<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 0-25674
CBT GROUP PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
Republic of Ireland None
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
900 CHESAPEAKE DRIVE
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 817-5900
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
------------------- ---------------------
<S> <C>
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Ordinary Shares IR9.375p
Subscription Rights
(Title of class)
Indicate by check mark whether Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period of time that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting shares held by non-affiliates of
Registrant was $553,309,875 as of March 12, 1999 (excludes 221,292 shares
which may be deemed to be held by directors, officers and affiliates of
Registrant as of March 12, 1999).
The number of Registrant's equivalent American Depositary Shares outstanding
as of March 12, 1999 was 44,486,082.
Portions of Registrant's definitive proxy statement to be delivered to
shareholders in connection with Registrant's annual general meeting of
shareholders to be held on or about May 13, 1999 in Dublin, Ireland, are
incorporated by reference into Part III of this Form 10-K to the extent stated
herein. Except with respect to information specifically incorporated by
reference to this Form 10-K, the proxy statement is not deemed to be filed as
a part hereof.
This annual report on Form 10-K/A ("Form 10-K/A") is being filed as
Amendment No. 1 to the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 1999 for the purposes of
amending Item 7, Item 8 and Item 14.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes thereto contained in Item 8 of this
Annual Report on Form 10-K, which have been restated to reflect the
acquisition of The ForeFront Group, Inc. ("ForeFront"), a Delaware
corporation.
Important Note About Forward Looking Statements
In addition to historical statements, this Annual Report on Form 10-K
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Words such as "anticipates", "expects", "intends",
"plans", "believes", "seeks", "estimates" and similar expressions identify
such forward looking statements. These forward looking statements are not
guarantees of future performance and are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
expressed or forecasted. Actual results may vary because of factors such as
product ship schedules, life cycles, terms and conditions, product mix,
competitive products and pricing, customer demand, technological shifts,
litigation and other issues discussed elsewhere in this Annual Report filed on
Form 10-K. These forward-looking statements reflect management's opinions only
as of the date hereof, and the Company assumes no obligation unless required
by law to revise or publicly release the results of any revision to these
forward-looking statements. Risks and uncertainties include, but are not
limited to, those discussed in the section entitled "Additional Risk Factors
That Could Affect Operating Results." The following discussion and analysis
should be read in conjunction with, and is qualified by, the consolidated
financial statements, including the notes thereto, and selected consolidated
financial data included elsewhere in this Annual Report. Historical results
are not necessarily indicative of trends in operating results for any future
period.
Overview
CBT Group PLC ("CBT Group," "CBT" or the "Company") is a leading provider of
interactive education software designed to meet the information technology
("IT") education and training needs of businesses and organizations worldwide.
The Company develops, publishes and markets a comprehensive library of over
837 software titles covering a range of client/server, mainframe, Internet and
intranet technologies. CBT Group's products are used by almost 2,000 of the
world's leading corporations to train employees to develop and apply mission-
critical technologies in the workplace. CBT Group works with leading software
companies, including Cisco Systems, Inc. ("Cisco"), Informix Corporation
("Informix"), Lotus Development Corporation ("Lotus"), Marimba, Inc.
("Marimba"), Microsoft Corporation ("Microsoft"), Netscape Communications
Corporation ("Netscape"), Novell, Inc. ("Novell"), Oracle Corporation
("Oracle"), SAP America, Inc. ("SAP"), Rational Software ("Rational"), Intel
Corporation ("Intel"), Centra Software ("Centra"), Sybase, Inc. ("Sybase") and
the IBM-Netscape-Sun Microsystems, collaborative Java education effort to
develop and market vendor-specific training. CBT Group has also formed the
Internet Security Training Consortium with Check Point Software Technologies,
Inc. ("Check Point"), Cisco, IBM, Intel, the Javasoft business unit of Sun
Microsystems, Inc., Lotus, Netscape, Network Associates, Inc. (formerly McAfee
Associates, Inc.) ("Network Associates"), RSA Data Security, Inc. ("RSA Data
Security"), Security Dynamics Technologies, Inc. ("Security Dynamics"), the
Hewlett Packard Company ("HP") and VeriSign, Inc. ("VeriSign") to address the
Internet security training needs of enterprises worldwide.
Beginning in fiscal 1998, the Company adopted Statement of Position 97-2
"Software Revenue Recognition" as amended by Statement of Position 98-4. The
effect of adoption did not have a material impact on the Company's results of
operations. The Company derives its revenues primarily pursuant to license
agreements under which customers license usage of delivered products for a
period of one, two or three years. On each anniversary date during the term of
multi-year license agreements, customers are generally allowed to exchange any
or all of the licensed products for an equivalent number of alternative
products within the CBT Group library. The first year license fee is generally
recognized as revenue at the time of delivery of all products, provided the
Company's fees are fixed or determinable and collections of accounts
receivable are probable. Subsequent annual license fees are recognized on each
anniversary date, provided the Company's fees are fixed
19
<PAGE>
or determinable and collections of accounts receivable are probable. The cost
of satisfying any Post Contract Support ("PCS") is accrued at the time revenue
is recognized, as PCS fees are included in the annual license fee, the
estimated cost of providing PCS during the agreements is insignificant and
unspecified upgrades or enhancements offered have been and are expected to be
minimal and infrequent. For multi-element agreements Vendor Specific Objective
Evidence exists to allocate the total fee to the undelivered elements of the
agreement. In addition, the Company derives revenues from sales of its
products, which is recognized upon shipment, net of allowances for estimated
future returns and for excess quantities in distribution channels, provided
the Company's fees are fixed or determinable and collections of accounts
receivable are probable.
In recent years, the Company has entered into several development and
marketing alliances with key vendors of client/server software under which the
Company develops titles for training on specific products. Under certain of
its development and marketing alliances, the Company's partners have agreed to
fund certain product development costs. The Company recognizes such funding as
revenues on a percentage of completion basis, and the costs associated with
such revenues are reflected as cost of revenues. These agreements have the
effect of shifting expenses associated with developing certain new products
from research and development to cost of revenues. The Company expects that
cost of revenues may fluctuate from period to period in the future based upon
many factors, including, but not limited to, the timing of expenses associated
with development and marketing alliances. The Company does not expect funding
from development partners to contribute significantly to revenues in future
years.
Recent Developments
On December 10, 1998 the Company announced that it had signed a definitive
agreement to acquire Knowledge Well Ltd. and Knowledge Well Group Ltd.
(collectively, "Knowledge Well"), providers of business, management and
professional education using interactive learning technologies. Knowledge
Well's software titles are delivered using advanced interactive learning
methodologies, while requiring that the student only have access to basic,
industry-standard computing platforms. Knowledge Well's strategy is to provide
a self-paced education and training solution allowing individuals to obtain
degrees and/or other credentials. This ageement has been amended and restated
on March 30, 1999, to reflect certain changes agreed upon December 9, 1998 as
a result of the decision to account for the acquisition under the purchase
method of accounting in accordance with U.S. generally accepted accounting
principles. The acquisition of Knowledge Well has been approved by an
Independent Committee of CBT Group's Board of Directors, in view of the fact
that certain members of the Board of Directors of CBT Group are shareholders
and/or former officers of Knowledge Well, and by the shareholders of Knowledge
Well. The acquisition is subject to specified closing conditions, including
approval by the disinterested shareholders of CBT Group and the receipt of
required regulatory approvals. The acquisition has been structured as a stock-
for-stock exchange, in which a total of approximately 4.0 million CBT Group
shares will be issued in exchange for all outstanding shares of Knowledge
Well. CBT Group will also assume options to acquire Knowledge Well stock
exercisable for an issuance of up to approximately 0.8 million CBT Group
shares.
The successful combination of CBT Group and Knowledge Well, including the
successful operation of Knowledge Well as an autonomous subsidiary of CBT
Group, will require substantial effort from each company. The diversion of the
attention of management and any difficulties encountered in the transition
process could have an adverse impact on CBT Group's ability to realize the
full benefits of the acquisition. The successful combination of the two
companies will also require coordination of their research and development and
sales and marketing efforts. In addition, the process of combining the two
organizations could cause the interruption of, or loss of momentum in,
Knowledge Well's activities. There can be no assurance that CBT Group will be
able to retain Knowledge Well's technical, sales and customer support
personnel, or that it will realize any of the anticipated benefits of the
acquisition.
The acquisition of Knowledge Well will result in an increase of the
Company's research and development, general and administrative and other
expenses as a result of combining the operations of the Company and Knowledge
Well. The acquisition may also increase the Company's revenue to the extent
Knowledge Well's products generate incremental revenue.
20
<PAGE>
The Company estimates that the negotiation and implementation of the
acquisition will result in aggregate pre-tax expenses of approximately $2.2
million, primarily relating to costs associated with combining the companies
and the fees of attorneys, accountants and the financial advisor to the
Company's Independent Committee. Although the Company does not believe that
the costs will significantly exceed the aforementioned amount, there can be no
assurance that the Company's estimate is correct or that unanticipated
contingencies that will substantially increase the costs of combining the
operations of the Company and Knowledge Well will not occur. In addition, the
Company intends to account for the acquisition of Knowledge Well under the
purchase method of accounting in accordance with generally accepted accounting
principles. Under this method of accounting, the purchase price will be
allocated to assets acquired and liabilities assumed based on their estimated
fair values at the time of the closing of the acquisition. The Company intends
to record a non-cash expense of approximately $5.4 million with respect to the
write-off of in-process research and development acquired. In any event, the
Company anticipates that costs associated with the acquisition of Knowledge
Well and the write-off of acquired in-process research and development and
goodwill amortization will negatively impact results of operations in the
quarter in which the acquisition closes. In addition, the amortization of
acquired intangible assets will negatively impact results of operations in
future quarters.(2)
Annual Results of Operations
The following table sets forth certain consolidated statement of operations
data as a percentage of revenues for the three years in the period ended
December 31, 1998:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues...................................................... 100% 100% 100%
Cost of revenues.............................................. 17.7 16.4 15.5
---- ---- ----
Gross profit.................................................. 82.3 83.6 84.5
Operating Expenses
Research and development.................................... 16.6 15.2 15.9
Sales and marketing......................................... 45.0 43.2 46.5
General and administrative.................................. 10.3 8.5 9.8
Acquired research and development........................... 3.2 3.0 --
Costs of acquisitions....................................... 2.5 1.1 3.4
---- ---- ----
Total operating expenses.................................. 77.6 71.0 75.6
---- ---- ----
Income from operations........................................ 4.7 12.6 8.9
Other income, net............................................. 3.2 3.4 2.9
---- ---- ----
Income before provision for income taxes...................... 7.9 16.0 11.8
Provision for income taxes.................................... (2.7) (2.8) (1.6)
---- ---- ----
Net income.................................................... 5.2% 13.2% 10.2%
==== ==== ====
</TABLE>
- --------
(2) This paragraph consists of forward-looking statements reflecting current
expectations. The amount of the expense to be recorded with respect to the
write-off of acquired in-process research and development is based on a
current intention, and the amount actually recorded may be reduced. If such
amount is reduced, the effect on the results of operations for the quarter in
which the acquisition closes will be correspondingly reduced, and the effect
of the amortization of acquired intangible assets on results of operations in
future quarters will be correspondingly increased. In addition, the Company's
actual future performance may not meet the Company's current expectations.
Investors are strongly encouraged to review the section entitled "Additional
Risk Factors That Could Affect Operating Results" commencing on page 29 and
discussions elsewhere in this Annual Report on Form 10-K of the factors that
could affect future performance.
21
<PAGE>
Revenues
Revenues increased from $87.4 million in 1996 to $137.0 million in 1997 and
to $162.2 million in 1998, increases of 57% and 18% in 1997 and 1998 compared
to the corresponding prior years of 1996 and 1997 respectively. The increases
in revenues during these periods were primarily attributable to an increase in
the number of available courses, customer contract renewals and upgrades and
expanded marketing and distribution efforts. During the three month periods
ended September 30, 1998 and December 31, 1998, the Company experienced a
slowdown in the historical quarterly revenue growth rate due in part to a
decline in contract renewals and upgrades and significant new contracts were
also impacted by the uncertainty surrounding the volatility of the Company's
stock price during the final weeks of September 1998. In addition some
contracts that were signed in the six month period ending December 31, 1998
generated less revenue than had historically been the case. Also, the
Company's "Channel" businesses, including the corporate telesales operations,
did not perform as well as had been anticipated. There can be no assurance
that the issues that adversely affected revenues in the third and fourth
quarters of 1998 will not continue to negatively affect the Company's revenues
in the future.
Revenues in the United States increased from $63.1 million (or 72% of
revenues) in 1996 to $101.1 million (or 74% of revenues) in 1997 and to $113.6
million (or 70% of revenues) in 1998. The increases in 1997 and 1998 were
primarily the result of significant increases in the number of sales and
related personnel employed in the United States, an increase in the number of
available courses and an expansion of the Company's customer base. While
revenues in the United States increased significantly in absolute terms over
these periods, the Company's sales and marketing expenses and general and
administrative expenses in the United States also increased rapidly as the
Company hired and expanded its staff to support the U.S. sales growth.
Revenues in the United Kingdom were $9.8 million (or 11% of revenues) in
1996, $11.3 million (or 8% of revenues) in 1997, and $17.4 million (or 11% of
revenues) in 1998, respectively. Revenues in Ireland were $0.8 million (or 1%
of revenues) in 1996, $1.5 million (or 1% of revenues) in 1997 and $3.2
million (or 2% of revenues) in 1998, respectively.
Revenues from countries outside the United States, United Kingdom and
Ireland (principally from Australia, Europe (other than Ireland and the United
Kingdom), Canada, South Africa and MidEast in 1997) were $13.7 million (or 16%
of revenues) in 1996, $23.1 million (or 17% of revenues) in 1997, and $28.1
million (or 17% of revenues) in 1998, respectively. Because a significant
portion of the Company's business is conducted outside the United States, the
Company is subject to numerous risks of doing business in other countries,
including risks related to currency fluctuations.
No customer accounted for more than 5% of revenues in 1996, 1997 or 1998,
although a single customer can account for a significantly higher percentage
of the Company's quarterly revenues. Accordingly, failure to achieve a
forecasted sale on schedule can have (and did have in the third quarter of
1998) a material adverse effect on quarterly operating results. Approximately
35% of the Company's backlog at December 31, 1998 was concentrated among 15
customers, compared to 35% among seven customers at December 31, 1997. Backlog
at any given date represents the amount of all license fees under current
agreements, which have not yet been recognized as revenues. Although the
Company's license agreements are noncancellable by their terms, there can be
no assurance that any customer will fulfill the contractual obligations under
its agreement. Cancellation, reduction or delay in orders by or shipments to
any of these or other customers could have a material adverse effect on the
Company's business and results of operations.
Cost of Revenues
Cost of revenues includes the cost of materials (such as compact discs,
diskettes, packaging and documentation), royalties to third parties, the
portion of development costs associated with funded development projects and
fulfillment costs.
