##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2005 OR o
    
    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 000-25674 SKILLSOFT PUBLIC LIMITED
COMPANY  REPUBLIC OF IRELAND
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
    
    N/A
(I.R.S. EMPLOYER
IDENTIFICATION NO.)107 NORTHEASTERN BOULEVARD
    
    03062NASHUA, NEW HAMPSHIRE(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
    
    (ZIP CODE)
 REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 324-3000 Not Applicable
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) Indicate by check mark whether the registrant: (1) Has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.   Yes þ  No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).   Yes þ  No o On May 31, 2005, the registrant had outstanding 106,819,173 Ordinary Shares (issued or issuable in
exchange for the registrants outstanding American Depository Shares).




---



SKILLSOFT PLC FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2005
INDEX PAGE NO.PART I  FINANCIAL INFORMATION
    
    
    3Item 1. Condensed Consolidated Financial Statements:
    
    
    3Condensed Consolidated Balance Sheets as of April 30, 2005 and January 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended April 30, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    31PART II  OTHER INFORMATION
    
    
    31Item 1. Legal Proceedings
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    32Item 4. Submission of Matters to a Vote of Security Holders
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    32SIGNATURE
    
    
    33EX-10.1 First Loan Modification AgreementEX-10.2 Second Loan Modification AgreementEX-31.1 Section 302 CEO CertificationEX-31.2 Section 302 CFO CertificationEX-32.1 Section 906 CEO CertificationEX-32.2 Section 906 CFO Certification
  2




---



##### Table of Contents



PART I 
 ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SKILLSOFT PLC AND SUBSIDIARIES 
   APRIL 30,
    
    
    JANUARY 31,2005
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    47,698
    
    
    $
    34,906Short-term investments
    
    
    19,813
    
    
    
    20,021Restricted cash
    
    
    983
    
    
    
    994Accounts receivable, net
    
    
    48,491
    
    
    
    87,030Prepaid expenses and other current assets
    
    
    22,284
    
    
    
    22,659Total current assets
    
    
    139,269
    
    
    
    165,610Property and equipment, net
    
    
    8,775
    
    
    
    9,137Intangible assets, net
    
    
    15,173
    
    
    
    16,171Goodwill
    
    
    102,246
    
    
    
    103,576Long-term investments
    
    
    2,590
    
    
    
    8,943Other assets
    
    
    59
    
    
    
    60Total Assets
    
    $
    268,112
    
    
    $
    303,497LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,551
    
    
    $
    5,361Accrued expenses
    
    
    51,104
    
    
    
    66,995Deferred revenue
    
    
    122,288
    
    
    
    140,008Total current liabilities
    
    
    179,943
    
    
    
    212,364Long term liabilities
    
    
    5,170
    
    
    
    6,214Stockholders equity:Ordinary Shares, E0.11 par value: 250,000,000
shares authorized at April 30, 2005 and
January 31, 2005, respectively;
106,794,824 and 106,207,818 shares
issued and outstanding at April 30,
2005 and
January 31, 2005, respectively
    
    
    11,700
    
    
    
    11,617Additional paid-in capital
    
    
    560,547
    
    
    
    559,052Treasury stock, at cost, 2,285,271
and 443,757 ordinary shares at April
30, 2005 and January 31, 2005,
respectively
    
    
    (8,686
    )
    
    
    (2,523
    )Accumulated deficit
    
    
    (478,562
    )
    
    
    (481,029
    )Deferred compensation
    
    
    (1,120
    )
    
    
    (1,358
    )Accumulated other comprehensive loss
    
    
    (880
    )
    
    
    (840
    )Total stockholders equity
    
    
    82,999
    
    
    
    84,919Total Liabilities and Stockholders Equity
    
    $
    268,112
    
    
    $
    303,497
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




---



##### Table of Contents



SKILLSOFT PLC AND SUBSIDIARIES 
   THREE MONTHS ENDEDApril 30,2005
    
    
    2004Revenue
    
    $
    53,327
    
    
    $
    52,817Cost of revenue
    
    
    5,834
    
    
    
    5,078Gross profit
    
    
    47,493
    
    
    
    47,739Operating expenses:Research and development
    
    
    9,869
    
    
    
    9,444Selling and marketing
    
    
    24,030
    
    
    
    24,362General and administrative
    
    
    6,276
    
    
    
    6,054Amortization of intangible assets and FAS 86 assets
    
    
    2,246
    
    
    
    2,422Amortization of stock-based compensation (1)
    
    
    237
    
    
    
    348Restructuring
    
    
    703
    
    
    
    147Restatement:SEC investigation
    
    
    250
    
    
    
    324Other professional fees
    
    
    
    
    
    
    114Total operating expenses
    
    
    43,611
    
    
    
    43,215Operating income
    
    
    3,882
    
    
    
    4,524Other expense, net
    
    
    (110
    )
    
    
    (179
    )Interest income, net
    
    
    295
    
    
    
    123Loss on sale of assets, net
    
    
    (681
    )
    
    
    Income before provision for income taxes
    
    
    3,386
    
    
    
    4,468Provision for income taxes
    
    
    919
    
    
    
    1,265Net income
    
    $
    2,467
    
    
    $
    3,203Net income per share (Note 9):Basic
    
    $
    0.02
    
    
    $
    0.03Basic weighted average common shares outstanding
    
    
    105,662,213
    
    
    
    103,163,380Diluted
    
    $
    0.02
    
    
    $
    0.03Diluted weighted average common shares outstanding
    
    
    105,877,094
    
    
    
    110,392,610
   (1)
    
    The following summarizes the departmental allocation of the stock-based compensation THREE MONTHS ENDEDApril 30,2005
    
    
    2004Cost of revenue
    
    $
    
    
    
    $
    Research and development
    
    
    48
    
    
    
    79Selling and marketing
    
    
    181
    
    
    
    256General and administrative
    
    
    8
    
    
    
    13$
    237
    
    
    $
    348
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




---



##### Table of Contents



SKILLSOFT PLC AND SUBSIDIARIES 
   THREE MONTHS ENDEDAPRIL 30,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    2,467
    
    
    $
    3,203Adjustments to reconcile net income to net cash provided by operating activities -Stock-based compensation
    
    
    237
    
    
    
    348Depreciation and amortization
    
    
    1,226
    
    
    
    1,293Amortization of intangible assets and FAS 86 assets
    
    
    2,246
    
    
    
    2,422Provision for bad debts
    
    
    (226
    )
    
    
    (62
    )Loss on disposition
    
    
    681
    
    
    
    Provision for income tax  non-cash
    
    
    785
    
    
    
    1,124Changes in current assets and liabilities:Accounts receivable, net
    
    
    38,835
    
    
    
    27,913Prepaid expenses and other current assets
    
    
    286
    
    
    
    3,430Accounts payable
    
    
    760
    
    
    
    (1,431
    )Accrued expenses
    
    
    (16,192
    )
    
    
    (14,381
    )Deferred revenue
    
    
    (17,861
    )
    
    
    (15,189
    )Net cash provided by operating activities
    
    
    13,244
    
    
    
    8,670Cash flows from investing activities:Purchases of property and equipment
    
    
    (979
    )
    
    
    (2,225
    )Capitalized software development costs
    
    
    (1,247
    )
    
    
    Purchases of investments
    
    
    (3,748
    )
    
    
    (16,726
    )Maturity of investments
    
    
    10,225
    
    
    
    14,508Net cash
provided by (used in) investing activities
    
    
    4,251
    
    
    
    (4,443
    )Cash flows from financing activities:Exercise of stock options
    
    
    242
    
    
    
    12,452Proceeds from employee stock purchase plan
    
    
    1,336
    
    
    
    1,675Payments to acquire treasury stock
    
    
    (6,163
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (4,585
    )
    
    
    14,127Effect of exchange rate changes on cash and cash equivalents
    
    
    (118
    )
    
    
    (430
    )Net increase in cash and cash equivalents
    
    
    12,792
    
    
    
    17,924Cash and cash equivalents, beginning of period
    
    
    34,906
    
    
    
    42,866Cash and cash equivalents, end of period
    
    $
    47,698
    
    
    $
    60,790
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




---



##### Table of Contents



SKILLSOFT PLC AND SUBSIDIARIES 
   1. THE COMPANY SkillSoft PLC, formerly known as SmartForce PLC (the Company or SkillSoft), was incorporated in
Ireland on August 8, 1989. The Company is a leading provider of content resources and complementary
technologies for integrated enterprise learning. On September 6, 2002, the Company completed its
merger with SkillSoft Corporation (the Merger). Due to a number of factors, including composition
of the board of directors, management team, and concentrated shareholder interest, all of which had
SkillSoft Corporation being in a control or majority position, the Merger was accounted for as a
reverse acquisition, with SkillSoft Corporation as the accounting acquirer. Accordingly, the
historical financial statements of SkillSoft Corporation are the historical financial statements of
the combined company, and the assets and liabilities of the Company are accounted for as required
under the purchase method of accounting. The results of operations and cash flow of the former
SmartForce PLC, the acquired entity for accounting purposes, are included in the financial
statements of the combined company from September 6, 2002, the date on which the Merger was
consummated. In connection with the Merger, the Company changed its name to SkillSoft PLC and its
fiscal year end to January 31 (the fiscal year end of SkillSoft Corporation) from December 31 (the
Companys historical fiscal year end). 2. BASIS OF PRESENTATION The accompanying, unaudited condensed consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities and Exchange
Commission (the SEC). Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles in the United
States have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of
management, the condensed consolidated financial statements reflect all material adjustments
(consisting only of those of a normal and recurring nature) which are necessary to present fairly
the consolidated financial position of the Company as of April 30, 2005, the results of its
operations for the three months ended April 30, 2005 and 2004 and its cash flows for the three
months ended April 30, 2005 and 2004. These condensed consolidated financial statements and notes
thereto should be read in conjunction with the consolidated financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the fiscal year ended January 31, 2005.
The results of operations for the interim period are not necessarily indicative of the results of
operations to be expected for the full year. 3. CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND INVESTMENTS The Company considers all highly liquid investments with original maturities of 90 days or less at
the time of purchase to be cash equivalents. At April 30, 2005 and January 31, 2005, cash
equivalents consisted mainly of commercial paper, short-term notes and money market funds. The
Company considers the cash held in certificates of deposit with a commercial bank to secure its
line of credit to be restricted cash. The Company accounts for its investments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities (SFAS No. 115). Under SFAS No. 115, securities that the Company does not
intend to hold to maturity are reported at market value, and are classified as available-for-sale.
At April 30, 2005, the Companys investments had an average maturity of approximately 143 days.
These investments are classified as current assets in the accompanying consolidated balance sheets
as they mature within one year. 4. REVENUE RECOGNITION The Company generates revenue from the license of products and services and from providing
hosting/application service provider (ASP) services. The Company follows the provisions of the American Institute of Certified Public Accountants
(AICPA) Statement of Position (SOP) 97-2, Software Revenue Recognition as amended by SOP 98-4
and SOP 98-9 to account for revenue derived pursuant to license agreements under which customers
license the Companys products and services. The pricing for the Companys courses varies based
upon the number of course titles or the courseware bundle licensed by a customer, the number of
users within the customers organization and the length of the license agreement (generally one,
two or three years). License agreements permit customers to exchange course titles, generally on
the contract anniversary date. Additional product features, such as hosting and online mentoring
services, are separately licensed for an additional fee. 6




