10QSB/A 1 d10qsba.txt FORM 10QSB/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ----------------------- FORM 10-QSB/A (MARK ONE) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF EXCHANGE ACT For the transition period from ________ to _________ Commission File Number 0-13741 ITC LEARNING CORPORATION ------------------------ (Name of small business issuer as specified in its charter) Maryland 52-1078263 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 13515 Dulles Technology Drive Herndon, Virginia 20171 ----------------------- (Address of principal executive offices) (703) 713-3335 -------------- (Issuer's telephone number) ----------------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. [X] Yes [_] No As of September 30, 2000, 3,964,078 shares of Common Stock were outstanding. Transitional Small Business Disclosure Format (check one): [_] Yes [X] No ITC LEARNING CORPORATION FORM 10-QSB INDEX
Part I - Financial Information Page ---- Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2000 and 1999................... 1 Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999......................................... 2-3 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999.................................... 4 Notes to Condensed Consolidated Financial Statements............................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................ 12 Part II - Other Information Item 1. Legal Proceedings................................................................ 17 Item 2. Changes in Securities and Use of Proceeds........................................ 17 Item 3. Defaults Upon Senior Securities.................................................. 17 Item 4. Submission of Matters to a Vote of Security Holders.............................. 17 Item 5. Other Information................................................................ 17 Item 6. Exhibits and Reports on Form 8-K................................................. 18
PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements ITC LEARNING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the 3 Months Ended For the 9 Months Ended September 30, September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Net revenues.......................... $ 823,436 $ 3,102,150 $ 4,153,439 $ 14,273,729 Cost of sales......................... 835,748 2,220,530 3,162,458 6,733,204 ------------- ------------- ------------- ------------- Gross margin.......................... (12,312) 881,620 990,981 7,540,525 Sales and marketing expense........... 538,265 1,582,673 1,838,123 4,777,734 General and administrative expense............. 1,456,792 1,545,022 4,546,239 4,356,325 Equity in earnings of affiliates...... (20,882) (37,101) (107,547) (149,408) ------------- ------------- ------------- ------------- Loss before interest and income taxes.................. (1,986,487) (2,208,974) (5,285,834) (1,444,126) Interest income....................... 6,580 21,003 14,730 67,969 Interest expense...................... (228,647) (79,053) (631,573) (239,959) Gain on sale of product line.......... 24,587 -- 24,587 -- ------------- ------------- ------------- ------------- Loss before income taxes.............. (2,183,967) (2,267,024) (5,878,090) (1,616,116) Income tax expense (benefit).......... -- -- -- -- ------------- ------------- ------------- ------------- Net loss.............................. $ (2,183,967) $ (2,267,024) $ (5,878,090) $ (1,616,116) ============= ============= ============= ============= Net loss per common share: Basic and diluted................. $ (0.56) $ (0.58) $ (1.51) $ (0.42) ============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements. 1 ITC LEARNING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (Unaudited)
September 30, December 31, 2000 1999 ---- ---- Current assets: Cash and cash equivalents....................................... $ 246,819 $ 535,178 Accounts receivable, net (note 2)............................... 940,129 4,482,511 Due from affiliates............................................. 112,269 175,533 Inventories, net of reserve of $22,500 at September 30, 2000 and December 31, 1999................. 90,864 338,900 Prepaid expenses (note 8)....................................... 951,986 153,724 Income taxes receivable......................................... 68,192 70,258 Deferred financing costs, net................................... 38,409 65,000 ------------- ------------- Total current assets........................................ 2,448,668 5,821,104 Note receivable (note 3)............................................. 344,828 537,628 Property and equipment: Video and computer equipment.................................... 2,510,955 2,666,316 Furniture and fixtures.......................................... 191,309 210,994 Leasehold improvements.......................................... 59,336 61,340 ------------- ------------- 2,761,600 2,938,650 Less accumulated depreciation and amortization.................. (2,314,795) (2,020,237) ------------- ------------- Net property and equipment.................................. 446,805 918,413 Capitalized program development costs, net of accumulated amortization of $8,050,019 and $6,282,102 at September 30, 2000 and December 31, 1999, respectively................................. 2,634,429 5,097,679 Intangible assets, net of accumulated amortization of $1,547,535 and $1,617,499 at September 30, 2000 and December 31, 1999, respectively............................. 1,779,245 3,504,645 Prepaid royalties.................................................... 1,366,769 -- Other................................................................ 10,352 10,927 ------------- ------------- Total assets.................................................... $ 9,031,096 $ 15,890,396 ============= =============
See accompanying notes to condensed consolidated financial statements. 2 ITC LEARNING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