Gross margins increased from 82.3% in 1996 to 83.6% in 1997 and to 84.5% in
1998. Gross margins have been increasing as a result of the inclusion in the
earlier periods of royalty payments by acquired companies to third party
providers, which were higher than the average royalty payments paid by CBT
Group. Products
22
<PAGE>
previously provided by such acquired companies are being replaced by CBT Group
product. The Company expects that cost of revenues may fluctuate from period
to period in the future based upon many factors, including the mix of titles
licensed (between titles developed exclusively by CBT Group and royalty-
bearing titles developed pursuant to development and marketing alliances) and
the timing of expenses associated with development and marketing alliances.
Research and Development Expenses
Research and development expenses consist primarily of salaries and
benefits, related overhead costs, travel expenses and fees paid to outside
consultants. Research and development expenses increased in absolute terms
from $14.5 million (or 16.6% of revenues) in 1996 to $20.9 million (or 15.2%
of revenues) in 1997 and to $25.8 million (or 15.9% of revenues) in 1998,
principally as a result of an increase in research and development personnel
employed to expand and enhance the Company's library of software products. The
Company delivered 279 new titles during 1998, which brought the Company's
library of titles to 837, representing a 50% increase over the number of
titles at the end of fiscal 1997. The increase in fiscal 1998 is attributable
to the expansion of the Company's Dublin development center, partially offset
by a reduction in the research and development expenses at ForeFront following
the merger in May 1998. The decrease in 1997 in the research and development
expenses as a percentage of revenues was a result of the reorganization of
ForeFront's research and development facility for Internet content management
products in April 1997 compared to 1996 when ForeFront made significant
investments in research and development efforts relating to Internet content
management products. In addition, approximately $803,000, $442,000 and
$596,000 of development expenses incurred in connection with development and
marketing alliances were charged to cost of revenues in 1996, 1997 and 1998,
respectively. The Company believes that significant investment in research and
development is required to remain competitive in the IT education and training
market, and the Company therefore expects research and development expenses to
continue to increase in future periods. (1)
Software development costs are accounted for in accordance with the
Financial Accounting Standards Board Statement No. 86, under which the Company
is required to capitalize software development costs after technological
feasibility has been established. To date, development costs after
establishment of technological feasibility have been immaterial, and all
software development costs have been expensed as incurred.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries and commissions,
travel expenses, advertising and promotional expenses and related overhead
costs. These expenses increased in absolute terms from $39.3 million (or 45.0%
of revenues) in 1996 to $59.2 million (or 43.2% of revenues) in 1997 and to
$75.4 million (or 46.5% of revenues) in 1998. The increases in sales and
marketing expenses are primarily attributable to an increase in the number of
sales and marketing personnel to accommodate the expected growth in operation
in the United States and to a lesser extent outside the United States.
Commission costs have also increased in absolute terms along with the
increases in revenues during these periods. In 1997 and 1998, the Company
increased significantly advertising and promotional expenses to market the
Company's expanded library of titles. The increase in sales and marketing
expenses as a percentage of revenues was negatively impacted by the less than
expected sequential revenue growth for the third and fourth quarters of 1998.
The Company expects to increase sales and marketing expenses in the future to
support expansion of its sales and marketing efforts. (1)
- --------
(1) This statement is a forward-looking statement reflecting current
expectations. The Company's actual future performance may not meet the
Company's current expectations or its current plans may change. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results" commencing on page 29 and discussions
elsewhere in this Annual Report on Form 10-K of the factors that could affect
future performance.
23
<PAGE>
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and
benefits, travel expenses, legal, accounting and consulting fees and related
overhead costs for administrative officers and support personnel. General and
administrative expenses increased in absolute terms from $9.1 million (or
10.3% of revenues) in 1996 to $11.6 million (or 8.5% of revenues) in 1997 and
to $15.9 million (or 9.8% of revenues) in 1998. The increases were primarily
due to increased staffing and infrastructure to support expanding operations.
The increase in general and administrative expenses as a percentage of
revenues in 1998 was due to the increase in staffing and infrastructure to
facilitate revenue growth, which was less than that which was anticipated. The
decrease as a percentage of revenues from 1996 to 1997 was due principally to
more rapid increases in revenues than in associated expenses during 1997. The
Company anticipates that general and administrative expenses will increase in
future periods due to increases in staffing and infrastructure. (1)
Acquired Research and Development
Acquired research and development expenses increased from $2.8 million (or
3.2% of revenues) in 1996 to $4.1 million (or 3.0% of revenues) in 1997 and
decreased to nil in 1998. The acquired research and development was incurred
by the acquisitions by ForeFront of Blue Squirrel Inc. in 1996, Lan
Professional Corporation and BookMaker Corporation in 1997. These amounts are
included in the Company's results under the pooling method of accounting rules
in accordance with the U.S. GAAP.
Costs of Acquisitions
Costs of acquisitions decreased from $2.2 million (or 2.5% of revenues) in
1996 to $1.5 million (or 1.1% of revenues) in 1997 and increased to $5.5
million (or 3.4% of revenues) in 1998. The acquisition expenses incurred in
1996 were due to the acquisitions of CLS and NTT by the Company and the
acquisition of Blue Squirrel, Inc. by ForeFront. The acquisition expenses
incurred in 1997 were due to the acquisitions of ALA, Benelux, Scholars and
Mid-East by the Company and the acquisitions of BookMaker Corporation, All
Micro, Inc. and Lan Professional Corporation by ForeFront. The acquisition
expenses incurred in 1998 related to the acquisition of ForeFront, accounted
for as a pooling of interests. These expenses consisted primarily of
professional fees, such as investment banking, legal and accounting, severance
costs, closure of offices, goodwill and other intangibles written off
following the closure of certain business segments and other related costs in
connection with the acquisitions. The Company may incur additional acquisition
expenses in the future should it undertake additional acquisitions.
Other Income, Net
Other income, net, comprises interest income, interest expense, gain or loss
on sale of assets and foreign currency exchange gains and losses. The Company
recognized other income, net, of approximately $2.8 million, $4.7 million and
$4.7 million in 1996, 1997 and 1998, respectively.
Included in other income, net in 1997 is a one-time gain on the sale by
ForeFront of Internet printing technology of $1.9 million. Excluding this one
time gain on sale of assets in 1997, the increase in other income, net was due
principally to an increase of $1.5 million in interest income in 1998 as
compared to 1997. This increase in interest income resulted from interest on
increased cashflows from financing and operations. In addition, the Company
recognized net exchange gains of $4,000, $112,000 and $516,000 in 1996, 1997
and 1998 respectively.
- --------
(1) This statement is a forward-looking statement reflecting current
expectations. The Company's actual future performance may not meet the
Company's current expectations or its current plans may change. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results" commencing on page 29 and discussions
elsewhere in this Annual Report on Form 10-K of the factors that could affect
future performance.
24
<PAGE>
The Company's consolidated financial statements are prepared in dollars,
although several of the Company's subsidiaries have functional currencies
other than the dollar, and a significant portion of the Company's and its
subsidiaries' revenues, costs and assets are denominated in currencies other
than their respective functional currencies. The Company has significant
subsidiaries in the United Kingdom, Australia, the Netherlands, Canada and
Germany whose functional currencies are their local currencies and the
majority of whose sales and operating expenses other than cost of goods sold
are denominated in their respective local
currencies. In addition, the Company's Irish subsidiaries, whose functional
currency is the U.S. dollar, incur substantial operating expenses denominated
in Irish pounds. Fluctuations in exchange rates may have a material adverse
effect on the Company's results of operations, particularly its operating
margins, and could result in exchange losses. The impact of future exchange
rate fluctuations on the Company's results of operations cannot be accurately
predicted.
The Company's subsidiaries in the United Kingdom, the Netherlands,
Australia, and Canada whose functional currencies are their local currencies,
had unhedged liabilities denominated in U.S. dollars payable to CBT Ireland at
December 31, 1998 of $11.3 million, $3.2 million, $2.7 million and $2.6
million respectively.
During 1998, the Company undertook hedging transactions against the Irish
pound because the Company has substantial expenses denominated in that
currency. The hedging transactions consisted of holding funds in an Irish
pound denominated deposit account. To date, the Company has not sought to
hedge the risks associated with fluctuations in the exchange rates of other
currencies against the U.S Dollar, but may undertake such transactions in the
future. There can be no assurance that any hedging techniques implemented by
the Company would be successful in eliminating or reducing the effects of
currency fluctuations.
Other income, net may fluctuate in future periods as a result of movements
in cash, cash equivalents and short-term investments balances, interest rates,
foreign currency exchange rates and asset disposals.
Provision for Income Taxes
CBT Group PLC operates as a holding company with operating subsidiaries in
several countries, and each subsidiary is taxed based on the laws of the
jurisdiction in which it operates. Because taxes are incurred at the
subsidiary level, and one subsidiary's tax losses cannot be used to offset the
taxable income of subsidiaries in other tax jurisdictions, the Company's
consolidated effective tax rate may increase to the extent that the Company
reports tax losses in some subsidiaries and taxable income in others.
The Company has significant operations and generates a majority of its
taxable income in the Republic of Ireland, and certain of the Company's Irish
operating subsidiaries are taxed at rates substantially lower than tax rates
in effect in the United States and other countries in which the Company has
operations. One Irish subsidiary currently qualifies for a 10% tax rate and
another Irish subsidiary is income tax exempt. If such subsidiaries were no
longer to qualify for such tax rates or if the tax laws were rescinded or
changed, the Company's operating results could be materially adversely
affected. The standard rate of Irish corporation tax on both trading and non-
trading income presently (from January 1, 1999) is 28%. The 10% incentive rate
referred to above applies in respect of income derived from certain activities
carried out in the Republic of Ireland. The incentive rate will continue up to
December 31, 2010. Commencing January 1, 2003, it has been confirmed by the
Government of Ireland in an announcement by the Irish Minister for Finance on
December 2, 1998, the corporation tax rate is expected to be 12.5% on trading
income and 25% on non-trading income. Moreover, because the Company incurs
income tax in several countries, an increase in the profitability of the
Company in one or more of these countries could result in a higher overall tax
rate. In addition, if tax authorities were to challenge successfully the
manner in which profits are recognized among the Company's subsidiaries, the
Company's taxes could increase and its cash flow and net income could be
materially adversely affected.
The Company's provision for income taxes was $2.4 million, $3.9 million and
$2.7 million for each of 1996, 1997 and 1998, respectively.
The effective tax rate for the Company was 34.9%, 17.8% and 13.9% in 1996,
1997 and 1998, respectively. The movement in the effective tax rate was
principally the result of losses incurred by pooled entities in both
25
<PAGE>
1996 and 1997, which were not available to offset taxable income earned in the
same or other jurisdictions pre or post the merger. In particular, ForeFront
had losses of $7.3 million in 1996 and $4.1 million in 1997, which could not
be offset, thus resulting in an increased overall tax rate for those years.
Quarterly Results of Operations
The following table sets forth certain unaudited statement of operations
data for each of the Company's last eight quarters. This unaudited quarterly
financial information has been prepared on a basis consistent with the annual
information presented elsewhere in this Annual Report and, in management's
opinion, reflects all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the information presented. The
operating results for any quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
Quarters Ended
----------------------------------------------------------------------
June Sept June Sept
Mar 31, 30, 30, Dec 31, Mar 31, 30, 30, Dec 31,
1997 1997 1997 1997 1998 1998 1998 1998
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $26,727 $29,755 $35,136 $45,429 $39,929 $44,852 $35,182 $42,269
Cost of revenues........ 4,683 5,173 5,657 6,989 5,944 6,697 5,998 6,498
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 22,044 24,582 29,479 38,440 33,985 38,155 29,184 35,771
Operating expenses
Research and
development.......... 4,431 4,731 5,105 6,611 6,390 6,604 5,762 7,076
Sales and marketing... 12,827 13,415 14,680 18,238 16,868 18,622 17,684 22,221
General and
administrative....... 2,349 3,616 2,624 3,012 3,214 3,594 4,179 4,906
Acquired research and
development.......... -- 447 3,650 -- -- -- -- --
Costs of
acquisitions......... 926 -- 242 366 -- 5,505 -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses........... 20,533 22,209 26,301 28,227 26,472 34,325 27,625 34,203
------- ------- ------- ------- ------- ------- ------- -------
Income from operations.. 1,511 2,373 3,178 10,213 7,513 3,830 1,559 1,568
Other income, net....... 554 665 2,599 892 967 936 1,786 1,045
------- ------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes....... 2,065 3,038 5,777 11,105 8,480 4,766 3,345 2,613
Provision for income
taxes.................. (517) (817) (1,043) (1,539) (1,138) (667) (468) (393)
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. 1,548 2,221 4,734 9,566 7,342 4,099 2,877 2,220
======= ======= ======= ======= ======= ======= ======= =======
Basic net income per
share(1)............... $ 0.04 $ 0.06 $ 0.12 $ 0.23 $ 0.17 $ 0.09 $ 0.07 $ 0.05
======= ======= ======= ======= ======= ======= ======= =======
Diluted net income per
share(1)............... $ 0.04 $ 0.05 $ 0.11 $ 0.21 $ 0.16 $ 0.09 $ 0.06 $ 0.05
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------
(1) Basic and diluted Net income per share gives effect to the two-for-one
split of Registrant's ADSs effected in March 1998 and the ordinary share
split in May 1998. Prior periods have been restated to give effect to such
split.
26
<PAGE>
The following table sets forth, as a percentage of revenues, certain line
items in the Company's statement of operations for the periods indicated.
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------------------------
Mar 31, June 30, Sept 30 Dec 31, Mar 31, June 30, Sept 30 Dec 31,
1997 1997 1997 1997 1998 1998 1998 1998
------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues........ 17.5 17.4 16.1 15.4 14.9 14.9 17.0 15.4
---- ---- ---- ---- ---- ---- ---- ----
Gross profit............ 82.5 82.6 83.9 84.6 85.1 85.1 83.0 84.6
Operating expenses
Research and
development.......... 16.6 15.9 14.5 14.6 16.0 14.7 16.4 16.7
Sales and marketing... 48.0 45.1 41.8 40.1 42.3 41.6 50.3 52.6
General and
administrative....... 8.8 12.1 7.5 6.6 8.0 8.0 11.9 11.6
Acquired research and
development.......... -- 1.5 10.4 -- -- -- -- --
Costs of
acquisitions......... 3.5 -- 0.7 0.8 -- 12.3 -- --
---- ---- ---- ---- ---- ---- ---- ----
Total operating
expenses........... 76.9 74.6 74.9 62.1 66.3 76.6 78.6 80.9
---- ---- ---- ---- ---- ---- ---- ----
Income from operations.. 5.6 8.0 9.0 22.5 18.8 8.5 4.4 3.7
Other income, net....... 2.1 2.2 7.4 1.9 2.4 2.1 5.1 2.5
---- ---- ---- ---- ---- ---- ---- ----
Income before provision
for income taxes....... 7.7 10.2 16.4 24.4 21.2 10.6 9.5 6.2
Provision for income
taxes.................. (1.9) (2.7) (2.9) (3.3) (2.8) (1.5) (1.3) (1.0)
---- ---- ---- ---- ---- ---- ---- ----
Net income.............. 5.8 % 7.5 % 13.5 % 21.1 % 18.4 9.1 % 8.2 % 5.2 %
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
The Company's growth in revenues over the last eight quarters has been
primarily attributable to an increase in the number of available courses in
the Company's library, an increase in the number of customers and increases in
sales to existing customers, as well as the Company's expanded marketing and
distribution efforts in the United States, and to a lesser extent, countries
outside the United States. During the three month periods ended September 30,
1998 and December 31, 1998, the Company experienced a slowdown in the
historical quarterly revenue growth rate due in part to a decline in contract
renewals and upgrades and significant new contracts were also impacted by the
uncertainty surrounding the volatility of the Company's stock price during the
final weeks of September, 1998. In addition some contracts that were signed in
the six month period ending December 31, 1998 generated less revenue than had
historically been the case. Also, the Company's "Channel" businesses,
including the corporate telesales operations, did not perform as well as had
been anticipated. There can be no assurance that the issues that adversely
affected revenues in the third and fourth quarters of 1998 will not continue
to negatively affect the Company's revenues in the future.
