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EX-31.2 - EX-31.2 SECTION 302 CERTIFICATION OF CFO - SSI Investments II Ltdexhibit31-2.htm
EX-32.2 - EX-32.2 SECTION 906 CERTIFICATION OF CFO - SSI Investments II Ltdexhibit32-2.htm
EX-31.1 - EX-31.1 SECTION 302 CERTIFICATION OF CEO - SSI Investments II Ltdexhibit31-1.htm
EX-32.1 - EX-32.1 SECTION 906 CERTIFICATION OF CEO - SSI Investments II Ltdexhibit32-1.htm




UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(MARK ONE)
R
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2011
OR
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM   TO                                                                                                           

COMMISSION FILE NUMBER 333-169857

SSI INVESTMENTS II LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Republic of Ireland
None
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
107 Northeastern Boulevard
03062
Nashua, New Hampshire
(Zip Code)
(Address of Principal Executive Offices)
 
   

Registrant’s Telephone Number, Including Area Code: (603) 324-3000

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes £ No R

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes £ No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
   Large accelerated filer £  Accelerated filer £  
   Non-accelerated filer R  Smaller reporting company £  
     (Do not check if a smaller reporting company)  
 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes  £ No R



 
 

 


SSI INVESTMENTS II LIMITED

FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 2011
INDEX

 
PAGE NO.
PART I — FINANCIAL INFORMATION
  2
Item 1. Unaudited Consolidated Financial Statements:
  2
Consolidated Balance Sheets as of July 31, 2011 and January 31, 2011
  2
Consolidated Statements of Operations for the Three and Six Months Ended July 31, 2011 (Successor), the period from May 26, 2010 through July 31, 2010 (Successor), the period from May 1, 2010 through May 25, 2010 (Predecessor) and the period from February 1, 2010 through May 25, 2010 (Predecessor)
  3
Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2011 (Successor), the period from May 26, 2010 through July 31, 2010 (Successor) and the period from February 1, 2010 through May 25, 2010 (Predecessor)
  4
Notes to Consolidated Financial Statements
  5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
  33
Item 3. Quantitative and Qualitative Disclosures about Market Risk
  44
Item 4. Controls and Procedures
  45
PART II — OTHER INFORMATION
  45
Item 1. Legal Proceedings
  45
Item 1A. Risk Factors
  45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  45
Item 3. Defaults Upon Senior Securities
  45
Item 4. Reserved
  45
Item 5. Other Information
  46
Item 6. Exhibits
  46
SIGNATURE
  47


The accompanying notes are an integral part of these condensed consolidated financial statements.

 
 
1

 

PART I

ITEM 1. — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SSI INVESTMENTS II LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS)

   
July 31, 2011
 
January 31, 2011
ASSETS
Current assets:
               
Cash and cash equivalents
 
$
65,891
   
$
35,199
 
Short term investment
   
9
     
-
 
Restricted cash
   
128
     
59
 
Accounts receivable, net
   
66,381
     
144,665
 
Deferred tax assets
   
1,997
     
1,644
 
Prepaid expenses and other current assets
   
26,066
     
25,717
 
Total current assets
   
160,472
     
207,284
 
Property and equipment, net
   
5,320
     
4,977
 
Goodwill
   
570,951
     
564,516
 
Intangible assets, net
   
531,417
     
590,162
 
Deferred tax assets
   
3,824
     
2,291
 
Other assets
   
21,621
     
23,757
 
Total assets
 
$
1,293,605
   
$
1,392,987
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
               
Current maturities of long term debt
 
$
8,217
   
$
8,487
 
Accounts payable
   
4,679
     
5,189
 
Accrued compensation
   
9,394
     
16,962
 
Accrued expenses
   
24,810
     
31,513
 
Deferred tax liabilities
   
7,071
     
4,615
 
Deferred revenue
   
159,469
     
196,803
 
Total current liabilities
   
213,640
     
263,569
 
                 
Long term debt
   
618,727
     
622,973
 
Deferred tax liabilities
   
64,980
     
75,178
 
Other long term liabilities
   
4,078
     
3,444
 
Total long term liabilities
   
687,785
     
701,595
 
Commitments and contingencies (Note 10)
               
Shareholders’ equity:
               
Ordinary shares, $1.00 par value:1,000,000,000 shares authorized; 534,513,270 shares issued at July 31, 2011 and January 31, 2011
   
534,513
     
534,513
 
Additional paid-in capital
   
325
     
-
 
Accumulated deficit
   
(162,547
)
   
(119,090)
 
Accumulated other comprehensive income
   
19,889
     
12,400
 
Total shareholders’ equity
   
392,180
     
427,823
 
Total liabilities and shareholders’ equity
 
1,293,605
   
$
1,392,987
 




The accompanying notes are an integral part of these condensed consolidated financial statements.

 
 
2

 

SSI INVESTMENTS II LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS)

   
Successor
   
Predecessor
   
Successor
   
Predecessor
 
   
Three Months Ended July 31, 2011
   
For the Period from May 26, to
July 31, 2010
   
For the Period from May 1, to
 May 25, 2010
   
Six Months Ended July 31, 2011
   
For the Period from May 26, to
July 31, 2010
   
For the Period from February 1, to
May 25, 2010
 
Revenue
 
$
80,241
   
$
34,056
   
$
20,620
   
$
156,636
   
$
34,056
   
$
97,538
 
Cost of revenue
   
7,551
     
5,211
     
2,143
     
14,836
     
5,211
     
9,226
 
Cost of revenue – amortization of intangible assets
   
15,986
     
11,706
     
8
     
31,972
     
11,706
     
40
 
Gross profit
   
56,704
     
17,139
     
18,469
     
109,828
     
17,139
     
88,272
 
Operating expenses:
                                               
Research and development
   
13,114
     
7,378
     
7,462
     
26,068
     
7,378
     
17,131
 
Selling and marketing
   
29,428
     
14,521
     
15,574
     
56,560
     
14,521
     
40,378
 
General and administrative
   
7,708
     
5,675
     
13,335
     
15,776
     
5,675
     
21,828
 
Amortization of intangible assets
   
15,717
     
7,789
     
241
     
31,386
     
7,789
     
1,137
 
Acquisition related expenses
   
551
     
20,598
     
9,741
     
859
     
20,598
     
15,063
 
Total operating expenses
   
66,518
     
55,961
     
46,353
     
130,649
     
55,961
     
95,537
 
Operating loss
   
(9,814
)
   
(38,822
)
   
(27,884
)
   
(20,821
)
   
(38,822
)
   
(7,265
)
    Other (expense) income, net
   
(319
)
   
(1,035
)
   
274
     
(1,654
)
   
(1,035
)
   
385
 
    Interest income
   
41
     
16
     
13
     
71
     
16
     
95
 
    Interest expense
   
(15,022
)
   
(18,580
)
   
(1,353
)
   
(29,936
)
   
(18,580
)
   
(3,723
)
    Loss before benefit for income taxes
   
(25,114
)
   
(58,421
)
   
(28,950
)
   
(52,340
)
   
(58,421
)
   
(10,508
)
 Benefit for income taxes
   
(4,088
)
   
(5,451
)
   
(7,733
)
   
(8,883
)
   
(5,451
)
   
(1,894
)
Net loss
 
$
(21,026
)
 
$
(52,970
)
 
$
(21,217
)
 
$
(43,457
)
 
$
(52,970
)
 
$
(8,614
)



The accompanying notes are an integral part of these condensed consolidated financial statements.

