect to Employees and no collective bargaining agreement
is being negotiated by KnowledgeWell.
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<PAGE>
2.21 Ireland Employee Matters and Benefits Plans.
-------------------------------------------
(a) There are not in existence any service agreements with directors
or employees of Knowledge Well which cannot be terminated by three months notice
or less or (whether or not reduced to writing) by reasonable notice without
giving rise to any claim for damages or compensation (other than the statutory
redundancy payment or statutory compensation for unfair dismissals).
(b) The information set out in the KnowledgeWell Disclosure Letter,
comprises accurate disclosure of all retirement, death, superannuation and
pension benefits and schemes actually or contingently agreed, or due, or
accrued, or proposed in respect of all of the present and former employees of
KnowledgeWell (all such schemes and benefits being hereinafter called the
"Pension Schemes").
(c) There are no gratuitous payments, pensions, or benefits payable,
promised, undertaken or being paid by KnowledgeWell to any directors,
consultants, employees or former directors consultants or employees of
KnowledgeWell.
(d) KnowledgeWell:
(i) has not given any undertaking or assurance (whether legally
enforceable or not) to any Relevant Employee or to any widow, child or dependant
of any Relevant Employee as to the continuance, introduction, improvement or
increase of any benefit of a kind described in paragraph (b) above; or
(ii) is not paying or has not in the period since incorporation
paid any benefit of the kind described in paragraph (c) above to any Relevant
Employee or the widow, child or dependant of any Relevant Employee.
(e) The Pension Schemes have been registered pursuant to the
provisions of the Pensions Act, 1990, of Ireland.
(f) The Pension Schemes are exempt approved schemes within the
meaning of Sections 15 and 16 of the Finance Act, 1972, of Ireland and comply
with and have at all times been administered in accordance with all applicable
laws, regulations and requirements (including those of the Revenue Commissioners
and of trust law) and KnowledgeWell is not aware of any reason why such exempt
status should or could be withdrawn.
(g) True copies of all of the Definitive and interim Trust Deeds,
Rules, Explanatory Booklets and Announcements relating to the Pension Schemes
have been delivered to CBT and copies thereof are contained in the KnowledgeWell
Disclosure Letter, and KnowledgeWell has no obligation to any employee or former
employee in relation to death in service, pension, superannuation or analogous
benefits except as provided in the said Deeds, Rules, Booklets and
Announcements.
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<PAGE>
(h) All of the Pension Schemes are fully, properly and adequately
funded with respect to existing and prospective liabilities having regard to
current funding rates, assets and investment and liability assumptions of the
Pension Schemes and no increase in funding rates is proposed or has been
recommended in relation to any of the Pension Schemes. Schedule 2.21(h) of the
KnowledgeWell Disclosure Letter contains a true copy of the latest reports and
valuations of all of the Pension Schemes by the actuary or actuaries advising
thereon and since the dates of such reports all recommendations contained
therein have been fully implemented and no material change has occurred in the
assets, valuations, liabilities or funding rates of any of the Pension Schemes
or as to the assumptions according to which the same are calculated.
(i) All benefits (other than any refund of members' contributions
with interest where appropriate) payable under the Pensions Schemes on the death
of any person while in employment to which the Pension Schemes relate are
insured fully under a policy with an insurance company of good repute and there
are no grounds on which that company might avoid liability thereunder.
(j) Contributions to the Pension Schemes are not paid in arrears and
all contributions and other amounts which have fallen due for payment have been
paid and no fees, charges or expenses referable to the Pension Schemes for which
KnowledgeWell is or may become liable (whether wholly or in part) have been
incurred but not paid and KnowledgeWell has reimbursed any person who has paid
any such fees, costs or expenses if and to the extent that KnowledgeWell is or
may become liable so to do.
(k) KnowledgeWell:
(i) has been admitted to participation in the Pension Schemes
on the same terms as apply to all other employers participating in the Schemes;
(ii) has observed and performed those provisions of the Pension
Schemes which apply to it;
(iii) may terminate its liability to contribute to the Pension
Schemes without notice, without the consent of any person and without further
payment;
(iv) has at all material times held or been named in a
contracting-out certificate referable to the Pensions Scheme.
(l) The trustees of the Pension Scheme are not engaged in any
litigation or arbitration proceedings and so far as KnowledgeWell is aware no
litigation or arbitration proceedings are pending or threatened by or against
the trustees of the Pension Scheme and there are no facts likely to give rise to
any litigation or arbitration.
-35-
<PAGE>
(m) Except as set forth in the KnowledgeWell Financial Statements
there are no amounts owing to any present or former directors of KnowledgeWell
other than remuneration agreed due or for reimbursement of business expenses
properly incurred.
(n) Except to the extent (if any) to which provision or allowance has
been made in the KnowledgeWell Financial Statements, KnowledgeWell has not made
or agreed to make any payment to or provided or agreed to provide any benefit
for any present or former officer or employee which is not allowable as a
deduction for the purposes of Tax.
(o) No liability has been incurred by KnowledgeWell for breach of any
contract of service for redundancy payment or for compensation for wrongful or
unfair dismissal or for failure to comply with any order for the reinstatement
or re-engagement of any employee and no gratuitous payment has been made or
promised by KnowledgeWell in connection with the termination or proposed
termination of the employment of any present or former director or employee.
(p) KnowledgeWell is not involved in any industrial or trade dispute
or any dispute or negotiation regarding a claim of material importance with any
trade union or organization or body of employees or any dispute arising out of
or affected by or otherwise relating to the provisions of the Employment
Statutes as defined in 2.21(r)(iii) below and there are no agreements or other
arrangements (whether or not legally binding) between KnowledgeWell and any
trade union or other body representing employees.
(q) Except for the KnowledgeWell Option Plans, KnowledgeWell has not
in existence nor is it proposing to introduce any share incentive scheme, share
option scheme or profit sharing scheme for all or any part of its directors or
employees.
(r) KnowledgeWell has in relation to each of its employees (and so
far as is relevant to each of its former employees);
(i) complied in all material respects with all obligations
imposed on it by any statutory provision or regulation and codes of conduct
relevant to the relations between it and its employees or any recognized trade
union and has maintained adequate and suitable records regarding the service of
each of its employees; and
(ii) complied in all material respects with all collective
agreements for the time being having effect as regards such relations or the
conditions of service of its employees;
(iii) complied in all material respects with the following
regulations of Ireland: the Redundancy Payments Acts, 1967-1991, the Minimum
Notice and Terms of Employment Act, 1973 to 1991, the Organization of Working
Time Act, 1997, the Anti-Discrimination (Pay) Act, 1974, the Protection of Young
Persons (Employment) Act, 1976, the Unfair Dismissals Acts, 1977 to 1993, the
Protection of Employment Act, 1977 to 1993, the Employment Equality Act, 1977,
the European Communities (Safeguarding of Rights of Employees on Transfer of
Undertakings) Regulations, 1980, the Maternity Protection of Employees Act,
1981, the Pensions Act, 1990, the
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<PAGE>
Payment of Wages Act, 1991 and the Worker Protection (Regular Part Time
Employees) Act, 1991 (the "Employment Statutes").
-------------------
(s) No KnowledgeWell employee in receipt of a salary at a basic rate
in excess of IR(Pounds)40,000 per annum has advised KnowledgeWell formally or
informally that he or she is terminating or considering terminating his or her
employment with the company and to KnowledgeWell's knowledge, there are no
circumstances likely to give rise to such termination. KnowledgeWell has no
existing dispute with any of its employees of a material nature and to
KnowledgeWell's knowledge, there are no circumstances reasonably likely to give
rise to a dispute with any of its employees of a material nature.
(t) To KnowledgeWell's knowledge, all persons in receipt of income at
a basic rate in excess of IR(Pounds)40,000 per annum who have during the period
since the Relevant Accounting Date habitually or normally carried out duties of
a full time nature on behalf of KnowledgeWell in connection with its business
and affairs are not planning to terminate employment with KnowledgeWell at or
after Closing.
(u) No change has been made since the Accounts Date by KnowledgeWell
in the rate or basis of the emoluments or other terms of any contract of
service, contract for services or otherwise of any directors or employees of
KnowledgeWell who at any time since the said date were in receipt of emoluments
at the rate of IR(Pounds)40,000 per annum or more.
(v) True and complete particulars of the total numbers of
KnowledgeWell's full time and part time employees as at the Accounts Date, their
dates of commencement of employment or appointment to office, and terms and
conditions of their employment including their remuneration and other benefits
have been disclosed to CBT and are referred to or contained in Schedule 2.21(v)
of the KnowledgeWell Disclosure Letter and there has been no material change in
such numbers since the Accounts Date.
(w) KnowledgeWell is not under any contractual or other obligation to
increase the rates of remuneration of or make any bonus or incentive or other
similar payment to any of its officers or employees at any future date.
(x) KnowledgeWell has not given to any person any power or attorney or
other authority (express, implied or ostensible) which is still outstanding.
(y) KnowledgeWell has not entered into any recognition agreement with
a trade union nor has it done any act which might be construed as recognition.
2.22 Borrowed Moneys. KnowledgeWell has not received notice (whether
---------------
formal or informal) from any lenders of money to it in respect of or as a
preliminary to the demand by such persons for payment of any money owing by
KnowledgeWell to such persons and KnowledgeWell is not aware of any
circumstances likely to give rise to such notice being given to it.
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<PAGE>
2.23 Grants, etc. Not Repayable. Except for disposals in the ordinary
--------------------------
course of business KnowledgeWell has not done or failed to do any act or thing
which could result in all or any part of a government grant or other similar
payment or allowance made or due to be made by it becoming repayable or being
forfeited by it.
2.24 Oral Contracts. No tender, quotation or offer issued or made at any
--------------
time by KnowledgeWell is or will become capable of giving rise to a contract by
an order or acceptance by another party or parties, except in the ordinary
course of business and on terms calculated to yield a gross profit margin
consistent with the prudent carrying on of the business of KnowledgeWell.
2.25 Returns Up-to-Date.
------------------
(a) All returns, particulars, resolutions and other documents required
to be filed or to be delivered on behalf of KnowledgeWell to the Registrar of
Companies of Ireland or any other applicable jurisdiction have been correctly
and properly made up and so filed or delivered within the period prescribed.
(b) All charges in favor of KnowledgeWell have (if appropriate) been
registered in accordance with the provisions of the Companies Acts, 1963 to 1990
of Ireland.
2.26 Insolvency.
----------
(a) No order has been made or petition presented or resolution passed
for the winding up of KnowledgeWell to the Shareholders, there are no grounds on
which any such order or petition could be made or presented to the Shareholders
and no such resolution is contemplated by the members or any of them.
(b) No distress, execution or other process has been levied on any of
the assets of KnowledgeWell, nor has any of KW Limited, KW Group or the
Subsidiary stopped payment or become insolvent or unable to pay its debts for
the purposes of Section 214 of the Companies Act, 1963 of Ireland.
