Filed by SmartForce PLC Pursuant to Rule 425
Under the Securities Act of 1933
And Deemed Filed Pursuant to Rule 14a-12
Under the Securities Act of 1934
Subject Company: Centra Software, Inc.
Commission File No.: 000-27861
The following is a transcript of the presentation made on the fourth
quarter earnings conference call for SmartForce PLC by Gregory M. Priest,
Chairman of the Board, President and Chief Executive Officer of SmartForce,
David Drummond, Executive Vice President of Finance and Chief Financial Officer
of SmartForce, and Leon Navickas, Chairman of the Board and Chief Executive
Officer of Centra Software, Inc.
Certain statements in this transcript are forward-looking statements that
involve a number of risks and uncertainties that could cause actual results to
differ materially from those contained in the forward-looking statements.
Forward looking statements include, but are not limited to, statements regarding
expected revenue, earnings and financial results for the first quarter and on a
full year basis for 2002, expected synergies resulting from the combination of
SmartForce and Centra, impact of the transaction on the revenue, earnings,
earnings per share and financial results of SmartForce, timing of closing,
industry ranking of the combined company, execution of integration plans and
management and organizational structure. Factors that could cause results to
differ materially include, but are not limited to, the factors more fully set
forth in the "Risk Factor" section that follows the transcript.
SmartForce intends to file a registration statement on Form S-4 in
connection with the transaction, and SmartForce and Centra intend to mail a
joint proxy statement/prospectus to their respective stockholders in connection
with the transaction. Investors and security holders of SmartForce and Centra
are urged to read the joint proxy statement/prospectus when it becomes available
because it will contain important information about SmartForce, Centra and the
transaction. Investors and security holders may obtain a free copy of the joint
proxy statement/prospectus (when it is available) at the SEC's web site at
WWW.SEC.GOV. A free copy of the joint proxy statement/prospectus may also be
obtained (when it is available) from SmartForce or Centra. In addition to the
registration statement on Form S-4 to be filed by SmartForce in connection with
the transaction, and the joint proxy statement/prospectus to be mailed to the
stockholders of SmartForce and Centra in connection with the transaction, each
of SmartForce and Centra file annual, quarterly and special reports, proxy and
information statements, and other information with the SEC. Investors may read
and copy any of these reports, statements and other information at the SEC's
public reference rooms located at 450 5th Street, N.W., Washington, D.C., 20549,
or any of the SEC's other public reference rooms. Investors should call the SEC
at 1-800-SEC-0330 for further information on these public reference rooms. The
reports, statements and other information filed by SmartForce and Centra with
the SEC are also available for free at
the SEC's web site at WWW.SEC.GOV. A free copy of these reports, statements and
other information may also be obtained from SmartForce or Centra.
SmartForce's executive officers and directors may be deemed to be
participants in the solicitation of proxies from the stockholders of Centra and
SmartForce in favor of the Merger. A description of the interests of
SmartForce's executive officers and directors in SmartForce is set forth in the
proxy statement for SmartForce's 2001 Annual Meeting of Stockholders, which was
filed with the SEC on June 15, 2001. Investors and security holders may obtain
more detailed information regarding the direct and indirect interests of
SmartForce's executive officers and directors in the Merger by reading the
preliminary joint proxy statement/prospectus filed with the SEC when it becomes
available.
Centra's executive officers and directors may be deemed to be participants
in the solicitation of proxies from the stockholders of Centra and SmartForce in
favor of the Merger. A description of the interests of Centra's executive
officers and directors in Centra is set forth in the proxy statement for
Centra's 2001 Annual Meeting of Stockholders, which was filed with the SEC on
March 30, 2001. Investors and security holders may obtain more detailed
information regarding the direct and indirect interests of Centra's executive
officers and directors in the Merger by reading the preliminary joint proxy
statement/prospectus filed with the SEC when it becomes available.
--------------------------------------------------------------------------------
SmartForce
4th Quarter Earnings Conference
Greg Priest
January 16, 2001 at 2:00 p.m. Pacific
Conference Coordinator: Good afternoon, ladies and gentlemen and thank you
for standing by. Welcome to the SmartForce 4th
Quarter Earnings Conference Call. At this time, all
participants are in a listen-only mode. Following the
formal presentation, instructions will be given for
the question and answer session. If anyone needs
assistance at anytime during the conference, please
press the star, followed by the 0 for operator
assistance. As a reminder, this conference is being
recorded, today, Wednesday, January 16, 2002. I would
now like to turn the conference over to Ms. Anna Yen.
Please go ahead, ma'am.
Anna Yen: Good afternoon, and welcome to SmartForce's Q4 and
Year 2001 Conference Call. With us today is Greg
Priest, Chairman and CEO, David Drummond, CFO, and
Leon Navickas, Chairman and CEO of Centra.
I'd like to remind you that this conference call is
available on our website at www.smartforce.com or at
------------------
www.shareholder.com. If you've not seen our earning's
-------------------
release, you can obtain a copy by calling Michelle
Brown at (650)-817-5708.
Before we begin, I'd like to make a brief statement
regarding forward-looking remarks that you may hear
today on this call. During the course of this call,
the company may make projections or other
forward-looking remarks regarding future events or
the future financial performance of the company. We
wish to caution you that such statements are just
predictions, and actual events or results may differ
materially. Additionally, all revenue and earnings
comments made today represent the current targets as
of the date of this relief and are based on current
conditions, and that the company does not undertake
any obligation to update these targets in any way for
any reason.
We would like to refer you to the documents at
SmartForce and Centra filed from time to time with
the SEC. Specifically, their respective form 10Ks for
the year ended December 31, 2000 and their most
recent 10Qs for the quarter ended December 30, 2001.
These documents contain important factors that could
cause actual results to differ materially from those
contained in the company's projections or
forward-looking statement.
Additionally, SmartForce and Centra intend to file a
joint proxy statement and prospectus with the SEC in
connection with today's announced merger. This
document will be mailed to the respective
stockholders, and will be available on the SEC's
website. We urge you to read these materials when
they become available because they will contain
important information about SmartForce, Centra and
the merger.
Now let me turn it over to Greg.
Greg Priest: Hello everyone. On behalf of myself, SmartForce's
Chief Financial Officer, David Drummond and the CEO
of Centra Software, Leon Navickas who is also with us
today, I'd like to welcome you to the conference
call. Thanks for joining us.
In light of our announcement today of our agreement
to acquire Centra, this conference call is going to
follow a slightly different format than we normally
would. First, I'm going to comment on today's
critical announcement regarding the combination of
the two companies. David and I will then briefly
discuss SmartForce's 4th quarter financial results,
also announced today, and then following that, Leon
is going to briefly talk about Centra's anticipated
4th quarter results, which are being pre-announced
today, as well as briefly giving you his perspective
on the combination. We'll then open the call to your
questions.
Today's most important news for the future of
SmartForce and Centra, and I think it's fair to say
for the future of the e-Learning industry as a whole,
is the combination of the two companies.
First I'll give you the basics. We'll be acquiring
Centra in a stock for stock transaction, issuing
approximately 11.6 million SmartForce shares in the
transaction. This will provide Centra shareholders
with approximately 16% pro forma ownership of the
combined company. The deal will be accounted for as a
purchase, and is subject to the approval of both
company's shareholders and other customary
conditions. We expect the deal to close during the
2nd quarter.
Before I go into the strategic rational for the deal,
let me just take a minute to talk a little bit about
who Centra is for the benefit of those of you who are
not very familiar with the company.
Centra develops and sells Internet-based
collaboration software that companies use to support
real-time, live e-Learning and collaboration.
Centra's focus is to deliver offerings that
enterprises can use to support a variety of business
processes that require rapid vision distribution of a
company's content throughout the extended enterprise.