September 30, December 31, 2000 1999 ---- ---- Current liabilities: Line of credit (note 4)......................................... $ -- $ 663,838 Current installments of long-term debt (note 5)................. 2,362,578 277,160 Accounts payable................................................ 2,078,997 2,193,676 Due to affiliates............................................... 52,525 187,070 Accrued compensation and benefits............................... 233,801 167,218 Deferred revenues............................................... 300,204 373,144 Other accrued expenses.......................................... 1,058,262 2,260,240 Income taxes payable ........................................... 42,750 6,128 ------------- ------------- Total current liabilities................................... 6,129,117 6,128,474 Deferred lease obligations........................................... 17,837 12,119 Long-term debt (note 5).............................................. 1,074,068 2,313,604 ------------- ------------- Total liabilities........................................... 7,221,022 8,454,197 Stockholders' equity: Common stock, $0.10 par value, 12,000,000 shares authorized; 3,964,078 and 3,964,078 shares issued and outstanding at September 30, 2000 and December 31, 1999........................................... 396,408 396,408 Additional capital.............................................. 17,083,716 16,975,959 Note receivable from ESOP....................................... (290,002) (359,377) Retained deficit................................................ (15,441,799) (9,563,709) Accumulated other comprehensive gain (loss) (note 7)............ 61,751 (13,082) ------------- ------------- Total stockholders' equity.................................. 1,810,074 7,436,199 ------------- ------------- Total liabilities and stockholders' equity........................... $ 9,031,096 $ 15,890,396 ============= =============
3 ITC LEARNING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2000 1999 ---- ---- Cash flows from operating activities: Net loss............................................................. $ (5,878,090) $ (1,616,116) Reconciling items: Provision for doubtful accounts................................. 180,000 150,000 Depreciation and amortization................................... 5,325,639 2,830,776 Foreign currency translation adjustment......................... 74,833 (9,095) Changes in operating assets and liabilities: Decrease in accounts receivable............................. 3,362,382 397,777 Decrease in inventories..................................... 248,036 140,246 Increase in prepaid expenses and other assets............... (2,165,031) (76,055) Decrease in income taxes receivable......................... 2,066 209,567 Decrease in long term receivable............................ 192,800 3,832 Decrease in accounts payable................................ (114,678) (361,223) Decrease in due to affiliates, net.......................... (71,281) (166,664) Increase in accrued compensation and benefits............... 66,583 175,189 Decrease in accrued expenses................................ (1,179,533) (729,355) Decrease in deferred revenues............................... (72,940) (55,196) Increase (decrease) in deferred lease obligations........... 5,718 (17,087) Increase (decrease) in income tax payable................... 36,622 (9,415) ------------- ------------- Net cash provided by operating activities............................ 13,126 867,181 Cash flows from investing activities: Capitalized program development costs........................... (358,513) (1,886,112) Capital expenditures............................................ -- (402,106) ------------- ------------- Net cash used for investing activities............................... (358,513) (2,288,218) Cash flows from financing activities: Borrowings under line of credit................................. -- 9,736,729 Repayments under line of credit................................. (663,838) (7,834,000) Principal payments on long-term debt............................ (311,221) (567,439) Proceeds from issuance of long-term debt........................ 962,712 -- Issuance of common stock........................................ -- 45,805 Employee stock ownership plan note collections.................. 69,375 69,375 ------------- ------------- Net cash provided by financing activities............................ 57,028 1,450,470 ------------- ------------- Net increase (decrease) in cash...................................... (288,359) 29,433 Cash and cash equivalents, beginning of period....................... 535,178 267,045 ------------- ------------- Cash and cash equivalents, end of period............................. $ 246,819 $ 296,478 ============= =============
See accompanying notes to condensed consolidated financial statements. 4 ITC LEARNING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 (Unaudited) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements of ITC Learning Corporation ("ITC" or the "Company") include the accounts of its wholly owned subsidiaries Activ Training, Ltd. ("Activ"), ITC Australasia Pty. Ltd. ("ITCA"), Turn-Key Training Technologies, Inc. ("Turn-Key"), ITC Canada Limited, and ComSkill Learning Centers, Inc. ("ComSkill"). ITC is a worldwide provider of education and training software to professionals in business, education and government organizations. Incorporated under the laws of the state of Maryland in 1977 the Company develops, markets and delivers specific libraries of interactive multimedia computer-based training ("CBT") courseware designed for CD-ROM, intranet and Internet delivery, thus enabling organizations to effectively and efficiently deliver training to improve individual and organizational performance. The Company operates in four reportable segments: U.S., Canada, Australia and the United Kingdom. Significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of the Company's management, the interim condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Certain prior year amounts have been reclassified to improve comparability to current year presentations. The interim condensed consolidated financial statements should be read in conjunction with the Company's December 31, 1999 audited financial statements included with the Company's filing on Form 10-KSB. The interim operating results are not necessarily indicative of the operating results for the full fiscal year. The Company's financial statements have been presented on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. The Company experienced a net loss in the nine months ended September 30, 2000, and the years ended 1999 and 1998. Although the Company expects operating results to improve, there can be no assurances that the Company will not experience adverse results of operation in the future. The Company believes that its existing cash, anticipated cash flows from 2000 