In 1998, the Company experienced a slowdown in the historical quarterly
revenue growth rate for the quarters ended September 30, and December 31,
1998. The Company's revenues historically have been highest in the fourth
quarter of each year. There can be no assurance that the issues that adversely
affected revenues in the third and fourth quarters of 1998 will not continue
to negatively affect the Company's net income in the future.
During 1998, the Company hired a number of employees, particularly sales and
marketing personnel, which resulted in an increase in sales and marketing
expenses for the year. The Company also added a significant number of
employees to research and development. As a result of these increases, as well
as continued hiring in other departments, the Company expects operating
expenses in future periods to be significantly higher than in prior periods.
27
<PAGE>
The Company anticipates that it will continue this hiring in the first half
of 1999, which will reduce operating margins, particularly in the first and
second quarters. (2)
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments were $54.0 million, $71.5
million and $102.0 million as of December 31, 1996, 1997 and 1998,
respectively. Working capital was $52.0 million, $84.0 million and $116.8
million as of December 31, 1996, 1997 and 1998 respectively.
The increases in cash, cash equivalents, short term investments and working
capital in 1997 and 1998 were due principally to net income and the proceeds
from the exercise of options, which were offset by investments in property and
equipment to support the Company's expanded operations.
Net cash provided by operating activities decreased from $6.2 million in
1996 to $4.1 million in 1997 and increased to $13.5 million in 1998. The
decrease in net cash provided by operating activities in 1997 was primarily
due to an increase in accounts receivable in 1997. At December 31, 1997
accounts receivable had increased by $19.2 million as compared with the
accounts receivable balance at December 31, 1996. This increase was due
primarily to the revenue earned in the quarter ended December 31, 1997 of
$45.4 million as compared to revenue of $27.8 million for the quarter ended
December 31, 1996. The increase in net cash provided by operating activities
in 1998 was primarily attributable to a significantly lower increase in
accounts receivable than in 1997. The accounts receivable balance at December
31, 1998 increased by $3.6 million from that at December 31, 1997. The
significantly lower increase in accounts receivable compared to the increase
in 1997, can be attributed to the revenue generated in the quarter ended
December 31, 1998 of $42.3 million compared to $45.4 in the corresponding
quarter of 1997. The increase in accounts receivable balance is primarily a
function of the revenue earned in the preceeding quarter and the timing of
payments in respect of receivables. Accounts receivable write-offs in an
accounting year to date have not been material and have been within the
amounts reserved.
Capital expenditures were approximately $7.4 million in 1996, $5.4 million
in 1997 and $12.6 million in 1998. The increases in 1998 were primarily
attributable to expenditures relating to computer equipment and infrastructure
as a result of investments in the Companys' information systems and capital
expenditures on new corporate headquarters in Redwood City, California, a new
facility in Scottsdale, Arizona and the new research and development
facilities in Dublin, Ireland. The Company expects that its capital
expenditure will increase in 1999, primarily as a result of continuing
investments in its information systems and expenditures on the new research
and development facility. (1)
The Company believes that its existing cash, cash equivalents and short-term
investments and cash to be generated from operations will be sufficient to
meet its expected working capital and capital expenditure requirements for at
least the next twelve months. (3) The Company may from time to time consider
the acquisition of complementary businesses, products or technologies, which
may require additional financing.
- --------
(1) This statement is a forward-looking statement reflecting current
expectations. The Company's actual future performance may not meet the
Company's current expectations or its current plans may change. Investors
are strongly encouraged to review the section entitled "Additional Risk
Factors That Could Affect Operating Results" commencing on page 29 and
discussions elsewhere in this Annual Report on Form 10-K of the factors
that could affect future performance.
(2) This paragraph consists of forward-looking statements reflecting current
expectations. The Company's actual future performance may not meet the
Company's current expectations or its current plans may change. Investors
are strongly encouraged to review the section entitled "Additional Risk
Factors That Could Affect Operating Results" commencing on page 29 and
discussions elsewhere in this Annual Report on Form 10-K of the factors
that could affect future performance.
(3) This is a forward-looking statement, and actual results may differ
materially depending on a variety of factors, including variable operating
results or presently unexpected uses of cash such as mergers and
acquisitions.
28
<PAGE>
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". The SOP requires
the capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use once certain
criteria are met. The Company adopted SOP 98-1 in fiscal 1998.
In February 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No.132, "Employers' Disclosures About Pensions and Other Post-Retirement
Benefits." This statement revises employers' disclosures about pensions and
other post-retirement benefit plans. It does not, however, change the
measurement of recognition of those plans. This statement standardizes the
disclosure requirements for pensions and other post-retirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. Restatement of disclosures for
earlier periods is required. The Company has implemented the provisions of
SFAS 132 in 1998 for its defined contribution plan.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activity" ("SFAS 133") which is required to be adopted in years beginning
after June 15, 1999. The Company has yet to determine its date of adoption.
The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges of underlying
transactions must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. Management has not yet determined what the
effect of SFAS 133 will be on the Company's consolidated financial position,
results of operations or cash flows.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions" and
addresses software revenue recognition as it applies to certain multiple-
element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2" through fiscal years beginning on
or before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999.
Additional Risk Factors that Could Affect Operating Results
In addition to the other factors identified in this Annual Report, the
following risk factors could materially and adversely affect the Company's
future operating results, and could cause actual events to differ materially
from those predicted in the Company's forward looking statements relating to
its business.
Fluctuations in Operating Results
The Company has in the past experienced fluctuations in its quarterly
operating results and anticipates that such fluctuations will continue and
could intensify in the future. Fluctuations in operating results may result in
volatility in the price of the Company's ADSs. For example, the Company's
revenue for the quarter ended September 30, 1998 did not increase at a rate
comparable to prior quarters. As a direct result, the trading price of the
Company's ADSs decreased rapidly and significantly, having an extreme adverse
effect on the value of an investment in the Company's securities.
Although the Company was profitable in each of the last ten quarters, there
can be no assurance that such profitability will continue in the future or
that the levels of profitability will not vary significantly among quarterly
periods. The Company's operating results may fluctuate as a result of many
factors, including size and
29
<PAGE>
timing of orders and shipments, mix of sales between products developed solely
by the Company and products developed through development and marketing
alliances, royalty rates, the announcement, introduction and acceptance of new
products, product enhancements and technologies by the Company and its
competitors, mix of sales between the Company's field sales force, its other
direct sales channels and its indirect sales channels, competitive conditions
in the industry, loss of significant customers, delays in availability of
existing or new products, spending patterns of the Company's customers,
litigation costs and expenses, currency fluctuations and general economic
conditions.
The Company's expense levels are based in significant part on its
expectations regarding future revenues and are fixed to a large extent in the
short term. Accordingly, the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. Any
significant revenue shortfall would therefore have a material adverse effect
on the Company's results of operations. This risk materialized in the third
and fourth quarters of 1998, where profit was dramatically negatively affected
by a shortfall in revenues as against management's expectations.
Dependence on Key Personnel
On October 1, 1998, Mr. James J. Buckley, the Company's Chairman and Chief
Executive Officer, and Mr. Richard Y. Okumoto, the Company's Senior Vice
President of Finance and Chief Financial Officer, stepped down from their
respective positions. Messrs. Buckley and Okumoto were replaced on an interim
basis by a newly formed management committee. Effective December 10, 1998 the
Company appointed Mr. William G. McCabe as Chairman of the Board and Mr.
Gregory M. Priest as President and Chief Executive Officer. Both Mr. McCabe
and Mr. Priest served on the interim management committee that had managed the
Company since October 1, 1998 and remain on the Board of Directors. Failure to
retain these and other executives, or the loss of certain additional senior
management personnel or other key employees, could have a material adverse
effect on the Company's business and future business prospects.
The Company's future success also depends on the continued service of its
key sales, product development and additional operational personnel and on its
ability to attract, motivate and retain highly qualified employees. In
addition, the Company depends on writers, programmers and graphic artists, as
well as third-party content providers. The Company expects to continue to hire
additional product development, sales and marketing, IS and accounting staff.
However, there can be no assurance that the Company will be successful in
attracting, retaining or motivating key personnel. In particular, the
Company's recent adverse operating results, stock price performance and
management changes could create uncertainties that could have a material
adverse effect on the Company's ability to attract and retain key personnel.
Although the Company has repriced all stock options (other than stock options
held by the Company's directors) in an effort to retain and reincent
employees, there can be no assurance that this strategy will be successful,
and in any event, it will have a dilutive effect on future earnings per share.
The inability to hire and retain qualified personnel or the loss of the
services of key personnel could have a material adverse effect upon the
Company's current business, new product development efforts and future
business prospects.
Competition
The IT education and training market is highly fragmented and competitive,
and the Company expects this competition to increase. The Company expects that
because of the lack of significant barriers to entry into this market, new
competitors may enter the market in the future. In addition, larger companies
are competing with the Company in the IT education and training market, in
part through the acquisition of the Company's competitors, and the Company
expects this trend to continue. Such competitors may also include publishing
companies and vendors of application software, including those vendors with
whom the Company has formed development and marketing alliances.
The Company competes primarily with third-party suppliers of instructor-led
IT education and training and internal training departments and with other
suppliers of IT education and training, including several other
30
<PAGE>
companies that produce interactive software training. To a lesser extent, the
Company also competes with consultants, value-added resellers and network
integrators. Certain of these value-added resellers also market products
competitive with those of the Company. The Company expects that as
organizations increase their dependence on outside suppliers of training, the
Company will face increasing competition from these other suppliers as IT
education and training managers more frequently compare training products
provided by outside suppliers.
Many of the Company's current and potential competitors have substantially
greater financial, technical, sales, marketing and other resources, as well as
greater name recognition, than the Company. In addition, the IT education and
training market is characterized by significant price competition, and the
Company expects that it will face increasing price pressures from competitors
as IS managers demand more value for their training budgets. Accordingly,
there can be no assurance that the Company will be able to provide products
that compare favorably with new instructor-led techniques or other interactive
training software or that competitive pressures will not require the Company
to reduce its prices significantly.
Developing Market
The market for IT education and training is rapidly evolving. New methods of
delivering interactive education software are being developed and offered in
the marketplace, including intranet and internet deployment and management
systems. Many of these new delivery and training management systems will
involve new and different business models and contracting mechanisms. In
addition, multimedia and other product functionality features are being added
to the educational software. Accordingly, CBT's future success will depend
upon, among other factors, the extent to which CBT is able to develop and
implement products which address these emerging market requirements. There can
be no assurance that CBT will be successful in meeting changing market needs.
Seasonality
The software industry generally, and the Company in particular, are subject
to seasonal revenue fluctuations, based in part on customers' annual budgetary
cycles and in part on the annual nature of sales quotas. These seasonal trends
have in the past caused, and in the future are expected to continue to cause,
revenues in the first quarter of a year to be less, perhaps substantially so,
than revenues for the immediately preceding fourth quarter. In addition, the
Company has in past years added significant headcount in the sales and
marketing and research and development functions in the first quarter, and to
a lesser extent, the second quarter. Because these headcount additions do not
immediately contribute significant revenues, the Company's operating margins
in the earlier part of the year tend to be significantly lower than in the
later parts of the year. Because of the issues affecting the Company's third
and fourth quarter results, which will continue to negatively affect the
Company for at least the next several quarters, the reduction in operating
margins is expected to continue for at least the next several quarters. Many
software companies also experience a seasonal downturn in demand during the
summer months. There can be no assurance that these or other seasonal trends
will not have a material adverse effect on the Company's results of
operations.
Economic Conditions
The revenue growth and profitability of the Company's business depends on
the overall demand for computer software and services as well as new
developments within the IT industry. The demand for computer software and
services is dependent on general economic and business conditions. Thus, a
weakening of the global economy could result in decreased revenues or
decelerating growth rates.
31
<PAGE>
Management of Expanding Operations and Acquisitions
The Company has recently experienced rapid expansion of its operations,
which has placed, and is expected to continue to place, significant demands on
the Company's administrative, operational and financial personnel and systems.
The Company's future operating results will substantially depend on the
ability of its officers and key employees to manage changing business
conditions and to implement and improve its operational, financial control and
reporting systems. In particular, the Company requires significant improvement
in its order entry and fulfillment and management information systems in order
to support its expanded operations. If the Company is unable to respond to and
manage changing business conditions, its business and results of operations
could be materially adversely affected.
As a result of the consummation of a number of acquisitions the Company's
operating expenses have increased. There can be no assurance that the
integration of these businesses can be successfully completed in a timely
fashion, or at all, or that the revenues from the acquired businesses will be
sufficient to support the costs associated with those businesses, without
adversely affecting the Company's operating margins. Any failure to
successfully complete the integration in a timely fashion or to generate
sufficient revenues from the acquired businesses could have a material adverse
effect on the Company's business and results of operations.
On May 29, 1998, the Company acquired The ForeFront Group, Inc., a Houston
based provider of high quality, cost-effective, computer-based training
products and network utilities for technical professionals. The successful
combination of CBT and ForeFront, including the operation of ForeFront as an
autonomous subsidiary of CBT, has required and will continue to require
substantial effort from each company. The Company has experienced some
difficulties in the integration of ForeFront and CBT, in particular in
connection with the integration of the two companies' sales operations. These
difficulties contributed to the company's failure to achieve its internal
revenue expectations in the third quarter of 1998 and have continued to affect
the Company since that time. These difficulties could continue to have a
negative effect on future results, which could be material.
In addition to the pending acquisition of Knowledge Well, the Company
regularly evaluates acquisition opportunities and is likely to make
acquisitions in the future. Future acquisitions by the Company could result in
potentially dilutive issuances of equity securities, the incurrence of debt
and contingent liabilities and amortization expenses related to goodwill and
other intangible assets, which could materially adversely affect the Company's
results of operations. Product and technology acquisitions entail numerous
risks, including difficulties in the assimilation of acquired operations,
technologies and products, diversion of management's attention to other
business concerns, risks of entering markets in which the Company has no or
limited prior experience and the potential loss of key employees of acquired
companies. The Company's management has had limited experience in assimilating
acquired organizations and products into the Company's operations. No
assurance can be given as to the ability of the Company to integrate
successfully any operations, personnel or products that have been acquired or
that might be acquired in the future, and the failure of the Company to do so
could have a material adverse effect on the Company's results of operations.
