<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 issued and outstanding Ordinary Shares) outstanding as
of April 30, 1999 was 44,816,132.
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CBT GROUP PUBLIC LIMITED COMPANY
Table of Contents
<TABLE>
<CAPTION>
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C> <C>
Condensed Consolidated Balance Sheets as of December 31, 1998 3
and as of March 31, 1999
Condensed Consolidated Statements of Operations for the three 4
months ended March 31, 1998 and 1999
Condensed Consolidated Statements of Cash Flows for the three 5
months ended March 31, 1998 and 1999
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
</TABLE>
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<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CBT GROUP PLC
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
----------- --------
Assets
Current Assets
<S> <C> <C>
Cash $ 65,648 $ 57,603
Short-term investments 36,386 38,550
Accounts receivable, net 43,508 41,642
Inventories 247 180
Deferred tax assets 253 142
Prepaid expenses 5,777 8,675
----------- --------
Total current assets 151,819 146,792
Intangible assets 4,237 3,977
Property and equipment, net 17,636 17,414
Investment 550 550
Other assets 16,002 17,702
----------- --------
Total assets 190,244 186,435
=========== ========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable 5,161 4,604
Accrued payroll and related expenses 6,790 4,722
Other accrued liabilities 20,023 17,597
Deferred revenues 3,004 2,631
----------- --------
Total current liabilities 34,978 29,554
Non-Current Liabilities
Minority equity interest 383 383
Other liabilities 82 57
----------- --------
Total non-current liabilities 465 440
Shareholders' Equity
Ordinary Shares, IR9.375p par value: 120,000,000 shares authorized 6,725 6,747
at December 31, 1998 and March 31, 1999; issued and outstanding:
44,412,808 and 44,387,039 shares at December 31, 1998 and
44,502,416 and 44,528,185 at March 31, 1999
Additional paid-in capital 127,869 128,672
Accumulated profit 19,293 20,621
Capital redemption reserve 231 231
Treasury stock (2) (2)
Cumulative translation adjustment 685 172
----------- --------
Total shareholders' equity 154,801 156,441
----------- --------
Total liabilities and shareholders' equity 190,244 186,435
=========== ========
</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.
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<PAGE>
CBT GROUP PLC
Condensed Consolidated Statements of Operations
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months
ended March 31,
1998 1999
--------- --------
<S> <C> <C>
Revenues $39,929 $40,197
Cost of revenues 5,944 6,330
--------- --------
Gross profit 33,985 33,867
Operating expenses:
Research and development 6,390 7,387
Sales and marketing 16,868 20,973
General and administrative 3,214 4,478
--------- --------
Total operating expenses 26,472 32,838
--------- --------
Income from operations 7,513 1,029
Other income, net 967 533
--------- --------
Income before provision for income taxes 8,480 1,562
Provision for income taxes (1,138) (234)
--------- --------
Net income 7,342 1,328
========= ========
Net income per share Basic (1) $0.17 $0.03
========= ========
Shares used in computing net income per share - Basic 42,592 44,476
========= ========
Net income per share Diluted (1) $0.16 $0.03
========= ========
Shares used in computing net income per share - Diluted 45,767 47,484
========= ========
</TABLE>
See notes to condensed consolidated financial statements
(1) Basic and diluted Net Income per share gives effect to both two-for-one
share split of Registrant's ADSs effected in March 1998 and the ordinary
share split in May 1998.
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<PAGE>
CBT GROUP PLC
Condensed Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1999
----------- ----------
Cash Flows from Operating Activities
<S> <C> <C>
Net income $ 7,342 $ 1,328
Adjustments to reconcile net income to net cash provided/(used)
by operating activities:
Depreciation and amortization 1,428 1,909
Accrued interest on short-term investments 438 201
Changes in operating assets and liabilities:
Accounts receivable 1,715 1,655
Inventories 3 71
Deferred tax assets (67) 113
Prepaid expenses and other assets (4,006) (4,667)
Accounts payable 576 (580)
Accrued payroll and related expenses and other accrued liabilities 1,509 (4,472)
Deferred revenues (2,067) (394)
----------- ----------
Net cash provided/(used) by operating activities 6,871 (4,836)
----------- ----------
Cash Flows from Investing Activities
Purchases of property and equipment (2,615) (1,466)
Proceeds from sale and maturities of short-term investments 732 29,084
Payments to acquire short-term investments (1,078) (31,449)
----------- ----------
Net cash used in investing activities (2,961) (3,831)
----------- ----------
Cash Flows from Financing Activities
Proceeds from issuance of ordinary shares, net 8,658 825
----------- ----------
Net cash provided by financing activities 8,658 825
----------- ----------
Effect of exchange rate changes on cash and cash equivalents 125 (203)
----------- ----------
Net increase /(decrease) in cash and cash equivalents 12,693 (8,045)
Cash and cash equivalents at beginning of period 35,505 65,648
----------- ----------
Cash and cash equivalents at end of period $48,198 $ 57,603
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements
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<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, the Company 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 (Form 10-K and Amendment No. 1 to Form 10-K ("Form 10-K/A")) for
the 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. FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS
The Company may enter into foreign currency forward exchange contracts to
hedge the currency exposure of contractual and other firm commitments
denominated in foreign currencies. The Company may also enter into foreign
currency forward exchange contracts to hedge the currency exposure of
anticipated, but not yet committed, transactions expected to be denominated
in foreign currencies. Gains and losses on hedges related to contractual and
other firm commitments are deferred and recognized in the Company's results
of operations in the same period as the gain or loss from the underlying
transactions. Gains and losses on forward exchange contracts used to hedge
anticipated, but not yet committed, transactions are recognized in the
Company's results of operations as changes in the exchange rates for the
applicable foreign currencies occur.