---



##### Table of Contents



The pricing for the Companys SkillChoice multi-modal learning (SMML) licenses varies based on the
choice of SMML, the content offering selected by the customer, the number of users within the
customers organization and the length of the license agreement. A SMML license provides customers
access to a full range of learning products including courseware, Referenceware, simulations,
mentoring and prescriptive assessment. A Referenceware license gives users access to a full Referenceware library within one or more
Referenceware collections (examples of which are; ITPro, BusinessPro, FinancePro and
OfficeEssentials) from Books24x7.com, Inc. (Books). The pricing for the Companys Referenceware
licenses varies based on the collections specified by a customer, the number of users within the
customers organization and the length of the license agreement. The Company offers discounts from its ordinary pricing, and purchasers of licenses for larger
numbers of courses, for larger user bases or for longer periods generally receive discounts.
Generally, customers may amend their license agreements, for an additional fee, to gain access to
additional courses or product lines and/or to increase the size of the user base. The Company also
derives revenue from hosting fees for clients that use its solutions on an ASP basis, online
mentoring services and professional services. In selected circumstances, the Company derives
revenue on a pay-for-use basis under which some customers are charged based on the number of
courses accessed by users. Revenue derived from pay-for-use contracts has been minimal to date. The Company recognizes revenue ratably over the license period if the number of courses that a
customer has access to is not clearly defined, available, or selected at the inception of the
contract, or if the contract has additional undelivered elements for which the Company does not
have vendor specific objective evidence (VSOE) of the fair value of the various elements. This may
occur if the customer does not specify all licensed courses at the outset, the customer chooses to
wait for future licensed courses on a when and if available basis, the customer is given exchange
privileges that are exercisable other than on the contract anniversaries, or the customer licenses
all courses currently available and to be developed during the term of the arrangement. Nearly all
of the Companys contractual arrangements result in the recognition of revenue ratably over the
license period. The Company also derives revenue from extranet hosting/ASP services and online mentoring services.
The Company recognizes revenue related to extranet hosting/ASP services and online mentoring
services on a straight-line basis over the period the services are provided. The Company generally bills the annual license fee for the first year of a multi-year license
agreement in advance and license fees for subsequent years of multi-year license arrangements are
billed on the anniversary date of the agreement. Occasionally, the Company bills customers on a
quarterly basis. In some circumstances, the Company offers payment terms of up to six months from
the initial shipment date or anniversary date for multi-year license agreements to its customers.
To the extent that a customer is given extended payment terms (defined by the Company as greater
than six months), revenue is recognized as cash becomes due, assuming all of the other elements of
revenue recognition have been satisfied. The Company typically recognizes revenue from resellers when both the sale to the end user has
occurred and the collectibility of cash from the reseller is probable. With respect to reseller
agreements with minimum commitments, the Company recognizes revenue related to the portion of the
minimum commitment that exceeds the end user sales at the expiration of the commitment period
provided the Company has received payment. The Company provides professional services; including instructor led training, customized content,
websites, and implementation services. The Company recognizes professional service revenue as the
services are performed. The Company records reimbursable out-of-pocket expenses in both maintenance and services revenues
and as a direct cost of maintenances and services in accordance with Emerging Issues Task Force
(EITF) Issue No. 01-14, Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred (EITF 01-14). EITF 01-14 requires reimbursable out-of-pocket
expenses incurred to be characterized as revenue in the income statement. The Company records as deferred revenue amounts that have been billed in advance for products or
services to be provided. Deferred revenue includes the unamortized portion of revenue associated
with license fees for which the Company has received payment or for which amounts have been billed
and are due for payment in 90 days or less for resellers and 180 days or less for direct customers.
In addition, deferred revenue includes amounts which have been billed and not collected for which
revenue is being recognized ratably over the license period. 7




---



##### Table of Contents



5. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for its stock-based employee compensation plans on the intrinsic value method
under the recognition and measurement principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25) and related Interpretations under APB No.
25. The Company provided pro forma disclosures only of the compensation expense determined under
the fair value provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No.
123). See Note 15 for a description of FASB Statement No. 123 (revised 2004), Share-Based Payment. SFAS No. 123 requires the measurement of the fair value of stock options to employees to be
included in the statements of operations or disclosed in the notes to financial statements. The
Company elected the disclosure-only alternative under SFAS No. 123, which requires disclosure of
the pro forma effects on earnings as if the fair-value-based method of accounting under SFAS No.
123 had been adopted, as well as certain other information. In accordance with SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure (SFAS No. 148), the Company has
computed the pro forma disclosures required under SFAS No. 123 for options granted using the
Black-Scholes option-pricing model prescribed by SFAS No. 123. The weighted average information and
assumptions used for the grants were as follows: THREE MONTHS ENDEDAPRIL 30,2005
    
    
    2004Risk-free interest rates
    
    
    3.97% - 4.33
    %
    
    
    3.31%-3.89
    %Expected dividend yield
    
    
    
    
    
    
    Volatility factor
    
    
    76
    %
    
    
    91
    %Expected lives
    
    7 years
    
    7 yearsWeighted average fair value of options granted
    
    $
    2.72
    
    
    $
    9.61Weighted average remaining contractual life of options outstanding
    
    6.58 years
    
    7.55 years
 Had compensation expense for its plans been determined consistent with SFAS No. 123, the Companys
net income/(loss) and basic and diluted net income/(loss) per share would have been increased to
the following pro forma amounts (in thousands, except per share data): THREE MONTHS ENDEDAPRIL 30,2005
    
    
    2004Net income As reported
    
    $
    2,467
    
    
    $
    3,203Add: Stock-based compensation expense
recognized under APB No. 25
    
    
    237
    
    
    
    348Less: Total stock-based compensation
expense determined under fair value based
method for all awards
    
    
    (4,809
    )
    
    
    (6,233
    )Pro forma net loss
    
    $
    (2,105
    )
    
    $
    (2,682
    )Basic and diluted net income (loss) per share As reported
    
    $
    0.02
    
    
    $
    0.03Pro forma net loss
    
    $
    (0.02
    )
    
    $
    (0.03
    )
 Because additional option grants are expected to be made in future periods, the above pro forma
disclosures may not be representative of pro forma effects on results for future periods. 8




---



##### Table of Contents



6. RESTRUCTURING AND OTHER NON-RECURRING CHARGES MERGER AND EXIT COSTS In connection with the Merger, the Companys management approved and initiated plans prior to
December 31, 2002 to restructure the operations of pre-Merger SmartForce PLC to eliminate redundant
facilities and headcount, reduce cost structure and better align the Companys operating expenses
with existing economic conditions. Consequently, the Company recorded $30.3 million of costs
relating to exiting activities of pre-Merger SmartForce PLC, such as severance and related
benefits, costs to vacate leased facilities and other pre-Merger liabilities. These costs were
accounted for under EITF 95-3, Recognition of Liabilities in Connection with Purchase Business
Combinations. These costs, which were recognized as a liability assumed in the purchase business
combination, were included in the allocation of the purchase price, and have increased goodwill. The reductions in employee headcount totaled approximately 632 employees from the administrative,
sales, marketing and development functions, and amounted to a charge of approximately $14.4
million. Approximately $12.5 million was paid out against the exit plan accrual through April 30,
2005, and the remaining amount of $1.8 million, net of adjustments for foreign currency
translation, is expected to be paid within fiscal 2006. In connection with the exit plan, the Company decided to abandon or downsize certain leased
facilities. For the year ended January 31, 2003, facilities consolidation charges of $12.7 million,
consisting of sublease losses, broker commissions and other facility costs, were recorded in
connection with the downsizing and closing of sites. As part of the plan, 11 sites have been
vacated and 4 sites have been downsized. To determine the sublease loss, which is the loss after
the Companys cost recovery efforts from subleasing vacated space, certain assumptions were made
related to the (1) time period over which the property will remain vacant, (2) sublease terms and
(3) sublease rates. The lease loss is an estimate under SFAS No. 5 Accounting for Contingencies
(SFAS No. 5). In the year ended January 31, 2004, the Company revised certain of its estimates made
in connection with the original purchase price pertaining to unoccupied facilities under lease as a
result of the Merger. This adjustment to the exit plan accrual fell within the one year purchase
price allocation period prescribed by SFAS No. 141 Business Combinations (SFAS No. 141). In the
fiscal year ended January 31, 2005, the Company again revised certain of its estimates made in
connection with the original purchase price pertaining to unoccupied facilities under lease as a
result of the Merger. This adjustment to the exit accrual fell outside the one year purchase price
allocation period and was charged to restructuring which is included in the statement of operations
The net present value of the obligation under this exit plan, as adjusted, was approximately $14.6
million. Activity in the Companys merger and exit costs, which are included in accrued expenses (see Note
13) and long-term liabilities, was as follows (in thousands): EMPLOYEESEVERANCE AND
    
    
    CLOSEDOWN OFRELATED COSTS
    
    
    FACILITIES
    
    
    OTHER
    
    
    TOTALMerger and exit accrual January 31, 2005
    
    $
    1,955
    
    
    $
    6,552
    
    
    $
    334
    
    
    $
    8,841Payments and other adjustments made during
the three months ended April 30, 2005
    
    
    (116
    )
    
    
    (1,356
    )
    
    
    (79
    )
    
    
    (1,551
    )Merger and exit accrual April 30, 2005
    
    $
    1,839
    
    
    $
    5,196
    
    
    $
    255
    
    
    $
    7,290
 The Company anticipates that the remainder of the merger and exit accrual will be paid out by
October 2011 as follows (in thousands): Year ended January 31,2006
    
    $
    3,2682007
    
    
    1,3742008
    
    
    1,0932009
    
    
    816Thereafter
    
    
    739Total
    
    $
    7,290
 RESTRUCTURING, SEC INVESTIGATION AND OTHER PROFESSIONAL FEES The Company recorded a $14.2 million restructuring charge for the fiscal year ended January 31,
2003, which was included in the statement of operations, approximately $10.2 million of this charge
represents the compensation cost of terminated SmartForce PLC 9




---



##### Table of Contents



employees for services rendered from the date of the Merger through such employees termination
dates and certain other compensation costs to terminated and continuing employees of the Company.
Also included in the $14.2 million charge are certain other one time costs incurred by SkillSoft
Corporation as a result of the Merger. These costs primarily consist of employee severance and
related costs and contractual obligations. Payments made under these obligations during the years
ended January 31, 2003, 2004 and 2005 aggregated approximately $11.5 million, $2.6 million, and
$100,000, respectively. During the fiscal year ended January 31, 2005, the Company recorded and paid an additional $260,000
of restructuring charges related to the further restructuring of the pre-Merger SmartForce PLC
operations. These restructuring costs included additional compensation to pre-Merger SmartForce PLC
employees as well as additional facilities obligations as a result of the Merger. The Company recorded a $13.4 million restructuring charge for the fiscal year ended January 31,
2005, which was included in the statement of operations. Approximately $9.3 million of this charge
represents contractual obligations, and included in this amount is approximately $528,000 of merger
and exit costs incurred during the fiscal year ended January 31, 2005. These costs primarily relate
to facilities consolidation and the repayment of government grant obligations resulting from the
restructuring. Approximately $3.4 million represents the compensation cost of terminated employees
for services rendered from the date of the restructuring through termination dates and one time
severance payouts and approximately $400,000 is related to the write-down of fixed assets rendered
obsolete as a result of the restructuring activities. The Company recorded a $703,000 restructuring charge for the fiscal quarter ended April 30, 2005,
which is included in the statement of operations, related to our retail certification business.
Approximately $350,000 of this charge represents contractual obligations, which primarily relate
to the shut down of facilities resulting from the restructuring. Approximately $353,000 represents
the compensation cost of terminated employees for services rendered from the date of restructuring
through termination dates and one time severance payouts. Activity in the Companys restructuring accrual related to the Merger in fiscal 2005 and 2006 was
as follows (in thousands): EMPLOYEESEVERANCEAND RELATED
    
    
    CONTRACTUALCOSTS
    
    
    OBLIGATIONS
    
    
    TOTALRestructuring accrual January 31, 2005
    
    $
    624
    
    
    $
    8,744
    
    
    $
    9,368Payments and write downs made during the quarter ended April 30, 2005
    
    
    (577
    )
    
    
    (2,244
    )
    
    
    (2,821
    )Restructuring charge for the quarter ended April 30, 2005
    
    
    353
    
    
    
    350
    
    
    
    703Restructuring provision April 30, 2005
    
    $
    400
    
    
    $
    6,850
    
    
    $
    7,250
 Consistent with the Companys accounting policy and historical treatment regarding annual audit
fees, the Company accrued the estimated audit fees related to the restatement of the historical
SmartForce PLC financial statements, the acquired business, in the year ended January 31, 2003. All
other costs associated with the restatement, the resulting SEC investigation, and the 2002
shareholder class action lawsuit are expensed as the work is performed. For the fiscal quarter
ended April 30, 2005 and 2004, the Company recorded $250,000 and $324,000, respectively, in
expenses related to the ongoing SEC investigation. For the fiscal quarter ended April 30, 2004, the
Company recorded $114,000 in expense related to the re-filing of statutory tax returns as a result
of the restatement of the historical SmartForce PLC financial statements. 7. GOODWILL AND INTANGIBLE ASSETS On February 1, 2002, the Company adopted SFAS No. 142, which requires companies to discontinue
amortizing goodwill and certain intangible assets with indefinite useful lives and requires an
annual review for impairment. The non-amortization provisions of SFAS 10




---



##### Table of Contents



No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. The Companys
goodwill and intangible assets relate to both the Merger and its acquisitions of Books 24x7.com,
Inc (Books) and GoTrain Corp. (GoTrain), which were accounted for in accordance with the
non-amortization provisions of SFAS No. 142. Therefore, there is no impact on the comparability of
the accompanying condensed consolidated statements of operations as a result of discontinuing the
amortization of goodwill. Goodwill and intangible assets are as follows (in thousands): APRIL 30, 2005
    
    
    JANUARY 31, 2005GROSS
    
    
    
    
    
    
    NET
    
    
    GROSS
    
    
    
    
    
    
    NETCARRYING
    
    
    ACCUMULATED
    
    
    CARRYING
    
    
    CARRYING
    
    
    ACCUMULATED
    
    
    CARRYINGAMOUNT
    
    
    AMORTIZATION
    
    
    AMOUNT
    
    
    AMOUNT
    
    
    AMORTIZATION
    
    
    AMOUNTInternally developed software/courseware
    
    $
    27,857
    
    
    $
    18,175
    
    
    $
    9,682
    
    
    $
    26,610
    
    
    $
    16,476
    
    
    $
    10,134Customer contracts
    
    
    13,018
    
    
    