Risk of Increasing Taxes
Certain of the Company's subsidiaries have significant operations and
generate significant taxable income in Ireland, and certain of the Company's
Irish subsidiaries are taxed at rates substantially lower than tax rates in
effect in the United States and in other countries in which the Company has
operations. The extent of the tax benefit could vary from period to period,
and there can be no assurance that the Company's tax situation will not
change.
Euro Currency
The participating members of the European Union adopted the Euro as the
common legal currency on January 1, 1999. On that same date they established
the fixed conversion rates between the existing sovereign
32
<PAGE>
currencies and the Euro. The Company's research and development operation, as
well as a number of sales operations, are based in Europe. The Company does
not believe that the Euro Conversion will have a material impact on its
business and financial condition. However the Company is unable to determine
with certainty if the Euro conversion will have a material adverse impact on
the Company's business and financial condition.
Year 2000
In the past, many information technology products were designed with two
digit year codes that are unable to determine the correct century for a
particular year. As a result, these hardware and software products may not
function or may give incorrect results in and beyond the year 1999. This
problem has been generally referred to as the "Year 2000" problem.
The Company has established a Year 2000 Task Force in its Dublin Development
Centre (the "Dublin Task Force") and a Year 2000 Task Force in its corporate
headquarters in Redwood City, California (the "US Task Force") to together
identify and resolve Year 2000 issues. The Dublin Task Force is testing the
Year 2000 readiness of CBT's current software products and making appropriate
modifications to ensure that CBT's software will function appropriately in
1999, the Year 2000, and throughout the next century. The Dublin Task Force is
also testing the Company's internal systems in Ireland. The US Task Force is
coordinating testing and preparation of the Company' internal systems
throughout the world that are material to CBT's operations. The Company has
defined "Year 2000 Ready" to mean that neither performance nor functionality
of the hardware or software product will be negatively affected by four digit
dates prior to, during, and after the Year 2000 in a material manner provided
that all other products (whether hardware or software) used in or in
combination with the product properly exchange data with it.
The Company is utilizing internal resources to identify, test and as
necessary correct or reprogram its products and services for Year 2000
Readiness. The Company has tested almost all of its current products that are
generally available and has determined that all such products are Year 2000
Ready, except for certain older products that the Company does not plan to
make Year 2000 Ready and for which there is presently relatively small demand
(such as DOS based products). The Company has not specifically tested software
obtained from third parties, which is incorporated in CBT's products, but
plans to seek assurances from these third parties that their software is Year
2000 Ready. Despite the Company's testing or assurances from third party
software providers, there can be no assurances that the Company's products do
not contain undetected errors or defects associated with Year 2000 date
functions which may result in delay or loss of revenue, diversion of
development resources, damage to the Company's reputation, costs for third
party damage claims, or increased service costs any of which could impair the
Company's finances or business prospects.
The Company is utilizing internal resources to identify, correct, replace or
reprogram, and test its internal systems, including both information
technology ("IT") and non-IT systems. The Company has not yet determined
whether any external resources will be required. The Company's Year 2000
internal readiness program primarily covers: taking inventory of hardware,
software and embedded systems, creating action plans to address known risks
associated with such systems, contacting vendors for assurances that their
systems are or shall be timely Year 2000 Ready, and contingency planning. The
Company has initiated an assessment of its material internal IT systems and
its non-IT systems. There can be no assurance that the Company's internal
systems or the systems of other companies on which the Company's systems rely
will be timely Year 2000 Ready and that such failure to achieve Year 2000
Readiness will not have a material adverse effect on the Company's systems.
The Company has thus far funded its Year 2000 Readiness plan from operating
cash flows and in the past has not separately accounted for these costs. These
costs have principally been the related payroll costs for personnel in the
development and information systems group. The Company estimates that costs
incurred through December 31, 1998 in connection with the Year 2000 Readiness
program have not been material to the Company. In connection with the
Company's internal system Year 2000 readiness plan, the Company will incur
additional costs which may be material for internal and possibly external
administrative personnel to manage the
33
<PAGE>
project, and for new (or upgrades to) internal use software, hardware and
related engineering costs. Although the Company expects to implement
successfully the systems and programming changes necessary to adequately
address issues confronting the Company raised by the Year 2000 problem, there
can be no assurance, however, that problems will not arise with respect to
Year 2000 Readiness that the Company fails to identify or address timely. The
Company's inability to timely implement such changes could have a material
adverse effect on future results of operations.
Some commentators have stated that a significant amount of litigation will
arise out of Year 2000 Readiness issues, and the Company is aware of lawsuits
against other software vendors. In addition, the Company could be affected by
Year 2000 litigation against its software development partners. Because of the
unprecedented nature of such litigation and unknown impact of the Year 2000
problem, it is uncertain to what extent the Company may be affected by such
litigation.
The Company presently has only minimal information concerning the Year 2000
Readiness status of its customers. If the Company's current or future
customers fail to achieve Year 2000 Readiness or if they divert or delay
technology expenditures to focus on or in connection with preparing their
business for the Year 2000, capital expenditure, software investment and
training budgets may be delayed or spent on remediation efforts rather than
information technology training. Such a delay in software investment or
diversion of software investment or training funds could reduce the demand for
the Company's products both (a) directly, if current and potential customers
allocate less funds to information technology training, and (b) indirectly, by
delaying the purchase and implementation of new systems. This could adversely
affect the Company's future revenues, although the impact is not known at this
time.
The Company has facilities, operations, and customers located throughout the
world. Some commentators have reported that some countries, and organizations
within those countries, are not acting intensively to remediate their Year
2000 issues. To the extent that the businesses and governments in countries
where the Company does business do not work intensively at remediation of
their Year 2000 issues, the Company may suffer significant interruptions or
delays in its operations and business. This could have a material adverse
effect on the Company's future results of operations.
The Company is also subject to external forces that might affect industry
and commerce generally, such as Year 2000 Readiness failures at utility,
transportation, telecommunication, and Internet provider companies and related
service interruptions. In addition, because the Company has facilities,
operations, and customers located throughout the world, the Company's
operations and financial results may be impacted more severely than those of
other businesses by the failure of its internal network or by the temporary
loss of telecommunication systems or the Internet generally.
The Company has not yet developed a contingency plan to address situations
that may result if it is unable to achieve Year 2000 Readiness of its critical
operations. The cost of developing or implementing such a plan may itself be
material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company did not directly or benefically own any market risk sensitive
instruments at the end of fiscal 1998 or fiscal 1997.
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Ernst & Young, Independent Auditors.......................... 36
Report of Arthur Andersen LLP, Independent Public Accountants.......... 37
Consolidated Balance Sheets............................................ 38
Consolidated Statements of Operations.................................. 39
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income.................................................. 40-42
Consolidated Statements of Cash Flows.................................. 43
Notes to Consolidated Financial Statements............................. 44-61
</TABLE>
35
<PAGE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors and Shareholders.
CBT Group PLC
We have audited the accompanying consolidated balance sheets of CBT Group
PLC as of December 31, 1997 and 1998 and the related consolidated statements
of operations, changes in shareholders' equity and comprehensive income, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits. We did not audit the financial statements of The
Forefront Group, Inc., a company acquired by the Company in a business
combination accounted for as a pooling-of-interests as described in note 4 to
the consolidated financial statements, which statements reflect total assets
of $10,008,111 as of December 31, 1997, and total revenues of $13,798,466 and
$18,407,770 for the years ended December 31, 1996 and 1997, respectively.
Those statements were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to data included for
The Forefront Group, Inc., is based solely on the report of the other
auditors.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits, and the report
of other auditors, provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of CBT Group PLC at December 31,
1997 and 1998, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with United States generally accepted accounting principles.
/s/ Ernst & Young
_________________________________
ERNST & YOUNG
Dublin, Ireland
Date: January 19, 1999
36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The ForeFront Group, Inc.:
We have audited the accompanying consolidated balance sheets of The
ForeFront Group, Inc., and subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, stockholders' equity and Cash
Flows for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
ForeFront Group, Inc., and subsidiaries as of December 31, 1997, and the
results of their operations and their Cash Flows for each of the two years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
January 30, 1998
37
<PAGE>
CBT GROUP PLC
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
At December 31
------------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................. $ 35,505 $ 65,648
Short term investments..................................... 36,038 36,386
Accounts receivable, net................................... 40,031 43,508
Inventories................................................ 615 247
Deferred tax assets, net................................... 140 253
Prepaid expenses........................................... 4,198 5,777
-------- --------
Total current assets..................................... 116,527 151,819
Intangible assets.......................................... 5,956 4,237
Property and equipment, net................................ 10,207 17,636
Investments................................................ 200 550
Deferred tax assets, net................................... 342 --
Other assets............................................... 8,097 16,002
-------- --------
Total assets............................................. $141,329 $190,244
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under bank overdraft facility and overdrafts.... 13 --
Accounts payable........................................... 4,820 5,161
Accrued payroll and related expenses....................... 6,411 6,790
Other accrued liabilities.................................. 16,715 20,023
Deferred revenues.......................................... 4,550 3,004
-------- --------
Total current liabilities................................ 32,509 34,978
Non Current Liabilities
Minority equity interest................................... 622 383
Other liabilities.......................................... 519 82
-------- --------
Total non current liabilities............................ 1,141 465
Shareholders' equity
Ordinary shares, IR9.375p par value: 120,000,000 shares
authorized at December 31, 1997 and 1998; issued and
outstanding 41,763,452 and 41,706,273 at December 31, 1997
and 44,412,808 and 44,387,039 shares at December 31, 1998.. 6,369 6,725
Additional paid-in capital................................. 97,870 127,869
Accumulated profit......................................... 2,986 19,293
Capital redemption......................................... -- 231
Deferred compensation...................................... (112) --
Other comprehensive income................................. 568 685
Treasury stock, 25,769 shares at cost...................... (2) (2)
-------- --------
Total shareholders' equity................................. 107,679 154,801
-------- --------
Total liabilities and shareholders' equity............... $141,329 $190,244
======== ========
</TABLE>
(see accompanying notes)
38
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Revenues........................................... $87,364 $137,047 $162,232
Cost of revenues................................... 15,445 22,502 25,137
------- -------- --------
Gross profit....................................... 71,919 114,545 137,095
Operating expenses:
Research and development......................... 14,502 20,878 25,832
Sales and marketing.............................. 39,288 59,160 75,395
General and administrative....................... 9,075 11,601 15,893
Acquired research and development................ 2,799 4,097 --
Costs of acquisitions............................ 2,155 1,534 5,505
------- -------- --------
Total operating expenses....................... 67,819 97,270 122,625
------- -------- --------
Income from operations............................. 4,100 17,275 14,470
Interest income, net............................... 2,821 2,729 4,218
Gain on sale of assets............................. -- 1,869 --
Net exchange gain.................................. 4 112 516
------- -------- --------
Income before provision for income taxes........... 6,925 21,985 19,204
Provision for income taxes......................... (2,419) (3,916) (2,666)
------- -------- --------
Net Income......................................... $ 4,506 $ 18,069 $ 16,538
======= ======== ========
Net income per share--Basic........................ $ 0.12 $ 0.45 $ 0.38
======= ======== ========
Net income per share--Diluted...................... $ 0.11 $ 0.41 $ 0.36
======= ======== ========
</TABLE>
(see accompanying notes)
39
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Additional Accumulated Receivable Other Total
Ordinary paid-in profit Capital Deferred from comprehensive Treasury shareholders'
shares capital (deficit) redemption compensation shareholders income stock equity
-------- ---------- ----------- ---------- ------------ ------------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1995........... $5,530 $72,412 $(18,196) $ -- $(586) $(190) $ 1 $ (2) $58,969
Issuance of
37,632 ordinary
shares as a
result of
pooling
Scholars.com... 5 (5) -- -- -- -- -- -- --
Issuance of
39,212 ordinary
shares as a
result of the
acquisition of
Blue Squirrel.. 6 392 -- -- -- -- -- -- 398
Issuance of
70,124 ordinary
shares as a
result of the
acquisition of
BookMaker...... 10 2,405 -- -- -- -- -- -- 2,415
Issuance of
1,572,456
ordinary shares
as a result of
option
exercises and
139,580 from
employee
purchase plan.. 257 2,459 -- -- -- -- -- -- 2,716
Amortization of
deferred
compensation... -- (16) -- -- 217 -- -- -- 201
Received from
shareholders... -- -- -- -- -- 190 -- -- 190
Distributions to
stockholders... -- -- (1,505) -- -- -- -- -- (1,505)
Comprehensive
Income:
Net income...... -- -- 4,506 -- -- -- -- -- 4,506
Translation
adjustment..... -- -- -- -- -- -- 358 -- 358
-------
Comprehensive
Income......... 4,864
------ ------- -------- ----- ----- ----- ----- ----- -------
Balance at
December 31,
1996........... $5,808 $77,647 $(15,195) $ -- $(369) $ -- $ 359 $ (2) $68,248
</TABLE>
(see accompanying notes)
40
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Additional Accumulated Receivable Other Total
Ordinary paid-in profit Capital Deferred from comprehensive Treasury shareholders'
shares capital (deficit) redemption compensation shareholders income stock equity
-------- ---------- ----------- ---------- ------------ ------------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996........... $5,808 $77,647 $(15,195) $ -- $ (369) $ -- $ 359 $ (2) $ 68,248
Issuance of
258,000
ordinary shares
as a result of
pooling
MidEast........ 37 370 -- -- -- -- -- -- 407
Issuance of
3,229,864
ordinary shares
as a result of
option
exercises and
91,492 from
employee share
purchase plan.. 522 16,438 -- -- -- -- -- -- 16,960
Issuance of
7,791 ordinary
shares as a
result of the
acquisition of
BookMaker...... 2 214 -- -- -- -- -- -- 216
Issuance of
ordinary shares
as a result of
the acquisition
of Lantec...... -- 2,552 -- -- -- -- -- -- 2,552
Taxation credit
as a result of
disqualifying
dispositions... -- 825 -- -- -- -- -- -- 825
Amortization of
deferred
compensation... -- (176) -- -- 257 -- -- -- 81
Adjustment to
record the
overlap in
accounting for
ALA's net loss
from January 1,
1997 to June
30, 1997....... -- -- 112 -- -- -- -- -- 112
Comprehensive
Income:
Net income...... -- -- 18,069 -- -- -- -- -- 18,069
Translation
adjustment..... -- -- -- -- -- -- 209 -- 209
--------
Comprehensive
Income......... -- -- -- -- -- -- -- -- 18,278
------ ------- -------- ----- ------ ----- ----- ----- --------
Balance at
December 31,
1997........... $6,369 $97,870 $ 2,986 $ -- $(112) $ -- $ 568 $ (2) $107,679
</TABLE>
(see accompanying notes)
41
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Additional Accumulated Receivable Other Total
Ordinary paid-in profit Capital Deferred from comprehensive Treasury shareholders'
shares capital (deficit) redemption compensation shareholders income stock equity
-------- ---------- ----------- ---------- ------------ ------------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1997........... $6,369 $ 97,870 $ 2,986 $ -- $(112) $ -- $ 568 $ (2) $107,679
Issuance of
2,314,200
ordinary shares
as a result of
option
exercises,
194,734 from
employee share
purchase plan
and 7,016 from
