-----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, JRv3CLu3tC2+ha9wNySGj9H7/zPbi4SMff0yDqozI40U5TQp/usu+iTbNVUfde61 1q4a8jIg8jKa/xizP0TNBA== 0000950133-99-003606.txt : 19991117 0000950133-99-003606.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950133-99-003606 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ITC LEARNING CORP CENTRAL INDEX KEY: 0000764867 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] 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: 99754423 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 SEPTEMBER 30, 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 12, 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of September 30, 1999, 3,964,078 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 Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 1999 and 1998 (Unaudited)............................................................... 1 Condensed Consolidated Balance Sheets as of September 30, 1999 (Unaudited) and December 31, 1998 (Audited).................... 2-3 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 (Unaudited).......................... 4 Notes to Condensed Consolidated Financial Statements (Unaudited)................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 11 PART II - OTHER INFORMATION Item 1. Legal Proceedings.................................................................. 17 Item 2. Changes in Securities.............................................................. 17 Item 3. Defaults Upon Senior Securities.................................................... 17 Item 4. Submission of Matters to a Vote of Security Holders................................ 17 Item 5. Other Information.................................................................. 17 Item 6. Exhibits and Reports on Form 8-K................................................... 17
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ITC LEARNING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the 3 Months Ended For the 9 Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Net revenues.......................... $ 3,102,150 $ 4,053,955 $ 14,273,729 $ 10,928,910 Cost of sales......................... 2,220,530 2,837,768 6,733,204 6,566,057 ------------- ------------- ------------- ------------- Gross margin.......................... 881,620 1,216,187 7,540,525 4,362,853 Sales and marketing expense........... 1,582,673 1,644,414 4,777,734 4,369,146 General and administrative expense............. 1,545,022 1,508,948 4,356,325 4,479,197 Equity in earnings of affiliates...... (37,101) (19,949) (149,408) (176,902) ------------- ------------- ------------- ------------- Loss before interest and income taxes.................. (2,208,974) (1,917,226) (1,444,126) (4,308,588) Interest income....................... 21,003 47,522 67,969 234,192 Interest expense...................... (79,053) (26,321) (239,959) (62,356) ------------- ------------- ------------- ------------- Loss before income taxes.............. (2,267,024) (1,896,025) (1,616,116) (4,136,752) Income tax expense (benefit).......... -- -- -- (222,516) ------------- ------------- ------------- ------------- Net loss.............................. $ (2,267,024) $ (1,896,025) $ (1,616,116) $ (3,914,236) ============= ============= ============= ============= Net loss per common share: Basic and diluted................. $ (0.58) $ (0.48) $ (0.42) $ (1.00) ============= ============= ============= ============= Weighted average number of shares outstanding............. 3,881,382 3,991,629 3,890,415 3,909,630 ============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements. 1 4 ITC LEARNING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS September 30, December 31, 1999 1998 ---- ---- (Unaudited) Current assets: Cash and cash equivalents....................................... $ 296,478 $ 267,045 Accounts receivable, net (notes 2, 4 and 5)..................... 5,445,125 5,992,902 Due from affiliates............................................. 168,247 117,023 Inventory, net (notes 4 and 5).................................. 448,725 588,971 Prepaid expenses................................................ 212,785 136,730 Income taxes receivable......................................... 58,094 279,747 ------------- ------------- Total current assets........................................ 6,629,454 7,382,418 Note receivable (note 3)............................................. 747,628 753,420 Property and equipment (note 5): Video and computer equipment.................................... 2,535,455 2,162,078 Furniture and fixtures.......................................... 211,062 206,313 Leasehold improvements.......................................... 59,074 35,092 ------------- ------------- 2,805,591 2,403,483 Less accumulated depreciation and amortization.................. (1,826,060) (1,354,854) ------------- ------------- Net property and equipment.................................. 979,531 1,048,629 Capitalized program development costs, net........................... 5,335,106 5,393,182 Intangible assets, net............................................... 3,644,766 4,060,150 Other ............................................................... 23,012 8,966 ------------- ------------- Total assets ....................................................... $ 17,359,497 $ 18,646,765 ============= =============