During the three months ended March 31, 1999 the Company entered into Irish
pound denominated foreign currency forward exchange contracts to hedge
contractual and firm commitments as well as anticipated but not yet committed
Irish denominated expenses. The Company did not enter into any foreign
currency forward exchange contracts during fiscal 1998. At March 31, 1999 the
Company had foreign currency forward exchange contracts for Irish pounds
totaling $20 million with maturity dates of less than five months.
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 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.
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.
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<PAGE>
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1999
- --------------------------------------------------------------------------
<S> <C> <C>
(dollars in thousands, except per share amounts)
Numerator:
Numerator for basic and diluted
net income per share - income
available to common shareholders $ 7,342 $ 1,328
======= =======
Denominator:
Denominator for basic net income
per share - weighted average shares 42,592 44,476
Effect of dilutive securities:
Employee stock options 3,175 3,008
------- -------
Denominator for diluted net income
per share - adjusted weighted average
shares and assumed conversion 45,767 47,484
======= =======
Basic net income per share $ 0.17 $ 0.03
======= =======
Diluted net income per share $ 0.16 $ 0.03
======= =======
</TABLE>
NOTE 4. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," establishes 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>
Three months ended
March 31,
1998 1999
------- ------
<S> <C> <C>
(dollars in thousands)
Net Income $7,342 $1,328
Foreign Currency Translation Loss (9) (513)
------ ------
Total Comprehensive Income 7,333 815
====== ======
</TABLE>
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<PAGE>
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
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.
NOTE 6. COMMITMENTS AND CONTINGENCIES
In October 1998, a third party, a training software supplier, notified the
Company of a claim that the Company has breached a distribution agreement
with the supplier. During the first quarter of 1999, the supplier has alleged
that it has suffered financial harm of approximately US$5 million as a result
of such a purported breach. No litigation has yet been initiated in relation
to the purported breach and the Company believes that the claim is without
merit and intends to vigorously defend itself against the claim.
Refer also 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.
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 filed on Form 10-K and Form 10-K/A
for the 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 on Form 10-K and Form 10-K/A for the year ended
December 31, 1998. Historical results are not necessarily indicative of
trends in operating results for any future period.
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<PAGE>
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
900 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. (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 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.
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<PAGE>
Recent Developments
Proposed Stock Repurchase Plan
On April 13, 1999 the Company announced that its Board of Directors had
approved a plan authorizing the company to repurchase up to $20 to $25
million of the Company's own ordinary shares. Implementation of the plan is
subject to the Company obtaining a listing for its shares on the Irish Stock
Exchange and to shareholder approval, both of which are prerequisites to any
repurchase under Irish law. The number of shares to be repurchased and the
price to be paid will depend upon the availability of shares, the prevailing
market prices, and any other considerations which may, in the opinion of the
Board of Directors, affect the advisability of repurchasing CBT shares.
Proposed Acquisition of Knowledge Well
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 to reflect certain changes agreed upon on December 9, 1998 as a
result of the decision that the acquisition should be accounted for 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 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 in 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.