(c) No power to appoint a receiver or administrative receiver has been
exercised or has arisen in respect of the business or any of the assets of
KnowledgeWell and there is no unfulfilled or unsatisfied judgment or Court order
outstanding against any of KW Limited, KW Group or the Subsidiary.
2.27 Stamp Duty and Capital Duty.
---------------------------
(a) KnowledgeWell has duly complied with and has no liability under
Section 1 of the Stamp Act, 1891, of Ireland as substituted by the provisions of
Section 94 of the Finance Act, 1991, of Ireland.
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<PAGE>
(b) All documents in existence and any others which may be existing
at Closing in the enforcement of which KnowledgeWell is, was or may be or become
interested have been duly stamped or adequate provision has been made therefor
in the KnowledgeWell Financial Statements.
(c) No relief or exemption has been obtained from companies capital
duty or stamp duty and, without prejudice to the generality of the foregoing, no
relief, exemption or reduction has been obtained from companies capital duty or
stamp duty under Section 72 of the Finance Act, 1973, of Ireland or from stamp
duty under Section 19 of the Finance Act, 1952, of Ireland or Statutory
Instrument No. 244 of 1979, of Ireland or Statutory Instrument No. 272 of 1981,
of Ireland or Section 31 of the Finance Act, 1965, of Ireland which has (a)
become liable to forfeiture or (b) been obtained in respect of a transaction
carried out within the period within which it may become liable to forfeiture
and pending Closing no relief or exemption under any of the said enactments will
be claimed and all stamp duty or capital duty which has become or pending
Closing will become payable by KnowledgeWell has been or will be duly paid.
(d) All capital duty and/or stamp duty payable by KnowledgeWell in
respect of any of the transactions referred to in the following Sections of the
Finance Act, 1973, of Ireland has been duly and promptly paid by KnowledgeWell
so that there is no liability in respect thereof or any interest thereon:
(i) Section 63;
(ii) Section 64;
(iii) Section 68; and
(iv) Section 69 and 70.
(e) All other capital and/or stamp duty howsoever arising or payable
has been paid by KnowledgeWell and there is no outstanding liability therefor or
interest thereon.
(f) KnowledgeWell has not executed an instrument in respect of which
fines could be imposed pursuant to Section 5 of the Stamp Act, 1891, of Ireland
as substituted by Section 97 of the Finance Act, 1991, of Ireland.
(g) KnowledgeWell is not liable for any penalty imposed by Section
103 of the Finance Act, 1991, of Ireland.
(h) KnowledgeWell and its employees have not done or omitted to do
anything which could give rise to a liability on KnowledgeWell for a fine,
penalty, interest, charge or additional duty under the Stamp Act, 1891, of
Ireland as amended.
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<PAGE>
2.28 VAT.
---
(a) Each of KW Limited and KW Group is a registered and taxable
person for the purposes of the VAT legislation (as hereinafter defined) and:
(i) Neither of them has at any time been treated as a member of
a group (other than that comprising KW Group and the Subsidiary alone) for such
purposes and no application for either of them to be so treated has at any time
been or pending Closing will be made and no act or transaction has been or
pending Closing will be effected in consequence whereof either KW Limited or KW
Group is or may be held liable for any Value Added Tax chargeable against some
other company except, in the case of KW Group, the Subsidiary;
(ii) Each of them has complied and pending Closing will comply
in all respects with the VAT legislation;
(iii) Each of them has given, obtained, made and maintained and
pending Closing will give, obtain, make and maintain full, complete, correct and
up to date invoices, records and other documents appropriate or requisite for
the purposes of the VAT legislation;
(iv) Neither of them is and will not pending Closing be in
arrears with any payment or returns or notifications thereunder or liable to any
abnormal or non-routine payment or any forfeiture or penalty or to the operation
of any penal provision and where payment is not yet due or receivable has
provided for such payment;
(v) neither of them has been and pending Closing neither of
them will be required by the appropriate fiscal authorities to give security;
and
(vi) all supplies made and to be made pending Closing by either
of them are taxable supplies and neither of them is or will pending Closing be
denied credit for any input tax;
(b) For the purposes of this clause the "VAT legislation" means the
---------------
Value Added Tax Act, 1972, of Ireland and all orders, rules, regulations,
notices, provisions, directions or conditions made, laid down, given or imposed
thereunder.
2.29 Shelf Registration Statement Information. The information supplied by
----------------------------------------
KnowledgeWell for inclusion in the registration statement contemplated by the
Declaration of Registration Rights attached hereto as Exhibit B (the "Rights
--------- ------
Declaration") does not contain, and will not contain at the effective date of
- -----------
such registration statement, any untrue statement of a material fact or omit,
and will not omit at the effective date of such registration statement, to state
any material fact required to be stated therein or necessary in order to make
the statements therein not misleading.
2.30 Representations Complete. None of the representations or warranties
------------------------
made by the Shareholders (as modified by the KnowledgeWell Disclosure Letter),
nor any statement made in the KnowledgeWell Disclosure Letter or certificate
furnished by KnowledgeWell pursuant to this
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<PAGE>
Agreement, contains any untrue statement of a material fact or omits to state
any material fact necessary in order to make the statements contained herein, in
the light of the circumstances under which they were made, not misleading.
2.31 Proxy Statements Complete. None of the statements made or furnished
-------------------------
by KnowledgeWell in or in connection with documents mailed or delivered to the
shareholders of CBT in connection with soliciting their approval of this
Agreement (it being acknowledged that KnowledgeWell shall have the opportunity
to review and comment on such documents prior to any such mailing or
delivering), contains or will contain at the date of such mailing or delivery or
the date of the CBT shareholder vote, any untrue statement of a material fact,
or omits or will omit at the date of such mailing or delivery or the date of the
CBT shareholder vote to state any material fact necessary in order to make the
statements contained therein, in the light of the circumstances under which they
were made, not misleading.
ARTICLE III
ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
Each Shareholder, severally and not jointly, represents and warrants to CBT
as of November 30, 1998 as follows:
3.1 Authority. This Agreement and each agreement attached as an exhibit
---------
hereto (collectively, the "Related Agreements") to which such Shareholder is a
------------------
party have been duly and validly executed and delivered by, or on behalf of,
Shareholder and, assuming due authorization, execution and delivery by the other
parties hereto and thereto, constitute valid and binding obligations of
Shareholder, enforceable against Shareholder in accordance with their respective
terms, subject to the laws of general application relating to bankruptcy,
insolvency and the relief of debtors and to rules of law governing specific
performance, injunctive relief or other equitable remedies.
3.2 Conflicts. Neither the execution and delivery of each of this
---------
Agreement and the Related Agreements to which such Shareholder is a party nor
the performance by Shareholder of his, her or its respective obligations
hereunder or thereunder, violate, conflict with, or constitute a default under
any agreement or commitment to which Shareholder is a party, or violate any
statute or law or any judgment, decree, order, regulation or rule of any court
or other Governmental Entity applicable to Shareholder that would preclude
Shareholder from entering into this Agreement or the Related Agreements to which
such Shareholder is a party or consummating the transactions contemplated hereby
or thereby.
3.3 Consents. No consent, waiver, approval, order or authorization of, or
--------
declaration, filing or registration with, any Governmental Entity or any third
party is required to be made or obtained by Shareholder in connection with the
execution and delivery by Shareholder of each of this Agreement and the Related
Agreements to which such Shareholder is a party or the performance by
Shareholder of
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his, her or its obligations hereunder or thereunder or the consummation by
Shareholder of the transactions contemplated herein or therein.
3.4 Title. Shareholder has the sole right to transfer the KnowledgeWell
-----
Shares registered in his, her or its name to CBT. Upon delivery of
KnowledgeWell Certificates representing such KnowledgeWell Shares to CBT,
together with a duly executed transfer instrument, CBT will receive good title
to such KnowledgeWell Shares, free and clear of all Liens.
3.5 Taxes. Shareholder has had an opportunity to review with his, her or
-----
its respective tax advisors the tax consequences to Shareholder of the Share
Exchange and the transactions contemplated by this Agreement. Shareholder
understands that he, she or it must rely solely on his, her or its advisors and
not on any statements or representations by CBT, KnowledgeWell or any of their
respective agents. Shareholder understands that he, she or it (and not CBT or
KnowledgeWell) shall be responsible for his, her or its own tax liability that
may arise as a result of the Share Exchange or any other transactions
contemplated by this Agreement or the Related Agreements.
3.6 Sufficient Assets. Shareholder will have sufficient assets, after
-----------------
sale of the KnowledgeWell Shares owned by Shareholder as contemplated hereby, to
satisfy all of Shareholder's obligations to his, her or its creditors, as the
same become due and payable.
3.7 Release of Liabilities. Shareholder has procured the release of
----------------------
KnowledgeWell and the Subsidiary unconditionally from all liability whatsoever
(actual or contingent) to the Shareholder and/or to third parties in respect of
the liabilities and obligations of Shareholder, including, without prejudice to
the generality of the foregoing, all guarantees given by KnowledgeWell and/or
the Subsidiary to the bankers of the Shareholder.
3.8 Investment Experience. Shareholder has substantial experience in
---------------------
evaluating and investing in private placement transactions so that Shareholder
is capable of evaluating the merits and risks of receiving CBT's securities in
the Share Exchange. Shareholder, by reason of his, her or its business or
financial experience or the business or financial experience of its professional
advisors who are unaffiliated with and who are not compensated by CBT or any
affiliate of CBT, directly or indirectly, has the capacity to protect its own
interests in connection with the Share Exchange.
3.9 Investment. Shareholder is acquiring CBT's shares for investment for
----------
Shareholders' own account, not as a nominee or agent, and not with the view to,
or for resale in connection with, any distribution thereof. Shareholder
understands that the CBT shares to be received in the Share Exchange have not
been, and will not be, registered under the United States Securities Act of
1933, as amended (the "Securities Act") by reason of a specific exemption from
--------------
the registration provisions of the Securities Act which depends upon, among
other things, the bona fide nature of the investment intent and the accuracy of
Shareholder's representations as expressed herein. If Shareholder is not an
individual, Shareholder has not been formed for the specific purpose of
acquiring CBT's shares in the Share Exchange.
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3.10 Rule 144. Shareholder acknowledges that the CBT shares to be received
--------
are characterized as "Restricted Securities" and must be held indefinitely
unless subsequently registered under the Securities Act or an exemption from
such registration is available. Shareholder is aware of the provisions of Rule
144 promulgated under the Securities Act, which permit limited resale of
securities purchased in a private placement subject to the satisfaction of
certain conditions, including (except as limited by Rule 144(k)), among other
things, the existence of a public market for the shares, the availability of
certain current public information about CBT, the resale occurring at least one
year after a party has purchased and paid for the security to be sold, the sale
being effected through a "broker's transaction" or in transactions directly with
a "market maker" (as provided by Rule 144(f)) and the number of shares being
sold during any three-month period not exceeding specified limitations.
