<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20548
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from ________ to ________
Commission File Number: 0-25674
CBT GROUP PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
Republic of Ireland Not Applicable
------------------- --------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
900 CHESAPEAKE DRIVE
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices, including zip code)
(650) 817-5900
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past ninety (90) days.
Yes [X] No [ ]
The number of American Depositary Shares ("ADSs") (issued or issuable in
exchange for Registrant's outstanding Ordinary Shares) outstanding as of August
5, 1999 was 48,734,383.
<PAGE>
CBT GROUP PUBLIC LIMITED COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1998
and as of June 30, 1999 3
Condensed Consolidated Statements of Operations for the three and
six months ended June 30, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Matters Submitted to a Vote of the
Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 27
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CBT GROUP PLC
Condensed Consolidated Balance Sheets
( dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
<S> <C> <C>
ASSETS
Current assets
Cash $ 65,648 $ 57,953
Short term investments 36,386 38,877
Accounts receivable, net 43,508 48,667
Inventories 247 183
Deferred tax assets, net 253 159
Prepaid expenses 5,777 8,285
-------- --------
Total current assets 151,819 154,124
Intangible assets 4,237 52,488
Property and equipment, net 17,636 19,184
Investment 550 700
Other assets 16,002 18,474
-------- --------
Total assets 190,244 244,970
======== ========
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities
Accounts Payable 5,161 5,617
Accrued payroll and related expenses 6,790 4,481
Other accrued liabilities 20,023 22,642
Deferred revenues 3,004 2,722
-------- --------
Total current liabilities 34,978 35,462
Non Current Liabilities
Other accrued liabilities 82 122
Minority equity interest 383 383
-------- --------
Total non current liabilities 465 505
Shareholders' Equity
Ordinary Shares, IR9.375p par value: 120,000,000 shares authorized at 6,725 7,234
December 31, 1998 and June 30, 1999; issued and outstanding: 44,412,808
and 44,387,039 shares at December 31, 1998 and 48,708,614 and 48,734,383
at June 30, 1999
Additional paid-in-capital 127,869 181,499
Accumulated profit 19,293 20,255
Capital redemption 231 231
Treasury Stock, 25,769 shares at cost (2) (2)
Other comprehensive income 685 (214)
-------- --------
Total shareholders' equity 154,801 209,003
-------- --------
Total liabilities and shareholders' equity 190,244 244,970
======== ========
</TABLE>
See notes to condensed consolidated financial statements
Note: The balance sheet does not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements.
3
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CBT GROUP PLC
Condensed Consolidated Statements of Operations
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
-------------------------------- --------------------------------
Ended June 30, Ended June 30,
-------------------------------- --------------------------------
1998 1999 1998 1999
-------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $44,852 $ 47,247 $84,781 $87,444
Cost of revenues 6,697 7,528 12,641 13,858
------- -------- ------- -------
Gross profit 38,155 39,719 72,140 73,586
Operating expenses:
Research and development 6,604 7,554 12,994 14,941
Sales and marketing 18,622 21,642 35,490 42,615
General and administrative 3,594 4,461 6,808 8,939
Amortization of acquired intangibles -- 157 -- 157
Acquired research and development -- 5,900 -- 5,900
Cost of acquisitions 5,505 -- 5,505 --
------- -------- ------- -------
Total operating expenses 34,325 39,714 60,797 72,552
------- -------- ------- -------
Income from operations 3,830 5 11,343 1,034
Other income, net 936 633 1,903 1,166
------- -------- ------- -------
Income before provision for income taxes 4,766 638 13,246 2,200
Provision for income taxes 667 1,004 1,805 1,238
------- -------- ------- -------
Net income (loss) $ 4,099 $ (366) $11,441 $ 962
======= ======== ======= =======
Net income (loss) per share (1) - Basic $0.09 ($ 0.01) $0.27 $0.02
======= ======== ======= =======
Shares used in computing net income (loss) 43,283 45,219 42,939 44,850
per share - Basic ======= ======== ======= =======
Net income (loss) per share (1) - Diluted $0.09 ($ 0.01) $0.25 $0.02
======= ======== ======= =======
Shares used in computing net income (loss) 46,357 45,219 46,080 47,957
per share - Diluted ======= ======== ======= =======
</TABLE>
See notes to condensed consolidated financial statements
(1) Net income (loss) per share gives effect to the two-for-one share split
effected in March 1998
4
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CBT GROUP PLC
Condensed Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1998 1999
-------------------- -----------------
Cash Flows from Operating Activities
<S> <C> <C>
Net income $ 11,441 $ 962
Adjustments to reconcile net income to net cash used
by operating activities:
Depreciation and amortization 2,958 4,100
Loss on disposal of assets 70 --
Accrued interest on short-term investments 236 (10)
Non cash acquired R&D expense -- 5,900
Compensation expense 112 --
Changes in operating assets and liabilities:
Accounts receivable (4,114) (5,378)
Inventories (410) 69
Deferred tax assets 293 100
Prepaid expenses and other assets (7,885) (5,008)
Accounts payable 1,541 (600)
Accrued payroll and related expenses and other accrued liabilities (1,784) (4,886)
Deferred revenues (3,455) (304)
-------- --------
Net cash used by operating activities (997) (5,055)
-------- --------
Cash Flows from Investing Activities
Purchases of property and equipment (6,499) (4,479)
Cash acquired on purchase of Knowledge Well -- 768
Payments to acquire short term investments (50,330) (44,323)
Proceeds from sale and maturities of short-term investments 50,041 41,842
Proceeds from disposal of property and equipment 20 --
Payments to acquire investments (150) (150)
-------- --------
Net cash used in investing activities (6,918) (6,342)
-------- --------
Cash Flows from Financing Activities
Proceeds from issuance of ordinary shares, net 18,076 4,249
-------- --------
Net cash provided by financing activities 18,076 4,249
-------- --------
Effect of exchange rate changes on cash and cash equivalents (90) (547)
-------- --------
Net increase / (decrease) in cash and cash equivalents 10,071 (7,695)
Cash and cash equivalents at beginning of period 35,506 65,648
-------- --------
Cash and cash equivalents at end of period $ 45,577 $ 57,953
======== ========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
CBT GROUP PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 INTERIM CONSOLIDATED FINANCIAL STATEMENTS
These interim unaudited condensed and consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements.