See accompanying notes to condensed consolidated financial statements. 2 5 ITC LEARNING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31, 1999 1998 ---- ---- (Unaudited) Current liabilities: Line of credit (note 4)......................................... $ 2,549,729 $ 647,000 Current installments of long-term debt (note 5)................. 204,540 287,283 Accounts payable................................................ 1,611,781 1,973,004 Due to affiliates............................................... 198,807 314,247 Accrued compensation and benefits............................... 456,423 281,234 Deferred revenues............................................... 364,809 420,005 Other accrued expenses.......................................... 921,625 1,650,980 Income taxes payable............................................ 746 10,161 ------------- ------------- Total current liabilities................................... 6,308,460 5,583,914 Deferred lease obligations........................................... 8,424 25,511 Long-term debt (note 5).............................................. 954,520 1,439,216 ------------- ------------- Total liabilities........................................... 7,271,404 7,048,641 Stockholders' equity (note 5): Common stock, $0.10 par value, 12,000,000 shares authorized; 3,964,078 and 3,958,245 shares issued and outstanding in 1999 and 1998, respectively.............. 396,408 395,826 Additional capital.............................................. 16,547,350 16,502,127 Note receivable from ESOP....................................... (370,302) (439,677) Retained earnings (deficit)..................................... (6,465,741) (4,849,625) Accumulated other comprehensive income (note 7)................. (19,622) (10,527) ------------- ------------- Total stockholders' equity.................................. 10,088,093 11,598,124 ------------- ------------- Total liabilities and stockholders' equity........................... $ 17,359,497 $ 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 Nine Months Ended September 30, 1999 1998 ---- ---- Cash flows from operating activities: Net loss............................................................. $ (1,616,116) $ (3,914,236) Reconciling items: Provision for doubtful accounts................................. 150,000 127,500 Depreciation and amortization................................... 2,830,776 1,774,230 Common stock issued to employees................................ -- 4,119 Foreign currency translation adjustment......................... (9,095) (31,108) Changes in operating assets and liabilities: Decrease in accounts receivable............................. 397,777 2,962,891 Decrease in inventories..................................... 140,246 118,118 Increase in prepaid expenses................................ (76,055) (79,702) Decrease in income taxes receivable......................... 209,567 21,492 Decrease in long term receivable............................ 3,832 143,207 Increase (decrease) in accounts payable..................... (361,223) 1,118,775 Decrease in due to affiliates, net.......................... (166,664) (202,143) Increase (decrease) in accrued compensation and benefits.... 175,189 (522,953) Decrease in accrued expenses................................ (729,355) (490,909) Decrease in deferred revenues............................... (55,196) (132,264) Decrease in deferred lease obligations...................... (17,087) (14,733) Decrease in income tax payable.............................. (9,415) (233,005) Net effect of acquired operating assets and liabilities..... -- (206,533) ------------- ------------- Net cash provided by operating activities............................ 867,181 442,746 Cash flows from investing activities: Capitalized program development costs........................... (1,886,112) (280,026) Capital expenditures............................................ (402,106) (528,581) Acquisitions, net of cash acquired and notes payable............ -- (3,148,471) ------------- ------------- Net cash used for investing activities............................... (2,288,218) (3,957,078) Cash flows from financing activities: Borrowings under line of credit................................. 9,736,729 3,809,935 Repayments under line of credit................................. (7,834,000) (3,834,935) Principal payments on long-term debt............................ (567,439) (62,837) Issuance of common stock........................................ 45,805 223,603 Repurchase of common stock...................................... -- (535,848) Employee stock ownership plan note collections.................. 69,375 76,500 ------------- ------------- Net cash provided by (used for) financing activities................. 1,450,470 (323,582) ------------- ------------- Net increase (decrease) in cash...................................... 29,433 (3,837,914) Cash and cash equivalents, beginning of period....................... 267,045 4,885,672 ------------- ------------- Cash and cash equivalents, end of period............................. $ 296,478 $ 1,047,758 ============= =============
See accompanying notes to condensed consolidated financial statements. 4 7 ITC LEARNING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 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 by dividing net income(loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income (loss) by 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. 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. NOTE 2 - ACCOUNTS RECEIVABLE Accounts receivable include the following:
September 30, December 31, 1999 1998 ---- ---- (Unaudited) Trade accounts receivable.................................... $ 5,539,425 $ 6,014,595 Unbilled contract receivables................................ 2,314 37,728 Less allowance for doubtful accounts......................... (150,000) (89,421) ------------ ------------ Trade accounts receivable, net........................... 5,391,739 5,962,902 Other receivables............................................ 53,386 30,000 ------------ ------------ $ 5,445,125 $ 5,992,902 ============ ============