operations, proceeds from sale of non-core Company assets, and planned capital fund raising activities should provide sufficient resources to fund its activities for the remainder of 2000. However, the timing of aforementioned capital infusion is critical, as the Company is currently receiving pressure from some of its larger suppliers. Anticipated cash flows from 2000 operations are largely dependent upon the Company's ability to achieve its sales and gross profit objectives for its currently existing products and new products to be launched in 2000. Achievement of these objectives is subject to various risk factors related to, among other things: incremental sales resulting from expansion of distribution capabilities; the Company's ability to deploy its courseware over the Internet and corporate intranets; the Company's ability to control costs in relation to future revenues, the acceptance of the Company's new CBT courseware management system and the Company's ability to raise capital. If the Company is unable to meet these objectives, it will consider expansion of existing or development of alternative sources of bank financing; the curtailment of certain capital expenditures and discretionary expenditures (such as travel, consulting and salaries); and various other courses of action, including the possible sale of the Company. These are forward-looking statements. See Forward-Looking Statements and Risk Factors for Further Discussion. 5 ITC LEARNING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) September 30, 2000 (Unaudited) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenues and Costs Revenues include both off-the-shelf and custom courseware sales, courseware licenses, consulting service revenues and hardware revenues. The Company recognizes revenues from off-the-shelf product and hardware sales as units are shipped. The Company permits the customer the right to return the courseware within 30 days of purchase. Revenues from sales of custom training programs that are developed and produced under specific contracts with customers, including contracts with affiliated joint ventures and limited partnerships, are recognized on a percentage of completion basis as related costs are incurred during the production period. Gross revenues from sales of affiliated joint venture and limited partnership copyrighted courseware are included in the Company's financial statements, as are related production, selling and distribution costs. Amounts due to co-owners of the affiliated venture/partnerships related to such courseware sales are reflected as royalties and included in cost of sales in the financial statements. Revenues from courseware licenses are recognized upon the delivery of the initial copy of each product licensed, and related duplication costs are accrued based on estimates. Revenues from consulting services are recognized as services are performed. Net Income (Loss) Per Common Share Basic earnings per common share is computed based on the weighted average number of common shares outstanding during the year. Diluted earnings per common share is computed based on the weighted average number of common shares outstanding plus the effect of stock options and other potentially dilutive common stock equivalents. The dilutive effect of stock options and other potentially dilutive common stock equivalents is determined using the treasury stock method based on the Company's average stock price. The details of the earnings per share calculation for the three and nine months ended September 30, 2000 and 1999 follow:
Income Per Share (Loss) Shares Amount ------ ------ ------ Three months ended September 30, 2000 Loss per share of common stock - basic............ $ (2,183,967) 3,905,755 $ (0.56) Dilutive securities: Stock options................................. -- -- -- ------------ ------------ ----------- Loss per share of common stock - diluted.......... $ (2,183,967) 3,905,755 $ (0.56) ------------ ------------ ----------- Three months ended September 30, 1999 Earnings per share of common stock - basic........ $ (2,267,024) 3,881,382 $ (0.58) Dilutive securities: Stock options................................. -- -- -- ------------ ------------ ----------- Earnings per share of common stock - diluted...... $ (2,267,024) 3,881,382 $ (0.58) ------------ ------------ -----------
6 ITC LEARNING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) September 30, 2000 (Unaudited) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Per Share (Loss) Shares Amount ------ ------ ------ Nine months ended September 30, 2000 Loss per share of common stock - basic............ $ (5,878,090) 3,915,755 $ (1.51) Dilutive securities: Stock options................................. -- -- -- ------------ ------------ ------------ Loss per share of common stock - diluted.......... $ (5,878,090) 3,915,755 $ (1.51) ------------ ------------ ------------ Nine months ended September 30, 1999 Earnings per share of common stock - basic........ $ (1,616,116) 3,890,415 $ (0.42) Dilutive securities: Stock options................................. -- -- -- ------------ ------------ ------------ Earnings per share of common stock - diluted...... $ (1,616,116) 3,890,415 $ (0.42) ------------ ------------ ------------
NOTE 2 - ACCOUNTS RECEIVABLE Accounts receivable include the following: September 30, December 31, 2000 1999 ---- ---- Trade accounts receivable................... $ 1,435,330 $ 4,717,097 Unbilled contract receivables............... 17,940 200,000 Less allowance for doubtful accounts........ (681,369) (502,644) ------------ ------------ Trade accounts receivable, net.......... 771,901 4,414,453 Other receivables........................... 168,228 68,058 ------------ ------------ $ 940,129 $ 4,482,511 ============ ============ NOTE 3 - NOTE RECEIVABLE On November 20, 1997, the Company entered into a stock purchase agreement with Anderson Holdings Inc., to sell all of the Company's stock in its wholly owned subsidiary Anderson Soft-Teach ("AST"). Pursuant to the transaction, ITC accepted an 8% promissory note in the amount of $950,000. Under the terms of the note, interest payments are due quarterly, with the remaining principal balance due in 2001. Under the terms of the stock purchase agreement, ITC and AST entered into a reciprocal agreement to sell each other's products. Royalties earned by AST for sales of their products under this agreement will be applied to the principal value of the note. NOTE 4 - LINE OF CREDIT On January 21, 2000, the Company satisfied its outstanding debt, and all associated fees and expenses under its line of credit agreement. The Company is currently operating without a short-term credit facility. 7 ITC LEARNING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) September 30, 2000 (Unaudited) NOTE 5 - LONG-TERM DEBT Long-term debt at September 30, 2000 and December 31, 1999 consists of the following:
September 30, December 31, 2000 1999 ---- ---- Non-related party debt: ----------------------- 8.0% senior note due 2003............................................ $ 866,709 $ 1,177,930 5.5% note due 2001, net of unamortized discount of $120,644.......... 879,356 795,834 9.5% note due 2001, net of unamortized discount of $334,818.......... 865,182 617,000 ------------- ------------- Subtotal - non-related party debt.................................... 2,611,247 2,590,764 Related party debt: ------------------- 7.0% notes due 2002, net of unamortized discount of $55,024.......... 407,369 -- 8.0% notes due 2000, net of unamortized discount of $7,288........... 418,030 -- ------------- ------------- Subtotal - related party debt........................................ 825,399 -- ------------- ------------- Total debt........................................................... 3,436,646 2,590,764 Less current maturities.............................................. (2,362,578) (277,160) ------------- ------------- Long-term debt, net.................................................. $ 1,074,068 $ 2,313,604 ============= =============
The 8.0% note payable is due in monthly interest installments and quarterly principal installments, and matures in June 2003. The note has a subordinated interest position to the Company's principal lender, in the receivables and inventory of ITC Canada Limited. Additionally, the note carries a security interest in the fixed assets and intellectual property of ITC Canada Limited, which ranks pari passu with the Company's principal lender. The 5.5% convertible subordinated note payable is due on April 2, 2001. The note is secured by the assets of the Company and is subordinated to existing and future indebtedness of the Company. Interest and principal are due in full at maturity. The note is convertible into shares of common stock of the Company, up to the maturity date, at a price of $2.00 per share. The note was issued with warrants which grant the holders the right to acquire 291,500 shares of the Company's common stock at a per share price of $2.00. The warrants expire on April 2, 2001. The warrants were determined to have a value of $245,000, which was recorded as additional capital. The resulting debt discount is being amortized over the holding period of the note. The 9.5% convertible subordinated note payable is due on April 2, 2001. The note is secured by the assets of the Company and is subordinated to existing and future indebtedness of the Company. Interest and principal are due in full at maturity. The note may be converted into shares of common stock of the Company at any time up to maturity date, at a price of $1.75 per share. The note was issued with warrants, which grant the holders the right to acquire 349,800 shares of the Company's common stock at a price of $1.75 per share. The warrants expire on April 1, 2002. The warrants were determined to have a value of $508,000, which was recorded as additional capital. The resulting debt discount is being amortized over the holding period of the note. 8 ITC LEARNING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) September 30, 2000 (Unaudited) NOTE 5 - LONG-TERM DEBT (CONTINUED) During the first quarter of 2000, the Company issued 7.0% convertible subordinated notes payable to certain Officers and Directors of the Company, and various other related parties, in the amount of $462,392, due on June 30, 2002. Interest is payable semi-annually and principal is due in full at maturity. The notes may be converted into shares of common stock of the Company at any time up to maturity date, at a price of $2.75 per share. The notes were issued with warrants that grant the holders the right to acquire 46,239 shares of the Company's common stock, at a price of $2.75 per share. The warrants expire on June 30, 2001. The warrants were determined to have a value of $78,607, which was recorded as additional capital. The resulting debt discount is being amortized over the holding period of the notes. On January 20, 2000 the Company issued 8.0% notes payable to certain Officers and Directors of the Company, and various other related parties, in the amount of $325,318, due upon the Company closing a line of credit of at least $1,000,000. As of June 30, 2000, the Company has not secured a line of credit, and has extended the due date of the notes until the repayment of the notes will not materially and adversely affect the Company's business operations. Interest and principal are due in full at maturity. The notes were issued with warrants that grant the holders the right to acquire 15,900 shares of the Company's common stock, at a price of $2.63 per share. The warrants expire January 31, 2002. The warrants were determined to have a value of $29,150, which was recorded as additional capital. The resulting debt discount is being amortized over the holding period of the notes. NOTE 6 - SEGMENT INFORMATION The following tables identify revenues and profit or loss by reportable segment for the three and nine months ended September 30, 2000 and 1999 (amounts in thousands): Three months ended September 30, 2000
---------------------------------------------------------------------------------------------------------- United United States Canada Kingdom Australia Total ---------------------------------------------------------------------------------------------------------- Revenues from external customers...... $ 534 $ 94 $ 145 $ 50 $ 823 Intersegment revenues................. 140 2 -- -- 142 Segment income (loss) before taxes.... (1,386) (519) (106) (173) (2,184) ---------------------------------------------------------------------------------------------------------- Three months ended September 30, 1999 ---------------------------------------------------------------------------------------------------------- United United States Canada Kingdom Australia Total ---------------------------------------------------------------------------------------------------------- Revenues from external customers...... $ 2,214 $ 264 $ 476 $ 148 $ 3,102 Intersegment revenues................. 316 42 -- -- 358 Segment loss before taxes............. (1,484) (440) (81) (262) (2,267) ----------------------------------------------------------------------------------------------------------