However, CBT Group PLC (the "Company", "CBT Group", "CBT") believes that the
disclosures are adequate to ensure that the information presented is not
misleading. The accompanying interim financial statements should be read in
conjunction with the financial statements and related notes included in the
Company's Annual Report to Shareholders, as amended on Form 10-K/A, for the
fiscal year ended December 31, 1998.
In the opinion of management, all adjustments (consisting of normal recurring
accruals), considered necessary for a fair presentation of financial position,
results of operations and cash flows at the dates and for the periods presented
have been included. The results of operations for the periods presented are not
necessarily indicative of the results expected for the full financial year or
for any future period.
NOTE 2 ACQUISITION OF KNOWLEDGE WELL
On June 18, 1999 the Company closed its acquisition of Knowledge Well Group
Limited and Knowledge Well Limited, two private companies formed under the laws
of the Ireland (collectively "Knowledge Well"), pursuant to the terms of a Share
Purchase Agreement, dated as of November 30, 1998 as amended and restated as of
March 30, 1999 (the "Share Purchase Agreement"), among CBT, Knowledge Well and
the shareholders of Knowledge Well (the "Share Exchange"). Knowledge Well
provides business, management and professional education using interactive
learning technologies. The acquisition of Knowledge Well is being accounted for
under the purchase method of accounting in accordance with U.S generally
accepted accounting principles ("GAAP"). The consolidated financial statements
include the operating results of Knowledge Well from June 18, 1999.
The acquisition has been structured as a stock-for-stock exchange, in which a
total of approximately 4.4 million CBT Group shares will be issued in exchange
for all outstanding shares of Knowledge Well. CBT Group has also assumed options
to acquire Knowledge Well stock exercisable for an issuance of up to
approximately 0.4 million CBT Group shares. At the date of closure of the
acquisition the Company had not acquired 18% of the outstanding shares of
Knowledge Well. The beneficial owners of the 18% shareholding of Knowledge Well
have contracted to sell the 18% shareholding to Mr. William G. McCabe, Chairman
of the Board. These shares, once acquired by Mr. McCabe, will be exchanged for
CBT Group shares in accordance with the Share Purchase Agreement.
Under generally accepted accounting principles, which require stock appreciation
in connection with the announcement of the Knowledge Well transaction to be
considered in calculating the purchase price, the purchase price of Knowledge
Well, on acquisition of 100% of the outstanding shares, will be approximately
$62.7 million. The Company recorded $5.9 million of acquired in-process research
and development expense in the three months ended June 30, 1999. The $5.9
million of acquired in-process research and development expense represents
management's estimate of the current fair value of those specifically identified
Knowledge Well research and development projects for which technological
6
<PAGE>
feasibility has not been established and for which alternative future uses do
not exist. Goodwill, the excess of the consideration paid over the estimated
fair value of the net assets and the identifiable intangible assets acquired,
was approximately $13.5 million. On acquisition of the 18% shareholding
outstanding, goodwill will increase to approximately $23.8 million. Goodwill
will be amortized on a straight line basis over ten years. The Company has also
acquired other identifiable intangible assets of approximately $35.5 million.
Other identifiable intangible assets will be amortized on a straight line basis
over periods not exceeding ten years.
The following unaudited pro forma information combines the consolidated results
of operations of the Company with those of Knowledge Well as if the acquisition
had occurred at the beginning of each period presented. The pro forma results
give effect to certain purchase accounting adjustments, including additional
amortization expense from goodwill and other identifiable intangible assets,
related income tax effects and the issuance of additional shares in connection
with the acquisition.
Pro Forma Results of Operations
(unaudited, in millions except per share amounts)
<TABLE>
<CAPTION>
Six Months Six Months
-------------------- --------------------
Ended June 30, Ended June 30,
-------------------- --------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Revenues $87,616 $84,781
Net Income (loss) ($187) $ 6,480
Net Income (loss) per share $ 0.00 $ 0.13
</TABLE>
NOTE 3 COMPUTATION OF NET INCOME PER SHARE
On March 9, 1998 the Company effected a two-for-one split of its issued and
outstanding ADSs. Subsequent thereto, the Company's shareholders approved a
proposal at the Company's 1998 Annual General Meeting to subdivide each of the
Ordinary Shares of IR37.5p into four Ordinary Shares of IR9.375p (the "Ordinary
Share Split"). As a consequence of the Ordinary Share Split, effective May 22,
1998 each ADS represents and is exchangeable for one Ordinary Share (the "Ratio
Change"). Aside from the Ratio Change, the Ordinary Share Split had no effect on
the ADSs and had no effect on the number of ADSs outstanding.
Basic net income per share is calculated using the weighted average number of
ordinary shares of the Company outstanding during the period including the
issuance of Company ordinary shares as a result of pooling of interests, at the
beginning of the earliest period presented or subsequent date of incorporation
of the pooled entity as applicable. Diluted net income per share is similarly
calculated using the combined weighted average number of ordinary and dilutive
potential ordinary shares, (as determined using the treasury stock method), such
as shares issuable pursuant to the exercise of options outstanding of the
Company including the issuance of Company ordinary and dilutive potential
ordinary shares as a result of pooling of interests. Potential ordinary shares
are not included in the results for the three months ended June 30, 1999, as the
effect of their inclusion would be anti-dilutive.
7
<PAGE>
The following table sets forth the computation of basic and diluted net income
per share:
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
---------------------------- ------------------------------
Ended June 30, Ended June 30,
---------------------------- ------------------------------
1998 1999 1998 1999
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Numerator:
- ----------
Numerator for basic and diluted net income $ 4,099 ($366) $11,441 $ 962
(loss) per share - net income (loss) ======= ====== ======= =======
Denominator:
- ------------
Denominator for basic net income (loss) per 43,283 45,219 42,939 44,850
share - weighted average shares
Effect of dilutive securities:
Employee stock options 3,074 -- 3,141 3,107
------- ------ ------- -------
Denominator for diluted net income per share
- adjusted weighted average shares and 46,357 45,219 46,080 47,957
assumed conversion ======= ====== ======= =======
Basic net income (loss) per share $ 0.09 ($0.01) $ 0.27 $ 0.02
======= ====== ======= =======
Diluted net income (loss) per share $ 0.09 ($0.01) $ 0.25 $ 0.02
======= ====== ======= =======
</TABLE>
NOTE 4. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting Standards Board
Statement No.130 ("SFAS 130"), "Reporting Comprehensive Income", which
established new rules for the reporting and display of comprehensive income and
its components. SFAS 130 requires foreign currency translation adjustments,
which prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income.