Centra's software infrastructure has been used to
support product launches, software deployment,
customer educations, supply chain readiness programs
and many other strategic business processes. They've
got about 300 employees, including 65 software
developers and 45 enterprise sales people. Their
revenues for this last year were approximately $38
million, up 70% over 2000. They've just turned
cash-flow positive, and they've targeted to reach
profitability on a standalone basis in the 2nd
quarter of this year. Centra has over 775 enterprise
customers, the majority of which do not overlap with
SmartForce's customer base.
Now we're going to spend a fair amount of time today
going through an analysis of why the deal makes
sense, how the companies fit, how we plan to manage
them, the positive financial implications of
transaction for our model and so on.
Let me start though by telling you at a high level
why I think this is a great deal.
Enterprise's spend over $100 billion a year on
corporate training in the United States alone, and
that doesn't count the vast number of dollars that
are spent in marketing departments, channel groups,
call centers and 10's of other business functions on
business processes that we don't call training, but
to fundamentally involve the distribution of
knowledge around an extended enterprise, so this is
an enormously large potential market. Today, most of
these processes are typically performed manually. A
technology, specifically Internet technologies, are
revolutionizing the way in which businesses can
perform these functions. They're making it faster,
they're making it cheaper, they're making it more
replicable and consistent across globally dispersed
enterprises, so Internet technologies are capable of
being deployed to very powerful effect in this
market, which leads me to my main point.
Some company is going to be the central player in
this market, and it's because they have that
position, that company is going to generate outsize
returns over the next 10 years.
Now this market is in an early stage with a lot of
little companies delivering point products that
address only a small sub segment of the market
requirement. You have your LMS companies, you have
your IT content companies, you have your soft-skills
content companies, you're virtual classroom
companies, your custom content companies, etc., etc.
These point products will sell, and the companies may
do fine, but the company that dominates this industry
is going to be the one that has brought all these
capabilities together into a single, global,
scaleable, leveragable architecture that can be the
foundation of global enterprises knowledge
distribution strategies.
SmartForce intends to be that company. We've spent
the last 3+ years pursuing this goal, and we're
taking another major step today, and it doesn't stop
here. At this point, we have the largest content
library in the industry, both IT and business skills.
We have industry-leading learning management and
content management capabilities. We have the only
global Internet platform for content distribution in
the industry. Today, we're adding to that the
state-of-the-art Internet collaboration capability
along with a simple cost-effective structure for
companies to create proprietary content focused on
their particular business issues.
In short, this is an enormous potential market.
Technology has created an opportunity for an entire
new industry to emerge to serve it. Someone is going
to be the central player in this market, and that
central position, once established, could continue
for a very long time to come. I think that someone is
going to be SmartForce. Today's transaction is just
another piece of evidence, albeit a pretty powerful
one I think, supporting that outcome.
Now let's turn to a little more details on the
elements of why we're doing this deal. There are
fundamentally 3 reasons.
First, the transaction is a very strong fit
strategically, both in terms of both company's
intermediate term strategies (INAUDIBLE) where we're
going longer term.
As most of you should know at this point,
SmartForce's approach to the e-Learning market is a
solutions approach. What I mean by this is that we
target our offerings around specific business
processes that are being performed in the enterprise.
We seek out business processes that involve the
distribution of knowledge around the enterprise or
the extended enterprise, and that are currently being
performed predominantly physically, rather than using
technology.
Once we identify such a process, we apply to it our
Internet-based knowledge platform, and using this
platform, we design a templated solution that a
variety of different customers who engage in the same
basic business process can use to perform that
process faster, more accurately and more effectively
than the enterprises are typically using today. That
means that we can build a business case clearly and
credibly that shows how a company can take money it's
already spending, reallocate it to a faster, more
effective, cheaper method of performing the same
business process, and if you can build a business
case like that, clearly and credibly, the simple fact
is you can get the sale. That's why we focus on areas
like getting new sales representatives up to quota
productivity, software rollouts, product launches,
supportive call center operations and the like. These
are business processes that require the distribution
of knowledge within an extended enterprise, but that
today are typically performed slowly, manually and at
great expense. They are therefore business processes
where e-Learning can make a clear, powerful
difference.
Of course, these business processes are typically
quite complex involving many sub processes and
activities. Anybody can talk about a solution-selling
strategy. The reality though is that to any one of
these business processes that are allowed to be
performed over the Internet, you have to bring to
bear a broad range of assets, including content that
can be created once and leveraged by many companies
performing similar business processes, management
capabilities, global distribution capabilities,
workflow and literally dozens of other capacities. In
simplest terms, our development strategy for the last
3 years, 3+ years, has been focused around
creating or acquiring and building out the
capabilities that allows to provide to our customers
as comprehensive support as possible for these
knowledge-related business processes.
Now Centra's offerings fit into the strategy
perfectly. Although much of the content that an
enterprise delivers to it's various audiences, in the
contents of these business processes, can be built
once at a leverage for many customers. There is
typically other content that is very proprietary to
the customer and that has a short shelf life. This
volatile content can be central to the business
process and create a simple, fast and inexpensive
process for creating and using it, can be central to
the value proposition.
Now Centra allows us to do this. By putting
SmartForce and Centra together, we can offer an
increasing range of the total capability set
necessary to Internet-enable the business processes
that we are supporting. This will increase the number
and power of the solutions that we can bring to
market and the speed with which we can do so, as well
as further enhance the degree to which our offerings
are differentiated from those of the other smaller
companies in our industry.
Of course it's our long-term strategy to use these
solutions to bring into our customers a basic
infrastructure for the delivery and distribution of
knowledge around their extended enterprises.
I believe that the e-Learning industry today is in a
position similar to the early days of the database
market. At that time, it was the application that
sold, and the customer bought the database to enable
the application that sat on top of it. Eventually,
companies began to understand that database
technology provided a critical enabling
infrastructure for their enterprises, and databases
have become ubiquitous.
Analogously, in e-Learning today, it's the solution
that sells. The infrastructure is not the driver. It
gets pulled through behind as the basis for the
solution. Long-term though, I believe that in the
knowledge economy, enterprises will need the
infrastructures for the distribution of knowledge
around their extended enterprises in the support not
of 1 or a few business processes, but a whole variety
of different business processes.
Again, Centra fits in with this strategy to a T. The
same Centra collaboration technologies that we can
bring to bear against the various business processes
that we support form the basis for an Internet
collaboration infrastructure that enterprises could
ultimately use to support virtual collaboration
throughout their extended enterprise.
The second reason for the transaction is the scale,
strength and reach that the combined business can
generate. I believe that our industry is at a
critical point in it's development, and that the
structures and lines of resistance that are created
at this point have the potential to define the basic
landscape of the industry for years to come.
Now, SmartForce is, by every measure today, the
dominant player in the market. Whether you look at
breadth of offering, number of customers,
distribution strength, revenues, profitability,
investment capacity, it doesn't matter. You can
literally pick almost any metric.
At the same time, newer, smaller companies in our
space are coming under greater pressure from the
economic climate, and in some ways more important,
from the demands that are increasingly getting
established by a global enterprise customer base
whose demands are expanding as the criticality of
what they are buying increases. Customers always want
to sign on with the leader. In an early-stage market
and in a difficult economic climate, that designs or
intensifies powerfully.
Now we're the dominant player now, and I think it's
fair to say that over the last 2 years, that
dominance has actually become clearer. Today we are
initiating a further major step forward in
strengthening that position. Our combination with
Centra is the largest deal in the history of the
e-Learning industry. Not just in terms of dollars,
but in terms of what really matters; acquired
distribution capacity, develop and capacity, customer
base, product set. Through this combination we had
775 customers taking our share of the Global 5000 to
well over 3000 companies, or 60%. We had 45
enterprise sales people, a 20% increase in our
enterprise sales force. We increased our pro forma
cash position at December 31 to $157 million. We had
65 software development professionals.
