-----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, D6EsYo81MNWUnuTRNDSih9zk7Dw+SyUbcmIIuAFG3gYR+L6zkuEfHJcaBmweY3tz ZTqHjpbWniXkftvU+4gBzg== 0000950133-99-001622.txt : 19990504 0000950133-99-001622.hdr.sgml : 19990504 ACCESSION NUMBER: 0000950133-99-001622 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990503 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-13741 FILM NUMBER: 99608522 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 10QSB 1 FORM 10-QSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------------- FORM 10-QSB (MARK ONE) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF EXCHANGE ACT For the transition period from ________ to _________ COMMISSION FILE NUMBER 0-13741 ITC LEARNING CORPORATION --------------------------------------------------------- (Name of small business issuer as specified in its charter) MARYLAND 52-1078263 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 13515 DULLES TECHNOLOGY DRIVE HERNDON, VIRGINIA 20171 ----------------------- (Address of principal executive offices) (703) 713-3335 --------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of March 31, 1999, 3,958,245 shares of Common Stock were outstanding. Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No 2 ITC LEARNING CORPORATION FORM 10-QSB INDEX
PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998.....................................1 Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998.........................................2-3 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998.....................................4 Notes to Condensed Consolidated Financial Statements...........................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................................10 PART II - OTHER INFORMATION Item 1. Legal Proceedings.............................................................14 Item 2. Changes in Securities and Use of Proceeds.....................................14 Item 3. Defaults Upon Senior Securities...............................................14 Item 4. Submission of Matters to a Vote of Security Holders...........................14 Item 5. Other Information.............................................................14 Item 6. Exhibits and Reports on Form 8-K..............................................14
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ITC LEARNING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended March 31, 1999 1998 ---- ---- Net revenues............................................... $ 5,702,384 $ 2,834,698 Cost of sales.............................................. 2,557,228 1,324,997 ------------------ ------------------ Gross margin......................................... 3,145,156 1,509,701 Selling, general and administrative expense................ 2,875,389 2,413,416 Equity in earnings of affiliates........................... (65,147) (62,800) ------------------ ------------------ Total costs and expenses............................. 2,810,242 2,350,616 Income (loss) before interest and income taxes............. 334,914 (840,915) Interest income............................................ 5,505 105,711 Interest expense........................................... (63,572) (17,972) ------------------ ------------------ Income (loss) before income taxes.......................... 276,847 (753,176) Income tax expense......................................... -- -- ------------------ ------------------ Net income (loss).......................................... $ 276,847 $ (753,176) ------------------ ------------------ Income (loss) per common share: Basic................................................ $ 0.07 $ (0.19) ------------------ ------------------ Diluted.............................................. $ 0.07 $ (0.19) ================== ==================
See accompanying notes to condensed consolidated financial statements. 1 4 ITC LEARNING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
March 31, December 31, 1999 1998 ---- ---- (Unaudited) Current assets: Cash and cash equivalents............................ $ 596,609 $ 267,045 Accounts receivable, net (notes 2, 4 and 5).......... 5,910,954 5,992,902 Due from affiliates.................................. 178,244 117,023 Inventories, net (notes 4 and 5)..................... 597,317 588,971 Prepaid expenses..................................... 121,564 136,730 Income taxes receivable.............................. 69,847 279,747 ------------------ ------------------ Total current assets........................... 7,474,535 7,382,418 Note receivable (note 3)................................... 753,420 753,420 Property and equipment (note 5): Video and computer equipment......................... 2,317,083 2,162,078 Furniture and fixtures............................... 206,513 206,313 Leasehold improvements............................... 37,950 35,092 ------------------ ------------------ 2,561,546 2,403,483 Less accumulated depreciation and amortization....... (1,501,783) (1,354,854) ------------------- ------------------ Net property and equipment..................... 1,059,763 1,048,629 Capitalized program development costs, net................. 5,232,967 5,393,182 Intangible assets, net..................................... 3,922,797 4,060,150 Other ..................................................... 8,341 8,966 ------------------ ------------------ Total assets............................................... $ 18,451,823 $ 18,646,765 ================== ==================
