-----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, Hy7ZMiFwrBYJCznU3inwlY08wND0Kqv37q2pdDz4B4X3BJnsMxS3gIkgsSQa6fEC CSI3AzIHY9pZhLHNF2yM5Q== 0001047469-99-024064.txt : 20010125 0001047469-99-024064.hdr.sgml : 20010125 ACCESSION NUMBER: 0001047469-99-024064 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRO LEARNING INC CENTRAL INDEX KEY: 0000893965 STANDARD INDUSTRIAL CLASSIFICATION: 2741 IRS NUMBER: 363660532 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20842 FILM NUMBER: 99645789 BUSINESS ADDRESS: STREET 1: POPLAR CREEK OFFICE PLAZA STREET 2: 1721 MOON LAKE BOULEVARD CITY: HOFFMAN ESTATES STATE: IL ZIP: 60194 BUSINESS PHONE: 8477817800 MAIL ADDRESS: STREET 1: 1721 MOON LAKE BLVD SUITE 555 CITY: HOOFMAN ESGTATES STATE: IL ZIP: 60194 FORMER COMPANY: FORMER CONFORMED NAME: TRO LEARNING INC DATE OF NAME CHANGE: 19940218 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ COMMISSION FILE NUMBER 0-20842 TRO LEARNING, INC. (Exact name of Registrant as specified in its charter) Delaware 36-3660532 - - -------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1721 Moon Lake Boulevard, Suite 555, Hoffman Estates, IL 60194 - - -------------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (847) 781-7800 -------------- Not Applicable -------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, $.01 par value 6,442,611 shares - - ---------------------------- ---------------- Class Outstanding as of June 1, 1999 (This document contains 20 pages) 1 TRO LEARNING, INC. AND SUBSIDIARIES INDEX
Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited): Consolidated Statements of Income for the Three and Six Months Ended April 30, 1999 and 1998.......................3 Consolidated Balance Sheets as of April 30, 1999 and October 31, 1998......................................4 Consolidated Statements of Cash Flows for the Six Months Ended April 30, 1999 and 1998.................................5 Notes to Consolidated Financial Statements...............................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................11 PART II. OTHER INFORMATION Item 1. Legal Proceedings.......................................................18 Item 2. Changes in Securities...................................................18 Item 3. Defaults Upon Senior Securities.........................................18 Item 4. Submission of Matters to a Vote of Security Holders.....................18 Item 5. Other Information.......................................................18 Item 6. Exhibits and Reports on Form 8-K........................................19 SIGNATURES..........................................................................20
2 PART I. FINANCIAL INFORMATION TRO LEARNING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Revenues by product line: PLATO-Registered Trademark- Education............. $ 9,545 $ 8,391 $ 15,206 $ 14,434 Aviation Training................................. --- 1,222 --- 2,382 ------------ ------------ ------------ ------------ Total revenues.................................. 9,545 9,613 15,206 16,816 Cost of revenues..................................... 1,402 1,347 2,363 2,937 ------------ ------------ ------------ ------------ Gross profit.................................... 8,143 8,266 12,843 13,879 ------------ ------------ ------------ ------------ Operating expenses: Selling, general and administrative............... 6,297 6,418 11,843 12,360 Product development and customer support.......... 1,384 1,812 2,720 3,834 ------------ ------------ ------------ ------------ Total operating expenses........................ 7,681 8,230 14,563 16,194 ------------ ------------ ------------ ------------ Operating income (loss)....................... 462 36 (1,720) (2,315) Interest expense..................................... 474 490 1,089 954 Interest income and other expense, net............... 42 62 91 148 ------------ ------------ ------------ ------------ Loss before income taxes...................... (54) (516) (2,900) (3,417) Credit for income taxes.............................. --- --- --- --- ------------ ------------ ------------ ------------ Net loss...................................... (54) (516) (2,900) (3,417) Preferred stock accretion................... (32) --- (32) --- ------------ ------------ ------------ ------------ Net loss available to common stockholders..... $ (86) $ (516) $ (2,932) $ (3,417) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Basic and diluted earnings per share................. $ (0.01) $ (0.08) $ (0.46) $ (0.53) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Weighted average common shares outstanding: 6,439 6,404 6,427 6,402 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
See Notes to Consolidated Financial Statements 3 TRO LEARNING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