Just to give you a perspective on this, the combined
R&D spend by our 2 companies last year is almost
exactly equal to the estimated combined spend of all
of the other public companies in our universe
combined. We are, in short, at a critical time in the
development of the industry, taking another major
step to consolidate and strengthen our already
dominant position.
Now, the third reason for the transaction is that the
transaction, is we believe, very attractive from a
financial point of view. The target operating models
of the companies are very similar, 80+% gross
margins, similar levels of sales and marketing in R&D
investment, high teens to 20% target operating
margins and strong, targeted revenue and earnings
growth.
We target the transaction to be neutral to earnings
in Q3, which will be the first full quarter of
combined operations at a penny accretive to earnings
in Q4. We also target the transaction to be accretive
for 2003, taking our earlier target of a $1.00 per
share to a dollar $1.05 per share. The deal will be
diluted to the Q2 earnings, with the exact amount
depending on the timing of the closing, since this is
a purchase transaction.
Regarding cost synergies, we've already spend
substantial time identifying the key cost synergies
that we expect to be able to achieve, and it's gotten
to the point where we've identified, at a very
granular level, the precise items that are targeted
for reduction in connection with the deal. We plan to
implement these synergies while leaving Centra's
sales and research and development's stats
fundamentally untouched, allowing them to
aggressively pursue their build plans and sales
goals.
On the revenue side, we believe that there is
substantial potential outside for 3 sources. Selling
Centra's offerings into SmartForce's 2500+ customers,
selling our offerings into Centra's 775 customers,
and using the combination of the 2 company's
capabilities to strengthen our offerings around
existing business processes and to enable new
business processes to conform the core of new and
strengthened offerings into both of our customer
bases.
Now all of that said, despite the strength of the
potential revenue synergies that we see, our 2002
targets are not dependant in any way on any of these
revenue synergies being realized, and 2003 would
still be accretive even in the absence of revenue
synergies.
I briefly touched on the "who and why" of the
transaction. Before turning to our quarterly results,
I'd like to touch on the "how", in 2 respects.
First is how we plan to manage the integration of the
businesses and second, the management team of the
combined company going forward.
On the integration, the key is speed. We've already
begun the planning process to some level of detail
and expect to begin implementation immediately after
we receive anti-trust clearance for the deal. We've
already done substantial work, as I mentioned
earlier, identifying at a granular level cost
synergies and developing a plan to implement them
quickly.
From a technical standpoint, we've been engaged for
some time in a detailed analysis of the technical
integration requirements that our company's offering,
and we'll immediately begin implementation of a
technical integration plan.
Finally, we are already developing sales plans to
immediately begin to share leads and co-sell in each
other's accounts on a commercial basis.
We are, in short, absolutely committed, from today,
to rapidly begin to create and leverage the synergies
that exist in our combination.
Regarding the management of the combined company, not
only are we bringing in talent from Centra to help us
manage the combined business, at the same time, we
are using the opportunity to bring new capabilities
and skill sets into the company at an executive
level, as well as to better tie our existing
management structures into how the company has
evolved over the last couple of years.
I know I plan to continue to act as Chairman and
Chief Executive of the combined company.
On the customer-facing side of the business, we're
promoting Jeff Newton, who had been SmartForce's
Executive Vice President of Global Sales and
Services, to be the company's Chief Customer Officer.
Jeff is going to have responsibility for all
customer-facing aspects of the combined business.
Jeff's been with SmartForce for all of 10 years and
was one of our first hires in the sales force.
On the technology side, Leon Navickas, who today
serves as Centra's CEO, will serve as Chief
Technology Officer. Leon will be responsible for
designing and building out the infrastructure that
serves as the basis for our solutions going forward.
Leon was the founder of Centra and has been the CEO
for the last 6 years. Prior to that, Leon ran R&D for
the Notes Division of Lotus Development.
Also reporting to me will be Duncan Thomas, who
joined SmartForce this last fall and will serve as
our Executive Vice President of Business and
Strategic Planning. Among other duties, importantly
for this transaction, Duncan will be responsible for
coordinating all integration activities in connection
with companies we're acquiring. In that role, Duncan
will lead the integration activities around the
Centra combination. Duncan joins us coming from
Exult, where he served as Executive Vice President of
Corporate Development Strategy. Before that, he was a
Consultant at McKenzie and Vane and served as a
partner in an LBO firm.
All of our other current Executive Officers at
SmartForce will continue in their existing roles,
with one exception. David Drummond, our Chief
Financial Officer, as part of this process, has
informed me that he's ready to take on a more direct
business role with more direct revenue
responsibility. David and I have begun to explore
together the jobs that could exist in SmartForce that
might meet his career goals and our business needs,
and we'd ideally like to see such an outcome. At the
same time, regardless of how those discussions
proceed, we are going to need to fill the Chief
Financial Officer role, and we will plan to do so. Of
course, David is going to continue to serve in his
current role as we activate the transition process.
Overall, I believe we have in place a management team
well positioned to drive and leverage the powerful
franchise that we're creating. One that takes the
best that each of the companies has to offer. We do
plan to move quickly to fill the one organizational
gap that now exists as part of our overall strategy
for 2002.
Before I turn the call over to David to go through
our numbers for the 4th quarter and the year and to
Leon for a snapshot of Centra's 4th quarter and his
perspective on the combination, let me briefly run
through our 4th quarter and full year results.
We met our Q4 revenue target, delivering a record
$65.3 million of revenue against the consensus
estimate of $65 million. This represents the highest
quarterly revenues in SmartForce's history, the 4th
consecutive quarter that we've achieved that
milestone.
We also met our Q4 earnings target, coming in at
$0.04 a share in line with our target.
Over the year, we recorded revenues of $261 million,
a 55% increase over revenues of $168 million in 2000,
and to put this achievement in perspective, at the
end of 2000, our guidance was
for $255 to $265 million in revenue for 2001. To have
achieved that target during what was the most
challenging year for enterprise software companies in
recent memory, is I think, an accomplishment.
Also for the year 2001, we recorded a profit for
amortization of $13.2 million, or $0.22 a share. This
represents a year-over-year earnings increase of $33
million. No other publicly traded corporate
e-Learning company did anywhere close to profitable
for 2001 as a whole.
Now let me give you a couple more highlights. After
September 11th, we knew the business would be slow to
regenerate, but we felt that by December we would
begin to see improvement. We did. SmartForce booked
more business in December than in any previous month
this year. We again exceeded our target of 5 million
dollar plus contracts for the quarter. Our average
contract size for the quarter, again, was up
sequentially for the 13th consecutive quarter. Dollar
renewal rates for the quarter continued to run at
over 150%. We had, in short, a very solid quarter
that met our expectations at a time of significant
economic dislocation.
We've already told you what we think this business
standing on it's own can do this year. With addition
of Centra in Q2, not only will revenues obviously
increase, but we are also now targeting earnings for
the back half of the year even stronger than we had
previously indicated, and 2003 looks better still,
and I genuinely believe this is just the beginning.
I'd now like to turn the call over to David to run
though the numbers in more detail. Dave?
David Drummond: Thanks, Greg, and thanks to everyone for joining us
on the call today. In addition to taking you through
our financial results for the 4th quarter and for
2001 as a whole, I'd like to share with you our
near-term financial outlook, as well as some
additional details about the financial impact of the
Centra transaction.
First, the results. Revenues for the 4th quarter were
$65.3 million, in line with our previously announced
target of $65 million. This represents 13% growth
over the $57.7 million we recorded in the 4th quarter
of 2000. For the full year 2001, revenues were $260.9
million, compared to revenues of $168.2 million for
the full year 2000, representing a year-over-year
increase of 55%.