 
 
3

 

SSI INVESTMENTS II LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)

   
Successor
   
Predecessor
 
   
Six Months Ended July 31, 2011
   
For the Period from May 26, to July 31, 2010
   
For the Period from February 1, to
May 25, 2010
 
Cash flows from operating activities:
                       
Net loss
 
$
(43,457
)
 
$
(52,970
)
 
$
(8,614
)
Adjustments to reconcile net loss to net cash provided by operating activities:
                       
Share-based compensation
   
-
     
-
     
25,159
 
Depreciation and amortization
   
2,069
     
833
     
1,374
 
Amortization of intangible assets
   
63,358
     
19,495
     
1,177
 
(Recovery of ) provision for bad debts
   
(137
)
   
268
     
(52
)
Benefit for income taxes - non-cash
   
(10,883
)
   
(5,400
)
   
(2,800
)
Non-cash interest expense
   
2,210
     
792
     
3,219
 
Tax effect related to exercise of non-qualified stock options
   
-
     
-
     
282
 
Changes in current assets and liabilities, net of acquisitions
                       
Accounts receivable
   
81,133
     
(7,800
)
   
86,230
 
Prepaid expenses and other current assets
   
82
     
(2,411
)
   
(2,218
)
Accounts payable
   
(666
)
   
1,078
     
(1,559
)
Accrued expenses, including long-term
   
(12,999
)
   
(8,733
)
   
(6,296
)
Deferred revenue
   
(40,610
)
   
17,229
     
(41,817
)
Net cash provided by (used in) operating activities
   
40,100
     
(37,619
)
   
54,085
 
Cash flows from investing activities:
                       
Purchases of property and equipment
   
(2,315
)
   
(370
)
   
(438
)
Acquisition of SkillSoft, net of cash acquired
   
-
     
(1,074,181
)
   
-
 
Purchases of investments
   
(9
)
   
-
     
(2,562
)
Maturity of investments
   
-
     
-
     
6,122
 
Acquisition of 50 Lessons
   
(3,820
)
   
-
     
-
 
(Increase) decrease in restricted cash, net
   
(69
)
   
1,802
     
27
 
Net cash (used in) provide by investing activities
   
(6,213
)
   
(1,072,749
)
   
3,149
 
Cash flows from financing activities:
                       
Exercise of share options
   
-
     
-
     
3,065
 
Capital contribution
   
325
     
-
     
-
 
Proceeds from employee share purchase plan
   
-
     
-
     
1,666
 
Proceeds from issuance of ordinary shares
   
-
     
534,513
     
-
 
Proceeds from issuance of Senior Credit Facilities, net of fees
   
-
     
306,398
     
-
 
Proceeds from issuance of Senior Notes, net of fees
   
-
     
296,448
     
-
 
Principal payments on Senior Credit Facilities
   
(4,605
)
   
-
     
(84,365
)
Tax effect related to exercise of non-qualified stock options
   
-
     
-
     
(282
)
Net cash (used in) provided by financing activities
   
(4,280
)
   
1,137,359
     
(79,916
)
Effect of exchange rate changes on cash and cash equivalents
   
1,085
     
1,421
     
(1,315
)
Net increase (decrease) in cash and cash equivalents
   
30,692
     
28,412
     
(23,997
)
Cash and cash equivalents, beginning of period
   
35,199
     
-
     
76,682
 
Cash and cash equivalents, end of period
 
$
65,891
   
$
28,412
   
$
52,685
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
4

 


SSI INVESTMENTS II LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. THE COMPANY

On May 26, 2010, SSI Investments III Limited (“SSI III”), a wholly owned subsidiary of SSI Investments Limited II (“SSI II”), completed its acquisition of SkillSoft PLC (the “Acquisition”), which was subsequently re-registered as a private limited company and whose corporate name changed from SkillSoft PLC (the “Predecessor”) to SkillSoft Limited (“SkillSoft” or the “Successor”). Unless otherwise indicated or the context otherwise requires, as used in this discussion, the terms “the Company”, “we”, “us”, “our” and other similar terms refers to (a) prior to the Acquisition, the Predecessor and its subsidiaries and (b) from and after the Acquisition, SSI II and its subsidiaries, including SkillSoft.

2. BASIS OF PRESENTATION

The accompanying, unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of management, the condensed consolidated financial statements reflect all material adjustments (consisting only of those of a normal and recurring nature) which are necessary to present fairly the consolidated financial position of the Company as of July 31, 2011 and the results of its operations and cash flows for three and six month periods ended July 31, 2011. The results prior to May 26, 2010 represent the Predecessor period. The Predecessor period does not include financial information of SSI II because prior to May 26, 2010, SSI II did not conduct operations or have any material assets. These condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2011, as filed with the SEC on April 14, 2011. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year.

The Company evaluates events occurring after the date of the accompanying unaudited condensed consolidated balance sheets for potential recognition or disclosure in the financial statements. The Company did not identify any material subsequent events requiring adjustment to the accompanying unaudited condensed consolidated financial statements (recognized subsequent events). Those items requiring disclosure (unrecognized subsequent events) in the financial statements have been disclosed accordingly.
 
3. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND INVESTMENTS
 
The Company considers all highly liquid investments with original maturities of 90 days or less at the time of purchase to be cash equivalents. At July 31, 2011, the Company did not have any cash equivalents but did hold a nominal amount of available for sale investments. At January 31, 2011, the Company did not have any cash equivalents or available for sale investments.

At July 31, 2011 and January 31, 2011, the Company had approximately $0.1 million of restricted cash held in certificates-of-deposits with a commercial bank pursuant to terms of certain facilities lease agreements.

Realized gains and losses and declines in value determined to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in other income.

In accordance with the guidance of the Financial Accounting Standards Board (FASB), securities that the Company does not intend to hold to maturity or for trading purposes are reported at market value, and are classified as available for sale.

 
5

 

Cash and cash equivalents and available for sale short-term investments as of July 31, 2011 were as follows (in thousands):

Description
 
Contracted Maturity
 
Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
Cash and cash equivalents:
                           
Cash
 
N/A
 
$
65,891
   
$
-
   
$
-
   
$
65,891
 
       
$
65,891
   
$
-
   
$
-
   
$
65,891
 
Short-term investments:
                                   
Equity securities
 
N/A
 
$
4
   
$
5
   
$
-
   
$
9
 
       
$
4
   
$
5
   
$
-
   
$
9
 

Realized gains and losses and declines in value determined to be other-than-temporary on available-for-sale securities are included in investment income. Gross realized gains and losses for the six months ended July 31, 2011 were nominal. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in other income.

4. REVENUE RECOGNITION

The Company generates revenue primarily from the licensing of its products, providing professional services and from providing hosting/application service provider (ASP) services.

The Company follows the provisions of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 985-605 Software – Revenue Recognition and Staff Accounting Bulletin No. 104 to account for revenue derived pursuant to license agreements under which customers license the Company's products and services. The pricing for the Company's courses varies based upon the content offering selected by a customer, the number of users within the customer's organization and the term of the license agreement (generally one, two or three years). License agreements permit customers to exchange course titles, generally on the contract anniversary date. Hosting services are sold separately for an additional fee. A license can provide customers access to a range of learning products including courseware, Referenceware®, simulations, mentoring and prescriptive assessment.

The Company offers discounts from its ordinary pricing, and purchasers of licenses for a larger number of courses, larger user bases or longer periods of time generally receive discounts. Generally, customers may amend their license agreements, for an additional fee, to gain access to additional courses or product lines and/or to increase the size of the user base. The Company also derives revenue from hosting fees for customers that use its solutions on an ASP basis and from the provision of professional services. In selected circumstances, the Company derives revenue on a pay-for-use basis under which some customers are charged based on the number of courses accessed by its users.

For arrangements subject to ASC 985-605 Software – Revenue Recognition, the Company recognizes revenue ratably over the license period if the number of courses that a customer has access to is not clearly defined, available, or selected at the inception of the contract, or if the contract has additional undelivered elements for which the Company does not have vendor specific objective evidence (VSOE) of the fair value of the various elements. This may occur if the customer does not specify all licensed courses at the outset, the customer chooses to wait for future licensed courses on a when and if available basis, the customer is given exchange privileges that are exercisable other than on the contract anniversaries, or the customer licenses all courses currently available and to be developed during the term of the arrangement.

Arrangements which include extranet hosting/ASP services are generally accounted for under Staff Accounting Bulletin No. 104. Revenue from these arrangements is recognized on a straight-line basis over the period the services are provided. Upfront professional service fees are recorded as revenue over the contract period.

Revenue from nearly all of the Company's contractual arrangements is recognized on a subscription or straight-line basis over the contractual period of service.

 
6

 

The Company generally bills the annual license fee for the first year of a multi-year license agreement in advance and license fees for subsequent years of multi-year license arrangements are billed on the anniversary date of the agreement. Occasionally, the Company bills customers on a quarterly basis. In some circumstances, the Company offers payment terms of up to six months from the initial shipment date or anniversary date for multi-year license agreements to its customers. To the extent that a customer is given extended payment terms (defined by the Company as greater than six months), revenue is recognized as payments become due, assuming all of the other elements of revenue recognition have been satisfied.

The Company typically recognizes revenue from resellers over the commitment period when both the sale to the end user has occurred and the collectability of cash from the reseller is probable. With respect to reseller agreements with minimum commitments, the Company recognizes revenue related to the portion of the minimum commitment that exceeds the end user sales at the expiration of the commitment period provided the Company has received payment. If a definitive service period can be determined, revenue is recognized ratably over the term of the minimum commitment period, provided that payment has been received or collectability is probable.

The Company provides professional services, including instructor led training, customized content development, website development/hosting and implementation services.

During the first quarter of fiscal 2012 the Company prospectively adopted the guidance of Accounting Standards Update (ASU) No. 2009-13 Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, specifically for multiple element arrangements which are not accounted for under ASC 985-605 Software – Revenue Recognition (this is normally due to the inclusion of extranet hosting/ASP services). ASU No. 2009-13 was ratified by the Financial Accounting Standards Board (FASB) Emerging Issues Task Force on September 23, 2009. ASU No. 2009-13 affects accounting and reporting for all multiple-deliverable arrangements.