    8,427
    
    
    
    4,591
    
    
    
    13,018
    
    
    
    7,881
    
    
    
    5,137Trademarks and trade name
    
    
    900
    
    
    
    
    
    
    
    900
    
    
    
    900
    
    
    
    
    
    
    
    90041,775
    
    
    
    26,602
    
    
    
    15,173
    
    
    
    40,528
    
    
    
    24,357
    
    
    
    16,171Goodwill
    
    
    102,246
    
    
    
    
    
    
    
    102,246
    
    
    
    103,576
    
    
    
    
    
    
    
    103,576$
    144,021
    
    
    $
    26,602
    
    
    $
    117,419
    
    
    $
    144,104
    
    
    $
    24,357
    
    
    $
    119,747
 Customer contracts are existing contracts that relate to underlying customer relationships
pertaining to the services provided by the acquired company. The Company expects to amortize the
fair value of customer contracts on an accelerated basis over a weighted average estimated useful
life. Internally developed software/courseware relates to the Books platform, GoTrain content and
platform, the SmartForce PLC content and costs incurred subsequent to technological feasibility and
prior to general release for the development of SkillSoft Dialogue capitalized under FAS 86. Course
content includes courses in both the business skills and information technology skills subject
areas. All courseware is deployable via the Internet or corporate intranets. The change in goodwill at April 30, 2005 from the amount recorded at January 31, 2005 was due to
revisions to the purchase price accruals, collections of accounts receivable in excess of the
estimated realizable value at the purchase date and the Companys utilization of net operating loss
carryforwards obtained as part of the Merger. Amortization expense for the three months ended April 30, 2005 and April 30, 2004 was as follows
(in thousands): THREE MONTHS ENDED
    
    
    THREE MONTHS ENDEDAPRIL 30, 2005
    
    
    APRIL 30, 2004Internally developed software/courseware
    
    $
    1,699
    
    
    $
    1,740Customer contracts
    
    
    546
    
    
    
    682$
    2,245
    
    
    $
    2,422
 Amortization expense for the next four fiscal years is expected to be as follows (in thousands): FISCAL YEAR
    
    AMORTIZATION EXPENSE2006
    
    $
    9,1122007
    
    
    5,9692008
    
    
    1,4252009
    
    
    12
 The Company will be conducting its annual impairment test of goodwill in the fourth quarter of the
fiscal year ending January 31, 2006. 8. COMPREHENSIVE INCOME (LOSS) SFAS No. 130, Reporting Comprehensive Income, requires disclosure of all components of
comprehensive income (loss) on an annual and interim basis. Comprehensive income (loss) is defined
as the change in equity of a business enterprise during a period resulting from transactions, other
events and circumstances related to non-owner sources. The components of accumulated comprehensive
income/(loss) for the three months ended April 30, 2005 and 2004 were as follows (in thousands): 11




---



##### Table of Contents



THREE MONTHS ENDEDAPRIL 30,2005
    
    
    2004Comprehensive income:Net income
    
    $
    2,467
    
    
    $
    3,203Other comprehensive income/(loss) -Foreign currency adjustment
    
    
    (793
    )
    
    
    69Unrealized holding losses
    
    
    (87
    )
    
    
    (200
    )Comprehensive income
    
    $
    1,587
    
    
    $
    3,072
 9. NET INCOME PER SHARE Basic net income per share was computed using the weighted average number of shares outstanding
during the period. Diluted net income per share was computed by giving effect to all dilutive
potential shares outstanding. The weighted average number of shares outstanding used to compute
basic net income per share and diluted net income per share was as follows: THREE MONTHS ENDEDAPRIL 30,2005
    
    
    2004Basic weighted average shares outstanding
    
    
    105,662,213
    
    
    
    103,163,380Effect of dilutive shares outstanding
    
    
    214,881
    
    
    
    7,229,230Weighted average common shares outstanding, as adjusted
    
    
    105,877,094
    
    
    
    110,392,610
 10. INCOME TAXES The Company 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. The Company has significant net operating loss (NOL) carryforwards, some of which are subject to
potential limitations based upon the change in control provisions of Section 382 of the Internal
Revenue Code. The provision for income tax was approximately $900,000 in the fiscal quarter ended April 30, 2005.
Of this amount, $785,000 relates to the utilization of acquired NOL carryforwards which do not
alleviate tax burden in the statement of operations. The $785,000 does not require cash payments to
the taxing authorities. In addition, there is income generated in foreign countries, which cannot
be offset through NOL carryforwards. 11. COMMITMENTS AND CONTINGENCIES The Company leases its facilities and certain equipment and furniture under operating lease
agreements that expire at various dates through 2023. The lease agreements frequently include
renewal clauses, escalation clauses and purchase provisions and require the Company to pay taxes,
insurances and maintenance costs. Future minimum lease payments under the operating lease agreements are approximately as follows (in
thousands): Facilities
    
    
    Other
    
    
    TotalTwelve month period ended April 30:2006
    
    $
    5,389
    
    
    $
    413
    
    
    $
    5,8022007
    
    
    4,893
    
    
    
    168
    
    
    
    5,0612008
    
    
    4,632
    
    
    
    21
    
    
    
    4,6532009
    
    
    3,523
    
    
    
    9
    
    
    
    3,5322010
    
    
    1,590
    
    
    
    
    
    
    
    1,590Thereafter
    
    
    15,243
    
    
    
    
    
    
    
    15,243$
    35,270
    
    
    $
    611
    
    
    $
    35,881
 On or about February 4, 2003, the SEC informed the Company that it is the subject of a formal order
of private investigation relating to its November 19, 2002 announcement that it would restate the
financial statements of SmartForce PLC for the period 1999 through June 2002. The Company
understands that the SECs investigation concerns SmartForces financial disclosure and accounting
during that period, other related matters, compliance with rules governing reports required to be
filed with the SEC, and the conduct of those 12




---



##### Table of Contents



responsible for such matters. On June 2, 2005, the Boston District Office of the SEC informed the
Company that it had made a preliminary determination to recommend that the SEC bring a civil
injunctive action against the Company. Under the SECs rules, the Company is permitted to make a
so-called Wells Submission in which the Company seeks to persuade the SEC that no such action should be
commenced. The Company
intends to make such a submission. The Company continues to cooperate
with the SEC in this matter. At the present time the Company is unable to predict the outcome of this action and as
such has not determined what, if any, impact it may have on its financial statements. On November 18, 2004, Jody Glidden, Michael LeBlanc and Trish Glidden filed a lawsuit against the
Company, David C. Drummond, Gregory M. Priest, Patrick E. Murphy and Jack Hayes in the United
States District Court for the Northern District of California. The plaintiffs had previously opted
out of the class action settlement that received final approval from the court on September 29,
2004. The lawsuit sets forth substantially the same claims as were alleged in the class action
litigation. In particular, the lawsuit alleges that the Company misrepresented or omitted to state
material facts in its SEC filings and press releases regarding the Companys revenues and earnings
and failed to correct such false and misleading SEC filings and press releases, which are alleged
to have artificially inflated the price of the Companys ADSs in connection with its acquisition of
IC Global in early 2001. The lawsuit seeks compensatory damages of approximately $3.7 million and
other unspecified damages. The Company believes that it has meritorious defenses to this lawsuit
and intends to defend ourselves vigorously. Six class action lawsuits have been filed against the Company and certain of its current and former
officers and directors captioned: (1) Gianni Angeloni v. SmartForce PLC d/b/a SkillSoft, William
McCabe and Greg Priest; (2) Ari R. Schloss v. SkillSoft PLC f/k/a SmartForce PLC, Gregory M.
Priest, Patrick E. Murphy, David C. Drummond and William G. McCabe; (3) Joseph J. Bish v.
SmartForce PLC d/b/a SkillSoft, Gregory M. Priest, William G. McCabe, David C. Drummond, John M.
Grillos, John P. Hayes and Patrick E. Murphy; (4) Stacey Cohen v. SmartForce PLC d/b/a SkillSoft,
William G. McCabe and Greg Priest; (5) Daniel Schmelz v. SmartForce PLC d/b/a SkillSoft, William G.
McCabe and Greg Priest; and (6) John ODonoghue v. SmartForce PLC d/b/a SkillSoft, William G.
McCabe and Greg Priest. Each lawsuit was filed in the United States District Court for the District
of New Hampshire; the first action was filed on November 22, 2002, the second action was filed on
December 4, 2002 and the third and fourth actions were filed on December 11, 2002, the fifth action
was filed on December 23, 2002, and the sixth action was filed on January 16, 2003. These lawsuits
allege that the Company misrepresented or omitted to state material facts in its SEC filings and
press releases regarding its revenues and earnings and failed to correct such false and misleading
SEC filings and press releases, which are alleged to have artificially inflated the price of the
Companys ADSs. These lawsuits seek unspecified monetary damages, including punitive damages
together with interest, costs, fees and expenses. These lawsuits have all been assigned to Chief
Judge Paul J. Barbadoro. On March 26, 2003, Judge Barbadoro consolidated the lawsuits under the
caption In re SmartForce Securities Litigation, Civil Action No. 02-544-B, appointed as lead
plaintiffs the Teachers Retirement System of Louisiana and the Louisiana Sheriffs Pension &
Relief Fund, and approved the lead plaintiffs choice of lead counsel and local counsel. In March
2004, the Company reached a settlement of this litigation for total settlement payments of $30.5
million, with one-half paid in August 2004 and the remainder to be paid in August 2005. The Company
is in discussions with its insurers to determine how much, if any, of this settlement amount will
be paid by them. The Company has recorded the aggregate settlement as a charge in its fiscal 2004
fourth quarter; any reimbursement from its insurers will be recorded in the period in which it is
finalized. 12. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE The Company follows the provisions of SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information (SFAS No. 131). SFAS No. 131 established standards for reporting
information regarding operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports issued to stockholders.
SFAS No. 131 also established standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief operating decision
maker, or decision-making group, in making decisions how to allocate resources and assess
performance. The Companys chief operating decision makers, as defined under SFAS No. 131, are the
Chief Executive Officer and the Chief Financial Officer. The Company views its operations and
manages its business as principally two operating segments  SMML and Retail Certification. On
April 29, 2005, the Company sold certain assets and transferred certain liabilities related to its
Retail Certification business and incurred a $681,000 loss on disposition. 13




---



##### Table of Contents



The following tables set forth the Companys statements of operations for the fiscal quarters ended
April 30, 2005 and 2004: Quarter Ended April 30, 2005Multi-Modal
    
    
    Retail Certification
    
    
    Combined(In thousands)Revenue
    
    $
    48,050
    
    
    $
    5,277
    
    
    $
    53,327Net income/(loss)
    
    $
    3,702
    
    
    $
    (1,235
    )
    
    $
    2,467
 Quarter Ended April 30, 2004Multi-Modal
    
    
    Retail Certification
    
    
    Combined(In thousands)Revenue
    
    $
    48,233
    
    
    $
    4,584
    
    
    $
    52,817Net income
    
    $
    3,106
    
    
    $
    97
    
    
    $
    3,203
 The Company attributes revenues to different geographical areas on the basis of the location of the
customer. Revenues by geographical area for the three month periods ended April 30, 2005 and 2004
were as follows (in thousands): THREE MONTHS ENDEDAPRIL 30,2005
    
    
    2004Revenue:United States
    
    $
    41,971
    
    
    $
    40,922United Kingdom
    
    
    5,587
    
    
    
    4,279Canada
    
    
    2,172
    
    
    
    2,037Europe, excluding UK
    
    
    1,339
    
    
    
    2,463Australia/New Zealand
    
    
    1,871
    
    
    
    1,747Other
    
    
    387
    
    
    
    1,369Total revenue
    
    $
    53,327
    
    
    $
    52,817
 Long-lived tangible assets at international facilities are not significant. 13. ACCRUED EXPENSES Accrued expenses in the accompanying condensed combined balance sheets consist of the following (in
thousands): APRIL 30, 2005
    
    
    JANUARY 31, 2005Accrued compensation and benefits
    
    $
    9,588
    
    
    $
    20,415Course development fees
    
    
    1,309
    
    
    
    2,205Professional fees
    
    
    4,435
    
    
    
    2,788Accrued payables
    
    
    771
    
    
    
    1,798Accrued misc. taxes
    
    
    57
    
    
    
    238Accrued merger related costs*
    
    
    4,183
    
    
    
    5,271Sales tax payable/VAT payable
    
    
    2,694
    
    
    
    3,864Accrued royalties
    
    
    2,645
    
    
    
    2,422Accrued litigation settlements
    
    
    15,250
    
    
    
    15,250Accrued restructuring
    
    
    5,619
    
    
    
