-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AauUQYKVawGqBqaBfQWY499O3f7AZZPXgKpTVhwdCh95Bwo0md11kvfmVAf1O772 vQMtbCoiXMsyUI2H+n9PsA== 0000950133-98-000756.txt : 19980317 0000950133-98-000756.hdr.sgml : 19980317 ACCESSION NUMBER: 0000950133-98-000756 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980313 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ITC LEARNING CORP CENTRAL INDEX KEY: 0000764867 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 521078263 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-13741 FILM NUMBER: 98564941 BUSINESS ADDRESS: STREET 1: 13515 DULLES TECHNOLOGY DR CITY: HERNDON STATE: VA ZIP: 22071 BUSINESS PHONE: 7037133335 MAIL ADDRESS: STREET 1: 13515 DULLES TECHNOLOGY DRIVE CITY: HERNDON STATE: VA ZIP: 22071 FORMER COMPANY: FORMER CONFORMED NAME: INDUSTRIAL TRAINING CORP DATE OF NAME CHANGE: 19920703 10KSB 1 ITC LEARNING CORPORATION FORM 10-KSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB [X] Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 [Fee Required] for the Fiscal Year ended December 31, 1997 [ ] Transition Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 [No Fee Required] Commission File Number 0-13741 ITC LEARNING CORPORATION ------------------------ (FORMERLY KNOWN AS INDUSTRIAL TRAINING CORPORATION) (Exact name of small business issuer as specified in its charter) Maryland 52-1078263 -------- ---------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
13515 Dulles Technology Drive, Herndon, Virginia 20171 ------------------------------------------------------ (Address of principal executive offices and zip code) (703) 713-3335 -------------- Issuer's telephone number (including area code) Securities registered pursuant to Section 12(b) of the Act: None None ---- ---- (Title of each Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10 par value per share --------------------------------------- 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 X No ----- ----- Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Issuer's revenues for the year ended December 31, 1997 were $25,582,153. Aggregate market value of voting stock held by non-affiliates and outstanding at February 20, 1998 was $11,753,776. Amount was computed using the average bid and ask price as of February 20, 1998, which was $3.91. As of February 20, 1998, 3,887,731 shares of common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of the proxy statement for the annual shareholders meeting to be held May 7, 1998 are incorporated by reference into Part III. 2 TABLE OF CONTENTS
PART I PAGE - ------ ---- Item 1 Description of Business 1 Item 2 Description of Properties 3 Item 3 Legal Proceedings 4 Item 4 Submission of Matters to a Vote of Security Holders 4 PART II - ------- Item 5 Market for Common Equity and Related Stockholder Matters 5 Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 5 Item 7 Financial Statements 9 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 26 PART III - -------- Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 27 Item 10 Executive Compensation 29 Item 11 Security Ownership of Certain Beneficial Owners and Management 29 Item 12 Certain Relationships and Related Transactions 29 Item 13 Exhibits and Reports on Form 8-K 29
3 PART I ITEM 1. DESCRIPTION OF BUSINESS (a) General Development of Business ITC Learning Corporation (the "Company" or "ITC") was incorporated under the laws of the State of Maryland on January 28, 1977 as Industrial Training Corporation. Following approval by the Company's shareholders, the Company changed its name to ITC Learning Corporation on May 9, 1997. ITC develops, markets and sells training materials that are delivered in multimedia platforms. ITC's multimedia training courseware combines full-motion video, audio, animation, graphics and text into a single training presentation. The Company provides self-directed multimedia learning solutions that improve employee skills in business, education and government. The Company's products, which include the largest library of interactive CD-ROM programs available today, have improved productivity in major corporations and school systems across America. These products also enable local communities to make a positive difference every day by opening multimedia learning opportunities to the general public through the use of multimedia learning centers and they have proven very effective as Welfare to Work programs. The Company has a worldwide customer base of approximately 5,000. During 1997, the Company continued to concentrate its efforts on product development and increasing its distribution capabilities. Prior to 1997, the Company's product development efforts had focused on improving ITC's core multimedia training products, including converting its existing analog laserdisc training programs into the digital CD-ROM format. In 1997, the Company's development efforts were focused on updating its product offerings in the area of PC Skills training, particularly the Microsoft Office 97 suite of products and Internet training products. The Company also invested in the next release of its training administration product, ActivPro and in its electrical maintenance series. During 1997, the Company also invested in research and development activities to explore the feasibility of delivering its product over the Internet and corporate intranets. In 1997, the Company embarked on a new strategy intended to position itself as a broad-based education and training integrator of an expanded line of multimedia training products. In addition to broadening its own courseware library, ITC intends to enter into strategic alliances with publishers of training software in the areas of customer service, leadership, financial skills and other "soft skills" training topics. These products represent approximately 75% of the $60 billion training market, according to International Data Corporation's August 1997 industry report. In an effort to increase its distribution capabilities, the Company launched its new Business Alliance Partner ("BAP") program which is intended to increase both market coverage and bring additional industry knowledgeable resources to drive sales. In concert with these changes, the Company also began to expand its direct sales force and intends to triple its number of sales representatives and to continue the expansion and growth of the BAP program in 1998. In January 1997, the Company announced a joint marketing agreement with IBM which will enable IBM to distribute the Company's products to both the K-12 and Higher Education markets. In September 1997, the Company partnered with Pomeroy Computer Resources, Inc. of Hebron, Kentucky to supply interactive multimedia teacher training in PC literacy skills to the state of West Virginia as part of a $16 million state funded technology integration initiative. These alliances combine ITC's extensive products with the industry experience and distribution networks of these business partners, and are considered important steps in expanding the Company's distribution capabilities in the Education market. 1 4 In November 1997, the Company sold its Anderson Soft-Teach subsidiary ("Anderson" or "AST") to an investor group. As part of the agreement, the Company will retain certain rights to distribute Anderson's products throughout 1998. In December 1997, the Company's Board of Directors agreed to appoint Carl D. Stevens as Chief Executive Officer, in addition to his duties as President, replacing James H. ("Bill") Walton, a founder of the Company. In January 1998, the appointment was officially approved by the Board. Mr. Stevens had joined the Company in March 1997 as Senior Vice President and was subsequently named President and Chief Operating Officer in June 1997. Mr. Walton resigned his position as a Director of the Company in February 1998. In January 1998, the Company announced that it invested $1 million in the stock of Mentor Networks, Inc. ("Mentor"). For its investment, ITC acquired 8% of the outstanding stock of Mentor with an option to acquire an additional 12%. The Company had previously acquired the rights to distribute Mentor's products exclusively in the United States. Mentor, based in Nova Scotia, specializes in the development and distribution of interactive multimedia courseware. Mentor's product offerings include the Microsoft Office suite of PC Skills training products and Professional Skills training products in the areas of customer service, telesales, collections, leadership training and human resources. Its products include the only training product rated by Call Center Magazine as a Call Center Product of the Year in February 1998. In February 1998, the Company signed a letter of intent to acquire Turn-Key Training Technologies, Inc. ("Turn-Key"), a developer and distributor of performance-based training administration software. The purchase price for all of the outstanding common stock of Turn-Key is $700,000 in cash. ITC also agreed to employ the founder and president of Turn-Key, and will enter into an agreement with him providing for an initial payment of $600,000 cash and the issuance of 100,000 shares of ITC common stock in consideration of his employment and certain extended non-competitive covenants. Turn-Key is a privately-held company located in Grand Rapids, Michigan. Turn-Key's proprietary administration software, AdminSTAR(R), provides customers with the capability for personal skills assessment, creation of individual development plans, management of the training process for corporate training departments, and a broad array of reporting capabilities. Turn-Key's customers include the Coca Cola Corporation, NASA, Shaw Industries and the Pentagon. The Company expects to complete the acquisition of Turn-Key by the end of March 1998. (b) Narrative Description of Business ITC is an education and training integrator specializing in the development, production, marketing and sale of multimedia training courseware for corporate, educational and governmental organizations. ITC courseware uses the power of full-motion video, audio and text as a learning tool on a PC platform. These courses combine high quality video and sound with the PC's capability for graphics and automatic recordkeeping. Standard multimedia platforms for ITC products include both AVI and MPEG CD-ROM digital video format. The majority of the Company's multimedia products are sold under the Company's registered trademark ACTIV(R). These products are focused in five primary areas, as represented by the five ACTIV(R) Learning Libraries: the "ACTIV(R) PC Skills Learning Library," the "ACTIV(R) Regulatory Compliance Training Library," the "ACTIV(R) Basic Skills Learning Library," the "ACTIV(R) Technical Skills Learning Library," and the "ACTIV(R) INVOLVE(R) Instrumentation Learning Library." Distribution of the Company's products is managed through a number of channels. Primarily, the Company employs a direct salesforce which is responsible for sales of the Company's multimedia training products throughout North America, Australia and the United Kingdom, with the exception of those territories which have been sold to certain resellers as exclusive territories for distribution of the "ACTIV(R) PC Skills Learning Library." These resellers in turn employ sales persons to market and sell ITC's "PC Skills" products throughout their protected territories. In certain other U.S. markets, the 2 5 Company also uses its Business Alliance Partners to distribute its courseware products. In foreign markets other than Canada, Australia and the United Kingdom, the Company markets its products primarily through dealers and distributors. All of the Company's training programs are proprietary and, as a result, they are all protected by copyright. The Company's libraries include in excess of 200 training programs, all of which were produced by the Company. Certain of the Company's "Basic Skills" and "Technical Skills" products are owned by limited partnerships in which the Company acts as a general partner; in some cases, the Company also participates as a limited partner. In addition to selling multimedia training courseware, the Company sells related hardware products. The Company uses many IBM compatible hardware systems for the delivery of its products. In addition to being an authorized IBM Industry Remarketer and a Value Added Reseller, the Company utilizes the products of Compaq, Hewlett Packard, Gateway 2000 and other computer hardware manufacturers. Such hardware is integrated with ITC's courseware to provide a full-service solution to meet the training needs of ITC's clients. No customer accounted for more than 10% of consolidated net courseware sales in 1997 and no material part of the business is dependent upon a single customer or a few customers, the loss of any one or several of which would have a materially adverse effect on the Company. All materials used in the Company's products are available from numerous sources of supply. The Company does not foresee any shortage of such materials. Further, ITC does not believe that the loss of any single supplier would have a material adverse effect on the Company as a whole. There are many companies engaged in the business of providing training and instructional materials using various media. These companies include providers of traditional instructor-led training, multimedia developers and sellers, textbook publishers, and others, all of which compete for available training funds. At present, there are several providers of interactive multimedia training products and management believes that the number of companies providing multimedia training products will continue to increase in the future. Some of these companies are larger and have greater resources than ITC, while others offer only specialized training materials. Considering the diversity of the Company's "Learning Libraries" and the related multiple platforms, management believes that ITC offers the broadest array of multimedia training products and services available. At December 31, 1997, the Company and its subsidiaries employed a total of 74 people, all of whom are full-time. This represents a decrease of 46 employees since December 31, 1996, due primarily to the divestiture of AST and cost-cutting measures enacted in 1997. The Company utilizes free-lance and temporary personnel who are familiar with ITC's development and production process to support increased personnel requirements that arise from time to time. The Company is not a party to any collective bargaining agreements, and believes that relations with its employees are good. ITEM 2. DESCRIPTION OF PROPERTIES The Company currently occupies 26,225 square feet of office, warehouse and production space in a commercial building located at 13515 Dulles Technology Drive, Herndon, Virginia. This lease will expire in June of 1999. The Company also occupies 3,405 square feet of office space in a commercial building located at 2000 RiverEdge Parkway, Atlanta, Georgia. This lease will expire in January of 2001. Additionally, the Company has various leased space for its international operations in Australia, Canada, and the United Kingdom. All facilities are in good condition and are adequate for the Company's use. 3 6 ITEM 3. LEGAL PROCEEDINGS The Company is not a party to, nor is any of its property the subject of, any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company has not submitted any matters to a vote of security holders since the May 1997 Annual Meeting of Stockholders. 4 7 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information The Company's Common Stock is traded on the National Association of Security Dealers Automated Quotation System (NASDAQ), National Market System (NMS). The following table states the high and low quotation information by quarter for the Company's Common Stock based on actual trading, as reported by NASDAQ/NMS.