3.11 Nature of Solicitation; Access to Data. Shareholder has had the
--------------------------------------
opportunity to ask questions of and receive answers from CBT or a person acting
on its behalf concerning the terms and conditions of this transaction as well as
to obtain any information requested by Shareholder. Shareholder has asked such
questions and received such answers as were necessary to enable him or it to
make an informed decision as to whether to participate in the Share Exchange.
Shareholders' decision to so participate is based in part on the answers to such
questions as Shareholder and its representatives have raised concerning the
transaction and on his or its own evaluation of the risks and merits of CBT's
business activities. Shareholder confirms that at no time was Shareholder
presented with or solicited by or through any leaflet, public promotional
meeting, television advertisement or any other form of general advertising in
connection and concurrently with such communicated offer.
3.12 Accredited Shareholder. Shareholder is an "Accredited Investor" as
----------------------
that term is defined in Rule 501 of Regulation D, promulgated by the United
States Securities and Exchange Commission under the Securities Act.
3.13 Shelf Registration Statement Information. The information supplied by
----------------------------------------
Shareholder for inclusion in the registration statement contemplated by the
Rights Declaration does not contain, and will not contain at the effective date
of such registration statement, any untrue statement of a material fact or omit,
and will not omit at the effective date of such registration statement, to state
any material fact required to be stated therein or necessary in order to make
the statements therein not misleading.
3.14 Representations Complete. None of the statements furnished by
------------------------
Shareholder in or in connection with documents mailed or delivered to the
shareholders of CBT in connection with soliciting their approval of this
Agreement, contains or will contain at the Closing Date, the date of such
mailing or delivery or the date of the CBT vote, any untrue statement of a
material fact, or omits or will omit at the Closing Date, the date of such
mailing or delivery or the date of the CBT vote to state any material fact
necessary in order to make the statements contained herein or therein, in the
light of the circumstances under which they were made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CBT
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CBT represents and warrants to each Shareholder as of November 30, 1998 as
follows:
4.1 Organization, Standing and Power. CBT is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of Ireland. CBT
has the corporate power to own its properties and to carry on its business as
now being conducted and is duly qualified to do business and is in good standing
in each jurisdiction in which the failure to be so qualified would have a
material adverse effect on the business, assets, financial condition, or results
of operations of CBT or the ability of CBT to consummate the transactions
contemplated hereby.
4.2 Authority. CBT has all requisite corporate power and authority to
---------
enter into this Agreement and the Related Agreements to which CBT is a party and
to consummate the transactions contemplated hereby and thereby. The execution
and delivery of this Agreement and the Related Agreements to which CBT is a
party and the consummation of the transactions contemplated hereby and thereby
have been duly authorized by all necessary corporate action on the part of CBT
and no further action is required on the part of CBT to authorize the Share
Exchange, this Agreement, the Related Agreements to which CBT is a party and the
transactions contemplated hereby or thereby, except for approval by the
shareholders of CBT and as expressly set forth elsewhere herein. This Agreement
and each Related Agreement to which CBT is a party has been duly executed and
delivered by CBT and, assuming due authorization, execution and delivery by
other parties hereto, constitute the valid and binding obligations of CBT,
enforceable in accordance with their respective terms, except as such
enforceability may be limited by principles of public policy and subject to the
laws of general application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies.
4.3 No Conflict. The execution and delivery of this Agreement and the
-----------
Related Agreements to which CBT is a party do not, and the consummation of the
transactions contemplated hereby and thereby will not, conflict with, or result
in any violation of, or default under (with or without notice or lapse of time,
or both), or give rise to a right of termination, cancellation or acceleration
of any obligation or to loss of a material benefit under (i) any provision of
the Memorandum and the Articles of Association of CBT or (ii) any mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to CBT or its properties or assets, other than any such
conflicts, violations, defaults, terminations, cancellations or accelerations
which would not have a material adverse effect on the ability of CBT to
consummate the transactions contemplated hereby and thereby.
4.4 Consents. No consent, approval, order or authorization of, or
--------
registration, declaration or filing with, any Governmental Entity, or any third
party is required by or with respect to CBT in connection with the execution and
delivery of this Agreement and the Related Agreements to which CBT is a party by
CBT or the consummation by CBT of the transactions contemplated hereby and
thereby, except for (i) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
state and federal securities laws and the laws of any foreign country, and (ii)
such other consents, authorizations, filings, approvals and registrations which
if not obtained or made would not have a material adverse effect on the ability
of CBT to consummate the transactions contemplated hereby and thereby.
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<PAGE>
4.5 Capital Structure.
-----------------
(a) The authorized share capital of CBT is IR(Pounds)11,250,000
divided into 120,000,000 Ordinary Shares, par value IR9.375 pence per share, of
which 44,355,890 shares were issued and outstanding as of October 31, 1998. No
shares of preferred stock are issued or outstanding. All such shares of CBT have
been duly authorized and validly issued, and all such issued and outstanding
shares are fully paid and nonassessable. An aggregate of 4,049,007 Ordinary
Shares are subject to outstanding, unexercised options issued to employees,
directors and consultants pursuant to CBT employee benefit plans, and 3,640,537
shares remain available for future grant. There are no other options, warrants,
calls, rights, commitments or agreements of any character to which CBT is a
party or by which it is bound obligating CBT to issue, deliver, sell, repurchase
or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of the capital stock of CBT or obligating CBT to grant, extend or enter
into any such option, warrant, call, right, commitment or agreement.
(b) The CBT Ordinary Shares to be issued pursuant to the Share
Exchange will be, at the Share Exchange, duly authorized, validly issued, fully
paid, not subject to any call, preemptive or similar rights and nonassessable.
Upon issuance of the Ordinary Shares issued pursuant to Article I, the right,
title and interest to such Ordinary Shares will be transferred to the
Shareholders, free and clear of all liens, charges, encumbrances, security
interests and claims.
(c) CBT meets all requirements for the qualification of the inclusion
and quotation of ADSs on the Nasdaq National Market System ("NMS"). ADSs to be
---
issued pursuant to the Share Exchange or in connection with the resale of
Ordinary Shares issued in the Share Exchange, as the case may be, will be
included and quoted in the NMS.
4.6 SEC Documents; CBT Financial Statements. CBT has made available to
---------------------------------------
each Shareholder true and complete copies of CBT's annual report on Form 10-K
for the fiscal year ended December 31, 1997 and quarterly reports on Form 10-Q
for each of the three fiscal quarters in the period ended September 30, 1998,
which CBT filed under the United States Securities Exchange Act of 1934, as
amended (the "Exchange Act"), with the Securities and Exchange Commission (the
------------
"SEC") and of its registration statement on Form S-4 (Registration Statement No.
---
333-51159), which CBT filed under the Securities Act with the SEC (collectively,
the "SEC Documents"). As of their respective dates, the SEC Documents complied
-------------
in all material respects with the requirements of the Exchange Act and the
Securities Act, as applicable, and the SEC Documents did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances in which they were made, not misleading. The financial statements
of CBT, including the notes thereto, included in the SEC Documents (the "CBT
---
Financial Statements") comply as to form in all material respects with
- --------------------
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles in the United States consistently applied and
fairly present in all material respects the consolidated financial position of
CBT at the dates thereof and of its operations and cash flows for the periods
then ended. Except as set forth in Schedule 4.6, since September 30, 1998, there
have not been any changes in the assets, liabilities, financial condition,
business or operations of CBT from that reflected in the SEC
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Documents except changes which have not been, either individually or in the
aggregate, materially adverse to CBT. Except as set forth in Schedule 4.6, since
September 30, 1998, there has not been, occurred or arisen any event or
condition which has had a material adverse effect on the business, assets
(including intangible assets), financial conditions or results of operations of
CBT and subsidiaries, taken as a whole. Since September 30, 1998, CBT has filed
all forms, reports and documents with the SEC required to be filed by it
pursuant to the U.S. federal securities laws and the rules and regulations of
the SEC (collectively, "Securities Laws"), each of which complied as to form, at
---------------
the time such form, document or report was filed, in all material respects with
the applicable requirements of all Securities Laws, except for such failures to
file or to comply with Securities Laws as are not, individually or in the
aggregate, materially adverse to CBT and its subsidiaries, taken as a whole.
None of the statements made by CBT in or in connection with documents mailed or
delivered to the shareholders of CBT in connection with soliciting their
approval of this Agreement contains or will contain at the Closing Date or the
date of the CBT shareholder vote, any untrue statement of a material fact, or
omits or will omit at the Closing Date or the date of the CBT shareholder vote
to state any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which they were made,
not misleading.
4.7 Broker's and Finder's Fees. Except for Lehman Brothers Inc., no
--------------------------
broker, finder or investment banker is entitled to any brokers', finders' or
other fee or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of CBT.
ARTICLE V
CONDUCT PRIOR TO THE CLOSING DATE
5.1 Conduct of Business of KnowledgeWell. During the period from November
------------------------------------
30, 1998 and continuing until the earlier of (i) the termination of this
Agreement and (ii) the Closing Date, the Shareholders, as shareholders, and
Martin Scully, as a director, shall procure that KnowledgeWell shall (except to
the extent that CBT shall otherwise consent in writing) carry on its business in
the usual, regular and ordinary course in substantially the same manner as
heretofore conducted, pay its debts and Taxes when due, pay or perform other
obligations when due, and, to the extent consistent with such business, use all
reasonable efforts consistent with past practice and policies to preserve intact
its present business organization, keep available the services of its present
officers and key employees and preserve their relationships with customers,
suppliers, distributors, licensors, licensees, and others having business
dealings with it, all with the goal of preserving unimpaired its goodwill and
ongoing business at the Closing Date. KnowledgeWell shall promptly notify CBT of
any event or occurrence or emergency not in the ordinary course of its business,
and any material event involving KnowledgeWell or its business. Such
representatives and advisors as CBT requests may be designated to work with
KnowledgeWell with regard to the management and operations of KnowledgeWell.
Subject to such representatives and advisors being reasonably available,
KnowledgeWell will consult with such representatives and advisors with respect
to any action that may materially affect the business of
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<PAGE>
KnowledgeWell. KnowledgeWell will furnish to such representatives and advisors
such information as they may reasonably request for this purpose. Except as
expressly contemplated by this Agreement or disclosed in Schedule 5.1, the
Shareholders, as shareholders, and Mr. Scully, as a director, shall procure that
KnowledgeWell shall not (and KW Group shall cause the Subsidiary to not),
without the prior written consent of CBT (which consent shall not be
unreasonably withheld):
(a) Enter into any commitment or transaction not in the ordinary
course of business.