NOTE 3 - NOTE RECEIVABLE On November 20, 1997 the Company entered into a stock purchase agreement with Anderson Holdings Inc. to sell all of the Company's stock in its 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. 6 9 ITC LEARNING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (UNAUDITED) NOTE 4 - LINE OF CREDIT On August 11, 1999, the Company entered into a new line of credit agreement with its principal lender for a two-year term. The new agreement provided the Company with $4,000,000 of borrowing capacity. The Company collateralized the credit facility by granting the bank a security interest in the assets of the Company. 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. At September 30, 1999 and December 31, 1998, the balances outstanding on the line of credit were $2,550,000 and $647,000, respectively. Interest on the facility is calculated at the U.S. prime rate plus 1% and is payable monthly on any outstanding balance. On October 29, 1999, the Company signed a Forbearance Agreement with its principal lender to avoid the declaration of default with respect to certain covenants and conditions in its August 11, 1999 line of credit agreement, including maximum debt to tangible net worth and minimum tangible net worth requirements. The Forbearance Agreement increased the Company's interest rate to prime plus 3% and reduced the Company's borrowing capacity per the following schedule:
Date Range Maximum Borrowing Capacity ---------- -------------------------- 10/31/99 - 11/14/99 $ 1,950,000 11/15/99 - 11/29/99 $ 1,650,000 11/30/99 - 12/14/99 $ 1,450,000 12/15/99 - 12/30/99 $ 1,000,000 12/31/99 - Thereafter $ 250,000
Additionally, the Forbearance Agreement stipulates a restructuring fee in an amount not to exceed $100,000 due in full upon the earlier of (i) payment in full of all outstanding balances of the line of credit or (ii) December 31, 1999. The Agreement also requires the Company to obtain capital infusion in accordance with the following schedule:
Date Required Amount of Capital Infusion Required ------------- ----------------------------------- 10/31/99 $ 165,000 11/15/99 $ 150,000 11/30/99 $ 150,000 12/15/99 $ 200,000 12/31/99 $ 200,000 ----------- $ 865,000 ===========
As of November 12, 1999, the capital infusion requirement has been satisfied. See Note 8 - Subsequent Events. 7 10 ITC LEARNING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (UNAUDITED) NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following: September 30, December 31, 1999 1998 ---- ---- (Unaudited) 8.5% note payable to the Company's principal lender due in $ - $ 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. Per the Company's line of credit agreement dated August 11, 1999, the Company's 8.5% note payable was reclassified to a current liability and accounted for as part of its line of credit balance. (See note 4 - Line of Credit.) 8.0% note payable to Nova Scotia Business Development 1,159,060 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. ------------ ------------ 1,159,060 1,726,499 (204,540) (287,283) Less amount classified as current ------------ ------------ $ 954,520 $ 1,439,216 ============ ============
8 11 ITC LEARNING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (UNAUDITED) NOTE 6 - SEGMENT INFORMATION The following tables identify revenues and profit or loss by reportable segment for the quarters and the nine months ended September 30, 1999 and 1998 (amounts in thousands): QUARTER ENDED SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------------------------------------- United United States Canada Kingdom Australia Total - --------------------------------------------------------------------------------------------------------------- Revenues from external customers...... $2,214 $264 $476 $148 $3,102 Intersegment revenues................. 316 42 -- -- 358 Segment loss before taxes............. (1,484) (440) (81) (262) (2,267) - --------------------------------------------------------------------------------------------------------------- QUARTER ENDED SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------------------------------------- United United States Canada(1) Kingdom Australia Total - --------------------------------------------------------------------------------------------------------------- Revenues from external customers...... $3,197 $53 $533 $271 $4,054 Intersegment revenues................. 349 -- -- -- 349 Segment income (loss) before taxes.... (1,902) (27) 138 (105) (1,896) - --------------------------------------------------------------------------------------------------------------- (1) Canadian subsidiary commenced operations September 25, 1998. NINE MONTHS ENDED SEPTEMBER 30, 1999 - --------------------------------------------------------------------------------------------------------------- United United States Canada Kingdom Australia Total - --------------------------------------------------------------------------------------------------------------- Revenues from external customers...... $10,416 $1,447 $1,729 $682 $14,274 Intersegment revenues................. 1,523 291 -- -- 1,814 Segment loss before taxes............. (351) (848) (179) (238) (1,616) - --------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------------------------------------- United United States Canada(1) Kingdom Australia Total - --------------------------------------------------------------------------------------------------------------- Revenues from external customers...... $7,882 $53 $2,035 $959 $10,929 Intersegment revenues................. 1,159 -- -- -- 1,159 Segment income (loss) before taxes.... (4,367) (27) 309 (52) (4,137) - --------------------------------------------------------------------------------------------------------------- (1) Canadian subsidiary commenced operations September 25, 1998.