ASU No. 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable in a sale arrangement. The selling price for each deliverable is based on vendor-specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not available, or the Company's best estimated selling price (BESP) if neither VSOE nor TPE are available. The amendments in ASU No. 2009-13 eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price allocation method. The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of the deliverable's estimated fair value.

For transactions entered into subsequent to the adoption of ASU No. 2009-13 that include multiple elements, arrangement consideration is allocated to each element based on the relative selling prices of all of the elements in the arrangement using the fair value hierarchy as required by ASU No. 2009-13. The Company limits the amount of revenue recognition for the software and content licenses and extranet hosting services (as a bundled unit) to the amount that is not contingent on the future delivery of products or services or future performance obligation. That amount is then recognized on a straight-line basis over the contractual term. Professional services, including instructor led training, customized content development, website development/hosting and implementation services, are sometimes included in the arrangements. If the Company determines that the professional services are not separable from an existing customer arrangement, revenue from these services is recognized over the existing contractual terms with the customer; otherwise the Company typically recognizes professional service revenue as the services are performed. The Company does not have VSOE for its professional service offerings. Therefore, fair value for these elements is based on TPE, which is determined based on competitor prices for similar elements when sold separately, or the BESP. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company determines BESP for a product or service by considering multiple factors including, but not limited to, pricing practices, geographies, customer classes and distribution channels.

The adoption of ASU 2009-13 did not significantly impact the Company’s financial statements.


 
7

 

Multiple contracts with a single customer or amendments to existing contracts with the same customer are evaluated as to whether they should be recognized as separate accounting arrangements from other contracts with the customer, based on an evaluation of several factors including, but not limited to the timing of when contracts were negotiated and executed, whether the software is interdependent in terms of design, technology or function and whether payment terms coincide. If contracts are considered linked for accounting purposes and accounted for as one arrangement, fees are recognized over the longest service periods. If contracts are considered separable, fees in each arrangement are recognized over their respective service period.

The Company records reimbursable out-of-pocket expenses in both revenue and as a direct cost of revenue, as applicable. Out-of-pocket expenses were immaterial for the six months ended July 31, 2011, the period from May 26, 2010 through July 31, 2010 and for the period from February 1, 2010 through May 25, 2010.

The Company records revenue net of applicable sales tax collected. Taxes collected from customers are recorded as part of accrued expenses on the balance sheet and are remitted to state and local taxing jurisdictions based on the filing requirements of each jurisdiction.

The Company records as deferred revenue amounts that have been billed in advance for products or services to be provided. Deferred revenue includes the unamortized portion of revenue associated with license fees for which the Company has received payment or for which amounts have been billed and are due for payment in 90 days or less for resellers and 180 days or less for direct customers.

The Company’s contracts often include an uptime guarantee for solutions hosted on the Company's servers whereby customers may be entitled to credits in the event of non-performance. The Company also retains the right to remedy any nonperformance event prior to issuance of any credit. Furthermore, the Company’s contracts contain standard warranty and indemnification coverage to its customers. Historically, the Company has not incurred substantial costs relating to this guarantee and the Company currently accrues for such costs as they are incurred. The Company reviews these costs on a regular basis as actual experience and other information becomes available; and, should these costs become substantial, the Company would accrue an estimated exposure and consider the potential related effects of the timing of recording revenue on its license arrangements. The Company has not accrued any costs related to these warranties in the accompanying consolidated financial statements.

5. SHAREHOLDERS’ EQUITY

   (a)    Share-based Compensation

Predecessor

The Company had two share-based compensation plans under which employees, officers, directors and consultants may have been granted options to purchase the Company's ordinary shares, generally at the market price on the date of grant. The options became exercisable over various periods, typically four years (and typically one or three years in the case of directors), and had a maximum term of ten years.

No options were granted during the period from February 1, 2010 through May 25, 2010.

Excess tax benefits from the exercise of share options, classified as a cash flow from financing activities, were $0.3 million for the period from February 1, 2011 through May 25, 2010.

Share-based compensation included in cost of revenue and operating expenses for the Predecessor periods was as follows (in thousands):

   
May 1, to
 May 25, 2010
   
February 1, to May 25, 2010
 
Cost of revenue
 
 $
188
   
$
201
 
Research and development
   
4,660
     
4,861
 
Selling and marketing
   
7,737
     
8,260
 
General and administrative
   
11,132
     
11,837
 


 
8

 

Successor
 
On November 16, 2010, the Manager of SSILuxco II S.A. (“Luxco II”), a Luxembourg entity which is an indirect parent of the Company, adopted the SSILuxco II S.A. 2010 Equity Incentive Plan (the “2010 Plan”) to advance the interests of Luxco II and its subsidiaries by providing Luxco II with the right to grant equity-based awards to eligible participants (i.e., key employees and directors of, and consultants and advisors to, Luxco II and/or its subsidiaries). Awards under the 2010 Plan are intended to align the incentives of (i) the executives of Luxco II and its subsidiaries and (ii) its direct and indirect shareholders.

Stock options granted to date are subject to service, performance- and market-based vesting conditions, based on the return received (or deemed received) by the equity sponsors on their initial equity investment in Luxco II and upon the occurrence of certain events, including, a change in control of Luxco II. Shares of Luxco II acquired upon the exercise of such stock options are subject to both transfer restrictions and repurchase rights following a termination of employment. The stock options expire on the tenth anniversary of the date of grant.

Any share-based compensation recognized in relation to options granted under the 2010 Plan will be recorded in the statement of operations for the subsidiaries for which those persons who received grants are employed.

No tax benefit was realized during the three and six month periods ended July 31, 2011, as no stock options were exercised.

No options were granted under the 2010 Plan for the three months ended July 31, 2011. During the six months ended July 31, 2011, 32,432 options were granted under the 2010 Plan. Each option entitled the holder to acquire an ordinary share at an aggregate strike price of $100.

Service-Based Vesting Options

Grants of options which become exercisable on service consist of options to purchase 13,514 shares of Luxco II common stock that vest over a period of 5 years (20% of the options vest on each of the first, second, third, fourth and fifth anniversaries of May 26, 2010) provided the participant of the option plan is continuously employed by Luxco II or any of its subsidiaries, and vest immediately upon a change in control of Luxco II. The options expire 10 years from the date of grant.

Service-based vesting options were valued on the date of grant using the Black-Scholes option-pricing model. Key assumptions used in estimating the grant date fair value of these options were as follows:

   
Assumptions
Expected term (years)
   
6.11
 
Expected volatility
   
56.93
%
Risk-free interest rate
   
2.55
%
Dividend yield
   
0
%
Fair value of underlying shares
 
$
100.00
 

The expected term of the options with service conditions was based upon the “simplified” methodology as allowed by the guidance. The expected term is determined by computing the mathematical mean of the average vesting period and the contractual life of the options. Luxco II reviews the historical and implied volatility of publicly-traded companies within its industry and utilizes the implied volatility to calculate the fair value of the options. The risk-free interest rate is based on the yield for a U.S. Treasury security having a maturity similar to the expected life of the related grant. The dividend yield is based on judgment and input from Luxco II’s board of directors.

The fair value of Luxco II’s shares determined for the valuation of share-based payment awards for the period from February 1, 2011 through July 31, 2011 was based on the purchase price paid for the Company in the Acquisition. Luxco II’s board of directors felt this most accurately represented fair market value due to the transaction occurring within a year preceding the grant dates of these awards.

 
9

 

This assertion was supported by a recent valuation to estimate the fair value of Luxco II’s shares in connection with the issuance of share-based payment awards. The assumptions required by these valuation analyses involve the use of significant judgments and estimates on the part of management.

The valuation analysis of the ordinary shares of Luxco II utilizes a combination of the discounted cash flow method and the guideline company method. For the discounted cash flow method, detailed annual projections of future cash flows were prepared over a period of six fiscal years, or the “Projected Financials.” The total value of the cash flow beyond the final fiscal year is estimated by applying a multiple to the final projected fiscal year EBITDA, or the “Terminal Year.” The cash flows from the Projected Financials and the Terminal Year are discounted at an estimated weighted-average cost of capital. The estimated weighted-average cost of capital is derived, in part, from the median capital structure of comparable companies within similar industries. Luxco II believes that its procedures for estimating discounted future cash flows, including the Terminal Year valuation, are reasonable and consistent with accepted valuation practices. For the guideline company method, an analysis was performed to identify a group of publicly-traded companies that are comparable to Luxco II and the Company or are believed to operate in industries similar to Luxco II and the Company. Luxco II calculated an implied EBITDA multiple (enterprise value/EBITDA) and an implied revenue multiple (enterprise value/revenue) and applied a weighted-average of the two for each of the guideline companies and selected the appropriate multiple to apply to the EBITDA and revenue depending on the facts and circumstances. In addition, Luxco II applied a marketability discount to the implied value of equity. Luxco II believes that the overall approach is consistent with the principles and guidance set forth in the 2004 AICPA Practice Aid on Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

The weighted-average grant date fair value of the options with service conditions granted in the period from February 1, 2011 through July 31, 2011 was $55.55 per share.