In terms of geographic breakdown, we generated 71% of
our 3rd quarter revenues in North America and 29%
from the rest of the world, which is consistent with
our historical pattern, and notwithstanding an
overall economic environment that continues to be
challenging, we were able to achieve solid
performance against our key operating metrics. Our
average deal size increased to approximately
$180,000. Our dollar renewal rate, which reflects the
uplift in the dollar value of business that was set
to expire, one again exceeded 150%. In addition, we
once again exceeded our target of five 1 million
dollar plus deals for the quarter.
Moreover, we met our target for 2002 backlog release,
which as many of you know, represents that amount of
early-contracted backlog that will be recognized into
revenue for the year. We expect that $150 million of
our firmly contracted backlog will be recognized into
revenue in 2002.
Gross margin was 83% for the 4th quarter, which was
in our target range of between 83 and 85%. This
compares to gross margin of 84% for the 4th quarter
of 2000. For the full year, gross margin was 83%,
compared to the 84% we recorded in 2000.
Research and development expenses for the 4th quarter
were $13.4 million, or 20% of revenues, compared to
$12.1 million, or 21% of revenues in the 4th quarter
of 2000. The full year, research and development
expenses were $51.3 million, compared to $42.1
million for the year 2000.
Sales and marketing expenses for the 4th quarter were
$33.6 million, or 51% of revenues, compared with
$31.2 million, or 54% of revenues for the 4th quarter
of 2000. For the year, sales and marketing expenses
were $132.8 million, compared to $105.6 million for
the year 2000.
General and administrative expenses for the 4th
quarter were $5.3 million, or 8% of revenues,
compared with $5.4 million, or 9% of revenues for the
4th quarter of 2000. For the year, G&A expenses were
$21.7 million, compared to $19.7 million in the year
2000.
Amortization of acquired intangibles for the quarter,
which relates to purchase acquisitions we completed
over the past couple of years, totaled $2.8 million.
Now last year, the Financial Accounting Standards
Board completed its business comp combinations
project abolishing pooling accounting, requiring
purchase accounting for all acquisitions after June
30, 2001 and changing the accounting for goodwill
from an amortization
approach to an impairment approach. You will also
recall the new rules require companies to cease
amortizing acquisition-related goodwill, but not
other intangibles as of January 1, 2002. As a result,
we expect that our acquisition-related amortizations
for the 1st quarter of 2002, barring any additional
acquisitions, will be approximately $2 million.
Now as the Centra transaction will, under the new
rules, be treated as a purchase, we anticipate that
our acquisition-related amortization will increase
substantially following closing. Now we've begun to
do the analysis of the good will and other intangible
assets we'll be acquiring in the deal, and we'll be
in a position to give more specific guidance on this
point as we move closer to the shareholder votes on
the transaction.
We recorded operating income of $2 million for the
quarter, before amortization of acquired intangibles,
compared to an operating loss of $392,000 for the 4th
quarter of 2000. The full year, pre-amortization
operating income was $12 million, compared to an
operating loss of $26.7 million for the year 2000.
Other income was $936,000 for the quarter, compared
to $1.1 million for the 4th quarter of 2000. Other
income primarily reflects interest on invested cash,
as well as foreign currency exchange gains or losses.
(INAUDIBLE) decrease in other income in the quarter
was primarily due to lower interest income resulting
from a significantly lower prevailing interest rate.
Again, in the 4th quarter we recorded a tax provision
of 12% of the income before amortization of acquired
intangibles, and that was consistent with our
guidance for the year. Net income in the 4th quarter
before acquisition-related amortization was $2.6
million, or $0.04 per share, compared to $648,000 or
$0.01 per share for the 4th quarter of 2000,
representing a year-over-year increase of 300%.
On a reported basis, we recorded a net loss of
$205,000, which works out to break even per share.
For the year, net income before acquisition-related
amortization was $13.2 million, or $0.22 per share,
as compared to a net loss for the year 2000 or $20.1
million, or $0.39 per share, representing a
year-over-year increase of $33.3 million.
On a reported basis, we recorded net income of $3
million for the full year 2001.
Fully diluted shares outstanding for the quarter,
which we use to determine pre-amortization earnings
per share, were 60.7 million. We expect that the
fully diluted share count will increase to between 76
million and 77 million in the 3rd and 4th quarters of
2002, primarily as a result of the Centra deal. We
also expect that the share count will increase in the
2nd quarter of 2002 as a result of the deal, with the
amount of the increase depending on the date of the
closing.
Moving to the balance sheet, cash and short-term
investments were $109 million at December 31,
compared to cash at December 31, 2000 of $108
million.
We expected to use $5 million or more in operations
during the quarter as a result of the reduction and
our 4th quarter earnings target, but by sound cash
management, we were able to keep the operating cash
earned during the quarter to $3 million. Deferred
revenues at December 31 were $44.4 million,
essentially flat compared to the $45.2 million we
reported at September 30. After a sequential decline
in deferred revenue in the September quarter, we had
hoped to stabilize this item in the 4th quarter, and
we were able to achieve this result.
Going forward, our goal is to modestly grow deferred
revenue on a sequential basis, indicating that
billings are staying ahead of revenue recognition
across the business.
Our accounts receivable at December 31 were $102.4
million, up from $88.8 million at September 30,
yielding a (INAUDIBLE) figure of 144 days, and that's
up from the 120 days we reported at September 30th.
But of the approximately 13 million dollar increase
in AR, approximately $10 million of that was the
result of an increase in the amount of current
receivable invoiced during the last month of the
quarter.
As you may remember from our last conference call, we
expected that the aftermath of September 11th could
have a lingering effect on bookings in the early
weeks of the 4th quarter, and that has been the case,
so things picked up in December, which turned out to
be a strong bookings month, and made as Greg said,
our strongest of the year. This resulted in a greater
proportion of the quarter's bookings being billed
toward the end of the quarter, and hence not
collected in the quarter than the previous quarters.
But the point to understand here is that
approximately 75% of the increase in accounts
receivable is attributable to an increase in current
ordinary course receivables with standard net-30
payment terms that we expect to collect in January.
Moreover, the amount of past-due accounts remained
officially flat during the quarter, and our overall
AR (INAUDIBLE) situation improved.
The remaining portion in increase was caused by the
extension of extended payment terms, primarily to our
largest, most credit-worthy customers, which as we've
indicated in prior calls, has been a function of the
increased focus on cash management on the part of
these customers over the past several months. You
should note that the number and magnitude of these
transactions decreased in the quarter.
Going forward, we believe the DSOs will decline in
the 1st quarter of 2002, and we believe that over the
course of the year, we can return DSOs to at least
the 120-day range.
This concludes the overview of the 4th quarter and
full year financial results, but before I turn the
call over to Leon, I'd like to discuss our financial
outlook going forward, both in terms of our financial
targets for the 1st quarter of 2002 and the financial
implications of the acquisition we announced today.
As many of you know, Q1 is seasonally the slowest
bookings quarter for SmartForce. Outstanding in
seasonality, we set a revenue target for the quarter
of $67 million, representing a modest sequential
increase over the 4th quarter of 2001.
We're also targeting pre-amortization earnings of
$0.05 per share. I should also point out, even though
this is less meaningful in light of the Centra
transaction, that we remain comfortable with the
standalone targets for 2002 that we established in
October.
Turning to the Centra transaction, the strategic
rationale for the combination as Greg mentioned is
extremely compelling, and we also believe that the
financial rationale for the transaction is equally
powerful.
Now let me spend a few moments describing the
financial impact of the deal in a little bit more
detail. I'd like to start with the effect on the
bottom line.