(b) Transfer to any person or entity any rights to KnowledgeWell
Intellectual Property Rights (other than pursuant to end-user licenses in the
ordinary course of business);
(c) Enter into or amend any material agreements pursuant to which any
other party is granted marketing, distribution or similar rights of any type or
scope with respect to any products of KnowledgeWell;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements set
forth or described in the KnowledgeWell Disclosure Letter;
(e) Commence any litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
share capital, or split, combine or reclassify any of its share capital or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of share capital of KnowledgeWell, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its share
capital (or options, warrants or other rights exercisable therefor);
(g) Except for the issuance of shares upon exercise or conversion of
presently outstanding KnowledgeWell Options or KW Preferred, create, issue,
grant, deliver or sell or authorize or propose the creation, issuance, grant,
delivery or sale of, or purchase or propose the purchase of, any of its share
capital or securities convertible into, or subscriptions, rights, warrants or
options to acquire, or other agreements or commitments of any character
obligating it to issue any such shares or other convertible securities;
(h) Cause or permit any amendments to its Memorandum or Articles of
Association or Bylaws (as the case may be) or pass any resolution by its
members;
(i) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
material assets;
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(j) Sell, lease, license or otherwise dispose of any of its properties
or assets, other than in the ordinary course of business;
(k) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities of KnowledgeWell or guarantee
any debt securities of others, or create, extend, grant or issue any loan,
mortgage, charge, debenture, guarantee, warranty or other form of security or
agree to do so;
(l) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee, except payments made pursuant to standard
written agreements outstanding on November 30, 1998;
(m) Adopt or amend any employee benefit plan, or enter into any
employment contract, extend employment offers, pay or agree to pay any bonus or
special remuneration to any director or employee, or increase the salaries or
wage rates of its employees;
(n) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(o) Pay, discharge or satisfy, in an amount in excess of US$10,000 (in
any one case) or US$50,000 (in the aggregate), any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or otherwise),
other than the payment, discharge or satisfaction in the ordinary course of
business of liabilities reflected or reserved against in the KnowledgeWell
Financial Statements (or the notes thereto) or liabilities, claims or
obligations arising in the ordinary course of business after October 31, 1998 or
expenses consistent with the provisions of this Agreement incurred in connection
with any transaction contemplated and permitted hereby;
(p) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(q) Incur any capital commitment in excess of US$25,000, or acquire
any assets on lease, purchase, credit sale or deferred terms;
(r) Co-opt any person to its board of directors;
(s) Enter into any strategic alliance, development or joint marketing
agreement except in the ordinary course of business; or
(t) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 5.1(a) through (s) above, or any other action that would
prevent KnowledgeWell from performing or cause KnowledgeWell not to perform its
covenants hereunder.
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5.2 No Solicitation. Until the earlier of (i) the Closing Date and (ii)
---------------
the date of termination of this Agreement pursuant to the provisions of Section
9.1 hereof, KnowledgeWell will not (nor will KnowledgeWell permit any of
KnowledgeWell's officers, directors, agents, representatives or affiliates to)
directly or indirectly, take any of the following actions with any party other
than CBT and its designees: (a) solicit, conduct discussions with or engage in
negotiations with any person, relating to the possible acquisition of
KnowledgeWell or any of its subsidiaries (whether by way of share exchange,
purchase of share capital, purchase of assets or otherwise) or any material
portion of its or their share capital or assets, (b) provide information with
respect to it or any of its subsidiaries to any person, other than CBT, relating
to the possible acquisition of KnowledgeWell (whether by way of share exchange,
purchase of share capital, purchase of assets or otherwise) or any material
portion of its or their share capital or assets, (c) enter into an agreement
with any person, other than CBT, providing for the acquisition of KnowledgeWell
(whether by way of share exchange, purchase of share capital, purchase of assets
or otherwise) or any material portion of its share capital or assets or (d) make
or authorize any statement, recommendation or solicitation in support of any
possible acquisition of KnowledgeWell or any of its subsidiaries (whether by way
of share exchange, purchase of share capital, purchase of assets or otherwise)
or any material portion of its or their share capital or assets by any person,
other than by CBT. In addition to the foregoing, if KnowledgeWell receives prior
to the Closing Date or the termination of this Agreement any offer or proposal
relating to any of the above, KnowledgeWell shall promptly notify CBT thereof,
including information as to the identity of the offeror or the party making any
such offer or proposal and the specific terms of such offer or proposal, as the
case may be, and such other information related thereto as CBT may reasonably
request.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Proxy Statement; Shareholder Meetings. As promptly as practicable
-------------------------------------
after the execution of this Agreement, CBT shall prepare, and KnowledgeWell
shall assist in preparing, a Proxy Statement (the "Proxy Statement") relating to
---------------
the solicitation of the approval of the shareholders of CBT of this Agreement.
CBT shall file with the SEC the Proxy Statement as soon as is reasonably
practicable following preparation thereof. KnowledgeWell shall provide to CBT
and its counsel for inclusion in the Proxy Statement, in form and substance
reasonably satisfactory to CBT and its counsel, such information concerning
KnowledgeWell, its operations, capitalization, technology, share ownership and
other material as CBT or its counsel may reasonably request. Each of CBT and
KnowledgeWell shall use its reasonable efforts to respond to any comments of the
SEC, to have the Proxy Statement approved by the SEC as promptly as practicable
after such filing and to cause the Proxy Statement to be mailed to CBT's
shareholders at the earliest practicable time. Each party will notify the other
parties hereto promptly of the receipt of any comments from the SEC or its staff
and of any request by the SEC or its staff for amendments or supplements to the
Proxy Statement or for additional information and will supply the other party
with copies of all correspondence between such party or any of its
representatives, on the one hand, and the SEC, or its staff, on the other hand,
with respect to the Proxy Statement. Whenever any event occurs which should be
set forth in an amendment or
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supplement to the Proxy Statement, CBT or KnowledgeWell, as the case may be,
shall promptly inform the other company of such occurrence and cooperate in
filing with the SEC or its staff.
6.2 Access to Information. Subject to any applicable contractual
---------------------
confidentiality obligations (which each party shall use its reasonable best
efforts to cause to be waived) each party shall afford the others and its
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Closing Date to (a) all of its
properties, books, contracts, agreements and records, and (b) all other
information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of it as the others may reasonably
request, including without limitation all information required by CBT's
accountants to perform an audit in accordance with United States Generally
Accepted Accounting Principles ("GAAP") of the financial statements of
----
KnowledgeWell for the year ended October 31, 1997. No information or knowledge
obtained in any investigation pursuant to this Section 6.2 shall affect or be
deemed to modify any representation or warranty contained herein or the
conditions to the obligations of the parties to consummate the Share Exchange.
6.3 Expenses. Whether or not the Share Exchange is consummated, all fees
--------
and expenses incurred in connection with the Share Exchange including, without
limitation, all legal, accounting, financial advisory, consulting and all other
fees and expenses of third parties ("Third Party Expenses") incurred in
--------------------
connection with the negotiation and effectuation of the terms and conditions of
this Agreement and the transactions contemplated hereby (i) by CBT and the
Independent Committee of the Board of Directors of CBT shall be the obligation
of CBT and (ii) by KnowledgeWell and the Shareholders shall be the joint and
several obligation of the Shareholders, provided that if the necessary approvals
under Section 60 of the Ireland Companies Act 1963 have been obtained, such
Third Party Expenses shall be the obligation of Knowledge Well.
6.4 Public Disclosure. Upon execution and delivery of this Agreement by
-----------------
the parties hereto, CBT and KnowledgeWell shall release a jointly prepared
announcement describing the Share Exchange.
6.5 Consents. KnowledgeWell shall use its reasonable efforts to obtain
--------
the consents, waivers and approvals under any of the Contracts as may be
required in connection with the Share Exchange (all of such consents, waivers
and approvals are set forth in KnowledgeWell Disclosure Letter) so as to
preserve all rights of, and benefits to KnowledgeWell thereunder.
6.6 FIRPTA Compliance. On the Closing Date, KnowledgeWell shall deliver to
-----------------
CBT a properly executed statement in a form reasonably acceptable to CBT for
purposes of satisfying CBT's obligations under Treasury Regulation Section
1.1445-2(c)(3).
6.7 Reasonable Efforts. Subject to the terms and conditions provided in
------------------
this Agreement, each of the parties hereto shall use its reasonable efforts to
take promptly, or cause to be taken, all actions, and to do promptly, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby to obtain all necessary waivers, consents and approvals and to effect all
necessary registrations
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and filings and to remove any injunctions or other impediments or delays, legal
or otherwise, in order to consummate and make effective the transactions
contemplated by this Agreement for the purpose of securing to the parties hereto
the benefits contemplated by this Agreement; provided that CBT shall not be
required to agree to any divestiture by CBT or KnowledgeWell or any of CBT's
subsidiaries or affiliates of share capital or of any business, assets or
property of CBT or its subsidiaries or affiliates or KnowledgeWell or its
affiliates, or the imposition of any material limitation on the ability of any
of them to conduct their businesses or to own or exercise control of such
assets, properties and share capital.
6.8 Notification of Certain Matters. The Shareholders shall give prompt
-------------------------------
notice to CBT, and CBT shall give prompt notice to the Shareholders, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Shareholder and
CBT, respectively, contained in this Agreement to be untrue or inaccurate at or
prior to the Closing Date except as contemplated by this Agreement (including
KnowledgeWell Disclosure Letter) and (ii) any failure of the Shareholders,
KnowledgeWell or CBT, as the case may be, to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by it hereunder; provided, however, that the delivery of any notice
pursuant to this Section 6.8 shall not limit or otherwise affect any remedies
available to the party receiving such notice.
6.9 Affiliate Agreements.
--------------------
(a) Prior to the Exchange Date, each Shareholder shall cause to
be delivered to CBT a certificate of an officer of KnowledgeWell on behalf of
KnowledgeWell identifying all persons who are "affiliates" (as that term is used
in paragraphs (c) and (d) of Rule 145 under the Securities Act) of KnowledgeWell
(collectively, the "KnowledgeWell Affiliates").
------------------------
(b) Prior to the Exchange Date, KnowledgeWell shall cause each
KnowledgeWell Affiliate to execute and deliver a written agreement in the form
attached as Exhibit C (the "Affiliate Agreement"), that he will not sell, offer
---------
to sell, or otherwise dispose of any of the Ordinary Shares or ADSs, as the case
may be, issued to him pursuant to the Share Exchange, except in compliance with
Rule 145 or another exemption for the registration requirements of the
Securities Act. CBT shall be entitled to place appropriate legends on the
certificates evidencing any Ordinary Shares or ADSs, as the case may be, or
other CBT securities to be received by KnowledgeWell Affiliates, and to issue
appropriate stop transfer instructions to the transfer agent for CBT Ordinary
Shares and, if applicable, the Depositary consistent with the terms of such
Affiliate Agreement.
6.10 Additional Documents and Further Assurances. Each party hereto, at
-------------------------------------------
the request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be reasonably
necessary or desirable for effecting completely the consummation of this
Agreement and the transactions contemplated hereby.
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6.11 NMS Listing. CBT shall authorize for listing on the NMS the ADRs
-----------
with respect to the securities issued in connection with the Share Exchange,
upon official notice of issuance.
6.12 Form S-8. CBT shall file a registration statement on Form S-8 for
--------
the CBT Ordinary Shares issuable with respect to assumed KnowledgeWell Options
no later than fifteen business days after the Closing Date.
