SSI Investments II Ltd - FORM 10-Q

Attached files

file	filename
EX-31.2 - EX-31.2 SECTION 302 CERTIFICATION OF CFO - SSI Investments II Ltd	exhibit31-2.htm
EX-32.2 - EX-32.2 SECTION 906 CERTIFICATION OF CFO - SSI Investments II Ltd	exhibit32-2.htm
EX-31.1 - EX-31.1 SECTION 302 CERTIFICATION OF CEO - SSI Investments II Ltd	exhibit31-1.htm
EX-32.1 - EX-32.1 SECTION 906 CERTIFICATION OF CEO - SSI Investments II Ltd	exhibit32-1.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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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

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

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		-			14,664			1,053			-			15,717
Acquisition related expenses		-			542			9			-			551
Total operating expenses		55			61,819			4,644			-			66,518
Operating loss		(55	)		(8,380	)		(1,379	)		-			(9,814	)
Other income (expense), net		(3	)		10,704			(252	)		(10,768	)		(319	)
Interest income		-			30			11			-			41
Interest expense		(9,032	)		(5,990	)		-			-			(15,022	)
Loss before benefit of income taxes		(9,090	)		(3,636	)		(1,620	)		(10,768	)		(25,114	)

Equity in (losses) earnings of subsidiaries before taxes		(16,024	)		(1,434	)		-			17,458			-
Benefit of income taxes		(4,088	)		(3,902	)		(186	)		4,088			(4,088	)

Net loss	$	(21,026	)	$	(1,168	)	$	(1,434	)	$	2,602		$	(21,026	)

CONDENSED CONSOLIDATED INCOME STATEMENTS

FOR THE PERIOD FROM MAY 26, 2010 TO JULY 31, 2010

(UNAUDITED, IN THOUSANDS)

	Issuer			Guarantor			Non-Guarantor			Elimination			Consolidated

Revenues	$	-		$	32,196		$	5,949		$	(4,089	)	$	34,056
Cost of revenues		-			5,187			4,113			(4,089	)		5,211
Cost of revenues - amortization of intangible assets		-			11,706			-			-			11,706

Gross profit		-			15,303			1,836			-			17,139

Operating expenses:
Research and development		-			7,199			179			-			7,378
Selling and marketing		-			13,046			1,475			-			14,521
General and administrative		6			5,584			85			-			5,675
Amortization of intangible assets		-			7,159			630			-			7,789
Acquisition related expenses		7,879			12,719			-			-			20,598

Total operating expenses		7,885			45,707			2,369			-			55,961

Operating Margin		(7,885	)		(30,404	)		(533	)		-			(38,822	)

Other (expense) income, net		-			(1,225	)		(512	)		702			(1,035	)
Interest income		-			8			13			(5	)		16
Interest expense		(14,129	)		(4,456	)		-			5			(18,580	)

Income before provision for income taxes		(22,014	)		(36,077	)		(1,032	)		702			(58,421	)

Equity in (losses) earnings of subsidiaries before taxes		(36,407	)		(951	)		-			37,358			-
(Benefit) provision for income taxes		(5,451	)		(5,370	)		(81	)		5,451			(5,451	)

Net (loss) income	$	(52,970	)	$	(31,658	)	$	(951	)	$	32,609		$	(52,970	)

CONDENSED CONSOLIDATED INCOME STATEMENTS

FOR THE PERIOD FROM MAY 1, 2010 TO MAY 25, 2010

(UNAUDITED, IN THOUSANDS)

	Issuer		Guarantor			Non-Guarantor			Elimination			Consolidated

Revenues	$	-	$	19,748		$	1,903		$	(1,031	)	$	20,620
Cost of revenues		-		2,129			1,045			(1,031	)		2,143
Cost of revenues - amortization of intangible assets		-		174			-			(166)			8

Gross profit		-		17,445			858			166			18,469

Operating expenses:
Research and development		-		7,364			98			-			7,462
Selling and marketing		-		14,623			951			-			15,574
General and administrative		-		13,233			102			-			13,335
Amortization of intangible assets		-		12,530			-			(12,289	)		241
Acquisition related expenses		-		9,741			-			-			9,741

Total operating expenses		-		57,491			1,151			(12,289	)		46,353

Operating Margin		-		(40,046	)		(293	)		12,455			(27,884	)

Other (expense) income, net		-		11,391			353			(11,470	)		274
Interest income		-		8			5			-			13
Interest expense		-		(1,353	)		-			-			(1,353	)

Income before provision for income taxes		-		(30,000	)		65			985			(28,950	)

Equity in (losses) earnings of subsidiaries before taxes		-		1,050			-			(1,050	)		-
(Benefit) provision for income taxes		-		(7,733	)		(92	)		92			(7,733	)

Net (loss) income	$	-	$	(21,217	)	$	157		$	(157	)	$	(21,217	)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JULY 31, 2011

(UNAUDITED, IN THOUSANDS)

	Issuer			Guarantor			Non-Guarantor			Elimination			Consolidated

Revenue	$	-		$	149,234		$	21,185		$	(13,783	)	$	156,636
Cost of revenue		-			14,832			13,787			(13,783	)		14,836
Cost of revenue - amortization of intangible assets		-			31,972			-			-			31,972
Gross profit		-			102,430			7,398			-			109,828
Operating expenses:
Research and development		-			26,068			-			-			26,068
Selling and marketing		-			50,480			6,080			-			56,560
General and administrative		124			15,182			470			-			15,776
Amortization of intangible assets		-			29,312			2,074			-			31,386
Acquisition related expenses		-			844			15			-			859
Total operating expenses		124			121,886			8,639			-			130,649
Operating loss		(124	)		(19,456	)		(1,241	)		-			(20,821	)
Other income (expense), net		(4	)		21,250			(1,364	)		(21,536	)		(1,654	)
Interest income		-			50			21			-			71
Interest expense		(18,062	)		(11,874	)		-			-			(29,936	)
Loss before benefit of income taxes		(18,190	)		(10,030	)		(2,584	)		(21,536	)		(52,340	)