High Low ---- --- 1st Quarter, 1996 9 1/2 6 1/4 2nd Quarter, 1996 9 6 3rd Quarter, 1996 8 1/4 5 5/16 4th Quarter, 1996 6 5/16 4 1ST QUARTER, 1997 6 1/4 4 2ND QUARTER, 1997 6 4 3RD QUARTER, 1997 5 5/8 4 9/16 4TH QUARTER, 1997 5 1/4 3 5/8
(b) Holders As of December 31, 1997, there were 1,028 holders of record of the Company's Common Stock, the Company's only class of stock. (c) Dividends Shareholders of the Company's Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available. There has been no declaration of dividends since 1984. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenues During 1997, revenues for ITC Learning Corporation totaled $25,582,000 as compared with $22,144,000 in 1996, representing an increase of $3,438,000 or 16%. Courseware revenues, which includes sales of off-the-shelf courseware, custom courseware and consulting services, fees and royalties and videotape training products, totaled $18,720,000, as compared to $18,003,000 in 1996, an increase of $717,000 or 4%. Revenues from the sales of hardware systems aggregated $6,862,000 in 1997 as compared with $4,141,000 in 1996, representing an increase of $2,721,000 or 66%. The increase in courseware revenues for 1997 was primarily attributable to sales of the Company's PC Skills courseware training products in the domestic markets as well increased courseware sales in the international markets. Domestic sales from PC Skills training products, which include sales to commercial, education and government market sectors, totaled $7,819,000 for 1997 as compared to $7,192,000 for 1996, representing an increase of $627,000 or 9%. The increase is due to revenues 5 8 generated by Anderson Soft-Teach in 1997, partially offset by PC Skills revenues from the DeKalb contract in 1996. International courseware sales for the year totaled $4,210,000, representing an increase of $1,238,000 or 42% from 1996. The increase was due in part to the fact that 1997 was the first full year of operations for ITC Australasia Pty., Ltd., the Company's Australian subsidiary. Revenues in 1997 from the Education market declined from 1996 levels due to the Company's contract with the DeKalb County (GA) Board of Education ("DeKalb"). In 1996, the Company recognized approximately $3,200,000 in courseware revenues under the Dekalb contract, while 1997 courseware and services revenues from DeKalb amounted to $511,000. In total, the Company recognized $1,693,000 in Education revenues in 1997, as compared to $4,607,000 in 1996. Excluding the effect of the DeKalb contract, 1997 Education revenues decreased from 1996 by $225,000. Sales of the Company's core Technical Skills and Regulatory Compliance products totaled $5,394,000 during 1997, representing a decrease of $604,000 from 1996 levels; meanwhile, sales from the Federal Government markets aggregated $610,000 during 1997 as compared to $1,512,000 achieved during 1996. The increase in hardware revenues was attributable to the Company's 1997 contract with DeKalb. Under the terms of the contract, the Company delivered and installed approximately 3,000 desktop and laptop computers to the County's public schools during the third and fourth quarters of 1997. The hardware contract placed a personal computer in every classroom in DeKalb County. During the second half of 1997, the Company recognized revenues of approximately $5,750,000 associated with the hardware contract. Excluding the effect of the DeKalb hardware contract, total hardware revenues decreased $3,029,000 from 1996 to 1997. The substantial decrease in hardware revenues was the result of the proliferation of multimedia hardware equipment in the marketplace as well as significant competitive price pressures experienced by the Company. The Company anticipates that revenues from hardware systems will continue to decline in the near future. Cost of Sales and Gross Margin Cost of sales for 1997 totaled $16,202,000 resulting in a gross margin of $9,380,000 or 37% of total revenues. During 1996, cost of sales totaled $15,031,000 and resulted in a gross margin of $7,113,000 and gross margin percent of 32% of total revenues. Excluding revenue and costs associated with hardware sales, gross margin in 1997 totaled $9,066,000 or 48% of total revenues as compared with $7,003,000 or 39% in 1996, an increase of $2,063,000. The increase in gross margin and gross margin percent is principally due to lower amortization expense associated with capitalized program development costs. The lower amortization expense is attributable to the effect of the 1996 write-down of $3,300,000 in program development costs and lower overall levels of development activities during 1997. Selling, General and Administrative Expenses Selling, general and administrative expenses during 1997 totaled $12,038,000, as compared to $9,316,000 in 1996. The increase of $2,722,000 or 29% is primarily attributable to the increased infrastructure costs associated with the Company's 1996 acquisitions and the costs incurred in establishment and maintenance of the Company's international subsidiaries. Additionally, included in SG&A expense for 1997 is approximately $600,000 of compensation related expenses associated with the termination of the Company's contract with its former Chief Executive Officer. Gain on Sale of Subsidiary On November 20, 1997 the Company sold all of the stock of its Anderson Soft-Teach ("AST") subsidiary to an investor group for $4,000,000 in cash, a promissory note in the amount of $950,000 and forgiveness of AST's intercompany debt to ITC. The Company realized a pre-tax gain of 6 9 approximately $732,000 for 1997, after deducting the carrying value of ITC's investment in AST and ITC's costs of divestiture from the proceeds realized on the sale. ITC had acquired AST in December of 1996 for approximately $5,800,000 in cash and stock. At the end of 1996, ITC recorded a charge of $2,500,000 associated with the purchase price, representing the value of acquired in-process research and development. When taking into consideration both the acquisition in 1996 and the sale in 1997, the Company incurred a loss on its investment in AST of approximately $1,800,000. Income Taxes The Company did not recognize any net tax benefit during 1997, as estimated foreign tax expenses of $335,000 offset deferred benefits available from the losses of the Company's domestic operations. Net Loss The Company incurred a net loss for 1997 of $1,433,000 or $0.37 per share (basic and diluted) compared with a loss of $5,659,000 or $1.59 per share (basic and diluted) in 1996. The loss per share amounts prior to 1997 have been restated as required by the Financial Accounting Standards Board's SFAS No. 128 - Earnings per Share. CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES Working capital at December 31, 1997 was $7,344,000 as compared to $6,056,000 at December 31, 1996, an increase of $1,288,000 or 21%. The increase is primarily due to the cash received from the sale of Anderson Soft Teach, net of the working capital relinquished as part of the sale. Cash flow from operations totaled $2,017,000 in 1997, compared with $983,000 in 1996, an increase of $1,034,000 or 105%. The increase is principally due to the smaller net loss incurred in 1997, although after-tax losses net of non-cash charges resulted in a cash inflow of $1,326,000 in 1997 compared with $2,981,000 in 1996. Changes in operating assets and liabilities accounted for the remaining increase in operating cash flow in 1997, principally reductions in accounts receivable of $1,242,000 and inventories of $349,000. Net cash provided by investing activities during 1997 totaled $715,000 as compared with net cash used of $8,750,000 in 1996. The total difference of $9,465,000 from 1996 is due to lower investments in program development of $2,015,000 and net cash realized in the sale of AST of $3,149,000 as compared with cash used to acquire AST and ITC Australasia of $4,426,000 during 1996. The Company used net cash of $544,000 for financing activities in 1997 as compared with $116,000 of net cash provided by financing activities during 1996. The total difference of $660,000 is principally due to the payment of $515,000 for the line of credit assumed in the purchase of Anderson Soft-Teach and proceeds received from the exercise of common stock options totaling $127,000 during 1996. No common stock options were exercised in 1997. Management believes that cash generated from operations combined with the Company's existing resources and available line of credit are adequate to meet ITC's working capital requirements for 1998. 7 10 SOFTWARE REVENUE RECOGNITION In October 1997, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue Recognition, which supersedes SOP 91-1. The provisions of SOP 97-2 take effect in fiscal years beginning after December 15, 1997 and clarify rules of revenue recognition related to customer acceptance, upgrades and post-contract customer support. The Company's management has undertaken an assessment of the impact of these rules on its pricing and revenue recognition policies and the terms and conditions of its courseware license agreements. While the Company has implemented SOP 97-2 beginning January 1, 1998, management does not expect it to materially impact the Company's results of operations or to impair the comparability of its financial statements. IMPLICATIONS OF YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's courseware products or internal computer software that have time-sensitive programs may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Similar failures in the Company's courseware could result in an impairment of revenue recognition due to significant future obligations, impairment of future sales of the Company's product, or potential product liability. The Company began an assessment of the implications of the Year 2000 during late 1997. At December 31, 1997, the process of evaluating the Company's courseware products and internal systems was underway and is expected to be completed in the first quarter of 1998. At this time, the actual impact of Year 2000 compliance on the Company's future results of operations, capital spending, and business operations is not known, but is not expected to be material. 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 completion and profitability of sales reported, changes in economic conditions and interest rates, increases in raw material and labor costs, changes in technology and general competitive factors, that may cause actual results to differ materially. 8 11 ITEM 7. FINANCIAL STATEMENTS
INDEX PAGE - -------------------------------------------------------------------------------------------------------------- Report of Independent Auditors 10 Consolidated Statements of Operations for the Years Ended December 31, 1997 and 1996 11 Consolidated Balance Sheets as of December 31, 1997 and 1996 12-13 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997 and 1996 14 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1996 15 Notes to Consolidated Financial Statements 16-26
9 12 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders ITC Learning Corporation We have audited the accompanying consolidated balance sheets of ITC Learning Corporation as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ITC Learning Corporation at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. Washington, D.C. Ernst & Young LLP February 23, 1998 10 13 ITC LEARNING CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1997 and 1996
1997 1996 ---- ---- Revenues, net: Courseware $ 18,720,292 $ 18,002,803 Hardware 6,861,861 4,140,767 ------------ ------------ Total revenues, net (note 3) 25,582,153 22,143,570 Costs and expenses: Courseware cost of sales 9,654,736 10,999,376 Hardware cost of sales 6,547,324 4,031,627 Reduction in capitalized program development costs - 3,300,000 Acquired research and development - 2,500,000 Selling, general and administrative expenses 12,038,439 9,316,163 Equity in earnings of affiliates (288,129) (216,832) ------------ ------------ Total costs and expenses 27,952,370 29,930,334 Gain on sale of subsidiary (note 9) 732,238 - ------------ ------------ Loss before interest and income tax benefit (1,637,979) (7,786,764) Interest income, net 204,651 467,454 ------------ ------------ Loss before income tax benefit (1,433,328) (7,319,310) Income tax benefit (note 8) - (1,660,000) ------------ ------------ Net loss $ (1,433,328) $ (5,659,310) ============ ============ Net loss per common share, basic and diluted (note 1) $ (0.37) $ (1.59) ============ ============ Weighted average number of shares outstanding 3,885,462 3,566,000 ============ ============
See accompanying notes. 11 14 ITC LEARNING CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 ASSETS