6.13 Repurchase of "C" Ordinary Shares. William G. McCabe hereby
---------------------------------
covenants and agrees that on or prior to the Closing Date he will acquire all of
the "C" Ordinary Shares of IR25p each in the capital of KW Limited in issue from
the holder thereof. Mr. McCabe hereby further covenants and agrees that
following such acquisition, and in any event not later than the Closing Date, he
will exercise the options held by him pursuant to the Option Agreements dated
August 31, 1998 in respect of shares in each of KW Limited and KW Group and that
in the event of his failing to exercise such options as aforesaid, such options
shall forthwith lapse and shall be of no further force and effect. Any shares
issued to Mr. McCabe pursuant to the exercise of the foregoing options shall be
deemed to be "KnowledgeWell Shares" for purposes of this Agreement.
6.14 Tax-Free Reorganization. The parties hereto shall not take any
-----------------------
action either prior to or after the Closing that could reasonably be expected to
cause the Share Exchange to fail to qualify as a "reorganization" under Section
368(a) of the Code.
6.15 Resale Registration Statement. CBT shall file, within thirty (30)
-----------------------------
days following the Closing Date, a registration statement on Form S-3 with the
SEC covering the resale of the Ordinary Shares and the ADSs representing such
Ordinary Shares received by the Shareholders hereunder. CBT shall use its
reasonable best efforts to cause such registration statement to be declared
effective under the Securities Act as promptly as reasonably practicable. Any
such registration shall be subject to the terms and conditions set forth in the
Rights Declaration. CBT covenants that with respect to information contained in
the registration statement and supplied by CBT in connection therewith, such
information will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading, or omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. Each Shareholder covenants that with
respect to information contained in the registration statement and supplied in
writing by such Shareholder in connection therewith, such information will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein not misleading, or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
6.16 Restricted ADR Facility. CBT shall use its reasonable best efforts
-----------------------
to arrange a Restricted ADR Facility at the Bank of New York with respect to the
Ordinary Shares to be issued to the Shareholders hereunder, such that at the
Closing the Shareholders will receive Restricted ADSs (each representing one
restricted Ordinary Share) in lieu of restricted Ordinary Shares.
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ARTICLE VII
CONDITIONS TO THE SHARE EXCHANGE
7.1 Conditions to Obligations of Each Party to Effect the Share Exchange.
--------------------------------------------------------------------
The respective obligations of each party to this Agreement to effect the Share
Exchange shall be subject to the satisfaction at or prior to the Closing of the
following conditions:
(a) Shareholder Approval. The Share Purchase Agreement, the Share
--------------------
Exchange and the issuance of CBT Ordinary Shares (or ADSs representing such
Ordinary Shares) pursuant to the Share Exchange shall have been approved by the
shareholders of CBT (who are not also Shareholders) by the requisite vote under
applicable law and CBT's Articles of Association.
(b) No Injunctions or Restraints; Illegality; HSR Act. (i) No
-------------------------------------------------
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint or prohibition preventing the consummation of the Share Exchange shall
be in effect; (ii) all waiting periods under the HSR Act shall have expired or
terminated early; and (iii) either (A) the Irish Minister for Enterprise and
Employment (the "Minister") shall have informed CBT in writing that he has
--------
decided not to make an order under Section 9 of the Mergers, Take-Overs and
Monopolies (Control) Act, 1978, as amended (the "Mergers Act"), in relation to
-----------
the sale and purchase of the Knowledge Well Shares hereunder, (B) the Minister
shall have made a conditional order in relation to such sale and purchase on
terms acceptable to CBT and the Shareholders, (C) the relevant period under
Section 6 of the Mergers Act shall have expired without the Minister having so
informed CBT or having made any order, or (D) the Minister shall have confirmed
that the Mergers Act does not apply.
7.2 Additional Conditions to Obligations of Shareholders. The obligations
----------------------------------------------------
of Shareholders to consummate the Share Exchange and the transactions
contemplated by this Agreement shall be subject to the satisfaction at or prior
to the Closing of each of the following conditions, any of which may be waived,
in writing, exclusively by William G. McCabe and/or Gregory M. Priest, as the
representatives on behalf of the Shareholders:
(a) Representations and Warranties. The representations and warranties
------------------------------
of CBT contained in this Agreement shall have been true and correct in all
material respects as of November 30, 1998. In addition, the representations and
warranties of CBT contained in Section 4.5(a) of this Agreement shall be true
and correct in all material respects on and as of the Closing Date, and the
Shareholders shall have received a certificate to such effect signed by a vice
president of CBT.
(b) Agreements and Covenants. CBT shall have performed or complied
------------------------
(which performance or compliance shall be subject to CBT's ability to cure as
provided in Section 9.1(e) below) in all material respects with all agreements
and covenants required by this Agreement to be performed or complied with by it
on or prior to the Closing Date, and the Shareholders shall have received a
certificate to such effect signed by a vice president of CBT.
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(c) Nasdaq Listing. The CBT ADSs issuable to the Shareholders
--------------
pursuant to this Agreement or upon resale of Ordinary Shares issuable to the
Shareholders shall have been authorized for listing on the NMS upon official
notice of issuance.
(d) Restricted ADR Facility. The Restricted ADR Facility shall have
-----------------------
been arranged such that the Shareholders are able to receive Restricted ADRs in
lieu of restricted Ordinary Shares.
7.3 Additional Conditions to the Obligations of CBT. The obligations of
-----------------------------------------------
CBT to consummate the Share Exchange and the transactions contemplated by this
Agreement shall be subject to the satisfaction at or prior to the Closing of
each of the following conditions, any of which may be waived, in writing,
exclusively by CBT:
(a) Representations and Warranties. The representations and warranties
------------------------------
of the Shareholders contained in this Agreement shall have been true and correct
in all material respects as of November 30, 1998. In addition, the
representations and warranties of the Shareholders contained in Sections 2.2 and
3.4 of this Agreement shall be true and correct in all material respects on and
as of the Closing Date. CBT shall have received a certificate with respect to
the foregoing signed by William G. McCabe and/or Gregory M. Priest, as the
representatives on behalf of the Shareholders.
(b) Agreements and Covenants. KnowledgeWell and the Shareholders
------------------------
shall have performed or complied (which performance or compliance shall be
subject to KnowledgeWell's or the Shareholders' ability to cure as provided in
Section 9.1(d) below) in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it or them, as
the case may be, on or prior to the Closing Date, and CBT shall have received a
certificate to such effect signed by the Chief Executive Officer of
KnowledgeWell (to the extent applicable to KnowledgeWell) and by William G.
McCabe and/or Gregory M. Priest, as the representatives on behalf of the
Shareholders (to the extent applicable to the Shareholders).
(c) Legal Opinion. CBT shall have received a legal opinion on Irish
-------------
law matters from Mason, Hayes & Curran, Irish legal counsel to KnowledgeWell, in
form and substance reasonably satisfactory to CBT.
(d) Affiliate Agreements. Each of the KnowledgeWell Affiliates shall
--------------------
have delivered an executed Affiliate Agreement which shall be in full force and
effect.
(e) Employment and Noncompetition Agreements. Each of William G.
----------------------------------------
McCabe, Gregory M. Priest, Jeffrey Newton, William Beamish, William Lewis and
John M. Grillos shall have executed and delivered to CBT an Employment and
Noncompetition Agreement in form and substance reasonably satisfactory to CBT
and consistent with all applicable laws, and all such Employment and
Noncompetition Agreements shall be in full force and effect.
(f) Audited Financial Statements. CBT's independent accountants shall
----------------------------
have completed an audit of the financial statements of KnowledgeWell. Such
audited financial statements shall have been prepared in accordance with GAAP
and shall confirm that the
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KnowledgeWell Financial Statements present fairly, in all material respects, the
financial position of KnowledgeWell as of the dates and during the periods
indicated therein. Such audited financial statements shall, in the view of CBT's
independent accountants, satisfy the requirements of Regulation S-X and shall be
sufficient for the requirements of the SEC with respect to CBT's reporting
obligations under the U.S. federal securities laws.
(g) Preference Shares; "C" Ordinary Shares. Immediately prior to the
--------------------------------------
Closing, each Shareholder shall have voluntarily converted all of his, her or
its shares of KW Preferred into Ordinary Shares of US$0.01 each of KW Group on a
one-for-one basis, no KW Preferred shall be in issue or outstanding, and no "C"
Ordinary Shares of KW Limited shall be in issue or outstanding. Any Ordinary
Shares issued pursuant to the conversion of the KW Preferred shall be deemed to
be "KnowledgeWell Shares" for purposes of this Agreement.
(h) William G. McCabe, Gregory M. Priest, Peregrine Company Managers
Limited, William Beamish, John Grillos and Patricia Grillos, ITech Partners
L.P., Finite Properties Limited and Molyneux Secretarial Services Limited shall
have executed a Lock-Up Agreement in the form attached hereto as Exhibit D.
---------
7.4 No Additional Conditions. Except for the conditions set forth in
------------------------
Sections 7.1, 7.2 and 7.3 of this Agreement, no other statement, term or
provision of this Agreement shall constitute a condition to the obligations of
the parties to consummate the Share Exchange.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW; INDEMNITY
8.1 Survival of Representations, Warranties and Covenants. All
-----------------------------------------------------
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement and all covenants to be performed prior to the
Closing Date shall not in any respect be extinguished or affected by the Closing
shall survive the Share Exchange for a period ending at 5:00 p.m., California
time, on the date two (2) years from the Closing Date, provided that
representations and warranties related to Tax shall survive the Share Exchange
for a period ending at 5:00 p.m., California time, on the date six (6) years
from the Closing Date.
8.2 Agreement to Indemnify.
----------------------
(a) Each Shareholder agrees, jointly and severally, to indemnify and
hold CBT and its affiliates, officers, directors, employees and shareholders
(collectively, the "CBT Indemnitees") harmless against any losses, claims,
---------------
damages, costs, expenses or other liabilities (including reasonable attorneys'
fees and expenses) (collectively, "Damages") resulting from (i) any breach of or
-------
inaccuracy in any representations and warranties of the Shareholders set forth
in Article II of this Agreement or in any certificate delivered by the
Shareholders or KnowledgeWell pursuant to this Agreement, or (ii) any breach or
default by KnowledgeWell or the Shareholders of any covenant, obligation or
other
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<PAGE>
agreement of KnowledgeWell or the Shareholders set forth in this Agreement
(each, a "CBT Indemnifiable Claim," which term shall include a claim made
-----------------------
pursuant to the following sentence). In addition, each Shareholder agrees,
severally and not jointly, to indemnify and hold the CBT Indemnitees harmless
against any Damages resulting from any breach of or inaccuracy in any
representations and warranties of such Shareholder set forth in Article III of
this Agreement.
