"Filed by SmartForce Public Limited Company
pursuant to Rule 425 under the Securities Act
of 1933 and deemed filed pursuant to
Rule 14a-12 under the Securities Exchange Act of 1934
Subject Company: SkillSoft Corporation
Commission File No. 000-28823"
SMARTFORCE
SKILLSOFT MERGER UPDATE
Moderator: Greg Priest
June 10, 2002, 2:00 P.M. Pacific
Conference Coordinator: Good afternoon, ladies and gentlemen, and thank you for
standing by. Welcome to the SmartForce SkillSoft Merger
Update 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 any time during the
conference, please press the star followed by the 0. As a
reminder, this conference is being recorded today, Monday,
June 10, 2002. I would now like to turn the conference over
to Miss Anna Yen. Please go ahead ma'am.
Anna Yen: This conference call will contain forward-looking
statements within the meaning of Section 27a of the
Securities Act of 1933 as amended, and Section 21e of the
Securities Exchange Act of 1934 as amended, including
statements regarding expected synergies, the effect of the
merger on long-term customer and shareholder value, the
ability to grow revenues and profits, the return on trainee
investments for the Company's customers, financial
estimates, timing of closing, industry ranking, execution of
integration plans, and management and organizational
structure. All forward-looking statements in this conference
call are subject to risks, uncertainties, and assumptions
that could cause actual results or events to differ
materially from those contained in the forward-looking
statements.
The factors that could cause actual results or event to
differ include, but are not limited to, the possibility that
the market for the sale of certain products and services may
not develop as expected. That development of these products
and services may not proceed as planned, that the
transaction does not close, that the Companies may be
required to modify aspects of the transaction to achieve
regulatory approval. That prior to the closing of the
proposed merger, the business of the companies that reduced
to uncertainty or that the parties are unable to transition
customers, successfully execute their integration strategies
or achieve plan synergies. For additional factors that could
cause actual results or events to differ materially from
those in the forward-looking statements, we refer you to
SmartForce and SkillSoft filings with the SEC, specifically
SmartForce's annual report on Form 10K for the year ended
December 31, 2001, SkillSoft's annual report on Form 10K for
the year ended January 31, 2002, and subsequently filed
reports.
In addition, SmartForce intends to file a registration
statement on Form S4 in connection with the transaction, and
SmartForce and SkillSoft intend to mail a join proxy
statement and prospectus to their respective stockholders in
connection with the transactions. Investors and security
holders of SmartForce and SkillSoft are urged to read the
joint proxy statement and prospectus when it becomes
available, because it will contain important information
about SmartForce, SkillSoft, and the transaction. SmartForce
Page 1
and SkillSoft assume no obligation and do not intend to
update these forward-looking statements. Now let me hand it
over to Greg.
Greg Priest: Hi everybody. Welcome to our conference call discussing the
pending merger between SkillSoft and SmartForce. I'm here
today with Chuck Moran, SkillSoft's President and Chief
Executive Officer and Tom McDonald who is SkillSoft's Chief
Financial Officer. Thanks for coming in. In a moment, I'm
going to turn the call over to Chuck to walk us through the
basic terms of the merger. What the resulting combined
company is going to look like, specifically how we're going
to put the companies together to form what we believe will
be the clear leading force in e-learning. Tom's going to
then provide you some detail about the financials of our new
company, including revenue and profit guidance. We'll then
open the call to your questions.
Before I turn the call over to Chuck, I would like to give
you a perspective on the merger. Why are we doing it, why
are we doing it now, and what do we think it means for the
future of our newly combined company and for the future of
our industry? The answer, I think, is actually quite simple.
We're doing this deal because we believe that we have the
potential to take the clear, leading position in a very
attractive market and to bring our companies together will
significantly strengthen the platform from which we can
attack that opportunity and significantly increase the
likelihood of succeeding in our goals.
Regarding the market opportunity, the last year has been a
tough one for e-learning, for the e-learning industry, as
for enterprise software generally. At the same time, while I
wouldn't willingly repeat the experience of going through
it, one positive development for our industry occurred over
the last year. That was that the market landscape in our
segment of the e-learning industry has clarified
dramatically. Now there is simply a vast amount of money
spent by enterprises on training their staff. The estimates
range from around $75 billion to over $100 billion every
year and the great majority of this training occurs in
traditional instructor-led formats, and it has been obvious
to many of us for some time that there's an enormous market
opportunity in delivering this training through technology.
I don't believe at this point there can be any question
about the magnitude of that potential market. What there
have been questions about, is how to get at that market.
Where is the money going to be spent specifically? In trying
to get an answer to that question, investors and industry
analysts have created a variety of models for the market.
Most of these show their commonality in dividing the market
into a content segment, an infrastructure or technology
segment, and a services segment. There's still
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quite a bit of confusion about the infrastructure segment.
What are the categories of e-learning infrastructure that
customers are going to want to buy? Which companies will be
the long-term winners? Will the independent LMS companies
survive? Is content management a viable product category?
What role are the large software companies going to play -
the ELP's, the CRM, vendors, etc? At the same time, real
questions continue to exist about the services segment. Can
the custom content development houses generate the same
profits at scale? Is there an e learning systems-integration
opportunity? What roles are the consulting firms going to
play? What role are the Big 5 firms going to play - people
like CFC and EDS?
Now theses are all valid questions and while I obviously
have my opinion on the probable answers to them, the fact is
that the jury is still out on many of them. With respect to
the content area, though, the landscape has clarified
considerably. It is absolutely clear that there is a market
of some very significant size for generic content.