Equity in (losses) earnings of subsidiaries before taxes		(34,150	)		(2,188	)		-			36,338			-
Benefit of income taxes		(8,883	)		(8,487	)		(396	)		8,883			(8,883	)

Net loss	$	(43,457	)	$	(3,731	)	$	(2,188	)	$	5,919		$	(43,457	)

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM FEBRUARY 1, 2010 TO MAY 25, 2010

(UNAUDITED, IN THOUSANDS)

	Issuer		Guarantor			Non-Guarantor			Elimination			Consolidated

Revenue	$	-	$	92,854		$	9,329		$	(4,645	)	$	97,538
Cost of revenue		-		9,166			4,705			(4,645	)		9,226
Cost of revenue - amortization of intangible assets		-		822			-			(782	)		40
Gross profit		-		82,866			4,624			782			88,272
Operating expenses:
Research and development		-		16,744			387			-			17,131
Selling and marketing		-		36,825			3,553			-			40,378
General and administrative		-		21,513			315			-			21,828
Amortization of intangible assets		-		24,422			-			(23,285	)		1,137
Acquisition related expenses		-		15,063			-			-			15,063
Total operating expenses		-		114,567			4,255			(23,285	)		95,537
Operating (loss) income		-		(31,701	)		369			24,067			(7,265	)
Other income (expense), net		-		22,569			54			(22,238	)		385
Interest income		-		64			31			-			95
Interest expense				(3,723	)		-			-			(3,723	)
(Loss) income before benefit of income taxes				(12,791	)		454			1,829			(10,508	)
Equity in (losses) earnings of subsidiaries before taxes		-		2,283			-			(2,283	)		-
Benefit of income taxes		-		(1,894	)		(28	)		28			(1,894	)
Net (loss) income	$		$	(8,614	)	$	482		$	(482	)	$	(8,614	)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JULY 31, 2011

(UNAUDITED, IN THOUSANDS)

	Issuer			Guarantor			Non-Guarantor			Elimination			Consolidated
Cash flows from operating activities:
Net cash (used in) provided by operating activities		(17,424	)		76,835			2,225			(21,536	)		40,100
Cash flows from investing activities:
Purchases of property and equipment		-			(2,312	)		(3	)		-			(2,315	)
Purchases of investments		-			(9	)		-			-			(9	)
Acquisition of 50 Lessons, net of cash acquired		-			(3,820	)		-			-			(3,820	)
Decrease in restricted cash		-			(18	)		(51	)		-			(69	)
Net cash used in investing activities		-			(6,159	)		(54	)		-			(6,213	)
Cash flows from financing activities:
Proceeds from intercompany investment in subsidiaries		-			-			-			-			-
Proceeds from capital contribution		325			-			-			-			325
Proceeds from payments (on) intercompany loans		17,247			(28,158	)		(10,625	)		21,536			-
Proceeds from issuance of ordinary shares		-			-			-			-			-
Proceeds from issuance of Senior Credit Facilities, net of fees		-			-			-			-			-
Proceeds from issuance of Senior Notes, net of fees		-			-			-			-			-
Principal payments on Senior Credit Facilities		-			(4,605	)		-			-			(4,605	)
Net cash provided by (used in) financing activities		17,572			(32,763	)		(10,625	)		21,536			(4,280	)
Effect of exchange rate changes on cash and cash equivalents		-			66			1,019			-			1,085
Net increase in cash and cash equivalents		148			37,979			(7,435	)		-			30,692
Cash & cash equivalents, at beginning of period		3			19,719			15,477			-			35,199
Cash & cash equivalents, at end of period	$	151		$	57,698		$	8,042		$	-		$	65,891

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM MAY 26, 2010 TO JULY 31, 2010

(UNAUDITED, IN THOUSANDS)

	Issuer			Guarantor			Non-Guarantor			Elimination			Consolidated
Cash flows from operating activities:
Net cash (used in) provided by operating activities		(15,509	)		(34,778	)		11,966			702			(37,619	)
Cash flows from investing activities:
Purchases of property and equipment		-			(370	)		-			-			(370	)
Acquisition of SkillSoft, net of cash received		-			510,120			(38,187	)		(1,546,114	)		(1,074,181	)
Increase in restricted cash		-			1,808			(6	)		-			1,802
Net cash provided by (used in) investing activities		-			511,558			(38,193	)		(1,546,114	)		(1,072,749	)
Cash flows from financing activities:
Proceeds from intercompany investment in subsidiaries		(1,129,184	)		(1,129,184	)		-			2,258,368			-
Proceeds from payments (on) intercompany loans		313,732			365,403			33,821			(712,956	)		-
Capital received from sale of stock		534,513			.			-			-			534,513
Proceeds from issuance of Senior Credit Facilities, net of fees		-			306,398			-			-			306,398
Proceeds from issuance of Senior Notes, net of fees		296,448			-			-			-			296,448
Net cash provided by (used in) financing activities		15,509			(457,383	)		33,821			1,545,412			1,137,359
Effect of exchange rate changes on cash and cash equivalents		-			1,535			(114	)		-			1,421
Net increase in cash and cash equivalents		-			20,932			7,480			-			28,412
Cash & cash equivalents, at beginning of period		-			-			-			-			-
Cash & cash equivalents, at end of period	$	-			20,932		$	7,480		$	-		$	28,412

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM FEBRUARY 1, 2010 TO MAY 25, 2010

(UNAUDITED, IN THOUSANDS)