1997 1996 ---- ---- Current assets: Cash and cash equivalents $ 4,885,672 $ 2,697,566 Accounts receivable, net (notes 2, 5 and 6) 6,167,592 7,641,066 Due from affiliates (note 3) 33,092 36,768 Inventories, net of reserve of $199,809 and $142,267 at December 31, 1997 and 1996, respectively (notes 5 and 6) 357,374 1,018,383 Prepaid expenses 123,042 190,402 Income taxes receivable (note 8) 175,206 689,104 Other current assets 11,912 -- ------------ ------------ Total current assets 11,753,890 12,273,289 Long-term receivable (notes 2, 5 and 6) 836,882 1,589,916 Note receivable (note 9) 922,940 -- Property and equipment (note 6): Video and computer equipment 1,336,735 3,361,923 Furniture and fixtures 125,259 747,146 Leasehold improvements 21,313 95,422 ------------ ------------ 1,483,307 4,204,491 Less accumulated depreciation and amortization (802,989) (2,963,197) ------------ ------------ Net property and equipment 680,318 1,241,294 Capitalized program development costs, net of accumulated amortization of $1,847,481 and $977,775 at December 31, 1997 and 1996, respectively 3,947,086 4,226,525 Intangible assets, net of accumulated amortization of $676,111 and $511,111 at December 31, 1997 and 1996, respectively (note 9) 1,631,299 3,975,840 Other 12,340 67,461 ------------ ------------ Total assets $ 19,784,755 $ 23,374,325 ============ ============
See accompanying notes. 12 15 ITC LEARNING CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996 ---- ---- Current liabilities: Line of credit (note 5) $ -- $ 515,000 Current installments of long-term debt (note 6) 100,000 130,745 Accounts payable 740,353 1,331,079 Due to affiliates (note 3) 293,561 335,797 Accrued compensation and benefits 1,281,691 826,764 Deferred revenues 422,787 1,458,945 Other accrued expenses 1,236,012 1,619,326 Income taxes payable (note 8) 335,102 -- ------------ ------------ Total current liabilities 4,409,506 6,217,656 Deferred lease obligations 60,296 113,020 Deferred income taxes (note 8) -- 353,522 Long-term debt (note 6) 400,000 -- ------------ ------------ Total liabilities 4,869,802 6,684,198 Commitments (note 10) Stockholders' equity (notes 6, 7, 9, and 11): Common stock, $.10 par value, 12,000,000 shares authorized; 3,897,074 and 3,896,924 shares issued and outstanding in 1997 and 1996, respectively 389,708 389,693 Additional paid-in capital 16,090,816 16,067,366 Note receivable from ESOP (541,677) (143,677) Retained earnings (deficit) (1,056,583) 376,745 Foreign currency translation adjustment 32,689 -- ------------ ------------ Total stockholders' equity 14,914,953 16,690,127 ------------ ------------ Total liabilities and stockholders' equity $ 19,784,755 $ 23,374,325 ============ ============
See accompanying notes. 13 16 ITC LEARNING CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 1997 and 1996
Common Stock Additional Note ------------ Paid-In Receivable Shares Par Value Capital From ESOP ------ --------- ------- --------- Balance at January 1, 1996 3,556,424 $ 355,643 $ 14,770,853 $ (250,177) Note payments - - - 106,500 New shares issued: Stock issuance 300,000 30,000 1,170,000 - Stock options exercised 40,000 4,000 123,113 - Common stock issued to employees 500 50 3,400 - Net loss - - - - ------------ ------------ ------------ ------------ Balance at December 31, 1996 3,896,924 389,693 16,067,366 (143,677) NOTE PAYMENTS - - 392 102,000 SHARES REPURCHASED (103,322) (10,332) (467,532) - NEW SHARES ISSUED: COMMON STOCK ISSUED TO EMPLOYEES 150 15 922 - COMMON STOCK CONTRIBUTED TO ESOP 103,322 10,332 489,668 (500,000) NET LOSS - - - - CUMULATIVE EFFECT OF FOREIGN CURRENCY TRANSLATION ADJUSTMENT - - - - ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1997 3,897,074 $ 389,708 $ 16,090,816 $ (541,677) ============ ============ ============ ============
Retained Foreign Currency Total Earnings Translation Stockholders' (Deficit) Adjustment Equity --------- ---------- ------ Balance at January 1, 1996 $ 6,036,055 $ - $ 20,912,374 Note payments - - 106,500 New shares issued: Stock issuance - - 1,200,000 Stock options exercised - - 127,113 Common stock issued to employees - - 3,450 Net loss (5,659,310) - (5,659,310) ------------ ------------ ------------ Balance at December 31, 1996 376,745 - 16,690,127 NOTE PAYMENTS - - 102,392 SHARES REPURCHASED - - (477,864) NEW SHARES ISSUED: COMMON STOCK ISSUED TO EMPLOYEES - - 937 COMMON STOCK CONTRIBUTED TO ESOP - - - NET LOSS (1,433,328) - (1,433,328) CUMULATIVE EFFECT OF FOREIGN CURRENCY TRANSLATION ADJUSTMENT - 32,689 32,689 ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1997 $ (1,056,583) $ 32,689 $ 14,914,953 ============ ============ ============
See accompanying notes. 14 17 ITC LEARNING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1997 and 1996
1997 1996 ---- ---- Cash flows from operating activities: Net loss $ (1,433,328) $ (5,659,310) Reconciling items: Reduction in capitalized program development costs -- 3,300,000 Acquired research and development -- 2,500,000 Deferred tax benefit -- (1,255,000) Depreciation and amortization 2,725,367 4,091,483 Common stock issued to employees 937 3,450 Foreign currency translation adjustment 32,689 -- Changes in operating assets and liabilities: Decrease (increase) in accounts receivable 1,241,541 (4,428,928) Decrease (increase) in inventories 349,450 (147,311) Decrease in prepaid expenses 46,026 62,659 Increase (decrease) in due to affiliates, net (38,560) 56,641 Decrease (increase) in other assets 40,857 (36,372) Decrease in accounts payable (489,293) (290,464) Increase (decrease) in accrued expenses (803,991) 2,990,441 Increase (decrease) in deferred lease obligations (23,875) 10,056 Decrease (increase) in income taxes receivable 368,681 (794,104) Net effect of acquired operating assets and liabilities -- 579,454 ------------ ------------ Net cash provided by operating activities 2,016,501 982,695 Cash flows from investing activities: Capitalized program development costs (1,983,392) (3,997,925) Capital expenditures (449,934) (326,007) Sale of subsidiary, net of cash relinquished 3,148,676 -- Acquisitions, net of cash acquired -- (4,426,397) ------------ ------------ Net cash provided by (used in) investing activities 715,350 (8,750,329) Cash flows from financing activities: Repayment of line of credit (515,000) -- Proceeds from long-term debt 500,000 -- Principal payments under term loans (130,745) (117,175) Repurchase of common stock (500,000) -- Issuance of common stock -- 127,113 Employee stock ownership plan note collections 102,000 106,500 ------------ ------------ Net cash (used in) provided by financing activities (543,745) 116,438 ------------ ------------ Net increase (decrease) in cash 2,188,106 (7,651,196) Cash and cash equivalents at beginning of year 2,697,566 10,348,762 ------------ ------------ Cash and cash equivalents at end of year $ 4,885,672 $ 2,697,566 ============ ============
See accompanying notes. 15 18 ITC LEARNING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Basis of Presentation The consolidated financial statements of ITC Learning Corporation (the "Company" or "ITC") include the accounts of its wholly owned subsidiaries, ITC Australasia Pty., Ltd., Activ Training, Ltd., and ComSkill Learning Centers, Inc. Pursuant to approval by the Company's shareholders, the Company changed its name to ITC Learning Corporation on May 9, 1997. The Consolidated Statements of Operations and Statements of Stockholders' Equity and Statements of Cash Flows also reflect the results of operations and subsequent sale of the Company's Anderson Soft-Teach ("AST") subsidiary which was acquired on December 31, 1996 and divested on November 20, 1997. Significant intercompany accounts and transactions have been eliminated in consolidation. The Company is a full-service training company specializing in the development, production, marketing and sale of both off-the-shelf and custom multimedia training courseware for corporate, educational and governmental organizations. ITC's multimedia training courseware combines full-motion video, audio, animation, graphics and text into a single training presentation. b) Revenues and Costs Revenues from courseware include both off-the-shelf and custom courseware sales, courseware licenses and consulting service revenues. The Company recognizes revenues on 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. In the event that sales returns are material, the Company adjusts revenue accordingly. 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 the 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 joint venture and 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 delivery of the initial copy of each product licensed, less any duplication costs which are accrued based on estimates. Revenues from consulting services are recognized as services are performed. In October 1997, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue Recognition, which supersedes SOP 91-1. The provisions of SOP 97-2 take effect in fiscal years beginning after December 15, 1997 and clarify rules of revenue recognition related to customer acceptance, upgrades and post-contract customer support. The Company's management has undertaken an assessment of the impact of these rules on its pricing and revenue recognition policies and the terms and conditions of its courseware license agreements. While the Company has implemented SOP 97-2 beginning January 1, 1998, management does not expect it to materially impact the Company's results of operations or to impair the comparability of its financial statements. 16 19 c) Capitalized Program Development Costs Certain costs of developing and producing off-the-shelf courseware have been capitalized. Capitalized costs include direct labor, materials, product masters, subcontractors, consultants, and applicable overhead. These capitalized costs are amortized on a straight-line basis over the estimated useful lives of the related programs which range from three to five years. The related amortization expense is included in the cost of sales and amounts to approximately $1,578,000 and $3,202,000 in 1997 and 1996, respectively. Periodically, the Company assesses the net realizable value of program development costs by reviewing past sales performances, current and planned future marketing activities, specific sales promotions and strategic distribution arrangements. Based on this assessment, the Company determines each product's prospects for future sales, and, if necessary, adjusts asset values to net realizable value. During 1996, sales of products in laser videodisc format declined dramatically as a result of the conversion of all the Company's multimedia products to digital format, and the Company determined that potential future sales in the laser videodisc format are limited. As a result, the Company recorded an additional $3,300,000 pre-tax charge, principally consisting of the unamortized cost of laser videodisc product, to reduce all capitalized program development costs in excess of net realizable value. d) Cash and Cash Equivalents Cash and cash equivalents include cash and other highly liquid investments having original maturities of less than three months. e) Inventories Inventories primarily consist of multimedia courseware and related computer hardware, and are stated at the lower of cost or market. Cost is determined using the average cost method. f) Property and Equipment Property, equipment and leasehold improvements are stated at cost. Depreciation on property and equipment is computed on a straight-line basis over estimated useful lives of three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful lives of the related assets. Depreciation and leasehold amortization expense amounted to approximately $759,000 and $736,000 in 1997 and 1996, respectively. During 1997, the Company recorded an adjustment to remove the cost of property and equipment which was fully depreciated. The result of the adjustment was a reduction of approximately $2,844,000 in both cost and accumulated depreciation. g) Investments in Affiliates Investments in affiliated joint ventures and limited partnerships are accounted for using the equity method and, accordingly, the initial cost of the investments are adjusted for the Company's proportionate share of joint venture and partnership undistributed earnings or losses. h) Income Taxes The Company provides for income taxes using the liability method in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Deferred income taxes result primarily from differences between financial statement and income tax treatment of program development costs, revenue recognition and net operating loss carryforwards. 17 20 i) Net Loss Per Common Share In 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per Share ("Statement 128"). Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to Statement 128 requirements. The effect on weighted average shares outstanding of securities that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the periods presented were 4,789 and 50,304 of stock options and warrants for 1997 and 1996, respectively. j) Intangible Assets Intangible assets include allocations of the purchase price of acquisitions to workforce investments, customer base and goodwill. These assets are being amortized using the straight-line method over estimated useful lives of five to fifteen years. Amortization expense for 1997 and 1996 amounted to approximately $389,000 and $165,000, respectively. As part of its ongoing review, management takes into consideration any events and circumstances which might indicate an impairment to the carrying amount of intangible assets. Factors that management uses to evaluate continuing value include sales from acquired product lines, employee turnover, and development of related customer and distribution networks that were in place at the date of the acquisition. As a result of the sale of AST (see Note 9), the Company reduced net intangible assets by $1,956,000, which represents the amount originally recorded when AST was purchased, less $224,000 in amortization expense incurred in 1997. k) Research and Development Research and development costs consist of software-related expenditures incurred during the course of planned search and investigation aimed at developing new products or processes. The Company expenses all research and development costs as they are incurred. Research and development costs of $764,000 and $329,000 were incurred during 1997 and 1996, respectively, and are included in cost of sales. l) Foreign Subsidiaries The Company owns international subsidiaries in both the United Kingdom and Australia. Each of these subsidiaries primarily perform sales and marketing activities of products developed in the U.S. Therefore, under Statement of Financial Accounting Standards No. 52, Foreign Currency Translation, the subsidiaries' financial statements are translated from their local currencies using the corresponding foreign currency exchange rate with the resulting difference recorded as a component of consolidated stockholders' equity. Transaction gains and losses incurred during 1997 were not material. The Company believes its exposure to foreign currency risk is not material. The following table presents sales and other financial information from 1997 related to its foreign operations:
U.S. U.K. AUSTRALIA ---------------------------------------------------------------- Sales $ 21,281,000 $ 2,858,000 $ 1,443,000 Operating Profit (Loss) (3,742,000) 677,000 343,000 Identifiable Assets 17,341,000 1,734,000 710,000
18 21 m) Stock Option Plans In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation (Statement 123), which provides an alternative to APB Opinion No. 25 in accounting for stock-based compensation. The Company has elected to follow APB 25 and related Interpretations in accounting for its employee stock options. The Company's method of adoption of Statement 123 requires additional footnote disclosures regarding the Company's stock-based compensation, but does not impact the financial position or the results of operations of the Company. n) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the associated amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. o) New Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued SFAS No. 129, Disclosure of Information about Capital Structure (Statement 129), which establishes standards for disclosing information about an entity's capital structure. Statement 129 was effective for periods ending after December 15, 1997. The adoption of Statement 129 did not impact the Company's capital structure disclosures as the Company was already in compliance with Statement 129. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income (Statement 130) and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (Statement 131), which are effective for fiscal years beginning after December 15, 1997. The Company will adopt Statement 130 and Statement 131 with the fiscal year beginning January 1, 1998. Statement 130 and Statement 131 will not have a material impact on the financial results or financial condition of the Company, but will result in certain changes in required disclosures. Management is evaluating the additional disclosure requirements for the Company upon the implementation of Statement 130 and Statement 131. 2) ACCOUNTS RECEIVABLE Accounts receivable include the following at December 31:
1997 1996 ---- ---- Trade accounts receivable $ 5,412,822 $ 6,738,762 Current portion of long-term receivable, net 909,575 1,012,287 Unbilled contract receivables 98,162 182,025 Less allowance for doubtful accounts (254,728) (296,148) ------------- ------------- Trade accounts receivable, net 6,165,831 7,636,926 Other receivables 1,761 4,140 ------------- ------------- $ 6,167,592 $ 7,641,066 ============= =============
During the second quarter of 1996, the Company entered into a contract with the DeKalb County (GA) Board of Education ("DeKalb") for the sale of a district-wide multicopy courseware license, hardware and certain future services. The total contract amount of $5,060,000 is payable in four installments, $1,535,000 upon contract execution, and the remaining $3,525,000 in three equal annual installments beginning in June 1997. The June 1997 installment was received in accordance with the provisions of the contract and the effect of the payments is reflected in the financial statements. Total revenues recognized under the contract during the second quarter of 1996 for the courseware license and 19 22 hardware were $3,218,000 and $620,000, respectively. Dealer fees relating to this sale have been charged against the related revenues, and are payable only when proceeds are received by the Company. The long-term portion of the net receivable has been discounted assuming a 6% interest rate. Components of the long-term receivable include the following:
DECEMBER 31, December 31, 1997 1996 Receivable from DeKalb County (GA) Board of Education $ 2,350,000 $ 3,525,000 Related dealer fees payable (510,758) (737,083) Less amounts classified as current, net of related dealer fees (909,575) (1,012,287) Less amount representing interest (92,785) (185,714) ------------- ------------- $ 836,882 $ 1,589,916 ============= =============
3) INVESTMENTS IN AND DUE TO AFFILIATES The Company is a participant in five separate limited partnerships with Industrial Training Partners, Ltd. (the ITP partnerships) and a joint venture with DynCorp. In all of the ITP partnerships, the Company is a 5% general partner and in certain partnerships the Company has acquired limited partnership interest as well. In the joint venture with DynCorp, the Company has a 50% ownership interest. The ITP partnerships and the DynCorp joint venture were formed to develop and produce various series of training programs. Under the contracts to market the programs for the partnerships and joint venture, ITC receives 50%-70% of the sales price for the costs of reproducing and marketing the training materials. In the case of the joint venture agreement, the Company also receives an additional 25% for its share of the joint venture profits. Sales of programs related to these affiliates were approximately $1,729,000 and $2,493,000 in 1997 and 1996, respectively. In connection with the development of new off-the-shelf partnership programs, the Company billed certain of the ITP partnerships approximately $532,000 in 1996; however, no new development activity took place in 1997. Amounts earned but not billed to the ITC partnerships totaling $21,000 are included in unbilled receivables at December 31, 1996. In connection with the financing of product development activities for these partnerships, the Company has guaranteed two bank loans for two of the partnerships. At December 31, 1997, the outstanding balance of these loans totaled $299,000. 4) LEASES The Company has several noncancelable operating leases, primarily for office space and transportation equipment, that expire over the next four years, certain of which include purchase or renewal options at fair value at the time of renewal. Future minimum lease payments under noncancelable operating leases as of December 31, 1997 are as follows:
Year ending December 31: ------------------------ 1998 $ 491,000 1999 284,000 2000 117,000 2001 32,000 ------------- Total future minimum lease payments $ 924,000 =============
Rental expenses for operating leases for the years ended December 31, 1997 and 1996 were approximately $910,000 and $533,000, respectively. 20 23 5) LINES OF CREDIT At December 31, 1997, the Company had no amounts outstanding relating to its $3,000,000 and $250,000 revolving bank lines of credit, which bear interest at prime (8.5% at December 31, 1997). Borrowings under the lines are collateralized by the Company's accounts receivable and inventory. The loan agreements include certain covenants which limit borrowings and the ability to merge or dispose of assets, and require the maintenance of minimum working capital and tangible net worth ratios. In connection with the acquisition of AST, the Company assumed a line of credit with an outstanding balance of $515,000 at December 31, 1996. In January 1997, this amount was repaid and the related line of credit was terminated. 6) LONG-TERM DEBT
Long-term debt consists of the following at December 31: 1997 1996 ---- ---- 8.5% note payable to financial institution due in monthly $ 500,000 $ 130,745 principal and interest installments of $10,258 through December 2002, collateralized by the assignment of interest in the shares of the Company's common stock held by the ESOP, accounts receivable, inventory and property and equipment. Less current installments (100,000) (130,745) --------- --------- Long-term debt, excluding current installments $ 400,000 $ -- ========= =========
Interest paid on all debt amounted to approximately $36,000 and $34,000 in 1997 and 1996, respectively. 7) STOCK OPTIONS AND STOCK WARRANTS At December 31, 1997, the Company had outstanding options to purchase common stock under two separate incentive stock option plans. These plans, the 1992 Director Incentive Stock Option Plan and the 1992 Key Employee Incentive Stock Option Plan have effectively replaced the Company's 1982 Incentive Stock Option Plan. Options granted under the 1992 Director Incentive Stock Option Plan may be qualified or non-qualified. From time to time, the Company also has granted other non-qualified options to certain individuals. The Company also has outstanding 14,572 warrants to purchase common stock. These warrants are exercisable at $3.50 and expire in July 1998. 21 24 The following table summarizes option activity:
NON-QUALIFIED OPTIONS QUALIFIED OPTIONS --------------------- ----------------- No. of Exercise No. of Exercise Options Price Options Price ------- ----- ------- ----- Outstanding at January 1, 1996 117,000 $2.875-7.50 127,000 $2.875-10.05 Granted -- 95,000 Canceled or expired -- (41,000) Exercised (6,000) (34,000) ----------- ---------- Outstanding at December 31, 1996 111,000 $5.00-7.50 147,000 $4.75-6.50 GRANTED 108,000 $4.875-4.875 115,000 $4.25-6.25 CANCELED OR EXPIRED (76,384) $6.50-7.50 (119,616) $4.75-6.50 ----------- ---------- OUTSTANDING AT DECEMBER 31, 1997 142,616 $4.875-6.50 142,384 $4.25-6.25 =========== ========== EXERCISABLE AT DECEMBER 31, 1997 34,616 $6.50-6.50 38,434 $4.75-6.50 =========== ========== EXERCISABLE AT DECEMBER 31, 1996 91,000 $5.00-7.50 52,000 $5.00-6.50 =========== ==========
Qualified options outstanding under the Company's stock option plans expire as follows: 2,000 in 1999, 15,384 in 2000, 50,000 in 2001 and 75,000 in 2002. Non-qualified options outstanding expire as follows: 34,616 in 2000 and 108,000 in 2002. As of December 31, 1997 there were no more options available for additional grants under the 1992 Director Incentive Stock Option Plan and 168,500 options available under the 1992 Key Employee Incentive Stock Option Plan. Subsequent to December 31, 1997, the Board of Directors approved the allocation of 200,000 shares of the Company's stock to the ITC Learning Corporation 1998 Incentive Stock Option Plan, contingent on and subject to approval of the Company's stockholders at the 1998 Annual Meeting. The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock option plans because stock options are granted with an exercise price equal to the fair value of the stock on the grant date. Had compensation cost for the Company's stock option plans been determined based upon the fair value of the options at the grant date for awards under these plans consistent with the methodology prescribed under Statement 123, the Company's 1997 net income and earnings per share would not have been materially affected. The fair value of the options granted was determined using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, volatility of 73%, risk-free interest rate of 5.625% and an expected life of five years. 8) INCOME TAXES The components of income tax expense (benefit) are as follows:
1997 1996 ---- ---- Current: Federal $ -- $ (320,000) State -- (85,000) Foreign 335,000 -- -------------- -------------- 335,000 (405,000) Deferred: Federal (193,000) (1,148,000) State (142,000) (107,000) -------------- -------------- (335,000) (1,255,000) -------------- -------------- $ -- $ (1,660,000) ============== ==============
22 25 The difference between income tax expense (benefit) and the amount determined by applying the federal statutory rate is as follows:
1997 1996 ---- ---- Federal statutory rate $ (487,000) $ (2,488,000) State income taxes, net of federal benefit (59,000) (192,000) Amortization of intangibles 63,000 60,000 Acquired research and development -- 925,000 Subsidiary foreign tax liability 335,000 -- Income tax at other than the U.S. rate 89,000 -- Alternative Minimum Tax credit 47,000 -- Other 12,000 35,000 -------------- -------------- $ -- $ (1,660,000) ============== ==============
The following temporary differences give rise to the provision for deferred taxes (benefit) at December 31:
1997 1996 ---- ---- Capitalized program development costs $ 241,000 $ (419,000) Deferred revenues and accruals 279,000 (583,000) Depreciation -- (80,000) Allowance for doubtful accounts 5,000 (30,000) Inventory reserves (49,000) 14,000 Net operating loss/capital loss and tax credit carryforwards (net) (549,000) (107,000) Accrued compensation (259,000) (50,000) Other (3,000) -- -------------- -------------- $ (335,000) $ (1,255,000) ============== ==============
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31 are presented below.