SmartForce alone has shown that and companies like SkillSoft
and NETg have demonstrated it as well. It is also clear that
it is possible to generate profits in this market at scale.
Notwithstanding the fact that we built up our cost base more
quickly than in the event proved to be appropriate,
SmartForce has successfully generated profits, and based on
our recent cost reduction initiatives, we are well on our
way to returning to profitability. SkillSoft is now
profitable and NETg, for another example, is profitable for
a number of years, many of them under Chuck's leadership.
The fact is, in short, there is a large market opportunity
for e-learning content. Several companies have successfully
built franchises in that market and that market can support
quite profitable businesses. If I had to identify one reason
why we're doing this deal, it would be this: Together we
have the opportunity at a reasonably early stage in the
development of this market to take an obviously leading
position in the content arena. SmartForce is the leader in
IT sales and CRM content. SkillSoft is the leader in
interpersonal skills. Both companies have a strong presence
in other generic content areas. The combination of the two
company's strengths solidifies our abilities to further
penetrate and address enterprise's training needs and so
powerfully expand on our already strong competitive
position. Moreover, it is also clear that there are a wide
variety of applications outside of the formal training
function for e-learning.
There are a number of business processes that are performed
within enterprises that involve the transfer of knowledge
around the business that are not formally part of the
training function. These business processes include managing
contact centers, launching products where we outdo
enterprise software applications, and getting new sales
hires up to quota
Page 3
productivity. SmartForce has begun to pursue these
applications through our solutions sets. Long-term, we
believe that these are some of the most exciting
opportunities for the combined company. These package
solutions are some of the stronger elements of SmartForce's
current sales pipeline and, since they are built from a
combination of generic content, infrastructural technologies
and services, no one other than SmartForce has been
successful in bringing such an application to market. We
believe that we can build on our position and content to
establish the Industry's strongest packaged solutions
business as well.
So far, I've been talking about the long-term strategic
rationales for the deal, but I think there are some
immediate benefits as well. First, we've got the potential
to leverage dramatic cost benefits. SmartForce has just
reduced its cost base considerably. On April 18th, we
announced that we intended to make 421 job cuts, which
amounted to about 20% of our workforce. That has now been
achieved. It would be difficult to pursue more aggressive
cuts, however, because as we discussed on our April 18th
conference call, to do so would potentially put our backlog
at risk. Because much of our planned expenditures for next
year overlapped with SkillSoft, we can therefore
significantly reduce our planned expenditures for next year
while maintaining and even increasing the resources we will
devote together to content-build software support and the
like. Second, we've strengthened the management team and I
genuinely believe dramatically.
At SmartForce I was acting as Chairman, CEO, and President.
Chuck has effectively had a similar role at SkillSoft.
SmartForce needed to reduce the span of control of our top
management, and I believe that SkillSoft was going to face
the same issue in the near future. We are combining what I
believe, from an admittedly biased perspective, to be the
two best management teams in the industry, to create what I
believe - well, what is certainly - the most experienced
team in the industry bar none. I really think that the
management culture is strong. I know that everybody who does
a merger always talks about how happy they are to be doing
the deal, but in our case Chuck and I have known each other
for many years. We've been competitors and I can say without
hesitation that I've always held him in the greatest
respect. We've looked at bringing our businesses together in
the past and for one reason or another, have not been able
to make it happen. I think Chuck and I both genuinely
believe that we have complimentary strengths and there's no
one I'd rather be working with to drive our Company and our
industry forward.
I'm now going to hand it off to Chuck, but before I do, I'd
like to make one final comment, and that is to address why
we're doing this now. I can say without hesitation that now
would not have been a good time to sell SmartForce. I think
there's great value to be created for shareholders
Page 4
simply by returning SmartForce to profitability and growth
and I do not have the slightest doubt about our ability to
achieve that. At the same time, what this deal does is
powerful in the immediate and the long-term. Immediately, we
can achieve major efficiencies and cost-savings together
that would've been practically impossible apart. This will
allow us, I believe, to deliver strong earnings even if the
challenging environment we are presently in continues. Over
the longer term I believe this deal positions us as an
e-learning powerhouse. When the market does turn (and it
will) we'll be in a unique position to leverage that turn.
On a personal note, I and the rest of my executive team and
are very excited to have the opportunity to work with Chuck
and his team to build what we believe to be the strongest
corporate e-learning company in the world, now and over the
long-term. So now I'll turn it over to Chuck and then to Tom
to discuss the combined company.
Chuck Moran: Thank you, Greg. Let me talk briefly about the deal.
Financially, this is a merger of equals but where SmartForce
is receiving a premium to its current market price as we
bring the companies together. The premium that SmartForce
shareholders are receiving amounts to approximately 30%
using a 30-day, trailing average, and approximately 19%
using today's close. Looking at the same point from another
angle, for each share a SmartForce shareholder owns, they
will effectively receive value of $7.88 using a 30-day
trailing average, and $6.38 using Friday's close. Following
the deal, former shareholders of SmartForce will hold
approximately 58% of the combined Company. Former
shareholders of SkillSoft will hold approximately 42% of the
combined Company. Legally, rather than creating a new
company and issuing shares to both sets of shareholders from
the new company, we are structuring this transaction as a
merger of SkillSoft into a newly formed subsidiary of
SmartForce. Legally, SmartForce will be issuing shares to
the former shareholders of SkillSoft, and SmartForce will be
the surviving corporation legally. The deal will be tax-free
and will be accounted for as a purchase. The deal is subject
to the approval of company shareholders, antitrust
clearance, and other customary conditions. We expect the
deal to close by the end of the third quarter.