	Issuer		Guarantor			Non-Guarantor			Eliminations			Consolidated
Cash flows from operating activities:
Net cash provided by (used in) operating activities				74,194			(2,129	)		(22,238	)		54,085
Cash flows from investing activities:
Purchases of property and equipment		-		(438	)		-			-			(438	)
Purchases of investments		-		(2,562	)		-			-			(2,562	)
Maturity of investments		-		6,122			-			-			6,122
Decrease in restricted cash		-		18			9			-			27
Net cash provided by (used in) investing activities		-		3,140			9			-			3,149
Cash flows from financing activities:
Exercise of share options		-		3,065			-			-			3,065
Proceeds from employee share purchase plan		-		1,666			-			-			1,666
Proceeds from payments (on) intercompany loans		-		(14,134	)		(8,104	)		22,238			-
Principal payments on long term debt		-		(84,365	)		-			-			(84,365	)
Tax effect related to exercise of non-qualified stock options		-		(282	)		-			-			(282	)
Net cash (used in) provided by financing activities		-		(94,050	)		(8,104	)		22,238			(79,916	)
Effect of exchange rate changes on cash and cash equivalents		-		(726	)		(589	)		-			(1,315	)
Net decrease in cash and cash equivalents		-		(17,442	)		(6,555	)		-			(23,997	)
Cash & cash equivalents, at beginning of period		-		64,214			12,468			-			76,682
Cash & cash equivalents, at end of period	$	-	$	46,772		$	5,913		$	-		$	52,685

ITEM 2. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

From time to time, including in this Quarterly Report on Form 10-Q, we may make forward-looking statements relating to, among other things, such matters as anticipated financial performance, business outlook and prospects, strategy, plans, regulatory, market and industry trends, expected levels of liquidity over the next 12 months and similar matters. The Private Securities Litigation Reform Act of 1995 and federal securities laws provides a safe harbor for forward-looking statements. We note that a variety of factors, including known and unknown risks and uncertainties as well as incorrect assumptions, could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The factors that may affect the operations, performance, development and results of our business include those discussed under Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended January 31, 2011.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and notes appearing elsewhere in this Quarterly Report on Form 10-Q.

FORMAT OF PRESENTATION

The discussion in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" is presented for both the Predecessor and Successor periods on a combined basis. The information presented for the three and six months ended July 31, 2011 includes only the results of operations of the Successor. A non-GAAP presentation of the results for the combined three and six months ended July 31, 2010 is provided in this Management's Discussion and Analysis of Financial Condition and Results of Operations and includes the results of operations for the period from May 1 to May 25, 2010 and February 1 to May 25, 2010 of the Predecessor, respectively and the results of operations for the period from May 26 to July 31, 2010 of the Successor. The discussion refers to the three months ended July 31, 2010 and the six months ended July 31, 2010 as combined three months ended July 31, 2010 and combined six months ended July 31, 2010, respectively. This presentation does not comply with GAAP, it is not an attempt to present pro-forma results, and may yield results that are not strictly comparable to prior periods as a result of purchase accounting adjustments. However, management believes it provides a meaningful method of comparing the current period to the prior period results.

OVERVIEW

We are a leading Software as a Service (SaaS) provider of on-demand e-learning and performance support solutions for global enterprises, government, education and small to medium-sized businesses. We enable business organizations to maximize business performance through a combination of comprehensive e-learning content, online information resources, flexible learning technologies and support services. Our multi-modal learning solutions support and enhance the speed and effectiveness of both formal and informal learning processes and integrate our in-depth content resources, learning management system, virtual classroom technology and support services.

We generate revenue primarily from the licensing of our products, the provision of professional services and the provision of hosting and application services. The pricing for our courses varies based upon the content offering selected by a customer, the number of users within the customer's organization and the length of the license agreement (generally one, two or three years). Our agreements permit customers to exchange course titles, generally on the contract anniversary date. Hosting services are sold separately for an additional fee.

Cost of revenue includes the cost of materials (such as storage media), packaging, shipping and handling, CD duplication, custom content development, hosting services, royalties, certain infrastructure and occupancy expenses and share-based compensation. We generally recognize these costs as incurred. Also included in cost of revenue is amortization expense related to capitalized software development costs and intangible assets related to developed software and courseware acquired in business combinations.

We account for software development costs by capitalizing certain computer software development costs incurred after technological feasibility is established. No software development costs incurred during the three and six months ended July 31, 2011 met the requirements for capitalization.

Research and development expenses consist primarily of salaries and benefits, share-based compensation, certain infrastructure and occupancy expenses, fees to consultants and course content development fees. Selling and marketing expenses consist primarily of salaries and benefits, share-based compensation, commissions, advertising and promotion expenses, travel expenses and certain infrastructure and occupancy expenses. General and administrative expenses consist primarily of salaries and benefits, share-based compensation, consulting and service expenses, legal expenses, audit and tax preparation costs, regulatory compliance costs and certain infrastructure and occupancy expenses.

Amortization of intangible assets for the period following the Acquisition represents the amortization of customer value, trademarks and tradenames and backlog from the Acquisition and the acquisition of 50 Lessons Limited (50 Lessons). The amortization of intangible assets for the period prior to the Acquisition represents amortization of similar intangible asset categories from the Predecessor's acquisitions of NETg, Targeted Learning Corporation (“TLC”), Books24x7 and GoTrain Corp. and the Predecessor's merger with SkillSoft Corporation (the “SmartForce Merger”).

Acquisition related expenses primarily consist of transaction fees, legal, accounting and other professional services related to an acquisition.

We record tangible and intangible assets acquired and liabilities assumed in business combinations under the purchase method of accounting. Amounts paid for each acquisition are allocated to the assets acquired and liabilities assumed based on their fair values at the dates of acquisition. We then allocate the purchase price in excess of net tangible assets acquired to identifiable intangible assets based on detailed valuations that use information and assumptions provided by management. We allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed to goodwill.