the exercise of
warrants....... 334 29,493 -- -- -- -- -- -- 29,827
Release of
31,410 Escrow
shares in
respect of
BookMaker
acquisition.... 4 303 -- -- -- -- -- -- 307
Issue of
exchangable
shares in
respect of
LanTec
acquisition.... 18 (18) -- -- -- -- -- -- --
Amortization of
deferred
compensation... -- -- -- -- 112 -- -- -- 112
Capital
redemption
reserve........ -- -- (231) 231 -- -- -- -- --
Tax credit on
disqualifying
dispositions... -- 221 -- -- -- -- -- -- 221
Comprehensive
Income:
Net income...... -- -- 16,538 -- -- -- -- -- 16,538
Translation
adjustment..... -- -- -- -- -- -- 117 -- 117
--------
Comprehensive
Income......... 16,655
------ -------- ------- ----- ----- ----- ----- ----- --------
Balance at
December 31,
1998........... $6,725 $127,869 $19,293 $ 231 $ -- $ -- $ 685 $ (2) $154,801
====== ======== ======= ===== ===== ===== ===== ===== ========
</TABLE>
(see accompanying notes)
42
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
( dollars in thousands)
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Years ended December
31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................... $ 4,506 $18,069 $16,538
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 2,437 3,582 6,689
Non cash acquired research and development......... 2,799 4,097 --
Taxation credit from disqualifying dispositions.... -- 825 221
(Gain)/ loss on disposal of assets................. -- (1,869) 318
Overlap in accounting for ALA net loss, excluding
depreciation...................................... -- (67) --
Accrued interest on short-term investments......... 221 (465) 241
Changes in operating assets and liabilities:
Accounts receivable................................ (5,910) (19,199) (3,636)
Inventories........................................ (116) 2 367
Deferred tax assets................................ (132) 49 215
Prepaid expenses and other assets.................. (4,260) (5,375) (9,527)
Accounts payable................................... 1,822 168 406
Accrued payroll and related expenses and other
accrued liabilities............................... 2,780 7,175 3,118
Deferred revenue................................... 2,096 (2,855) (1,485)
------- ------- -------
Net cash provided by operating activities.......... 6,243 4,137 13,465
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of intangible assets..................... -- (5,297) --
Purchases of property and equipment................ (7,378) (5,410) (12,634)
Payments to acquire short-term investments......... (1,334) (2,291) (93,673)
Payments to acquire Blue Squirrel, LanTec.......... (128) (1,803) --
Proceeds from acquisition of BookMaker............. 77 -- --
Proceeds from short-term investments............... 12,998 3,500 93,085
Proceeds from investments.......................... -- 4,997 --
Proceeds from sale of assets....................... -- 1,869 --
Payments to acquire investments.................... (4,997) (200) (350)
------- ------- -------
Net cash used in investing activities.............. (762) (4,635) (13,572)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable......................... (79) -- --
Repayments under bank overdraft facility........... (1,381) (140) (13)
Repayments of bank loan............................ (742) -- --
Payment of receivables from shareholders........... 190 -- --
Proceeds from issuance of preferred shares in
subsidiary........................................ -- 606 --
Proceeds from issuance of ordinary shares, net..... 2,716 17,367 30,124
Dividend distributions............................. (1,505) -- --
------- ------- -------
Net cash provided (used) by financing activities... (801) 17,833 30,111
------- ------- -------
Effect of exchange rate changes on cash and cash
equivalents....................................... (135) 929 139
------- ------- -------
Net increase in cash and cash equivalents.......... 4,545 18,264 30,143
Cash and cash equivalents at beginning of period... 12,696 17,241 35,505
------- ------- -------
Cash and cash equivalents at end of period......... $17,241 $35,505 $65,648
======= ======= =======
Supplemental disclosure of cash flow information:
Interest paid...................................... $ 108 $ 43 $ 30
Taxes paid......................................... $ 847 $ 994 $ 2,283
</TABLE>
(see accompanying notes)
43
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
CBT Group PLC is organized as a public limited company under the laws of the
Republic of Ireland. CBT Group PLC and its subsidiaries (collectively, the
"Company" or "CBT") develops and markets interactive information technology
("IT") education and training software. The principal market for the Company's
products comprises major U.S. national and multinational organizations.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States and include the
Company and its subsidiaries in the United States, United Kingdom, Ireland,
South Africa, Canada, Germany, Australia, the Netherlands, Sweden, Norway,
Denmark, the Commonwealth of the Bahamas and Grand Cayman after eliminating
all material inter-company accounts and transactions. All acquisitions have
been accounted for under the purchase accounting method, except for the
mergers with Personal Training Systems ("PTS"), CBT Systems Canada Limited (
formerly known as New Technology Training Limited ) ("NTT"), CLS Consult
Gessellschaft fur Beratung, Management und Beteiligung mbH ("CLS"), CBT
Systems Benelux B.V. ("Benelux"), Applied Learning Limited ("ALA"), Ben Watson
& Associates Limited ("Scholars.com"), CBT Systems Middle East Limited
("MidEast"), and The ForeFront Group, Inc ("ForeFront"), which have been
included in the consolidated financial statements under the pooling of
interests method (see note 4).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Translation of Financial Statements of Foreign Entities
The reporting currency for the Company is the U.S. dollar ("dollar"). The
functional currency of the Company's subsidiaries in the United States, United
Kingdom, Republic of South Africa, Canada, Germany, Australia, the
Netherlands, Sweden, Norway and Denmark are the currencies of those countries.
The functional currency of the Company's subsidiaries in Ireland, the
Commonwealth of the Bahamas and Grand Cayman is the dollar.
Balance sheet amounts are translated to the dollar from the local functional
currency at year-end exchange rates, while statements of operations amounts in
local functional currency are translated using average exchange rates.
Translation gains or losses are recorded in other comprehensive income.
Currency gains or losses on transactions denominated in a currency other than
an entity's functional currency are recorded in the results of the operations.
The Company does not use derivative financial instruments for speculative
purposes or to hedge foreign currency exposures. The Company has however
utilized Irish pound deposits to hedge against foreign currency exposures in
Irish pounds during 1998.
Revenue Recognition
Beginning in fiscal 1998, the Company adopted Statement of Position 97-2
"Software Revenue Recognition" as amended by Statement of Position 98-4. The
effect of adoption did not have a material impact on the Company's results of
operations.
The Company derives its revenues primarily pursuant to license agreements
under which customers license usage of delivered products for a period of one,
two or three years. On each anniversary date during the term of
44
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Organization and Summary of Significant Accounting Policies (continued)
multiyear license agreements, customers are allowed to exchange any or all of
the licensed products for an equivalent number of alternative products within
the CBT library. The first year license fee is generally recognized as revenue
at the time of delivery of all products, provided the Company's fees are fixed
or determinable and collections of accounts receivable are probable.
Subsequent annual license fees are recognized on each anniversary date,
provided the Company's fees are fixed or determinable and collections of
accounts receivable are probable. The cost of satisfying any Post Contract
Support ("PCS") is accrued at the time revenue is recognized as PCS fees are
included in the annual license fee, the estimated cost of providing PCS during
the agreements is insignificant and unspecified upgrades or enhancements
offered have been and are expected to be minimal and infrequent. For multi-
element agreements Vendor Specific Objective Evidence exists to allocate the
total fee to the undelivered elements of the agreement. In addition, the
Company derives revenues from sales of its products, which is recognized upon
shipment, net of allowances for estimated future returns and for excess
quantities in distribution channels, provided the Company's fees are fixed or
determinable and collections of accounts receivable are probable.
Revenues from product development arrangements are generally recognized on a
percentage of completion basis as milestones are completed or products
produced under the arrangement.
Revenues from license agreements providing product exchange rights other
than annually during the term of the agreement are deferred and recognized
ratably over the contract period. Such amounts, together with unearned
development and license revenues, are recorded as deferred revenues in the
consolidated financial statements.
Cost of Revenues
Cost of revenues include materials (such as diskettes, compact discs,
packaging and documentation), royalties paid to third parties, the portion of
development costs associated with product co-development arrangements,
fulfillment costs and the amortization of the cost of purchased products.
Approximately $803,000, $442,000 and $596,000 of development expenses incurred
in connection with development and marketing alliances were charged to cost of
revenues in 1996, 1997 and 1998, respectively.
Inventories
Inventories are stated at the lower of cost (first in, first out) or net
realizable value and consist principally of compact discs, diskettes and
manuals. Net realizable value is the estimated selling price less all
applicable selling costs.
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of a working model. Development costs incurred by the Company between
completion of the working model and the point at which the product is ready
for general release have been insignificant. Through December 31, 1998, all
research and development costs have been expensed as incurred.
Intangible Fixed Assets
In December 1997 the Company and Street Technologies, Inc. ("Street") a
developer of technology to "stream" multimedia and other large data files to
permit real-time delivery over local and wide area networks,
45
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Organization and Summary of Significant Accounting Policies (continued)
corporate intranets and the Internet, entered into an agreement pursuant to
which Street granted to the Company a perpetual license to its software in
return for a once off payment of $5,297,000. As part of the agreement the
Company disposed of its investment in Street for $4,997,000, which was the
cost of its original investment. The Company commenced amortizing this asset,
using the straight line method, over a period of five years on January 1,
1998. Also included in intangible assets are goodwill and other intangibles
relating to the acquisition of Lantec (see note 4). These intangibles were
amortized in full at December 31, 1998. Accumulated amortization at December
31, 1997 and 1998 was $13,000 and $1,732,000 respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of two to
five years. Leasehold improvements are amortized over the lesser of the term
of the lease or the estimated useful life of the asset.
Net Income Per Share
On March 9, 1998 the Company effected a two-for-one split of its issued and
outstanding ADSs. Subsequent thereto, the Company's shareholders approved a
proposal at the Company's 1998 Annual General Meeting to subdivide each of the
Ordinary Shares of IR37.5p into four Ordinary Shares of IR9.375p (the
"Ordinary Share Split"). As a consequence of the Ordinary Share Split,
effective May 22, 1998 each ADS represents and is exchangeable for one
Ordinary Share (the "Ratio Change"). Aside from the Ratio Change, the Ordinary
Share Split had no effect on the ADSs and had no effect on the number of ADSs
outstanding.
Basic net income per share is calculated using the weighted average number
of ordinary shares of the Company outstanding during the period including the
issuance of Company ordinary shares as a result of pooling of interests (see
note 4), at the beginning of the earliest period presented or subsequent date
of incorporation of the pooled entity as applicable. Diluted net income per
share is similarly calculated using the combined weighted average number of
ordinary and dilutive potential ordinary shares, (as determined using the
treasury stock method), such as shares issuable pursuant to the exercise of
options outstanding, of the Company including the issuance of Company ordinary
and dilutive potential ordinary shares as a result of pooling of interests.
Defined Contribution Plan
The Company sponsors and contributes to a defined contribution plan for
certain employees and directors. Contribution amounts by the Company are
determined by management and allocated to employees on a pro rata basis based
on the employees' contribution. The Company contributed approximately
$232,000, $270,000 and $350,000 to the Plan in the years ended December 31,
1996, 1997 and 1998, respectively.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock -
Based Compensation" encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25. "Accounting for Stock Issued to Employees" ("APB25"), and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. This cost is deferred and charged to expense ratably over the
vesting period, generally four years. Where shares are issued at less than the
deemed value for accounting
46
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Organization and Summary of Significant Accounting Policies (continued)
purposes, the excess of the deemed value for accounting purposes over the
amount the employee must pay to acquire the shares is charged to expense as
stock compensation and credited to additional paid-in capital in the period of
transfer. The Company has recognized compensation expense of $201,050, $81,100
and $112,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
Advertising Costs
Costs incurred for producing and communicating advertising are expensed when
incurred. Advertising expenses amounted to $3.6 million, $9.3 million and
$11.4 million for the years ended December 31, 1996, 1997 and 1998
respectively.
Gain on sale of assets
In September 1997, ForeFront sold certain of its Internet printing
technologies under development to Hewlett-Packard Company and licensed
additional technologies to be used in connection with ongoing development
efforts of Hewlett-Packard, and recorded an one-time gain of $1.87 million
(net of closing costs). The sale proceeds consisted entirely of cash which was
received by the Company in September 1997.
Government Grants
Applications for payment under the grant agreement are made on a quarterly
basis. The application is matched with the relevant expenditure for the period
and, once approved by the grant authority, the grant is recognized and offset
against the relevant expense in the statement of operations.
Employment Grants are payable in two equal annual installments. The first
installment is due when the employee is made permanent and the second on the
anniversary thereof. Rent grants are payable quarterly equal to 40% of the
rent of the Company's Irish premises, subject to a maximum amount. Management
development grants are payable quarterly for 50% of the eligible costs of
employing five members of management, subject to a maximum amount.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consists principally of cash investments and trade receivables.
The Company invests its excess cash in deposits with major banks, in U.S.
Treasury and U.S. agency obligations and in debt securities of corporations
with strong credit ratings. The Company performs periodic evaluations of the
relative credit standing of all the financial institutions dealt with by the
Company, and considers the related credit risk to be minimal.
The principal market for the Company's products comprises major U.S.
national and multi-national organizations. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential credit
losses. To date such losses have been within management's expectations. The
Company had an allowance for doubtful accounts of $1,219,500 and $1,142,800 at
December 31, 1997 and 1998, respectively. The Company generally requires no
collateral from its customers.
Accounting for Income Taxes
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes",
which uses the liability method to calculate deferred income taxes.
47
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents consist of cash on deposit with banks, money
market instruments, and certificates of deposit with maturities of 90 days or
less when acquired.
Short-term investments at December 31, 1997 and 1998 comprise debt
securities issued by the U.S. Treasury, U.S. agency obligations and debt
securities of corporations with strong credit ratings with a maturity of less
than six months but greater than three months at the date of acquisition by
the Company. These are included at cost plus accrued interest, which
approximates the fair market value of the securities. At December 31, 1997 and
1998 $36,038,000 and $36,386,000 respectively (inclusive of accrued interest
of $713,000 and $472,000 respectively) was held in short-term investments. The
Company classifies available for sale securities as short-term investments.
Other Assets
Other assets at December 31, 1997 and 1998 consist primarily of deferred
sales commissions. Deferred sales commissions are charged to expense when the
related revenue is recognized.
2. Net Income Per Share
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
(dollars in thousands,
except per share
amounts)
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted net income per
share--income available to common shareholders...... $ 4,506 $18,069 $16,538
======= ======= =======
Denominator:
Denominator for basic net income per share--weighted
average shares...................................... 37,276 40,292 43,630
Effect of dilutive securities:
Employee stock options............................... 4,736 3,836 2,349
------- ------- -------
Denominator for diluted net income per share--
adjusted weighted average shares and assumed
conversion.......................................... 42,012 44,128 45,979
======= ======= =======
Basic net income per share............................. $ 0.12 $ 0.45 $ 0.38
======= ======= =======
Diluted net income per share........................... $ 0.11 $ 0.41 $ 0.36
======= ======= =======
</TABLE>
3. Comprehensive Income
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No.130 ("SFAS 130"), "Reporting Comprehensive Income", which
established new rules for the reporting and display of comprehensive income
and its components; however, adoption in 1998 had no impact on the Company's
net income or shareholders' equity. SFAS 130 requires foreign currency
translation adjustments, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS 130.