Let me briefly move from a financial point of view to an
operational point of view. Operationally this is a true
merger of equals. We are taking the strongest elements of
each of our companies and bringing them together. Our goal
is simple: To be the leading player in the e-learning
content and packaged solutions landscape. We believe that
the Company combined has the power to generate the outsized
returns that tend to flow to companies that are leaders in a
market space. Customers are looking for a provider that can
offer comprehensive e-learning solutions and who brings
financial stability and long-term dependability. Together we
are better
Page 5
positioned than any other player in the market to be our
customers' long-term partner for their e-learning needs.
In terms of management, Greg will be Chairman of the Board and
Chief Strategy Officer, and I will be the Chief Executive
Officer. I will run the day-to-day business of the Company. Greg
will spend his time helping to bring to fruition some of the
strategic initiatives that have the power to act as a catalyst of
the Company's growth over time. Our management team will consist
of 3 executives from SmartForce and 3 from SkillSoft, all
reporting directly to me. Tom McDonald from SkillSoft will be the
Company's Chief Financial Officer. Jeff Newton from SmartForce
and Jerry Nine from SkillSoft will run the key business units,
with Jeff running the Complex Solutions business and Jerry
focusing on the Content business. Paul Henry from SmartForce will
run Corporate Marketing and Customer Support. Mark Townsend from
SkillSoft will run Software Development and Colm Darcy from
SmartForce will run Content Development.
Regarding the Board, three members of the Board will be from
SmartForce, three members will be from SkillSoft, and we have
identified a new seventh Director who has not previously served
on either Board and who was originally nominated by SkillSoft.
All seven Board members have already been identified. Our plan is
to select a new name for the combined Company that is different
from both of the company's existing names and we are working on
the alternatives now. Depending upon the availability of
appropriate names, we may continue with one of the existing
names. Corporate headquarters of the combined Company will be in
Dublin, Ireland, where SmartForce is headquartered, however North
American headquarters will be in Nashua, New Hampshire,
SkillSoft's headquarters. The Company expects to maintain a
presence in Redwood City, California, which is SmartForce North
American headquarters.
The Company's fiscal years are different by one month. In order
to reduce the impact of the deal on our sales force, we will
adopt SkillSoft's fiscal year ending January 31st. On behalf of
everyone at SkillSoft, I'd like to express our excitement about
this transaction and as Greg mentioned, the next growth phase of
the e-learning industry will be driven by vendors like us,
providing solutions designed to meet comprehensive,
enterprise-wide training needs. This transaction positions us to
capture a leading share of this growing market. As companies
continue to manage their costs, the future of the e-learning
industry is very positive and we believe that properly designed
e-learning solutions can effectively and economically help
companies control costs and help them become more competitive.
While each company individually has a strong offering in
e-learning solutions, together we can provide customers with
access, tremendous breadth and depth of IT, and critical business
skills content.
Page 6
Currently, SkillSoft offers customers one of the largest
e-learning business skills libraries and SmartForce offers one of
the largest IT sales and CRM content libraries, that together can
target sales, marketing, IT, HR, operations, channeling customer
service departments. SkillSoft has over 1,500 courses,
translations, and simulations, and with the addition of recently
integrated Books 24 X 7 acquisition, we've added over 2,000
digitized IT and business books to comprise our reference ware
offering. SmartForce has over 1,500 courses in 10 languages, real
time mentors, interactive workshops, and role-play simulations.
The combined entity will have over 3,000 courses and simulations,
along with over 2,000 reference ware products, which will be
supported by a comprehensive infrastructure.
Just as important as products is the distribution support of
those solutions. We believe that our complimentary sales and
distribution approaches will be a significant strength for the
Company. We both employ a direct sales approach, which will allow
us to capitalize on significant cross-sell opportunities that
exist. Our sales forces, post closing, will begin joint selling
immediately. Although both companies call on the Global 2000 and
actually Global 5000, there is minimal overlap of products
actually sold to our respective customers in this target market.
We believe that the majority of SmartForce's customers will be
excellent prospects for SkillSoft's critical business skill
offerings. Since SkillSoft has just begun it's sales efforts on
IT products, we have a great opportunity to sell IT in addition
to sales and CRM to all our customers that are not presently
SmartForce accounts. Importantly, we are also going to leverage
SmartForce's strong indirect sales channel through their
international presence and channel partnerships, which accounts
for approximately 25-30% of their revenues. As a point of
reference, SkillSoft's long-term target model of direct versus
indirect sales is approximately 25-30%. As of today, SkillSoft's
percentage is much smaller, approximately 10-15%.
Another important note is that our respective sales forces have
extensive experience in selling e-learning solutions, and
although we will train the sales force on products, they already
have the experience of selling technology-delivered e-learning
solutions to the Global 5000. In terms of synergies, we have
identified significant cost savings that Tom will walk you
through in a moment. Tom will also discuss how the combined
Company will standardize on SkillSoft contracting methodology,
which will result in forward visibility. Our strategy in running
the Company is to grow top and bottom line, but when balancing
the two, we will prioritize bottom line. We feel that our
business model lends itself to leverage and we intend to take
advantage of that. Both companies have high gross and operating
margin models, with cost structures that are comprised of
primarily head count. We expect to continue focusing on generic
Page 7
solutions such that as revenues increase, costs remain constant,
and the result will be a positive margin growth with high
earnings potential.
Although no integration is easy, we are confident in our ability
to integrate the companies with minimal disruption, due to our
familiarity with each others' business model, compatible
corporate cultures, minimal product overlap, shared direct sales
approach, and an experienced management team. We have a detailed
integration plan that is broken into departmental analysis and
plan on combining the two companies with little disruption to
customers and partners. Given the size of this merger and the
effect the accounting regulations will have on the financials, we
though it advantageous to have Tom walk you through the details.
