CBT continues to suffer from a confidence crisis

 

Spot the difference. (1) A "provider of business, management and professional education using interactive learning technologies". (2) A "leading provider of interactive education software for IT professionals in business, education, and government markets worldwide".

The first one is a definition of what Knowledge Well does. It following the collapse in its share price and the stepping down of its two most senior executives- the then chairman and chief executive, Mr Jim Buckley, and its then chief financial officer, Mr Richard Okumoto. Both companies are clearly in the business of providing educational software. Does this raise conflict of interest questions?

A spokesman for CBT is adamant that there is no conflict of interest. They are in different markets, he said. Knowledge Well provides management and university training software, while CBT software trains people in information technology.

Knowledge Well was set up after Mr Cabe resigned as chief executive in late 1996, though he remained non-executive chairman until two months ago. If he spotted a niche in the educational software market, should he not have offered this to CBT?

If this were accepted as the norm, what is to stop entrepreneurs from building up a company, floating it, selling the shares at an appropriate time and setting up a new company in broadly the same area? A spokesman for CBT has stressed that the CBT board (excluding Mr McCabe) was offered Knowledge Well, but declined to accept. Knowledge Well's publicity makes it clear that Mr McCabe, its chairman, was "formerly the founding chairman and chairman of CBT Systems, the leading vendor of interactive education software for information technology professionals".

Some of its customers, universities for example, are the same. And Knowledge Well's products "are based on the industry-leading architecture and delivery technologies that Knowledge Well has licensed from CBT Systems and that have been developed over nearly a decade and with an investment of tens of millions of dollars".

That raises the question - what has CBT benefited from this? There are no figures on this but the spokesman said CBT operates an "open door" in sharing technology.

CBT is continuing to suffer from a crisis of confidence. Yet another class action has been lodged against it and some of its current and former officers and directors. This one, filed in the Superior Court of California, for allegedly "violating sections 11, 12(2) and 15 of the Securities Act of 1933 by misrepresenting and omitting material facts in the registration statement and prospectus issued in connection with the merger" (ForeFront).

Among other things, the complaint alleges that defendants concealed the loss of orders and market share by CBT before the merger, concealed the erosion of CBT's competitive position, and misrepresented "CBT's true purpose in acquiring ForeFront. . . .".

That, and the others, follow a similar pattern. They home in on the substantial sale of shares by directors - Mr McCabe sold shares worth $39 million over the last year but he was a non-executive director at the time. Class actions, of course, are among the known hazards in the litigious US market.

They are unlikely to cause CBT too much grief unless any settlements (and there may be none) are substantially ahead of the norm. The company, for example, has insurance which covers it and its officers to the tune of $40 million. However, of more immediate concern is for CBT to regain some credibility. When Mr McCabe retook the reins earlier this month following a collapse in the share price from $60 to $10 in just three weeks, they fell further last week to just over $6.5 before recovering to $8.5 on Friday. The timely share sale by the directors will continue to haunt the company whose shares were also negatively affected by the third quarter results which showed a 40 per cent fall in profits to $2.9 million and the comment that it will take "several quarters" for the company to return to "a path of growth and profitability".

That, coming from a company which saw its revenue rise five fold from $22.7 million in 1993 to $118.6 million in 1997 and its profit before tax rise 22 fold from $1.19 million to $26.1 million over the same period, is just short of a disaster. And the US analysts are particularly aggrieved since, up to a month ago, they were recommending the shares as a buy.

However, there are positive signs. First, Mr McCabe has come back - he could have devoted all his energies on Knowledge Well. Second, there could be a profit recovery in the last quarter. US analysts' predictions now vary considerably but on average they are opting for a 22 per cent growth in earnings for the full year (to December 1998).

While not matching the past, this puts the shares (quoted on Nasdaq) on a prospective p/e of 10.6 or almost one third of the composite software sector. That must provide them with plenty of upside potential, provided there are no further skeletons lurking about.