We anticipate that the transaction will be completed
sometime during the 2nd quarter. Therefore, it's
difficult to model the
earnings impact of the deal on the 2nd quarter, but
we believe that it's likely that the deal will be
diluted to 2nd quarter earnings. We also anticipate
that we will take a substantial one-time charge for
the quarter associated with acquisition costs and
other deal-related items.
For the 3rd quarter of 2002, the first full quarter
of operations for the combined company, we expect
that the transaction will be neutral to earnings, and
we believe that the deal will become accretive by
$0.01 per share by the 4th quarter.
On our conference call in October, we established an
earnings target for 2003 of $1.00 per share. Based on
our analysis of the achievable synergies and the
overall strategic fit of the 2 businesses, we believe
that the combined company can achieve 2003 earnings
of $1.05 per share.
Now let me also calibrate you on some of the grammars
we've used in our financial modeling for the
transaction.
First, in modeling the revenues of the combined
company, we've assumed that an increasing portion of
Centra's revenues will migrate to a subscription
model. This is a trend that is already underway at
Centra, and customers increasingly recognize the
power of the Centra ASP solution.
Those of you who follow SmartForce closely know that
we operate primarily on an ASP subscription model. We
anticipate that the migration of Centra's business to
the ASP model will accelerate following the merger.
Second, we've assumed very little in the way of
revenue synergies. Our targets for 2002 do not depend
on any revenue synergies, and while we've built in
modest revenue synergies for our 2003 target of $1.05
in earnings per share, the deal would still be
accretive in 2003 without any revenue synergies at
all.
Finally, as Greg mentioned, we've done substantial
work in identifying cost synergies for the deal,
which we've built into our model. Achieving these
synergies will not require us to sacrifice the keys
investments that Centra has made in product
development and sales, as those organizations will
remain largely intact.
To summarize, we believe that the combination of
SmartForce and Centra is truly a watershed
transaction for the e-Learning industry, and a
transaction that
presents the combined company with an enormous
opportunity to build an enduring, powerful franchise.
Now I'd like to turn the call over to Leon Navickas,
CEO of Centra Software who will take you through
Centra's 4th quarter results, full year results, as
well his prospective on the transaction. Leon?
Leon Navickas: Thank you, David. I'm delighted to be here today for
this monumental event. This is a very exciting time
for me personally and for Centra as we bring our
company together with SmartForce to create and
e-Learning powerhouse. We are very confident that
this will be a winning combination positioned to
dominate the e-Learning industry.
Before I talk about the merger, I'd like to share
some great news about Centra's results from the 4th
quarter and year ended December 31, 2001.
In Q4, Centra generated a record $11 million in
revenue, meeting analyst consensus estimates. This
represents a 20% increase from 9.2 million in the 3rd
quarter and a 41% increase over the same period last
year. The company came in on target for the year with
$39.1 million in total revenue.
In addition to the increased revenues for the 4th
quarter, bookings were the highest in the company's
history providing positive momentum in to 2002.
Pro forma EPS loss for Q4 was $0.08 per share,
bettering analyst consensus estimates by 1 penny and
down from a pro forma loss of $0.14 per share for the
3rd quarter. For the year 2001 pro forma EPS loss was
$0.47 per share versus a pro forma EPS loss of $0.57
per share in 2000.
Our gross margins improved this quarter on the
strengths of our software business model, up 400
basis points from the previous quarter to 84%. This
increase is related to higher margins for both
Centra's ASP and professional services.
The company had a very strong quarter for new
customer acquisition, signing 97 new accounts. This
brings the total roster of customers worldwide to
over 775, serving a population of nearly 2 million
licensed users.
New customers include, Ameritage, Autonation, BMW,
Check-Free, Citifinancial, Deutsche Telecom,
Genentech, Cambar and
Barkley, Hitachi, Iron Mountain, Kinko's, Nevemedics,
NCR at Teradata, New Balance, Queensland Rail,
Sybase, Underwriter's Laboratory, University of
Michigan and University of Montreal.
The reference to advanced customer propagation, more
than 50% of total revenue in the 4th quarter came
from our install base of corporations, government
agencies and universities.
Organizations that added central licenses to their
existing deployments included Aventis, Cadbury
Schweppes, Cingular, Conagra, Daimler-Chrysler, First
Union, France Telecom, McKesson, Nortel Networks,
Novartis, Ortho-McNeil, PricewaterhouseCoopers,
Siemens and the U.S. Internal Revenue Service.
Turning to the balance sheet, Centra had its first
cash-flow positive quarter generating a million
dollars and increasing our cash position to 48.2
million. Our DSOs came down dramatically from 96 days
in Q3 to 79 days at the end of the 4th quarter.
The Centra Management Team will be holding our
regularly scheduled earnings call, providing more
detail around our quarterly results, new customers
and other business metrics on January 24, 5:30 p.m.
Eastern time.
So now let me spend a moment on the topic of our
business combination with SmartForce.
First of all, we see this as 2 phenomenally
successful and market-leading companies coming
together to meet real customer demands. While more
and more businesses deploy e-Learning solutions to
accelerate knowledge transfer and increase human
interaction at lower cost, businesses worldwide are
looking for one vendor to deliver the total solution.
This vendor is now SmartForce. As one company, we
will integrate the strongest elements of our
respective technology, creating the most robust and
powerful e-Learning platform. On this platform, we
will deliver total solutions comprised of our content
and applications, as well as those from our partners
that provide value-add. Hence, our business will run
on AOL-like economics, leveraging the interplay
between delivery infrastructure and content tools and
applications.
For our existing and prospective customers, this
promises to be an awesome combination, positioned
ideally to deliver comprehensive, compelling, high
ROI solutions to a huge global market place.
For the first time, Centra customers will be able to
seamlessly deploy the world's largest and most
engaging content and robust set of e-Learning
applications. For SmartForce customers, our strengths
and technology infrastructure will preserve and
extend their investment in e-Learning solutions.
With SmartForce and Centra's sales force, 300 strong
and growing will cross-sell to new accounts and
existing deployments. This should also be good news
to the many potential customers that are poised to
buy and e-Learning solution from a credible provider
that simplifies procurement and deployment. We plan
to be the enabler and prime beneficiary of that
expanding market.
For Centra shareholders, this transaction represents
a premium on Centra's share price today, with
inherent equity-value creation accelerated by
realizing synergies from the business combination
going forward.
The combined company has scale, market leadership and
long-term sustainability. The combined R&D investment
that I will manage will be equal to what other
companies spend in the rest of our sector. Strong
brands and global presence will drive revenue
opportunity from around the world. With high gross
margins and excellent business fundamentals, we
envision an accretive transaction that will generate
healthy profits going forward.
(INAUDIBLE) there will be very little that we won't
be able to do to address customer needs and extend
leadership. This company is truly poised to be the
industry juggernaut with great opportunity for
long-term capital appreciation.
I look forward to joining Greg and his management
team on the top of the e-Learning industry building
this large and substantially profitable company for
our customers, partners, stakeholders and employees,
and I'll look forward to seeing many of you in person
over the next several weeks as we launch the business
combination of Centra with SmartForce. Thank you.
Greg Priest: Well I think we're now ready to - we're now done with
the prepared remarks for the call, and we would be
happy to take any questions that anybody has.
[End of Transcript]
RISK FACTORS RELATING TO OUR BUSINESS
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. THIS LIMITS YOUR
ABILITY TO EVALUATE OUR 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 anticipate that these fluctuations will continue and could intensify
in the future. As a result, we believe that our quarterly revenue, expenses and
operating results are likely to vary significantly in the future. Thus, it is
likely that in some future quarters our results of operations will be below the
expectations of public market analysts and investors, which could have a severe
adverse effect on the price of our ADSs. For example, our revenue for the
quarter ended September 30, 1998 did not increase at a rate comparable to prior
quarters. As a direct result, the trading price of our ADSs decreased rapidly
and significantly, having an extreme adverse effect on the value of an
investment in our securities.