The following table sets forth the calculation of comprehensive income on an
interim basis:
<TABLE>
<CAPTION>
Six months ended
June 30,
(dollars in thousands) 1998 1999
------------------- -------------------
<S> <C> <C>
Net Income $11,441 $ 962
Other comprehensive income (122) (899)
------- -----
Total Comprehensive Income $11,319 $ 63
======= =====
</TABLE>
8
<PAGE>
NOTE 5. COMMITMENTS AND CONTINGENCIES
Refer to Legal Proceedings in Part II, Item 1 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part I, Item 2
herein.
PART I. FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Important Note About Forward Looking Statements
In addition to historical statements, this Quarterly Report on Form 10-Q
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Words such as "anticipates", "expects", "intends",
"plans", "believes", "seeks", "estimates" and similar expressions identify such
forward looking statements. These forward looking statements are not guarantees
of future performance and are subject to certain risks and uncertainties that
could cause actual results to differ materially from those expressed or
forecasted. Actual results may vary because of factors such as product ship
schedules, life cycles, terms and conditions, product mix, competitive products
and pricing, customer demand, technological shifts, litigation and other issues
discussed elsewhere in this Quarterly Report and in the Company's most recent
annual report, as amended on Form 10-K/A, for the fiscal year ended December 31,
1998. These forward-looking statements reflect management's opinions only as of
the date hereof, and the Company assumes no obligation unless required by law to
revise or publicly release the results of any revision to these forward-looking
statements. Risks and uncertainties include, but are not limited to, those
discussed in the section entitled "Additional Risk Factors That Could Affect
Operating Results." Other risks and uncertainties are disclosed in the Company's
SEC filings, including the Company's Annual Report, as amended on Form 10-K/A,
for the fiscal year ended December 31, 1998. Historical results are not
necessarily indicative of trends in operating results for any future period.
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 950
software titles covering a range of client/server, mainframe, Internet and
intranet technologies. CBT Group's products are used by over 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"), 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. ("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.
9
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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 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.
The Company recently entered into an agreement with a major customer to provide
an outsourced virtual university for technical education to the customer. Under
the contract, the customer has licensed educational software from the Company,
as well as contracting for professional services, management fees, on-line
mentoring services and certain other items. In addition, the agreement provides
for the Company to resell third parties' instructor led training to the
customer. The Company believes that this agreement is a positive development for
the Company and has a strategy of seeking to develop similar types of agreements
with other customers.
The accounting and operating model consequences of this agreement are materially
different from the accounting and operating model consequences of the multi-year
software licensing structure that has been the basis of a majority of the
Company's historical revenues. In particular, revenues from the non-software
licenses portion of this agreement, which represent a substantial majority of
the firmly contracted amount with the customer and all of the potential
incremental revenues over the firmly contracted amount, will generally be
recognized ratably as services are performed, which will have the effect of
deferring revenue. Moreover, the gross margins associated with the non-software
license components (and in particular the resale of third-party instructor-led
training) are expected to be substantially lower that the gross margins
typically associated with the Company's software license agreements.
10
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The Company may not be successful in its efforts to develop similar types of
agreements with other companies, and the economic terms of any arrangements that
might be expected may not be as favorable. The Company believes that a lack of
success in this regard could have a material negative effect on the Company.
Moreover, to the extent that the Company is successful in its efforts to enter
into similar types of agreements with other customers, those arrangements are
expected to have accounting and operating model consequences that would also be
materially different from the consequences of the Company's traditional software
licensing model.
Recent Developments
Acquisition of Knowledge Well
- -----------------------------
On June 18, 1999, CBT Group closed its acquisition of Knowledge Well Ltd. and
Knowledge Well Group Ltd. (collectively, "Knowledge Well"), providers of
business, management and professional education using interactive learning
technologies. Knowledge Well's software titles are delivered using advanced
interactive learning methodologies, while requiring that the student only have
access to basic, industry-standard computing platforms. Knowledge Well's
strategy is to provide a self-paced education and training solution, allowing
individuals to obtain degrees and/or other credentials.
The successful combination of 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.
The acquisition of Knowledge Well will result in an increase of the Company's
research and development, general and administrative and other expenses as a
result of combining the operations of the Company and Knowledge Well. The
amortization of the acquired intangible assets will negatively impact the
results of operations in future quarters. The acquisition may also increase the
Company's revenue to the extent Knowledge Well's products generate incremental
revenue. (1) There can be no assurance that unanticipated contingencies that
would substantially increase the costs of combining the operations of the
Company and Knowledge Well will not occur.
_______________________________________________________________________________
Footnote:
- ---------
(1) This paragraph consists of forward-looking statements reflecting current
expectations. In addition, the Company's actual future performance may not
meet the Company's current expectations. Investors are strongly encouraged
to review the section entitled "Additional Risk Factors That Could Affect
Operating Results" commencing on page 18 and discussions elsewhere in this
Quarterly Report on Form 10-Q of the factors that could affect future
performance.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain restated consolidated statements of
operations data as a percentage of revenues:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1999 1998 1999
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Cost of revenues 14.9 15.9 14.9 15.9
---- ---- ---- ----
Gross profit 85.1 84.1 85.1 84.1
Operating expenses:
Research and development 14.7 16.1 15.3 17.0
Sales and marketing 41.5 45.8 41.9 48.7
General and administrative 8.0 9.5 8.0 10.2
Amortization of acquired intangibles -- 0.4 -- 0.2
Acquired research and development -- 12.5 -- 6.9
Costs of acquisitions 12.3 - - 6.5 -
---- ---- ---- ----
Total operating expenses 76.5 84.3 71.7 83.0
---- ---- ---- ----
Income from operations 8.6 (0.2) 13.4 1.1
Other income, net 2.1 1.3 2.2 1.4
---- ---- ---- ----
Income before provision for income taxes 10.7 1.1 15.6 2.5
Provision for income taxes 1.5 2.1 2.1 1.4
---- ---- ---- ----
Net income 9.2 (1.0) 13.5 1.1
==== ==== ==== ====
</TABLE>
Revenues
- --------
Revenues increased to $47.2 million in the three months ended June 30, 1999 from
$44.9 million in the three months ended June 30, 1998, and increased to $87.4
million in the six months ended June 30, 1999 from $84.8 million in the six
months ended June 30, 1998. Since the third quarter of 1998 the Company has
experienced a slowdown in the historical quarterly revenue growth rate due in
part to a decline in contract renewals and upgrades and some contracts
generating less revenue than they had historically. The Company's revenue
performance has improved over the last three quarters. In the first quarter of
1999, revenues increased on a year-over-year basis for the first time since the
second quarter of 1998. In the second quarter of 1999, year-over-year revenues
also increased.