See accompanying notes to condensed consolidated financial statements. 2 5 ITC LEARNING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31, 1999 1998 ---- ---- (Unaudited) Current liabilities: Line of credit (note 4).............................. $ 1,728,000 $ 647,000 Current installments of long-term debt (note 5)...... 287,283 287,283 Accounts payable..................................... 786,949 1,973,004 Due to affiliates.................................... 241,602 314,247 Accrued compensation and benefits.................... 553,541 281,234 Deferred revenues.................................... 507,611 420,005 Other accrued expenses............................... 998,374 1,650,980 Income taxes payable................................. 7,400 10,161 ------------------ ------------------ Total current liabilities...................... 5,110,760 5,583,914 Deferred lease obligations................................. 15,197 25,511 Long-term debt (note 5).................................... 1,422,030 1,439,216 ------------------ ------------------ Total liabilities.............................. 6,547,987 7,048,641 Stockholders' equity (note 5): Commonstock, $0.10 par value, 12,000,000 shares authorized; 3,958,245 and 3,958,245 shares issued and outstanding in 1999 and 1998, respectively............................. 395,826 395,826 Additional capital................................... 16,502,127 16,502,127 Note receivable from ESOP............................ (416,553) (439,677) Retained earnings (deficit).......................... (4,572,778) (4,849,625) Accumulated other comprehensive income (note 7)...... (4,786) (10,527) ------------------ ------------------ Total stockholders' equity..................... 11,903,836 11,598,124 ------------------ ------------------ Total liabilities and stockholders' equity................. $ 18,451,823 $ 18,646,765 ================== ==================
See accompanying notes to condensed consolidated financial statements. 3 6 ITC LEARNING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended March 31, 1999 1998 ---- ---- Cash flows from operating activities: Net income (loss)......................................................... $ 276,847 $ (753,176) Reconciling items: Provision for doubtful accounts..................................... 15,000 37,500 Depreciation and amortization....................................... 908,497 516,585 Common stock issued to employees.................................... -- 4,119 Foreign currency translation adjustment............................. 5,741 (6,816) Changes in operating assets and liabilities: Decrease in accounts receivable............................... 66,948 1,833,845 Decrease (increase) in inventories............................ (8,346) 50,353 Decrease in prepaid expenses.................................. 15,164 9,450 Increase in due from affiliates, net.......................... (133,866) (159,225) Decrease in other assets...................................... 210,525 12,907 Decrease in accounts payable.................................. (1,186,055) (8,447) Decrease in accrued expenses.................................. (380,296) (552,061) Decrease in deferred revenues................................. 87,606 -- Decrease in deferred lease obligations........................ (10,314) (4,911) Decrease in income tax payable................................ (2,761) -- Net effect of acquired operating assets and liabilities....... -- 42,297 ------------------ ------------------ Net cash provided by (used for) operating activities...................... (135,310) 1,022,420 Cash flows from investing activities: Capitalized program development costs............................... (464,004) (120,839) Capital expenditures................................................ (158,061) (98,624) Acquisitions, net of cash acquired and notes payable................ -- (2,485,338) ------------------ ------------------- Net cash used for investing activities.................................... (622,065) (2,704,801) Cash flows from financing activities: Borrowings under line of credit..................................... 4,076,000 -- Repayments under line of credit..................................... (2,995,000) (25,000) Principal payments on long-term debt................................ (17,186) (21,078) Repurchase of common stock.......................................... -- (534,595) Employee stock ownership plan note collections...................... 23,125 25,500 ------------------ ------------------ Net cash provided by (used for) financing activities.......... 1,086,939 (555,173) ------------------ ------------------ Net increase (decrease) in cash........................................... 329,564 (2,237,554) Cash and cash equivalents, beginning of period............................ 267,045 4,885,672 ------------------ ------------------ Cash and cash equivalents, end of period.................................. $ 596,609 $ 2,648,118 ================== ==================