The Company estimates that the negotiation and implementation of the
acquisition will result in aggregate pre-tax expenses of approximately $2.5
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
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<PAGE>
would 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. (1)
Results of Operations
The following table sets forth certain restated consolidated statements of
operations data as a percentage of revenues:
Three months
ended March 31,
1998 1999
----- -----
Revenues 100% 100%
14.9 15.7
Cost of revenues ----- -----
Gross profit 85.1 84.3
Operating expenses:
Research and development 16.0 18.4
Sales and marketing 42.3 52.2
General and administrative 8.0 11.1
----- -----
Total operating expenses 66.3 81.7
----- -----
Income from operations 18.8 2.6
Other income, net 2.4 1.3
----- -----
Income before provision for income taxes 21.2 3.9
Provision for income taxes (2.8) (0.6)
----- -----
Net income 18.4 3.3
===== =====
________________________________________________________________
Footnote:
- ---------
(1) 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 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 16 and discussions
elsewhere in this Quarterly Report on Form 10-Q of the factors that could affect
future performance.
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<PAGE>
Revenues
- --------
Revenues increased to $40.2 million in the three months ended March 31, 1999
from $39.9 million in the three months ended March 31, 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.
Also, the Company's "Channel" businesses, including the Corporate telesales
operations did not perform as well as had been anticipated. The Company's
revenue performance has improved over the last two 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. 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.
Revenues in the United States for the three months ended March 31, 1999 were
$28.6 million (or 71% of revenues) compared to $29.2 million (or 73% of
revenues) for the three months ended March 31, 1998.
Revenues in the United Kingdom for the three months ended March 31, 1999 were
$4.7 million (or 12% of revenues), compared to $2.9 million (or 7% of revenues)
for the three months ended March 31, 1998. Revenues in Ireland for the three
months ended March 31, 1999 were $0.6 million (or 1% of revenues) compared to $1
million (or 3% of revenues) for the three months ended March 31, 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 months ended March 31,
1999 were $6.3 million (or 16% of revenues), compared to $6.9 million (or 17% of
revenues) for the three months ended March 31, 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 discs,
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 84.3% in the three months ended March 31, 1999 from
85.1% in the three months ended March 31, 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 Group and royalty-bearing titles developed pursuant to
development and marketing alliances) and the timing of expenses associated with
development and marketing alliances.
Operating Expenses
- ------------------
Throughout the first three quarters of 1998, the Company grew its cost base to
support the expected growth in operations. However, in the third quarter of 1998
the Company's revenue performance was substantially lower than the expectations
on which the Company had built its cost base. Management decided in October 1998
not to drastically reduce the cost base but to hold it relatively constant.
Management believed that the risks of overly-aggressive reductions in the cost
base out-weighed the risks of maintaining the cost base in support of future
operations. The decision not to reduce the cost base has, as management
expected, had the effect of significantly increasing operating expenses as a
percentage of revenues over levels experienced in the first quarter of 1998. The
Company expects this dynamic to continue at least for the next two quarters. (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 16 and
discussions elsewhere in this Quarterly Report on Form 10-Q of the factors
that could affect future performance.
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<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 the three months ended March 31,
1999 to $7.4 million (or 18.4% of revenues) from $6.4 million (or 16.0% of
revenues) in the three months ended March 31, 1998. The increase is 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 74 new titles during the three months ended March 31, 1999, which
brought the Company's library of titles to 911. 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 months ended March
31, 1999 compared to the three months ended March 31, 1998. This decision is
expected to continue to affect research and development expenses as a percentage
of revenues for at least the next two quarters. 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 as incurred.
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 months
ended March 31, 1999 to $21.0 million (or 52.2% of revenues) from $16.9 million
(or 42.3% of revenues) for the three months ended March 31, 1998. The increases
were primarily attributable to an increase in the number of sales personnel in
the United States and, to a lesser extent, outside the United States. 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 months
ended March 31, 1999 compared to the three months ended March 31, 1998. This
decision is expected to continue to affect sales and marketing as a percentage
of revenues for at least the next two quarters. The Company expects to increase
sales and marketing expenses in the future to support an increase in its sales
force and expansion of its marketing efforts. (2)
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 month period ended March 31, 1999 to $4.5 million (or
11.1% of revenues) from $3.2 million (or 8.0% of revenues) for the three month
period ended March 31, 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 months ended March 31, 1999 compared to the
three months ended March 31, 1998. This decision is expected to continue to
affect general and administrative expenses as a percentage of revenues for at
least the next two quarters. The Company anticipates that general and
administrative expenses will increase in future periods due to increases in
staffing and infrastructure. (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 16 and
discussions elsewhere in this Quarterly Report on Form 10-Q of the factors
that could affect future performance.