For the three and  six months ended July 31, 2011, no stock-based compensation expense has been recognized on the accompanying consolidated statement of operations due to repurchase rights held by Luxco II for any shares of Luxco II acquired from the exercise of options from the 2010 Plan. These repurchase rights are exercisable in the event of termination of the option holder’s employment. The repurchase rights lapse on a change in control or public offering, at which point compensation expense associated with these awards will be recognized.

There is $14.7 million of unrecognized compensation expense associated with service based options.

Options with Performance and Market Conditions

Luxco II also granted options to purchase 18,918 shares of Luxco II that vest based on the completion of a liquidity event that results in specified returns on the equity sponsors’ investment in Luxco II.

Such liquidity events would include, but not be limited to, an initial public offering of Luxco II, or a change-in-control transaction under which the investor group disposes of or sells more than 50 percent of the total voting power or economic interest in Luxco II to one or more third independent parties. These options expire ten years from the date of grant.

The fair value of the options with market and performance conditions was estimated on the grant date using the Monte Carlo Simulation Approach. Key assumptions used in estimating the grant date fair value of these options were as follows:

   
Assumptions
Assumed time to liquidity event (years)
   
5
 
Expected volatilities
   
58.52
%
Risk-free interest rate
   
1.21
%
Dividend yield
   
0
%
Fair value of underlying shares
 
$
100.00
 

Luxco II reviews the historical and implied volatility of publicly-traded companies within its industry and utilizes the implied volatility to calculate the fair value of the options. The risk-free interest rate is based on the yield for a U.S. Treasury security having a maturity similar to the expected life of the related grant. The forfeiture rate is based on historical forfeiture data. The assumed time to liquidity event and dividend yield is based on judgment and input from the board of directors of Luxco II.

 
10

 
 
The fair value of Luxco II’s shares determined for the valuation of share-based payment awards for the period from February 1, 2011 through July 31, 2011 was determined using the same assumptions as the service-based vesting options.

The weighted-average grant date fair value of options with performance and market conditions granted in the six months ended July 31, 2011 was $34.11 per share. There is $13.9 million of unrecognized expense associated with market- and performance-based options. Management has concluded that satisfaction of the performance conditions is not probable, and as such, no compensation expense has been recorded for these options for the three and six months ending July 31, 2011. In accordance with Topic 718, if a liquidity event occurs, Luxco II will be required to recognize compensation expense upon consummation of the liquidity event, regardless of whether or not the equity sponsor achieves the specified returns.

    (b)   Share Capital following the Acquisition

As of July 31, 2011, the Company's authorized share capital consisted of 1,000,000,000 ordinary shares of par value $1.00 each. As of July 31, 2011 and January 31, 2011, 534,513,270 ordinary shares were issued and outstanding.

Subject to the Articles of Association of the Company, at a general meeting of the Company, on a show of hands every holder of ordinary shares who (being an individual) is present in person or by proxy or (being a body corporate) is present by proxy or by a representative shall have one vote, and on a poll every holder of ordinary shares who is present in person or by a proxy or (being a body corporate) is present by proxy or by a representative shall have one vote for every ordinary share of which he is the holder. However, if and for so long as the Company is a single member company, all matters requiring a resolution of the Company in general meeting (except the removal of the auditors of the Company from office) may be validly dealt with by a decision of the sole member.

Subject to the Articles of Association of the Company, sums legally available to be distributed by the Company in or in respect of any financial period may (to the extent so resolved or recommended by the board of directors of the Company) be distributed amongst the holders of ordinary shares in proportion to the number of ordinary shares held by them.

6. ACQUISITIONS

 
(a)
SkillSoft PLC

On March 31, 2010, SkillSoft and SSI III, a wholly owned subsidiary of SSII, announced an agreement on the terms of the proposed revised recommended acquisition of SkillSoft by SSI III for cash at the price of $11.25 per SkillSoft share (the “Acquisition”) to be implemented by means of a scheme of arrangement under Irish law (the “Scheme”). SkillSoft and SSI III had previously announced on February 12, 2010 that they had reached agreement on the terms of a recommended acquisition of SkillSoft by SSI III for cash at a price of $10.80 per SkillSoft share. The price was increased to $11.25 in the March 31, 2010 agreement.

The Acquisition valued the entire issued and to be issued share capital of SkillSoft at approximately $1.1 billion. Shareholder approval was obtained on May 3, 2010. At the time of the Acquisition, pursuant to the Scheme, the shares of SkillSoft were cancelled in accordance with Irish law or transferred to SSI III. SkillSoft then issued new SkillSoft shares to SSI III in place of those shares cancelled pursuant to the Scheme, and SSI III paid consideration to former SkillSoft shareholders and option holders in consideration for the Acquisition. As a result of the Scheme, SkillSoft became a wholly-owned subsidiary of SSI III. The Acquisition closed on May 26, 2010.

On June 23, 2010, SkillSoft PLC re-registered under the Companies Acts 1963 to 2009 as a private limited company and its corporate name changed from SkillSoft PLC to SkillSoft Limited.

The acquisition of SkillSoft was preliminarily accounted for as a business combination under FASB (ASC Topic) 805, Business Combinations, using the purchase method. Accordingly, the results of SkillSoft have been included in the Company's consolidated financial statements since the date of acquisition.


 
11

 

The cash purchase price of $1.1 billion was allocated based upon the fair value of the assets acquired and liabilities assumed at the date of acquisition using available information and certain assumptions management believed reasonable. The following table summarizes the allocation of the initial purchase price (in thousands):

Description
 
Amount
 
Current assets                                                                                                            
 
$
125,089
 
Property and equipment
   
5,842
 
Goodwill
   
561,055
 
Other intangible assets
   
656,558
 
Current liabilities
   
(141,960
)
Deferred revenue
   
(77,400
)
Total
 
 $
1,129,184
 

The Acquisition resulted in allocations of the purchase price to goodwill and identified intangible assets of $561.1 million and $656.6 million, respectively. Intangible assets and their estimated useful lives consist of the following (in thousands):

Description
 
Amount
 
Life
Trademark/tradename - SkillSoft
 
$
129,900
 
indefinite
Trademark/tradename – Books 24X7
   
14,700
 
10 years
Developed software and courseware
   
247,958
 
2 to 5 years
Customer relationships
   
218,900
 
10 years
Backlog
   
45,100
 
6 years
   
656,558
   

Values and useful lives assigned to intangible assets were based on estimated value and use of these assets of a market participant. The trademark/tradename and customer relationships were valued using the income approach and the developed software and courseware was valued using the cost approach.

Goodwill represents the excess of the purchase price over the net identifiable tangible and intangible assets acquired. The Company determined that the Acquisition resulted in the recognition of goodwill primarily because the Acquisition is expected to help SkillSoft to reach critical mass and shorten its timeframe to approach its long term operating profitability objectives through incremental scalability and significant cost synergies. Goodwill is not deductible for tax purposes.

The acquired intangible assets and goodwill are subject to review for impairment if indicators of impairment develop and otherwise at least annually.

The Company assumed certain liabilities in the Acquisition including deferred revenue that was ascribed a fair value of $77.4 million using a cost-plus profit approach. The Company is amortizing deferred revenue over the average remaining term of the contracts, which reflects the estimated period to satisfy these customer obligations. In allocating the preliminary purchase price, the Company recorded an adjustment to reduce the carrying value of SkillSoft's deferred revenue by $78.1 million. Approximately $2.4 million of acquired SkillSoft deferred revenue remained unamortized at July 31, 2011.