(b) Subject to Section 8.4, the liability of the Shareholders under
this indemnity (other than in respect of Damages resulting from any breach of or
inaccuracy in any representations or warranties of the Shareholders relating to
Tax) shall expire at 5:00 p.m., California time, on the second anniversary of
the Closing Date (the "Two-Year Indemnity Termination Date"), and the liability
-----------------------------------
of the Shareholders under this indemnity in respect of Damages resulting from
any breach of or inaccuracy in any representations or warranties of the
Shareholders relating to Tax shall expire at 5:00 p.m., California time, on the
sixth anniversary of the Closing Date (the "Six-Year Indemnity Termination Date"
-----------------------------------
and, collectively with the Two-Year Indemnity Termination Date, the "Indemnity
---------
Termination Dates").
- -----------------
8.3 Escrow Arrangements; Limits of Liability.
----------------------------------------
(a) In no event shall (i) any Shareholder be liable to CBT, any other
CBT Indemnitees or anyone claiming through either of them under this Article
VIII or any other theory of liability for Damages or other amounts in connection
with the transactions contemplated by this Agreement or any of the Related
Agreements in excess of the lesser of (A) such Shareholder's pro rata share
(assuming exercise of all of such Shareholder's Knowledge Well Options assumed
by CBT regardless of whether such options are vested or unvested) of the
Acquisition Price and (B) such Shareholder's pro rata share (assuming exercise
of all of such Shareholder's Knowledge Well Options assumed by CBT regardless of
whether such options are vested or unvested) of the aggregate amount of such
Damages or other amounts or (ii) any CBT Indemnitee be reimbursed for any
Damages under this Article VIII or any other theory of liability in connection
with the transactions contemplated by this Agreement or any of the Related
Agreements until the aggregate of all Damages exceeds US$500,000 (after which
all Damages, including such US$500,000, shall become payable in accordance with
the provisions of this Article VIII). As partial security for the obligations of
each Shareholder pursuant to this Article VIII, the Escrow Amount shall be
deposited with an escrow agent and shall be controlled pursuant to the terms of
the escrow agreement (the "Escrow Agreement") in substantially the form
----------------
attached hereto as Exhibit E.
---------
(b) For purposes of determining the amount of any Damages incurred by
the CBT Indemnitees, the amount of any Damages shall be reduced to the extent of
(i) any net tax benefit actually realized by the CBT Indemnitees arising from
the incurrence or payment by the CBT Indemnitees of the indemnifiable loss to
which such Damages relate and after giving full effect to the actual tax effect
of receipt of the indemnification payments to the CBT Indemnitees, if any, and
(ii) any amounts previously received by the CBT Indemnitees pursuant to this
Article VIII for losses resulting from the same facts or events.
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<PAGE>
(c) Nothing in this Agreement shall in any way diminish any obligation
on the part of CBT under applicable law to attempt to mitigate its loss. If the
amount of any Damages, at any time subsequent to the making of a payment
hereunder in respect thereof, is reduced (i) by recovery, settlement or
otherwise under or pursuant to any insurance coverage or (ii) pursuant to any
claim, recovery, settlement or otherwise against or with any person or entity
that is not an affiliate of a CBT Indemnitee, the amount of such reduction, in
each case less any costs or expenses of recovery (including attorney's fees and
expenses), will be repaid by the CBT Indemnitees to (A) the Escrow Agent to be
controlled pursuant to the terms of the Escrow Agreement if such repayment is
made prior to the Two-Year Indemnity Termination Date or (B) the Shareholders if
such repayment is made after the Two-Year Indemnity Termination Date.
(d) CBT confirms to the Shareholders that, as of November 30, 1998, it
had not formulated nor is it in the process of formulating any claim under this
Agreement. The information supplied by Knowledge Well or its professional
advisers to the Shareholders or their agents, representatives or advisors in
connection with the representations and warranties and indemnities in this
Agreement and the contents of the Knowledge Well Disclosure Letter or otherwise
in relation to the business or affairs of Knowledge Well shall not be deemed a
representation, warranty or guarantee of its accuracy by Knowledge Well to the
Shareholders, and the Shareholders hereby irrevocably waive any claim against
Knowledge Well (and its employees and agents) which any of them might otherwise
have in respect of it.
8.4 Survival of Indemnity; Indemnification Procedures; Time Limits.
--------------------------------------------------------------
(a) The indemnification obligations of each Shareholder pursuant to
Section 8.2 for amounts up to the Escrow Amount shall apply only to those claims
for indemnification as to which CBT has given written notice thereof pursuant to
the terms of the Escrow Agreement on or prior to the relevant Indemnity
Termination Date; provided that the foregoing shall not limit the liability of
such Shareholder for Damages incurred by CBT Indemnitees after the relevant
Indemnity Termination Date that result from a CBT Indemnifiable Claim if CBT
Indemnitees have given written notice of such CBT Indemnifiable Claim prior to
the relevant Indemnity Termination Date. CBT and each Shareholder agree that
the indemnification procedures set forth in the Escrow Agreement shall apply to
all claims for Damages up to the Escrow Amount resulting from a CBT
Indemnifiable Claim. Notwithstanding the foregoing, any claim for Damages in
respect of any breach of or inaccuracy in any representation or warranties of
the Shareholders relating to Tax made after the Two-Year Indemnity Termination
Date shall be administered in accordance with paragraph (c) of this Section 8.4
regardless of whether the amount is less than or exceeds the Escrow Amount.
(b) The indemnification obligations of each Shareholder pursuant to
Section 8.2 for amounts in excess of the Escrow Amount shall apply only to those
claims for indemnification as to which CBT has given written notice thereof
pursuant to the terms of paragraph (c) of this Section 8.4 on or prior to the
relevant Indemnity Termination Date; provided that the foregoing shall not limit
the liability of such Shareholder for Damages incurred by CBT Indemnitees after
the relevant Indemnity Termination Date that result from a CBT Indemnifiable
Claim if CBT Indemnitees have given written
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<PAGE>
notice of such CBT Indemnifiable Claim prior to the relevant Indemnity
Termination Date. CBT and each Shareholder agree that the indemnification
procedures set forth in paragraph (c) of this Section 8.4 shall apply to all
claims for Damages in excess of the Escrow Amount resulting from a CBT
Indemnifiable Claim.
(c) If any CBT Indemnitee shall incur Damages that exceed the Escrow
Amount, there shall be delivered to each Shareholder a certificate signed in
good faith on behalf of CBT by an officer of CBT or by a member of the Special
Committee (an "Officer's Certificate") stating that a CBT Indemnitee has paid,
---------------------
properly accrued, or reasonably anticipates that it will have to pay or accrue
Damages in an amount specified in such Officer's Certificate, with the basis for
such claim set forth in reasonable detail. Each Officer's Certificate shall be
delivered to each Shareholder in the manner specified in Section 10.1 hereof.
In the event CBT becomes aware of a third-party claim which CBT believes may
result in a demand which exceeds the Escrow Amount, CBT shall, as soon as
reasonably practicable, notify each Shareholder of such claim, and each
Shareholder shall be entitled, at their individual expense, to participate in
any defense of such claim. Delay in providing such notice shall not eliminate
such claim except to the extent that the Shareholders are prejudiced thereby.
CBT shall have the right in its sole discretion to settle any such claim;
provided, however, that except with the consent of a given Shareholder, no
settlement of any such claim with third-party claimants shall be determinative
of the validity and quantum of any claim against such Shareholder. In the event
that a given Shareholder has consented to any such settlement, such Shareholder
shall have no power or authority to object to the amount of any claim by CBT
against such Shareholder with respect to such settlement.
8.5 Representative; Power of Attorney.
---------------------------------
(a) Each Shareholder hereby appoints Gethin Taylor of Peregrine
Company Managers Limited as agent and attorney-in-fact (the "Representative")
--------------
for such Shareholder to give and receive notices and communications, to
authorize delivery to CBT of ADSs or Ordinary Shares, as the case may be, from
the Escrow Amount in satisfaction of claims by CBT, to object to such
deliveries, to agree to, negotiate, enter into settlements and compromises of,
such claims, to perform such other obligations and make such other decisions as
are set forth in the Escrow Agreement, and to take all actions necessary or
appropriate in the judgment of the Representative for the accomplishment of the
foregoing. Such agency may be changed by the Shareholders from time to time upon
not less than thirty (30) days prior written notice to CBT; provided that the
Representative may not be removed unless holders of a two-thirds interest of the
Escrow Amount agree to such removal and to the identity of the substituted
agent. The Representative may resign upon not less than thirty (30) days prior
written notice to CBT and to all holders of an interest in the Escrow Amount.
Any vacancy in the position of the Representative may be filled by approval of
the holders of a majority in interest of the Escrow Amount. No bond shall be
required of the Representative, and the Representative shall not receive
compensation for his or her services. Notices or communications to or from the
Representative shall constitute notice to or from each of the Shareholders.
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(b) The Representative shall not be liable for any act done or omitted
hereunder as Representative while acting in good faith and without recklessness.
The Shareholders shall severally indemnify the Representative and hold the
Representative harmless against any loss, liability or expense incurred without
recklessness or bad faith on the part of the Representative and arising out of
or in connection with the acceptance or administration of the Representative's
duties hereunder, including the reasonable fees and expenses of any legal
counsel retained by the Representative.
(c) A decision, act, consent or instruction of the Representative
shall be final, binding and conclusive upon each of such Shareholders, and the
Escrow Agent and CBT may rely upon any such decision, act, consent or
instruction of the Representative as being the decision, act, consent or
instruction of each Shareholder. The Escrow Agent and CBT are hereby relieved
from any liability to any person for any acts done by them in accordance with
such decision, act, consent or instruction of the Representative.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
9.1 Termination. Except as provided in Section 9.2 below, this Agreement
-----------
may be terminated and the Share Exchange abandoned at any time prior to the
Closing Date:
(a) by mutual consent of the Shareholders or their attorneys and CBT;
(b) by CBT or by William G. McCabe and/or Gregory M. Priest, as the
representatives on behalf of the Shareholders, if: (i) the Closing Date has not
occurred by June 30, 1999 (provided that the right to terminate this Agreement
under this clause 9.1(b)(i) shall not be available to any party whose willful
failure to fulfill any obligation hereunder has been the cause of, or resulted
in, the failure of the Closing Date to occur on or before such date); (ii) there
shall be a final nonappealable order of a federal or state court in the United
States or a court in Ireland in effect preventing consummation of the Share
Exchange; or (iii) there shall be any statute, rule, regulation or order
enacted, promulgated or issued or deemed applicable to the Share Exchange by any
Governmental Entity that would make consummation of the Share Exchange illegal;
(c) by CBT if there shall be any action taken, or any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to the
Share Exchange, by any Governmental Entity, which would: (i) prohibit CBT's or
KnowledgeWell's ownership or operation of any material portion of the business
of KnowledgeWell or (ii) compel CBT or KnowledgeWell to dispose of or hold
separate, as a result of the Share Exchange, any material portion of the
business or assets of KnowledgeWell or CBT;
(d) by CBT if it is not in material breach of its obligations under
this Agreement and there has been a breach of any representation, warranty,
covenant or agreement contained in this
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Agreement on the part of KnowledgeWell or any Shareholder and as a result of
such breach the conditions set forth in Section 7.3(a) or 7.3(b), as the case
may be, would not then be satisfied; provided, however, that if such breach is
curable by KnowledgeWell or such Shareholder within thirty (30) days through the
exercise of its reasonable best efforts, then for so long as KnowledgeWell or
such Shareholder continues to exercise such reasonable best efforts CBT may not
terminate this Agreement under this Section 9.1(d) unless such breach is not
cured within thirty (30) days (but no cure period shall be required for a breach
which by its nature cannot be cured);
(e) by William G. McCabe and/or Gregory M. Priest, as the
representatives on behalf of the Shareholders, if KnowledgeWell and the
Shareholders are not in material breach of their respective obligations under
this Agreement and there has been a breach of any representation, warranty,
covenant or agreement contained in this Agreement on the part of CBT and as a
result of such breach the conditions set forth in Section 7.2(a) or 7.2(b), as
the case may be, would not then be satisfied; provided, however, that if such
breach is curable by CBT within thirty (30) days through the exercise of its
reasonable best efforts, then for so long as CBT continues to exercise such
reasonable best efforts Messrs. McCabe and/or Priest, as the representatives on
behalf of the Shareholders, may not terminate this Agreement under this Section
9.1(e) unless such breach is not cured within thirty (30) days (but no cure
period shall be required for a breach which by its nature cannot be cured).
