The Securities and Exchange Commission (SEC) is conducting an informal inquiry into the finances of SkillSoft, the company that recently merged with Dublin-based e-learning firm SmartForce.
The disclosure of the SEC inquiry is the latest in a series of problems for SkillSoft, and could ultimately lead to a full investigation and the initiation of legal proceedings against the US firm.
SkillSoft confirmed yesterday it was co-operating with the inquiry, which is investigating SkillSoft's disclosure that SmartForce improperly accounted for revenues and understated its bad-debt reserve over a three-year period.
SkillSoft, which employs more than 200 staff in Dublin, said yesterday that the inquiry could lead to a formal investigation or the commencement of legal proceedings against it by the authorities.
"We could be subject to substantial penalties, fines or regulatory sanctions, which could adversely affect our business," the firm said in a filing posted with the SEC.
The filing also discloses that SkillSoft is likely to incur substantial costs in connection with the inquiry. It may also cause a diversion of management time and attention, said the SEC filing.
However, Mr Chuck Moran, SkillSoft chief executive, told analysts yesterday that he understood the inquiry was standard practice following a restatement announcement. He said the firm could not give any detail on the inquiry.
The SEC inquiry follows the commencement of several class-action lawsuits against the firm by shareholders, which allege that SmartForce misled investors. The suits are being led by legal firms that are asking shareholders to join the action, to recover damages caused by SmartForce's alleged violation of securities law.
Several of these class action legal suits name former SmartForce executives Mr Greg Priest and Mr Bill McCabe as defendants in the cases. Mr Priest, the former chief executive of SmartForce, is now chairman of SkillSoft, and is helping the firm develop strategy.
SkillSoft said yesterday it would incur substantial legal expenses fighting these and other legal cases pending against it. The firm spent $2.5 million on legal fees in the third quarter, and estimates it will spend $2.7 million in the fourth quarter, said chief financial officer Mr Tom McDonald.
The SEC inquiry is the latest in a series of difficult issues faced by SkillSoft since it acquired SmartForce in September 2002. The firm was informed just before Christmas by the Nasdaq that it could face delisting for delaying its third-quarter financial results.
The firm delayed issuing its results in November 2002 to give it time to study SmartForce's finances and restate certain historical financial statements made by the firm over recent years.
SkillSoft warned yesterday in its results filing that it would require "significant additional time and effort" to complete this restatement process. However, it said it was hopeful that since it had now filed its quarterly report for the period in question, its shares would continue to trade on the Nasdaq National Market.
In a briefing note, Davy Stockbrokers said it remained cautious on the stock until the restatement process was completed, and it could get comfort on the revenue base for the firm going forward.
But shares in SkillSoft rose in early trading on better than expected earnings. SkillSoft reported a loss per share of nine cents, compared to a consensus estimate of 15 cents loss per share.
SkillSoft, which develops a range of e-learning software and course material for companies, said it had now completed the integration of SmartForce.