APRIL 30, OCTOBER 31, 1999 1998 -------------- --------------- ASSETS Current assets: Cash and cash equivalents............................................... $ 154 $ 466 Accounts receivable, less allowances of $976 and $920, respectively.................................................... 15,142 16,427 Inventories............................................................. 696 648 Prepaid expenses and other current assets............................... 826 1,121 -------------- --------------- Total current assets.................................................. 16,818 18,662 Equipment and leasehold improvements, less accumulated depreciation of $3,518 and $3,204, respectively......................... 1,151 1,073 Product development costs, less accumulated amortization of $5,941 and $4,768, respectively................................................ 6,593 6,380 Other assets............................................................... 1,317 1,292 -------------- --------------- $ 25,879 $ 27,407 -------------- --------------- -------------- --------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................................ $ 2,099 $ 2,895 Accrued employee salaries and benefits.................................. 1,915 2,647 Accrued liabilities..................................................... 1,564 2,130 Revolving loan.......................................................... 8,363 9,321 Deferred revenue........................................................ 2,695 3,290 -------------- --------------- Total current liabilities............................................. 16,636 20,283 Long-term debt............................................................. 3,050 3,050 Deferred revenue, less current portion..................................... 804 405 -------------- --------------- Total liabilities..................................................... 20,490 23,738 -------------- --------------- Convertible redeemable preferred stock, net of unamortized discount and issuance costs............................................. 4,166 --- Stockholders' equity: Common stock, $.01 par value, 25,000 shares authorized; 6,562 shares issued and 6,440 shares outstanding in 1999; 6,535 shares issued and 6,415 shares outstanding in 1998............................................................... 64 64 Paid in capital......................................................... 23,419 22,956 Treasury stock at cost, 122 and 120 shares, respectively................ (1,186) (1,176) Accumulated deficit..................................................... (20,524) (17,592) Accumulated other comprehensive loss.................................... (550) (583) -------------- --------------- Total stockholders' equity............................................ 1,223 3,669 -------------- --------------- $ 25,879 $ 27,407 -------------- --------------- -------------- ---------------
See Notes to Consolidated Financial Statements 4 TRO LEARNING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED APRIL 30, ------------------------------ 1999 1998 ------------ ------------- Cash flows from operating activities: Net loss $ (2,900) $ (3,417) ------------ ------------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization.............................................. 1,465 1,402 Provision for doubtful accounts............................................ 562 375 Disposal of fixed assets................................................... 2 --- (Increase) decrease in assets: Accounts receivable...................................................... 723 3,089 Inventories.............................................................. (48) (60) Prepaid expenses and other current and noncurrent assets................. 270 (282) Increase (decrease) in liabilities: Accounts payable......................................................... (796) 596 Accrued liabilities, accrued employee salaries and benefits and other liabilities......................................... (1,298) (836) Deferred revenue......................................................... (196) (106) ------------ ------------- Total adjustments...................................................... 684 4,178 ------------ ------------- Net cash provided by (used in) operating activities.................. (2,216) 761 ------------ ------------- Cash flows from investing activities: Capital expenditures......................................................... (376) (254) Capitalization of product development costs.................................. (1,386) (1,409) ------------ ------------- Net cash used in investing activities.................................... (1,762) (1,663) ------------ ------------- Cash flows from financing activities: Net proceeds from short-term borrowings...................................... 1,482 944 Repayment of long-term debt.................................................. (2,441) (250) Net proceeds from issuance of convertible redeemable preferred stock......... 4,529 --- Net proceeds from issuance of common stock................................... 61 103 ------------ ------------- Net cash provided by financing activities.................................. 3,631 797 ------------ ------------- Effect of foreign currency on cash.............................................. 35 (27) ------------ ------------- Net decrease in cash and cash equivalents....................................... (312) (132) Cash and cash equivalents at beginning of period................................ 466 537 ------------ ------------- Cash and cash equivalents at end of period...................................... $ 154 $ 405 ------------ ------------- Cash paid for interest expense.................................................. $ 856 $ 1,018 ------------ ------------- ------------ -------------