9 12 ITC LEARNING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (UNAUDITED) NOTE 7 - COMPREHENSIVE INCOME (LOSS) The components of comprehensive loss, net of related tax, for the nine months ended September 30, 1999 and 1998 are as follows:
September 30, September 30, 1999 1998 ---- ---- Net loss..................................................... $ (1,616,116) $ (3,914,236) Foreign currency translation adjustment...................... (9,095) (31,108) ------------ ------------ Comprehensive income (loss) $ (1,625,211) $ (3,945,344) ============ ============ The components of accumulated other comprehensive income, net of related tax, at September 30, 1999 and December 31, 1998 are as follows: September 30, December 31, 1999 1998 ---- ---- (Unaudited) Cumulative foreign currency translation adjustment........... $ (19,622) $ (10,527) ============ ============
NOTE 8 - SUBSEQUENT EVENTS On October 29, 1999, the Company signed a Forbearance Agreement with its principal lender to avoid the declaration of default with respect to certain covenants and conditions in its August 11, 1999 line of credit agreement, including maximum debt to tangible net worth and minimum tangible net worth requirements. See Note 4 - Line of Credit for further discussion. On November 1, 1999, a private-equity fund committed to make up to a $1,000,000 investment in the Company, which was fully funded by November 12, 1999. The investment is in the form of a 5.5% subordinated debenture convertible into common stock at $2.00 per share with 291,500 warrants exercisable at $2.00 per share. The debenture and warrants will mature on October 31, 2000. 10 13 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 and implementation 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 organizations. 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 Reform 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 The Company has experienced adverse results of operations during 1998 and 1999, resulting in erosion of its working capital. Anticipated current cash flows are largely dependent upon the Company's ability to achieve its sales and gross profit objectives. Achievement of these objectives is subject to various risk factors related to, among other things: incremental sales results; the Company's ability to control costs in relation to revenues; the Company's ability to mitigate the negative impact of its recent reduction in force; and the Company's ability to obtain replacement working capital financing. The Company is also considering alternative sources of liquidity, such as: public or private offerings of debt or equity securities in addition to the $1,000,000 which the Company raised in November 1999; development of alternative sources of bank financing; further cost reductions; and sale of Company assets. No assurances can be provided that the Company's adverse operating results will not continue, that its gross profit objectives will be achieved, and that the Company will be successful in obtaining further sources of liquidity. During the fourth quarter of 1999, the Company implimented a reduction in force eliminating approximately 70 of its 140 employees, consisting primarily of its content development operations. Management believes it has retained the necessary resources to fully support its current business operations, although no assurances can be provided that it will do so. A number of factors could also contribute to significant fluctuations in operating results, which may result in volatility in the price of the Company's common stock. These include 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, 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. 11 14 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 ("THIRD QUARTER OF 1999") COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1998 ("THIRD QUARTER OF 1998") Revenues Revenues for the third quarter of 1999 totaled $3,102,000, as compared to $4,054,000 for the third quarter of 1998, representing a decrease of $952,000 or 23%. The decrease in overall revenues for the quarter was attributable to decreased hardware sales, and lower courseware sales of the Company's core courseware libraries, offset by increased revenue from products and business acquired during 1998. Sales revenue associated with several large transactions failed to materialize during the third quarter of 1999 as expected. The majority of those opportunities continue to be pursued. Revenue generated from products and businesses acquired in 1998 was $322,000 and $169,000 during the third quarter of 1999 and the third quarter of 1998, respectively. During the third quarter of 1999, the Company recorded $534,000 in hardware revenues, as compared to $1,373,000 recorded during the third quarter of 1998, representing a decrease of $839,000, primarily the result of decreased demand for the hardware component of the Company's training solution. Cost of