1997 1996 ---- ---- Deferred tax assets: Deferred revenues and accruals $ 304,000 $ 583,000 Allowance for doubtful accounts 96,000 101,000 Inventory reserves 76,000 27,000 Accrued compensation 337,000 78,000 Net operating and capital loss carryforwards 2,450,000 580,000 Deferred lease obligation 23,000 26,000 Difference in depreciation 97,000 97,000 Other -- 478 -------------- -------------- Total deferred tax assets 3,383,000 1,492,478 Less valuation allowance (1,917,000) (421,000) -------------- -------------- Net deferred tax assets 1,466,000 1,071,478 -------------- -------------- Deferred tax liabilities: Capitalized product development costs (1,466,000) (1,425,000) -------------- -------------- Total gross deferred tax liabilities (1,466,000) (1,425,000) -------------- -------------- Net deferred tax assets $ -- $ (353,522) ============== ==============
At December 31, 1997, the Company had $1,172,000 in net operating loss carryforwards available for income tax purposes. The Company also has a capital loss carryforward available for income tax 23 26 purposes in the amount of $3,239,000. The Company has recorded a reserve of $1,917,000 to reduce the value of its net deferred tax asset to the amount of its available net operating loss carryforwards. As a result of an acquisition, the Company has available approximately $1,125,000 of additional net operating loss carryforwards that expire at varying dates through 2007. Pursuant to Section 382 of the Internal Revenue Code (the "Code"), the utilization of the net operating loss is limited to approximately $245,000 per year. Due to the limitation on uses and other uncertainties relating to the utilization of the remaining tax benefit of these deductions, a valuation allowance has been recorded to substantially offset the net deferred tax asset related to the acquisition. The Company paid federal and state income taxes of $14,000 and $103,000 in 1997 and 1996 respectively. The Company also received refunds of federal and state income taxes in 1997 totaling $577,000. 9) ACQUISITIONS AND DIVESTITURES Effective December 31, 1996, the Company purchased the common stock of Anderson Soft-Teach for $4,500,000 in cash and 300,000 shares of the Company's common stock valued at $4.00 per share. AST is a developer, producer and distributor of multimedia training solutions for computer skills training and on-line electronic performance support systems. As a result of the acquisition, the Company recorded intangible assets of approximately $2,180,000, consisting of workforce investment, customer base, and goodwill. Additionally, the Company recorded a charge of $2,500,000 of the $5,800,000 purchase price, representing the value of acquired in-process research and development. On September 1, 1996, ITC Australasia Pty., Ltd. ("ITCA"), a newly-formed and wholly-owned subsidiary of the Company, purchased substantially all of the assets of Acumen People and Productivity Pty., Ltd. ("Acumen") for approximately $80,000. Acumen had been a distributor of ITC products in Australia and Asia since 1991. ITCA was created in order to continue the expansion of the Company's presence in the international marketplace, particularly throughout Australia and the Pacific Rim. On November 20, 1997 the Company entered into a stock purchase agreement with Anderson Holdings, an investor group headed by a former employee of the Company, to sell all of the Company's stock in AST in exchange for $4,000,000 cash, a promissory note in the amount of $950,000, and forgiveness of AST's outstanding intercompany obligations to ITC. One of the Company's Directors, who subsequently resigned his position on the Board, was paid a fee of $150,000 for services provided in connection with the sale of AST. As a result of the sale, the Company recorded a gain of $732,000. When taking into consideration both the costs incurred on the initial acquisition in 1996 and the subsequent gain on sale in 1997 of AST, the Company incurred an overall loss of approximately $1,800,000. Under the terms of the stock purchase agreement, ITC and AST entered into a reciprocal agreement to sell each other's products over the remainder of 1997 and all of 1998. Royalties earned by AST for sales of their products under this agreement will be applied to the principal value of the note. As of December 31, 1997, the note's principal had been reduced by $27,000 for such royalties. Under the terms of the note, AST will make quarterly interest payments to ITC at an interest rate of 8% and will pay the remaining principal balance at the end of four years. 10) COMMITMENTS The Company has entered into separate employment agreements with certain of its corporate officers which are subject to termination upon death or disability or upon notice by the Company providing up to 10 months of severance pay. In addition to basic salary, each of these officers is eligible to receive 24 27 salary increases, bonuses, stock option grants, pension and profit-sharing arrangements, and other employee benefits which may from time to time be awarded or made available. In December of 1997, and in accordance with the provisions of the Company's contract with its then Chief Executive Officer, the Company recorded a charge of approximately $600,000 in compensation related expenses associated with the termination of the executive's contract. 11) STOCKHOLDERS' EQUITY The Company instituted an Employee Stock Ownership Plan (ESOP) and Trust for the benefit of substantially all employees effective January 1, 1992. To establish the plan, ITC entered into a loan agreement with a bank and borrowed $637,500 for the purchase of 200,000 shares of ITC common stock from DynCorp. ITC pledged this stock to the bank to collateralize the loan. The provisions of the ESOP require that, on an annual basis, the greater of 33,334 shares or the amount of shares equal to five percent of total compensation of eligible employees be allocated to employee accounts. Each participant then receives shares based on their relative annual compensation. The Company recognized compensation expense of approximately $102,000 for both 1997 and 1996, based on the cost of shares allocated for the period and any interest expense incurred. Contributions to the ESOP amounted to approximately $135,000 in both 1997 and 1996, including approximately $6,000 and $16,000 of interest in 1997 and 1996, respectively. In December 1997, the Company's Board of Directors approved the repurchase of 100,000 shares of the Company's stock through a private purchase transaction and authorized the Company's management to purchase an additional 100,000 shares under favorable market prices and conditions. To repurchase the shares, the Company entered into a loan agreement for $500,000, pledging the repurchased stock to collateralize the loan. The unallocated shares are not considered outstanding for earnings per share computations. The fair value of the 103,322 unallocated shares at December 31, 1997 was approximately $375,000. These shares were used to replenish the Company's ESOP plan which was depleted after the allocation of shares for 1997. 12) EMPLOYEE 401(k) PLAN On January 1, 1991, the Company established a 401(k) Plan for the benefit of substantially all of its employees. Employees can contribute from 1% to 15% of their salary to the Plan subject to statutory limitations. At the discretion of the Board of Directors, the Company can elect to make a contribution to the Plan. The Company did not make contributions to the 401(k) Plan in either 1997 or 1996. 13) QUARTERLY FINANCIAL DATA (UNAUDITED) Financial data for the interim periods of 1997 and 1996 were as follows (amounts in thousands except per share amounts):
BASIC EARNINGS NET NET INCOME (LOSS) REVENUE (LOSS) PER SHARE (c) ------- ------ ------------- 1996 Quarters First $ 3,716 $ (397) $ (0.11) Second 7,605 349 0.10 Third 5,537 (498) (0.14) Fourth (a) 5,286 (5,113) (1.44) -------- -------- -------- Total $ 22,144 $ (5,659) $ (1.59) ======== ======== ========
25 28 1997 QUARTERS FIRST $ 4,722 $ (456) $ (0.12) SECOND 4,487 (749) (0.19) THIRD 7,089 (243) (0.06) FOURTH (b) 9,284 15 -- -------- -------- -------- TOTAL $ 25,582 $ (1,433) $ (0.37) ======== ======== ========
(a) Includes pre-tax write-offs of $3,300,000 for capitalized program development costs and $2,500,000 for acquired research and development (see notes 1 and 9). (b) Includes a pre-tax gain of $732,000 recognized on the disposition of Anderson Soft-Teach, $600,000 of compensation expense related to the termination of the Company's contract with its former Chief Executive Officer, and an adjustment to reduce the benefit for income taxes of $716,000. (c) The 1996 and the first three quarters of 1997 earnings per share amounts have been restated to conform with Statement 128. 14) SUBSEQUENT EVENTS In January of 1998, the Company entered into an exclusive product distribution agreement with and purchased $1,000,000 of stock of Mentor Networks, Inc., located in Nova Scotia. For its investment, the Company acquired 8% of the outstanding stock of Mentor with an option to acquire an additional 12%. In February of 1998, the Company signed a letter of intent to acquire Turn-Key Training Technologies, Inc., located in Grand Rapids, Michigan. The purchase price for all of the outstanding common stock of Turn-Key is $700,000 in cash. ITC also agreed to employ the founder and president of Turn-Key, and will enter into an agreement with him providing for an initial payment of $600,000 cash and the issuance of 100,000 shares of ITC common stock in consideration of his employment and certain extended non-competitive covenants. Turn-Key is a developer and distributor of performance-based training administration software. The Company expects to complete the acquisition of Turn-Key by the end of March 1998. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE 26 29 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT (a) Identification of Directors
Name Age Year First Elected Year of Expiration ---- --- ------------------ ------------------ Daniel R. Bannister 67 1988 1999 John D. Sanders 59 1977 1998 Chairman of the Board Carl D. Stevens 51 1997 2000 Richard E. Thomas 71 1982 1998 James H. Walton(1) 64 1977 2000
(b) Identification of Executive Officers
Year First Name Age Served As Officer ---- --- ----------------- Anne J. Fletcher, Secretary 35 1995 Christopher E. Mack, Vice President, Treasurer 32 1996 and Chief Financial Officer William S. Moser, Vice President 53 1998 Harvey L. Shuster, Vice President 52 1998 Carl D. Stevens, President 51 1997 and Chief Executive Officer Robert F. VanStry, Vice President 47 1983