So let me pass the call over to Tom now.
Tom McDonald: Thanks, Chuck. Good afternoon, everyone. I'm excited about the
opportunities that the combination of SkillSoft and SmartForce
can provide to customers, investors, employees, and partners. Let
me provide some of the financial highlights this combined Company
should achieve. First it will be accretive to SmartForce
shareholders immediately, excluding deal-related costs and
intangible amortization, and accretive to SkillSoft shareholders
in fiscal year ending January 31, 2004. Second, substantial cost
synergies have been identified, leveraging the strengths of both
organizations while eliminating redundancy and under performing
operations and assets. Third, revenue synergies provide an
upside, due to cross selling opportunities, but are not required
or assumed to make this deal accretive as stated. Fourth, this
combination positions the combined Company for future growth and
profitability.
There are key accounting and financial reporting impacts that I
would like to bring to your attention. First, SkillSoft will be
the acquirer in this transaction for accounting purposes, as
determined by the SEC. This means that despite the fact that
SmartForce is issuing shares in this transaction, the transaction
will be accounted for considering SkillSoft as the acquirer. The
determination of whom is treated as the acquirer for accounting
purposes is driven by FAS 141, therefore the purchase accounting
impact will cause the combined Company to lose a significant
amount of SmartForce's balance sheet deferred revenue to
goodwill. It will create intangible assets requiring a non-cash,
quarterly amortization expense, and also a one-time charge for
transaction related expenses.
Second, the account methods and customer contracting will
standardize around SkillSoft's current policies, resulting in
more contracts using subscription revenue recognition instead of
delivery-based up front recognition. We support this conversion
because it is the most conservative position and provides
enhances financial visibility and stability. As we undertake the
conversion of up front license-based
Page 8
revenues to subscription, we will see a one-time reduction in
revenue as revenue recognized under converted contracts is pushed
out to future periods. Third, the combination will also result in
some commercial overlap that will result in loss of revenue in
the short term. This involves a select number of situations where
the nature of our contract, such as an all product inclusive
contract, will result in a re-negotiation of fees or where the
combined offering for common customers drives a more attractive
pricing structure according to our standard fee schedules. In
addition, our intention to de-emphasize custom service revenue
activities to focus on the higher margin segments of the business
will result in a modest amount of lost revenue growth.
Before explaining the financial guidance for the combined Company
for fiscal year 2003 and 2004, I would like to review the current
guidance for both companies as stand-alone entities for calendar
year 2002 and SkillSoft's fiscal year ending January 31, 2003, to
set a baseline for assessing the combined Company numbers. The
assumption is the merger will close on September 30, 2002. The
fiscal year end will be January 31, 2003. SmartForce has provided
revenue baseline guidance on Q4, calendar year 2002, with a range
of $48-52 million in revenue, with a midpoint of $50 million, and
corresponding net income before amortization of approximately $1
million. SkillSoft has provided revenue baseline guidance for the
fiscal year ended January 31, 2003, with a range of $72-75
million and a midpoint of approximately $73.5 million, and a
corresponding net income of approximately $10 million, consistent
with our previously stated guidance. The combined revenue for
fiscal year 2003, therefore, is approximately $124 million, with
a net income of $11 million before amortization and deal-related
expenses.
Non cash accounting adjustments, about 124 midpoint revenue
number, will be lost deferred revenue of $13 million and $8
million of up front license revenue converted to subscription
revenue. Other adjustments due to business overlap and
realignment are expected to be $3.5 million due to the emphasis
in growth in the custom service area as well as commercial
overlap in business realignment. Total revenue adjustment for the
fourth quarter would therefore be $24.5 million. Again $21
million of this will have no cash impact. On the cross synergy
side, cost stabilization in the custom service area, immediate
reduction of overlap product bill plans, immediate reduction of
overlap marketing expenditures, and redundant public company
depreciation of facility costs will allow an expected $6.5
million reduction. Taking into account our full year, as well as
SmartForce's Q4 under purchase accounting, the pro forma fiscal
year 2003 results are expected to be approximately $99 million
and a net loss before amortization of $7 million, resulting in a
pro forma EPS of $0.06 loss per basic and diluted share.
Page 9
Moving on to calendar year 2003/fiscal year 2004, we will
first discuss the stand-alone financial guidance for
SmartForce and SkillSoft. For the fiscal year ending January
31, 2004, SkillSoft has reaffirmed at revenue of $92-97
million, with an EPS of $0.83 to $0.91 per share. I'll now
turn it back to Greg to briefly introduce stand-alone
guidance for SmartForce.
Greg Priest: Thanks, Tom. As you're aware to this point, we have not
introduced formal guidance for calendar year 2003. As Tom
mentioned for 2002, given our indication that we would have
a cost base that would run about $50 million in Q4 and that
we would be modestly profitable in Q4, you're obviously able
to get your 2002 guidance out of that. For 2003, we have not
yet put anything formally out. We are now initiating on a
stand-alone basis, 2003 guidance that is in line with
consensus of $220-230 million of revenues and EPS of $0.34
to $0.42 a share. That compares to the 2002 numbers of
$180-185 million and a net loss of $0.40 to $0.50 a share,
so with that indication of our stand-alone guidance, let me
turn it back over to Tom to describe the combined
expectations of the merged Company.