 
12

 

SUPPLEMETAL PRO-FORMA INFORMATION

The Company concluded that the Acquisition represents a material business combination. The following unaudited pro forma information presents the consolidated results of operations of the Company and SkillSoft as if the Acquisition had occurred as of the beginning of the annual period for each interim period presented with pro forma adjustments to give effect to amortization of intangible assets, an increase in interest expense on acquisition financing, and certain other adjustments:

 
THREE MONTHS ENDED
   
SIX MONTHS ENDED
 
 
JULY 31, 2010
   
JULY 31, 2010
 
Revenue
$
50,162
     
94,832
 
Cost of revenue
 
7,166
     
14,236
 
Cost of revenue – amortization of intangible assets
 
15,986
     
31,972
 
Gross profit
 
27,010
     
48,624
 
Operating expenses:
             
Research and development
 
10,180
     
19,648
 
Selling and marketing
 
21,761
     
42,069
 
General and administrative
 
7,919
     
15,955
 
Amortization of intangible assets
 
12,056
     
24,111
 
Acquisition related expenses
 
30,339
     
35,661
 
Total operating expenses
 
82,255
     
137,444
 
Operating loss
 
(55,245
)
   
(88,820
)
Other (expense), net
 
(761
)
   
(650
)
Interest income
 
29
     
111
 
Interest expense
 
(15,210
)
   
(30,176
)
Loss before benefit from income taxes
 
(71,187
)
   
(119,535
)
Benefit from income taxes
 
(231
)
   
(2,750
)
Net loss
$
(70,956
)
   
(116,785
)

The unaudited pro forma results are not necessarily indicative of the results that the Company would have attained had the Acquisition occurred as of February 1, 2010.

(b) 50 Lessons Limited

On February 15, 2011, the Company acquired certain assets of 50 Lessons Limited (“50 Lessons”), a provider of leadership video content that helps organizations around the world develop their employees by leveraging the power of story-based lessons, for approximately $3.8 million in cash plus liabilities assumed of $0.2 million.

The acquisition of 50 Lessons was preliminarily accounted for as a business combination under FASB (ASC Topic) 805, Business Combinations, using the purchase method. Accordingly, the results of 50 Lessons have been included in the Company's consolidated financial statements since the date of acquisition and were immaterial to the Company's condensed consolidated financial statements.

The acquisition resulted in a preliminary allocation of the purchase price to goodwill and identified tangible and intangible assets. Intangible assets consist of internally developed software, comprised of learning content, customer contracts and relationships and the 50 Lessons tradename. Values and useful lives assigned to intangible assets will be based on estimated value and use of these assets of a market participant. The Company has concluded that the acquisition of 50 Lessons does not represent a material business combination and therefore no pro forma financial information has been provided herein.

Goodwill represents the excess of the purchase price over the net identifiable tangible and intangible assets acquired. The Company determined that the acquisition of 50 Lessons resulted in the recognition of goodwill primarily because the acquisition allowed the Company to quickly acquire and integrate a library of video courses that complimented the Company’s current product offerings. Goodwill is expected to be deductible for tax purposes.


 
13

 

7. GOODWILL AND INTANGIBLE ASSETS

Intangible assets are as follows (in thousands):

   
July 31, 2011
   
January 31, 2011
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying Amount
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net
Carrying Amount
 
Internally developed software/ courseware
 
$
249,038
   
$
76,009
   
$
173,029
   
$
247,958
   
$
43,828
   
$
204,130
 
Customer contracts/ relationships
   
229,636
     
39,693
     
189,943
     
225,688
     
21,993
     
203,695
 
Trademarks and trade names
   
14,780
     
2,473
     
12,307
     
14,700
     
1,465
     
13,235
 
Backlog
   
45,100
     
18,862
     
26,238
     
45,100
     
5,898
     
39,202
 
SkillSoft trademark
   
129,900
     
-
     
129,900
     
129,900
     
-
     
129,900
 
   
$
668,454
   
$
137,037
   
$
531,417
   
$
663,346
   
$
73,184
   
$
590,162
 

Amortization expense related to the existing finite-lived intangible assets is expected to be as follows (in thousands):

Fiscal Year
 
Amortization
Expense
2012 (remaining six months)
 
$
63,487
 
2013
   
102,744
 
2014
   
84,741
 
2015
   
59,978
 
2016
   
30,011
 
2017
   
19,170
 
2018
   
15,641
 
2019
   
12,783
 
2020
   
10,418
 
2021
   
2,544
 
Total
 
$
401,517
 

In connection with the Acquisition, the Company concluded that its “SkillSoft” brand name is an indefinite lived intangible asset, as the brand has been in continuous use since 1999 and the Company has no plans to discontinue using the SkillSoft name.

The change in goodwill at July 31, 2011 from the amount recorded at January 31, 2011 is as follows:

Gross carrying amount of goodwill, January 31, 2011
 
 $
564,516
 
Acquisition of 50 Lessons
   
2,107
 
Foreign currency translation adjustment
   
4,328
 
Gross carrying amount of goodwill, July 31, 2011
 
 $
570,951
 

The Company will be conducting its annual impairment test of goodwill for fiscal 2012 on the first day of the fourth quarter. There were no indicators of impairment in the second quarter of fiscal 2012.


 
14

 

8. COMPREHENSIVE INCOME

Comprehensive income was as follows (in thousands):

   
Successor
   
Predecessor
   
Successor
   
Predecessor
 
   
Three Months Ended July 31, 2011
   
For the Period from May 26, to
July 31, 2010
   
For the Period from May 1, to
 May 25, 2010
   
Six Months Ended July 31, 2011
   
For the Period from May 26, to
July 31, 2010
   
For the Period from February 1, to
May 25, 2010
 
Comprehensive
                                               
Net loss
 
$
(21,026
)
 
$
(52,970
)
 
$
(21,217
)
 
$
(43,457
)
 
$
(52,970
)
 
$
(8,614
)
Other comprehensive (loss) income — Foreign currency adjustment, net of tax
   
(694
)
   
8,039
     
220
     
7,484
     
8,039
     
210
 
Unrealized gains on available-for-sale securities
   
5
     
-
     
-
     
5
     
-
     
-
 
Comprehensive loss
 
$
(21,715
)
 
$
(44,931
)
 
$
(20,997
)
 
$
(35,968
)
 
$
(44,931
)
 
$
(8,404
)

9. INCOME TAXES

The Company operates as a holding company with operating subsidiaries in several countries, and each subsidiary is taxed based on the laws of the jurisdiction in which it operates.

The Company has significant net operating loss (NOL) carryforwards, some of which are subject to potential limitations based upon the change in control provisions of Section 382 of the United States Internal Revenue Code.

Predecessor Period

For the period from February 1 to May 25, 2010, the Company's effective tax rate was 18%. During this period, the Company recorded an income tax benefit of $1.9 million, consisting of a cash tax provision of $0.9 million and a non-cash tax benefit of $2.8 million. Included in the non-cash tax benefit of $2.8 million is a $0.5 million provision due to an adjustment to the Company's net operating loss carryforward related to a deferred tax asset and a $0.2 million provision related to uncertain tax return positions.

The Company's unrecognized tax benefits, including interest and penalties, totaled $6.3 million at May 25, 2010, all of which, if recognized, would affect the Company's effective tax rate. The Company recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expense. As of May 25, 2010, the Company had approximately $0.7 million of accrued interest related to uncertain tax positions.

Successor Period

For the three and six months ended July 31, 2011, the Company recorded an income tax benefit of $4.1 million and $8.9 million, respectively. The Company's effective tax rate for the three and six months ended July 31, 2011 was 16.3% and 17.0%, respectively. The tax benefit consists of a cash tax provision of $0.6 million and a non-cash tax benefit of $4.7 million for the three months ended July 31, 2011. For the six months ended July 31, 2011, the tax benefit consists of a cash tax provision of $2.0 million and a non-cash tax benefit of $10.9 million.

The Company's gross unrecognized tax benefits, including interest and penalties, totaled $8.0 million at July 31, 2011, all of which, if recognized, would result in a reduction of the Company's effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. As of July 31, 2011, the Company had approximately $0.8 million of accrued interest and penalties related to uncertain tax positions.


 
15

 

In the normal course of business, the Company and its subsidiaries are subject to examination by taxing authorities in such major jurisdictions as Ireland, the United States, the United Kingdom, Germany, Australia and Canada. With few exceptions, the Company is no longer subject to any national level income tax examinations for years before fiscal 2008.

10. COMMITMENTS AND CONTINGENCIES

From time to time, the Company is a party to or may be threatened with other litigation in the ordinary course of its business. The Company regularly analyzes current information, including, as applicable, the Company's defense and insurance coverage and, as necessary, provides accruals for probable and estimable liabilities for the eventual disposition of these matters. The Company is not a party to any material legal proceedings.

The Company's software license arrangements and hosting services are typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and substantially in accordance with the Company's product documentation under normal use and circumstances. The Company's arrangements also include certain provisions for indemnifying customers against liabilities if its products or services infringe a third party's intellectual property rights.

The Company has entered into service level agreements with some of its hosted application customers warranting certain levels of uptime reliability and permitting those customers to receive credits against monthly hosting fees or terminate their agreements in the event that the Company fails to meet those levels for an agreed upon period of time.

To date, the Company has not incurred any material costs as a result of such indemnifications or commitments and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.