- -------------------------------------------------------- 1. Mr. Walton resigned his position on the Company's Board of Directors in February 1998. 27 30 (c) Business Experience DANIEL R. BANNISTER, a Director since 1988, is Chairman of the Board of DynCorp, a leading technology services firm. Previously, he served as President and Chief Executive Officer of DynCorp, from 1985 until 1997. ANNE J. FLETCHER is Secretary of ITC. Ms. Fletcher is an attorney with the law firm of De Martino, Finkelstein, Rosen & Virga. Ms. Fletcher served as in-house general counsel to ITC from 1994-1996. Prior to joining ITC, she was engaged in the private practice of law for six years in Fairfax, Virginia. Ms. Fletcher received her J.D. from George Mason University School of Law and a B.A. from the State University of New York, College at Oswego. CHRISTOPHER E. MACK is Vice President, Treasurer and Chief Financial Officer of ITC. Prior to being named Chief Financial Officer in January 1998, Mr. Mack served as the Company's Vice President of Finance and Administration and Treasurer since April 1997. Mr. Mack served as the Company's Chief Operating Officer from November 1996 to April 1997. Prior to being named COO, Mr. Mack served as the Company's Controller from December 1993 to November 1996. Prior to joining ITC in December 1993, Mr. Mack served as Assistant Controller of Bardon, Inc., an international construction materials firm. Mr. Mack holds a B.S. in Accounting from Shepherd College and is a C.P.A. WILLIAM S. MOSER is Vice President of Sales and Marketing of ITC. Mr. Moser joined ITC in August of 1997, after a 30 year career with IBM. During his career with IBM, Mr. Moser held numerous sales and marketing management positions within IBM. In addition, he held several management positions in IBM's Education and Training Group including Business Alliance Manager for Personal Computer Skills. He also brings extensive channels marketing experience to ITC. Mr. Moser holds a B.A. in Marketing from Michigan State University. JOHN D. SANDERS, a Director since 1977, and Chairman of the Board since 1997, served as Chairman of TechNews Inc., publishers of Washington Technology newspaper, from 1987 to 1996, and currently serves as a consultant to Post Newsweek Business Information, Inc. (formerly TechNews). He is also a registered representative with Wachtel & Co., Inc., an investment banking firm, a position held since 1968. Mr. Sanders is a member of the Boards of Directors of: Daedalus Enterprises, Inc., an electronics specialty manufacturer, and Hadron, Inc., a technical and engineering services company. He holds a B.E.E. from the University of Louisville, Kentucky, and an M.S. and Ph.D. in Electrical Engineering from Carnegie-Mellon University. HARVEY L. SHUSTER is Vice President of Business Development of ITC. Mr. Shuster joined ITC in 1993 as part of ITC's acquisition of Comsell Training, Inc. Since joining ITC, Mr. Shuster has held many management level positions and served in various capacities from operations to sales. Most recently, Mr. Shuster has been the Divisional Vice President in charge of the PC Skills product line for the Company. Prior to ITC's acquisition of Comsell, Mr. Shuster was Chief Operating Officer of Comsell. Prior to then, Mr. Shuster was in charge of the MicroComputer Consulting Group for Coopers and Lybrand in the Southeast U.S. Additionally, Mr. Shuster was a founding member of Peachtree Software, the microcomputing accounting software package that is now owned by ADP. Mr. Shuster holds a B.S. in Accounting from Temple University and an M.B.A. in Finance from Drexel University and is a C.P.A. CARL D. STEVENS is President and Chief Executive Officer of ITC, having been named CEO in January 1998. Mr. Stevens joined ITC in February 1997 as Senior Vice President of Marketing and Strategic Business Development. He was later appointed President and Chief Operating Officer in June 1997. Prior to joining ITC, Mr. Stevens was Program Director for Public Sector for IBM responsible for the sale of personal computers into higher education, K-12, federal, state and local governments. During his 26 year career with IBM, he held numerous field and headquarters marketing and management positions. He was Branch Manager for the Southeastern U.S., managed IBM's New Manager School 28 31 for experienced managers, held various management positions involving IBM's Personal Computer Remarketer Channels, and was the Business Alliance Executive for IBM's Education and Training Division. Mr. Stevens received his education from Indiana University, where he majored in Marketing and Business Education. RICHARD E. THOMAS, a Director since 1982, is semi-retired having served as President of COMSAT RSI from 1994-1996. Prior to that, he was Chairman of the Board, President and Chief Executive Officer of Radiation Systems, Inc. (RSI), a communications systems manufacturer, from 1978 until 1994, at which time RSI was merged into COMSAT Corporation. Mr. Thomas was originally employed by RSI as Vice President, Operations in 1966. ROBERT F. VANSTRY is Vice President of ITC and manages the Company's Process and Manufacturing market sector sales effort and sales support function. During 1997, Mr. VanStry managed the Domestic Sales Force. Mr. VanStry was previously in charge of ITC's product and technology development. Mr. VanStry joined the Company in May 1978 as Senior Training Associate and subsequently fulfilled the responsibilities of Manager of Engineering Projects, Manager of Project Development, and Vice President of Training Services. JAMES H. WALTON served as a Director of ITC from 1977 until February 1998. Until January 1998, Mr. Walton served as Chief Executive Officer and was Chairman of the Board of Directors prior to April 1997. Prior to the founding of ITC in 1977, he was responsible for audiovisual production at NUS Corporation, an engineering and consulting firm (1973-1977). Mr. Walton holds a B.S. and M.A. from the University of Nebraska. ITEM 10. EXECUTIVE COMPENSATION The information contained on pages 6, 7 and 8 of ITC's Proxy Statement dated March 11, 1998, with respect to executive compensation and transactions, is incorporated herein by reference in response to this item. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained on pages 2 and 3 of ITC's Proxy Statement dated March 11, 1998, with respect to security ownership of certain beneficial owners and management, is incorporated herein by reference in response to this item. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained on page 10 of ITC's Proxy Statement dated March 11, 1998, with respect to certain relationships and related transactions, is incorporated herein by reference in response to this item. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) The following are filed as part of this Form 10-KSB: 1. Financial Statements: See Part II, Item 7. 2. Exhibits: See exhibit index, which index is incorporated herein by reference. 29 32 (b) Reports on Form 8-K: On January 13, 1997, the Company filed an 8-K to report the acquisition of Anderson Soft-Teach (AST) on December 31, 1996. On February 10, 1997, the Company filed an 8-K to report the resignation of Mr. Thomas Balderston from his position as a Director of the Company. On March 13, 1997, the Company filed an amendment to the 8-K filed on January 13 to provide the audited financial statements of Anderson Soft-Teach as of the date of acquisition and the pro forma financial information required under item 7. On December 8, 1997, the Company filed an 8-K to report the sale of its wholly-owned subsidiary, Anderson Soft-Teach, on November 20, 1997. On January 14, 1998, the Company filed an 8-K to report the appointment of Carl D. Stevens as Chief Executive Officer in addition to his duties as President of ITC, replacing J. H. ("Bill") Walton. 30 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. ITC LEARNING CORPORATION (Registrant) BY /s/Carl D. Stevens DATE March 11, 1998 ---------------------------------------------- ------------------------------------ Carl D. Stevens, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. BY /s/Christopher E. Mack DATE March 11, 1998 ---------------------------------------------- ------------------------------------ Christopher E. Mack, Vice President, Treasurer, and Chief Financial Officer BY /s/John D. Dobey DATE March 11, 1998 ---------------------------------------------- ------------------------------------ John D. Dobey, Corporate Controller BY /s/Daniel R. Bannister DATE March 11, 1998 ---------------------------------------------- ------------------------------------ Daniel R. Bannister, Director BY /s/John D. Sanders DATE March 11, 1998 ---------------------------------------------- ------------------------------------ John D. Sanders, Chairman of the Board of Directors BY /s/Richard E. Thomas DATE March 11, 1998 ---------------------------------------------- ------------------------------------ Richard E. Thomas, Director
34 CORPORATE HEADQUARTERS STOCK REGISTRAR AND TRANSFER AGENT ITC Learning Corporation American Securities Transfer & Trust, Inc. 13515 Dulles Technology Drive 938 Quail Street Herndon, VA 20171-3413 Suite 101 (800) 638-3757 Lakewood, CO 80215 (703) 713-3335 FAX: (703) 713-0065 STOCK LISTING Web-site: http://www.itclearning.com National Market System NORTH AMERICAN SALES LOCATIONS NASDAQ/NMS Trading Symbol: ITCC Atlanta, GA MARKET-MAKERS (770) 984-9881 Koonce Securities, Inc. Charlotte, NC Ferris, Baker Watts, Incorporated (704) 364-1223 Moors & Cabot Fort Myers, FL ANNUAL MEETING (941) 274-0005 The Annual Meeting of shareholders will be held on Houston, TX May 7, 1998 at 3:00 pm at the Corporate Offices (713) 852-0601 located at 13515 Dulles Technology Drive, Herndon, Virginia 20171. New York, NY (718) 465-5121 SHAREHOLDER INQUIRIES Plymouth, WI Communications concerning transfer requirements, (414) 893-3900 lost certificates, and changes in address should be directed to the Stock Registrar and Transfer Agent. Rochester, NY Other inquiries may be directed to Christopher E. (716) 223-5009 Mack, CFO. San Francisco, CA PRINCIPAL BANK (707) 935-7971 Wachovia Bank Toronto, Ontario Charlotte, NC (905) 886-1584 GENERAL COUNSELS INTERNATIONAL SALES LOCATIONS Ginsburg, Feldman and Bress, Chartered London, England Washington, D.C. 44 1234 34-0880 Kirkpatrick & Lockhart LLP Melbourne, Australia Washington, D.C. 613-9593-9955 INDEPENDENT AUDITORS Sydney, Australia 612-9438-2500 Ernst & Young LLP Washington, D.C.
35 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - -------------------------------------------------------------------------------- 3.1 Amended Articles of Incorporation of the Company, incorporated by reference to the Company's Form 10-QSB for the quarter ended June 30, 1996 filed with the Securities and Exchange Commission ("SEC") (Commission File No. 33-61393). 3.2 Amended By-Laws of the Company. 4.1 Specimen Certificate for ITC Common Stock, incorporated by reference to the Company's 10-QSB for the quarter ended June 30, 1997, filed August 6, 1997 with the SEC (Commission File No. 01-13741). 4.2 Registration Rights and Shareholders' Agreement, incorporated by reference to the Company's Form 8-K filed January 13, 1997 with the SEC (Commission File No. 0-13741). 10.1 Agreement and Plan of Reorganization By and Among ITC Learning Corporation, ITC Acquisition Corporation and Anderson Soft-Teach, incorporated by reference to the Company's Form 8-K filed January 13, 1997 with the SEC (Commission File No. 0-13741). 10.2 Stock Purchase Agreement dated November 20, 1997 by and between ITC Learning Corporation and Anderson Holdings, Inc., incorporated by reference to the Company's 8-K filed December 8, 1997 with the SEC (Commission File No. 0-13741). 10.3 1992 Director Incentive Stock Option Plan, as amended, incorporated by reference to the Company's 10-KSB for the year ended December 31, 1996 filed March 14, 1997 with the SEC (Commission File No. 0-13741). 10.4 1992 Key Employee Incentive Stock Option Plan, as amended, incorporated by reference to the Company's 10-KSB for the year ended December 31, 1996 filed March 14, 1997 with the SEC (Commission File No. 0-13741). 10.5 Employee Stock Ownership Plan, incorporated by reference to the Company's Form 10-KSB filed March 19, 1992 with the SEC (Commission File No. 0-13741). 10.6 Employment Agreements with Management (d) Robert F. VanStry, incorporated by reference to Pre-Effective Amendment No. 1 to the Registration Statement on Form SB-2 filed August 16, 1995 with the SEC (Commission File No. 33-61393). (g) Christopher E. Mack, incorporated by reference to the Company's 10-KSB for the year ended December 31, 1996 filed March 14, 1997 with the SEC (Commission File No. 0-13741). (i) Carl D. Stevens, incorporated by reference to the Company's 10-QSB for the quarter ended March 31, 1997 filed April 25, 1997 with the SEC (Commission File No. 0-13741).