Sales and Gross Margin Cost of sales for the third quarter of 1999, which includes courseware and hardware costs, totaled $2,221,000, resulting in gross margin of $882,000 or 28% of total revenues, as compared to cost of sales of $2,838,000 resulting in gross margin of $1,216,000 or 30% of total revenues for the third quarter of 1998, a decrease in gross margin of $334,000 and a decrease in gross margin percentage of 2%. Included in courseware cost of sales is product development cost amortization charges which are relatively fixed. The decrease in cost of sales and total gross margin was primarily due to decreased revenues during the third quarter of 1999 as compared to the third quarter of 1998. Selling, General and Administrative Expenses Selling, general and administrative expenses totaled $3,128,000 for the third quarter of 1999, as compared to $3,153,000 for the third quarter of 1998, representing a decrease of $25,000 or 1%. Selling expenses consist primarily of salaries of sales personnel, travel, advertising, marketing and promotional expenses. Selling expenses for the third quarter of 1999 totaled $1,583,000, as compared to $1,644,000 for the third quarter of 1998. The decrease in selling expenses of $61,000 or 4% was due to an overall reduction in marketing expenditures, offset by higher direct sales costs as a result of business acquired during 1998. Selling expenses as a percentage of revenues increased to 51% in the third quarter of 1999 from 41% in the third quarter of 1998 primarily due to lower revenues during the third quarter of 1999 as compared to the third quarter of 1998, in relation to static sales and marketing costs. 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 third quarter of 1999 totaled $1,545,000, as compared to $1,509,000 for the third quarter of 1998. The increase in general and administrative expenses of $36,000 or 2% was primarily due to general and administrative expenses associated with the Company's Canadian subsidiary which commenced operations on September 25, 1998. General and administrative expenses as a percentage of revenue increased to 50% in the third quarter of 1999 from 37% in the third quarter of 1998, primarily due to lower revenues during the third quarter of 1999 as compared to the third quarter of 1998, in relation to a static cost structure. Income Before Income Taxes and Net Income Operations for the third quarter of 1999 resulted in a pre-tax loss of $2,267,000, as compared to a pre-tax loss of $1,896,000 for the third quarter of 1998. The resulting net loss of $2,267,000 or $0.58 per share compares with a net loss of $1,896,000 or $0.48 per share in the third quarter of 1998. The higher pre-tax and 12 15 net loss for the third quarter of 1999 was primarily due to decreased sales revenues and resulting gross margin as compared to the third quarter of 1998. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1998 Revenues Revenues for the nine months ended September 30, 1999 totaled $14,274,000 as compared to $10,929,000 for the comparable prior year period, representing an increase of $3,345,000 or 31%. The increase was attributable to an overall increase in sales of the Company's core technology-delivered multimedia courseware products, offset by lower sales of hardware component systems. Revenue from products and business acquired in 1998 amounted to $4,469,000 during the nine months ended September 30, 1999, as compared to $368,000 during the comparable prior year period, representing an increase of $4,101,000. During the nine months ended September 30, 1999, ITC recorded $973,000 in hardware revenue, as compared to $1,754,000 recorded during the comparable prior year period, representing an decrease of $781,000 or 45%. While the Company continues to fulfill its customers' hardware requirements as a part of its training solution, the Company does not anticipate significant revenue growth from hardware sales. This is a forward-looking statement. See Forward-Looking Statements and Risk Factors for Further Discussion. Cost of Sales and Gross Margin Cost of sales for the nine months ended September 30, 1999 totaled $6,733,000 resulting in a gross margin of $7,541,000 or 53% of total revenues, as compared to cost of sales of $6,566,000 resulting in gross margin of $4,363,000 or 40% of total revenues for the comparable prior year period. The increase in total gross margin of $3,178,000 was attributable to increased revenues during the nine months ended September 30, 1999 over the comparable prior year period. The increase in gross margin as a percentage of revenues for the nine months ended September 30, 1999 over the comparable prior year period was 13%, due to a shift in sales channel mix from resellers or third party agents to direct sales. Selling, General and Administrative Expenses Selling, general and administrative expenses totaled $9,134,000 for the nine months ended September 30, 1999 as