    8,005Other accrued liabilities
    
    
    4,553
    
    
    
    4,739Total accrued expenses
    
    $
    51,104
    
    
    $
    66,995
   *
    
    Includes $1,705 of accrued income taxes 14. LINE OF CREDIT On July 23, 2004, the Company entered into a $25 million two year, line of credit with a bank.
Under the terms of the line of credit, the bank holds a first security interest in all domestic
business assets. All borrowings under the line of credit bear interest at the banks prime rate.
The facility is subject to a commitment fee of $50,000 to secure the line of credit and unused
commitment fees of 0.125% based upon the daily average of un-advanced amounts under the revolving
line of credit. The Company paid approximately $2,900 in 14




---



##### Table of Contents



unused commitment fees for the quarter ended April 30, 2005. In addition, the line of credit
contains certain financial and non-financial covenants. At January 31, 2005, the Company was unable
to attain one of the financial covenants set forth in the line of credit. With a net loss of
approximately $29.1 million for the quarter ended January 31, 2005, the Company did not meet the
minimum quarterly profitability of $6.5 million for the fourth quarter. The Company was unable to
meet the financial covenant due to the restructuring and impairment charges recorded in the fourth
quarter. The bank agreed to amend the original loan agreement and issue a first loan modification
agreement. The first loan modification agreement has been executed and the Company is currently in
compliance with all covenants. Also, the line of credit provides that in the event of a Material
Adverse Change (as defined in the line of credit), the lender has the ability to call amounts
outstanding under the line of credit. As of April 30, 2005, there were no borrowings on the line of
credit; however, the Company had an outstanding letter of credit of $15.5 million that reduced the
availability under the line of credit. Letters of credit are subject to commission fees of 0.75% as
well as administrative costs. The Company did not pay any letters of credit fees for the fiscal
quarter ended April 30, 2005. 15. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123
(revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the
approach in Statement 123(R) is similar to the approach described in Statement 123. However,
Statement 123(R) requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair values. Pro forma disclosure
is no longer an alternative. Statement 123(R) is effective for the first quarter of the first fiscal year that begins after June
15, 2005. Early adoption will be permitted in periods in which financial statements have not yet
been issued. We expect to adopt Statement 123(R) on February 1, 2006. Statement 123(R) permits public companies to adopt its requirements using one of two methods: 1. A modified prospective method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of Statement 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of Statement 123 for all awards
granted to employees prior to the effective date of Statement 123(R) that remain unvested on the
effective date. 2. A modified retrospective method which includes the requirements of the modified prospective
method described above, but also permits entities to restate based on the amounts previously
recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods
presented or (b) prior interim periods of the year of adoption. We have not yet determined which method to use in adopting SFAS 123(R). 
 ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Any statement in this Quarterly Report on Form 10-Q about our future expectations, plans and
prospects, including statements containing the words believes, anticipates, plans, expects,
will and similar expressions, constitute forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those
indicated by such forward-looking statements as a result of various important factors, including
those set forth in this Item 2 under the heading Future Operating Results. The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our financial statements and notes appearing elsewhere in this
Quarterly Report on Form 10-Q. OVERVIEW We are a leading provider of content resources and complementary technologies for integrated
enterprise learning. SkillChoice multi-modal learning (SMML) solutions offer powerful tools to
support and enhance the speed and effectiveness of both formal and informal learning processes.
SMML solutions integrate our in-depth courseware, learning management platform technology and
support services to meet our customers learning needs. We derive revenue primarily from agreements under which customers license our products and purchase
our services. The pricing for 15




---



##### Table of Contents



our courses varies based upon the number of course titles or the courseware bundle licensed by a
customer, the number of users within the customers organization and the length of the license
agreement (generally one, two or three years). Our agreements permit customers to exchange course
titles, generally on the contract anniversary date. Additional services, such as hosting and online
mentoring are subject to additional fees. The pricing for our SMML licenses varies based on the choice of SMML, content offering selected by
the customer, the number of users within the customers organization and the length of the license
agreement. Our SMML license provides customers access to a full range of learning products
including courseware, Referenceware, simulations, mentoring and prescriptive assessment. A Referenceware license from our subsidiary, Books24x7.com (Books), gives users access to a full
Referenceware library within one or more Referenceware collections (examples of which are: ITPro,
BusinessPro, FinancePro and OfficeEssentials). The pricing for our Referenceware licenses varies
based on the collections specified by a customer, the number of users within the customers
organization and the length of the license agreement. We offer discounts from our ordinary pricing in arrangements covering larger numbers of courses,
for larger user bases or for longer periods. Generally, customers may amend their license
agreements, for an additional fee, to gain access to additional courses or product lines and/or to
increase the size of the user base. We also derive revenue from hosting fees for clients that use
our solutions on an application service provider (ASP) basis, online mentoring services and
professional services. In selected circumstances, we derive revenue on a pay-for-use basis under
which some customers are charged based on the number of courses accessed by users. Revenue derived
from pay-for-use contracts has been minimal to date. Cost of revenue includes the cost of materials (such as storage media), packaging, shipping and
handling, CD duplication, the cost of online mentoring and hosting services, royalties and certain
infrastructure and occupancy expenses. We generally recognize these costs as incurred. Research and
development expenses consist primarily of salaries and benefits, certain infrastructure and
occupancy expenses, fees to consultants and course content development fees. We account for
software development costs in accordance with Statement of Financial Accounting Standards (SFAS)
No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,
which requires the capitalization of certain computer software development costs incurred after
technological feasibility is established. In the fiscal quarter ended April 30, 2005 we capitalized
approximately $1.2 million in software development costs. Selling and marketing expenses consist
primarily of salaries, commissions and benefits, advertising and promotion, travel and certain
infrastructure and occupancy expenses. General and administrative expenses consist primarily of
salaries and benefits, consulting and service expenses, legal expenses, other public company costs
and certain infrastructure and occupancy expenses. Deferred compensation consists of two components: (1) the value of unvested options assumed in the
Books acquisition and the Merger, and (2) the difference between the exercise or sale price of
share options granted or restricted common stock sold during the year ended January 31, 2000 and
the fair market value of the common stock as determined for accounting purposes. The deferred
compensation is amortized over the vesting period of the underlying share option or shares. Amortization of intangibles represents the amortization of intangible assets, such as customer
value and content, from the Books acquisition, the GoTrain acquisition and the Merger, as well as
amortization of those assets capitalized under FAS 86. Restructuring primarily consists of charges associated with international restructuring activities
as well as activities related to our recent content development restructure. SEC investigation and other professional fees primarily consist of charges associated with, and as
a result of, the restatement of SmartForces financial statements for 1999, 2000, 2001 and the
first two quarters of 2002, the re-filing of statutory tax returns as a result of the restatement
and charges for the ongoing SEC investigation. BUSINESS OUTLOOK In the quarter ended April 30, 2005 we generated revenue of $53.3 million, an increase compared to
the quarter ended April 30, 2004, and we reported positive net earnings. However, we continue to
find ourselves in a challenging business environment. The overall market adoption rate for
e-learning solutions remains relatively slow and we are seeing constraints on IT spending by our
current and potential customers. As a result, we are experiencing delays in customer orders and
some non-renewals of contracts from existing customers. In addition, price competition in the
e-learning market is having a negative impact on the revenue we are generating from the new
contracts and the contract renewals we do succeed in obtaining. 16




---



##### Table of Contents



On the positive side, our recent revenue growth and our growth prospects are strongest in our
product lines focused on informal learning, such as our Books24x7 products. As a result, we have
increased our research and development spending in order to invest aggressively in those areas and
accelerate the time by which our planned new products will be available to our customers. In addition, during the fourth quarter of fiscal 2005, we restructured our content development
organization to more efficiently manage costs and capitalize further on the flexibility inherent in
our existing outsourcing model. The goal of the restructuring is to enable us to meet our existing
content production targets at a reduced cost and with greater flexibility with respect to the
product offerings in which we elect to make investments. The restructuring involved the elimination
of 119 jobs in Dublin, Ireland and 12 in Nashua, New Hampshire, as well as facilities consolidation
in Dublin. We have shifted the remainder of our IT skills content development activities to our
outsourcing suppliers, while continuing to maintain project management and quality control
internally. This restructuring included a reduction of an additional 12 jobs in Nashua, New
Hampshire for a rightsizing of our inside sales operation and 9 jobs in Germany related to the
shutdown of our German facility. We incurred restructuring charges related to payments to
terminated employees, facilities consolidation and the repayment of grants previously awarded by
Irish agencies. These charges totaled approximately $13.0 million and were incurred in the fourth
quarter of fiscal 2005. We believe that the restructuring will result in content development cost
savings of approximately $5.0 million per year at current production levels, beginning in this
fiscal year. This will afford us more flexibility to reinvest dollars that can be recaptured in an
outsourcing model for other research and development initiatives and/or to increase the
profitability of the organization. In the quarter ended April 30, 2005, in order to more fully focus on the Multi-Modal Learning (MML)
business (which includes informal learning), we sold certain assets of our retail IT certification
business, SmartCertify (the Retail Certification business). The Retail Certification business was
focused on direct-to-consumer business and contributed less revenue than expected. This action will
allow us to fully focus our attention and resources on our core enterprise business. We will
maintain a reseller arrangement with the acquiring organization, and we will also maintain the
existing customer contracts and service those contracts until the contractual obligation is
fulfilled. We will be recognizing revenue from the deferred revenue balance related to
direct-to-consumer business over the next 18 to 24 months. Substantially all of the sales,
marketing and administrative costs on a going forward basis will be eliminated. CRITICAL ACCOUNTING POLICIES Our significant accounting policies are more fully described in Note 2 of the Notes to the
Consolidated Financial Statements in our Annual Report on Form 10-K as filed with the SEC on April
18, 2005. However, we believe the accounting policies described below are particularly important to
the portrayal and understanding of our financial position and results of operations and require
application of significant judgment by our management. In applying these policies, management uses
its judgment in making certain assumptions and estimates. Revenue Recognition We generate revenue from the license of products and services and from providing hosting/ ASP
services. We follow the provisions of the American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP
98-9 to account for revenue derived pursuant to license agreements under which customers license
our products and services. The pricing for our courses varies based upon the number of course
titles or the courseware bundle licensed by a customer, the number of users within the customers
organization and the length of the license agreement (generally one, two or three years). License
agreements permit customers to exchange course titles, generally on the contract anniversary date.
Additional product features, such as hosting and online mentoring services, are separately licensed
for an additional fee. The
pricing for our SMML licenses varies based on the choice of SMML, the content offering selected by
the customer, the number of users within the customers organization and the length of the license
agreement. A SMML license provides customers access to a full range of learning products including
courseware, Referenceware, simulations, mentoring and prescriptive assessment. A Referenceware license gives users access to a full Referenceware library within one or more
Referenceware collections (examples of which are: ITPro, BusinessPro, FinancePro and OfficeEssentials) from
Books. The pricing for our Referenceware licenses varies based on the collections specified by a
customer, the number of users within the customers organization and the length of the license
agreement. We offer discounts from our ordinary pricing, and purchasers of licenses for larger numbers of
courses, for larger user bases or for longer periods generally receive discounts. Generally,
customers may amend their license agreements, for an additional fee, to gain 17