Tom McDonald: Thanks, Greg. With that baseline guidance set for each
company, I'll move on to assessing the combined Company
numbers as follow. The SmartForce baseline revenue is the
midpoint $225 million, with a net income midpoint before
amortization of approximately $24 million. SkillSoft
baseline revenue is the midpoint $95 million on the guidance
range of $92-97 million, net income of approximately $18
million. The combined midpoint baseline revenue therefore is
$320 million, with net income of approximately $42 million
before amortization and one-time charges. Non cash
accounting adjustments to the 320 revenue number will be
lost deferred revenue of $25 million and a $22 million
adjustment of up front license revenue converted to
subscription revenue. Cash adjustments due to commercial
overlap and business realignment would be $18 million, due
to de-emphasizing growth in the custom service area, as well
as commercial overlap situations. Therefore the total
revenue adjustment for the year would be $65 million,
comprised of $47 million non cash accounting adjustments and
$18 million of other adjustments due to commercial overlap
and business realignment.
On the cost synergy side, cost stabilization in the custom
service area for approximately $4 million of savings,
reduction of overlap product bill plans, reduction of R&D
platform and simulation redundancies, as well as
consolidating the learning delivery technology, would result
in cost savings of approximately $10 million. Reduction of
marketing expenditures to be more in line with the SkillSoft
model and eliminating redundant sales management and the
bottom 20% sales and support performers would result in cost
savings of approximately $39 million. Redundant facilities,
public Company costs, accounting, legal, and general
Page 10
administrative costs will result in additional cost savings
of approximately $13 million. Net adjusted impact for
calendar year 2003 and SkillSoft's fiscal year 2004 will be
combined revenue of $255 million, with a net profit of
approximately $43 million before amortization, for a pro
forma EPS of approximately $0.39 per diluted share. The
combined Company's target long-term operating model is
86-88% gross margin, 17-18% for product development, 40-41%
for sales and marketing, 6-7% for G&A to achieve a 19-25%
operating profit. We would target annual revenue growth to
be 20% plus, and target EPS growth to be 30% plus.
Additionally looking forward, we expect our combined diluted
share count as of January 31, 2003 to be approximately
107-108 million shares and January 31, 2004 to be
approximately 110-111 million shares, excluding the effect
of any future acquisitions. I would now like to open the
call up for questions, operator.
Conference Coordinator: Thank you sir. Ladies and gentlemen, at this time we
will begin the question and answer session. If you have a
question, please press the star followed by the 1 on your
push button phone. If you would like to decline from the
polling process, press the star followed by the 2. You will
hear a 3-tone prompt acknowledging your selection. Your
questions will be polled in the order they are received. If
you are using speaker equipment, you will need to lift the
handset before pressing the numbers. One moment, please, for
the first question. Our first question comes from Greg
Cappelli with Credit Suisse First Boston. Please go ahead.
Greg Cappelli: Thanks. Good afternoon Chuck, Tom, and Greg. I guess just a
couple of questions to start off with. Chuck, just to
clarify the $0.39 that you guys talked about combined, I
guess from an adjusted standpoint, would that presume that
your stand-alone number would have in calendar `03, your
fiscal - what, $0.36, $0.37, something like that?
Chuck Moran: Thirty-seven cents, I believe, Greg, so...
Greg Cappelli: Okay.
Chuck Moran: It's accretive.
Greg Cappelli: Okay and then, Tom, you were just mentioning the cost
synergies. What's the timing for actually realizing those?
How quickly can you realize the kinds of synergies you were
talking about? Is that immediate or right when the deal
closes, or does it take 6 months, or?
Chuck Moran: Greg, we've got, you know a phase-in plan. This is Chuck
talking. We're anticipating about 10%, or approximately 10%
in this calendar year, and the balance being effective at
the beginning of next year, so that they're in place for the
whole year.
Page 11
Greg Cappelli: Okay, so relatively quickly then.
Chuck Moran: Yes sir.
Greg Cappelli: Sounds like within a quarter.
Chuck Moran: Right.
Greg Cappelli: Then just a quick question from a tax perspective, just in
terms of the consequences. I guess SmartForce is the legal
acquirer here from a tax perspective, so you might - I'm
assuming you'll be assuming their tax rate that they have
right now. How do you, how do we look at the NOL's that you
currently have in place?
Greg Priest: Well the NOL's will not be lost. They'll just be taken down
at a different rate, but they'll still be intact for both
companies. From a tax perspective, as we continue to have
products built over in Ireland and the way that the
transference of profits go, the more products that are
created au tier, or not in the U.S., therefore not
generating taxable income. That will be consistent with our
long-term approach.
Greg Cappelli: Okay and then I guess - I know there's probably a lot of
questions, so let me just ask one more and that is from the
perspective of the combined firm. Obviously SmartForce has
you know hundreds of people over in Ireland I guess in
product development and many sales people as well. I just
want to - and Greg gave out some of the new numbers from the
reductions that they had made most recently, I think in
April. What is the plan to keep most of those people in
place and how do you look at the combined you know
production in terms of content development, R&D? Do you plan
on doing most of it overseas or in the U.S., and I'll hang
up and let somebody else ask some questions.
Chuck Moran: Sure, well, naturally there are some overlaps which we will
be taking advantage of and eliminating redundancy and costs,
but you know when you phrased your question that way, the
majority will be staying but there still will be
elimination's for the obvious reasons. For example, we don't
need to build 2 product lines for Soft Skills obviously, and
it will be some rationalization of that product line along
with sales force and the sales channels. There will be some,
and Tom's identified those at a high level.
Conference Coordinator: Thank you. Our next question comes from Howard Block
with Bank of America Securities. Please go ahead.