Our operating results have historically fluctuated, and may in the
future continue to fluctuate, as a result of factors, which include:
- the size and timing of new and renewal agreements;
- the rate at which we continue to migrate our customers to our
e-Learning solutions;
- the number and size of outsourced virtual university agreements or
other agreements providing for professional services or the resale
of instructor-led training;
- the mix of revenue between content, e-Learning platform,
professional services and products licensed from third parties;
- 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 sales channels;
- the impact of any unanticipated decline in net revenues in any
particular quarter as compared to the relatively fixed nature of our
expense levels in the short term;
- general conditions in the U.S. or the international economy;
- general conditions in our market or the markets served by our
customers in the U.S.;
- competitive conditions in the industry;
- the loss of significant customers;
- delays in availability of existing or new products;
- the spending patterns of our customers;
- litigation costs and expenses;
- currency fluctuations; and
- the length of sales cycles.
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. Some 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.
In addition, the general condition of the economy, and by extension our
business, can be affected by social, political and military conditions. For
example, the terrorist events of September 11, 2001 and their aftermath had a
material adverse effect on our third quarter bookings. It is not possible to
predict the outcome of the recent escalation of hostilities between the United
States and certain countries and persons related to the events of September 11.
The continuation of these hostilities could result in further weakness in the
economy which would have an adverse impact on our operating results and
financial condition.
OUR EXPERIENCE IN SELLING FULLY INTEGRATED, INTERNET-BASED LEARNING SOLUTIONS,
IS RELATIVELY LIMITED.
In the fourth quarter of 1999 we introduced SmartForce e-Learning, a
hosted Internet-based learning solution. While the results of our efforts to
migrate our business to the e-Learning model and market these solutions to our
customers have exceeded our expectations, we have relatively limited experience
with these solutions, which makes our historical results of limited value in
predicting the potential success of this initiative. The ultimate success of
this initiative will depend on our ability to continue to expand and enhance our
e-Learning infrastructure, to market and sell the new e-Learning solutions to
existing and prospective customers, to host, operate and manage our destination
site, and to attract and retain key management and technical personnel.
We may not be successful in these efforts and the economic terms of any
arrangements that might be expected may not be as favorable as the traditional
licensing agreements. We believe that a lack of success in this regard could
have a material negative effect on us. Moreover, the arrangements with our
customers under the e-Learning model have had and will continue to have
accounting and operating model consequences that would also be materially
different from the consequences of our traditional software licensing model.
OUR OPERATING RESULTS ARE SUBJECT TO SEASONAL FLUCTUATIONS WHICH MAY ADVERSELY
IMPACT OUR BUSINESS.
Our operating results are subject to seasonal fluctuations, based in
part on customers' annual budgetary cycles and in part on the annual nature of
sales quotas. These seasonal trends have in the past caused revenues in the
first quarter of a year to be less, perhaps substantially so, than revenues for
the immediately preceding fourth quarter. We expect that these seasonal trends
could continue to adversely affect our revenues. In addition, we have in past
years added significant headcount in the sales and marketing and research and
development functions in the first quarter, and to a lesser extent, the second
quarter. Because these headcount additions do not immediately contribute
significant revenues, our operating margins in the earlier part of the year tend
to be significantly lower than in the later parts of the year. In addition, many
technology companies also experience a seasonal downturn in demand during the
summer months. These seasonal trends may have a material adverse effect on our
results of operations.
WE RELY ON STRATEGIC ALLIANCES THAT MAY NOT CONTINUE IN THE FUTURE.
We have developed strategic alliances to develop and market many of our
products, and we believe that an increasing proportion of our future revenues
may be attributable to products developed and marketed through these and other
future alliances. However, these relationships are not exclusive and we may be
unable to continue to develop future products through these alliances in a
timely fashion or may be unable to negotiate additional alliances in the future
on acceptable terms or at all.
The marketing efforts of our partners may also disrupt our direct sales
efforts. Our development and marketing partners could pursue their existing or
alternative training programs in preference to and in competition with those
being developed by us. In the event that we are unable to maintain or expand our
current development and marketing alliances or enter into new development and
marketing alliances, our operating results and financial condition could be
materially adversely affected. Furthermore, we are required to pay royalties to
our development and marketing partners on products developed with them, which
reduces 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 (between content, e-Learning platform, services and partner's products) and
the timing of expenses associated with development and marketing alliances. In
addition, the collaborative nature of the development process under these
alliances may result in longer development times and less control over the
timing of product introductions than for e-Learning offerings developed solely
by us. Our strategic alliance partners may from time to time renegotiate the
terms of our agreement with them and could result in changes to the royalty
arrangements, which could adversely effect our results of operations.
OUR SUCCESS DEPENDS ON OUR ABILITY TO MEET THE NEEDS OF THE RAPIDLY CHANGING
MARKET.
The market for interactive education and training is influenced 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. Many of these new
offerings involve new and different business models and contracting mechanisms.
In addition, multimedia and other product functionality features are being added
to the educational software. Accordingly, our future success will depend upon
the extent to which we are able to develop and implement products which address
these emerging market requirements on 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 reduce sales of
predecessor products. We may not be able to introduce 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.
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 we exercise any unscheduled down
times, even for only a short period of time, our business and reputation could
be materially harmed. We have in the past experienced performance problems and
unscheduled downtime, and these problems could occur. We rely on third parties
for proper functioning of our computer infrastructure, delivery of our
e-Learning application 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 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. A key element of our strategy is to generate a high
volume of traffic to the Web site and create a significant subscriber base.
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 site infrastructure
to handle increased traffic, and these difficulties could recur. The failure to
expand and upgrade the Web site or any system error, failure or extended down
time, could materially harm our business, reputation, financial condition or
results of operations.
Our facilities in the State of California, including our corporate
headquarters and other critical business operations, are currently subject to
electrical blackouts as a consequence of a shortage of available power. In the
event these blackouts continue to increase in severity, they could disrupt the
operations of our affected facilities and our business could be seriously
harmed. In addition, in connection with the shortage of available power, prices
for electricity have risen dramatically, and will likely to continue to increase
in the foreseeable future. Such price changes will increase our operating costs,
which could adversely impact our profitability.
THE INTERNET-BASED LEARNING MARKET IS A DEVELOPING MARKET, AND OUR BUSINESS WILL
SUFFER IF E-LEARNING IS NOT WIDELY ACCEPTED.
The market for Internet-based enterprise learning is a new and emerging
market. Corporate training and education has historically been conducted
primarily through classroom instruction and has 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 and use the Internet in connection
with 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
Internet 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 and the use of the Internet for 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 services, may not achieve commercial success.
WE MAY FAIL TO INTEGRATE ADEQUATELY ACQUIRED PRODUCTS, TECHNOLOGIES AND
BUSINESSES.
As a result of the consummation of a number of acquisitions our
operating expenses have increased. The integration of these businesses may not
be successfully completed in a timely fashion, or at all. Further, the revenues
from the acquired businesses may not be sufficient to support the costs
associated with those businesses, without adversely affecting our operating
margins. Any failure to successfully complete
the integration in a timely fashion or to generate sufficient revenues from the
acquired businesses could have a material adverse effect on our business and
results of operations.
In April 2001 we acquired icGlobal, providers of industry acclaimed
Learning Management System software. In August 2001 we acquired substantially
all of the assets of Impaxselling.com, a sales performance company providing
global enterprises with web-based learning solutions designed to improve sales
and account management performance. In October 2001 we acquired SkillScape
Solutions, Inc., a provider of competency management systems. Difficulties in
combining these companies' products and technologies could have an adverse
impact on our ability to fully benefit from our existing and future investment
in this business and on the future prospects for our business, management and
professional education software products.