See accompanying notes to condensed consolidated financial statements. 4 7 ITC LEARNING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (UNAUDITED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements of ITC Learning Corporation ("ITC" or the "Company") include the accounts of its wholly owned subsidiaries Activ Training, Ltd. ("Activ"), ITC Australasia Pty. Ltd. ("ITCA"), Turn-Key Training Technologies, Inc. ("Turn-Key"), ITC Canada Limited, and ComSkill Learning Centers, Inc. ("ComSkill"). The Company is a full-service training company specializing in the development, production, marketing and sale of multimedia and technology-delivered training solutions designed to improve employee skills in business, industry, education and government. The Company operates in four reportable segments: U.S., Canada, Australia and the United Kingdom. Significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of the Company's management, the interim condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Certain prior year amounts have been reclassified to improve comparability to current year presentations. The interim condensed consolidated financial statements should be read in conjunction with the Company's December 31, 1998 and 1997 audited financial statements included with the Company's filing on Form 10-KSB. The interim operating results are not necessarily indicative of the operating results for the full fiscal year. Revenues and Costs In October 1997, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue Recognition, which supercedes SOP 91-1. The provisions of SOP 97-2 took effect in fiscal years beginning after December 15, 1997 and clarify rules of revenue recognition related to customer acceptance, product upgrades and post-contract customer support. In March 1998, the AICPA issued SOP 98-4, which defers for one year the implementation of certain provisions of SOP 97-2. The Company implemented SOP 97-2 as amended by SOP 98-4 for transactions entered into beginning January 1, 1998. In December 1998, the AICPA issued SOP 98-9, which extends the deferral date of implementation of certain provisions of SOP 97-2 to 2000 for the Company and amends the method of revenue recognition in some circumstances. The Company does not anticipate that the adoption of this SOP will have a significant impact on its results of operations or financial position. Revenues include both off-the-shelf and custom courseware sales, courseware licenses, consulting service revenues and hardware revenues. The Company recognizes revenues from off-the-shelf product and hardware sales as units are shipped. The Company permits the customer the right to return the courseware within 30 days of purchase. 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 a percentage of completion basis as related costs are incurred during the production period. Gross revenues from sales of affiliated joint venture and limited partnership copyrighted courseware are included in the Company's 5 8 ITC LEARNING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1999 (UNAUDITED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) financial statements, as are related production, selling and distribution costs. Amounts due to co-owners of the affiliated venture/partnerships related to such courseware sales are reflected as royalties and included in cost of sales in the financial statements. Revenues from courseware licenses are recognized upon the delivery of the initial copy of each product licensed, and related duplication costs are accrued based on estimates. Revenues from consulting services are recognized as services are performed. Net Income (Loss) Per Common Share Basic earnings per common share is computed based on the weighted average number of common shares outstanding during the year. Diluted earnings per common share is computed based on the weighted average number of common shares outstanding plus the effect of stock options and other potentially dilutive common stock equivalents. The dilutive effect of stock options and other potentially dilutive common stock equivalents is determined using the treasury stock method based on the Company's average stock price. The details of the earnings per share calculation for the quarters ended March 31, 1999 and 1998 follow:
Income Per Share (Loss) Shares Amount ------ ------ ------ QUARTER ENDED MARCH 31, 1999 Earnings per share of common stock - basic............... $ 276,847 3,879,923 $ 0.07 Dilutive securities: Stock options...................................... 53,739 --------------- --------------- ----------- Earnings per share of common stock - diluted............. $ 276,847 3,933,662 $ 0.07 --------------- --------------- ----------- QUARTER ENDED MARCH 31, 1998 Loss per share of common stock - basic................... $ (753,176) 3,876,171 $ (0.19) Dilutive securities: Stock options...................................... --------------- --------------- ----------- Loss per share of common stock - diluted................. $ (753,176) 3,876,171 $ (0.19) ---------------- --------------- -----------
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. 6 9 ITC LEARNING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1999 (UNAUDITED) NOTE 2 - ACCOUNTS RECEIVABLE Accounts receivable include the following:
March 31, December 31, 1999 1998 ---- ---- (Unaudited) Trade accounts receivable............................ $ 5,843,828 $ 6,014,595 Unbilled contract receivables........................ 94,561 37,728 Less allowance for doubtful accounts................. (104,571) (89,421) ---------------- ---------------- Trade accounts receivable, net................... 5,833,818 5,962,902 Other receivables.................................... 77,136 30,000 ---------------- ---------------- $ 5,910,954 $ 5,992,902 ================ ================
NOTE 3 - NOTE RECEIVABLE On November 20, 1997 the Company entered into a stock purchase agreement with Anderson Holdings Inc., an investor group headed by a former employee of the Company, to sell all of the Company's stock in its Anderson Soft-Teach subsidiary ("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. Under the terms of the note, AST makes quarterly interest payments to ITC at an interest rate of 8%, and will repay the principal balance in 2001. NOTE 4 - LINE OF CREDIT The Company has a credit agreement with a bank which provides for a $3,000,000 secured revolving credit facility expiring on June 30, 1999. At March 31, 1999 and December 31, 1998, the balance outstanding on the line of credit was $1,728,000 and $647,000, respectively. Interest on the facility is calculated at the U.S. prime rate and is payable monthly on any outstanding balance. The Company collateralized the credit facility by granting the bank a security interest in its accounts receivable. The agreement requires maintenance of certain financial ratios (minimum working capital, and tangible net worth) and contains certain restrictive covenants which limit borrowings and the ability to merge or dispose of assets. 7 10 ITC LEARNING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1999 (UNAUDITED) NOTE 5 - LONG-TERM DEBT Long-term debt consists of the following:
March 31, December 31, 1999 1998 ---- ---- (Unaudited) 8.5% note payable to the Company's principal lender due in $ 398,363 $ 415,549 monthly principal and interest installments of $10,258 through December 2002, collateralized by the assignment of interest in the Company's accounts receivable, inventory and property and equipment. 8.0% note payable to Nova Scotia Business Development 1,310,950 1,310,950 Corporation ("NSBDC") due in monthly interest installments (beginning October 31, 1998) and quarterly principal installments (beginning March 31, 1999), maturing in December 2003. The NSBDC has a subordinated interest position to the Company's principal lender, in the receivables and inventory of ITC Canada Limited. Additionally, the NSBDC's interest in the fixed assets and intellectual property of ITC Canada Limited ranks pari passu with the Company's principal lender. ---------------- ---------------- 1,709,313 1,726,499 Less amount classified as current (287,283) (287,283) ---------------- ---------------- $ 1,422,030 $ 1,439,216 ================ ================
NOTE 6 - SEGMENT INFORMATION The following tables show revenues and profit or loss by reportable segment for the quarters ended March 31, 1999 and 1998 (amounts in thousands): Quarter ended March 31, 1999
- ----------------------------------------------------------------------------------------------------------------------- United United States Canada Kingdom Australia Total - ----------------------------------------------------------------------------------------------------------------------- Revenues from external customers............. $4,204 $616 $665 $217 $5,702 Intersegment revenues................ 500 - - - 500 Segment income (loss) before taxes................... 557 (227) (47) (6) 277 - -----------------------------------------------------------------------------------------------------------------------
8 11 ITC LEARNING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1999 (UNAUDITED) NOTE 6 - SEGMENT INFORMATION (CONTINUED) Quarter ended March 31, 1998
- ------------------------------------------------------------------------------------------------------- United United States Canada Kingdom Australia Total - ------------------------------------------------------------------------------------------------------- Revenues from external customers............ $1,748 $ - $807 $280 $2,835 Intersegment revenues............... - - - - - Segment income (loss) before taxes.................. (1,361) - 473 135 (753) - -------------------------------------------------------------------------------------------------------
NOTE 7 - COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss), net of related tax, for the three months ended March 31, 1999 and 1998 are as follows:
March 31, March 31, 1999 1998 ---- ---- Net income (loss)......................................... $ 276,847 $ (753,176) Foreign currency translation adjustment................... 5,741 (6,816) ---------------- ---------------- $ 282,588 $ (759,992) ================ ================
The components of accumulated other comprehensive income, net of related tax, for the three months ended March 31, 1999 and December 31, 1998 are as follows:
March 31, December 31, 1999 1998 ---- ---- (Unaudited) Cumulative foreign currency translation adjustment........ $ (4,786) $ (10,527) ================ ================