compared to $8,848,000 for the comparable prior year period, representing an increase of $286,000 or 3%. Selling expenses for the nine months ended September 30, 1999 totaled $4,778,000 as compared to $4,369,000 for the comparable prior year period, representing an increase of $409,000 or 9%. The increase was due to the expansion of sales and marketing efforts focused on products and businesses acquired during 1998. For the nine months ended September 30, 1999, selling expenses as a percentage of revenues decreased to 33% as compared to 40% for the comparable prior year period. The decrease of 7% was the result of achieving higher revenues during the nine months ended September 30, 1999 as compared to the nine months ended September 30, 1998, while maintaining a static cost structure. General and administrative expenses for the nine months ended September 30, 1999 totaled $4,356,000 as compared to $4,479,000 for the comparable prior year period, representing a decrease of $123,000 or 3%. The decrease was due to lower personnel related costs, offset by higher general and administrative expenses associated with the Company's Canadian subsidiary which commenced operations on September 25, 1998. General and administrative expenses as a percentage of revenues decreased to 31% during the nine months ended September 30, 1999 from 41% during the comparable prior year period. The decrease of 10% was the result of achieving higher revenues during the nine months ended September 30, 1999 as compared to the nine months ended September 30, 1998, while maintaining a static cost structure. 13 16 Income Before Income Taxes and Net Income Operations for the nine months ended September 30, 1999 resulted in a pre-tax loss of $1,616,000, as compared to a pre-tax loss of $4,137,000 for the comparable prior year period. The resulting net loss of $1,616,000 or $0.42 per share compares with a net loss of $3,914,000 or $1.00 per share during the comparable prior year period. The increase in net income of $2,298,000 was due to increased sales revenues and resulting gross margin as compared to the prior year period. CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES Working capital at September 30, 1999 was $321,000 as compared to $1,799,000 at December 31, 1998, a decrease of $1,478,000 or 82%, primarily due to increased utilization of the Company's line of credit during the nine months ended September 30, 1999. Cash provided by operating activities totaled $867,000 for the nine months ended September 30, 1999, as compared to cash provided by operating activities of $443,000 for the comparable prior year period, an increase of $424,000. The increase was due to a higher net income offset by slower turnover of operating assets in relation to operating liabilities. Cash used for investing activities totaled $2,288,000 for the nine months ended September 30, 1999, as compared to cash used for investing activities of $3,957,000 for the comparable prior year period, a decrease of $1,669,000. The decrease was primarily attributable to the absence of acquisition activity in 1999 as compared to 1998, partially offset by higher product development costs relating to the Company's development of its Microsoft(R) Office 2000 suite of courseware products, and enhancements, modifications and new development of its AdminSTAR(TM) training management system. Cash provided by financing activities totaled $1,450,000 for the nine months ended September 30, 1999, as compared to cash used for financing activities of $324,000 for the comparable prior year period, an increase of $1,774,000. The increase is principally attributable to the Company's increased utilization of its line of credit as compared to 1998, and the absence of a stock repurchase transaction, which occurred during 1998. During the third quarter of 1999, the Company executed a letter of intent with Thoma Cressey Fund VI, LP ("TCEP"), a private equity fund managed by Thoma Cressey Equity Partners, Inc., to invest $20 million in ITC. On October 9, 1999, TCEP notified the Company that it had elected to terminate the contemplated transaction. On October 15, 1999, the Company announced it was winding down its multimedia content development operations. As such, the Company reduced its total worldwide workforce by approximately 70 employees, which was approximately half of the Company's existing workforce, consisting primarily of content development operations. Management believes it has retained the necessary resources to fully support its current business operations. This is a forward-looking statement. See Forward-Looking Statements and Risk Factors for Further Discussion. On November 1, 1999, a private-equity fund committed to make up to a $1,000,000 investment in the Company, which was fully funded by November 12, 1999. The investment is in the form of a 5.5% subordinated debenture convertible into common stock at $2.00 per share with 291,500 