48
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Acquisitions and Mergers
On May 31, 1996, a merger occurred between the Company and CLS, a
distributor of multimedia training and education software based in Germany,
under which the Company issued 145,604 ordinary shares for all the outstanding
stock of CLS. On the same date a merger occurred between the Company and NTT,
the Company's Canadian distributor, under which the Company issued 146,124
ordinary shares for all the outstanding stock of NTT.
On February 28, 1997, a merger occurred between the Company and ALA, a
distributor of multimedia training and education software based in Australia,
under which the Company issued 343,084 ordinary shares for all the outstanding
stock of ALA. On the same date a merger occurred between the Company and
Benelux, the Company's Benelux distributor, under which the Company issued
71,360 ordinary shares for all the outstanding stock of Benelux.
On August 31, 1997, a merger occurred between the Company and Scholars.com,
a provider of online mentoring, under which the Company issued 37,632 ordinary
shares for all the outstanding stock of Scholars.com.
On December 1, 1997, a merger occurred between the Company and MidEast, the
Company's Middle Eastern distributor, under which the Company issued 258,000
ordinary shares for all the outstanding stock of MidEast. On May 28, 1998, a
merger occurred between the Company and ForeFront, under which the Company
issued 2,182,851 ordinary shares for all outstanding stock of ForeFront. The
financial results of the Company, CLS, NTT, ALA, Benelux, Scholars.com,
MidEast and ForeFront have been accounted for using the "pooling-of-interests"
method. The "pooling-of-interests" method gives effect to the mergers as if
they had occurred at the beginning of the earliest period presented or
subsequent date of incorporation of the pooled entity as applicable. The
consolidated financial statements as presented are based on the Company's
historical consolidated financial statements and CLS's, NTT's ALA's,
Benelux's, Scholars.com's, MidEast's and ForeFront's historical financial
statements.
The consolidated financial information for the year ended December 31, 1997
and 1998 includes the results of the Company and CLS, NTT, ALA, Benelux,
Scholars.com, MidEast (from the date of its incorporation) and ForeFront for
these periods and the assets and liabilities of the Company and CLS, NTT, ALA,
Benelux, Scholars.com, MidEast and ForeFront as at December 31, 1997 and 1998,
respectively. The comparative figures for the year ended December 31, 1996
comprise the results of the Company and CLS, NTT, Benelux, Scholars.com and
ForeFront for that period combined with the results of ALA for the year ended
June 30, 1997. ALA and Benelux, in the two month period ended February 28,
1997 had net revenues of $1,094,315 and $374,390 respectively. Net income in
that period was $123,642 and $21,190, respectively.
Scholars. com, in the eight month period ended August 31, 1997 had net
revenues of $1,293,518. Net income in that period was $111,418.
MidEast was established in April 1997 and in the period to December 1, 1997
had net revenues of $225,171. The net loss in the period was $532,046.
ForeFront in the six month period ended June 30, 1998 had net revenues of
$12.1 million. The net loss for the six month period ended June 30, 1998 was
$3.1 million.
ALA's results of operations for the six month period ended June 30, 1997
which reflected net revenues of $2,991,712, expenses of $3,104,193 and a net
loss of $112,481 have been duplicated in the accompanying 1997 Financial
Statements to conform operating results to the Company's fiscal year end. The
duplicate periods have been adjusted by including the net loss as an increase
to the Company's accumulated profit as of December 31,1997.
49
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Acquisitions and Mergers (continued)
The results of the operations for the enterprise acquired in 1998 and the
combined amounts presented in the consolidated financial statements are
summarized below (dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Revenues:
CBT Group PLC.................................... $73,566 $118,639 $139,919
ForeFront........................................ 13,798 18,408 22,313
------- -------- --------
Combined....................................... $87,364 $137,047 $162,232
======= ======== ========
Net income:
CBT Group PLC.................................... $11,839 $ 22,197 $ 21,891
ForeFront........................................ (7,333) (4,128) (5,353)
------- -------- --------
Combined....................................... $ 4,506 $ 18,069 $ 16,538
======= ======== ========
</TABLE>
ForeFront Acquisitions
On March 8, 1996 ForeFront acquired Blue Squirrel, Inc., for a consideration
comprising 39,212 equivalent CBT ordinary shares and $100,000 in cash to
retire debt assumed by ForeFront. On June 12, 1996, ForeFront acquired
BookMaker Corporation, and issued 81,968 equivalent CBT ordinary shares. On
July 22, 1996, a merger occurred between ForeFront and AllMicro Inc. under
which the stockholders of AllMicro received 331,315 equivalent CBT ordinary
shares. On September 29, 1997, ForeFront acquired Lan Professional, Inc.
"LanTec", in exchange for $1.8 million and 174,860 equivalent CBT ordinary
shares, which are issuable upon exchange of an equivalent number of
Exchangeable Shares of LanTec retained by the LanTec shareholders at closing.
The acquisitions of Blue Squirrel, Inc., BookMaker Corporation and LanTec have
been accounted for under the "purchase method" and accordingly, the operating
results are included in the operating results since the date of acquisition.
The merger with AllMicro has been accounted for using the "pooling of
interests" method.
5. Property and Equipment
Property and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
1997 1998
------- -------
(dollars in
thousands)
<S> <C> <C>
Office and computer equipment.................................. $13,993 $22,781
Furniture, fixtures and others................................. 3,547 6,431
------- -------
Total property and equipment................................... 17,540 29,212
Accumulated depreciation....................................... 7,333 11,576
------- -------
Property and equipment, net.................................... $10,207 $17,636
======= =======
</TABLE>
Depreciation of property and equipment amounted to $2,236,503, $3,488,104
and $4,858,399 for the years ended December 31, 1996, 1997 and 1998,
respectively.
50
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Other Accrued Liabilities
Other accrued liabilities consist of the following at December 31 (dollars
in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Royalties...................................................... $ 3,305 $ 4,756
Income and other taxes payable................................. 6,484 7,363
Other.......................................................... 6,926 7,904
------- -------
$16,715 $20,023
======= =======
</TABLE>
7. Operating Lease Commitments
The Company leases various facilities, automobiles and equipment under non-
cancellable operating lease arrangements. The major facilities leases are for
terms of 2 to 5 years, (except for CBT Systems Limited's new premises which
has a non-cancellable lease term of 11 years) and generally provide renewal
options for terms of up to 3 additional years. Rent expense under all
operating leases was approximately $2,245,000, $2,694,000 and $3,696,000 in
1996, 1997 and 1998, respectively. Future minimum lease payments under these
non-cancellable operating leases as of December 31, 1998 are as follows
(dollars in thousands):
<TABLE>
<S> <C>
1999................................. $ 5,018
2000................................. 4,644
2001................................. 4,161
2002................................. 3,722
2003................................. 2,700
Thereafter........................... 3,755
-------
Total minimum lease payments....... $24,000
=======
</TABLE>
8. Contingencies
During 1998, the previously disclosed litigation involving the transfer of
certain securities of Datacode Electronics Ltd. was settled. All amounts paid
in relation to the settlement have been expensed.
Since the end of the third quarter of 1998 purported class action lawsuits
were filed in the United States District Court for the Northern District of
California, the United States District Court for the Southern District of New
York and the Superior Court of California for the County of San Mateo against
CBT Group PLC, its American operating subsidiary, CBT Systems USA Ltd. and
certain of its former and current officers and directors alleging violations
of the federal securities laws. The complaints allege that the defendants
misrepresented and/or omitted to state material facts regarding CBT's business
and financial condition and prospects during the class periods in order to
artificially inflate and maintain the price of the Company's ADSs, and
misrepresented and/or omitted to state material facts in the registration
statement and prospectus issued in connection with the merger with The
ForeFront Group, Inc., artificially inflating the price of the Company's ADSs.
The Company believes that these actions are without merit and intends to
vigorously defend itself against these claims. Although the outcome of these
actions cannot presently be determined, an adverse resolution of these matters
could have a material adverse effect on the Company's financial position and
results of operations.
51
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Contingencies (continued)
On October 29, 1998, a derivative complaint was filed in the Superior Court
of California for the County of San Mateo against several present and former
officers and directors of the Company alleging that these persons violated
various duties to the Company. The derivative complaint also names the Company
as a nominal defendant. The derivative complaint is predicated on the factual
allegations contained in the class action complaints discussed above. No
demand was previously made to the Company's Board of Directors or shareholders
concerning the allegations of the derivative complaint, which seeks an
unspecified amount of damages.
In addition, certain other claims and litigation have arisen against the
Company in the ordinary course of its business. The Company believes that all
such claims and lawsuits against the Company are without merit, and the
Company intends to vigorously contest such disputes. In the opinion of
management, the outcome of such disputes will not have a material effect on
its financial position, results of operations or liquidity, as reported in
these financial statements.
Depending on the amount and timing of any unfavorable resolution of these
matters, it is possible that the Company's future results of operations or
cash flows could be materially affected in a particular period.
9. Shareholders' Equity
Dividends may only be declared and paid out of profits available for
distribution determined in accordance with accounting principles generally
accepted in Ireland and applicable Irish Company Law. There are no material
restrictions on the distribution of income or retained earnings by the
consolidated group companies of CBT Group PLC. Any dividends, if and when
declared, will be declared and paid in dollars.
In 1995, the Company issued warrants to purchase 11,699 ordinary shares to
holders of previously outstanding preferred stock. Warrants to purchase 15,173
ordinary shares were also issued to the holders of previously outstanding
senior convertible notes. The warrants to purchase ordinary shares at $8.99
per share have a five-year term.
Share Option Plans
The Company has elected to follow Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options because, as discussed
below, the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options generally equals the market price of the
underlying stock on the date of grant, no compensation expense is generally
recognized.
However, for certain options granted by ForeFront in August and September
1995, ForeFront recognized deferred compensation for the excess of the deemed
value for accounting purposes of the common stock on the date the options were
granted ($8.99 per share) over the $3.60 exercise price of such options.
Aggregate deferred compensation of $726,375 resulted from the issuance of
these options, and compensation expense is recognized ratably over the vesting
period of each option, generally four years. ForeFront recognized $201,050,
$81,100 and $112,000 of this amount as compensation expense for the years
ended December 31, 1996, 1997 and 1998, respectively.
The Company has six share option plans, the 1990 Share Option Scheme (the
"1990 Plan"), the 1994 Share Option Plan (the "1994 Plan"), the Supplemental
Share Option Scheme (the "1996 Plan"), the 1992 ForeFront
52
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Shareholders' Equity (continued)
Stock Option Plan (the "FF92 Plan"), the 1996 ForeFront Non-Qualified Stock
Option Plan (the "FF96 Plan") and the 1996 ForeFront Non-Employee Directors'
Stock Option Plan (the "FF Directors' 1996 Plan"), (collectively the "Plans")
Under the 1990 Plan, options to acquire ordinary shares in the Company may
be granted to any director or employee of the Company. Under the 1994 Plan,
all employees and directors of the Company and any independent contractor who
performs services for the Company are eligible to receive grants of non
statutory options ("NSO"). Employees are also eligible to receive grants of
incentive share options ("ISO") which are intended to qualify under section
422 of the United States Internal Revenue Code of 1986, as amended. Under the
1996 Plan all employees, with the exception of directors and executive
officers, are eligible to receive grants of NSO's. Under the FF92 Plan, non-
qualified and/or incentive options to acquire shares of common stock in
ForeFront were granted to any employee or director of ForeFront. Under the FF
96 Plan, non-qualified options to acquire shares of common stock in ForeFront
were granted to employees and directors of ForeFront. Under the FF Directors'
1996 Plan, non-employee directors were eligible to receive grants of options
to acquire common stock of ForeFront upon election to the Board of Directors
and each subsequent year thereafter.
As of December 31, 1998, 4,700,000, 7,243,004, 4,500,000 (which includes an
increase in the number of shares reserved for issuance under the 1994 Plan and
1996 Plan respectively of 1,000,000, authorized by a resolution passed at the
Annual General Meeting of the Company on April 28, 1998 and 3,500,000
respectively), 470,550, 627,400 and 47,055 ordinary shares have been reserved
for issuance under the 1990 Plan, the 1994 Plan, 1996 Plan, FF92 Plan, FF96
Plan and FF Directors' 1996 Plan, respectively. The Plans are administered by
the Stock Option Committee (the "Committee").
The terms of the options granted are generally determined by the Committee.
The exercise price of options granted under the 1990 Plan and ISO's granted
under the 1994 Plan cannot be less than the fair market value of ordinary
shares on the date of grant. In the case of ISO's granted to holders of more
than 10% of the voting power of the Company the exercise price cannot be less
than 110% of such fair market value. Under the 1994 Plan, the exercise price
of NSO's is set by the Committee at its discretion. The term of an option
under the 1994, 1996, FF92, FF96 Plans cannot exceed ten years and, generally,
the terms of an option under the 1990 Plan and FF Directors' 1996 Plan cannot
exceed ten years. The term of an ISO granted to a holder of more than 10% of
the voting power of the Company cannot exceed five years. An option may not be
exercised unless the option holder is at the date of exercise, or within three
months of the date of exercise has been, a director, employee or contractor of
the Company. There are certain exceptions for exercises following retirement
or death. Options under the Plans generally expire not later than 90 days
following termination of employment or service or six months following an
optionees' death or disability.
In the event that options under the Plans terminate or expire without having
been exercised in full, the shares subject to those options are available for
additional option grants. Vesting periods of the options are determined by the
Committee and are currently for periods of up to four years. Under the 1990,
1994, 1996, FF92, FF96 and FF Directors 1996 Plans, options to purchase
103,410, 434,689, 135,312, 39,829, 126,267 and 7,842 shares respectively were
exercisable as of December 31, 1998. As of December 31, 1998, 2,412,906
options are available for grant under the plans.
In November 1996, the Compensation Committee of the ForeFront Board of
Directors approved the repricing of substantially all of ForeFront's
oustanding options held by the existing employees to the then current fair
market value in order to incentivize the Company's employees. In October 1998,
the Compensation Committee of the Board of Directors approved the repricing of
all of the Company's outstanding options held by the existing employees,
except for director stock options, to the then current market value of $6.9375
per share
53
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Shareholders' Equity (continued)
(the closing price on the date of such repricing) in an effort to retain and
reincent employees. Under the terms of the repricing, the repriced options
maintain the same vesting and expiration terms.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996, 1997 and 1998; risk-free interest rates of approximately
6%, 6%, and 5% respectively; dividend yields of 0%; volatility factors of the
expected market price of the Company's ordinary shares of .37, .45 and 1.26
respectively; and a weighted-average expected life of the option of five
years.