11. GEOGRAPHICAL DISTRIBUTION OF REVENUE

The Company attributes revenue to different geographical areas on the basis of the location of the customer. Revenues by geographical area were as follows (in thousands):

   
Successor
   
Predecessor
   
Successor
   
Predecessor
 
   
Three Months Ended July 31, 2011
   
For the Period from May 26, to
July 31, 2010
   
For the Period from May 1, to
 May 25, 2010
   
Six Months Ended July 31, 2011
   
For the Period from May 26, to
July 31, 2010
   
For the Period from February 1, to
May 25, 2010
 
Revenue:
                                               
United States
 
$
59,505
   
$
42,209
   
$
15,493
   
$
118,403
   
$
42,209
   
$
72,583
 
United Kingdom
   
7,940
     
6,015
     
2,204
     
15, 837
     
6,015
     
10,802
 
Canada
   
4,092
     
2,710
     
975
     
8,322
     
2,710
     
4,789
 
Europe, excluding United Kingdom
   
4,368
     
1,694
     
609
     
8,562
     
1,694
     
2,754
 
Australia/New Zealand
   
4,557
     
2,506
     
911
     
9,017
     
2,506
     
4,268
 
Other
   
2,026
     
1,884
     
428
     
4,058
     
1,884
     
2,342
 
Purchase accounting adjustments
   
(2,247
)
   
(22,962
)
   
-
     
(7,563
)
   
(22,962
)
   
-
 
Total revenue
 
$
80,241
   
$
34,056
   
$
20,620
   
$
156,636
   
$
34,056
   
$
97,538
 

Long-lived tangible assets at international locations are not significant.


 
16

 

12. ACCRUED EXPENSES

Accrued expenses in the accompanying consolidated balance sheets consisted of the following (in thousands):

   
July 31,
2011
   
January 31,
2011
 
Professional fees
 
$
3,444
   
$
4,088
 
Sales tax payable/VAT payable
   
2,344
     
6,587
 
Accrued royalties
   
1,949
     
1,447
 
Accrued tax
   
1,494
     
578
 
Interest payable
   
7,590
     
7,616
 
Other accrued liabilities
   
7,989
     
11,197
 
Total accrued expenses
 
24,810
   
$
31,513
 

13. OTHER ASSETS

Other assets in the accompanying consolidated balance sheets consist of the following (in thousands):

   
July 31,
2011
   
January 31,
2011
 
Debt financing cost – long term (See Note 15)
 
$
20,954
   
$
23,048
 
Other
   
667
     
709
 
Total other assets
 
21,621
   
$
23,757
 

14. OTHER LONG TERM LIABILITIES

Other long term liabilities in the accompanying consolidated balance sheets consist of the following (in thousands):

   
July 31,
2011
   
January 31,
2011
 
Uncertain tax positions; including interest and penalties – long term
   
3,841
     
3,230
 
Other
   
237
     
214
 
Total other long-term liabilities
 
4,078
   
$
3,444
 

15. CREDIT FACILITIES AND DEBT

Predecessor

The Company had a credit agreement, with Credit Suisse and certain lenders that provided a $225 million senior secured credit facility (the “Previous Credit Facilities”) comprised of a $200 million term loan facility and a $25 million revolving credit facility. The term loan was used to finance the acquisition of NETg.

The term loan bore interest at a rate per annum equal to, at the Company’s election, (i) a base rate plus a margin of 2.50% or (ii) adjusted LIBOR plus a margin of 3.50%. The Company was required to maintain certain financial covenants under the credit facility. The Company had been in compliance with these covenants since the inception of the term loan.

In connection with the Previous Credit Facilities, the Company incurred debt financing costs of $6.2 million which were capitalized and amortized as additional interest expense over the term of the loans using the effective-interest method. During the period from May 1, 2010 through May 25, 2010, the Company paid approximately $0.2 million in interest and recorded $1.3 million of amortized interest expense related to the capitalized debt financing costs. During the period from February 1, 2010 through May 25, 2010, the Company paid approximately $0.8 million in interest and recorded $3.1 million of amortized interest expense related to the capitalized debt financing costs.

 
17

 

The Company paid $84.4 million against the term loan amount during the period from February 1, 2010 through May 25, 2010. In conjunction with the Acquisition, the Company fully repaid and terminated the Previous Credit Facilities.

Successor

SENIOR CREDIT FACILITIES

On May 26, 2010, in connection with the closing of the Acquisition, the Company entered into a senior credit facility (the “Senior Credit Facilities”) with certain lenders providing for a $365 million senior secured credit facility comprised of a $325 million term loan facility and a $40 million revolving credit facility. The revolving credit facility includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as swingline loans. The revolving credit facility is available for general corporate purposes, including capital expenditures, subject to certain conditions. As of July 31, 2011, there were no amounts outstanding under the revolving credit facility.

Availability of the revolving credit facility is subject to the absence of any default under the Senior Credit Facilities, compliance with the financial covenant in certain circumstances and the accuracy in all material respect of certain representations and warranties. The revolving credit facility, including the letter of credit and swingline subfacilities, terminates on May 26, 2015, at which time all outstanding borrowings under the revolving credit facility are due. The applicable margin percentage for the revolving credit facility is 3.50% per annum for base rate loans and 4.50% per annum for LIBOR rate loans.

The term loans under the Senior Credit Facilities bear interest at a rate per annum equal to, at the Company's election, (i) a base rate plus a margin of 3.75%, provided that the base rate is not lower than 2.75% or (ii) adjusted LIBOR, provided that adjusted LIBOR is not lower than 1.75% plus a margin of 4.75%. As of July 31, 2011, the applicable base rate was 3.25% and adjusted LIBOR was 1.75%. On June 30, 2011, the Company elected its interest calculation to be based on adjusted LIBOR.

The Company’s Senior Credit Facilities require it to prepay outstanding term loans, subject to certain exceptions, with:

 
·
a percentage initially expected to be 50% (subject to reduction to 25% and 0% based upon the Company’s leverage ratio) of the Company’s excess cash flow as determined at the end of each fiscal year;
 
 
·
100% of the net cash proceeds of certain asset sales and casualty and condemnation events, subject to reinvestment rights and certain other exceptions; and
 
 
·
100% of the net cash proceeds of any incurrence of certain debt, other than debt permitted under the Company’s Senior Credit Facilities.
 
The foregoing mandatory prepayments are applied to installments of the term loan facility in direct order of maturity.

The Company may voluntarily repay outstanding loans under its Senior Credit Facilities at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans and, with respect to outstanding term loans, a premium during the first three years following the closing date for voluntary prepayments, repricings or effective repricings of such term loans. The premium for voluntary prepayments, repricings or effective repricings of term loans is 2% in the second year and 1% in the third year, with a customary make-whole premium for prepayments during the first year of the term loan facility. Voluntary prepayments may be applied as directed by the borrower.

The Company’s Senior Credit Facilities require scheduled quarterly payments on the term loan facility equal to 0.25% of the initial aggregate principal amount of the term loans made on the closing date, with the balance due at maturity. The Company’s scheduled quarterly payments are subject to change based on excess cash flow provisions as defined in the Senior Credit Facilities.


 
18

 

The Senior Credit Facilities are guaranteed by, subject to certain exceptions (including an exception for foreign subsidiaries of U.S. subsidiaries), each of the Company’s existing and future material wholly owned subsidiaries and its immediate parent. All obligations under the Company’s Senior Credit Facilities, and the guarantees of those obligations, will be secured by substantially all of the Company’s, its subsidiary guarantors' and its parent's existing and future property and assets and by a pledge of the Company’s capital stock and the capital stock of, subject to certain exceptions, each of its material wholly owned restricted subsidiaries (or up to 65% of the capital stock of material first-tier foreign wholly owned restricted subsidiaries of its U.S. subsidiaries).

In addition, the Company’s Senior Credit Facilities require it to comply on a quarterly basis with a single financial covenant for the benefit of the revolving credit facility only. Such covenant will require the Company to maintain a maximum secured leverage ratio tested on the last day of each fiscal quarter (but failure to maintain the required ratio would not result in a default under the revolving credit facility so long as the revolving credit facility is undrawn at such time). The maximum secured leverage ratio will reduce over time, subject to increase in connection with certain material acquisitions. At July 31, 2011, the Company was in compliance with this financial covenant.

In addition, the Company’s Senior Credit Facilities include negative covenants that, subject to significant exceptions, limit the Company’s ability and the ability of its restricted subsidiaries to, among other things, incur additional indebtedness; create liens on assets; engage in mergers or consolidations; sell assets (including pursuant to sale and leaseback transactions); pay dividends and distributions or repurchase its capital stock; make investments, loans or advances; repay certain indebtedness (including the Senior Notes); engage in certain transactions with affiliates; amend material agreements governing certain indebtedness (including the Senior Notes); and change its lines of business.