See Notes to Consolidated Financial Statements 5 TRO LEARNING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - ------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF BUSINESS: TRO Learning, Inc. and its subsidiaries (the "Company") develop and market microcomputer-based, interactive, self-paced instructional systems. The Company's PLATO Learning Systems are marketed primarily to educational institutions and private industry. BASIS OF PRESENTATION: The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Form 10-K for the fiscal year ended October 31, 1998. The financial information furnished reflects, in the opinion of the Company, all adjustments of a normal, recurring nature necessary for a fair statement of the results for the interim periods presented. Because of cyclical and other factors, the results for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year. REVENUE RECOGNITION: Revenue from the sale of education and training courseware licenses, computer hardware, and related support services, is recognized when courseware, hardware, and related services are delivered. Post customer support is recognized ratably over the contract period. Deferred revenue represents the portion of billings made or payments received in advance of services being performed or products being delivered. PRODUCT DEVELOPMENT, ENHANCEMENT, AND MAINTENANCE COSTS: The Company develops education and training products, referred to hereafter as courseware products. Costs incurred in the development of the Company's current generation courseware products and related enhancements and routine maintenance thereof are expensed as incurred. All costs incurred by the Company in establishing the technological feasibility of new courseware products to be sold, leased, or otherwise marketed are expensed as incurred. Once technological feasibility has been established, costs incurred in the development of new generation courseware products are capitalized. 6 TRO LEARNING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - ------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED PRODUCT DEVELOPMENT, ENHANCEMENT, AND MAINTENANCE COSTS, Continued Amortization is provided over the estimated useful life of the new courseware products, generally three years, using the straight-line method. Amortization begins when the product is available for general release to customers. Unamortized capitalized costs determined to be in excess of the net realizable value of the product are expensed at the date of such determination. EARNINGS PER SHARE: Basic earnings per share is calculated based only upon the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated based upon the weighted average number of common and, where dilutive, potential common shares outstanding during the period. Potential common shares include options, warrants and convertible securities. COMPREHENSIVE INCOME: As of November 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS 130"), as required. SFAS 130 establishes new rules for the reporting of comprehensive income and its components. Foreign currency translation adjustments, which prior to adoption were reported separately in stockholders' equity, are required to be included in other comprehensive income in the consolidated financial statements. The adoption of SFAS 130 does not impact the Company's net income (loss) or total stockholders' equity. RECLASSIFICATIONS: Certain prior year amounts have been reclassified in the consolidated financial statements to conform to the current year presentation. 7 TRO LEARNING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - ------------------------------------------------------------------------------- 2. ACCOUNTS RECEIVABLE: Accounts receivable include net installment receivables of $9,936,000 and $10,496,000 at April 30, 1999 and October 31, 1998, respectively. Installment receivables to be billed after one year were $618,000 and $575,000 at April 30, 1999 and October 31,1998, respectively, and are included in other assets on the consolidated balance sheets. 3. DEBT: NEW REVOLVING LOAN AGREEMENT: On February 26, 1999, the Company entered into a new revolving loan agreement, with a new lender, that provides for a maximum $15 million line of credit through February 26, 2002. Substantially all of the Company's assets are pledged as collateral under the agreement. Borrowings are limited by the available borrowing base, as defined, consisting of certain accounts receivable and inventory, and bear interest at the prime rate plus 1% or the London Interbank Offered Rate (LIBOR) plus 3%, as determined by the Company pursuant to the agreement. A commitment fee is payable quarterly based on the unused portion of the line of credit. The agreement contains restrictive financial covenants (including Minimum Net Worth, Minimum Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), and Minimum Interest Coverage) and restrictions on borrowings, asset sales and dividends, as defined. Upon entering the new agreement, the Company terminated its previous revolving loan agreement. All outstanding borrowings and accrued interest were repaid with funds advanced under the new line of credit. At April 30, 1999, borrowings of $8,363,000 were outstanding at an interest rate of 8.2%. In May 1999, the revolving loan agreement was amended to provide up to $2 million of additional borrowing capacity over the borrowing base through July 31, 1999. LONG-TERM DEBT: At April 30, 1999, the Company's long-term debt consisted of $3,050,000 of 10% subordinated convertible debentures with interest payable semiannually. At the option of the holder, the debentures are convertible into the Company's common stock at $9.60 per share. The Company may redeem the debentures at 101% of principal, plus interest, subject to certain terms and conditions. The debentures have a scheduled maturity in 2004 and are subject to mandatory redemption at 25% of principal annually beginning in 2001. 