Significant management judgments and assumptions are required in determining the fair value of acquired assets and liabilities, particularly acquired intangible assets. The valuation of purchased intangible assets is based upon (i) estimates of the future performance and cash flows from the acquired business (income approach) and (ii) estimates of the cost to purchase or replace an asset adjusted for obsolescence (cost approach). We have used the income approach to determine the estimated fair value of certain other identifiable intangible assets including tradenames, customer relationships, backlog, and deferred revenue. This approach determines fair value by estimating the after-tax cash flows attributable to an identified asset over its useful life and then discounting these after-tax cash flows back to a present value. Tradenames represent acquired product names that we intend to continue to utilize. Customer contracts and relationships represent established relationships with customers to whom we believe we may sell additional content and services. Backlog represents contracts that have been signed that represent a future projected revenue stream and deferred revenue represents billed customer contracts that will amortize into revenue at a future date. We have used the cost approach to determine the estimated fair value of our acquired technology, content, and publishing rights. Our technology represents patented and unpatented technology and know-how. Our content includes electronic media, text, video and executive summaries on various topics which is delivered online to our customers. Our publishing rights represent long term contractual relationships with certain publishers with the rights to digitize and offer textbook and referenceware material within our course library.

BUSINESS OUTLOOK

In the three and six months ended July 31, 2011, we generated revenue of $80.2 million and $156.6 million as compared to $54.7 million and $131.6 million in the combined three and combined six months ended July 31, 2010. We reported a net loss in the three and six months ended July 31, 2011 of $21.0 million and $43.5 million, respectively, as compared to $74.2 million and $61.6 million in the combined three and combined six months ended July 31, 2010, respectively.

The net loss for the three and six months ended July 31, 2011 was primarily driven by the activities resulting from, and related to, the Acquisition. The significant components of the Acquisition and Acquisition related activities include the following as of July 31, 2011 (amounts in millions):

		Three Months Ended July 31, 2011	Six Months Ended July 31, 2011
Current period impact to reductions to deferred revenue in purchase accounting	$	2.2	$	7.6
Amortization of intangible assets related to content and technology		16.0		32.0
Current period impact to reductions to prepaid commissions in purchase accounting		-		(0.5	)
Amortization of intangible assets		15.7		31.4
Interest expense from borrowings		15.0		29.9
Subtotal of Acquisition and Acquisition related activities	$	48.9	$	100.4

We continue to experience a cautious customer spending environment due to the current global economic climate. In addition, we continue to find ourselves in a challenging business environment due to (i) budgetary constraints on training and information technology (IT) spending by our current and potential customers, (ii) price competition and value-based competitive offerings from a broad array of competitors in the learning market and (iii) the relatively slow overall market adoption rate for e-learning solutions. The challenging U.S. and global economic environment has placed further constraints on our customers' and potential customers' training budgets and spending. We have not yet seen signs of an improving customer environment, but we are also not experiencing continued deterioration. We continue to encounter sales cycles that include the impact of additional customer scrutiny on deals. This has given us less visibility into the overall timing of our sales cycles with new customers and to a lesser extent with our existing and renewing customers. Despite these challenges, our core business this fiscal year has performed generally with our expectations. In response to the cautious spending environment, we will continue to expand our sales resources to augment our customer base and increase our product and technology assets to enhance our value proposition.

In fiscal 2012, we will continue to focus on revenue generation and earnings growth primarily by:

cross selling and up selling;

evaluating new markets and expansion in existing markets;

acquiring new customers;

carefully managing our spending;

continuing to execute on our new product and technologies and telesales distribution initiatives;

continuing to evaluate merger and acquisition and possible partnership opportunities that could contribute to our long-term objectives; and

focusing more and improve on retaining existing customers.

CRITICAL ACCOUNTING POLICIES

We believe that our critical accounting policies are those related to revenue recognition, amortization of intangible assets and impairment of goodwill, share-based compensation, deferral of commissions, restructuring charges, legal contingencies and income taxes. We believe these accounting policies are particularly important to the portrayal and understanding of our financial position and results of operations and require application of significant judgment by our management. In applying these policies, management uses its judgment in making certain assumptions and estimates. Our critical accounting policies are more fully described under the heading “Summary of Significant Accounting Policies” in Note 2 of the Notes to the Consolidated Financial Statements and under “Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Critical Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2011 as filed with the SEC on April 14, 2011. The policies set forth in our Form 10-K have not changed.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JULY 31, 2011 VERSUS COMBINED THREE MONTHS ENDED JULY 31, 2010

The following table presents our condensed consolidated statements of operations for the periods indicated.

	Successor						Predecessor			Combined (1)
	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			Three months ended July 31, 2010
	(Unaudited)
Revenue	$	80,241		$	34,056		$	20,620		$	54,676
Cost of revenue		7,551			5,211			2,143			7,354
Cost of revenue – amortization of intangible assets		15,986			11,706			8			11,714
Gross profit		56,704			17,139			18,469			35,608
Operating expenses:
Research and development		13,114			7,378			7,462			14,840
Selling and marketing		29,428			14,521			15,574			30,095
General and administrative		7,708			5,675			13,335			19,010
Amortization of intangible assets		15,717			7,789			241			8,030
Acquisition related expenses		551			20,598			9,741			30,339
Total operating expenses		66,518			55,961			46,353			102,314
Operating loss		(9,814	)		(38,822	)		(27,884	)		(66,706	)
Other (expense) income, net		(319	)		(1,035	)		274			(761	)
Interest income		41			16			13			29
Interest expense		(15,022	)		(18,580	)		(1,353	)		(19,933	)
Loss before benefit for income taxes		(25,114	)		(58,421	)		(28,950	)		(87,371	)
Benefit for income taxes		(4,088	)		(5,451	)		(7,733	)		(13,184	)
Net loss	$	(21,026	)	$	(52,970	)	$	(21,217	)	$	(74,187	)

(1) This presentation does not comply with GAAP, it is not an attempt to present pro-forma results, and may yield results that are not strictly comparable to prior periods as a result of purchase accounting adjustments. However, management believes it provides a meaningful method of comparing the current period to the prior period results.