9 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview of Business ITC Learning Corporation ("ITC" or the "Company") develops, markets and sells multimedia and technology-delivered training solutions designed to improve employee skills in business, industry, education and government. ITC was incorporated under the laws of the State of Maryland on January 28, 1977. The Company's training solutions include a state-of-the-art training management system, approximately 600 training titles, CD-ROM, Internet, intranet and videotape delivery capabilities and customer support services. The Company's portfolio of products is one of the largest libraries of interactive CD-ROM and technology-delivered training programs available today, having improved productivity in major corporations, government agencies and school systems across the United States. ITC's training programs combine full-motion video, audio, animation, graphics, and text into a single learning presentation. The Company has a worldwide customer base of approximately 5,000. FORWARD-LOOKING STATEMENTS AND RISK FACTORS Forward-Looking Statements Certain statements made by the Company's management may be considered to be "forward-looking statements" within the meaning of the Private Securities Litigation Act of 1995. Forward-looking statements are based on various factors and assumptions that include known and unknown risks and uncertainties. The words "believe," "expect," "anticipate" and "project," and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. Such statements may include, but not be limited to, projections of revenues, income or loss, expenses, plans, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future results could differ materially from those described in forward-looking statements as a result of the risks set forth in the following discussion, among others. Risk Factors A number of factors could contribute to significant fluctuations in operating results, which may result in volatility in the price of the Company's common stock. These include the size and timing of orders and shipments, the mix of ITC-developed products and third party products, the mix of sales from the Company's direct and indirect distribution channels, the introduction and acceptance of new products, the Company's ability to renew or replace its existing line of credit under favorable terms and conditions, and the degree to which the market understands and accepts the Company's role as a provider of training solutions. In addition, the Company faces certain general business risks which could materially and adversely impact future operating results. These include, but are not limited to, changes in economic conditions, the cost of labor and raw materials, changes in technology and general competitive factors. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 ("FIRST QUARTER OF 1999") COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 1998 ("FIRST QUARTER OF 1998") Revenues Revenues for the first quarter of 1999 totaled $5,702,000, as compared to $2,835,000 for the first quarter of 1998, representing an increase of $2,867,000 or 101%. The increase in revenues was primarily attributable to increased sales of the Company's core technology-delivered and multimedia courseware products. Revenues 10 13 from the Company's PC Skills, Regulatory, Technical and Basic Skills courseware libraries remained strong during the first quarter of 1999, while revenues generated from businesses acquired during 1998 increased to 13% of total revenues and represented 25% of the total revenue growth for the period. During 1998, the Company made significant investments in the expansion of its sales and marketing infrastructure as well as its Business Alliance Partner program. Those investments, along with the Company's 1998 product acquisitions, were primarily responsible for the significant revenue growth over the first quarter of 1998. The Company believes that its revenue performance for the first quarter of 1999 is more indicative of revenue levels for the subsequent periods during 1999. This is a forward-looking statement. See Forward-Looking Statements and Risk Factors for Further Discussion. During the first quarter of 1999, ITC recorded $176,000 in hardware sales, as compared to $64,000 recorded during the first quarter of 1998, representing an increase of $112,000. Cost of Sales and Gross Margin Cost of sales for the first quarter of 1999, which includes courseware and hardware costs, totaled $2,557,000, resulting in gross margin of $3,145,000 or 55% of total revenues, as compared to cost of sales of $1,325,000 resulting in gross margin of $1,510,000 or 53% of total revenues for the first quarter of 1998, an increase in gross margin of $1,635,000 and an increase in gross margin percentage of 2%. The increase in total gross margin is principally due to increased courseware revenues during the first quarter of 1999 as compared to the first quarter of 1998. The slight increase in gross margin percentage was due to normal fluctuations in the Company's distribution channel mix. Selling, General and Administrative Expenses Selling, general and administrative expenses totaled $2,875,000 for the first quarter of 1999, as compared to $2,413,000 for the first quarter of 1998, representing an increase of $462,000 or 19%. Selling expenses consist primarily of salaries of sales personnel, travel, advertising, marketing and promotional