8 TRO LEARNING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - ------------------------------------------------------------------------------- 4. CONVERTIBLE REDEEMABLE PREFERRED STOCK: On January 13, 1999, the Company issued 540 shares of its Series C Convertible Redeemable Preferred Stock (the "Series C Preferred") and warrants to purchase 125,000 shares of the Company's common stock at $9.51 per share for an aggregate purchase price of $5 million. The proceeds, net of transaction fees, were approximately $4,529,000 and were used to repay existing borrowings. A value of $394,000 has been assigned to the warrants using the Black-Scholes stock option-pricing model. Each share of the Series C Preferred has a par value of $0.01 and a stated value of $10,000. The Series C Preferred ranks senior to the Company's common stock, has no voting rights, and is not entitled to any dividends. The Series C Preferred, as amended, is convertible into shares of the Company's common stock, at the option of the holder, up to ten years from the issue date. Conversion is mandatory for all such securities still outstanding on January 13, 2009. The number of common shares to be issued is determined by dividing the stated value of the Series C Preferred being converted by the conversion price. The conversion price of the Series C Preferred is equal to the lower of (a) $9.51 per share or (b) the applicable percentage of the average of the three lowest closing prices of the Company's common stock during the 30 trading days immediately prior to the date of conversion. The applicable percentage is adjusted over time from 90% to 82%. There is a minimum conversion price of $4.69 per share, subject to adjustment based on the Company's financial performance. If fiscal year 1999 pretax income does not meet established thresholds, the minimum conversion price will be adjusted to as low as $3.17 per share. Certain conversion restrictions exist in the event such conversion would result in (a) the holders' beneficial ownership being more than 4.99% of the Company's outstanding common stock or (b) the issuance of more than 20% of the Company's outstanding common stock. The Company may redeem the Series C Preferred in cash at any time, provided the average closing price of the Company's common stock during the defined period prior to such redemption is greater than $15.85 per share. The redemption price is based on the number of common shares that would be received upon conversion at such time and from 125% to 156% of the average closing price of the Company's common stock during the defined period prior to such time. The Series C Preferred is subject to redemption in cash, at the option of the holder, upon certain events, as defined, including a change in control of the Company and a trading suspension of the Company's common stock on NASDAQ or a subsequent market. The redemption price is equal to the greater of (a) 115% of the stated value or (b) the number of common shares that would be received upon conversion at such time multiplied by the closing price of the Company's common stock prior to redemption, as defined. As these events are outside of the Company's control and redemption would be in cash, the Series C Preferred is presented between total liabilities and stockholders' equity on the consolidated balance sheet, as required by the Securities and 9 TRO LEARNING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - ------------------------------------------------------------------------------- 4. CONVERTIBLE REDEEMABLE PREFERRED STOCK, CONTINUED Exchange Commission. Upon conversion of the Series C Preferred into common shares, the related amounts will be classified as stockholders' equity. The initial carrying value will increase to the aggregate stated value of $5,400,000 over the ten-year term of the Series C Preferred. This accretion of the discount and issuance costs will be reflected as a charge to accumulated deficit in the consolidated balance sheet and will reduce net income (loss) available to common stockholders for purposes of calculating basic earnings per share. Concurrent with the issuance of the Series C Preferred, the Company issued 125,000 warrants to purchase the Company's common stock at $9.51 per share. These warrants expire five years from the issue date. The value assigned to these warrants of $394,000 has been reflected as an increase to paid-in capital and a component of the discount on the Series C Preferred in the consolidated balance sheet. 5. INCOME TAXES: No tax benefit has been recorded at April 30, 1999 for the current year to date loss as the Company is unable to demonstrate that, more likely than not, it will be able to realize its deferred tax asset. 6. COMPREHENSIVE INCOME (LOSS): Total comprehensive loss was as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED ---------------------------- ----------------------------- APRIL 30, APRIL 30, APRIL 30, APRIL 30, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Net loss.......................................... $ (54) $ (516) $ (2,900) $ (3,417) Foreign currency translation adjustments.......... (11) 58 33 (29) ------------- ------------- ------------- ------------- Total comprehensive loss................... $ (65) $ (458) $ (2,867) $ (3,446) ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