Revenue

	THREE MONTHS ENDED JULY 31,						Dollar Increase/(Decrease)		Percent Change
	2011			2010
	Successor			Combined
(In thousands, except percentages)
Revenue:
United States	$	59,505		$	57,702		$	1,803		3	%
International		22,983			19,936			3,047		15	%
Fair value adjustments to deferred revenue		(2,247	)		(22,962	)		20,715		*
Total	$	80,241		$	54,676		$	25,565		47	%

____________

* Not meaningful

The increase in total revenue for the three months ended July 31, 2011 versus the combined three months ended July 31, 2010 was primarily the result of the fair value adjustments to deferred revenue in purchase accounting related to the Acquisition. The increase in domestic and international revenue was primarily related to a higher level of subscription based revenue from deferred revenue at the beginning of the fiscal year as compared to the same prior year period.

Costs and Expenses

	THREE MONTHS ENDED JULY 31,						Dollar Increase/(Decrease)		Percent Change
	2011			2010
	Successor			Combined
(In thousands, except percentages)
Cost of revenue	$	7,551		$	7,354		$	197		3	%
As a percentage of revenue		9	%		13	%
Cost of revenue – amortization of intangible assets		15,986			11,714			4,272		36	%
As a percentage of revenue		20	%		21	%

The increase in cost of revenue for the three months ended July 31, 2011 versus the combined three months ended July 31, 2010 was primarily due to royalties paid on increased revenue (excluding the fair value adjustments to deferred revenue in purchase accounting related to the Acquisition).

The increase in cost of revenue - amortization of intangible assets for the three months ended July 31, 2011 compared to the combined three months ended July 31, 2010 was primarily due to the timing of the Acquisition, as the three months ended July 31, 2011 included three full months of amortization expense.

	THREE MONTHS ENDED JULY 31,						Dollar Increase/(Decrease)			Percent Change
	2011			2010
	Successor			Combined
(In thousands, except percentages)
Research and development	$	13,114		$	14,840		$	(1,726	)		(12	)%
As a percentage of revenue		16	%		27	%

The decrease in research and development expense for the three months ended July 31, 2011 as compared to the combined three months ended July 31, 2010 was primarily due to a reduction of $4.7 million in share-based compensation resulting from the acceleration of vesting and settlement of stock options in the Predecessor prior to the Acquisition. This was partially offset by incremental software and content development costs of $2.6 million and increased compensation and benefits of $0.3 million during the three months ended July 31, 2011.

	THREE MONTHS ENDED JULY 31,						Dollar Increase/(Decrease)			Percent Change
	2011			2010
	Successor			Combined
(In thousands, except percentages)
Selling and marketing	$	29,428		$	30,095		$	(667	)		(2	)%
As a percentage of revenue		37	%		55	%

The decrease in selling and marketing expense for the three months ended July 31, 2011 as compared to the combined three months ended July 31, 2010 was primarily due to a reduction of $7.7 million in share-based compensation resulting from the acceleration of vesting and settlement of stock options in the Predecessor prior to the Acquisition. This was partially offset by increased compensation and benefits of $1.4 million as a result of an increase in headcount and an increase in commission expense of $0.7 million. We incurred incremental consulting fees of $1.0 million as well as increased marketing costs of $0.6 million to support our sales growth initiatives. In addition there was a $2.9 million increase in commission expense in the current period ended July 31, 2011 from the corresponding period ended July 31, 2010, due to the impact from the write-off of prepaid commissions in purchase accounting related to the Acquisition.

	THREE MONTHS ENDED JULY 31,						Dollar Increase/(Decrease)			Percent Change
	2011			2010
	Successor			Combined
(In thousands, except percentages)
General and administrative	$	7,708		$	19,010		$	(11,302	)		(59	)%
As a percentage of revenue		10	%		35	%

The decrease in general and administrative expense for the three months ended July 31, 2011 as compared to the combined three months ended July 31, 2010 was primarily due to a reduction in share-based compensation of $11.1 million resulting from the acceleration of vesting and settlement of stock options in the Predecessor prior to the Acquisition.

	THREE MONTHS ENDED JULY 31,						Dollar Increase/(Decrease)			Percent Change
	2011			2010
	Successor			Combined
(In thousands, except percentages)
Amortization of intangible assets	$	15,717		$	8,030		$	7,687			96	%
As a percentage of revenue		20	%		15	%
Acquisition related expenses		551			30,339			(29,788	)		(98	)%
As a percentage of revenue		1	%		55	%

The increase in amortization of intangible assets for the three months ended July 31, 2011 as compared to the combined three months ended July 31, 2010 was primarily due to the timing of the Acquisition, as the three months ended July 31, 2011 included three full months of amortization expense.

The decrease in acquisition related expenses for the three months ended July 31, 2011 as compared to the combined three months ended July 31, 2010 was primarily due to activity related to the Acquisition being substantially completed in fiscal 2011.

	THREE MONTHS ENDED JULY 31,						Dollar Increase/(Decrease)		Percent Change
	2011			2010
	Successor			Combined
(In thousands, except percentages)
Other (expense) income, net	$	(319	)	$	(761	)	$	442		(58	)%
As a percentage of revenue		0	%		(1	)%
Interest income	$	41		$	29		$	12		41	%
As a percentage of revenue		0	%		0	%
Interest expense	$	(15,022	)	$	(19,933	)	$	4,911		(25	)%
As a percentage of revenue		(19	)%		(36	)%

The increase in other expense, net for the three months ended July 31, 2011 as compared to the combined three months ended July 31, 2010 was primarily due to foreign currency fluctuations.

The decrease in interest expense for the three months ended July 31, 2011 as compared to the combined three months ended July 31, 2010 was primarily due to certain non-recurring interest costs which were incurred during the three months ended July 31, 2010. This was partially offset by the timing of when borrowings incurred in connection with the Acquisition were entered into, as the three months ended July 31, 2011 included three full months of interest expense related to Acquisition related borrowings.