---



##### Table of Contents



access to additional courses or product lines and/or to increase the size of the user base. We also
derive revenue from hosting fees for clients that use our solutions on an ASP basis, online
mentoring services and professional services. In selected circumstances, we derive revenue on a
pay-for-use basis under which some customers are charged based on the number of courses accessed by
users. Revenue derived from pay-for-use contracts has been minimal to date. We recognize revenue ratably over the license period if the number of courses that a customer has
access to is not clearly defined, available, or selected at the inception of the contract, or if
the contract has additional undelivered elements for which we do not have vendor specific objective
evidence (VSOE) of the fair value of the various elements. This may occur if the customer does not
specify all licensed courses at the outset, the customer chooses to wait for future licensed
courses on a when and if available basis, the customer is given exchange privileges that are
exercisable other than on the contract anniversaries, or the customer licenses all courses
currently available and to be developed during the term of the arrangement. Nearly all of our
contractual arrangements result in the recognition of revenue ratably over the license period. We also derive revenue from extranet hosting/ASP services and online mentoring services. We
recognize revenue related to extranet hosting/ASP services and online mentoring services on a
straight-line basis over the period the services are provided. We
generally bill the annual license fee for the first year of a
multi-year license agreement in advance
and license fees for subsequent years of multi-year license arrangements are billed on the
anniversary date of the agreement. Occasionally, we bill customers on a quarterly basis. In some
circumstances, we offer payment terms of up to six months from the initial shipment date or
anniversary date for multi-year license agreements to our customers. To the extent that a customer is given
extended payment terms (defined by us as greater than six months), revenue is recognized as cash
becomes due, assuming all of the other elements of revenue recognition have been satisfied. We typically recognize revenue from resellers when both the sale to the end user has occurred and
the collectibility of cash from the reseller is probable. With respect to reseller agreements with
minimum commitments, we recognize revenue related to the portion of the minimum commitment that
exceeds the end user sales at the expiration of the commitment period provided we have received
payment. We provide professional services; including instructor led training, customized content, websites,
and implementation services. We recognize professional service revenue as the services are
performed. We record reimbursable out-of-pocket expenses in both maintenance and services revenues and as a
direct cost of maintenances and services in accordance with EITF Issue No. 01-14, Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred (EITF 01-14).
EITF 01-14 requires reimbursable out-of-pocket expenses incurred to be characterized as revenue in
the income statement. We record as deferred revenue amounts that have been billed in advance for products or services to
be provided. Deferred revenue includes the unamortized portion of revenue associated with license
fees for which we have received payment or for which amounts have been billed and are due for
payment in 90 days or less for resellers and 180 days or less for direct customers. In addition,
deferred revenue includes amounts which have been billed and not collected for which revenue is
being recognized ratably over the license period. Amortization of Intangible Assets and Impairment of Goodwill We record intangible assets as historical cost. We amortize our intangible assets which include
customer contracts and internally developed software. We review these intangible assets at least
annually to determine if any adverse conditions exist or a change in circumstances has occurred
that would indicate impairment or a change in their remaining useful life. We also review our
indefinite-lived intangible assets at least annually for impairment which includes trademarks and
tradenames. We test goodwill during the fourth quarter of each year for impairment, or more frequently if
certain indicators are present or changes in circumstances suggest that impairment may exist. In
performing the test, we calculate the fair value of the reporting units as the present value of
estimated future cash flows using a risk-adjusted discount rate. The selection and use of an
appropriate discount rate requires significant management judgment with respect to revenue and
expense growth rates. Stock Based Compensation We account for our stock-based employee compensation plans on the intrinsic value method under the
recognition and measurement 18




---



##### Table of Contents



principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25) and related Interpretations under APB No. 25. We provide pro forma
disclosures only of the compensation expense determined under the fair value provisions of SFAS No.
123, Accounting for Stock-Based Compensation (SFAS No. 123). See Note 15 for a description of FASB Statement No. 123 (revised 2004), Share-Based Payment. Deferral of Commissions We employ an accounting policy consistent with guidance provided by FASB technical bulletin 90-1
and SEC staff accounting bulletin 104, related to the concept of a direct and incremental
relationship between revenue and expense. As such, we defer the recognition of commission expense
until such time as the revenue related to the contract for which the commission was paid is
recognized. Restructuring Charges We account for our restructuring activities under guidance provided by Statement of Financial
Accounting Standards No. 141 (SFAS 141), Business Combinations and Statement of Financial
Accounting Standards No. 146 (SFAS 146), Accounting for Costs Associated with Exit or Disposal
Activities. SFAS 141 states that after the end of the allocation period (generally one year from
date of merger) an adjustment that results from a preacquisition contingency other than an income
tax loss carryforward should be included in the determination of net income / (loss) in the period
in which the adjustment is determined. As such, adjustments to preacquisition contingencies
established at the time of the SmartForce  Skillsoft merger are recorded as restructuring charges
in our statement of operations. SFAS 146 states that a liability related to an exit or disposal
activity should be recognized at fair value in the period in which it is incurred. As such, when
we identify restructuring charges that fulfill the requirements identified in SFAS 146 as incurred,
we record the charges in our statement of operations. Legal Contingencies In connection with any material legal proceedings that we may become involved in, management
periodically reviews estimates of potential costs to be incurred by us in connection with the
adjudication or settlement, if any, of these proceedings. These estimates are developed in
consultation with our outside counsel and are based on an analysis of potential litigation outcomes
and settlement strategies. In accordance with SFAS No. 5, Accounting for Contingencies, loss
contingencies are accrued if, in the opinion of management, an adverse outcome is probable and such
outcome can be reasonably estimated. In accordance with SFAS No. 5, gain contingencies are accrued
if, in the opinion of management, a favorable outcome is probable and such outcome can be
reasonably estimated. Legal costs are expensed as incurred. RESULTS OF OPERATIONS DOLLAR
    
    
    QUARTER ENDED APRIL 30,INCREASE/(DECREASE)
    
    
    PERCENT CHANGE2004/2005
    
    
    INCREASE/(DECREASE)
    
    
    PERCENTAGE OF REVENUE(IN THOUSANDS)
    
    
    2004/2005
    
    
    2005
    
    
    2004Revenue
    
    $
    510
    
    
    
    1
    %
    
    
    100
    %
    
    
    100
    %Cost of revenue
    
    
    756
    
    
    
    15
    %
    
    
    11
    %
    
    
    10
    %Gross margin
    
    
    (246
    )
    
    
    (1
    %)
    
    
    89
    %
    
    
    90
    %Operating expenses:Research and development
    
    
    425
    
    
    
    5
    %
    
    
    19
    %
    
    
    18
    %Selling and marketing
    
    
    (332
    )
    
    
    (1
    %)
    
    
    45
    %
    
    
    46
    %General and administrative
    
    
    222
    
    
    
    4
    %
    
    
    12
    %
    
    
    11
    %Amortization of stock-based compensation
    
    
    (111
    )
    
    
    (32
    %)
    
    
    
    
    
    
    1
    %Amortization of intangible assets
    
    
    (176
    )
    
    
    (7
    %)
    
    
    4
    %
    
    
    5
    %Restructuring
    
    
    556
    
    
    
    378
    %
    
    
    1
    %
    
    
    Restatement:SEC investigation
    
    
    (74
    )
    
    
    (23
    %)
    
    
    1
    %
    
    
    1
    %Other professional fees
    
    
    (114
    )
    
    
    (100
    %)
    
    
    
    
    
    
    Total operating expenses
    
    
    396
    
    
    
    1
    %
    
    
    82
    %
    
    
    82
    %Operating income
    
    
    (642
    )
    
    
    (14
    %)
    
    
    7
    %
    
    
    9
    %Other expense, net
    
    
    (69
    )
    
    
    (38
    %)
    
    
    
    
    
    
    Interest income, net
    
    
    172
    
    
    
    140
    %
    
    
    1
    %
    
    
    Loss on sale of assets, net
    
    
    681
    
    
    
    100
    %
    
    
    (1
    %)
    
    
    Income before provision for income taxes
    
    
    (1,082
    )
    
    
    (24
    %)
    
    
    6
    %
    
    
    8
    %Provision for income taxes
    
    
    (346
    )
    
    
    (27
    %)
    
    
    2
    %
    
    
    2
    %Net income
    
    $
    (736
    )
    
    
    (23
    %)
    
    
    5
    %
    
    
    6
    %
 19




---



##### Table of Contents



COMPARISON OF THE FISCAL QUARTERS ENDED APRIL 30, 2005 AND 2004 REVENUE Revenue increased $510,000, or 1%, to $53.3 million in the quarter ended April 30, 2005 from
$52.8 million in the quarter ended April 30, 2004. This increase was primarily due to revenue
generated from new business primarily derived from our product lines focused on informal learning
and an increase in revenue from our Retail Certification business due to sales to new customers as
well as the full realization of the segments subscription-based revenue recognition model. This
business segment adopted subscription-based revenue recognition immediately after the Merger and
generally defers revenue at the time of sale over 18 to 24 months. Our revenues related to informal
learning increased in the quarter ended April 30, 2005 compared to the quarter ended April 30,
2004, and we expect revenues related to informal learning to increase for the remainder of fiscal
2006 when compared to fiscal 2005. QUARTERS ENDED APRIL 30,(IN THOUSANDS)
    
    2005
    
    
    2004
    
    
    CHANGERevenue:United States
    
    $
    41,971
    
    
    $
    40,922
    
    
    $
    1,049International
    
    
    11,356
    
    
    
    11,895
    
    
    
    (539
    )Total
    
    $
    53,327
    
    
    $
    52,817
    
    
    $
    510
 Revenue increased by 3% and decreased by 5% in the United States and internationally, respectively,
in the quarter ended April 30, 2005 as compared to the quarter ended April 30, 2004. The
international revenue decrease was primarily due a slight decrease in new customer sales. The
United States represented 79% and 77% of revenue for the quarters ended April 30, 2005 and 2004,
respectively. QUARTERS ENDED APRIL 30,(IN THOUSANDS)
    
    2005
    
    
    2004
    
    
    CHANGERevenue:Multi-Modal Learning
    
    $
    48,050
    
    
    $
    48,233
    
    
    $
    (183
    )Retail Certification
    
    
    5,277
    
    
    
    4,584
    
    
    
    693Total
    
    $
    53,327
    
    
    $
    52,817
    
    
    $
    510
 Revenue decreased slightly in the MML segment and increased by 15% in the Retail Certification
segment in the quarter ended April 30, 2005 as compared to the quarter ended April 30, 2004. We
anticipate MML revenue to remain flat or slightly down in the remainder of fiscal 2006 when
compared to fiscal 2005. In the quarter ended April 30, 2005, we sold certain assets related to the
Retail Certification business. The sale did not have a negative impact on retail certification
revenue for the quarter ended April 30, 2005, but will result in a reduction in revenue for the
remainder of fiscal 2006 when compared to fiscal 2005. We exited the fiscal year ended January 31, 2005 with noncancellable backlog of approximately $168
million as compared to $170 million at January 31, 2004. This amount is calculated by combining
the amount of deferred revenue at our fiscal year end with the amounts to be added to deferred
revenue throughout the next twelve months as a result of committed customer contracts and
determining how much of these amounts are scheduled to amortize into revenue during fiscal 2006.
The amount scheduled to amortize into revenue during fiscal 2006 is disclosed as backlog as of
January 31, 2005. Amounts to be added to deferred revenue during fiscal 2006 include subsequent
billings for ongoing contract periods as well as billings for new or continuing contracts. Company
management has included this non-GAAP disclosure due to the fact that it is directly related to our
subscription based revenue recognition policy. This is a key business metric, which factors into
our forecasting and planning activities and provides visibility into fiscal 2006 revenue. COSTS AND EXPENSES Cost of revenue increased $756,000, or 15%, to $5.8 million in the quarter ended April 30, 2005
from $5.1 million in the quarter 20




---



##### Table of Contents



ended April 30, 2004. This increase was primarily due to a higher mix of royalty-bearing revenue as
well as increased infrastructure charges incurred in connection with our efforts to consolidate
hosting sites. Cost of revenue as a percentage of total revenue was 11% in the quarter ended April
30, 2005 versus 10% in the quarter ended April 30, 2004. Research and development increased $425,000, or 5%, to $9.9 million in the quarter ended April 30,
2005 from $9.4 million in the quarter ended April 30, 2004. Research and development expenses as a
percentage of total revenue increased to 19% in the quarter ended April 30, 2005 from 18% in the
quarter ended April 30, 2004. This increase was primarily due to incremental costs incurred to
introduce the SkillSoft Dialogue product offering. We plan to incur incremental costs to pursue
informal learning opportunities for the remainder of fiscal 2006. Selling and marketing expenses decreased $332,000, or 1%, to $24.0 million in the quarter ended
April 30, 2005 from $24.4 million in the quarter ended April 30, 2004. Selling and marketing
expenses as a percentage of total revenue decreased to 45% in the quarter ended April 30, 2005 from
46% in the quarter ended April 30, 2004. The decrease was primarily due to several annual trade
show events that took place in the first quarter of fiscal 2005 but will take place in the second
quarter of fiscal 2006. This was partially offset by increased costs related to bringing our
virtual classroom offerings to market, expanding our distribution channels, including our new
tele-sales operation, and a settlement charge associated with the amendment of Mr. Greg Priests
employment agreement. While we plan to continue investing in new distribution channels we expect
that selling and marketing costs will decrease in fiscal 2006 compared to fiscal 2005 due to lower
commission expense primarily related to the Retail Certification
business as well as a decrease in selling and marketing costs
associated with the sale of certain assets of the Retail Certification business. We expect that
selling and marketing expenses as a percentage of revenue will be flat in fiscal 2006 compared to
fiscal 2005. General and administrative expenses increased $222,000, or 4%, to $6.3 million in the quarter ended
April 30, 2005 from $6.1 million in the quarter ended April 30, 2004. General and administrative
expenses as a percentage of total revenue increased to 12% in the quarter ended April 30, 2005 from
11% in the quarter ended April 30, 2004. General and administrative expenses increased primarily
due to additional compensation and benefit costs associated with an increased headcount. We
anticipate that general and administrative expenses will increase in absolute dollars and as a
percentage of revenue over the remainder of fiscal 2006 compared to fiscal 2005 due primarily to
continued increases in the costs of operating as a public company such as costs related to
compliance with Section 404 of the Sarbanes-Oxley Act, advisory services, legal representation and
insurance coverage. Amortization of intangible assets decreased $176,000, or 7%, to $2.2 million in the quarter ended
April 30, 2005 from $2.4 million in the quarter ended April 30, 2004. See Note 7 of the Notes to
the Condensed Consolidated Financial Statements. Stock-based compensation expense decreased $111,000, or 32%, to $237,000 in the quarter ended April
30, 2005 from $348,000 in the quarter ended April 30, 2004. The expense relates to amortization of
deferred compensation resulting from the fair market value of options assumed in the Merger and the
acquisition of Books. See Business Outlook for a discussion of our restructuring activities and Note 6 for a discussion
of the restatement. OTHER EXPENSE, NET Other expense in the quarter ended April 30, 2005 was $110,000 as compared to $179,000 in the
quarter ended April 30, 2004. This change was primarily due to foreign currency fluctuations. Due
to our multi-national operations, our business is subject to fluctuations based upon changes in the
exchange rates between the currencies we do business in. INTEREST INCOME, NET Interest income, net increased to $295,000 in the quarter ended April 30, 2005 from $123,000 in the
quarter ended April 30, 2004. This increase was primarily due to higher interest rates on our cash
and cash equivalents and investments. LOSS ON SALE OF ASSETS, NET We recorded a loss of $681,000 on sale of certain assets of the Retail Certification business which
resulted primarily from investment banking fees and professional fees associated with the sale of
certain assets of the Retail Certification business in the quarter ended April 30, 2005. 21