Where action is taken to terminate this Agreement pursuant to this Section
9.1, it shall be sufficient for such action to be authorized by the Independent
Committee of the Board of Directors of CBT on behalf of CBT or by William G.
McCabe and/or Gregory M. Priest, as the representatives on behalf of the
Shareholders, as the case may be.
9.2 Effect of Termination. In the event of termination of this Agreement
---------------------
as provided in Section 9.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of CBT, KnowledgeWell or the
Shareholders, or their respective officers, directors or shareholders, provided
that each party shall remain liable for any breaches of this Agreement prior to
its termination; and provided further that the provisions of Sections 6.3 and
Article X of this Agreement shall remain in full force and effect and survive
any termination of this Agreement.
9.3 Amendment. Except as is otherwise required by applicable law after
---------
the shareholders of CBT approve this Agreement, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of the parties hereto.
9.4 Extension; Waiver. At any time prior to the Closing Date, CBT, on the
-----------------
one hand, and KnowledgeWell and William G. McCabe and/or Gregory M. Priest, as
the representatives on behalf of the Shareholders, on the other, may, to the
extent legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or
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waiver shall be valid only if set forth in an instrument in writing signed on
behalf of CBT by a member of the Independent Committee of the Board of
Directors, on behalf of KnowledgeWell by an officer or director of KW Limited or
KW Group, and on behalf of the Shareholders by William G. McCabe and/or Gregory
M. Priest, as the representatives on behalf of the Shareholders.
ARTICLE X
GENERAL PROVISIONS
10.1 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with acknowledgment of complete transmission)
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
(a) if to CBT, to:
CBT Group PLC
Belfield Office Park, Clonskeagh
Dublin 4
Ireland
Attention: Jack Hayes / Company Secretary
Telephone No.: 011-353-1-283-0077
Facsimile No.: 011-353-1-208-1296
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
Attention: Steven V. Bernard
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
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(b) if to KnowledgeWell, to:
KnowledgeWell, Inc.
1701 Directors Blvd., Suite 920
Austin, Texas 78735
Attention: Chief Executive Officer
Telephone No.: (512) 462-9223
Facsimile No.: (512) 373-7557
(c) if to the Representative:
Peregrine Corporate Services Limited
Burleigh Manor
Peel Road
Douglas Isle of Man
Attention: Gethin Taylor
Telephone No.: (441-624) 626-586
Facsimile No.: (441-624) 673-827
(d) if to a Shareholder, at such Shareholder's address as is
specified on Exhibit A to this Agreement.
10.2 Interpretation. The words "include," "includes" and "including" when
--------------
used herein shall be deemed in each case to be followed by the words "without
limitation." The word "agreement" when used herein shall be deemed in each case
to mean any contract, commitment or other agreement, whether oral or written,
that is legally binding. As used in this Agreement, the phrase "to the best of
[a party's] knowledge," "to [a party's] knowledge," "[a party] is not aware,"
and similar phrases shall mean the actual knowledge of such party, or of the
officers and directors of such party, after careful consideration of the matters
set forth in the representation that is so qualified and after performing or
causing to be performed a reasonably diligent review of all files, documents,
agreements and other materials in such person's possession or subject to his or
her control. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
10.4 Entire Agreement; Successors; Assignment. This Agreement, the
----------------------------------------
schedules and Exhibits hereto, and the documents and instruments and other
agreements among the parties hereto referenced herein: (a) constitute the
entire agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, both written and oral, among
-62-
<PAGE>
the parties with respect to the subject matter hereof; (b) are not intended to
confer upon any other person any rights or remedies hereunder; and (c) shall not
be assigned by operation of law or otherwise except as otherwise specifically
provided. Notwithstanding the foregoing, this Agreement shall be binding upon
and enforceable against administrators, executors, representatives, heirs,
legatees and devisees of the Shareholders.
10.5 Severability. In the event that any provision of this Agreement or
------------
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforce able, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to
replace such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
10.6 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy. Notwithstanding any provision of this Agreement
to the contrary, the parties expressly agree that reasonable attorney's fees may
be recoverable in connection with any action to enforce contractual rights under
Section 6.15 of this Agreement.
10.7 Governing Law; Jurisdiction. This Agreement shall be governed by and
---------------------------
construed in accordance with the laws of the State of California, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof. Each of the parties hereto hereby consents to the jurisdiction
and venue of any state or U.S. federal court in California with respect to
matters arising out of or related to this Agreement, agrees that process may be
served upon them in any manner authorized by the laws of the State of California
for such persons and waives and covenants not to assert or plead any objection
which they might otherwise have to such jurisdiction and such process.
10.8 Rules of Construction. The parties hereto agree that they have been
---------------------
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
10.9 Specific Performance. The parties hereto agree that irreparable
--------------------
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
-63-
<PAGE>
10.10 Share Legends. All certificates representing any of the CBT Ordinary
-------------
Shares or ADRs to be issued pursuant to this Agreement shall have endorsed
thereon a restrictive legend substantially as follows:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS. THEY MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF
COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED."
(b) Any legend required to be placed thereon by applicable blue sky
laws of any state or under the laws of Ireland.
10.11 California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH
-----------------------------------
ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES
OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO
SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE
QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON
SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
(Remainder of page intentionally left blank)
-64-
<PAGE>
IN WITNESS WHEREOF, CBT, KW Limited, KW Group, the Representative (as to
matters set forth in Section 8.5 only), the Shareholders, the Escrow Agent and
Martin Scully (as to matters set forth in Section 5.1 only) have caused this
Agreement to be signed by their duly authorized respective officers, all as of
the date first written above.
CBT GROUP PLC KNOWLEDGE WELL LIMITED
By /s/ John P. Hayes By
________________________________ ________________________________
Name: John P. Hayes Name:
Title: Director Title:
KNOWLEDGE WELL GROUP LIMITED ESCROW AGENT
By________________________________ By________________________________
Name: Name:
Title: Title:
SHAREHOLDER REPRESENTATIVE
By________________________________ By________________________________
Name: Name:
Title:
MARTIN SCULLY
__________________________________
Martin Scully
***SHARE PURCHASE AGREEMENT***
-65-
<PAGE>
EXHIBIT 10.21
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
This Settlement Agreement and Mutual Release ("Agreement") is made by and
between CBT GROUP PUBLIC LIMITED COMPANY (together with its subsidiaries, the
"Company"), and William A. BEAMISH ("Beamish").
WHEREAS, Beamish has provided services to the Company since 1985;
WHEREAS, the Company and Beamish have entered into a Confidential Information
and Invention Assignment Agreement ( the "Confidentiality Agreement");
WHEREAS, the Company and Beamish have mutually agreed to terminate their
relationship and to release each other from any claims arising from or related
to that relationship;
NOW THEREFORE, in consideration of the mutual promises made herein, the Company
and Beamish (collectively referred to as "the Parties") hereby agree as
follows:
1. RESIGNATION. Beamish will resign from his position as Vice President,
-----------
Product Strategy and Development on March 31, 1998 (the "Resignation Date").
2. CONSIDERATION. Beamish will continue to provide services to the Company
--------------
and be entitled to participate in benefit plans available to comparable
Company consultants in the Republic of Ireland through March 31, 1998.
Beamish will also continue to vest in Company options as provided in
paragraph 4 below.
3. CONSULTING PERIOD. Beamish agrees to remain available as a consultant
-----------------
through December 31, 1998 (the "Consulting Period"). During the Consulting
Period and upon reasonable notice, the Beamish shall make himself available
for consultation and/or participation in conferences, up to a maximum of 30
hours per month.
4. STOCK OPTIONS. Beamish shall be allowed to continue to vest in options to
-------------
purchase American Depository Shares (ADSs") representing the ordinary shares
of the Company subject to stock option agreements dated April 13, 1995,
January 16, 1996, April 12, 1996 and March 18, 1997 (the "Options") through
December 31, 1998. As of December 31, 1998, Beamish will have fully vested
in Thirteen Thousand Nine Hundred and Seven (13,907) ADSs of the Company
subject to the Options (which number shall be multiplied by two as of the
effective date of the stock split announced January 20, 1998). To the extent
Beamish's Options have not vested as of December 31, 1998, such Options
shall terminate, and all vested Options which have not been exercised at
that date shall also terminate as of December 31, 1998. During the
Consulting Period, Beamish shall have no right to additional option grants
by the Company.
5. CONFIDENTIAL INFORMATION. Beamish shall continue to maintain the
------------------------
confidentiality of all confidential and proprietary information of the
Company and shall continue to comply with the
<PAGE>
terms and conditions of the Confidentiality Agreement between Beamish and
the Company. Beamish shall return all the Company property and confidential
and proprietary information in his possession to the Company within five
business days from the termination of the Consulting Period.
6. RELEASE OF CLAIMS. Beamish agrees that the foregoing consideration
-----------------
represents settlement in full of all outstanding obligations owed to Beamish
by the Company. Beamish and the Company, on behalf of themselves, and their
respective heirs, family members, executors, officers, directors, employees,
investors, shareholders, administrators, affiliates, divisions,
subsidiaries, predecessor and successor corporations, and assigns, hereby
fully and forever release each other and their respective heirs, family
members, executors, officers, directors, employees, investors, shareholders,
administrators, affiliates, divisions, subsidiaries, predecessor and
successor corporations, and assigns, from, and agree not to sue concerning,
any claim, duty, obligation or cause of action relating to any matters of
any kind, whether presently known or unknown, suspected or unsuspected, that
any of them may possess arising from any omissions, acts or facts that have
occurred up until and including the Effective Date (as hereafter defined) of
this agreement including, without limitation,
(a) any and all claims relating to or arising from Beamish's relationship
with the Company and the termination of that relationship;
(b) any and all claims relating to, or arising from, Beamish's right to
purchase, or actual purchase of shares of stock of the Company,
including, without limitation, any claims for fraud, misrepresentation,
breach of fiduciary duty, breach of duty under applicable state
corporate law, and securities fraud under any state or federal law;
(c) any and all claims for wrongful discharge of employment; breach of
contract, both express and implied; breach of a covenant of good faith
and fair dealing, both express and implied; negligent or intentional
infliction of emotional distress; negligent or intentional
misrepresentation; negligent or intentional interference with contract
or prospective economic advantage; defamation; negligence; personal
injury; assault; battery; invasion of privacy; false imprisonment;
conversion;
(d) any and all claims for violation of any federal, state or municipal
statute, including, but not limited to, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991,the Age Discrimination in
Employment Act of 1967, the Americans with Disabilities Act of 1990, the
Fair Labor Standards Act, the California Fair Employment and Housing
Act, Labor Code Section 201, et seq.;
(e) any and all claims arising out of any other laws and regulations and
regulations relating to employment or employment discrimination; and
(f) any and all claims for attorneys' fees and/or costs.