However, there can be no assurance that the issues that adversely affected
revenues since the third quarter of 1998 will not continue to negatively affect
the Company's revenues in the future. In particular, revenues in the third
quarter of 1999 (and to a lesser extent, the third quarter of 2000) will be
negatively affected by a reduction in the backlog of business available to be
recognized as revenues during the quarter from contracts signed during the third
quarter of 1998. Under a typical multi-year software license agreement, the
Company recognizes the second, third and subsequent years' (if any) license
revenue under the agreement on each subsequent annual anniversary of the
agreement. The Company's revenues were significantly sequentially down from the
second quarter of 1998 to the third quarter of 1998, reflecting a substantial
reduction in new contracts in the third quarter of 1998. This reduction in new
contracts in the third quarter of 1998 will therefore have an adverse impact on
the third quarter of 1999 (and to a lesser extent, the third quarter of 2000).
12
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Revenues in the United States for the three and six months ended June 30, 1999
increased to $34.1 million (or 72% of revenues) and $62.8 million (or 72% of
revenues), respectively, from $32.9 million (or 73% of revenues) and $61.1
million (or 72% of revenues) for the three and six month periods ended June 30,
1998, respectively.
Revenues in the United Kingdom for the three and six months ended June 30, 1999
increased to $6.9 million (or 15% of revenues) and $11.5 million (or 13% of
revenues), respectively, from $4.7 million (or 10% of revenues) and $8.0 million
(or 9% of revenues) for the three and six months ended June 30, 1998,
respectively. Revenues in Ireland for the three and six months ended June 30,
1999 were $0.5 million (or 1% of revenues) and $1.1 million (or 1% of revenues)
compared to $1.2 million (or 3% of revenues) and $2.2 million (or 3% of
revenues) for the six months ended June 30, 1998.
In addition, revenues from outside the United States, United Kingdom and Ireland
(principally from Australia, Europe (other than the United Kingdom and Ireland),
Canada, South Africa and the Middle East) in the three and six months ended June
30, 1999 were $5.7 million (or 12% of revenues) and $12.0 million (or 14% of
revenues), compared to $6.1 million (or 14% of revenues) and $13.6 million (or
16% of revenues) for the three and six months ended June 30, 1998.
Because a significant portion of the Company's business is conducted outside the
United States, the Company is subject to numerous risks of doing business in
other countries, including risks related to currency fluctuations.
Cost of Revenues
- ----------------
Cost of revenues includes the cost of materials (such as compact disks,
diskettes, packaging and documentation), royalties to third parties, the portion
of development costs associated with funded development projects and fulfillment
costs.
Gross margins decreased to 84.1% in the three and six months ended June 30,
1999, from 85.1% in the three and six months ended June 30, 1998. The Company
expects that cost of revenues may fluctuate from period to period in the future
based upon many factors, including the mix of titles licensed (between titles
developed exclusively by CBT and royalty-bearing titles developed pursuant to
development and marketing alliances), the timing of expenses associated with
development and marketing alliances and the number and size of contracts
providing for business other than traditional software licenses.
Operating Expenses
- ------------------
Throughout the first three quarters of 1998, the Company grew its cost base to
support the expected growth in operations. However, in the third quarter of 1998
the Company's revenue performance was substantially lower than the expectations
on which the Company had built its cost base. Management decided in October 1998
not to drastically reduce the cost base but to hold it relatively constant.
Management believed that the risks of overly-aggressive reductions in the cost
base out-weighed the risks of maintaining the cost base in support of future
operations. The decision not to reduce the cost base has, as management
expected, had the effect of significantly increasing operating expenses as a
percentage of revenues over levels experienced in the first and second quarters
of 1998. The Company expects this dynamic to continue at least for the next
quarter. (2)
________________________________________________________________________________
Footnote
(2) This paragraph consists of 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 18 and
discussions elsewhere in this Quarterly Report on Form 10-Q of the factors
that could affect future performance.
13
<PAGE>
Research and Development Expenses
- ---------------------------------
Research and development expenses consist primarily of salaries and benefits,
related overhead costs, travel expenses and fees paid to outside consultants.
Research and development expenses increased in absolute terms and as a
percentage of revenues in the three and six months ended June 30, 1999 to $7.6
million (or 16.1% of revenues) and $14.9 million (or 17.0% of revenues),
respectively, from $6.6 million (or 14.7% of revenues) and $13.0 million (or
15.3% of revenues) in the three and six months ended June 30, 1998. These
increases in absolute terms are primarily the result of the hiring of additional
research and development personnel and the expansion of the Company's Dublin
development center, which is required to expand and enhance the Company's
library of software products. The Company delivered 76 new interactive education
software titles in the second quarter of 1999 bringing the total for the six
months ended June 30, 1999 to 150 titles. The company's library currently
comprises 987 titles, representing an eighteen percent increase over the number
of titles at the end of 1998. As discussed under "Operating Expenses" above, the
decision by management not to significantly reduce the Company's cost base, from
the levels established at the end of the third quarter of 1998, has been a
primary contributor to the growth in research and development expenses as a
percentage of revenues in the three and six months ended June 30, 1999 compared
to the three and six months ended June 30, 1998. This decision is expected to
continue to affect research and development expenses as a percentage of revenues
for at least the next quarter. The Company believes that significant investment
in research and development is required to remain competitive in the information
technology education and training market, and the Company therefore expects
research and development expenses to continue to increase in absolute terms in
future periods. (2)
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, under which the Company is
required to capitalize software development costs after technological
feasibility has been established. To date, development costs after
establishment of technological feasibility have been immaterial, and all
software development costs have been expensed.