Provision for Income Taxes

	THREE MONTHS ENDED JULY 31,						Dollar Increase/(Decrease)			Percent Change
	2011			2010
	Successor			Combined
(In thousands, except percentages)
Benefit for income taxes	$	(4,088	)	$	(13,184	)	$	(9,096	)		69	%
As a percentage of revenue		(5)	%		(24)	%

For the three months ended July 31, 2011 and for the combined three months ended July 31, 2010, our effective tax rates were 16.3% and 15.1%, respectively. The tax benefit we have recorded in the three months ended July 31, 2011 and the combined three months ended July 31, 2010 are primarily attributable to the operating losses for such periods. For the three months ended July 31, 2011 and the combined three months ended July 31, 2010, our effective tax rate differed from the Irish statutory rate of 12.5% primarily due to the tax benefit of losses in jurisdictions with higher statutory tax rates.

SIX MONTHS ENDED JULY 31, 2011 VERSUS COMBINED SIX MONTHS ENDED JULY 31, 2010

The following table presents our condensed consolidated statements of operations for the periods indicated.

	Successor						Predecessor			Combined (1)
	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			Six months ended July 31, 2010
	(Unaudited)
Revenue	$	156,636		$	34,056		$	97,538		$	131,594
Cost of revenue		14,836			5,211			9,226			14,437
Cost of revenue – amortization of intangible assets		31,972			11,706			40			11,746
Gross profit		109,828			17,139			88,272			105,411
Operating expenses:
Research and development		26,068			7,378			17,131			24,509
Selling and marketing		56,560			14,521			40,378			54,899
General and administrative		15,776			5,675			21,828			27,503
Amortization of intangible assets		31,386			7,789			1,137			8,926
Acquisition related expenses		859			20,598			15,063			35,661
Total operating expenses		130,649			55,961			95,537			151,498
Operating loss		(20,821	)		(38,822	)		(7,265	)		(46,087	)
Other (expense) income, net		(1,654	)		(1,035	)		385			(650	)
Interest income		71			16			95			111
Interest expense		(29,936	)		(18,580	)		(3,723	)		(22,303	)
Loss before benefit for income taxes		(52,340	)		(58,421	)		(10,508	)		(68,929	)
Benefit for income taxes		(8,883	)		(5,451	)		(1,894	)		(7,345	)
Net loss	$	(43,457	)	$	(52,970	)	$	(8,614	)	$	(61,584	)

(1)

This presentation does not comply with GAAP, it is not an attempt to present pro-forma results, and may yield results that are not strictly comparable to prior periods as a result of purchase accounting adjustments. However, management believes it provides a meaningful method of comparing the current period to the prior period results.

(2)

Revenue

	SIX MONTHS ENDED JULY 31,						Dollar Increase/(Decrease)		Percent Change
	2011			2010
	Successor			Combined
(In thousands, except percentages)
Revenue:
United States	$	118,403		$	114,793		$	3,610		3	%
International		45,796			39,763			6,033		15	%
Fair value adjustments to deferred revenue		(7,563	)		(22,962	)		15,399		*
Total	$	156,636		$	131,594		$	25,042		19	%

____________

* Not meaningful

The increase in total revenue for the six months ended July 31, 2011 versus the combined six months ended July 31, 2010 was primarily the result of the fair value adjustments to deferred revenue in purchase accounting related to the Acquisition. The increase in domestic and international revenue was primarily related to a higher level of subscription based revenue from deferred revenue at the beginning of the fiscal year as compared to the same prior year period.

Costs and Expenses

	SIX MONTHS ENDED JULY 31,						Dollar Increase/(Decrease)		Percent Change
	2011			2010
	Successor			Combined
(In thousands, except percentages)
Cost of revenue	$	14,836		$	14,437		$	399		3	%
As a percentage of revenue		9	%		11	%
Cost of revenue – amortization of intangible assets		31,972			11,746			20,226		172	%
As a percentage of revenue		20	%		9	%

____________

* Not meaningful

The increase in cost of revenue for the six months ended July 31, 2011 versus the combined six months ended July 31, 2010 was primarily due to royalties paid on increased revenue (which excludes the fair value adjustments to deferred revenue in purchase accounting related to the Acquisition).

The increase in cost of revenue - amortization of intangible assets for the six months ended July 31, 2011 compared to the combined six months ended July 31, 2010 was primarily due to the timing of the Acquisition, as the six months ended July 31, 2011 included six full months of amortization expense.

	SIX MONTHS ENDED JULY 31,						Dollar Increase/(Decrease)		Percent Change
	2011			2010
	Successor			Combined
(In thousands, except percentages)
Research and development	$	26,068		$	24,509		$	1,559		6	%
As a percentage of revenue		17	%		19	%

The increase in research and development expense for the six months ended July 31, 2011 as compared to the combined six months ended July 31, 2010 was primarily due to incremental software content development costs of $5.4 million and increased compensation and benefits of $0.9 million during the six months ended July 31, 2011. This was partially offset by a reduction of $4.9 million in share-based compensation resulting from the acceleration of vesting and settlement of stock options in the Predecessor prior to the Acquisition.

	SIX MONTHS ENDED JULY 31,						Dollar Increase/(Decrease)		Percent Change
	2011			2010
	Successor			Combined
(In thousands, except percentages)
Selling and marketing	$	56,560		$	54,899		$	1,661		3	%
As a percentage of revenue		36	%		42	%

The increase in selling and marketing expense for the six months ended July 31, 2011 as compared to the combined six months ended July 31, 2010 was primarily due to increased compensation and benefits of $3.3 million as a result of an increase in headcount and an increase in commission expense of $1.5 million. The increase in headcount also contributed to an increase in travel and office expenses of $0.4 million. In addition there was a $2.3 million increase in commission expense resulting from the write-off of prepaid commissions in purchase accounting related to the Acquisition. We incurred incremental consulting fees of $1.2 million, increased marketing costs of $0.6 million to support our sales growth initiatives and increased professional fees of $0.4 million. This was partially offset by a reduction of $8.3 million in share-based compensation resulting from the acceleration of vesting and settlement of stock options in the Predecessor prior to the Acquisition.