9 ITC LEARNING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) September 30, 2000 (Unaudited) NOTE 6 - SEGMENT INFORMATION (CONTINUED) Nine months ended September 30, 2000
---------------------------------------------------------------------------------------------------------- United United States Canada Kingdom Australia Total ---------------------------------------------------------------------------------------------------------- Revenues from external customers...... $ 1,993 $ 240 $1,371 $ 549 $ 4,153 Intersegment revenues................. 1,022 40 -- -- 1,062 Segment income (loss) before taxes.... (3,780) (1,677) (5,878) (165) (5,878) ---------------------------------------------------------------------------------------------------------- Nine months ended September 30, 1999 ---------------------------------------------------------------------------------------------------------- United United States Canada Kingdom Australia Total ---------------------------------------------------------------------------------------------------------- Revenues from external customers...... $10,416 $1,447 $1,729 $ 682 $14,274 Intersegment revenues................. 1,523 291 -- -- 1,814 Segment loss before taxes............. (351) (848) (179) (238) (1,616) ......... ----------------------------------------------------------------------------------------------------------
NOTE 7 - COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss), net of related tax, for the nine months ended September 30, 2000 and 1999 are as follows:
September 30, September 30, 2000 1999 ---- ---- Net loss.......................................... $ (5,878,090) $ (1,616,116) Foreign currency translation adjustment........... 74,833 (9,095) ------------- -------------- Comprehensive income (loss) $ (5,803,257) $ (1,625,211) ============== ==============
The components of accumulated other comprehensive income, net of related tax, at September 30, 2000 and December 31, 1999 are as follows:
September 30, December 31, 2000 1999 ---- ---- Cumulative foreign currency translation adjustment........... $ 61,751 $ (13,082) ============= =============
10 ITC LEARNING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) September 30, 2000 (Unaudited) NOTE 8 - SALE OF PRODUCT LINE Sale of AdminSTAR(TM) Effective July 31, 2000, the Company completed the sale of its AdminSTAR(TM) enterprise learning management system product line, to LearnFrame, Inc., a provider of e-Learning technologies and services. The transaction, valued at a negotiated value of $4,000,000, consists of a cash payment of $250,000, paid in five equal monthly installments beginning on the closing date, and $3,750,000 of prepaid royalties on the sale of LearnFrame products over the next four years. The Company accounted for the sale of AdminSTAR(TM) at the recorded book value of AdminSTAR(TM) which management believes approximates fair value. As a result of the transaction, the Company recorded a receivable of $250,000, of which $150,000 had been received at December 31, 2000, and a prepaid royalty of $2,066,000. Based on the proration of the monetary to non-monetary portions of the transaction, the Company also recorded a gain of $25,000 on the sale of AdminSTAR(TM). The Company's prepaid royalty is charged to cost of sales as units of AdminSTAR and the Pinnacle Learning Manager are sold. It is reasonably possible that the estimates of anticipated future sales of the AdminSTAR(TM) and Pinnacle Learning Management Systems will be significantly reduced due to compatibility pressures or technological obsolescence. As a result, management will periodically evaluate the earning amount of the prepaid royalty at December 31, 2000 of $2,017,000 for potential impairment in accordance with the provisions of Statement of Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of". The Company will consider both historical performance and anticipated future results in its evaluation of potential impairment. Accordingly, when indicators of impairment are present, the Company will evaluate the carrying value of this asset in relation to the operating performance of the business and future and undiscounted cash flows expected to result from the use of this asset. Impairment losses will be recognized when the sum of expected future cash flows are less than the assets' carrying value. At December 31, 2000, management believes no impairment of the prepaid royalty exists. This sale follows the execution of an Original Equipment Manufacturer ("OEM") and distribution agreement between ITC and LearnFrame, dated May 22, 2000, giving ITC the right to private label and distribute LearnFrame's proprietary learning management system - Pinnacle Learning Manager. NOTE 9 - SUBSEQUENT EVENT In October of 2000, the Company entered into an agreement with two investors to provide the Company with $500,000 of convertible debt financing. Under the terms of the agreement, the debt may be converted into shares of common stock of the Company at $1.00 per share. The maturity of the debt financing is December 31, 2001, bears a 10% annual interest rate and has 500,000 warrants associated with the financing. 11 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview of Business ITC Learning Corporation is a worldwide provider of education and training software to professionals in business, education and government organizations. Incorporated under the laws of the state of Maryland in 1977 the Company develops, markets and delivers specific libraries of interactive multimedia CBT training courseware designed for CD-ROM, intranet and Internet delivery, thus enabling organizations to effectively and efficiently deliver training to improve individual and organizational performance. FORWARD-LOOKING STATEMENTS AND RISK FACTORS Forward-looking Statements Certain statements made by the Company's management may be considered to be "forward-looking statements" within the meaning of the Private Securities Litigation Act of 1995. Forward-looking statements are based on various factors and assumptions that include known and unknown risks and uncertainties. The words "believe," "expect," "anticipate" and "project," and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. Such statements may include, but not be limited to, projections of revenues, income or loss, expenses, availability of capital, plans, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future results could differ materially from those described in forward-looking statements as a result of the risks set forth in the following discussion, among others. Risk Factors The Company's financial statements have been presented on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. The Company experienced a net loss in the nine months ended September 30, 2000, and the years ended 1999 and 1998. Although the Company expects operating results to improve, there can be no assurances that the Company will not experience adverse results of operation in the future. The Company believes that its existing cash, anticipated cash flows from 2000 operations, proceeds from sale of non-core Company assets, and planned capital fund raising activities should provide sufficient resources to fund its activities for the remainder of 2000. However, the timing of aforementioned capital infusion is critical, as the Company is currently receiving pressure from some of its larger suppliers. Anticipated cash flows from 2000 operations are largely dependent upon the Company's ability to achieve its sales and gross profit objectives for its currently existing products and new products to be launched in 2000. Achievement of these objectives is subject to various risk factors related to, among other things: incremental sales resulting from expansion of distribution capabilities; the Company's ability to deploy its courseware over the Internet and corporate intranets; the Company's ability to control costs in relation to future revenues, the acceptance of the Company's new CBT courseware management system and the Company's ability to raise capital. If the Company is unable to meet these objectives, it will consider expansion of existing or development of alternative sources of bank financing; the curtailment of certain capital expenditures and discretionary expenditures (such as travel, consulting and salaries); and various other courses of action, including the possible sale of the Company. A number of factors could also contribute to significant fluctuations in operating results, which may result in volatility in the price of the Company's common stock. These include, but are not limited to, the size and timing of orders and shipments, the mix of ITC-developed products and third party products, the mix of sales from the Company's direct and indirect distribution channels, the introduction and acceptance of new products, and the degree to which the market understands and accepts the Company's role as a provider of training solutions. 12 In addition, the Company faces certain general business risks, which could materially and adversely impact future operating results. These include, but are not limited to, changes in economic conditions, the cost of labor and raw materials, changes in technology and general competitive factors. RESULTS OF OPERATIONS Three months ended September 30, 2000 ("Third Quarter of 2000") compared to the three months ended September 30, 1999 ("Third Quarter of 1999") Revenues Total revenues for the third quarter of 2000 totaled $823,000, as compared to $3,102,000 for the third quarter of 1999, representing a decrease of $2,279,000 or 73%. Courseware revenues, which include sales of off-the-shelf CBT products, custom CBT products, learning management system sales, consulting services, fees, royalties and videotape training products, totaled $771,000 during the third quarter of 2000, as compared to $2,504,000 for the third quarter of 1999. The decrease in total revenues was primarily attributable to lower product sales within the North American markets as well as the United Kingdom and Australia. As compared to the third quarter of 1999, the Company's North American sales and marketing efforts have been substantially impacted by the Company's working capital constraints, which hindered the Company's ability to aggressively recruit, train and support both direct and indirect sales and marketing resources. In the international markets, working capital constraints have limited the Company's ability to expand sales and marketing activities and continue efforts to develop new products for distribution. The Company does believe that its existing sales and marketing organization can perform at a level sufficient to generate positive cash flow for the Company, and will continue to leverage its existing, and new sales and marketing resources to maintain and increase revenues. This is a forward-looking statement. See Forward-Looking Statements and Risk Factors for Further Discussion. Cost of Sales and Gross Margin Cost of sales consists of the amortized costs of developing new course titles and updating the Company's existing libraries, product material costs, fulfillment costs, reseller discount fees, sales commissions, third party product royalties and hardware costs. Cost of sales for the third quarter 2000 totaled $836,000 resulting in a negative gross margin of $12,000, as compared to cost of sales of $2,221,000 and gross margin of $882,000, for the third quarter of 1999. The decrease in cost of sales of $1,385,000 in 2000 as compared to 1999, was the result of decreased sales volume. The decrease in gross margin of $894,000, was primarily attributable to decreased revenue in relation to fixed product development amortization costs, as well as changes in the mix of sales form the Company's direct and indirect sales channels. Selling, General and Administrative Expenses Selling, general and administrative expenses totaled $1,995,000 for the third quarter of 2000, as compared to $3,128,000 for the third quarter of 1999, representing a decrease of $1,133,000 or 36%. Selling expenses consist primarily of salaries of sales personnel, travel, advertising, marketing and promotional expenses. Selling expenses for the third quarter of 2000 totaled $538,000, as compared to $1,583,000 for the third quarter of 1999, representing a decrease of $1,045,000 or 66%. The decrease in selling expenses in the third quarter of 2000 as compared to the third quarter of 1999 was primarily due to the Company's reduction of North American sales and marketing personnel during the last half of 1999. General and administrative expenses consist of the costs of developing new products and the