Sales and Marketing Expenses
- ----------------------------
Sales and marketing expenses consist primarily of salaries and commissions,
advertising and promotional expenses and related overhead costs. These expenses
increased in absolute terms and as a percentage of revenues in the three and six
months ended June 30, 1999 to $21.6 million (or 45.8% of revenues) and $42.6
million (or 48.7% of revenues), respectively, from $18.6 million (or 41.5% of
revenues) and $35.5 million (or 41.9% of revenues) for the three and six months
ended June 30, 1998. The increases in absolute terms were primarily attributable
to an increase in the number of sales and sales related personnel in the United
States and, to a lesser extent, outside the United States. Commission costs have
also increased in absolute terms along with the increase in revenues during this
period. As discussed under "Operating Expenses" above, the decision by
management not to significantly reduce the Company's cost base, from the levels
established at the end of the third quarter of 1998, has been a primary
contributor to the growth in sales and marketing expenses as a percentage of
revenues in the three and six months ended June 30, 1999 compared to the three
and six months ended June 30, 1998. This decision is expected to continue to
affect sales and marketing as a percentage of revenues for at least the next
quarter. The Company expects to continue to increase sales and marketing
expenses in the future to support an increase in its sales force and expansion
of its marketing efforts. (2)
________________________________________________________________________________
Footnote
(2) This paragraph consists of 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 18 and
discussions elsewhere in this Quarterly Report on Form 10-Q of the factors
that could affect future performance.
14
<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 and as a percentage of
revenues in the three and six months ended June 30, 1999 to $4.5 million (or
9.5% of revenues) and $8.9 million (or 10.2% of revenues), compared to $3.6
million (or 8.0% of revenues) and $6.8 million (or 8.0% of revenues) for the
three and six months ended June 30, 1998. As discussed under "Operating
Expenses" above, the decision by management not to significantly reduce the
Company's cost base, from the levels established at the end of the third quarter
of 1998, has been a primary contributor to the growth in general and
administrative expenses as a percentage of revenues in the three and six months
ended June 30, 1999 compared to the three and six months ended June 30, 1998.
This decision is expected to continue to affect general and administrative
expenses as a percentage of revenues for at least the next quarter. The Company
anticipates that general and administrative expenses will increase in future
periods due to increases in staffing and infrastructure. (2)
Amortization of Acquired Intangibles
- ------------------------------------
As a result of the acquisition of Knowledge Well, the Company recorded
identifiable intangible assets of $35.5 million and goodwill of $13.5 million.
Goodwill will increase to $23.8 million on acquisition of the remaining 18% of
Knowledge Well shares outstanding. Goodwill and the identifiable intangible
assets will be amortized on a straight line basis over periods not exceeding 10
years. The Company recorded an amortization charge for goodwill and identifiable
intangibles from June 18, 1999, date of the closure of the acquisition, to June
30, 1999 of approximately $157,000.
Acquired Research and Development
- ---------------------------------
The Company expensed $5.9 million of acquired in-process research and
development in the three months ended June 30, 1999. The $5.9 million of
acquired in-process research and development expense represents management's
estimate of the current fair value of those specifically identified Knowledge
Well research and development projects for which technological feasibility has
not been established and for which alternative future uses do not exist.
Cost of Acquisitions
- --------------------
There were no costs of acquisitions expensed in the three or six months ended
June 30, 1999. The non-recurring costs estimated in respect of the acquisition
of Knowledge Well, approximately $2.5 million, have been capitalized under the
purchase method of accounting in accordance with U.S. GAAP. The acquisition
costs recorded during the three and six months ended June 30, 1998 were non
recurring costs related to the acquisition of The ForeFront Group, Inc. on May
29, 1998, which was accounted for under the pooling method of accounting in
accordance with U.S. GAAP.
________________________________________________________________________________
Footnote
(2) This paragraph consists of 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 18 and
discussions elsewhere in this Quarterly Report on Form 10-Q of the factors
that could affect future performance.
15
<PAGE>
Other Income, Net
- -----------------
Other income, net, comprises interest income, interest expense and foreign
currency exchange gains and losses. The Company recognized other income, net, of
$633,000 and $1.2 million in the three and six months ended June 30, 1999,
respectively, as compared to other income, net, of $936,000 and $1.9 million in
the three and six months ended June 30, 1998. Other income was primarily
attributable to interest on short-term investments. Included in other income,
net was net exchange losses of $247,000 and $711,000 for the three and six
months ended June 30, 1999, and net exchange losses of $110,000 and $90,000 for
the three and six months ended June 30, 1998. The net exchange loss incurred
during the three and six months ended June 30, 1999 was primarily attributable
to the weakening of the Euro and related currencies, in particular the Irish
pound, against the U.S. Dollar.
The Company's consolidated financial statements are prepared in dollars,
although several of the Company's subsidiaries have functional currencies other
than the dollar, and a significant portion of the Company's and its
subsidiaries' revenues, costs and assets are denominated in currencies other
than their respective functional currencies. The Company has significant
subsidiaries in the United Kingdom, Australia, the Netherlands, Canada and
Germany whose functional currencies are their local currencies and the majority
of whose sales and operating expenses other than cost of goods sold are
denominated in their respective local currencies. In addition, the Company's
Irish subsidiaries, whose functional currency is the U.S. dollar, incur
substantial operating expenses denominated in Irish pounds. Fluctuations in
exchange rates may have a material adverse effect on the Company's results of
operations, particularly its operating margins, and could result in exchange
losses as has occurred in the three and six months ended June 30, 1999. The
impact of future exchange rate fluctuations on the Company's results of
operations cannot be accurately predicted.
The Company's subsidiaries in Canada, Australia and the United Kingdom whose
functional currencies are their local currencies, had unhedged liabilities
denominated in U.S. dollars payable to CBT Systems Ltd. ("CBT Ireland") at June
30, 1999 of $4.1 million, $4.0 million and $3.9 million respectively.