Howard Block: Good afternoon, Chuck, Tom, and Greg, and first of all,
congratulations on the merger. I wish you the best of luck.
A couple of questions, on the
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development question you were just addressing, is there an
opportunity to utilize the Dublin force in a way that might
enable you to sort of free up to the extent you were leaning
on these outsource development teams that you had
domestically?
Chuck Moran: There absolutely is. As a matter of fact, you know how we
look at things as through an outsourcing strategy, and
actually SmartForce has done outsourcing as well, so they
have a blended model as well, whereas ours is exclusively
outsource. We're in a flexible position so that we can take
advantage of the highest quality products at the lowest cost
and wherever that will take us will dictate where products
will be built.
Conference Coordinator: Thank you. Our next question comes from Trace Urdan with
Dean Equity Partners. Please go ahead.
Trace Urdan: Hey, good afternoon. Tom, I was hoping you might be able to
elaborate a little bit on this issue of the change in
revenue recognition because frankly, my understanding of
SmartForce's revenue recognition was that each type of
revenue was being recognized in an appropriate manner. That
those revenues that really did represent library course ware
were already being recognized on a subscription basis, so
I'm a little bit lost as to where you know where this
disconnect is taking place. I wondered if you could
elaborate on that a little bit.
Greg Priest: Actually - this is Greg - I mean given that it relates to
SmartForce accounting, let me pick it up. The issue is, with
respect to one specific sub-category of revenue, your
understanding, Trace, is entirely correct. There is one
sub-category of revenue, which as you know, last year about
13% of our revenue at SmartForce came from software licenses
that were booked on an up front basis the way you book
software licenses. What we're going to do on a going-forward
basis is we are going to embed maintenance services within
those agreements, such that the agreements become service
agreements rather than software license agreements. Such
that you end up taking the revenue ratably over the life of
those agreements, rather than taking it up front, so that
13% that you would have seen last year coming from up front
licenses should go to 0. That going to 0 is going to cost us
the amount of money that Tom laid out. Everything else
remains exactly the same.
Trace Urdan: Some of those...
Conference Coordinator: Our next question comes from Fred McCrae with Thomas
Weisel Partners. Please go ahead.
Fred McCrae: A question for Tom, actually. Tom maybe you could walk us
through exactly what the - in terms of the mechanics with
the SkillSoft
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shareholder expects to receive and kind of the current
valuation. Maybe you could walk us back through relative to
where SmartForce has been trading over the past 30 days and how
we should get our hands around that.
Tom McDonald: Can you repeat that question again?
Fred McCrae: Yeah Tom, its Fred McCrae. I wanted to just get a little better
feel for what the SkillSoft shareholders should expect in terms
of the you know what mechanically will they expect in terms of
delivery to them at the time of closing?
Tom McDonald: Oh, okay. They're going to be receiving ADR's to the exchange
ration of 2.367 shares for each SkillSoft share that they are in
possession of, Fred, and (INAUDIBLE).
{Crosstalk}
Fred McCrae: (INAUDIBLE) of basically Newco, 2-spot-3-6-7 of...
{Crosstalk}
Tom McDonald: SmartForce ADR shares and...
Fred McCrae: Okay.
Tom McDonald: ...don't confuse Newco because we don't have a name...
Fred McCrae: Sure.
Tom McDonald: ...it will still be a legal entity of SmartForce.
Fred McCrae: Kind of relative to SmartForce's closing price on Friday, which
was what, 510 if I'm not mistaken?
Tom McDonald: Right.
Greg Priest: Yes.
Chuck Moran: Correct.
Fred McCrae: That's kind of what put the value of about 12
dollars-and-some-odd cents there on a SkillSoft share at the
current time? Is that accurate? What have I missed?
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Chuck Moran: No, it's not. It's really looked at as a premium, so you
would take either their share count divided by .4224 or you
take the SkillSoft and multiply it by 2.367 to do the math.
Greg Priest: You're right in principle, Fred, though, that basically you
can look at this one of two ways. You can look at it as, you
know a premium to SmartForce or as a discount to SkillSoft.
Obviously SmartForce being under (INAUDIBLE) serious
pressure from the stock price perspective.
Fred McCrae: Well I guess my point is, taking a look at you know, as a
SkillSoft shareholder getting 2-spot-3-6-7 ADR's in
SmartForce, what have I effectively missed there, Chuck?
Greg Priest: You've not missed anything. That is the correct exchange
ratio.
Fred McCrae: Okay and that at 510 per share is basically telling me
somewhere about you know - under the current price that
SkillSoft right now. That's just what I'm trying to get my
arms around.
Greg Priest: Oh, current price. That's right.
Fred McCrae: Yeah.
Greg Priest: Yeah. I thought you were using the historical price, my
apologies.
Fred McCrae: Okay, so I haven't missed anything in that part of the
equation.
Greg Priest: No.
Fred McCrae: Okay. Then maybe, Tom, you could tell us a little bit about
- I'm just going to follow up on Trace's question, in regard
to the recognition of the contracts. What about - I think,
what, 15% or 20% of what you guys recognize would be up
front, is that also going to go with the same thing that
Greg just described? In terms of those will also go to
maintenance and services?
Tom McDonald: No, what Greg's revenue segment relates to, software
licenses and converting those into service types of
agreements, really, is not a title content contract, which
is what Greg's, what SmartForce is now taking ratably as
well as SkillSoft is taking ratably. It's only when all of
the commitments and obligations are complete that delivery
is appropriate met on that contract.