-13-
<PAGE>
Costs of Acquisitions
- ---------------------
There were no costs of acquisitions in either of the quarters ended March 31,
1999 or March 31, 1998. However, the Company expects that there will be
significant costs of acquisitions in respect of the acquisition of Knowledge
Well, which is expected to close in the second quarter of 1999. See "Recent
Developments Proposed Acquisition of Knowledge Well" above. (3)
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 $533,000 in the three months ended March 31, 1999, as compared to other
income, net, of $967,000 for the comparable period of the prior year. Other
income during both periods was primarily attributable to interest on short-term
investments. Included in other income, net was net exchange losses of $464,000
for the three months ended March 31, 1999, compared to net exchange gains of
$20,000 for the comparable period of 1998. The net exchange loss incurred 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 months ended March 31, 1999. 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 Systems Ltd. ("CBT
Ireland") at March 31, 1999 of $2.3 million, $3.5 million, $3.2 million and $3.3
million respectively.
During the three months ended March 31, 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.
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.
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.
____________________________________________________________________________
Footnote
(3) 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 16 and
discussions elsewhere in this Quarterly Report on Form 10-Q of the factors
that could affect future performance.
-14-
<PAGE>
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. Moreover, because the
Company incurs income tax in several countries, an increase in the profitability
of the Company in one or more of these countries could result in a higher
overall tax rate. In addition, if tax authorities were to challenge
successfully the manner in which profits are recognized among the Company's
subsidiaries, the Company's taxes could increase and its cash flow and net
income could be materially adversely affected.
The effective tax rates for the three months ended March 31, 1998 and 1999 were
13.4% and 15.0% respectively.
Liquidity and Capital Resources
Cash and short-term investments at March 31, 1999 were $96.2 million compared to
$102.0 million at December 31, 1998. Working capital was $117.2 million at
March 31, 1999 compared to $116.8 million at December 31, 1998. The decrease in
cash and short term investments is primarily attributable to a $2.9 million
increase in prepaid expenses, a $2.1 million decrease in accrued payroll and
related expenses and a $2.4 million decrease in other accrued liabilities.
Net cash used by operating activities was $4.8 million in the three months ended
March 31, 1999 compared to net cash provided by operating activities of $6.9
million for the comparable period of the prior year. Cash out flow from
operations was primarily due to an increase in prepaid expenses and decreases in
payroll and related expenses and other accrued liabilities, as well as reduced
net income, for the three months ended March 31, 1999.
Capital expenditures were $1.5 million in the three months ended March 31, 1999
compared to $2.6 million for the comparable period of the prior year. The
Company expects to make significant investments to its information systems and
other capital expenditure projects during the remainder of 1999. (3)
Proceeds from the issuance of ordinary shares in the three months ended March
31, 1999 was $825,000 compared to $8.7 million for the three months ended March
31, 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.
(4) The Company may from time to time consider the acquisition of complementary
businesses, products or technologies, which may require additional financing.
________________________________________________________________________
Footnote:
- ---------
(3) 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 16 and discussions elsewhere
in this Quarterly Report on Form 10-Q of the factors that could affect future
performance.
(4) 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.
-15-
<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.
Although the Company was profitable in each of the last eleven quarters, there
can be no assurance that such profitability will continue in the future or that
the levels of profitability will not vary significantly among quarterly periods.
The Company's operating results may fluctuate as a result of many factors,
including size and timing of orders and shipments, mix of sales between products
developed solely by the Company and products developed through development and
marketing alliances, royalty rates, the announcement, introduction and
acceptance of new products, product enhancements and technologies by the Company
and its competitors, mix of sales between the Company's field sales force, its
other direct sales channels and its indirect sales channels, competitive
conditions in the industry, loss of significant customers, delays in
availability of existing or new products, spending patterns of the Company's
customers, 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 two quarters.
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, Information Service "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.
-16-
<PAGE>
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.
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 two quarters, the reduction in operating margins is expected to continue
for at least the next two 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.
-17-
<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 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 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.
-18-
<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 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 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.
-19-
<PAGE>
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 3. Quantitative and Qualitative Disclosures About Market Risk
During the three months ended March 31, 1999, 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.
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.
<TABLE>
<CAPTION>
Expected Maturity Weighted Average
Functional Currency Amount Quarter ended Exchange Rate
<S> <C> <C> <C>
Irish Pounds $14,000,000 June 30, 1999 1.390
Irish Pounds $ 6,000,000 September 30, 1999 1.395
</TABLE>
-20-
<PAGE>
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
The company filed a report on Form 8-K with the Securities and Exchange
Commission on February 1, 1999 reporting under Item 5 the Company's press
release of January 19, 1999.
-21-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CBT GROUP PLC
Date: May 13, 1999 By: /s/ William G. McCabe
---------------------
William G. McCabe
Chairman of the Board of Directors
Date: May 13, 1999 By: /s/ Gregory M. Priest
---------------------
Gregory M. Priest
Chief Executive Officer and President
-22-
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