expenses. Selling expenses for the first quarter of 1999 totaled $1,586,000, as compared to $1,037,000 for the first quarter of 1998. The increase in selling expenses of $549,000 or 53% during the first quarter of 1999 as compared to the first quarter of 1998 is principally due to the expansion of the Company's direct sales force during 1998. Selling expenses as a percentage of revenues decreased to 28% in the first quarter of 1999 from 37% in the first quarter of 1998 primarily due to higher revenues and increased efficiencies associated with the Company's marketing efforts. General and administrative expenses consist of the costs of developing new products and the costs of the Company's executive management and support functions such as customer assurance, product fulfillment, human resources, and finance and administration. General and administrative expenses for the first quarter of 1999 as compared to the first quarter of 1998 were $1,289,000 and $1,376,000, respectively. The decrease in general and administrative expenses was $87,000 or 6%, which was primarily due to tighter control of discretionary costs. General and administrative expenses as a percentage of revenues decreased to 23% in the first quarter of 1999 from 49% in the first quarter of 1998. Income Before Income Taxes and Net Income Operations for the first quarter of 1999 resulted in pre-tax income of $277,000, as compared to a pre-tax loss of $753,000 for the first quarter of 1998. The resulting net income of $277,000 or $0.07 per diluted share compares with a net loss of $753,000 or $0.19 per share in the first quarter of 1998. The higher pre-tax and net income for the first quarter of 1999 is primarily due to increased courseware sales and resulting gross margin as compared to the first quarter of 1998. 11 14 CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES Working capital at March 31, 1999 was $2,364,000 as compared to $1,799,000 at December 31, 1998, an increase of $565,000 or 31%, primarily due to the higher net income, and payment of various short-term liabilities during the first quarter of 1999. Cash used for operating activities totaled $135,000 for the first quarter of 1999, as compared to cash provided by operating activities of $1,022,000 for the first quarter of 1998, a decrease of $1,157,000. The decrease is due to slower turnover of operating assets in relation to operating liabilities during the first quarter of 1999 as compared to the first quarter of 1998. Cash used for investing activities totaled $622,000 for the first quarter of 1999, as compared to cash used for investing activities of $2,705,000 for the first quarter of 1998, a decrease of $2,083,000. The decrease is primarily attributable to the absence of acquisition activity in 1999 as compared to 1998, partially offset by slightly higher product development and capital expenditure costs. Cash provided by financing activities totaled $1,087,000 for the first quarter of 1999, as compared to cash used for financing activities of $555,000 for the first quarter of 1998, an increase of $1,642,000. The increase is principally attributable to the Company's increased utilization of its line of credit as compared to 1998, and a stock repurchase transaction which occurred during the first quarter of 1998. The Company's line of credit matures June 30, 1999 and the Company has historically been able to renew the borrowing for an additional one year term. The Company is negotiating with its principal lender for the renewal of its existing credit facility and as a contingency, the Company is also exploring other financing alternatives. The Company believes it will secure a credit facility with favorable terms and conditions by June 30, 1999, although there is no assurance that it will do so. This is a forward-looking statement. See Forward-Looking Statements and Risk Factors for Further Discussions. The Company believes that cash on hand, anticipated cash flows from 1999 operations and its existing line of credit or replacement financing will be sufficient to meet the Company's cash requirements for at least the next twelve months. Anticipated cash flows from 1999 operations are largely dependent upon the Company's ability to achieve its sales and gross profit objectives for its currently existing products, new products launched in 1999 and products resulting from its 1998 acquisitions. However, the Company will continue to evaluate alternative sources of liquidity available to it, including expansion of existing or development of alternative sources of bank financing and equity or debt securities offerings, to satisfy ongoing working capital and capital expenditure requirements. These are forward-looking statements. See Forward-Looking Statements and Risk Factors for Further Discussion. 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 supercedes SOP 91-1. The provisions of SOP 97-2 took effect in fiscal years beginning after December 15, 1997 and clarify rules of revenue recognition related to customer acceptance, product upgrades and post-contract customer support. In March 1998, the AICPA issued SOP 98-4, which defers for one year the implementation of certain provisions of SOP 97-2. The Company implemented SOP 97-2 as amended by SOP 98-4 for transactions entered into beginning January 1, 1998. In December 1998, the AICPA issued SOP 98-9, which extends the deferral date of implementation of certain provisions of SOP 97-2 to 2000 for the Company, and amends the method of revenue recognition in some circumstances. The Company does not anticipate that the adoption of the SOP will have a significant effect in its results of operations or financial position. 