2
<PAGE>
The Company and Beamish agree that the release set forth in this section shall
be and remain in effect in all respects as a complete general release as to the
matters released. This release does not extend to any obligations incurred
under this Agreement.
7. ACKNOWLEDGMENT OF WAIVER OF CLAIMS UNDER ADEA. Beamish acknowledges that he
---------------------------------------------
is waiving and releasing any rights he may have under the Age Discrimination
in Employment Act of 1967 ("ADEA") and that this waiver and release is
knowing and voluntary. Beamish and the Company agree that this waiver and
release does not apply to any rights or claims that may arise under ADEA
after the Effective Date of this Agreement. Beamish acknowledges that the
consideration given for this waiver and release Agreement is in addition to
anything of value to which Beamish was already entitled. Beamish further
acknowledges that he has been advised by this writing that (a) he should
consult with an attorney prior to executing this Agreement; (b) he has at
least twenty-one (21) days within which to consider this Agreement; (c) he
has at least seven (7) days following the execution of this Agreement by the
parties to revoke the Agreement; and (d) this Agreement shall not be
effective until the revocation period has expired.
8. CIVIL CODE SECTION 1542. The Parties represent that they are not aware of
-----------------------
any claim by either of them other than the claims that are released by this
Agreement. Beamish and the Company acknowledge that they have been advised
by legal counsel and are familiar with the provisions of California Civil
Code Section 1542, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW
OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH
IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
Beamish and the Company, being aware of said code section, agree to
expressly waive any rights they may have thereunder, as well as under any
other statute or common law principles of similar effect.
9. NON-COMPETITION. Beamish agrees that, during the Consulting Period and for
---------------
a period of two years after the termination of the Consulting Period, he
will not, directly or indirectly, own, manage, operate, join, control,
participate in or finance the ownership, management, operation or control
of, or be connected in any manner with the following companies that compete
with the Company: NETG, Gartner Group, WBT, Learning Tree, Harcourt,
Mastering Computers, Global Knowledge Network, Ziff Davis University, Data
Tech, Knowledge Universe and Knowledge Soft. Beamish may accept other non-
competitive employment while retaining consultancy with the Company as long
as he is able to meet the maximum 30 hour commitment, if required, as
specified above in Paragraph 2.
10. CONFIDENTIALITY. The Parties hereto each agree to use their best efforts
---------------
to maintain in confidence the existence of this Agreement, the contents and
terms of this Agreement, and the consideration for this Agreement
(hereinafter collectively referred to as "Settlement Information"). Each
Party hereto agrees to take every reasonable precaution to prevent
3
<PAGE>
disclosure of any Settlement Information to third parties, and each agrees
that there will be no publicity, directly or indirectly, concerning any
Settlement Information.
11. ARBITRATION. The Parties agree that any and all disputes arising out of
------------
the terms of this Agreement, their interpretation, and any of the matters
herein released, shall be subject to binding arbitration in Santa Clara
County before the American Arbitration Association under its California
Employment Dispute Resolution Rules, or by a judge to be mutually agreed
upon. The Parties agree that the prevailing party in any arbitration shall
be entitled to injunctive relief in any court of competent jurisdiction to
enforce the arbitration award. The Parties agree that the prevailing party
in any arbitration shall be awarded its reasonable attorney's fees and
costs.
12. NON-DISPARAGEMENT. Each party agrees to refrain from any disparagement,
-----------------
defamation, slander of the other, or tortious interference with the
contracts and relationships of the other. In addition, Beamish specifically
also agrees not to disparage or to publicly express disapproval of Company's
employees, products or services. The parties each acknowledge and agree that
it would be impossible and inadequate to measure actual damages if either
party breaches its obligations under this paragraph, and therefore the
parties agree that $250,000 shall be payable, as liquidated damages and not
as a penalty, by the breaching party to the non-breaching party. For
purposes of this paragraph, the "Company" shall be deemed to refer solely to
directors and officers of the Company. The parties agree that the damages
specified are a good faith estimate of the actual amount of damages which
would be sustained and that such damages are reasonable under the
circumstances.
13. COSTS. The Parties shall each bear their own costs, expert fees,
------
attorneys' fees and other fees incurred in connection with this Agreement.
14. NO REPRESENTATIONS. Each party represents that it has had the opportunity
------------------
to consult with an attorney, and has carefully read and understands the
scope and effect of the provisions of this Agreement. Neither party has
relied upon any representations or statements made by the other party hereto
which are not specifically set forth in this Agreement.
15. SEVERABILITY. In the event that any provision hereof becomes or is
-------------
declared by a court of competent jurisdiction to be illegal, unenforceable
or void, this Agreement shall continue in full force and effect without said
provision.
16. ENTIRE AGREEMENT. This Agreement, and the Confidentiality Agreement,
----------------
represent the entire agreement and understanding between the Company and
Beamish concerning Beamish's separation from the Company, and supersede and
replace any and all prior agreements and understandings concerning Beamish's
relationship with the Company and his compensation by the Company.
17. NO ORAL MODIFICATION. This Agreement may only be amended in writing signed
--------------------
by Beamish and the Chief Executive Officer of the Company.
18. GOVERNING LAW. This Agreement shall be governed by the laws of the
-------------
Republic of Ireland.
4
<PAGE>
19. EFFECTIVE DATE. This Agreement is effective seven days after it has been
--------------
signed by both Parties ("the Effective Date").
20. COUNTERPARTS. This Agreement may be executed in counterparts, and each
------------
counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
21. VOLUNTARY EXECUTION OF AGREEMENT. This Agreement is executed voluntarily
--------------------------------
and without any duress or undue influence on the part or behalf of the
Parties hereto, with the full intent of releasing all claims. The Parties
acknowledge that:
(a) They have read this Agreement;
(b) They have been represented in the preparation, negotiation, and
execution of this Agreement by legal counsel of their own choice or that
they have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this Agreement and of the
releases it contains;
(d) They are fully aware of the legal and binding effect of this Agreement.
IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective
dates set forth below.
CBT SYSTEMS USA, LTD.
Dated: February 11, 1998 By: /s/ James J. Buckley
-------------------------------------
(Signature)
Title: President and Chief Executive Officer
--------------------------------------
WILLIAM A. BEAMISH, an individual
Dated: February 11, 1998 /s/ William A. Beamish
-------------------------------------
(Signature)
5
<PAGE>
EXHIBIT 21.1
SIGNIFICANT SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
<S> <C>
CBT Systems USA, Ltd. Delaware
Personal Training Systems, Inc. California
Fidalco Limited Ireland
CBT Systems Limited Ireland
CBT Systems UK Limited England
CBT Systems Africa (Proprietary) Limited South Africa
CBT Finance Limited Grand Cayman
CBT (Technology) Limited Ireland
CBT Systems Canada Limited Canada
CBT Systems Deutscheland GmbH Germany
Applied Learning Ltd. Australia
CBT Systems Benelux, B.V. The Netherlands
Ben Watson Associates Ltd. Canada
CBT Systems Middle East Limited Bahamas
CBT Systems Scandinavia Limited Sweden
ForeFront Direct, Inc Florida
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Forms S-3 (Nos. 333-35855 and 333-42929), as filed with the Securities and
Exchange Commission on September 18, 1997 pertaining to the shares issued in
conjunction with the acquisition of Ben Watson Associates Limited and on
December 22, 1997 pertaining to the shares issued in conjunction with the
acquisition of CBT Systems Middle East Limited, on Form S-4 (No. 333-51159), as
filed with the Securities and Exchange Commission on April 28, 1998 pertaining
to the shares issued in conjunction with the acquisition of the Forefront Group,
Inc., on Forms S-8 (Nos. 333-06409, 333-25245, 333-35745, 333-57031 and 333-
68499), as filed with the Securities and Exchange Commission on June 20, 1996
pertaining to the 1994 Share Option Plan, on April 16, 1997 pertaining to the
1996 Supplemental Stock Plan and Applied Learning Limited Executive Stock Plan,
on September 16, 1997 pertaining to the 1994 Share Option Plan, on June 17, 1998
pertaining to the Forefront Group, Inc. Amended and Restated 1992 Stock Option
Plan, the Forefront Group, Inc. Amended and Restated 1996 Stock Option Plan and
the Forefront Group, Inc. 1996 Non-Employee Directors' Stock Option Plan, and on
December 7, 1998 pertaining to the Amended and Restated 1994 Share Option Plan
of our reports dated January 19, 1999, with respect to the consolidated
financial statements and schedule included in this annual report on Form 10-K
for the year ended December 31, 1998.
/s/ Ernst & Young
Dublin, Ireland
March 30, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the 1998 Form 10-K of CBT Group PLC of our report dated January 30,
1998, on the consolidated financial statements of The ForeFront Group, Inc., and
subsidiaries as of December 31, 1997, and for each of the two years in the
period ended December 31, 1997, included in the Form S-4 Registration Statement
of CBT Group PLC (File No. 333-51159). It should be noted that we have not
audited any financial statements of The ForeFront Group, Inc. and subsidiaries
subsequent to December 31, 1997, or performed any audit procedures subsequent to
the date of our report.
/s/ Arthur Andersen LLP
Houston, Texas
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 65,648
<SECURITIES> 36,386
<RECEIVABLES> 44,651
<ALLOWANCES> (1,143)
<INVENTORY> 247
<CURRENT-ASSETS> 151,819
<PP&E> 29,212
<DEPRECIATION> (11,576)
<TOTAL-ASSETS> 190,244
<CURRENT-LIABILITIES> 34,978
<BONDS> 0
0
0
<COMMON> 134,594
<OTHER-SE> 20,207
<TOTAL-LIABILITY-AND-EQUITY> 190,244
<SALES> 162,232
<TOTAL-REVENUES> 162,232
<CGS> 25,137
<TOTAL-COSTS> 122,109
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,218)
<INCOME-PRETAX> 19,204
<INCOME-TAX> 2,666
<INCOME-CONTINUING> 16,538
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,538
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.36
</TABLE>