Accumulated other comprehensive loss is included as a separate component of stockholders' equity on the consolidated balance sheets. 7. EARNINGS PER SHARE: Since the Company incurred a net loss for all periods presented, potential common shares are antidilutive and excluded from the calculation of diluted earnings per share. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - ------------------------------------------------------------------------------- OVERVIEW The Company is a leading developer and marketer of microcomputer-based, interactive, self-paced instructional systems. Offering more than 2,000 hours of comprehensive academic and applied skills courseware designed for adolescents and adults, the Company's PLATO-Registered Trademark- Learning Systems are marketed to middle schools and high schools, colleges, job training programs, correctional institutions, military education programs and corporations. The PLATO Learning System is delivered via networks, CD-ROM, the Internet and private Intranets. In September 1998, the Company announced the sale of its Aviation Training business (which marketed PC-based instructional systems to airlines worldwide for use by commercial airline pilots, maintenance crews and cabin personnel) and will focus exclusively on its PLATO brand going forward. RESULTS OF OPERATIONS SECOND QUARTER FISCAL 1999 COMPARED TO SECOND QUARTER FISCAL 1998 REVENUES: The following table highlights revenues by product line (in 000's):
PLATO EDUCATION AVIATION TRAINING TOTAL ------------------- ------------------- ------------------- 1999 1998 1999 1998 1999 1998 ------- ------- ------- ------- ------- ------- Courseware and professional services $ 8,668 $ 7,578 $ --- $ 1,222 $ 8,668 $ 8,800 Hardware, third-party courseware and other 877 813 --- --- 877 813 ------- ------- ------- ------- ------- ------- Total revenues $ 9,545 $ 8,391 $ --- $ 1,222 $ 9,545 $ 9,613 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
PLATO Education courseware and professional services revenue, the driver of the Company's operations, increased $1,090,000, or 14% as compared to the prior year. Sales to both new and existing customers accounted for the increase, as well as an adjustment for the recognition of certain deferred revenue to reflect the performance of the related services. Hardware and third-party courseware revenue was comparable to the prior year. Total PLATO Education revenues were $9,545,000 in the second quarter of 1999, an increase of $1,154,000 from the prior year. Aviation Training revenues were $1,222,000 in the second quarter of fiscal 1998. Total revenues of $9,545,000 for the second quarter of fiscal 1999 were comparable to $9,613,000 for the second quarter of fiscal 1998. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - ------------------------------------------------------------------------------- RESULTS OF OPERATIONS, CONTINUED SECOND QUARTER FISCAL 1999 COMPARED TO SECOND QUARTER FISCAL 1998, CONTINUED GROSS PROFIT: PLATO Education gross profit increased $792,000, or 11%, from the prior year, and gross margin decreased slightly from 88% to 85%. Aviation Training gross profit was $915,000 for the second quarter of fiscal 1998. Total gross profit for the second quarter of fiscal 1999 decreased $123,000 from the second quarter of fiscal 1998. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE: Selling, general, and administrative expense for the second quarter of fiscal 1999 decreased $121,000, or 2%, to $6,297,000 as compared to $6,418,000 for the second quarter of fiscal 1998. PLATO Education expenses increased $223,000 due primarily to increased selling expenses. Aviation Training expenses were $349,000 in the second quarter of fiscal 1998. PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT EXPENSE: Product development and customer support expense for the second quarter of fiscal 1999 decreased $428,000, or 24%, to $1,384,000 as compared to $1,812,000 for the second quarter of fiscal 1998. PLATO Education product development expenses increased $143,000 due primarily to increased amortization of previously capitalized costs. Aviation Training expenses were $583,000 in the second quarter of fiscal 1998. OPERATING INCOME: Operating income was $462,000 for the second quarter of fiscal 1999 as compared to $36,000 for the prior year. Operating income for PLATO Education was $53,000 for the second quarter of fiscal 1998, while Aviation Training had an operating loss of $17,000. The improvement in PLATO Education operating results for the second quarter of fiscal 1999 was due primarily to the increase in revenue offset by the approximate 5% increase in operating expenses. INTEREST EXPENSE: Interest expense was $474,000 for the second quarter of fiscal 1999 as compared to $490,000 for the second quarter of fiscal 1998. While interest on bank borrowings decreased approximately $160,000, the accelerated amortization of fees related to the Company's previous revolving loan agreement offset that savings, resulting in the net decrease of $16,000. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - ------------------------------------------------------------------------------- RESULTS OF OPERATIONS FIRST SIX MONTHS FISCAL 1999 COMPARED TO FIRST SIX MONTHS FISCAL 1998 REVENUES: The following table highlights revenues by product line (in 000's):