costs of the Company's executive management and support functions such as customer assurance, product fulfillment, human resources, and finance and administration. General and administrative expense for the third quarter of 2000 totaled $1,457,000 as compared to $1,545,000 for the third quarter of 1999, representing a decrease of 13 $88,000 or 6%. The decrease in general and administrative expenses in the third quarter of 2000 as compared to the third quarter of 1999 was primarily due to the effect of a reduction in North American administrative personnel during the fourth quarter of 1999 and other cost reduction measures taken by the Company during 2000. Income Before Income Taxes and Net Income Operations for the third quarter of 2000 resulted in a pre-tax and net loss of $2,184,000, or $0.56 per share, as compared to pre-tax and net loss of $2,267,000, or $0.58 per share, for the third quarter of 1999. The lower pre-tax and net loss for the third quarter of 2000 was primarily due to a combination of decreased operating costs and the recognition of a gain on the sale of the Company's AdminSTAR(TM) product line, offset by reduced revenues and resulting gross margin, as compared to the third quarter of 1999. Nine months ended September 30, 2000 compared to the Nine months ended September 30, 1999 Revenues Revenues for the nine months ended September 30, 2000 totaled $4,153,000 as compared to $14,274,000 for the nine months ended September 30, 1999, representing a decrease of $10,121,000 or 71%. The decrease in revenues was primarily attributable to decreased sales of the Company's learning management system - AdminSTAR(TM), and decreased courseware product sales within the Company's North American and international markets. As compared to the nine months ended September 30, 1999, the Company's North American sales and marketing efforts have been substantially impacted by the Company's working capital constraints, which hindered the Company's ability to aggressively recruit, train and support both direct and indirect sales and marketing resources. In the international markets, working capital constraints have limited the Company's ability to expand sales and marketing activities and continue efforts to develop new products for distribution. The Company does believe that its existing sales and marketing organization can perform at a level sufficient to generate positive cash flow for the Company, and will continue to leverage its existing, and new sales and marketing resources to maintain and increase revenues. This is a forward-looking statement. See Forward-Looking Statements and Risk Factors for Further Discussion. Cost of Sales and Gross Margin Cost of sales for the nine months ended September 30, 2000 totaled $3,162,000 resulting in a gross margin of $991,000, as compared to cost of sales of $6,733,000 resulting in gross margin of $7,540,000 for the nine months ended September 30, 1999. The decrease in cost of sales of $3,571,000 in 2000 as compared to 1999 was the result of decreased sales volume and related variable costs of sale. The decrease in gross margin of $6,549,000 was primarily attributable to decreased revenue in relation to fixed product development amortization costs, as well as changes in the mix of sales form the Company's direct and indirect sales channels. Selling, General and Administrative Expenses Selling, general and administrative expenses totaled $6,384,000 for the nine months ended September 30, 2000 as compared to $9,134,000 for the nine months ended September 30, 1999, representing a decrease of $2,750,000 or 30%. Selling expenses for the nine months ended September 30, 2000 totaled $1,838,000 as compared to $4,778,000 for the nine months ended September 30, 1999, representing a decrease of $2,940,000 or 62%. The decrease in selling expenses during the nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999 was primarily due to the Company's reduction of sales and marketing personnel during the last half of 1999. 14 General and administrative expenses for the nine months ended September 30, 2000 totaled $4,546,000 as compared to $4,356,000 for the nine months ended September 30, 1999, representing an increase of $190,000 or 4%. The increase in general and administrative expenses during the nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999 was primarily due to increased depreciation and amortization expense related to the divestiture of the Company's AdminSTAR(TM) product line, offset by the effect of a reduction in North American administrative personnel during the fourth quarter of 1999. Effective July 31, 2000, the Company completed a transaction for the sale of its AdminSTAR(TM) product line to Learnframe, Inc. See Note 8 to the condensed and consolidated financial statements - Sale of Product Line. The Company believes it will realize annual cost savings of approximately $267,000 in development and sales related expenses and $205,000 in depreciation and amortization expenses as a result of the divestiture of this product line. This is a forward-looking statement. See Forward-Looking Statements and Risk Factors for Further Discussion. Income Before Income Taxes and Net Income Operations for the nine months ended September 30, 2000 resulted in pre-tax and net loss of $5,878,000 or $1.51 per share, as compared to a pre-tax and net loss of $1,616,000 or $0.42 per share for the nine months ended September 30, 1999. The higher pre-tax and net loss for the nine months ended September 30, 2000 was primarily due to decreased revenues and resulting gross margin as compared to the nine months ended September 30, 1999. CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES Working capital deficit at September 30, 2000 was $3,680,000 as compared to a deficit of $307,000 at December 31, 1999, representing a decrease in working capital of $3,373,000, primarily due to the April 2, 2001 maturity date of $2,200,000 in convertible debt payable, as well as the Company's negative operating performance for the first nine months of 2000. Cash provided by operating activities totaled $13,000 for the nine months ended September 30, 2000, as compared to $867,000 for the nine months ended September 30, 1999, representing a decrease of $854,000. The decrease was primarily due to increased turnover of operating assets in relation to operating liabilities during the nine months ended September 30, 2000, offset by lower net income as compared to the nine months ended