We regularly evaluate acquisition opportunities and are likely to make
acquisitions in the future that would provide additional product or service
offerings, additional industry expertise or an expanded geographic presence. We
may be unable to locate attractive opportunities or acquire any that we locate
on attractive terms. Future acquisitions could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, which could materially adversely affect our results of operations.
Product and technology acquisitions entail numerous risks, including
difficulties in the assimilation of acquired operations, technologies and
products, diversion of management's attention to other business concerns, risks
of entering markets in which we have no or limited prior experience and the
potential loss of key employees of acquired companies. We may be unable to
integrate successfully any operations, personnel or products that have been
acquired or that might be acquired in the future and our failure to do so could
have a material adverse effect on our results of operations.
RAPID EXPANSION OF OUR OPERATIONS COULD STRAIN OUR PERSONNEL AND SYSTEMS.
We have recently experienced rapid expansion of our operations, which
has placed, and is expected to continue to place, significant demands on our
executive, administrative, operational and financial personnel and systems. Our
future operating results will substantially depend on the ability of our
officers and key employees to manage changing business conditions and to
implement and improve our operational, financial control and reporting systems.
In particular, we require significant improvement in our order entry,
fulfillment and management information systems in order to support our expanded
operations. If we are unable to respond to and manage changing business
conditions, our business and results of operations could be materially adversely
affected.
OUR EXPENSE LEVELS ARE FIXED IN THE SHORT TERM AND WE MAY BE UNABLE TO ADJUST
SPENDING TO COMPENSATE FOR UNEXPECTED REVENUE SHORTFALLS.
Our expense levels are based in significant part on our expectations
regarding future revenues and are fixed to a large extent in the short term.
Accordingly, we may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Any significant revenue
shortfall would therefore have a material adverse effect on our results of
operations. This risk materialized in the third quarter of 1998, where profit
was dramatically negatively affected by a shortfall in revenues as against
management's expectations.
WE DEPEND ON A FEW KEY PERSONNEL TO MANAGE AND OPERATE US.
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,
motivate and retain highly qualified employees. In addition, we depend on
writers, programmers, Web designers and graphic artists. We expect to continue
to hire additional content development, programmers, sales and marketing,
information systems and accounting staff. However, we may be unsuccessful in
attracting, retaining or motivating key personnel. The inability to hire and
retain qualified personnel or the loss of the services of key personnel could
have a material adverse effect upon our current business, new product
development efforts and future business prospects.
INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND FOR OUR PRODUCTS AND
SERVICES, WHICH MAY RESULT IN REDUCED REVENUES AND GROSS MARGINS AND LOSS OF
MARKET SHARE.
The market for business education training solutions is highly
fragmented and competitive, and we expect this competition to increase. We
expect that because of the lack of significant barriers to entry into this
market, new competitors may enter the market in the future. 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 we expect this trend to continue.
We expect the market to become increasingly competitive due to the lack of
significant barriers to entry. 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.
Our primary source of direct competition comes from third-party
suppliers of instructor-led information technology, business, management and
professional skills education and training as well as suppliers of
computer-based training and e-Learning solutions. We also face indirect
competition from internal education and training departments of our potential
customers. We also compete to a lesser extent with consultants, value-added
resellers and network integrators. Certain of these value-added
resellers also market products competitive with ours. We expect that as
organizations increase their dependence on outside suppliers of training, we
will face increasing competition from these other suppliers as education and
training managers more frequently compare training products provided by outside
suppliers.
Growing competition may result in reduced revenue and gross margins and
loss of market share, any one of which 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 price competition, and we expect that we will 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 or competitive pressures may require us to
reduce our prices significantly.
OUR BUSINESS IS SUBJECT TO CURRENCY FLUCTUATIONS THAT CAN ADVERSELY AFFECT OUR
OPERATING RESULTS.
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. In particular, the value of the U.S.
dollar against the Euro and related currencies impacts our operating results.
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, 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.
OUR CORPORATE TAX RATE MAY INCREASE, WHICH COULD ADVERSELY IMPACT OUR CASH FLOW,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We have significant operations and generate a majority of our taxable
income in the Republic of Ireland, and some of our Irish operating subsidiaries
are taxed at rates substantially lower than tax rates in effect in the United
States and other countries in which we have operations. If our Irish
subsidiaries were no longer to qualify for these lower tax rates or if the
applicable tax laws were rescinded or changed, our operating results could be
materially adversely affected. Moreover, because we incur income tax in several
countries, an increase in our profitability in one or more of these countries
could result in a higher overall tax rate. In addition, if U.S. or other foreign
tax authorities were to change applicable tax laws or successfully challenge the
manner in which our subsidiaries' profits are currently recognized, our taxes
could increase, and our business, cash flow, financial condition and results of
operations could be materially adversely affected.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS. UNAUTHORIZED USE OF OUR
TECHNOLOGY MAY RESULT IN DEVELOPMENT OF PRODUCTS OR SERVICES THAT COMPETE WITH
OURS.
Our success depends on our ability to protect our rights in our
intellectual property and trade secrets. We rely upon a combination of
copyright, trademark and trade secret laws and customer license agreements, and
other methods to protect our proprietary rights. We also enter into
confidentiality agreements with our employees, consultants and third parties to
seek to limit and protect the distribution of our proprietary information
regarding this technology. However, we have not signed protective agreements in
every case. Unauthorized parties may copy aspects of our products, services or
technology or obtain and use information that we regard as proprietary. Other
parties may breach confidentiality agreements and other protective contracts we
have executed. 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 our
intellectual property rights, to protect trade secrets or to determine the
validity and scope of the proprietary rights of others. This litigation could
result in substantial costs and diversion of management and technical resources.
SOME MAY CLAIM THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD
RESULT IN COSTLY LITIGATION OR REQUIRE US TO REENGINEER OR CEASE SALES OF OUR
PRODUCTS OR SERVICES.
Third parties 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 us or at all. Though no legal actions are pending at this time,
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 ARE SUBJECT TO A PENDING LEGAL PROCEEDING AND MAY BECOME SUBJECT TO
ADDITIONAL PROCEEDINGS AND ADVERSE DETERMINATIONS IN THESE PROCEEDINGS COULD
HARM OUR BUSINESS.
Since the end of the third quarter of 1998, a class action lawsuit has
been pending in the United States District Court for the Northern District of
California against us, one of our subsidiaries, SmartForce USA, and certain of
our former and current officers and directors, alleging violation of the federal
securities laws. It has been alleged in this lawsuit that we misrepresented or
omitted to state material facts regarding our business and financial condition
and prospects in order to artificially inflate and maintain the price of our
ADSs, and misrepresented or omitted to state material facts in our registration
statement and prospectus issued in connection with our merger with Forefront,
which also is alleged to have artificially inflated the price of our ADSs.
We believe that this action is without merit and intend to vigorously
defend ourselves against it. Although we cannot presently determine the outcome
of this action, an adverse resolution of this matter could significantly
negatively impact our financial position and results of operations.
We may be from time to time involved in various lawsuits and legal
proceedings, which arise in the ordinary course of business. An adverse
resolution of these matters could significantly negatively impact our financial
position and results of operations.
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, and intend to continue to expand our
operations outside of the United States. 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, in staffing and
managing foreign subsidiary operations, longer account receivable payment cycles
and potential adverse tax consequences. 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.
BECAUSE MANY USERS OF OUR E-LEARNING SOLUTIONS ACCESS THEM OVER THE INTERNET,
FACTORS ADVERSELY AFFECTING THE USE OF THE INTERNET COULD HARM OUR BUSINESS.