The Company’s Senior Credit Facilities include certain customary representations and warranties, affirmative covenants and events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain events under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), material judgments, the invalidity of material provisions of the Senior Credit Facilities documentation, actual or asserted failure of the guarantees or security documents for the Company’s Senior Credit Facilities, and a change of control. If an event of default occurs, the lenders under the Company’s Senior Credit Facilities will be entitled to take various actions, including the acceleration of all amounts due under the Company’s Senior Credit Facilities and all actions permitted to be taken by a secured creditor. At July 31, 2011, the Company was in compliance with these covenants.

In connection with the Senior Credit Facilities, the Company incurred debt financing costs of $18.6 million. The Company capitalized these fees and amortizes them to interest expense over the term of the loans. During the three and six months ended July 31, 2011, the Company paid approximately $5.3 million and $10.5 million in interest, respectively. During the three and six months ended July 31, 2011, the Company recorded $0.7 million and $1.4 million of amortized interest expense related to the capitalized debt financing costs. During the period from May 26, 2010 through July 31, 2010, the Company paid approximately $1.9 million in interest and recorded $0.5 million of amortized interest expense related to the capitalized debt financing costs.

Future scheduled minimum payments including estimated mandatory prepayments under the Senior Credit Facilities are as follows (in thousands):

Fiscal 2012
 
$
8,217
 
Fiscal 2013
   
3,250
 
Fiscal 2014
   
3,250
 
Fiscal 2015
   
3,250
 
Fiscal 2016
   
3,250
 
Fiscal 2017
   
3,250
 
Fiscal 2018
   
294,304
 
Total
 
$
318,771
 


 
19

 

SENIOR NOTES

On May 26, 2010, in connection with the closing of the Acquisition, senior notes (the “Senior Notes”) were issued under an indenture among the Company, as issuer, SSI Co-Issuer LLC, a wholly owned subsidiary of the Company; as co-issuer, Wilmington Trust FSB, as trustee, and the Guarantors in an aggregate principal amount of $310.0 million. The Senior Notes mature on June 1, 2018. Interest is payable semiannually (at 11.125% per annum) in cash to holders of Senior Notes of record at the close of business on the May 15 or November 15 immediately preceding the interest payment date, on June 1 and December 1 of each year, commencing December 1, 2010. Interest is paid on the basis of a 360-day year consisting of twelve 30-day months.

The Senior Notes are unsecured senior obligations of the Company and SSI Co-Issuer LLC and are guaranteed on a senior unsecured basis by SSI III Limited and the restricted subsidiaries of SkillSoft (other than immaterial subsidiaries and certain other excluded subsidiaries) that guarantee the Company’s Senior Credit Facilities.

The Company may redeem the Senior Notes, in whole or in part, at any time on or after on June 1, 2014, at a redemption price equal to 100% of the principal amount of the Senior Notes plus a premium declining ratably to par plus accrued and unpaid interest (if any). The Company may also redeem any of the Senior Notes at any time prior to June 1, 2014 at a redemption price of 100% of their principal amount plus a make-whole premium and accrued and unpaid interest (if any).

In addition, at any time prior to June 1, 2013, the Company may redeem up to 35% of the aggregate principal amount of the Senior Notes with the net cash proceeds of certain equity offerings at a redemption price of 111.125% of their principal amount plus accrued interest and unpaid interest (if any). This option is required to be bifurcated for accounting purposes as an embedded derivative in the Senior Notes. The Company has estimated the value of this option to be nominal as of May 26, 2010 and July 31, 2011. This call feature is marked to market over the period it is active.

If the Company experiences certain kinds of changes of control, it must offer to purchase the Senior Notes at 101% of their principal amount plus accrued and unpaid interest (if any). If the Company sells certain assets and does not reinvest the net proceeds as specified in the indenture governing the Senior Notes, it must offer to repurchase the Senior Notes at 100% of their principal amount plus accrued and unpaid interest (if any).

The indenture governing the Senior Notes contains covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability to: incur additional debt; pay dividends or distributions on its capital stock or repurchase its capital stock; issue preferred stock of subsidiaries; make certain investments; create liens on its assets to secure debt; enter into transactions with affiliates; merge or consolidate with another company; and sell or otherwise transfer assets. Subject to certain exceptions, the indenture governing the Senior Notes permits the Company and its subsidiaries to incur additional indebtedness, including secured indebtedness. At July 31, 2011, the Company was in compliance with these covenants.

In connection with issuance of the Senior Notes, the Company incurred debt financing costs of $11.5 million. The Company capitalized these fees and amortizes them to interest expense over the term of the notes. During the three and six months ended July 31, 2011, the Company recorded $0.4 million and $0.8 million of amortized interest expense related to the capitalized debt financing costs and original issue discount, respectively. During the period from May 26, 2010 through July 31, 2010, the Company recorded $0.2 million of amortized interest expense related to the capitalized debt financing costs.

On October 8, 2010, the Company filed a Registration Statement on Form S-4 (which became effective on November 22, 2010) for an exchange offer relating to its Senior Notes. The Company completed its exchange offer on December 29, 2010.


 
20

 

16. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force to amend certain guidance in FASB Accounting Standards Codification (ASC) Topic 605-25, Revenue Recognition, 25 Multiple-Element Arrangements. The amended guidance in ASC 605-25 (1) modifies the separation criteria by eliminating the criterion that requires objective and reliable evidence of fair value for the undelivered item(s), and (2) eliminates the use of the residual method of allocation and instead requires that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price. Adoption of this statement on February 1, 2011 did not have a material impact on the Company’s consolidated financial statements. See Note 4 for further discussion.

In October 2009, the FASB also issued ASU 2009-14, Certain Revenue Arrangements That Include Software Elements – a consensus of the FASB Emerging Issues Task Force, to amend the scope of arrangements under FASB ASC Topic 985-605, Software, 605, Revenue Recognition to exclude tangible products containing software components and non-software components that function together to deliver a product's essential functionality. Adoption of this statement on February 1, 2011 did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs . ASU  2011-04 clarifies the FASB's intent about the application of certain existing fair value measurement and disclosure requirements and changes certain principles or requirements for measuring or disclosing information about fair value. The Company is  required to adopt Update No. 2011-04 in the quarter ending April 30, 2012 and management does not believe its adoption will have a significant impact on the future results of operations or financial position.

In May 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 820): Presentation of Comprehensive Income .  ASU 2011-05 requires that net income, items of other comprehensive income and total comprehensive income be presented in one continuous statement or two separate consecutive statements. The amendments in this Update also require that reclassifications from other comprehensive income to net income be presented on the face of the financial statements. The Company is required to adopt Update No. 2011-05 for the quarter ending April 30, 2012.

17. FAIR VALUE MEASUREMENTS

FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) establishes a fair value hierarchy that prioritizes the inputs used to measure fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The three levels of the fair value hierarchy established by ASC 820 in order of priority are as follows:

 
·
Level 1:
Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
 
·
Level 2:
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
 
·
Level 3:
Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.


 
21

 

The Company had nominal assets that would be considered Type 1 and no assets or liabilities that would be considered Type 2 or 3 as of July 31, 2011. The Company currently invests excess cash balances primarily in cash deposits held at major banks. The carrying amounts of cash deposits, trade receivables, trade payables and accrued liabilities, as reported on the consolidated balance sheet as of July 31, 2011, approximate their fair value because of the short maturity of those instruments. The carrying value of borrowings outstanding on the Senior Credit Facilities bear interest at a variable rate and are considered to approximate fair value.

Financial Instruments Not Recorded at Fair Value

The carrying values and fair values of financial instruments not recorded at fair value in the consolidated balance sheets as of July 31, 2011 were as follows (in thousands):

   
July 31, 2011
 
   
Carrying Value
   
Fair Value
 
Senior Notes
 
$
310,000
   
$
344,488
 

The fair value of the Senior Notes is determined by the trading price on July 31, 2011.

18. GUARANTORS

On May 26, 2010, in connection with the Acquisition, the Company completed an offering of $310.0 million aggregate principal amount of 11.125% Senior Notes due 2018 as described in Note 15. The Senior Notes are unsecured senior obligations of the Company and SSI Co-Issuer LLC, a wholly owned subsidiary of the Company, and are guaranteed on a senior unsecured basis by SSI III and the restricted subsidiaries of SkillSoft (other than immaterial subsidiaries and certain other excluded subsidiaries) that guarantee the Company’s Senior Credit Facilities. Each of the Guarantors is 100 percent owned, directly or indirectly, by the Company. All other subsidiaries of the Company, either direct or indirect, do not guarantee the Senior Notes (“Non-Guarantors”). The Guarantors also unconditionally guarantee the Company’s Senior Credit Facilities, described in Note 15.