September 30, 1999. Effective July 31, 2000, the Company completed a transaction for the sale of its AdminSTAR(TM) product line to Learnframe, Inc. See Note 8 to the condensed and consolidated financial statements - Sale of Product Line. The Company believes it will realize annual cash cost savings of approximately $267,000 in development and sales related expenses as a result of the divestiture of this product line. This is a forward-looking statement. See Forward-Looking Statements and Risk Factors for Further Discussion. Cash used for investing activities totaled $359,000 for the nine months ended September 30, 2000, as compared to cash used for investing activities of $2,288,000 for the nine months ended September 30, 1999, representing a decrease of $1,929,000. The decrease was primarily due to decreased capital and product development expenditures during the nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999. Cash provided by financing activities totaled $57,000 for the nine months ended September 30, 2000, as compared to cash provided by financing activities of $1,450,000 for the nine months ended September 30, 1999, representing a decrease of $1,393,000. The decrease was primarily due to the Company's decreased utilization and subsequent payoff of its line of credit, offset by the issuance of long-term notes payable during 2000. The Company believes that its existing cash, anticipated cash flows from 2000 operations, proceeds from sale of non-core Company assets, and planned capital fund raising activities should provide sufficient resources 15 to fund its activities for the remainder of 2000. However, the timing of aforementioned capital infusion is critical, as the Company is currently receiving pressure from some of its larger suppliers. Anticipated cash flows from 2000 operations are largely dependent upon the Company's ability to achieve its sales and gross profit objectives for its currently existing products and new products to be launched in 2000. Achievement of these objectives is subject to various risk factors related to, among other things: incremental sales resulting from expansion of distribution capabilities; the Company's ability to deploy its courseware over the Internet and corporate intranets; the Company's ability to control costs in relation to future revenues, the acceptance of the Company's new CBT courseware management system and the Company's ability to raise capital. If the Company is unable to meet these objectives, it will consider expansion of existing or development of alternative sources of bank financing; the curtailment of certain capital expenditures and discretionary expenditures (such as travel, consulting and salaries); and various other courses of action, including the possible sale of the Company. These are forward-looking statements. See Forward-Looking Statements and Risk Factors for Further Discussion. 16 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION On May 23, 2000, the Company received notification from the Nasdaq National Stock Market, Inc. that based on its Form 10-QSB filed for the period ended March 31, 2000, the Company no longer met the minimum $4 million net tangible asset requirement for continued listing on the Nasdaq National Market under Maintenance Standard 1 as set forth in Marketplace Rule 4450(a)(3). In accordance with the requirements of the May 23, 2000 notification from Nasdaq, the Company submitted on June 7, 2000, its specific plan to achieve and sustain compliance with all Nasdaq National Market listing requirements. On July 27, 2000, the Company received notification from the Nasdaq National Stock Market, Inc. that its plan of compliance had been accepted, contingent upon the Company demonstrating, based on its Form 10-QSB filing for the period ended June 30, 2000, due to be filed with the Securities and Exchange Commission by August 14, 2000, compliance with all Nasdaq National Market listing requirements including an increased net tangible assets base of $5 million. Based on the Company's Form 10-QSB filing for the period ended June 30, 2000, the Company had not met the minimum $5 million net tangible asset requirement in accordance with the extension granted by Nasdaq on July 27, 2000. As a result of its noncompliance and to avoid immediate delisting, the Company has filed an appeal to the Nasdaq Listing Qualifications Panel pursuant to procedures set forth in the Nasdaq Marketplace Rule 4800 Series. Pending the outcome of the Nasdaq Listing Qualifications Panel hearing, the Company's securities will continue to be listed on the Nasdaq National Market. Under the terms of the July 27, 2000 extension granted by Nasdaq, the Company was required to maintain a net tangible asset base of $5 million as of the filing of its Form 10-QSB for the period ended June 30, 2000. Based on the Company's Form 10-QSB filing for the period ended June 30, 2000, the Company's net tangible assets were $1,503,000, resulting in a shortfall of $3,497,000. Although the Company intended to comply with the requirements of the extension, it was unable to meet those requirements for the following reasons: (i) the Company was unable to close a sale transaction by June 30, 2000 on the sale of its AdminSTARTM product line; (ii) the Company's negative operating performance for the three months ended June 30, 2000 further deteriorated its net tangible asset base; (iii) the Company was unable to solicit favorable response form its convertible debt holders to convert their debt into equity; (iv) the Company was unable to raise additional equity capital. On September 26, 2000, the Company received notification that, effective immediately, shares of its common stock were no longer trading on the Nasdaq National Market System as a result of the Company's failure to maintain the required minimum net tangible assets. The Company's common stock is currently trading on the OTC Bulletin Board System under the symbol-ITCC.BB. 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits Exhibit No. Description -------------------------------------------------------------------------------- 27.1 Financial Data Schedule (filed herewith). B. Reports on Form 8-K: None. 18 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ITC LEARNING CORPORATION (Registrant) By: /s/Christopher E. Mack DATE November 14, 2000 --------------------------------------- ---------------------------- Christopher E. Mack, President, Treasurer, and Chief Financial Officer