	SIX MONTHS ENDED JULY 31,						Dollar Increase/(Decrease)			Percent Change
	2011			2010
	Successor			Combined
(In thousands, except percentages)
General and administrative	$	15,776		$	27,503		$	(11,727	)		(43	)%
As a percentage of revenue		10	%		21	%

The decrease in general and administrative expense for the six months ended July 31, 2011 as compared to the combined six months ended July 31, 2010 was primarily due to a reduction in share-based compensation of $11.8 million resulting from the acceleration of vesting and settlement of stock options in the Predecessor prior to the Acquisition.

	SIX MONTHS ENDED JULY 31,						Dollar Increase/(Decrease)			Percent Change
	2011			2010
	Successor			Combined
(In thousands, except percentages)
Amortization of intangible assets	$	31,386		$	8,926		$	22,460			252	%
As a percentage of revenue		20	%		7	%
Acquisition related expenses		859			35,661			(34,802	)		(98	)%
As a percentage of revenue		1	%		27	%

The increase in amortization of intangible assets for the six months ended July 31, 2011 as compared to the combined six months ended July 31, 2010 was primarily due to the amortization of intangible assets acquired in the Acquisition.

The decrease in acquisition related expenses for the six months ended July 31, 2011 as compared to the combined six months ended July 31, 2010 was primarily due to the timing of the Acquisition, as the six months ended July 31, 2011 included six full months of amortization expense.

	SIX MONTHS ENDED JULY 31,						Dollar Increase/(Decrease)			Percent Change
	2011			2010
	Successor			Combined
(In thousands, except percentages)
Other (expense) income, net	$	(1,654	)	$	(650	)	$	(1,004	)		154	%
As a percentage of revenue		(1	)%		0	%
Interest income	$	71		$	111		$	(40	)		(36	)%
As a percentage of revenue		0	%		0	%
Interest expense	$	(29,936	)	$	(22,303	)	$	(7,633	)		34	%
As a percentage of revenue		(19	)%		(17	)%

The increase in other (expense), net for the six months ended July 31, 2011 as compared to the combined six months ended July 31, 2010 was primarily due to foreign currency fluctuations.

The increase in interest expense for the six months ended July 31, 2011 as compared to the combined six months ended July 31, 2010 was primarily due to the timing of when borrowings incurred in connection with the Acquisition were entered into, as the six months ended July 31, 2011 included six full months of interest expense related to Acquisition related borrowings. This was partially offset by certain non-recurring interest costs which were incurred during the six months ended July 31, 2010.

Provision for Income Taxes

	SIX MONTHS ENDED JULY 31,						Dollar Increase/(Decrease)		Percent Change
	2011			2010
	Successor			Combined
(In thousands, except percentages)
(Benefit) provision for income taxes	$	(8,883	)	$	(7,345	)	$	1,538		21	%
As a percentage of revenue		(6)	%		(6	)%

For the six months ended July 31, 2011 and for the combined six months ended July 31, 2010, our effective tax rates were 17.0% and 10.7%, respectively. The tax benefit we recorded for the six months ended July 31 2011 is primarily attributable to the loss from operations, adjusted for certain permanently non-deductible expenses, which were incurred in connection with the Acquisition. For the six months ended July 31, 2011, our effective tax rate differed from the Irish statutory rate of 12.5% due primarily to the tax benefit of losses reported in tax jurisdictions outside of Ireland and the impact of certain non-deductible expenses incurred in connection with the Acquisition. For the combined six months ended July 31, 2010, our effective tax rate differed from the Irish statutory rate of 12.5% due primarily to certain permanently non-deductible expenses incurred in connection with the Acquisition.

LIQUIDITY AND CAPITAL RESOURCES

As of July 31, 2011, our principal source of liquidity was our cash and cash equivalents, which totaled $65.9 million as compared to $35.2 million at January 31, 2011.

Net cash provided by operating activities of $40.1 million for the six months ended July 31, 2011 was primarily due to cash collections in accounts receivable, net of billings, of $81.1 million during the period. This change in accounts receivable is primarily a result of the seasonality of our operations, with the fourth quarter of our fiscal year historically generating the most activity, including order intake and billing, and the first quarter of our fiscal year historically generating the most cash collections and realization of accounts receivable, and this compares to a decrease in accounts receivable of $78.4 million for the combined six months ended July 31, 2010. This change period over period is primarily due to the timing of collections. Cash provided by operating activities also includes our net loss of $43.5 million, which reflects the impact of non-cash expenses for depreciation and amortization of $65.4 million and non-cash interest expense of $2.2 million, which was offset by a non-cash tax benefit of $10.9 million. In addition, we had decreases in deferred revenue of $40.6 million, accrued expenses of $13.0 million and accounts payable of $0.6 million. These decreases are the result of the seasonality of our operations and the movement in deferred revenues was further impacted by the effects of purchase accounting as a result of the Acquisition.

Net cash used in investing activities was $6.2 million for the six months ended July 31, 2011, which includes cash used to acquire 50 Lessons of $3.8 million, net of cash acquired as well as purchases of property and equipment $2.3 million.

Net cash used by financing activities was $4.3 million for the six months ended July 31, 2011. During this period, we made principal payments on our debt of $4.6 million.

We had a working capital deficit of approximately $53.2 million as of July 31, 2011 as compared to a deficit of approximately $56.3 million as of January 31, 2011. The reduction in working capital deficit was primarily due to a net loss of $43.5 million, which reflects the impact of non-cash expenses for depreciation and amortization of $65.4 million and non-cash interest expense of $2.2 million, which was offset by a non-cash tax benefit of $6.2 million. This was partially offset by cash used for the acquisition of 50 Lessons of $3.8 million as well as principal payments made on our Senior Credit Facilities of $4.6 million.