Chuck Moran: Fred, one of the other things that I'll add to that, which
plays nicely into the subscription model. It's that at
SkillSoft we historically had a pricing matrix that made it
quite expensive for people to not lease the products,
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which is how we sell the predominant amount of our
products. In other words, they buy it up front. I
think in a going forward basis as we adopt that
across the board, by the very nature I think that may
also drive more lease business.
Conference Coordinator: Thank you. Our next question comes from Mark
Murassico with Piper Jaffray. Please go ahead.
Dave Rideaux: Yeah, Dave Rideaux in for Mike Murassica. How are you
doing guys? Are there any collars on the deal and
what are the breakup fees if any?
Greg Priest: There are no collars on the deal and there is a
breakup fee based on events, which is anywhere from
1-4%.
Conference Coordinator: Thank you. Our next question comes from Brian
Rettenberg with Morgan Keegan. Please go ahead with
your question.
Brian Rettinberg: Yes, Brian Rettinberg, Morgan Keegan. Can you talk a
little bit about what the balance sheet will be post
the merger, finishing the combined balance sheet?
Then I have a follow up real quickly.
Tom McDonald: As far as the balance sheet, the balance sheet's
going to be - we're going to be reviewing that from a
restructuring standpoint. Since SkillSoft is the
acquirer, so intangible assets, fixed assets, the
SmartForce balance sheet is going to be impacted and
I'm really not at a point where I could really throw
out what that balance sheet is going to look like.
Until we do a little bit more, further investigation
as to what would be charged in the deal, what
intangibles would be valued going forward. The only
thing that is of record - at least as of 3/31 -
there's over $200 million in cash, which will come
down because of the loss situation with SmartForce,
as well as the deal cost, but it'll still be a strong
balance sheet going forward that will allow us to
take advantage of opportunities, that the existing
business requires, or new opportunities that might
exist for us in the future.
Conference Coordinator: Thank you. Our next question comes from Natalie
Waldren with Pacific Grove Equity. Please go ahead.
Natalie Waldren: Hi, I have a couple of questions for you. I guess,
first of all, if you could address sort of your
outlook for the business going forward. One of the
things that we've been hearing quite a bit about is
that with everything that's been going on in
e-learning, the content business, particularly at
SmartForce, has not been as competitive as it
possibly should be, that usage has been down. Can you
talk a little bit specifically about how you monitor
usage of your content and if you feel that there's
anything that needs to be done to make sure that the
content remains as competitive? Or remains to the
standard that it should be? Then the second question
is if
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you can talk a little bit about the combined
pipeline? What you think that's going to look like
and what the growth of that can be going forward.
You've addressed the revenue reductions for the next
fiscal years, but if you can talk about the pipeline
growth and what that means for visibility, that'd be
great.
Chuck Moran: Sure, Natalie. In terms of the competitiveness of the
products, we actually think they're both very
competitive. In terms of usage, what we have
typically done, which we were going to do on a
combined company basis, is - what we try and do is
have quarterly meetings with customers to review
really the status. I'll call it customer
satisfaction, because it shouldn't be coined or
termed usage because many companies have different
views of what the products are there for and what
constitutes acceptable usage or satisfaction. It's
really more of a satisfaction issue. For the most
part, we try and get with those customers on a
quarterly basis. Some we don't have to, frankly,
because they're experts at this and other that feel
that they don't have the time to spend with us, but
that's our goal to try and do that once a quarter
with each customer. We expect to do that on a
combined company basis.
In terms of the pipeline, you know both companies are
looking at, I think, healthy pipelines and I don't
think that's ever been an issue in the industry. It's
just a matter of you know the economy and it being
tight and how we expect to get our arms around that
pipeline. It's having a very disciplined sales
approach, using the metrics that we have been using
in the past at SkillSoft, using the sales automation
tracking system that has been quite helpful for us as
we were able to size the opportunities that exist in
the market.
Conference Coordinator: Thank you. Our next question comes from Jeff Silver
with Gerard Klauer Mattison. Please go ahead.
Jeff Silver: Good afternoon. I have to apologize. I'm not as
familiar with the SmartForce story. I was just
wondering, on a go forward basis, how you would
categorize the combined company. Maybe in terms of
percentage of revenues, content versus service, and I
don't know if there's any infrastructure piece as
well in the combined business?
Chuck Moran: Sure, Jeff, this is Chuck. The majority of the
revenues on a combined basis are still content
centric and content based. You can determine that
quite easily by just looking at the target gross
margins being as high as they are, but like
SkillSoft, SmartForce does have (and we all need to
have) a complete solution. We need to have a platform
that the products will be delivered under. We need to
have support services, which are the folks in the
field that make sure the products are working, and to
have a customization answer when customers want to
have those unique things
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done to those products that they have, either by ours
or by others. The focus of it, however, is going to be
in the content, which is the bread and butter, I
think, of both companies.
Conference Coordinator: Thank you. Our next question comes from Bob Craig
with Legg Mason. Please go ahead.
Bob Craig: Good afternoon; just a quick one. Could you give us
some idea of the size of the combined sales force post
the merger and how ultimately will they be going to
market? I take it they'll be selling all of the
products from the entire combined entity?
Chuck Moran: Hi Bob. Yes, your assumption's correct. The sales
force combined will be selling both products and it's
in excess of 250 people.
Conference Coordinator: Thank you. Our next question comes from Howard Block
with Bank of America Securities. Please go ahead.
Howard Block: Hey guys, I got cut off there after the first
question.
Greg Priest: Sorry, Howard.
Howard Block: Playing favorites there, I guess, based on something.
Can you elaborate a little bit, Tom, on the fourth
quarter guidance for the calendar '02, because it was,
you just spoke a little bit too quickly for my hand?