36 10.7 Lease dated October 21, 1993 for commercial office space in Herndon, VA, as amended, incorporated by reference to the Company's Form 10-KSB for the fiscal year ended December 31, 1995 filed March 15, 1996 with the SEC (Commission File No. 0-13741). 10.8 Lease dated November 30, 1995 for commercial office space in Atlanta, GA, incorporated by reference to the Company's Form 10-KSB for the fiscal year ended December 31, 1995 filed March 15, 1996 with the SEC (Commission File No. 0-13741). 10.9 Consulting agreement dated August 18, 1997 between ITC Learning Corporation and Philip J. Facchina. 10.11 IBM Subcontractor Agreement dated January 13, 1997, incorporated by reference to the Company's 10-QSB for the quarter ended March 31, 1997 filed April 25, 1997 with the SEC (Commission File No. 0-13741). 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst and Young LLP, independent auditors. 27.1 Financial Data Schedule
EX-3.2 2 AMENDED BY-LAWS OF THE COMPANY 1 EXHIBIT 3.2 RESTATED BY-LAWS OF INDUSTRIAL TRAINING CORPORATION (effective as of, and with amendments through, January 29, 1998) ARTICLE I - OFFICES The principal office of the corporation shall be located in the Commonwealth of Virginia. The Corporation may have such offices either within or without the state of incorporation, as the Board of Directors may designate or as the business of the corporation may from time to time require. ARTICLE II - STOCKHOLDERS 1. ANNUAL MEETING. The annual meeting of the stockholders shall be held on or before the 15th day of June in each year, beginning with the year 1978 at 10:00 a.m., for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday such meeting shall be held on the next succeeding business day. 2. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute, may be called only as provided in the Articles of Incorporation. 3. PLACE OF MEETING. The directors may designate any place, either within or without the State unless otherwise prescribed by statute, as the place of meeting for any annual meeting or for any special meeting called by the Directors. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the principal office of the corporation. 4. NOTICE OF MEETING. Written or printed notice stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than ninety (90) days before the date of the meeting, either personally or by mail, by or at the direction of the chairman and chief executive officer, or the secretary, or the officer or persons calling the meeting, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the stockholder at his address as it appears on the stock transfer books of the corporation, with postage thereon prepaid. 2 5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the directors of the corporation may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, ninety (90) days. If the stock transfer books shall be closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders such books shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of closing the stock transfer books, the directors may fix in advance a date as the record date for any such determination of stockholders, such date in any case to be not more than ninety (90) days and, in case of a meeting of stockholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of stockholders is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders, or stockholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the directors declaring such dividend is adopted, as the case may be shall be the record date for such determination of stockholders. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof. 6. VOTING LISTS. The officer or agent having charge of the stock transfer books for shares of the corporation shall make, at least ten (10) days before each meeting of the stockholders, a complete list of the stockholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order with the address of and the number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the principal office of the corporation and shall be subject to the inspection of any stockholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder during the whole time of the meeting. The original stock transfer book shall be prima facie evidence as to who are the stockholders entitled to examine such list or transfer books or to vote at the meeting of stockholders. 7. QUORUM. At any meeting of stockholders a majority of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. If less than said number of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. 2 3 8. PROXIES. At all meetings of stockholders a stockholder may vote by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. Such proxy shall be filed with the secretary of the corporation before or at the time of the meeting. 9. VOTING. Each stockholder entitled to vote in accordance with the terms and provisions of the certificate of incorporation and these by-laws shall be entitled to one vote, in person or by proxy, for each share of stock entitled to vote held by such stockholders. Upon the demand of any stockholder, the vote for directors and upon any question before the meeting shall be by ballot. All elections for directors shall be decided by plurality vote: all other questions shall be decided by majority vote except as otherwise provided by the Certificate of Incorporation or the laws of this state. 10. ORDER OF BUSINESS. The order of business at all meetings of the stockholders, shall be as follows: 1. Roll Call. 2. Proof of notice of meeting or waiver of notice. 3. Reading of minutes of preceding meeting. 4. Election of Directors. 5. Reports of Officers. 6. Unfinished Business. 7. New Business. ARTICLE III - BOARD OF DIRECTORS 1. GENERAL POWERS. The business and affairs of the corporation shall be managed by its board of directors. The directors shall in all cases act as a board, and they may adopt such rules and regulations for the conduct of their meetings and the management of the corporation, as they may deem proper, not inconsistent with these by-laws and the laws of this state. 2. NUMBER, TENURE AND QUALIFICATIONS. The number of directors of the corporation and the terms of office of the directors shall be as provided in the Articles of Incorporation. 3 4 3. REGULAR MEETINGS. A regular meeting of the directors, shall be held without other notice than this by-law immediately after, and at the same place as, the annual meeting of stockholders. The directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution. 4. SPECIAL MEETINGS. Special meetings of the directors may be called by or at the request of the chairman and chief executive officer or any two directors. The person or persons authorized to call special meetings of the directors may fix the place for holding any special meeting of the directors called by them. 5. NOTICE. Notice of any special meeting shall be given at least 5 days previously thereto by written notice delivered personally, or by telegram or mailed to each director at his business address. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. 6. QUORUM. At any meeting of the directors a majority shall constitute a quorum for the transaction of business, but if less then said number is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. 7. MANNER OF ACTING. Except as otherwise provided in the Articles of Incorporation or these bylaws, the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the directors. 8. INFORMAL ACTION BY DIRECTORS. Unless otherwise provided by law, any action required to be taken at a meeting of the directors, or any other action which may be taken at a meeting of the directors, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors entitled to vote with respect to the subject matter thereof. 4 5 9. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board for any reason shall be filled only as provided in the Articles of Incorporation. 10. REMOVAL OF DIRECTORS. Any or all of the directors may be removed only as provided in the Articles of Incorporation. 11. RESIGNATION. A director may resign at any time by giving written notice to the board, the chairman and chief executive officer or the secretary of the corporation. Unless otherwise specified in the notice, the resignation shall take effect upon receipt thereof by the board or such officer, and the acceptance of the resignation shall not be necessary to make it effective. 12. COMPENSATION. Directors shall not receive any stated salary for their service but, by resolution of the Board, outside directors may be allowed a quarterly retainer fee and/or a fixed sum for attendance at each regular or special meeting of the Board; provided that nothing containing herein shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefore. 13. PRESUMPTION OF ASSENT. A director of the corporation who is present at a meeting of the directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. 14. EXECUTIVE AND OTHER COMMITTEES. The board, by resolution, may designate from among its members an executive committee and other committees, each consisting of three or more directors. Each such committee shall serve at the pleasure of the board. 15. INTERESTED DIRECTORS. Actions of the Board shall not be invalidated or otherwise affected by the fact that one or more of its members have a personal interest, beyond their role as directors of this corporation, in the particular action being voted upon, provided said interested directors disclose to the board their 5 6 interests in the transaction. Interested directors shall be counted in determining whether a quorum exists at directors' meetings, may vote with the same effect as disinterested directors (subject to their having made the disclosures provided for herein), and shall be relieved from any liability that might otherwise arise by reason of their contracting with this corporation for the benefit of themselves or any firm or other corporation in which they are interested. 16. INDEMNIFICATION. In the absence of fraud or bad faith, the corporation shall indemnify its officers and directors, and every former officer and director, to the full extent authorized or permitted by the laws of the state of incorporation, against all liability and expenses (including, but not limited to, attorneys' fees, amounts of any judgment, fine, and amounts paid in settlement) actually and reasonably incurred by him in connection with or resulting from any action, suit or proceeding in which such person may become involved as a party or otherwise by reason of having been an officer or director of the corporation. 17. LIABILITY FOR DIVIDENDS ILLEGALLY DECLARED. A director shall not be liable for dividends illegally declared, distributions illegally made to shareholders, or any other action taken in reliance in good faith upon financial statements of the corporation represented to him to be correct by the president of the corporation or the officer having charge of its books of account, or certified by an independent public or certified accountant to fairly reflect the financial condition of the corporation; nor shall he be liable if in good faith in determining the amount available for dividends or distributions he considers the assets to be of their book value. ARTICLE IV - OFFICERS 1. NUMBER. The officers of the corporation shall be a president, one or more vice presidents, a secretary and a treasurer, each of whom shall be elected by the directors. Such other officers and assistant officers as may be deemed necessary may be elected or appointed by the directors. 2. ELECTION AND TERM OF OFFICE. The officers of the corporation to be elected by the directors shall be elected annually at the first meeting of the directors held after each annual meeting of the stockholders. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. 3. REMOVAL. Any officer or agent elected or appointed by the directors may be removed by the directors whenever in their judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. 6 7 4. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the directors for the unexpired portion of the term. 5. PRESIDENT. The president shall be the chief executive officer of the corporation and, subject to the control of the directors, shall in general supervise and control all of the business and affairs of the corporation, and operations of the corporation and its divisions. In the absence of the chairman of the Board of Directors, or if there is no such officer, he shall, when present, preside at all meetings of the stockholders and of the directors. He may sign, with the secretary or any other proper officer of the corporation thereunto authorized by the directors, certificates for shares of the corporation, any deeds, mortgages, bonds, contracts or other instruments which the directors have authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the directors or by these by-laws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the directors from time to time. 6. VICE PRESIDENTS. In the absence of the president or in the event of his death, inability or refusal to act, one of the vice presidents designated by the board of directors shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice president shall perform such other duties as from time to time may be assigned to him by the president or by the directors. 7. SECRETARY. The secretary shall keep the minutes of the stockholders' and of the directors' meetings in one or more books provided for that purpose, see that all notices are duly given in accordance with the provisions of these bylaws or as required, be custodian of the corporate records and of the seal of the corporation and keep a register of the post office address of each stockholder which shall be furnished to the secretary by such stockholder, have general charge of the stock transfer books of the corporation and in general perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the president or by the directors. 7 8 8. TREASURER. If required by the directors, the treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the directors shall determine. He shall have charge and custody of and be responsible for all funds and securities of the corporation receive and give receipts for moneys due and payable to the corporation from any source whatsoever, and deposit all such moneys in the name of the corporation in such banks, trust companies or other depositories as shall be selected in accordance with these bylaws and in general perform all of the duties as from time to time may be assigned to him by the president or by the directors. 