---



##### Table of Contents



PROVISION FOR INCOME TAXES The provision for income taxes was $900,000 and $1.3 million in the quarters ended April 30, 2005
and 2004, respectively. The income tax provision for the quarters ended April 31, 2005 reflects
managements expectation that the effective tax rate for fiscal 2005 will be approximately 27%. LIQUIDITY AND CAPITAL RESOURCES As of April 30, 2005, our principal source of liquidity was our cash and cash equivalents and
short-term investments, which totaled $67.5 million. This compares to $54.9 million at January 31,
2005. Net cash provided by operating activities was $13.2 million for the quarter ended April 30, 2005.
Our net cash provided by operating activities in the quarter ended April 30, 2005 reflects
primarily our net income of $2.5 million, depreciation and amortization of $3.5 million, a decrease
in accounts receivable of $38.8 million and an increase in accounts payable of $0.8 million,
partially offset by a decrease in accrued expenses of $16.2 million and a decrease in deferred
revenue of $17.9 million. Net cash provided by investing activities was $4.3 million for the quarter ended April 30, 2005.
Maturity of investments, net of purchases (short and long-term), generated a net cash inflow of
approximately $6.5 million in the quarter ended April 30, 2005. This was partially offset by
purchases of capital assets and capitalized development software costs totaling approximately $2.2
million. Net cash used in financing activities was $4.6 million for the quarter ended April 30, 2005. Cash
was used to purchase $6.2 million of shares on the open market under our share repurchase program.
The shares are accounted for as treasury stock. This was partially offset by proceeds from the
exercise of stock options and stock purchases under our 2004 Employee Share Purchase Plan of $1.6
million. Our working capital deficit was approximately $40.7 million and $46.8 million as of April 30, 2005
and January 31, 2005, respectively. The reduction in our working capital deficit in the quarter ended April 30,
2005 was primarily due to net income of $2.5 million, $3.5 million in depreciation and amortization
and the maturity of long-term investments, net of purchases of $6.4 million, which was
partially offset by the repurchase of shares of $6.2 million. Total assets were approximately
$268.1 million and $303.5 million as of April 30, 2005 and January 31, 2005, respectively. As of
April 30, 2005 and January 31, 2005, goodwill and separately identifiable intangible assets were
$117.4 million and $119.7 million, respectively. On July 23, 2004, we entered into a $25 million two year, line of credit with a bank. Under the
terms of the line of credit, the bank holds a first security interest in all domestic business
assets. All borrowings under the line of credit bear interest at the banks prime rate. The
facility is subject to a commitment fee of $50,000 to secure the line of credit and unused
commitment fees of 0.125% based upon the daily average of un-advanced amounts under the revolving
line of credit. We paid approximately $2,900 in unused commitment fees for the quarter ended April
30, 2005. In addition, the line of credit contains certain financial and non-financial covenants.
At January 31, 2005, we were unable to attain one of the financial covenants set forth in the line
of credit. With a net loss of approximately $29.1 million for the quarter ended January 31, 2005,
we did not meet the minimum quarterly profitability of $6.5 million for the fourth quarter. We
were unable to meet the financial covenant due to the restructuring and impairment charges recorded
in the fourth quarter. The bank agreed to amend the original loan agreement and issue a first loan
modification agreement. The first loan modification agreement has been executed and we are
currently in compliance with all covenants. Also, the line of credit provides that in the event of
a Material Adverse Change (as defined in the line of credit), the lender has the ability to call
amounts outstanding under the line of credit. As of April 30, 2005, there were no borrowings on the
line of credit; however we had an outstanding letter of credit of $15.5 million that reduced the
availability under the line of credit. Letters of credit are subject to commission fees of 0.75% as
well as administrative costs. We did not pay any letters of credit fees for the quarter ended April
30, 2005. As of January 31, 2005, we had U.S. federal net operating loss carryforwards (NOLs) of
approximately $342.9 million. These NOLs, which are subject to potential limitations based upon
change in control provisions of Section 382 of the Internal Revenue Code, are available to reduce
future taxable income, if any, through 2025. We also had U.S. federal tax credit carryforwards of
approximately $3.3 million at January 31, 2005. Additionally, we had approximately $101.5 million
of net operating loss carryforwards in jurisdictions outside of the U.S. If not utilized, these
carryforwards expire at various dates through the year ending January 31, 2025. Included in the
$342.9 million are approximately $217.7 million of U.S. net operating loss carryforwards and
$365,000 of U.S. tax credit carryforwards that were acquired in the Merger and the purchase of
Books. In addition, included in the $101.5 million is approximately $62.5 million of net operating
loss carryforwards in jurisdictions outside the U.S. acquired in the Merger and the purchase of
Books. We will realize the benefits of these acquired net operating losses through reductions to
goodwill and non- 22




---



##### Table of Contents



goodwill intangibles during the period that the losses are utilized to reduce tax payments. Also
included in the $342.9 million at January 31, 2005, we have approximately $27.5 million of net
operating loss carryforwards in the United States resulting from disqualifying dispositions. We
will realize the benefit of these losses through increases to stockholders equity in the periods
in which the losses are utilized to reduce tax payments. We lease certain of our facilities and certain equipment and furniture under operating lease
agreements that expire at various dates through 2023. Future minimum lease payments, net of
estimated rentals, under these agreements are as follows (in thousands): Payments Due by PeriodLess Than
    
    1-3
    
    3-5
    
    More ThanContractual Obligations
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    5 YearsOperating Lease Obligations
    
    $
    35,881
    
    
    $
    5,802
    
    
    $
    9,714
    
    
    $
    5,122
    
    
    $
    15,243
 We expect to continue to experience growth in capital expenditures and operating expenses,
particularly in research and development, in the fiscal year ending January 31, 2006, as compared
to the fiscal year ended January 31, 2005 in order to execute our business plan and achieve
expected revenue growth. To the extent that our execution of the business plan results in increased
sales, we expect to experience corresponding increases in deferred revenue, cash flow and prepaid
expenses. In addition, we are required to make litigation settlement payments totaling $15.25
million in the fiscal year ending January 31, 2006. We are in discussions with our insurers to
determine how much, if any, of the settlement related to the 2002 securities class action lawsuits
will be paid by them. Capital expenditures for the fiscal year ending January 31, 2006 are expected
to be approximately $7.0 million. We have approval of our Board of Directors and shareholders to
purchase, subject to certain limitations, up to 4,714,729 of our outstanding shares (above the
2,285,271 we have already purchased through April 30, 2005)
although there are limitations on our ability to purchase up to this
level, which include distributable profit limitations under Irish
regulations and available cash. We expect that the principal sources
of funding for our operating expenses, capital expenditures, litigation settlement payments and
other liquidity needs will be a combination of our available cash and cash equivalents and
short-term investments (which totaled approximately $67.5 million as of April 30, 2005), and funds
generated from future cash flows. We believe our current funds and expected cash flows from
operating activities will be sufficient to fund our operations for at least the next 12 months.
However, there are a number of factors that may negatively impact our available sources of funds.
In addition, our cash needs may increase due to factors such as unanticipated developments in our
business or significant acquisitions. The amount of cash generated from operations will be
dependent upon the successful execution of our business plan. Although we do not foresee the need
to raise additional capital, any unanticipated economic or business events could require us to
raise additional capital to support operations. FUTURE OPERATING RESULTS RISKS RELATED TO LEGAL PROCEEDINGS IN CONNECTION WITH OUR RESTATEMENT OF THE HISTORICAL FINANCIAL STATEMENTS OF SMARTFORCE, CLASS
ACTION LAWSUITS HAVE BEEN FILED AGAINST US AND ADDITIONAL LAWSUITS MAY BE FILED, AND WE ARE THE
SUBJECT OF A FORMAL ORDER OF PRIVATE INVESTIGATION ENTERED BY THE SEC. While preparing the closing balance sheet of SmartForce as at September 6, 2002, the date on
which we closed our merger with SkillSoft Corporation, certain accounting matters were identified
relating to the historical financial statements of SmartForce (which, following the Merger, are no
longer our historical financial statements  see Note 1 of the Notes to the Condensed Consolidated
Financial Statements). On November 19, 2002, we announced our intent to restate the SmartForce
financial statements for 1999, 2000, 2001 and the first two quarters of 2002. We have settled
several class action lawsuits that were filed following the announcement of the restatement. We are the subject of a formal order of private investigation entered by the SEC. We will likely incur substantial
costs in connection with the SEC investigation, which could cause a diversion of management time
and attention. In addition, we could be subject to substantial penalties, fines or regulatory
sanctions, which could adversely affect our business. On June 2, 2005, the Boston District Office of the SEC informed us that it had made a preliminary
determination to recommend that the SEC bring a civil injunctive action against us. Under the SECs
rules, we are permitted to make a so-called Wells Submission in which we seek to persuade the SEC
that no such action should be commenced. We intend to make such a submission. We continue to cooperate with the SEC in this
matter. At the present time
we are unable to predict the outcome of this action and as such have not determined what, if any,
impact it may have on our financial statements. CLAIMS THAT WE INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS COULD RESULT IN COSTLY
LITIGATION OR ROYALTY PAYMENTS TO THIRD PARTIES, OR REQUIRE US TO REENGINEER OR CEASE SALES OF OUR
PRODUCTS OR SERVICES. 23




---



##### Table of Contents



Third parties have in the past and could in the future claim that our current or future
products infringe their intellectual property rights. Any claim, with or without merit, could
result in costly litigation or require us to reengineer or cease sales of our products or services,
any of which could have a material adverse effect on our business. Infringement claims could also
result in an injunction in the use of our products or require us to enter into royalty or licensing
agreements. Licensing agreements, if required, may not be available on terms acceptable to the
combined company or at all. From time to time we learn of parties that claim broad intellectual property rights in the
e-learning area that might implicate our offerings. These parties or others could initiate actions
against us in the future. WE COULD INCUR SUBSTANTIAL COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS RELATING TO OUR CUSTOMERS
USE OF OUR PRODUCTS AND SERVICES. Many of the business interactions supported by our products and services are critical to our
customers businesses. Any failure in a customers business interaction or other collaborative
activity caused or allegedly caused in the future by our products and services could result in a
claim for substantial damages against us, regardless of our responsibility for the failure.
Although we maintain general liability insurance, including coverage for errors and omissions,
there can be no assurance that existing coverage will continue to be available on reasonable terms
or will be available in amounts sufficient to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim. WE COULD BE SUBJECTED TO LEGAL ACTIONS BASED UPON THE CONTENT WE OBTAIN FROM THIRD PARTIES OVER
WHOM WE EXERT LIMITED CONTROL. It is possible that we could become subject to legal actions based upon claims that our course
content infringes the rights of others or is erroneous. Any such claims, with or without merit,
could subject us to costly litigation and the diversion of our financial resources and management
personnel. The risk of such claims is exacerbated by the fact that our course content is provided
by third parties over whom we exert limited control. Further, if those claims are successful, we
may be required to alter the content, pay financial damages or obtain content from others. RISKS RELATED TO THE OPERATION OF OUR BUSINESS SOME OF OUR INTERNATIONAL SUBSIDIARIES HAVE NOT COMPLIED WITH REGULATORY REQUIREMENTS RELATING TO
THEIR FINANCIAL STATEMENTS AND TAX RETURNS. We operate our business in various foreign countries through subsidiaries organized in those
countries. Due to our restatement of the historical SmartForce financial statements, some of our
subsidiaries have not filed their audited statutory financial statements and have been delayed in
filing their tax returns in their respective jurisdictions. As a result, some of these foreign
subsidiaries may be subject to regulatory restrictions, penalties and fines and additional taxes. WE HAVE EXPERIENCED NET LOSSES IN THE PAST, AND WE MAY BE UNABLE TO MAINTAIN PROFITABILITY. We recorded a net loss of $284 million for the fiscal year ended January 31, 2003, $113.3
million for the fiscal year ended January 31, 2004 and $20.1 million for the fiscal year ended
January 31, 2005. We achieved profitability in the first quarter of the fiscal year ending January
31, 2006. However, we cannot guarantee that our combined business will sustain profitability in any
future period. OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. THIS LIMITS YOUR ABILITY TO EVALUATE
HISTORICAL FINANCIAL RESULTS AND INCREASES THE LIKELIHOOD THAT OUR RESULTS WILL FALL BELOW MARKET
ANALYSTS EXPECTATIONS, WHICH COULD CAUSE THE PRICE OF OUR ADSS TO DROP RAPIDLY AND SEVERELY. We have in the past experienced fluctuations in our quarterly operating results, and we
anticipate that these fluctuations will continue. As a result, we believe that our quarterly
revenue, expenses and operating results are likely to vary significantly in the future. If in some
future quarters our results of operations are below the expectations of public market analysts and
investors, this could have a severe adverse effect on the market price of our ADSs. Our operating results have historically fluctuated, and our operating results may in the
future continue to fluctuate, as a result of 24