During the six months ended June 30, 1999, the Company undertook hedging
transactions against the Irish pound because the Company has substantial
expenses denominated in that currency. The hedging transactions consisted of
$20 million in foreign currency forward exchange contracts maturing in monthly
installments from April 1999 to July 1999. To date, the Company has not sought
to hedge the risks associated with fluctuations in the exchange rates of other
currencies against the U.S Dollar, but may undertake such transactions in the
future. There can be no assurance that any hedging techniques implemented by
the Company would be successful in eliminating or reducing the effects of
currency fluctuations.
Other income, net may fluctuate in future periods as a result of movements in
cash, cash equivalents and short-term investment balances, interest rates,
foreign currency exchange rates and asset disposals.
Provision for Income Taxes
- --------------------------
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.
16
<PAGE>
The Company has significant operations and generates a majority of its taxable
income in the Republic of Ireland, and certain of the Company's Irish operating
subsidiaries are taxed at rates substantially lower than tax rates in effect in
the United States and other countries in which the Company has operations. One
Irish subsidiary currently qualifies for a 10% tax rate and another Irish
subsidiary is income tax exempt. If such subsidiaries were no longer to qualify
for such tax rates or if the tax laws were rescinded or changed, the Company's
operating results could be materially adversely affected. Moreover, because the
Company incurs income tax in several countries, an increase in the profitability
of the Company in one or more of these countries could result in a higher
overall tax rate. In addition, if tax authorities were to challenge
successfully the manner in which profits are recognized among the Company's
subsidiaries, the Company's taxes could increase and its cash flow and net
income could be materially adversely affected.
The effective tax rate for the three and six months ended June 30, 1999 was 15%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments at June 30, 1999 were $96.8 million as compared
to $102.0 million as at December 31, 1998. Working capital increased to $118.7
million at June 30, 1999 from $116.8 million at December 31, 1998.
Net cash used by operating activities was $5.1 million in the six months ended
June 30, 1999 as compared to $1.0 million for the six months ended June 30,
1998. Cash used by operations was primarily due to an increase in accounts
receivable, prepaid expenses and other assets, and decreases in accrued payroll
and related expenses and other accrued liabilities, as well as reduced net
income, for the six months ended June 30, 1999.
Capital expenditures were $4.5 million in the six months ended June 30, 1999
compared to $6.5 million for the six months ended June 30, 1998. The Company
expects to make significant investments to its information systems and other
capital expenditure projects during the remainder of 1999. (2)
Proceeds from the issuance of ordinary shares in the six months ended June 30,
1999 was $4.2 million compared to $18.1 million for the six months ended June
30, 1998. This decrease in proceeds from the issue of ordinary shares is
primarily attributable to reduced employee stock option exercises following the
substantial decline in the Company's stock price during September 1998.
The Company believes that its existing cash and short-term investments will be
sufficient to meet its cash requirements for at least the next twelve months.
(3) The Company may from time to time consider the acquisition of complementary
businesses, products or technologies, which may require additional financing, or
pursue other strategic capital raising.
________________________________________________________________________________
Footnote:
- ---------
(2) This statement is a forward-looking statement reflecting current
expectations. The Company's actual future performance may not meet the
Company's current expectations or its current plans may change. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results" commencing on page 18 and discussions
elsewhere in this Quarterly Report on Form 10-Q of the factors that could
affect future performance.
(3) This is a forward-looking statement, and actual results may differ
materially depending on a variety of factors, including variable operating
results or presently unexpected uses of cash such as mergers and
acquisitions.
17
<PAGE>
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS
In addition to the other factors identified in this Quarterly Report on Form 10-
Q, the following risk factors could materially and adversely affect the
Company's future operating results, and could cause actual events to differ
materially from those predicted in the Company's forward looking statements
relating to its business.
Fluctuations in Operating Results.
- ----------------------------------
The Company has in the past experienced fluctuations in its quarterly operating
results and anticipates that such fluctuations will continue and could intensify
in the future. Fluctuations in operating results may result in volatility in the
price of the Company's ADSs. For example, the Company's revenue for the quarter
ended September 30, 1998 did not increase at a rate comparable to prior
quarters. As a direct result, the trading price of the Company's ADSs decreased
rapidly and significantly, having an extreme adverse effect on the value of an
investment in the Company's securities.
The Company has been profitable (before one-time acquisition charges and
amortization of acquired intangibles) for each of the last twenty-two quarters.
There can be no assurance, however, that such profitability will continue in the
future or that the levels of profitability will not vary significantly among
quarterly periods. The Company's operating results may fluctuate as a result of
many factors, including size and timing of orders and shipments, the number and
size of contracts providing for business other than traditional software
licenses, 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 quarter of 1998,
where profit was dramatically negatively affected by a shortfall in revenues as
against management's expectations. Profit has continued to be negatively
affected since that time by the Company's strategic decision not to
significantly reduce its cost base. These effects are expected to continue for
at least the next quarter.
Dependence on Key Personnel
- ---------------------------
The Company is dependent on the services of certain key executives. Failure to
retain these executives, or the loss of certain additional senior management
personnel or other key employees, could have a material adverse effect on the
Company's business and future business prospects.
The Company's future success also depends on the continued service of its key
sales, product development and additional operational personnel and on its
ability to attract, motivate and retain highly qualified
18
<PAGE>
employees. In addition, the Company depends on writers, programmers and graphic
artists, as well as third-party content providers. The Company expects to
continue to hire additional product development, sales and marketing,
information systems and accounting staff. However, there can be no assurance
that the Company will be successful in attracting, retaining or motivating key
personnel. 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. 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 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.
New and Evolving Markets
- ------------------------
With the acquisition of Knowledge Well, the Company made a strategic decision
to invest in, allocate resources to, the development, sale and marketing of
business, management and professional education software. The market for this
software is new and rapidly evolving. Accordingly, the future prospects for
business, management and professional educational software products, as well
as the Company's ability to realize a return on its existing and future
investment in this business, will depend upon whether a robust market for
these products develops and is sustained and on the Company's ability to
develop and implement products that address emerging market requirements.