We lease our facilities and certain equipment and furniture under operating lease agreements that expire at various dates through fiscal 2017. In addition, we have Senior Credit Facilities which will be paid out over the next 6 years and Senior Notes due in 7 years. Future minimum lease payments, net of estimated sub-rentals, under these agreements and the debt repayments schedule are as follows at July 31, 2011 (in thousands):

	Payments Due by Period
Contractual Obligation	Total		Less Than 1 Year		1 – 3 Years		3 – 5 Years		More Than 5 Years
Operating Lease Obligations	$	7,080	$	3,690	$	3,152	$	238	$	-
Debt Obligations		628,770		8,217		6,500		6,500		607,553
Total Obligations	$	635,850	$	11,907	$	9,652	$	6,738	$	607,553

We do not have any contingent considerations related to the Acquisition nor do we have any off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating transactions that are not required to be reflected on our balance sheet.

Cash provided by operating activities is our main source of liquidity. We plan to rely on a combination of our available cash and cash equivalents and cash provided by operating activities, supplemented as necessary from time to time by borrowings under our Senior Credit Facilities and other financing transactions, to service our cash requirements. Management expects our cash flows from operations, combined with availability under our Senior Credit Facilities, to provide sufficient liquidity to fund our current obligations, projected working capital requirements, debt service requirements and capital spending for a period that includes the next 12 months.

On May 26, 2010, in connection with the closing of the Acquisition, we entered into 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, and we also issued an aggregate principal amount of $310.0 million of 11.125% Senior Notes due 2018. The Senior Notes were issued under an indenture among us, as issuer, SSI Co-Issuer LLC, our wholly owned subsidiary; as co-issuer, Wilmington Trust FSB, as trustee, and the Guarantors. As a result of the Acquisition, we are highly leveraged. As of July 31, 2011, we have outstanding $626.9 million in aggregate indebtedness (which resulted in net proceeds of $602.8 million for the Company after payment of debt acquisition fees and original issuance discount), with an additional $40 million of borrowing capacity available under our revolving credit facility. As of July 31, 2011, the revolving credit line facility was undrawn. Interest expense for the three and six months ended July 31, 2011 was $15.0 million and $29.9 million, respectively.

EXPLANATION OF USE OF NON-GAAP FINANCIAL RESULTS

In addition to reporting our audited and unaudited financial results in accordance with GAAP to assist investors we on occasion provide certain non-GAAP financial results as an alternative means to explain our periodic results. The non-GAAP financial results typically exclude non-cash or unusual charges or benefits.

Our management uses the non-GAAP financial results internally as an alternative means for assessing our results of operations. By excluding non-cash charges such as share-based compensation, amortization of purchased intangible assets, impairment of goodwill and purchased intangible assets, management can evaluate our operations excluding these non-cash charges and can compare our results on a more consistent basis to the results of other companies in our industry. By excluding charges such as merger and integration related expenses and one-time or infrequent charges our management can compare our ongoing operations to prior quarters where such items may be materially different and to ongoing operations of other companies in our industry who may have materially different unusual charges. Our management recognizes that non-GAAP financial results are not a substitute for GAAP results, but believes that non-GAAP measures are helpful in assisting them in understanding and managing our business.

Our management believes that the non-GAAP financial results may also provide useful information to investors. Non-GAAP results may also allow investors and analysts to more readily compare our operations to prior financial results and to the financial results of other companies in the industry who similarly provide non-GAAP results to investors and analysts. Investors may seek to evaluate our business performance and the performance of our competitors as they relate to cash. Excluding one-time and non-cash charges may assist investors in this evaluation and comparisons. When we provide non-GAAP financial results, we will also provide reconciliations of such results to GAAP financial measures.

ITEM 3. — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of July 31, 2011, we did not use derivative financial instruments for speculative or trading purposes.

INTEREST RATE RISK

Our general investing policy is to limit the risk of principal loss and to ensure the safety of invested funds by limiting market and credit risk. All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. Interest income is sensitive to changes in the general level of U.S. interest rates. Based on the short-term nature of our investments, we have concluded that there is no significant market risk exposure.

FOREIGN CURRENCY RISK

Due to our multinational operations, our results of operations are subject to fluctuations based upon changes in the exchange rates between the currencies in which we collect revenue or pay expenses and the U.S. dollar. Our expenses are not necessarily incurred in the currency in which revenue is generated, and, as a result, we are required from time to time to convert currencies to meet our obligations. These currency conversions are subject to exchange rate fluctuations, in particular changes to the value of the euro, Canadian dollar, Australian dollar, New Zealand dollar, Singapore dollar, and pound sterling relative to the U.S. dollar, which could adversely affect our business and our results of operations. During the six months ended July 31, 2011, the period from May 26, 2010 through July 31, 2010 and the period from February 1, 2010 through May 25, 2010, we incurred foreign currency exchange gains (losses) of ($1.7) million, ($1.1) million and $0.4 million, respectively.

ITEM 4. — CONTROLS AND PROCEDURES

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of July 31, 2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of July 31, 2011, our management, including our chief executive officer and chief financial officer, concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended July 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1. — LEGAL PROCEEDINGS

From time to time, we may be party to or may be threatened with litigation in the ordinary course of business, but we are not currently a party to any pending or ongoing legal proceedings responsive to this item number. See Note 7(b) to our consolidated financial statements, which are included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2011 as filed with the SEC on April 14, 2011, for more information regarding certain legal proceedings to which we are a party.

ITEM 1A. – RISK FACTORS

There have been no material changes in the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2011as filed with the SEC on April 14, 2011, but these are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition or operating results.

ITEM 2. — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. — DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. — (Removed and Reserved)

ITEM 5. — OTHER INFORMATION

None.

ITEM 6. — EXHIBITS

See the Exhibit Index attached hereto.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SSI INVESTMENTS II LIMITED

Date: September 14, 2011	By:	/s/ Thomas J. McDonald
		Thomas J. McDonald
		Chief Financial Officer

EXHIBIT INDEX

31.1	Certification of SSI Investments II Limited’s Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15(d)-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of SSI Investments II Limited’s Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15(d)-14(a) under the Securities Exchange Act of 1934.
32.1	Certification of SSI Investments II Limited’s Chief Executive Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of SSI Investments II Limited’s Chief Financial Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Attached files

SSI Investments II Ltd Reports

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