If you wouldn't mind just walking through those
numbers again? I got the '03, so maybe someone else
didn't get '03. I got '03, but '02 I was having a
problem catching up to you.
Tom McDonald: As far as the '02...
Howard Block: Right.
Tom McDonald: We'll be at a combined $99 million worth of revenue
and the profits are a loss of $7 million.
Conference Coordinator: Ladies and gentlemen, we have time for one more
question. Greg Cappelli with Credit Suisse First
Boston, please go ahead.
Greg Cappelli: Just a 2-part question. One is, can you just elaborate
on how you guys will manage through some of the
receivables - the near-term receivables - issues in
the IT space for Smart Force. Then secondly, your you
know just kind of a bigger strategy question, you're
obviously getting back into the IT business after your
NETg days. It's a difficult space right now. I guess
more difficult, it seems, than Soft Skills. Do you
actually, do we actually need to bake in a healthy up
tick in the economy to get to SmartForce, and
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I guess the combined company's, revenues? I know that
you recently said on your conference call that was not
the case for your own business, but I'd like to get
your views, maybe from you and Greg on those issues.
Chuck Moran: Okay, Greg. This is Chuck. The numbers that we have
put together on a combined basis does not assume an up
tick in the economy. It assumes as the assumptions
have in the past with SkillSoft, that it's going to be
status quo. In terms of managing receivables, we
actually have a great CFO who's done a wonderful job
at SkillSoft and can, I think, do an equally good job
on the long run of putting the combined receivables in
play. We're confident with his help and direction that
we'll achieve that.
Conference Coordinator: Thank you. Ladies and gentlemen, this concludes the
question and answer session. Mr. Moran, please
continue.
Chuck Moran: Thank you. I'd like to thank everyone for your
interest and participation in the call today and in
sharing this exciting opportunity with you. Bye.
Conference Coordinator: Ladies and gentlemen, this concludes the SmartForce
SkillSoft Merger Update Conference Call. If you would
like to listen to a replay of today's conference call,
please dial 303-590-3000 and enter the access number
of 477713. Once again, if you would like to listen to
a replay of today's conference call, please dial
303-590-3000 and enter the access number of 477713.
Thank you for participating. You may now disconnect.
END
Additional Information And Where To Find It
SmartForce intends to file a registration statement on Form S-4 in connection
with the transaction, and SmartForce and SkillSoft intend to mail a joint proxy
statement/prospectus to their respective stockholders in connection with the
transaction. Investors and security holders of SmartForce and SkillSoft are
urged to read the joint proxy statement/prospectus when it becomes available
because it will contain important information about SmartForce, SkillSoft 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 from SmartForce or SkillSoft. SmartForce and its executive officers and
directors may be deemed to be participants in the solicitation of proxies from
the stockholders of SmartForce and SkillSoft in favor of the transaction.
SkillSoft and its executive officers and directors may be deemed to be
participants in the solicitation of proxies from the stockholders of SmartForce
and SkillSoft in favor of the transaction.As of May 31, 2002, SmartForce's
directors and executive officers beneficially owned approximately 4.5 percent of
SmartForce's outstanding voting stock. Information regarding SkillSoft's
executive officers is contained in SkillSoft's Form 10-K for the year ended
January 31, 2002 and its proxy statement dated May 13, 2002, which are filed
with the SEC. As of May 31, 2002, SkillSoft's directors and executive officers
beneficially owned approximately
Page 19
43 percent of SkillSoft's outstanding common stock. A description of employment
agreements and other interests of the SmartForce and SkillSoft directors and
officers will be available in the Registration Statement and the Join Proxy
Statement/Prospectus.
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 SkillSoft in connection with the
transaction, each of SmartForce and SkillSoft 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 SkillSoft 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 SkillSoft.
Forward Looking Statements
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding expected
synergies, the effect of the merger on long-term customer and shareholder value,
the ability to grow revenues and profits, the return on training investments for
the companies' customers, timing of closing, industry ranking, execution of
integration plans, management and organizational structure, the name of the
combined company, and the tax effect to the shareholders of both companies. All
forward-looking statements in this document are subject to risks, uncertainties
and assumptions that could cause actual results or events to differ materially
from those contained in the forward-looking statements. The factors that could
cause actual results or events to differ include, but are not limited to, the
possibility that the market for the sale of certain products and services may
not develop as expected, that development of these products and services may not
proceed as planned, that the transaction does not close, that the companies may
be required to modify aspects of the transaction to achieve regulatory approval,
that prior to the closing of the proposed merger, the businesses of the
companies suffer due to uncertainty, that the parties opt for a different name
for the combined company or that the parties are unable to transition customers,
successfully execute their integration strategies, or achieve planned synergies.
Additional factors that could cause actual results or events to differ
materially from those in the forward-looking statements are included in
SmartForce's and SkillSoft's filings with the Securities and Exchange
Commission, specifically SmartForce's annual report on Form 10-K for the year
ended December 31, 2001, SkillSoft's quarterly report on Form 10-Q for the
quarter ended April 30, 2002, and subsequently filed reports. The
forward-looking information provided by SmartForce and SkillSoft in this
document represents SmartForce's and SkillSoft's views as of June 10, 2002.
SmartForce and SkillSoft anticipate that subsequent events and developments may
cause these views to change. However, while SmartForce and SkillSoft may elect
to update this forward-looking information at some point in the future,
SmartForce and SkillSoft specifically disclaim any obligation to do so. This
forward-looking information should not be relied upon as representing
SmartForce's or SkillSoft's views at any date subsequent to the date of this
document.
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