Many of our users access our e-Learning solutions over the Internet.
Any factors that adversely affect Internet usage could disrupt the ability of
those users to access our e-Learning solutions, which would adversely effect
customer satisfaction and therefore our business. Factors which could disrupt
Internet usage include slow access to download times, security concerns, network
problems or service disruptions that prevent users from accessing an Internet
server and delays in, or disputes concerning, the development of industry wide
Internet standards and protocols.
THE MARKET PRICE FOR 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. We believe
that factors, such as the following, could cause the price of our ADSs to
fluctuate, perhaps substantially:
- announcements of developments related to ourselves or our
competitors' business;
- announcements of new products or enhancements by ourselves or our
competitors;
- sales of our ADSs into the public market;
- developments in our relationships with our customers, partners and
distributors;
- shortfalls or changes in revenues, gross margins, earnings or losses
or other financial results which differ from public market
expectations;
- changes in the public market expectation of our performance or
industry performance;
- changes in market valuations of competitors;
- regulatory developments;
- additions or departures of key personnel;
- fluctuations in results of operations; and
- general conditions in our market or the markets served by our
customers or in the U.S. and or the International economy.
In addition, in recent years the stock market in general, and the
market for shares of technology stocks in particular, has experienced 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. To succeed we must continue to expand our
content offerings, upgrade our technology and distinguish our solution. We may
not be able to do successfully. Any failure by us to anticipate or respond
adequately to changes in technology and customer preferences or any significant
delays in content development or implementation could impact our ability to
capture market share.
RISKS RELATED TO THE PROPOSED MERGER
WE MAY FACE CHALLENGES IN INTEGRATING CENTRA'S BUSINESS WITH OURS AND, AS A
RESULT, MAY NOT REALIZE THE EXPECTED BENEFITS OF THE ANTICIPATED MERGER
We may not be successful in integrating Centra's business with ours.
Integrating our operations and personnel with Centra's will be a complex
process. The integration may not be completed rapidly or achieve the anticipated
benefits of the merger. The successful integration of Centra's business with
ours will require, among other things, integration of our two companies'
products and services, sales and marketing, information and software systems,
coordination of employee retention, hiring and training and coordination of
ongoing and future research and development efforts. The diversion of the
attention of management and any difficulties encountered in the process of
combining the companies could cause the disruption of, or a loss of momentum in,
the activities of the combined company's business. Further, the process of
combining Centra's business with ours could negatively affect employee morale
and our ability to retain some of our or Centra's key employees after the
merger. In addition, we intend after the merger to develop new products and
services that combine Centra's assets with ours. This may result in longer sales
cycles and product implementations, which may cause revenue and operating income
to fluctuate and fail to meet expectations. To date, we have not
completed our investigation into the obstacles, technological, market-driven or
otherwise, to developing and marketing these new products and services in a
timely and efficient way. There can be no assurance that we will be able to
overcome these obstacles, or that a market for such new SmartForce products and
services will develop after the merger.
Also, we could face additional risks inherent in Centra's business that
we were not previously subject to, such as additional requirements in the future
to fund our operations could be significantly increased due to the capital
requirements of Centra's business.
In addition to the integration risks discussed above, the combined
company's ability to realize these benefits and synergies could be adversely
impacted by practical or legal constraints on its ability to combine operations
or implement workforce reductions.
CHARGES TO EARNINGS RESULTING FROM THE APPLICATION OF THE PURCHASE METHOD OF
ACCOUNTING MAY ADVERSELY AFFECT SMARTFORCE'S RESULTS OF OPERATIONS AND THE
MARKET VALUE OF SMARTFORCE'S ADSS FOLLOWING THE MERGER
In accordance with United States generally accepted accounting
principles, the combined company will account for the merger using the purchase
method of accounting, which will result in charges to earnings that could have a
material adverse effect on Smartforce's results of operations and the market
value of SmartForce ADSs following completion of the merger. Under the purchase
method of accounting, the combined company will allocate the total estimated
purchase price to Centra's net tangible assets, amortizable intangible assets,
intangible assets with indefinite lives and in-process research and development
based on their fair values as of the date of completion of the merger, and
record the excess of the purchase price over those fair values as goodwill. The
portion of the estimated purchase price allocated to in-process research and
development will be expensed by the combined company in the quarter in which the
merger is completed. The combined company will incur additional depreciation and
amortization expense over the useful lives of certain of the net tangible and
intangible assets acquired in connection with the merger. In addition, to the
extent the value of goodwill or intangible assets with indefinite lives becomes
impaired, the combined company may be required to incur material charges
relating to the impairment of those assets. These depreciation, amortization,
in-process research and development and potential impairment charges could have
a material impact on the combined company's results of operations.
NEED FOR GOVERNMENTAL CLEARANCES MAY PREVENT OR DELAY CONSUMMATION OF THE MERGER
The merger is subject to review by the United States Federal Trade
Commission under the Hart-Scott-Rodino Improvements Act of 1976. In addition,
other filings with, notifications to and authorizations and approvals of,
various governmental agencies with respect to the merger and other transactions
contemplated by the reorganization agreement and the stockholder agreements,
relating primarily to antitrust issues, must be made prior to the consummation
of the merger. Under each of these statutes, SmartForce and Centra are required
to make pre-merger notification filings and to await the
expiration or early termination of statutory waiting periods and clearance prior
to completing the merger. We and Centra are seeking to obtain all such required
regulatory clearances prior to the scheduled completion of these transactions.
The reviewing authorities may not permit the merger at all or may
impose restrictions or conditions on the merger that may seriously harm the
combined company if the merger is completed. These conditions could include a
complete or partial license, divestiture, spin-off or the holding separate of
assets or businesses. Either SmartForce or Centra may refuse to complete the
merger if restrictions or conditions are required by governmental authorities
that would materially adversely impact the combined company's results of
operations or the benefits anticipated to be derived by the combined company.
Any delay in the completion of the merger could diminish the anticipated
benefits of the merger or result in additional transaction costs, loss of
revenue or other effects associated with uncertainty about the transaction.
SmartForce and Centra also may agree to restrictions or conditions imposed by
antitrust authorities in order to obtain regulatory approval, and these
restrictions or conditions could harm the combined company's operations. In
addition, during or after the statutory waiting periods, and even after
completion of the merger, governmental authorities could seek to block or
challenge the merger as they deem necessary or desirable in the public interest.
In addition, in some jurisdictions, a competitor, customer or other third party
could initiate a private action under the antitrust laws challenging or seeking
to enjoin the merger, before or after it is completed. SmartForce, Centra or the
combined company may not prevail, or may incur significant costs, in defending
or settling any action under the antitrust laws.
THE BUSINESSES OF SMARTFORCE AND CENTRA MAY BE ADVERSELY AFFECTED IF THE MERGER
IS NOT COMPLETED.
If the merger is not completed, SmartForce's business and Centra's
operations may be harmed to the extent that customers, suppliers and others
believe that the companies cannot effectively compete in the marketplace without
the merger, or otherwise remain uncertain about the companies. Completion of the
merger is subject to several closing conditions, including obtaining requisite
regulatory and shareowner approvals. SmartForce and Centra will be required to
pay significant costs incurred in connection with the merger, including legal,
accounting and a portion of the financial advisory fees, whether or not the
merger is completed.
PARTNERS OR CUSTOMERS MAY REACT UNFAVORABLY TO THE PROPOSED COMBINATION
Both we and Centra partner with numerous other technology companies including
software and services firms to deliver SmartForce and Centra products and
services to customers. Some of these partners may feel that the combined company
poses new competitive threats to their businesses and as a result may break
their relationships with us or Centra. In addition, some of our customers or
customers of Centra may view the combined company as a competitor and,
therefore, terminate relationships with SmartForce or Centra.