The Black-Scholes option model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the management's
opinion, the existing models do not provide a reliable single measure of the
fair value of its stock options.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
Pro forma net income/(loss) for the years ended December 31, 1996, 1997 and
1998 was $(2.2) million, $9.2 million and $(5.4) million respectively. Pro
forma basic net income/(loss) per share was $(0.06), $0.23 and $(0.12) for the
years ended December 31, 1996, 1997 and 1998, respectively. Pro forma diluted
net income/(loss) per share was $(0.05), $0.21 and $(0.12) for the years ended
December 31, 1996, 1997 and 1998, respectively. Because options vest over
several years and additional grants are expected, the effects of these
hypothetical calculations are not likely to be representative of similar
future calculations.
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1996, 1997 and 1998 follows:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------
Weighted
Number of Price per Average
Shares Share Exercise Price
---------- ------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1995........... 5,066,796 $ 0.15--11.28 $ 2.54
Granted in 1996...................... 4,067,404 $11.31--29.00 $15.82
Exercised in 1996.................... (1,572,456) $ 0.15--27.50 $ 1.00
Cancelled in 1996.................... (631,864) $ 0.51--27.50 $15.32
---------- ------------- ------
Balance at December 31, 1996........... 6,929,880 $ 0.15--29.00 $ 9.52
Granted in 1997...................... 1,899,275 $20.25--34.75 $21.68
Exercised in 1997.................... (3,223,948) $ 0.15--28.56 $ 4.73
Cancelled in 1997.................... (343,651) $ 2.68--25.63 $13.53
---------- ------------- ------
Balance at December 31, 1997........... 5,261,556 $ 0.40--34.75 $16.64
Granted in 1998...................... 9,203,529 $ 6.69--57.37 $32.87
Exercised in 1998.................... (2,196,200) $ 0.40--31.28 $12.52
Cancelled in 1998.................... (4,354,017) $ 0.15--57.37 $25.61
---------- ------------- ------
Balance at December 31, 1998........... 7,914,868 $ 1.41--36.00 $ 9.52
---------- ------------- ------
</TABLE>
The previously described repricing of the Company's stock options in October
1998 is included in the above summary within the amounts cancelled and granted
in 1998.
54
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Shareholders' Equity (continued)
<TABLE>
<CAPTION>
Options Outstanding At December 31, 1998 Options Exercisable
-------------------------------------------------- ------------------------
Range of Weighted Average Number
Exercise Shares Remaining Contractual Weighted Average of Weighted Average
Prices Outstanding Life Exercise Price Shares Exercise Price
- -------- ----------- --------------------- ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$
1.41--
6.69 104,616 6.19 $ 3.52 44,853 $ 2.70
$
6.94--
6.94 3,065,067 8.48 $ 6.94 492,187 $ 6.94
$
9.76--
9.94 4,136,137 9.94 $ 9.94 3,137 $ 9.76
$
11.00--
25.63 497,186 7.59 $17.55 297,310 $18.67
$
27.49--
36.00 111,862 8.88 $35.04 9,862 $28.66
- -------- --------- ---- ------ ------- ------
$
1.41--
36.00 7,914,868 9.16 $ 9.52 847,349 $11.09
- -------- --------- ---- ------ ------- ------
</TABLE>
At December 31, 1996 and 1997 there were 2,964,960 and 1,623,866 options
exercisable, respectively, at a weighted average exercise price of $3.84 and
$11.89 respectively. The weighted average fair value of options granted during
the years ended December 31, 1996, 1997 and 1998 was $9.00, $11.61 and $15.13,
respectively.
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------
Number of Price per Weighted Average
Shares Share Exercise Price
--------- --------- ----------------
<S> <C> <C> <C>
Other Options
Granted in 1994........................... 186,664 $0.40 $0.40
Exercised in 1996......................... (26,664) $0.40 $0.40
Cancelled in 1996......................... (52,000) $0.40 $0.40
Exercised in 1998......................... (108,000) $0.40 $0.40
-------- ----- -----
Balance at December 31, 1998.............. -- -- --
-------- ----- -----
</TABLE>
In November 1996, the Company granted to Forbairt, in conjunction with their
approval of an employment grant, a rent reduction grant and a management
development grant, an option to purchase 10,000 ordinary shares with an
exercise price equal to the fair market value at the date of grant. The option
was exercised in July 1998.
55
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Income Taxes
Income before provision for income taxes consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997 1998
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Ireland.............................................. $12,264 $22,579 $23,872
Rest of world........................................ (5,339) (594) (4,668)
------- ------- -------
Total.............................................. $ 6,925 $21,985 $19,204
======= ======= =======
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<S> <C> <C> <C>
Current................................................... $2,161 $3,916 $2,666
Deferred.................................................. 258 -- --
------ ------ ------
Total provision for income tax.......................... $2,419 $3,916 $2,666
====== ====== ======
</TABLE>
The current provision for 1998 relates predominantly to provision for income
taxes in Ireland
The provision for income taxes differs from the amount computed by applying
the statutory income tax rate to income before taxes. The sources and tax
effects of the difference are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997 1998
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Income taxes computed at the Irish statutory income
tax rate of 38% for 1996, 36.5% for 1997 and 32%
for 1998........................................... $ 2,632 $ 8,025 $ 6,145
Income from Irish manufacturing operations taxed at
lower rates........................................ (3,815) (7,143) (6,318)
Income subject to higher rate of tax................ 1,099 1,780 474
Operating losses not utilized....................... 3,703 1,598 2,475
Operating losses utilized........................... (554) (876) (348)
Intangible asset amortization and other non-
deductible expenses................................ (461) 662 1,155
Change in valuation allowance....................... 586 657 --
Profits arising not subject to tax.................. (771) (787) (917)
------- ------- -------
$ 2,419 $ 3,916 $ 2,666
======= ======= =======
<CAPTION>
EPS for tax holiday
- -------------------
<S> <C> <C> <C>
Basic............................................... $ 0.10 $ 0.18 $ 0.14
======= ======= =======
Diluted............................................. $ 0.09 $ 0.16 $ 0.14
======= ======= =======
</TABLE>
56
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Income Taxes (continued)
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred taxes consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
(dollars in
thousands)
Deferred tax assets
- -------------------
<S> <C> <C>
Net operating loss carry forwards........................... $ 17,349 $ 25,200
Research and Development tax credit carry forwards.......... 171 307
Non Compete................................................. -- 71
Allowance for returns, deferred revenue, depreciation....... 493 --
-------- --------
18,013 25,578
Valuation allowance......................................... (17,531) (25,325)
-------- --------
Net deferred tax assets..................................... $ 482 $ 253
======== ========
</TABLE>
At January 1, 1997 the valuation allowance was $5,213,381.
At December 31, 1998, the Company had net operating loss carry forwards in
its UK subsidiary of approximately $661,000. The utilization of these net
operating loss carry forwards is limited to the future profitable operations
of the Company in the UK tax jurisdiction where such carry forwards arose.
These losses carry forward indefinitely.
At December 31, 1998, the Company has a net operating loss carry forward of
approximately $72.0 million for U.S. federal income tax purposes which will
expire in the tax years 2007 through 2012 if not previously utilized.
Utilization of the U.S. net operating loss carry forward may be subject to an
annual limitation due to the change in ownership rules provided by the
Internal Revenue Code of 1986. This limitation and other restrictions provided
by the Internal Revenue Code of 1986 may reduce the net operating loss carry
forward such that it would not be available to offset future taxable income of
the U.S. subsidiary.
At December 31, 1998, approximately $69.0 million of the net operating loss
carry forwards in the United States result from disqualifying dispositions.
The tax value of the disqualifying dispositions has not been recognized in the
tax reconciliation note as it is not expected that it will reverse. At
December 31, 1998, $25.2 million of the valuation allowance related to such
disqualifying dispositions.
11. Segment, Geographic and Customer Information
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standard No. 131 "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). The new rules establish revised standards for
public companies relating to the reporting of financial information about
operating segments. The adoption of SFAS 131 did not have a material effect on
the Company's primary consolidated financial statements but did affect the
Company's segment information disclosures.
Segment Information
Upon adoption of SFAS 131, the Company has presented financial information
for its three reportable operating segments: Americas, Europe Middle East Asia
("EMEA") and Ireland. The Americas and EMEA segments are sales operations and
Ireland is the Company's Research and Development operation.
The Company and its subsidiaries operate in one industry segment, the
development and marketing of interactive education and training software.
Operations outside of Ireland consist principally of sales and marketing.
57
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Segment, Geographic and Customer Information (continued)
The Company's products are developed in Ireland and sold to the Company's
distribution subsidiaries in other Geographic segments. These inter segment
revenues are determined based on a proportion of the final revenues received
from third party customers of the distribution subsidiaries to the extent to
which a fair profit is earned by the Irish development subsidiary and which is
designed to comply with the OECD Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrators. All such inter segment revenues and costs
of revenues are eliminated on consolidation.
The Company's Chief Operating Decision Maker ("CODM"), the Company's
President and CEO allocates resources and evaluates performance based on a
measure of segment profit or loss from operations. The accounting policies of
the reportable segments are the same as described in the summary of
significant accounting policies. The Company's CODM does not view segment
results below operating profit (loss), therefore, net interest income, other
income and the provision for income taxes are not broken out by segment below.
The Company does not account for nor report to the CODM its assets or capital
expenditures by segment, thus asset information is not provided on a segment
basis.
A summary of the segment financial information reported to the CODM is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
------------------------------------------------
All Consolidated
Americas EMEA Ireland Other Total
-------- ------- ------- ------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues--External........... $121,382 $27,262 $ 6,293 $ 7,295 $162,232
Inter segment Revenues....... -- -- 69,994 -- 69,994
Depreciation and
Amortization................ 3,285 502 2,745 157 6,689
Segment Operating Income..... (7,728) (1,108) 26,231 (2,925) 14,470
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
------------------------------------------------
All Consolidated
Americas EMEA Ireland Other Total
-------- ------- ------- ------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues--External........... $108,865 $20,676 $ 1,079 $ 6,427 $137,047
Inter segment Revenues....... -- -- 57,708 -- 57,708
Depreciation and
Amortization................ 1,641 385 1,150 406 3,582
Segment Operating Income..... (4,393) (439) 24,653 (2,546) 17,275
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
------------------------------------------------
All Consolidated
Americas EMEA Ireland Other Total
-------- ------- ------- ------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues--External........... $67,210 $12,809 $ 774 $ 6,571 $87,364
Inter segment Revenues....... -- -- 31,732 -- 31,732
Depreciation and
Amortization................ 1,223 274 595 345 2,437
Segment Operating Income..... (6,319) (544) 14,000 (3,037) 4,100
</TABLE>
58
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Segment, Geographic and Customer Information (continued)
Revenues from external customers, based on the location of the customer, are
categorized by geographical areas as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1996 1997 1998
------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Revenues
Ireland............................................... $ 774 $ 1,463 $ 3,210
United States......................................... 63,111 101,141 113,552
United Kingdom........................................ 9,771 11,296 17,411
Other countries....................................... 13,708 23,147 28,059
------- -------- --------
Total............................................... $87,364 $137,047 $162,232
------- -------- --------
</TABLE>
Long-Lived assets are those assets that can be directly associated with a
particular geographic area. These assets are categorized by geographical areas
as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------- -------
(dollars in
thousands)
<S> <C> <C>
Long-Lived Assets
Ireland......................................................... $ 8,567 $ 7,753
United States................................................... 12,931 25,800
Other countries................................................. 2,962 4,872
------- -------
Total......................................................... $24,460 $38,425
======= =======
</TABLE>
The Company regards its products and services, IT Training, as homogenous
products and services.
12. Government Grants
Under agreements between the Company and Forbairt, the Company has offset
against related salary and rent expense amounts of $598,000, $1,021,000 and
$1,040,000 in the years ended December 31, 1996, 1997 and 1998, respectively.
Under the terms of the agreement between the Company and Forbairt, these
grants may be revoked in certain circumstances, principally failure to
maintain the related jobs for a period of five years from the payment of the
first installment of the related grant. The Company has complied with the
terms of the grant agreements through December 31, 1998.
Ownership of CBT Technology
Approximately 9% of the outstanding share capital of CBT (Technology)
Limited ("CBT T"), one of the Company's Irish subsidiaries, representing a
special non-voting class, is owned by Stargazer Productions ("Stargazer"), an
unlimited company which is wholly-owned by certain key employees of CBT Group
PLC. All of the voting securities of CBT T are owned by CBT Group PLC and,
except for the securities owned by CBT Group PLC and Stargazer, there are no
other outstanding securities of CBT T. CBT T has in the past and may in the
future declare and pay dividends to Stargazer, and Stargazer may pay dividends
to its shareholders out of such amounts. Except for the fact that Stargazer is
wholly owned by certain key employees of CBT Group PLC, there is no
relationship between the Group and Stargazer.
59
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Related Party Transactions (continued)
Loan to Director
In February 1996, Mr. Priest, a director, President and Chief Executive
Officer of the Company, received an interest free loan from the Group in the
amount of US$125,000 repayable in four equal annual installments. At December
31, 1997 and 1998 the balance outstanding on this loan was $93,750 and nil,
respectively.
ForeFront
In May 1997, ForeFront issued a letter of credit for $75,000 to its landlord
secured by a certificate of deposit maturing in August 1998 for the benefit of
an unrelated corporation (which is owned in part by a stockholder of
ForeFront), in exchange for the corporation assuming the balance of the lease
for ForeFront's former office space in Houston, Texas. The letter of credit
expired in June 1998. ForeFront also executed a note receivable totaling
$54,078 and maturing June 1, 2001 from this unrelated corporation for its
purchase of certain furniture and equipment of ForeFront.
Receivables also include $45,000 loaned to two officers of ForeFront. The
notes are due March 31, 2000, are unsecured and bear interest at 6.1%.
14. Recent Development
On December 10, 1998 the Company announced that it had signed a definitive
agreement to acquire Knowledge Well Ltd. and Knowledge Well Group Ltd.
(collectively, "Knowledge Well"), providers of business, management and
professional education using interactive learning technologies. Knowledge
Well's software titles are delivered using advanced interactive learning
methodologies, while requiring that the student only have access to basic,
industry-standard computing platforms. Knowledge Well's strategy is to provide
a self-paced education and training solution allowing individuals to obtain
degrees and/or other credentials. This agreement has been amended and restated
on March 30, 1999 to reflect certain changes agreed upon on December 9, 1998
as a result of the decision to account for the acquisition under the purchase
method of accounting in accordance with U.S. generally accepted accounting
principles. The acquisition of Knowledge Well has been approved by an
Independent Committee of CBT's Board of Directors, in view of the fact that
certain members of the Board of Directors of CBT are shareholders and/or
former officers of Knowledge Well, and by the shareholders of Knowledge Well.
The acquisition is subject to specified closing conditions, including approval
by the disinterested shareholders of CBT and the receipt of required
regulatory approvals. The acquisition has been structured as a stock-for-stock
exchange, in which a total of approximately 4.0 million CBT shares will be
issued in exchange for all outstanding shares of Knowledge Well. CBT will
assume options to acquire Knowledge Well stock exercisable for an issuance of
approximately 0.8 million CBT Shares.