---



##### Table of Contents



factors, which include (without limitation):  
    the size and timing of new/renewal agreements and upgrades;
    royalty rates;
    the announcement, introduction and acceptance of new products, product enhancements and
technologies by us and our competitors;
    the mix of sales between our field sales force, our other direct sales channels and our telesales channels;
    general conditions in the U.S. or the international economy;
    the loss of significant customers;
    delays in availability of new products;
    product or service quality problems;
    seasonality  due to the budget and purchasing cycles of our customers, we expect our
revenue and operating results will generally be strongest in the second half of our fiscal
year and weakest in the first half of our fiscal year;
    the spending patterns of our customers;
    litigation costs and expenses, including the costs related to the restatement of the SmartForce financial statements;
    non-recurring charges related to acquisitions;
    growing competition that may result in price reductions; and
    currency fluctuations. Most of our expenses, such as rent and most employee compensation, do not vary directly with
revenue and are difficult to adjust in the short-term. As a result, if revenue for a particular
quarter is below our expectations, we could not proportionately reduce operating expenses for that
quarter. Any such revenue shortfall would, therefore, have a disproportionate effect on our
expected operating results for that quarter. DEMAND FOR OUR PRODUCTS AND SERVICES MAY BE ESPECIALLY SUSCEPTIBLE TO ADVERSE ECONOMIC CONDITIONS. Our business and financial performance may be damaged by adverse financial conditions
affecting our target customers or by a general weakening of the economy. Companies may not view
training products and services as critical to the success of their businesses. If these companies
experience disappointing operating results, whether as a result of adverse economic conditions,
competitive issues or other factors, they may decrease or forego education and training
expenditures before limiting their other expenditures or in conjunction with lowering other
expenses. INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES, WHICH MAY
RESULT IN REDUCED REVENUES AND GROSS PROFITS AND LOSS OF MARKET SHARE. The market for corporate education and training solutions is highly fragmented and
competitive. We expect the market to become increasingly competitive due to the lack of significant
barriers to entry. In addition to increased competition from new companies entering into the
market, established companies are entering into the market through acquisitions of smaller
companies, which directly compete with us, and this trend is expected to continue. We may also face
competition from publishing companies and vendors of application software, including those vendors
with whom we have formed development and marketing alliances. 25




---



##### Table of Contents



Our primary sources of direct competition are:  
    third-party suppliers of instructor-led information technology, business, management and
professional skills education and training;
    suppliers of computer-based training and e-learning solutions;
    internal education and training departments of potential customers; and
    value-added resellers and network integrators. Growing competition may result in price reductions, reduced revenue and gross profits and loss
of market share, any one of which would have a material adverse effect on our business. Many of our
current and potential competitors have substantially greater financial, technical, sales, marketing
and other resources, as well as greater name recognition, and we expect to face increasing price
pressures from competitors as managers demand more value for their training budgets. Accordingly,
we may be unable to provide e-learning solutions that compare favorably with new instructor-led
techniques, other interactive training software or new e-learning solutions. WE RELY ON A LIMITED NUMBER OF THIRD PARTIES TO PROVIDE US WITH EDUCATIONAL CONTENT FOR OUR COURSES
AND REFERENCEWARE, AND OUR ALLIANCES WITH THESE THIRD PARTIES MAY BE TERMINATED OR FAIL TO MEET OUR
REQUIREMENTS. We rely on a limited number of independent third parties to provide us with the educational
content for a majority of our courses based on learning objectives and specific instructional
design templates that we provide to them. We do not have exclusive arrangements or long-term
contracts with any of these content providers. If one or more of our third party content providers
were to stop working with us, we would have to rely on other parties to develop our course content.
In addition, these providers may fail to develop new courses or existing courses on a timely basis.
We cannot predict whether new content or enhancements would be available from reliable alternative
sources on reasonable terms. In addition, Books relies on third party publishers to provide all of
the content incorporated into its Referenceware products. If one or more of these publishers were
to terminate their license with us, we may not be able to find substitute publishers for such
content. In addition, we may be forced to pay increased royalties to these publishers to continue
our licenses with them. In the event that we are unable to maintain or expand our current development alliances or
enter into new development alliances, our operating results and financial condition could be
materially adversely affected. Furthermore, we will be required to pay royalties to some of our
development partners on products developed with them, which could reduce our gross margins. We
expect that cost of revenues may fluctuate from period to period in the future based upon many
factors, including the revenue mix and the timing of expenses associated with development
alliances. In addition, the collaborative nature of the development process under these alliances
may result in longer development times and less control over the timing of product introductions
than for e-learning offerings developed solely by us. Our strategic alliance partners may from time
to time renegotiate the terms of their agreements with us, which could result in changes to the
royalty or other arrangements, adversely affecting our results of operations. The independent third party strategic partners we rely on for educational content and product
marketing may compete with us, harming our results of operations. Our agreements with these third
parties generally do not restrict them from developing courses on similar topics for our
competitors or from competing directly with us. As a result, our competitors may be able to
duplicate some of our course content and gain a competitive advantage. OUR SUCCESS DEPENDS ON OUR ABILITY TO MEET THE NEEDS OF THE RAPIDLY CHANGING MARKET. The market for education and training software is characterized by rapidly changing
technology, evolving industry standards, changes in customer requirements and preferences and
frequent introductions of new products and services embodying new technologies. New methods of
providing interactive education in a technology-based format are being developed and offered in the
marketplace, including intranet and Internet offerings. In addition, multimedia and other product
functionality features are being added to educational software. Our future success will depend upon
the extent to which we are able to develop and implement products which address these emerging
market requirements in a cost effective and timely basis. Product development is risky because it
is difficult to foresee developments in technology, coordinate technical personnel and identify and
eliminate design flaws. Any significant delay in releasing new products could have a material
adverse effect on the ultimate success of our products and could 26




---



##### Table of Contents



reduce sales of predecessor products. We may not be successful in introducing new products on
a timely basis. In addition, new products introduced by us may fail to achieve a significant degree
of market acceptance or, once accepted, may fail to sustain viability in the market for any
significant period. If we are unsuccessful in addressing the changing needs of the marketplace due
to resource, technological or other constraints, or in anticipating and responding adequately to
changes in customers software technology and preferences, our business and results of operations
would be materially adversely affected. We, along with the rest of the industry, face a
challenging and competitive market for IT spending that has resulted in reduced contract value for
our formal learning product lines. This pricing pressure is having a negative impact on revenue
for these product lines and may have a continued or increased adverse impact in the future. THE E-LEARNING MARKET IS A DEVELOPING MARKET, AND OUR BUSINESS WILL SUFFER IF E-LEARNING IS NOT
WIDELY ACCEPTED. The market for e-learning is a new and emerging market. Corporate training and education have
historically been conducted primarily through classroom instruction and have traditionally been
performed by a companys internal personnel. Many companies have invested heavily in their current
training solutions. Although technology-based training applications have been available for several
years, they currently account for only a small portion of the overall training market. Accordingly, our future success will depend upon the extent to which companies adopt
technology-based solutions for their training activities, and the extent to which companies utilize
the services or purchase products of third-party providers. Many companies that have already
invested substantial resources in traditional methods of corporate training may be reluctant to
adopt a new strategy that may compete with their existing investments. Even if companies implement
technology-based training or e-learning solutions, they may still choose to design, develop,
deliver or manage all or part of their education and training internally. If technology-based
learning does not become widespread, or if companies do not use the products and services of third
parties to develop, deliver or manage their training needs, then our products and service may not
achieve commercial success. THE SUCCESS OF OUR E-LEARNING STRATEGY DEPENDS ON THE RELIABILITY AND CONSISTENT PERFORMANCE OF OUR
INFORMATION SYSTEMS AND INTERNET INFRASTRUCTURE. The success of our e-learning strategy is highly dependent on the consistent performance of
our information systems and Internet infrastructure. If our Web site fails for any reason or if it
experiences any unscheduled downtimes, even for only a short period, our business and reputation
could be materially harmed. We have in the past experienced performance problems and unscheduled
downtime, and these problems could recur. We currently rely on third parties for proper functioning
of computer infrastructure, delivery of our e-learning applications and the performance of our
destination site. Our systems and operations could be damaged or interrupted by fire, flood, power
loss, telecommunications failure, break-ins, earthquake, financial patterns of hosting providers
and similar events. Any system failures could adversely affect customer usage of our solutions and
user traffic results in any future quarters, which could adversely affect our revenues and
operating results and harm our reputation with corporate customers, subscribers and commerce
partners. Accordingly, the satisfactory performance, reliability and availability of our Web site
and computer infrastructure is critical to our reputation and ability to attract and retain
corporate customers, subscribers and commerce partners. We cannot accurately project the rate or
timing of any increases in traffic to our Web site and, therefore, the integration and timing of
any upgrades or enhancements required to facilitate any significant traffic increase to the Web
site are uncertain. We have in the past experienced difficulties in upgrading our Web site
infrastructure to handle increased traffic, and these difficulties could recur. The failure to
expand and upgrade our Web site or any system error, failure or extended down time could materially
harm our business, reputation, financial condition or results of operations. BECAUSE MANY USERS OF OUR E-LEARNING SOLUTIONS WILL ACCESS THEM OVER THE INTERNET, FACTORS
ADVERSELY AFFECTING THE USE OF THE INTERNET OR OUR CUSTOMERS NETWORKING INFRASTRUCTURES COULD HARM
OUR BUSINESS. Many of our customers users access our e-learning solutions over the Internet or through our
customers internal networks. Any factors that adversely affect Internet usage could disrupt the
ability of those users to access our e-learning solutions, which would adversely affect customer
satisfaction and therefore our business. For example, our ability to increase the effectiveness and scope of our services to customers
is ultimately limited by the speed and reliability of both the Internet and our customers internal
networks. Consequently, the emergence and growth of the market for our products and services
depends upon the improvements being made to the entire Internet as well as to our individual
customers networking infrastructures to alleviate overloading and congestion. If these
improvements are not made, and the quality of networks 27