19
<PAGE>
Developing Market
- -----------------
The market for IT education and training is rapidly evolving. New methods of
providing interactive education in a technology based format are being developed
and offered in the marketplace, including intranet and internet offerings. Many
of these new offerings involve new and different business models and contracting
mechanisms. In addition, multimedia and other product functionality features
are being added to the educational software. Accordingly, the Company's future
success will depend upon, among other factors, the extent to which the Company
is able to develop and implement products which address these emerging market
requirements. There can be no assurance that the Company will be successful in
meeting changing market needs.
Seasonality
- -----------
The software industry generally, and the Company in particular, are subject to
seasonal revenue fluctuations, based in part on customers' annual budgetary
cycles and in part on the annual nature of sales quotas. These seasonal trends
have in the past caused, and in the future are expected to continue to cause,
revenues in the first quarter of a year to be less, perhaps substantially so,
than revenues for the immediately preceding fourth quarter. In addition, the
Company has in past years added significant headcount in the sales and marketing
and research and development functions in the first quarter, and to a lesser
extent, the second quarter. Because these headcount additions do not immediately
contribute significant revenues, the Company's operating margins in the earlier
part of the year tend to be significantly lower than in the later parts of the
year. Because of the issues affecting the Company's third and fourth quarter
1998 results, which will continue to negatively affect the Company for at least
the next quarter, the reduction in operating margins is expected to continue for
at least the next quarter. Many software companies also experience a seasonal
downturn in demand during the summer months. There can be no assurance that
these or other seasonal trends will not have a material adverse effect on the
Company's results of operations.
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.
Management of Expanding Operations and Acquisitions
- ----------------------------------------------------
The Company has recently experienced rapid expansion of its operations, which
has placed, and is expected to continue to place, significant demands on the
Company's executive, administrative, operational and financial personnel and
systems. The Company's future operating results will substantially depend on
the ability of its officers and key employees to manage changing business
conditions and to implement and improve its operational, financial control and
reporting systems. In particular, the Company requires significant improvement
in its order entry and fulfillment and management information systems in order
to support its expanded operations. If the Company is unable to respond to and
manage changing business conditions, its business and results of operations
could be materially adversely affected.
As a result of the consummation of a number of acquisitions the Company's
operating expenses have increased. There can be no assurance that the
integration of these businesses can be successfully completed in a timely
fashion, or at all, or that the revenues from the acquired businesses will be
sufficient to support the costs associated with those businesses, without
adversely affecting the Company's operating margins. Any failure to
successfully complete the integration in a timely fashion or to generate
sufficient revenues from the acquired businesses could have a material adverse
effect on the Company's business and results of operations.
20
<PAGE>
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 the
Company and ForeFront, including the operation of ForeFront as an autonomous
subsidiary of the Company, 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 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. These difficulties could continue to have a negative effect on future
results, which could be material. In addition, in June 1999, the Company
acquired Knowledge Well. Knowledge Well provides interactive software that
delivers business, management and professional education skills and/or courses.
Although, the software delivery systems are similar, the Company and Knowledge
Well developed distinct architectures for their respective products. Successful
integration of these architectures will require substantial effort. Difficulties
in combining the companies, products and technologies could have an adverse
impact on the Company's ability to fully benefit from its existing and future
investment in this business and on the future prospects for the business,
management and professional education software products.
The Company regularly evaluates acquisition opportunities and is likely to make
acquisitions in the future. Future acquisitions by the Company could result in
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and other
intangible assets, which could materially adversely affect the Company's results
of operations. Product and technology acquisitions entail numerous risks,
including difficulties in the assimilation of acquired operations, technologies
and products, diversion of management's attention to other business concerns,
risks of entering markets in which the Company has no or limited prior
experience and the potential loss of key employees of acquired companies. The
Company's management has had limited experience in assimilating acquired
organizations and products into the Company's operations. No assurance can be
given as to the ability of the Company to integrate successfully any operations,
personnel or products that have been acquired or that might be acquired in the
future, and the failure of the Company to do so could have a material adverse
effect on the Company's results of operations.
Risk of Increasing Taxes
- ------------------------
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 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.
21
<PAGE>
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 and external resources to identify, correct,
replace or reprogram, and test its internal systems, including both
information technology ("IT") and non-IT systems. 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 is in the process of completing 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
June 30, 1999 in connection with the Year 2000 Readiness program have not been
material to the Company. In connection with the Company's internal system Year
2000 readiness plan, the Company will incur additional costs which may be
material for internal and possibly external administrative personnel to manage
the project and for new (or upgrades to) internal use software, hardware and
related engineering costs.
22
<PAGE>
Although the Company expects to implement successfully the systems and
programming changes necessary to adequately address issues confronting the
Company raised by the Year 2000 problem, there can be no assurance, however,
that problems will not arise with respect to Year 2000 Readiness that the
Company fails to identify or address timely. The Company's inability to timely
implement such changes could have a material adverse effect on future results of
operations.
Some commentators have predicted that a significant amount of litigation will
arise out of Year 2000 readiness issues, and the Company is aware of lawsuits
against other software vendors. In addition, the Company could be affected by
Year 2000 litigation against its software development partners. Because of the
unprecedented nature of such litigation and unknown impact of the Year 2000
problem, it is uncertain to what extent the Company may be affected by such
litigation.
The Company 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 3. Quantitative and Qualitative Disclosures About Market Risk
The Company entered into Irish pound denominated foreign currency forward
exchange contracts totaling $20 million maturing monthly from April 1999 to July
1999. These foreign currency forward exchange contracts are for trading purposes
only.
23
<PAGE>
The Company's outstanding foreign currency forward exchange contracts are
presented in the table below. The weighted average exchange rates quoted below
represent the functional currency to the U.S. dollar.
Expected Maturity Weighted Average
Functional Currency Amount Quarter ended Exchange Rate
Irish Pounds $6,000,000 September 30, 1999 1.395
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since the end of the third quarter of 1998, purported class action lawsuits were
filed in United States District Court for the Northern District of California
and the Superior Court of California for the County of San Mateo against the
Company, 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.
On June 17, 1999, Datatask Pty, Ltd ("Datatask") and Interskill Services, Inc.