15. Effects of Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". The SOP requires
the capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use once certain
criteria are met. The Company adopted SOP 98-1 in fiscal 1998.
In February 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No.132, "Employers' Disclosures About Pensions and Other Post-Retirement
Benefits." This statement revises employers' disclosures about pensions and
other post-retirement benefit plans. It does not, however, change the
60
<PAGE>
measurement of recognition of those plans. This statement standardizes the
disclosure requirements for pensions and other post-retirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. Restatement of disclosures for
earlier periods is required. The Company has implemented the provisions of
SFAS 132 in 1998 for its defined contribution plan.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activity" ("SFAS 133") which is required to be adopted in years beginning
after June 15, 1999. The Company has yet to determine its date of adoption.
The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges of underlying
transactions must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. Management has not yet determined what the
effect of SFAS 133 will be on the Company's consolidated financial position,
results of operations or cash flows.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions" and
addresses software revenue recognition as it applies to certain multiple-
element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2" through fiscal years beginning on
or before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999.
16. Events Subsequent to Date of Auditors' Report--Unaudited
In October 1998, a third party, a training software supplier, notified the
Company of a claim that CBT 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 $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.
61
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Form 10-K.
(1)Financial Statements. The following CBT Group PLC
Consolidated Financial Statements Prepared in Accordance with US GAAP are
incorporated herein by reference to Item 8 of this Form 10-K.
Consolidated Balance Sheets--December 31, 1997 and 1998.
Consolidated Statements of Operations--December 31, 1996, 1997 and 1998.
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income. -
Consolidated Statements of Cash Flows--December 31, 1996, 1997, and 1998.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
(2) Financial Statement Schedule. The following financial statement schedule
of CBT Group PLC for the fiscal years ended December 31, 1996, 1997 and
1998 is filed as part of this Form 10-K and should be read in conjunction
with the Company's Consolidated Financial Statements included in Item 8 of
this Form 10-K.
<TABLE>
<CAPTION>
Schedule Page #
-------- ------
<C> <S> <C>
II Valuation and Qualifying Accounts S-1
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes
thereto.
(3) Exhibits. See Exhibit Index at page 62-65 of Form 10-K/A.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K dated October 1, 1998 with the
Securities and Exchange Commission attaching a press release announcing
high level management changes, preliminary third quarter financial results,
and the Board's decision to a adopt a shareholders' rights plan.
The Company filed a report on Form 8-K dated October 4, 1998 with the
Securities and Exchange Commission describing the Board's adoption of a
Subscription Rights Declaration.
The Company filed a report on Form 8-K dated December 10, 1998 with the
Securities and Exchange Commission attaching a press release announcing the
Company's definitive agreement to acquire Knowledge Well and the
appointment of the Company's executive management team.
(d) Exhibits.
EXHIBIT INDEX
<TABLE>
<C> <S>
2.1 Amended and Restated Agreement and Plan of Reorganization dated November
29, 1995 among the Company, CBT Acquisition Subsidiary, a Delaware
corporation, and Personal Training Systems, Inc., a California
corporation. (Incorporated by reference to exhibit 2.1 to the Company's
Current Report on Form 8-K dated December 13, 1995).
2.2 Implementation Deed dated as of November 26, 1996, as amended, among the
Company, Applied Learning Limited and Arie Baalbergen, James Josephson,
Geoffrey Bransbury and Brian Hacker (including schedules thereto)
(Incorporated by reference to exhibit 2.1 to the Company's Current Report
on Form 8-K dated March 14, 1997).
</TABLE>
62
<PAGE>
<TABLE>
<C> <S>
2.3 Agreement and Plan of Reorganization, dated as of March 16, 1998, among
the Company, Rockets Acquisition Corp. and The Forefront Group, Inc.
(Incorporated by reference to exhibit 2.1 to the Company's Registration
Statement on Form S-4 filed with the Securities and Exchange Commission
on April 27, 1998 (File No. 333-51159)).
2.4* Share Purchase Agreement dated as of November 30, 1998, as amended and
restated March 30, 1999, among the Company, Knowledge Well Limited
("KWL"), Knowledge Well Group Limited ("KWGL") and the shareholders of
KWL and KWGL.
3.1 Memorandum of Association of the Company as amended on March 24, 1992,
March 31, 1995 and April 28, 1998 (Incorporated by reference to exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1998 as filed with the Securities and Exchange
Commission on August 14, 1998).
3.2 Articles of Association of the Company as amended on July 6, 1995, and
April 28, 1998, (Incorporated by reference to exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1998 as filed with the Securities and Exchange Commission on
August 14, 1998).
4.1 Specimen certificate representing the ordinary shares (Incorporated by
reference to exhibit 4.1 to the Company's Registration Statement on
Form F-1 declared effective with the Securities and Exchange Commission
on April 13, 1995 (File No. 33-89904)).
4.2 Amended and Restated Deposit Agreement (including the form of American
Depositary Receipt), dated as of April 13, 1995 as amended and restated
as of May 22, 1998, among the Company, The Bank of New York, as
Depositary, and each Owner and Beneficial Owner from time to time of
American Depositary Receipts issued thereunder (Incorporated by
reference to [Exhibit (a) to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form F-6 (File No. 333-8380] ).
4.3 Amended and Restated Restricted Deposit Agreement (including the form
of American Depositary Receipt), dated as of November 30, 1995 and
amended and restated as of May 22, 1998, among the Company, The Bank of
New York, as Depositary, and each Owner and Beneficial Owner from time
to time of American Depositary Receipts issued thereunder (Incorporated
by reference to exhibit 4.2 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1998 as filed with the
Securities and Exchange Commission on August 13, 1998).
4.4 Declaration of Subscription Rights dated as of October 4, 1998
(Incorporated by reference to exhibit 4.1 to the Company's Report on
Form 8-A filed with the Securities and Exchange Commission on
October 5, 1998).
10.1** 1990 Share Option Scheme (Incorporated by reference to exhibit 10.1 to
the Company's Registration Statement on Form F-1 declared effective
with the Securities and Exchange Commission on April 13, 1995 (File
No. 33-89904)).
10.2** 1994 Share Option Plan (Incorporated be reference to exhibit 10.2 to
the Company's Registration Statement on Form F-1 declared effective
with the Securities and Exchange Commission on April 13, 1995 (File No.
33-89904)).
10.3** 1995 Employee Share Purchase Plan (Incorporated by reference to exhibit
10.3 to the Company's Registration Statement on Form F-1 declared
effective with the Securities and Exchange Commission on April 13, 1995
(File No. 33-89904)).
10.4** Form of Indemnification Agreement between CBT Systems USA, Ltd.
(formerly, Thornton Holdings, Ltd.) and its directors and officers
dated as of April, 1995 (Incorporated by reference to exhibit 10.5 to
the Company's Registration Statement on Form F-1 declared effective
with the Securities and Exchange Commission on April 13, 1995 (File No.
33-89904)).
10.5 Supplemental Agreement among Hoskyns, the Company and CBT Systems
Limited dated as of
March 31, 1995 (Incorporated by reference to exhibit 10.9 to the
Company's Registration Statement on Form F-1 declared effective with
the Securities and Exchange Commission on April 13, 1995
(File No. 33-89904)).
</TABLE>
63
<PAGE>
<TABLE>
<C> <S>
10.6 Share Purchase Agreement between CBT Systems Limited and the Company
dated as of March 31, 1995 (Incorporated by reference to exhibit 10.10
to the Company's Registration Statement on Form F-1 declared effective
with the Securities and Exchange Commission on April 13, 1995 (File
No. 33-89904)).
10.7 Distribution and License Agreement between the Company and CBT Systems
Limited dated as of March 14, 1995 (including form of Amendment No. 1)
(Incorporated by reference to exhibit 10.11 to the Company's
Registration Statement on Form F-1 declared effective with the
Securities and Exchange Commission on April 13, 1995 (File No. 33-
89904).
10.8 License Agreement dated June 7, 1994 between CBT (Technology) Limited
and CBT Systems Limited (Incorporated by reference to exhibit 10.20 to
the Company's Registration Statement on Form F-1 declared effective
with the Securities and Exchange Commission on April 13, 1995 (File
No. 33-89904).
10.9 Cost Sharing Agreement dated January 4, 1994 between CBT (Technology)
Limited and CBT Systems Limited (Incorporated by reference to exhibit
10.21 to the Company's Registration Statement on Form F-1 declared
effective with the Securities and Exchange Commission on April 13,
1995 (File No. 33-89904).
10.10** Agreement between the Company and Patrick J. McDonagh dated April 9,
1995 (Incorporated by reference to exhibit 10.22 to the Company's
Registration Statement on Form F-1 declared effective with the
Securities and Exchange Commission on April 13, 1995 (File No. 33-
89904).
10.11** Personal Training Systems, Inc. 1991 Stock Plan (Incorporated be
reference to exhibit 4.1 to the Company's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on January
21, 1996 (File No. 333-504).
10.13** 1996 Supplemental Stock Plan (Incorporated by reference to exhibit
10.16 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 as filed with the Securities and Exchange
Commission on March 30, 1997 (File No. 0-25674)).
10.14** Letter Agreement between CBT Systems USA, Ltd. and William B. Lewis
(Incorporated by reference to exhibit 10.18 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 as
filed with the Securities and Exchange Commission on March 30, 1997
(File No. 0-25674)).
10.15 Applied Learning Limited Executive Option Plan (Incorporated by
reference to exhibit 4.1 to the Company's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on April
16, 1997 (File No. 333-25245).
10.16** Agreement dated November 21, 1997 between CBT Systems Limited and
Clarion Worldwide Limited (Incorporated by reference to exhibit 10.21
to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 as filed with the Securities and Exchange Commission
on March 18, 1998 (File No. 0-25674)).
10.17 Lease Agreement dated April 6, 1998 between CBT Systems USA, Ltd. and
the Company, as tenants, and Seaport Centre Associates, LLC, as
landlord, for the facility located at 900 Chesapeake Drive, Redwood
City, California 94063 (Incorporated by reference to exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1998 as filed with the Securities and Exchange
Commission on November 11, 1998).
10.18 Consulting Agreement dated January 30, 1998 between CBT Systems USA,
Ltd. and Gregory M. Priest (Incorporated by reference to exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1998 as filed with the Securities and Exchange
Commission on May 13, 1998).
10.20 Agreement and Mutual Release dated June 3, 1998 between the Company.
and Jeffrey N. Newton (Incorporated by reference to exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1998 as filed with the Securities and Exchange
Commission on August 13, 1998).
</TABLE>
64
<PAGE>
<TABLE>
<C> <S>
10.21* Agreement and Mutual Release dated February 11, 1998 between the
Company and William A. Beamish.
21.1* List of Significant Subsidiaries.
23.1+ Consent of Ernst & Young, Independent Auditors.
23.2+ Consent of Arthur Andersen LLP, Independent Auditors.
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- --------
*Previously filed.
** Denotes management or compensatory plan or arrangement required to be filed
by Registrant pursuant to Item 14(c) of this report on Form 10-K.
+ Filed herewith.
65
<PAGE>
ERNST & YOUNG
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors and Shareholders,
CBT Group PLC
We have audited the consolidated balance sheets of CBT Group PLC as of
December 31, 1997 and 1998 and the related consolidated statements of
operations, changes in shareholders' equity and comprehensive income and cash
flows for each of the three years in the period ended December 31, 1998, and
have issued our report thereon dated January 19, 1999. Our audits also
included the financial statement schedule of the Company listed in Item 14(a).
This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. We did not audit
the financial statements of The Forefront Group, Inc., a company acquired by
the Company in a business combination accounted for as a pooling of interests
as described in note 4 to the consolidated financial statements, which
statements reflect total assets of $10,008,111 as of December 31, 1997, and
total revenues of $13,798,466 and $18,407,770 for the years ended December 31,
1996 and 1997, respectively. We have been furnished with the report of other
auditors with respect to Schedule II of The Forefront Group, Inc.
In our opinion, based on our audits and the report of other auditors, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ Ernst & Young
_____________________
ERNST & YOUNG
Dublin, Ireland
Date: January 19, 1999
66
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to
its annual report to be signed on its behalf by the undersigned thereunto duly
authorized.
CBT Group Public Limited Company
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William G. McCabe Chairman of the Board of April 30, 1999
____________________________________ Directors
William G. McCabe
/s/ Gregory M. Priest President and Chief April 30, 1999
____________________________________ Executive Officer
Gregory M. Priest
</TABLE>
67
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1997 and 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Year Accounts Accounts Deductions Year
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996
Deducted from asset
accounts
Allowance for doubtful
accounts............... 550 177 -- -- 727
===== === === === =====
Year ended December 31,
1997
Deducted from asset
accounts
Allowance for doubtful
accounts............... 727 580 -- 87 1,220
===== === === === =====
Year ended December 31,
1998
Deducted from asset
accounts
Allowance for doubtful
accounts............... 1,220 400 -- 477 1,143
===== === === === =====
</TABLE>
S-1
68
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Forms S-3 (Nos. 333-35855 and 333-42929), as filed with the Securities and
Exchange Commission on September 18, 1997 pertaining to the shares issued in
conjunction with the acquisition of Ben Watson Associates Limited and on
December 22, 1997 pertaining to the shares issued in conjunction with the
acquisition of CBT Systems Middle East Limited, on Form S-4 (No. 333-51159),
as filed with the Securities and Exchange Commission on April 28, 1998
pertaining to the shares issued in conjunction with the acquisition of the
Forefront Group, Inc., on Forms S-8 (Nos. 333-06409, 333-25245, 333-35745,
333-57031 and 333-68499), as filed with the Securities and Exchange Commission
on June 20, 1996 pertaining to the 1994 Share Option Plan, on April 16, 1997
pertaining to the 1996 Supplemental Stock Plan and Applied Learning Limited
Executive Stock Plan, on September 16, 1997 pertaining to the 1994 Share
Option Plan, on June 17, 1998 pertaining to the Forefront Group, Inc. Amended
and Restated 1992 Stock Option Plan, the Forefront Group, Inc. Amended and
Restated 1996 Stock Option Plan and the Forefront Group, Inc. 1996 Non-
Employee Directors' Stock Option Plan, and on December 7, 1998 pertaining to
the Amended and Restated 1994 Share Option Plan of our reports dated January
19, 1999, with respect to the consolidated financial statements and schedule
included in this annual report on Form 10-K/A for the year ended December 31,
1998.
/s/ Ernst & Young
Dublin, Ireland
April 30, 1999
69
<PAGE>
EXHIBIT 23.2
CONSENT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the 1998 Form 10-K/A of CBT Group PLC of our report dated January
30, 1998, on the consolidated financial statements of The ForeFront Group,
Inc., and subsidiaries as of December 31, 1997, and for each of the two years
in the period ended December 31, 1997, included in the Form S-4 Registration
Statement of CBT Group PLC (File No. 333-51159). It should be noted that we
have not audited any financial statements of The ForeFront Group, Inc. and
subsidiaries subsequent to December 31, 1997, or performed any audit procedures
subsequent to the date of our report.
/s/ Arthur Andersen LLP
Houston, Texas
April 30, 1999
70