12 15 IMPLICATIONS OF YEAR 2000 The Year 2000 ("Y2K") 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 internal or external hardware or software packages 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 products, or potential product liability. In addition, disruptions in the economy generally resulting from Year 2000 issues could have a material adverse affect on the Company. The Company began an assessment of the implications of the Year 2000 issue during late 1997. The Company appointed a Y2K readiness team, which meets periodically to assess Y2K trends and developments. The Company's plan to resolve the Year 2000 issue involves the following four phases: assessment, remediation, testing, and implementation. Management estimates the total costs to mitigate the Company's Y2K exposure will range from $300,000 to $400,000, of which $205,000 has been incurred to date. The Company has substantially completed its assessment of all software and hardware systems that could be significantly impacted by the Year 2000. Based on these assessments, current versions of the Company's administrative and courseware products and the majority of the Company's operational software applications have been determined to be Year 2000 compliant, and require no remediation. Versions of the Company's legacy products, which are analog-laserdisc delivered products, are not Year 2000 compliant. This is primarily due to the authoring language that the products were developed in as well as the operating systems and computer equipment that delivered the laserdisc training programs. The Company does not plan to modify the analog-laserdisc product to become Year 2000 compliant. The Company ceased sales and marketing efforts of the analog-laserdisc products in 1996; therefore, any impact on results of operations or financial position is not expected to be material. Courseware and operating applications that were found to be non-compliant are currently being reprogrammed or replaced. In addition, the Company has gathered information about the Year 2000 compliance status of its significant suppliers, vendors, and subcontractors and continues to monitor their compliance. The most reasonably likely worst case scenario, relating to Y2K compliance, would be failure of the Company's courseware products and its internal operating infrastructure. Failure of the Company's courseware products as a result of the Y2K bug, would require the Company to incur significant remediation costs and could potentially result in significant litigation costs, both which would have a material negative impact on the Company's results of operations and financial position. Failure of the Company's operating infrastructure would cause a significant disruption in the Company's ability to process transactions, fulfill orders, support customers and administer its business. The Company has and will continue to utilize both internal and external resources during the testing and implementation phases of its Year 2000 plan. The testing and implementation phases of the Company's Year 2000 plan are currently focused on courseware products and operational software applications. The Company has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds, increasing inventories, and adjusting staffing strategies. 13 16 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. 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. 0-13741). 3.2 Amended By-Laws of the Company, incorporated by reference to the Company's Form 10-KSB for the fiscal year ended December 31, 1997, filed March 13, 1998 with the SEC (Commission File No. 0-13741). 4.1 Specimen Certificate for ITC Common Stock, incorporated by reference to the Company's 10-QSB for the quarter ended March 31, 1998, filed May 1, 1998 with the SEC (Commission File No. 0-13741). 27.1 Financial Data Schedule (filed herewith). B. Reports on Form 8-K: None. 14 17 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ITC LEARNING CORPORATION (Registrant) By: /s/Carl D. Stevens DATE May 3, 1999 ---------------------------------------- ------------------- Carl D. Stevens, President, Chief Executive Officer and Director By: /s/Christopher E. Mack DATE May 3, 1999 ---------------------------------------- ------------------- Christopher E. Mack, Vice President, Treasurer, and Chief Financial Officer By: /s/Matthew C. Sysak DATE May 3, 1999 ---------------------------------------- ------------------- Matthew C. Sysak, Corporate Controller EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S 10-QSB AS FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRITY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1999 MAR-31-1999 596,609 0 6,015,525 (104,571) 597,317 7,474,535 2,561,546 (1,501,783) 18,451,823 5,110,760 0 0 0 395,826 11,508,010 18,451,823 5,702,384 5,702,384 2,557,228 2,810,242 0 15,000 0 276,847 0 276,847 0 0 0 276,847 0.07 0.07
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