---



##### Table of Contents



degrades, the ability of our customers to use our products and services will be hindered and
our revenues may suffer. Additionally, a requirement for the continued growth of accessing e-learning solutions over
the Internet is the secure transmission of confidential information over public networks. Failure
to prevent security breaches into our products or our customers networks, or well-publicized
security breaches affecting the Internet in general could significantly harm our growth and
revenue. Advances in computer capabilities, new discoveries in the field of cryptography or other
developments may result in a compromise of technology we use to protect content and transactions,
our products or our customers proprietary information in our databases. Anyone who is able to
circumvent our security measures could misappropriate proprietary and confidential information or
could cause interruptions in our operations. We may be required to expend significant capital and
other resources to protect against such security breaches or to address problems caused by security
breaches. The privacy of users may also deter people from using the Internet to conduct
transactions that involve transmitting confidential information. OUR RESTRUCTURING PLANS MAY BE INEFFECTIVE OR MAY LIMIT OUR ABILITY TO COMPETE. Since the Merger, we have recorded an aggregate of $31.4 million in merger and exit costs and
an aggregate of $30.1 million of restructuring charges. There are several risks inherent in these
efforts to transition to a new cost structure. These include the risk that we will not be
successful in restoring profitability, and hence we may have to undertake further restructuring
initiatives that would entail additional charges and create additional risks. In addition, there is
the risk that cost-cutting initiatives will impair our ability to effectively develop and market
products and remain competitive. Each of the above measures could have long-term effects on our
business by reducing our pool of talent, decreasing or slowing improvements in our products, making
it more difficult for us to respond to customers, limiting our ability to increase production
quickly if and when the demand for our products increases and limiting our ability to hire and
retain key personnel. These circumstances could cause our earnings to be lower than they otherwise
might be. WE DEPEND ON A FEW KEY PERSONNEL TO MANAGE AND OPERATE THE BUSINESS AND MUST BE ABLE TO ATTRACT AND
RETAIN HIGHLY QUALIFIED EMPLOYEES. Our success is largely dependent on the personal efforts and abilities of our senior
management. Failure to retain these executives, or the loss of certain additional senior management
personnel or other key employees, could have a material adverse effect on our business and future
prospects. We are also dependent on the continued service of our key sales, content development and
operational personnel and on our ability to attract, train, motivate and retain highly qualified
employees. In addition, we depend on writers, programmers, Web designers and graphic artists. We
may be unsuccessful in attracting, training, retaining or motivating key personnel. In particular,
the negative consequences (including litigation) of having to restate SmartForces historical
financial statements, uncertainties surrounding the Merger, and our recent adverse operating
results and stock price performance could create uncertainties that materially and adversely affect
our ability to attract and retain key personnel. The inability to hire, train and retain qualified
personnel or the loss of the services of key personnel could have a material adverse effect upon
our business, new product development efforts and future business prospects. CHANGES IN ACCOUNTING STANDARDS REGARDING STOCK OPTION PLANS COULD LIMIT THE DESIRABILITY OF
GRANTING STOCK OPTIONS, WHICH COULD HARM OUR ABILITY TO ATTRACT AND RETAIN EMPLOYEES, AND COULD
ALSO REDUCE OUR PROFITABILITY. The Financial Accounting Standards Board has determined to require all companies to treat the
value of stock options granted to employees as an expense commencing in our first quarter of fiscal
2007. This change will require companies to record a compensation expense equal to the value of
each stock option granted. This expense will be spread over the vesting period of the stock option.
Due to the fact that we will be required to expense stock option grants, it could reduce the
attractiveness of granting stock options because the additional expense associated with these
grants would reduce our profitability. However, stock options are an important employee recruitment
and retention tool, and we may not be able to attract and retain key personnel if we reduce the
scope of our employee stock option program. Accordingly, either our profitability, or our ability
to use stock options as an employee recruitment and retention tool would be adversely impacted. OUR BUSINESS IS SUBJECT TO CURRENCY FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS. Due to our multinational operations, our operating results are subject to fluctuations based
upon changes in the exchange rates between the currencies in which revenues are collected or
expenses are paid. In particular, the value of the U.S. dollar against the euro 28




---



##### Table of Contents



and related currencies will impact our operating results. Our expenses will not necessarily be
incurred in the currency in which revenue is generated, and, as a result, we will be required from
time to time to convert currencies to meet our obligations. These currency conversions are subject
to exchange rate fluctuations, and changes to the value of the euro, pound sterling and other
currencies relative to the U.S. dollar could adversely affect our business and results of
operations. WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS. UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY
MAY RESULT IN DEVELOPMENT OF PRODUCTS OR SERVICES THAT COMPETE WITH OURS. Our success depends to a degree upon the protection of our rights in intellectual property. We
rely upon a combination of patent, copyright, and trademark laws to protect our proprietary rights.
We have also entered into, and will continue to enter into, confidentiality agreements with our
employees, consultants and third parties to seek to limit and protect the distribution of
confidential information. However, we have not signed protective agreements in every case. Although we have taken steps to protect our proprietary rights, these steps may be inadequate.
Existing patent, copyright, and trademark laws offer only limited protection. Moreover, the laws of
other countries in which we market our products may afford little or no effective protection of our
intellectual property. Additionally, unauthorized parties may copy aspects of our products,
services or technology or obtain and use information that we regard as proprietary. Other parties
may also breach protective contracts we have executed or will in the future execute. We may not
become aware of, or have adequate remedies in the event of, a breach. Litigation may be necessary
in the future to enforce or to determine the validity and scope of our intellectual property rights
or to determine the validity and scope of the proprietary rights of others. Even if we were to
prevail, such litigation could result in substantial costs and diversion of management and
technical resources. OUR NON-U.S. OPERATIONS ARE SUBJECT TO RISKS WHICH COULD NEGATIVELY IMPACT OUR FUTURE OPERATING
RESULTS. We expect that international operations will continue to account for a significant portion of
our revenues. Operations outside of the United States are subject to inherent risks, including:  
    difficulties or delays in developing and supporting non-English language versions of our products and services;
    political and economic conditions in various jurisdictions;
    difficulties in staffing and managing foreign subsidiary operations;
    longer sales cycles and account receivable payment cycles;
    multiple, conflicting and changing governmental laws and regulations;
    foreign currency exchange rate fluctuations;
    protectionist laws and business practices that may favor local competitors;
    difficulties in finding and managing local resellers;
    potential adverse tax consequences; and
    the absence or significant lack of legal protection for intellectual property rights. Any of these factors could have a material adverse effect on our future operations outside of
the United States, which could negatively impact our future operating results. THE MARKET PRICE OF OUR ADSs MAY FLUCTUATE AND MAY NOT BE SUSTAINABLE. The market price of our ADSs has fluctuated significantly since our initial public offering
and is likely to continue to be volatile. In addition, in recent years the stock market in general,
and the market for shares of technology stocks in particular, have experienced 29




---



##### Table of Contents



extreme price and volume fluctuations, which have often been unrelated to the operating
performance of affected companies. The market price of our ADSs may continue to experience
significant fluctuations in the future, including fluctuations that are unrelated to our
performance. As a result of these fluctuations in the price of our ADSs, it is difficult to predict
what the price of our ADSs will be at any point in the future, and you may not be able to sell your
ADSs at or above the price that you paid for them. OUR SALES CYCLE MAY MAKE IT DIFFICULT TO PREDICT OUR OPERATING RESULTS. The period between our initial contact with a potential customer and the purchase of our
products (not including SmartCertify) by that customer typically ranges from three to twelve months
or more. Factors that contribute to our long sales cycle, include:  
    our need to educate potential customers about the benefits of our products;
    competitive evaluations by customers;
    the customers internal budgeting and approval processes;
    the fact that many customers view training products as discretionary spending, rather
than purchases essential to their business; and
    the fact that we target large companies, which often take longer to make purchasing
decisions due to the size and complexity of the enterprise. These long sales cycles make it difficult to predict the quarter in which sales may occur.
Delays in sales could cause significant variability in our revenues and operating results for any
particular period. OUR BUSINESS COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS CONTAIN ERRORS. Software products as complex as ours contain known and undetected errors or bugs that result
in product failures. The existence of bugs could result in loss of or delay in revenues, loss of
market share, diversion of product development resources, injury to reputation or damage to efforts
to build brand awareness, any of which could have a material adverse effect on our business,
operating results and financial condition. 
 ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of April 30, 2005, we did not use derivative financial instruments for speculative or trading
purposes. INTEREST RATE RISK Our general investing policy is to limit the risk of principal loss and to ensure the safety
of invested funds by limiting market and credit risk. We currently use a registered investment
manager to place our investments in highly liquid money market accounts and government-backed
securities. All highly liquid investments with original maturities of three months or less are
considered to be cash equivalents. Interest income is sensitive to changes in the general level of
U.S. interest rates. Based on the short-term nature of our investments, we have concluded that
there is no significant market risk exposure. FOREIGN CURRENCY RISK Due to our multinational operations, our business is subject to fluctuations based upon
changes in the exchange rates between the currencies in which we collect revenues or pay expenses
and the U.S. dollar. Our expenses are not necessarily incurred in the currency in which revenue is
generated, and, as a result, we are required from time to time to convert currencies to meet our
obligations. These currency conversions are subject to exchange rate fluctuations, in particular
changes to the value of the euro, Canadian dollar, Australian dollar, New Zealand dollar, Singapore
dollar, and pound sterling relative to the U.S. dollar, which could adversely affect our business
and the results of operations. 30




---



##### Table of Contents



ITEM 4.  CONTROLS AND PROCEDURES Our management, with the participation of our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures as of April 30,
2005. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act), means controls and other procedures
of a company that are designed to ensure that information required to be disclosed by a company in
the reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the companys management, including its principal executive
and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Our management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their objectives and
management necessarily applies its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based on the evaluation of our disclosure controls and procedures as of
April 30, 2005, our chief executive officer and chief financial officer concluded that, as of such
date, our disclosure controls and procedures were effective at the reasonable assurance level. No change in our internal control over financial reporting occurred during the fiscal quarter
ended April 30, 2005 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting. 
 PART II 
 ITEM 1.  LEGAL PROCEEDINGS SEC INVESTIGATION On or about February 4, 2003, the Securities Exchange Commission (SEC) informed us that we are the
subject of a formal order of private investigation relating to our November 19, 2002 announcement
that we would restate the financial statements of SmartForce PLC for the period 1999 through June
2002. We understand that the SECs investigation concerns SmartForces financial disclosure and
accounting during that period, other related matters, compliance with rules governing reports
required to be filed with the SEC, and the conduct of those responsible for such matters. On June
2, 2005, the Boston District Office of the SEC informed us that it had made a preliminary
determination to recommend that the SEC bring a civil injunctive action against us. Under the SECs
rules, we are permitted to make a so-called Wells Submission in which we seek to persuade the SEC
that no such action should be commenced. We intend to make such a submission. We continue to cooperate with the SEC in this
matter. At the present time
we are unable to predict the outcome of this action and as such have not determined what, if any,
impact it may have on our financial statements. LAWSUITS On November 18, 2004, Jody Glidden, Michael LeBlanc and Trish Glidden filed a lawsuit against the
Company, David C. Drummond, Gregory M. Priest, Patrick E. Murphy and Jack Hayes in the United
States District Court for the Northern District of California. The plaintiffs had previously opted
out of the class action settlement that received final approval from the court on September 29,
2004. The lawsuit sets forth substantially the same claims as were alleged in the class action
litigation. In particular, the lawsuit alleges that the Company misrepresented or omitted to state
material facts in its SEC filings and press releases regarding the Companys revenues and earnings
and failed to correct such false and misleading SEC filings and press releases, which are alleged
to have artificially inflated the price of the Companys ADSs in connection with its acquisition of
IC Global in early 2001. The lawsuit seeks compensatory damages of approximately $3.7 million and
other unspecified damages. We believe that we have meritorious defenses to this lawsuit and intend
to defend ourselves vigorously. We are not a party to any other material legal proceedings. 31




---



##### Table of Contents



ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. (c)
    
    
    
    (d)Total Number of
    
    
    
    Maximum Number (orShares (or Units)
    
    
    
    Approximate Dollar(a)
    
    
    
    (b)
    
    
    
    Purchased as Part
    
    
    
    Value) of Shares (orTotal Number of
    
    
    
    Average Price
    
    
    
    of Publicly
    
    
    
    Units) that May Yet BeShares (or Units)
    
    
    
    Paid per Share (or
    
    
    
    Announced Plans
    
    
    
    Purchased Under thePeriod
    
    
    Purchased (1)
    
    
    
    Unit) $
    
    
    
    or Programs (2)
    
    
    
    Plans or Programs2/01/05-2/28/05
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,556,2433/01/05-3/31/05
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,556,24304/01/05-04/30/05
    
    
    
    1,841,514
    
    
    
    
    3.35
    
    
    
    
    1,841,514
    
    
    
    
    4,714,729Total:
    
    
    
    1,841,514
    
    
    
    $
    3.35
    
    
    
    
    1,841,514
    
    
    
    
    4,714,729
    (2)      Our Board of Directors approved the repurchase by us of up to an aggregate of 7,000,000 ADSs at
a per share purchase price which complies with the requirements of Rule 10b-18 pursuant to the
Program. Unless terminated earlier by resolution of our Board of Directors, the Program will
expire on March 24, 2006 or when we have repurchased all shares authorized for repurchase
thereunder. 
 ITEM 3.  DEFAULTS UPON SENIOR SECURITIES Not applicable. 
 ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 
 ITEM 5.  OTHER INFORMATION Not applicable. 
 ITEM 6.  EXHIBITS See the Exhibit Index attached hereto. 32




---



##### Table of Contents



SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. SKILLSOFT PUBLIC LIMITED COMPANYDate: June 8, 2005
    By:
    /s/ Thomas J. McDonaldThomas J. McDonaldChief Financial Officer 33




---



##### Table of Contents



EXHIBIT INDEX  10.1
    First Loan Modification Agreement, dated as of April 11,
2005, by and among Silicon Valley Bank, Skillsoft Corporation, SmartCertify Direct Inc. and Books 24x7.com, Inc.10.2
    Second Loan Modification Agreement, dated as of April 25, 2005, by and among Skillsoft Corporation, SmartCertify Direct Inc. and Books 24x7.com, Inc.31.1
    Certification of the Companys CEO pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.31.2
    Certification of the Companys CFO pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.32.1
    Certification of the Companys CEO pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002.32.2
    Certification of the Companys CFO pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002. 34