warrants exercisable at $2.00 per share. The debenture and warrants will mature on October 31, 2000. The Company believes that cash on hand, anticipated cash flows from fourth quarter 1999 operations, its modified line of credit and the recent capital infusion, should be sufficient to meet the Company's cash requirements through December 31, 1999. Anticipated cash flows from fourth quarter 1999 operations are largely dependent upon the Company's ability to achieve its sales and gross profit objectives for its currently existing products. However, the Company will continue to evaluate alternative sources of liquidity available to it, including development of alternative sources of bank financing, equity or debt securities offerings, further cost reductions, or sale of Company assets, to satisfy ongoing working capital and capital expenditure 14 17 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. 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. Since then, the Company has made substantial progress towards eliminating its exposure to Y2K related issues. The Company's plan to resolve the Year 2000 issue has involved the following four phases: assessment, remediation, testing, and implementation. Through September 30, 1999, the Company has completed all four phases of its plan as it relates to the Company's courseware products and its operating infrastructure, and believes its products and mission critical operating functions to be year 2000 compliant. 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 have been 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, however the Company believes non-compliance of its suppliers and vendors will not represent a significant threat due to the nature of its raw materials and existing alternatives in the marketplace. These are forward-looking statements. See Forward-Looking Statements and Risk Factors for Further Discussion. 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 15 18 would cause a significant disruption in the Company's ability to process transactions, fulfill orders, support customers and administer its business. The Company has contingency plans for all mission critical applications. These contingency plans involve, among other actions, manual workarounds, increasing inventories, and adjusting staffing strategies. SUBSEQUENT EVENTS On October 29, 1999, the Company signed a Forbearance Agreement with its principal lender to avoid the declaration of default with respect to certain covenants and conditions in its August 11, 1999 line of credit agreement, including maximum debt to tangible net worth and minimum tangible net worth requirements. See Note 4 - Line of Credit for further discussion. Management believes it can adhere to the requirements prescribed in the Forbearance Agreement. Additionally, management is aggressively pursuing alternative banking arrangements and believes the acquisition of a short-term credit facility sufficient to meet its current working capital requirements to be probable. This is a forward-looking statement. See Forward-Looking Statements and Risk Factors for Further Discussion. On November 1, 1999, a private-equity fund committed to make up to a $1,000,000 investment in the Company, which was fully funded by November 12, 1999. The investment is in the form of a 5.5% subordinated debenture convertible into common stock at $2.00 per share with 291,500 warrants exercisable at $2.00 per share. The debenture and warrants will mature on October 31, 2000. Management believes the consummation of this investment represents a significant opportunity for the Company with respect to the development and ultimate funding of its growth strategy. This is a forward-looking statement. See Forward-Looking Statements and Risk Factors for Further Discussion. 16 19 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES 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. 17 20 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 November 15, 1999 ---------------------------------------------- ---------------------------- Carl D. Stevens, President, Chief Executive Officer and Director By: /s/Christopher E. Mack DATE November 15, 1999 ---------------------------------------------- ---------------------------- Christopher E. Mack, Vice President, Treasurer, and Chief Financial Officer By: /s/Matthew C. Sysak DATE November 15, 1999 ---------------------------------------------- ---------------------------- Matthew C. Sysak, Corporate Controller
EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S 10-QSB AS FOR THE QUARTER ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1999 JUL-01-1999 SEP-30-1999 296,478 0 5,539,425 (150,000) 448,725 6,629,454 2,805,591 (1,826,060) 17,359,497 6,308,460 0 0 0 396,408 9,691,685 17,359,497 3,102,150 3,102,150 2,220,530 3,127,695 0 0 0 (2,267,024) 0 (2,267,024) 0 0 0 (2,267,024) (0.58) (0.58)
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