The following condensed consolidated financial statements are presented for the information of the holders of the Senior Notes and present the Condensed Consolidated and Combining Balance Sheets as of July 31, 2011 and the Condensed Consolidated and Combining Statements of Operations and Statements of Cash Flows for the period from May 26, 2010 to July 31, 2011 of the Company, which is the issuer of the Senior Notes, the Guarantors, the Non-Guarantors, the elimination entries necessary to consolidate and combine the issuer with the Guarantor and Non-Guarantor subsidiaries and the Company on a consolidated basis.

Certain reclassifications have been made to prior period amounts to conform with current period presentation.
 
Investments in subsidiaries are accounted for using the equity method for purposes of the consolidated presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. Separate financial statements and other disclosures with respect to the Guarantors have not been provided as management believes the following information is sufficient, as the Guarantors are 100 percent owned by the parent and all guarantees are full and unconditional.


 
22

 

CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, 2011
(UNAUDITED, IN THOUSANDS)

 
Issuer
 
Guarantor
   
Non-Guarantor
 
Elimination
   
Consolidated
 
                         
ASSETS
                         
Current assets:
                       
Cash and cash equivalents
$
151
 
$
57,698
   
$
8,042
 
$
-
   
$
65,891
 
Short term investments
 
-
   
9
     
-
   
-
     
9
 
Restricted cash
 
-
   
18
     
110
   
-
     
128
 
Accounts receivable, net
 
-
   
55,566
     
10,815
   
-
     
66,381
 
Intercompany receivables
 
-
   
344,908
     
-
   
(344,908
)
   
-
 
Deferred tax assets
 
-
   
1,996
     
1
   
-
     
1,997
 
Prepaid expenses and other current assets
 
1,517
   
21,734
     
2,663
   
152
     
26,066
 
Total current assets
 
1,668
   
481,929
     
21,631
   
(344,756
)
   
160,472
 
Property and equipment, net
 
-
   
5,314
     
6
   
-
     
5,320
 
Goodwill
 
-
   
542,944
     
28,007
   
-
     
570,951
 
Intangible assets, net
 
-
   
507,816
     
23,601
   
-
     
531,417
 
Investment in subsidiaries
 
1,044,981
   
1,210,918
     
402
   
(2,256,301
)
   
-
 
Investment in, and advances to, nonconsolidated affiliates
 
-
   
152
     
-
   
(152
)
   
-
 
Deferred tax assets
 
-
   
3,764
     
60
   
-
     
3,824
 
Other assets
 
8,364
   
13,236
     
21
   
-
     
21,621
 
Total assets
$
1,055,013
 
$
2,766,073
   
$
73,728
 
$
(2,601,209
)
 
$
1,293,605
 
                                   
LIABILITIES AND SHAREHOLDERS' EQUITY
                                   
Current liabilities:
                                 
                                   
Current maturities of long term debt
$
-
 
$
8,217
   
$
-
 
$
-
   
$
8,217
 
Accounts payable
 
-
   
4,633
     
46
   
-
     
4,679
 
Accrued compensation
 
-
   
8,450
     
944
   
-
     
9,394
 
Accrued expenses
 
5,824
   
16,998
     
1,988
   
-
     
24,810
 
Intercompany payable
 
348,836
   
797,093
     
29,682
   
(1,175,611
)
   
-
 
Other liabilities
 
-
   
-
     
400
   
(400
)
   
-
 
Deferred tax liabilities
 
-
   
7,069
     
2
   
-
     
7,071
 
Deferred revenue
 
-
   
137,610
     
21,859
   
-
     
159,469
 
Total current liabilities
 
354,660
   
980,070
     
54,921
   
(1,176,011
)
   
213,640
 
                                   
Long term debt
 
308,173
   
310,554
     
-
   
-
     
618,727
 
Deferred tax liabilities
 
-
   
60,057
     
4,923
   
-
     
64,980
 
Other long term liabilities
 
-
   
2,769
     
1,309
   
-
     
4,078
 
Total long term liabilities
 
308,173
   
373,380
     
6,232
   
-
     
687,785
 
Total shareholders' equity
 
392,180
   
1,412,623
     
12,575
   
(1,425,198
)
   
392,180
 
Total liabilities and shareholders' equity
$
1,055,013
 
$
2,766,073
   
$
73,728
 
$
(2,601,209
)
 
$
1,293,605
 




 
23

 

CONDENSED CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2011
(UNAUDITED, IN THOUSANDS)

   
Issuer
   
Guarantor
   
Non-Guarantor
 
Elimination
   
Consolidated
 
                             
ASSETS
                             
Current assets:
                           
Cash and cash equivalents
 
$
3
   
$
19,719
   
$
15,477
 
$
-
   
$
35,199
 
Restricted cash
   
-
     
-
     
59
   
-
     
59
 
Accounts receivable, net
   
-
     
127,849
     
16,816
   
-
     
144,665
 
Intercompany receivables
   
-
     
365,302
     
-
   
(365,302
)
   
-
 
Deferred tax assets
   
-
     
1,554
     
90
   
-
     
1,644
 
Prepaid expenses and other current assets
   
1,460
     
21,585
     
2,546
   
126
     
25,717
 
Total current assets
   
1,463
     
536,009
     
34,988
   
(365,176
)
   
207,284
 
Property and equipment, net
   
-
     
4,972
     
5
   
-
     
4,977
 
Goodwill
   
-
     
538,624
     
25,892
   
-
     
564,516
 
Intangible assets, net
   
-
     
566,413
     
23,749
   
-
     
590,162
 
Investment in subsidiaries
   
1,062,759
     
1,191,397
     
402
   
(2,254,558
)
   
-
 
Investment in, and advances to, nonconsolidated affiliates
   
-
     
126
     
-
   
(126
)
   
-
 
Deferred tax assets
   
-
     
2,108
     
183
   
-
     
2,291
 
Other assets
   
9,091
     
14,650
     
16
   
-
     
23,757
 
Total assets
 
$
1,073,313
   
$
2,854,299
   
$
85,235
 
$
(2,619,860
)
 
$
1,392,987
 
                                       
LIABILITIES AND SHAREHOLDERS' EQUITY
                                       
Current liabilities:
                                     
                                       
Current maturities of long term debt
 
$
-
   
$
8,487
   
$
-
 
$
-
   
$
8,487
 
Accounts payable
   
-
     
5,160
     
29
   
-
     
5,189
 
Accrued compensation
   
9
     
15,032
     
1,921
   
-
     
16,962
 
Accrued expenses
   
5,806
     
22,531
     
3,176
   
-
     
31,513
 
Intercompany payable
   
331,589
     
819,593
     
66,359
   
(1,217,541
)
   
-
 
Other liabilities
   
-
     
-
     
400
   
(400
)
   
-
 
Deferred tax liabilities
   
-
     
5,117
     
(502
)
 
-
     
4,615
 
Deferred revenue
   
-
     
174,398
     
22,405
   
-
     
196,803
 
Total current liabilities
   
337,404
     
1,050,318
     
93,788
   
(1,217,941
)
   
263,569
 
                                       
Long term debt
   
308,086
     
314,887
     
-
   
-
     
622,973
 
Deferred tax liabilities
   
-
     
76,466
     
(1,288
)
 
-
     
75,178
 
Other long term liabilities
   
-
     
2,260
     
1,184
   
-
     
3,444
 
Total long term liabilities
   
308,086
     
393,613
     
(104
)
 
-
     
701,595
 
Total shareholders' equity
   
427,823
     
1,410,368
     
(8,449
)
 
(1,401,919
)
   
427,823
 
Total liabilities and shareholders' equity
 
$
1,073,313
   
$
2,854,299
   
$
85,235
 
$
(2,619,860
)
 
$
1,392,987
 




 
24

 


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 2011
(UNAUDITED, IN THOUSANDS)

   
Issuer
   
Guarantor
   
Non-Guarantor
   
Elimination
   
Consolidated
 
                               
Revenue
 
$
-
   
$
76,974
   
$
10,732
   
$
(7,465
)
 
$
80,241
 
Cost of revenue
   
-
     
7,549
     
7,467
     
(7,465
)
   
7,551
 
Cost of revenue - amortization of intangible assets
   
-
     
15,986
     
-
     
-
     
15,986
 
Gross profit
   
-
     
53,439
     
3,265
     
-
     
56,704
 
Operating expenses:
                                       
Research and development
   
-
     
13,114
     
-
     
-
     
13,114
 
Selling and marketing
   
-
     
26,140
     
3,288
     
-
     
29,428
 
General and administrative
   
55
     
7,359
     
294
     
-
     
7,708
 
Amortization of intangible assets