9. SALARIES. The salaries of the officers shall be fixed from time to time by the directors and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the corporation. ARTICLE V - CONTRACTS, LOANS, CHECKS AND DEPOSITS 1. CONTRACTS. Except as provided in the Articles of Incorporation, the directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. 2. LOANS. No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the directors. Such authority may be general or confined to specific instances. 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the directors. 4. DEPOSITS. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the directors may select. 8 9 ARTICLE VI - CERTIFICATES FOR SHARES AND THEIR TRANSFER 1. CERTIFICATES FOR SHARES. Certificates representing shares of the corporation shall be in such form as shall be determined by the directors. Such certificates shall be signed by the president and by the secretary or by such other officers authorized by law and by the directors. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the stockholders, the number of shares and date of issue, shall be entered on the stock transfer books of the corporation. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled; except that in case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the corporation as the directors may prescribe. 2. TRANSFERS OF SHARES. a. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, and cancel the old certificate; every such transfer shall be entered on the transfer book of the corporation which shall be kept at its principal office. b. The corporation shall be entitled to treat the holder of record of any share as the holder in fact thereof, and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person whether or not it shall have express or other notice thereof, except as expressly provided by the laws of this state. ARTICLE VII - FISCAL YEAR The fiscal year of the corporation shall begin on such date as may be determined by resolution of the Board of Directors. ARTICLE VIII - DIVIDENDS The directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law. ARTICLE IX - SEAL The directors shall provide a corporate seal which shall be circular in form and shall have inscribed thereon the name of the corporation, the state of incorporation, year of incorporation and the words, "Corporate Seal". 9 10 ARTICLE X - WAIVER OF NOTICE Unless otherwise provided by law, whenever any notice is required to be given to any director of the corporation under the provisions of these by-laws or under the provisions of the Articles of Incorporation, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. ARTICLE XI - AMENDMENTS These by-laws may be altered, amended or repealed and new by-laws adopted only by a vote of the directors representing a majority of the entire Board of Directors. 10 EX-10.9 3 CONSULTING AGREEMENT 1 EXHIBIT 10.9 [ITC LOGO] CONSULTANT AGREEMENT THIS AGREEMENT, made as of this 18th day of August, 1997 (the "Effective Date"), by and between ITC LEARNING CORPORATION, a corporation duly organized and existing under the laws of the State of Maryland, with principal offices in Herndon, Virginia (hereinafter referred to as "ITC"), and Philip J. Facchina, acting personally, of 8128 Boss Street Vienna, VA 22182 (hereinafter referred to as the "CONSULTANT"). ARTICLE 1 INDEPENDENT CONTRACTOR The CONSULTANT shall be deemed at all times to be an independent contractor and the CONSULTANT is not for any purposes an employee or CONSULTANT of ITC and the CONSULTANT agrees not to make any representation to the contrary. The CONSULTANT understands and agrees that as an independent contractor he/she does not have any authority to sign contracts, notes, obligations, to make any purchases or to acquire or dispose of any property on behalf of ITC. ITC does however, agree to indemnify, defend and hold harmless CONSULTANT for any claims, or actions which may result the transactions or transactions contemplated hereby regardless whether or not CONSULTANT is deemed liable for such claims or actions ARTICLE 2 CHARACTER AND EXTENT OF SERVICES The CONSULTANT shall act as an advisor to ITC for the potential sale of the assets, capital stock, intellectual property or other assets of Anderson SoftTeach ("Anderson"), a subsidiary of ITC. Sale of any of the foregoing could be accomplished through the exchange of cash or securities, assumption of debt or other liabilities, or other mutually agreed upon compensation. In such capacity, CONSULTANT shall use his best efforts and work with ITC, its officers and employees, in order to bring forward a term sheet from a potential purchaser for Anderson, which leads to the successful consummation of the proposed transaction outlined therein ("Transaction"). In accordance with the requirements of this engagement, the CONSULTANT shall perform the following tasks: - Communicate and coordinate with potential purchasers of Anderson regarding the timing of due diligence and due diligence procedures; - Negotiate in good faith with potential purchasers toward a purchase price acceptable to ITC, which may be accepted or rejected by ITC, in ITC's sole discretion; - Assist ITC in structuring and negotiating the terms of the Transaction. ITC acknowledges that groups headed by E. Tomaszewicz and S. Roden are potential purchasers of Anderson, and would be covered by this Agreement. CONSULTANT will be under the direction of J.H. (Bill) Walton, the Chief Executive Officer of ITC, or another ITC manager or officer when specifically designated by Bill Walton. ARTICLE 3 PERIOD OF PERFORMANCE The term of this AGREEMENT shall be that period commencing with the Effective Date through close of business December 31, 1997. 2 CONSULTANT Agreement with Philip J. Facchina Page 2 ARTICLE 4 TERMINATION This AGREEMENT may be terminated by either party without cause, upon 7 days written notice to the other party, or at any time by ITC for non-performance. Non-performance, which will be determined solely by ITC, includes failure on the part of CONSULTANT to diligently perform hereunder and/or failure to provide work acceptable to ITC, or, if requested by ITC, failure to show evidence of satisfactory progress in terms of producing acceptable work and/or maintaining schedule. ARTICLE 5 COMPENSATION As payment in full for satisfactory completion and acceptance of the services performed and provided to ITC, ITC will pay CONSULTANT a fee based on the following schedule: - - For sales which the aggregate purchase price is less than $5 million, a fee equal to $25,000 plus one percent (1%) of the aggregate purchase price. - - For sales which the aggregate purchase price is more than $5 million, a fee equal to $100,000 plus one percent (1%) of the aggregate purchase price. As used above, the aggregate purchase price of any transaction will include the following: the fair market value of all cash, securities or other assets exchanged or given to ITC in consideration of the purchase, as well as the book value of all liabilities or debt assumed by purchasers in the transaction. Any debt financing provided to purchaser by ITC will be included in the determination of aggregate purchase price. CONSULTANT's fee will be considered earned upon consummation of the transaction, and all funds payable to CONSULTANT will be made at closing. CONSULTANT's fee will be placed in escrow by ITC's attorney at closing and will be remitted directly to CONSULTANT by the closing attorney. ARTICLE 6 ACCEPTANCE AND PAYMENT Acceptance will not occur until the ITC representative has had appropriate time to review and approve the services performed and/or deliverables provided to ITC. If ITC considers CONSULTANT'S services to have been satisfactorily completed, the ITC representative will mark the CONSULTANT'S invoice "accepted for payment" and sign and date the invoice. Invoices or attachments must specify and detail the amount of time and service performed on each task. ALL INVOICES SHOULD BE SUBMITTED TO ITC, ACCOUNTS PAYABLE, 13515 DULLES TECHNOLOGY DRIVE, HERNDON, VIRGINIA, 20171-3413. ARTICLE 7 ASSIGNMENT AND SUBCONTRACTING CONSULTANT'S obligations authorized under this AGREEMENT are not assignable or transferable and CONSULTANT agrees not to subcontract any of the work authorized hereunder without prior written approval of ITC. ARTICLE 10 LIABILITY ITC specifically agrees by acceptance of this AGREEMENT to save harmless and indemnify CONSULTANT against all loss, liability, damage, and expense caused by any conduct or representations made by it to CONSULTANT or third parties related to the services contemplated by this AGREEMENT. Inasmuch as ITC is the seller of Anderson and that all assets, liabilities, contracts, agreements, understandings, partnerships, joint ventures, 3 CONSULTANT Agreement with Philip J. Facchina Page 3 business agreements and claims, and in general, the corporate, legal, financial, and accounting affairs of Anderson are under the care, custody and control of ITC, it is understood that the intent of this provision is to absolve and protect CONSULTANT from any and all loss, liability, damage, and expense caused by, or connected with the sale of Anderson by ITC to any party and, the work of CONSULTANT hereunder or the engagement of CONSULTANT pursuant to this AGREEMENT. Notwithstanding the foregoing, ITC will not have any obligation to CONSULTANT for any claim or losses arising from the bad faith, willful misconduct or negligence of the CONSULTANT. CONSULTANT agrees to indemnify ITC for any claims or losses arising out of CONSULTANT'S bad faith, willful misconduct or negligence in the performance of his duties hereunder. ARTICLE 11 OWNERSHIP OF WORK PRODUCT All technical data, evaluations, reports and other work product of CONSULTANT hereunder shall become the property of ITC and shall be delivered to ITC upon completion of services authorized hereunder. The CONSULTANT hereby releases any and all claim, right or interest including any claim, right or interest arising out of or recognized under Title 17 of the United States Code relating to copyrights, which the undersigned has or may have, now or in the future, in and to any videotape, book, article, pamphlet, chart, film, filmstrip, handbook, manual, or other materials produced or hereafter to be produced by ITC (all of which are hereinafter called the "Work"), including any claim, right or interest in and to any reproductions and derivative works of the Work. The CONSULTANT agrees that all such rights, including the right to reproduce, prepare derivative works of, distribute copies of (by sale or otherwise), perform, display or otherwise use the Work, have been and shall continue to be the sole and exclusive property of ITC Learning Corporation. ARTICLE 12 LEGAL REQUIREMENTS CONSULTANT shall secure all licenses or permits required by law and shall comply with all ordinances, laws, rules, and regulations pertaining to its services hereunder. ARTICLE 13 GUARANTEES AND WARRANTY CONSULTANT warrants and guarantees that the work performed hereunder will be in accordance with generally accepted professional standards. ARTICLE 14 PROPRIETARY INFORMATION CONSULTANT shall not, either during or after the term of this AGREEMENT, disclose to any third party any confidential information relative to the work of the business of ITC and/or any affiliated corporations, without written consent of ITC, or as disclosed to a potential purchaser pursuant to a duly executed non-disclosure or confidentiality agreement between ITC and the potential purchaser. ITC's representatives shall at all times have access to the work for purposes of inspecting same and determining that the work is being performed in accordance with the terms of the AGREEMENT. ARTICLE 15 WAIVER The failure of ITC to insist on strict performance of any of the terms and conditions hereof shall not constitute a waiver of any other provisions or any default to the CONSULTANT. The terms and conditions of this AGREEMENT shall survive the period herein stated. The failure of CONSULTANT to insist on strict performance of any of the terms and conditions hereof shall not constitute a waiver of any other provisions or any default to ITC. The terms and conditions of this Article 15 shall survive the period herein stated. 4 CONSULTANT Agreement with Philip J. Facchina Page 4 ARTICLE 16 ENTIRE AGREEMENT AND AMENDMENTS This instrument constitutes the entire AGREEMENT between the PARTIES covering the subject matter. No modifications or amendments shall be valid unless in writing and signed by the PARTIES. IN WITNESS WHEREOF, THE PARTIES hereto have caused this AGREEMENT to be duly executed in their respective names. For ITC LEARNING CORPORATION For AGREEMENT Executed By: AGREEMENT Executed By: /s/ J.H. (Bill) Walton /s/ Philip J. Facchina - -------------------------------------- --------------------------- J.H. (Bill) Walton SSN: ###-##-#### Reviewed by /s/ Christopher E. Mack ----------------------- Christopher E. Mack Vice President, Finance & Administration EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Activ Training, Ltd. Organized under the laws of the United Kingdom Bedford, England ITC Australasia Pty., Ltd. Organized under the laws of Australia Crows Nest, New South Wales, Australia ComSkill Learning Centers, Inc. Organized under the laws of the state of Georgia Herndon, Virginia EX-23.1 5 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-45036) pertaining to the 1982 Incentive Stock Option Plan, the Registration Statement (Form S-8 No 333-18941) pertaining to the 1992 Director Incentive Stock Option Plan and the Registration Statement (Form S-8 No. 333-18939) pertaining to the 1992 Key Employee Stock Option Plan of ITC Learning Corporation of our report dated February 23, 1998, with respect to the consolidated financial statements of ITC Learning Corporation included in the Annual Report (Form 10-KSB) for the year ended December 31, 1997. /s/ Ernst & Young LLP Washington, D.C. March 11, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S 10-KSB AS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 4,885,672 0 6,422,320 (254,728) 357,374 11,753,890 1,483,307 (802,989) 19,784,755 4,409,506 0 0 0 389,708 14,525,245 19,784,755 25,582,153 25,582,153 16,202,060 27,952,370 0 200,000 0 (1,433,328) 0 (1,433,328) 0 0 0 (1,433,328) (0.37) (0.37)
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