("Interskill") filed a complaint against the Company in the Superior Court of
the State of Delaware. Datatask and Interskill alleged breach of contract and
breach of implied covenant of good faith and fair dealing by the Company under
the terms of a distribution agreement. Datatask and Interskill alleged that they
suffered financial harm of approximately $5 million as a result of such
purported breach. The Company believes that the claim is without merit and
intends to vigorously defend itself against the claim.
24
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
Extraordinary General Meeting
- -----------------------------
The Company held an extraordinary general meeting of shareholders on June 3,
1999 (the "EGM"). Under the terms of the deposit agreement Bank of New York is
entitled to vote on behalf of the ADS holders. Three individual shareholders
and a representative of Bank of New York were present for the vote. Voting was
conducted by a show of hands in accordance with Irish law. There were no
abstentions, broker non-votes or votes withheld with respect to any matter
submitted to a vote of the security holders at the EGM.
The following is a brief description of each matter submitted to a vote of the
security holders (Ordinary Shareholders and the representative of the ADS
holders) and a summary of the votes tabulated with respect to each such matter
at the EGM, as well as a summary of the votes cast by the Bank of New York
based on the American Depositary Receipts ("ADR") facility:
(1) The Shareholders approved the Share Purchase Agreement dated November 30,
1998, as amended and restated as of March 30, 1999, made between CBT and
Knowledge Well, relating to the acquisition by CBT of all of the shares of
Knowledge Well in exchange for ordinary shares of IR9.375p each of CBT and
the assumption of all outstanding options to purchase shares in the capital
of Knowledge Well ("the Share Exchange") and the issuance of ordinary
shares (or American Depositary Shares representing such ordinary shares)
pursuant to such Share Exchange.
Votes "FOR" Votes "AGAINST" Votes "ABSTAIN"
----------- --------------- ---------------
Ordinary Shareholders 4 0 0
ADS holders 22,413,048 170,611 116,085
(2) The shareholders approved the amendment to the 1994 Share Option Plan (the
"1994 Plan") to increase the total number of shares reserved for issuance
thereunder by 2,000,000 ordinary shares of IR9.375p each and the directors
were authorized to do such acts and things as they may consider necessary or
expedient to establish and carry into effect the increase in the number of
shares available for issuance under the 1994 Plan.
Votes "FOR" Votes "AGAINST" Votes "ABSTAIN"
----------- --------------- ---------------
Ordinary Shareholders 4 0 0
ADS holders 31,981,197 9,811,230 2,969,143
Annual General Meeting
- ----------------------
The Company held its annual general meeting of shareholders on June 4, 1999
(the "AGM"). Under the terms of the deposit agreement Bank of New York is
entitled to vote on behalf of the ADS holders. Three individual shareholders
and a representative of Bank of New York were present for the vote. Voting was
conducted by a show of hands in accordance with Irish law. There were no
abstentions, broker non-votes or votes withheld with respect to any matter
submitted to a vote of the security holders at the AGM.
The following is a brief description of each matter submitted to a vote of the
security holders (Ordinary Shareholders and the representative of the ADS
holders) and a summary of the votes tabulated with respect to each such matter
at the AGM, as well as a summary of the votes cast by the Bank of New York
based on the ADR facility:
25
<PAGE>
(1) Re-election as directors of the following persons who retired by rotation
and being eligible offered themselves for re-election in accordance with
the Company's Articles of Association;
Mr. Gregory M. Priest
Votes "FOR" Votes "AGAINST" Votes "ABSTAIN"
----------- --------------- ---------------
Ordinary Shareholders 4 0 0
ADS holders 42,476,007 192,114 2,093,449
Mr. John P. Hayes
Votes "FOR" Votes "AGAINST" Votes "ABSTAIN"
----------- --------------- ---------------
Ordinary Shareholders 4 0 0
ADS holders 42,603,660 2,150,717 7,193
(2) Election as director of Mr. James S. Krzywicki who was appointed during the
year.
Votes "FOR" Votes "AGAINST" Votes "ABSTAIN"
----------- --------------- ---------------
Ordinary Shareholders 4 0 0
ADS holders 42,625,664 2,128,457 7,449
(3) To receive and consider the Report of the Directors and the Consolidated
Financial Statements of the Company for the year ended December 31, 1998
and the Auditors' Report to the Members.
Votes "FOR" Votes "AGAINST" Votes "ABSTAIN"
----------- --------------- ---------------
Ordinary Shareholders 4 0 0
ADS holders 44,751,327 1,959 8,284
(4) The shareholders authorized the Company's Board of Directors to fix the
remuneration of the Company's auditors for the year ending December 31,
1999;
Votes "FOR" Votes "AGAINST" Votes "ABSTAIN"
----------- --------------- ---------------
Ordinary Shareholders 4 0 0
ADS holders 44,751,699 1,687 8,184
(5) The shareholders authorized and approved an amendment to the Company's
Employee Share Purchase Plan (the "ESPP") increasing the total number of
shares reserved for issuance thereunder by 1,000,000 ordinary shares and
the directors were authorized to do such acts and things as they may
consider necessary or expedient to establish and carry into effect the
increase in the number of shares available for issuance under the ESPP;
Votes "FOR" Votes "AGAINST" Votes "ABSTAIN"
----------- --------------- ---------------
Ordinary Shareholders 4 0 0
ADS holders 44,513,647 167,511 80,412
26
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------------
2.1 Amended and Restated Share Purchase Agreement (Incorporated by
reference to exhibit 2.1 to the Company's Registration Statement on
Form 8-K dated June 18, 1999).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------------
The Company filed a report on Form 8-K dated June 18, 1999 with the
Securities and Exchange Commission on July 6, 1999 reporting under Item 2
the Company's acquisition of Knowledge Well. On July 19, 1999 the Company
filed an amendment to the Form 8-K (Form 8-K/A) dated June 18, 1999, to
provide the Financial Statements and Pro Forma Financial Information as
required under Item 7.
27
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBT GROUP PLC
Date: August 13, 1999 By: /s/ Gregory M. Priest
---------------------
Gregory M. Priest
President and Chief Executive Officer
Date: August 13, 1999 By: /s/ David Drummond
------------------
David Drummond
Executive Vice President of Finance
and Chief Financial Officer
28
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