PLATO EDUCATION AVIATION TRAINING TOTAL ------------------- -------------------- ------------------ 1999 1998 1999 1998 1999 1998 ------- ------- -------- -------- -------- -------- Courseware and professional services $13,738 $12,256 $ --- $ 2,329 $ 13,738 $ 14,585 Hardware, third-party courseware and other 1,468 2,178 --- 53 1,468 2,231 ------- ------- -------- -------- -------- -------- Total revenues $15,206 $14,434 --- $ 2,382 $ 15,206 $ 16,816 ------- ------- -------- -------- -------- -------- ------- ------- -------- -------- -------- --------
PLATO Education courseware and professional services revenue, the driver of the Company's operations, increased $1,482,000, or 12%, as compared to the prior year. Sales to both new and existing customers accounted for the increase. Hardware and third-party courseware revenue decreased 33%, in line with the Company's plan to improve profitability. Total PLATO Education revenues increased $772,000 from the prior year. Aviation Training revenues were $2,382,000 for the first six months of fiscal 1998. Total revenues of $15,206,000 for the first six months of fiscal 1999 decreased $1,610,000, or 10%, compared to the prior year. GROSS PROFIT: PLATO Education gross profit for the first six months of fiscal 1999 increased $904,000, or 8%, from the prior year, while gross margin increased to 85% from 83%, reflecting the increased mix of higher margin courseware and professional services revenue. Aviation Training gross profit was $1,940,000 for the first six months of fiscal 1998. Total gross profit decreased $1,036,000 from the comparable period in fiscal 1998. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE: Selling, general, and administrative expense for the first six months of fiscal 1999 decreased $517,000, or 4%, to $11,843,000 as compared to $12,360,000 for the first six months of fiscal 1998. PLATO Education expenses increased $417,000 due primarily to increased selling expenses. Aviation Training expenses were $711,000 for the first six months of fiscal 1998. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - ------------------------------------------------------------------------------- RESULTS OF OPERATIONS, CONTINUED FIRST SIX MONTHS FISCAL 1999 COMPARED TO FIRST SIX MONTHS FISCAL 1998, CONTINUED PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT EXPENSE: Product development and customer support expense for the first six months of fiscal 1999 decreased $1,114,000 or 29% to $2,720,000 as compared to $3,834,000 for the first six months of fiscal 1998. PLATO Education product development expenses increased $146,000 due primarily to increased amortization of previously capitalized costs. Aviation Training expenses were $1,337,000 for the first six months of fiscal 1998. OPERATING LOSS: The operating loss was $1,720,000 for the first six months of fiscal 1999 as compared to $2,315,000 for the first six months of fiscal 1998. The PLATO Education operating loss was $2,207,000 for the first six months of fiscal 1998, wile Aviation Training had an operating loss of $108,000. The improvement in PLATO Education operating results for the first six months of fiscal 1999 is due principally to the increased mix of higher margin courseware and professional services revenue, offset by the approximate 3% increase in operating expenses. INTEREST EXPENSE: Interest expense for the first six months of fiscal 1999 was $1,089,000 as compared to $954,000 for the first six months of fiscal 1998. This increase was due principally to the accelerated amortization of fees related to the Company's revolving loan agreement, which was replaced with a new loan agreement in February 1999 (see Note 3 of Notes to Consolidated Financial Statements). LIQUIDITY AND CAPITAL RESOURCES At April 30, 1999, the Company's principal sources of liquidity included cash and cash equivalents of $154,000, net accounts receivable of $15,142,000, and its line of credit. The Company had net installment receivables of $9,936,000 at April 30, 1999, of which $9,318,000 is to be billed within one year and is included in net accounts receivable on the consolidated balance sheet. Net cash used in the Company's operating activities was $2,216,000 for the first six months of fiscal 1999 as compared to net cash provided of $761,000 for the first six months of fiscal 1998. Borrowings under short-term arrangements and net proceeds from the issuance of convertible redeemable preferred stock were used principally to fund the Company's working capital requirements in the first six months of fiscal 1999. In addition to cash flows from operations, the Company has resources available under its revolving loan agreement (see Note 3 of Notes to 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - ------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES, CONTINUED Consolidated Financial Statements). At April 30, 1999, borrowings of $8,363,000 were outstanding under the line of credit at an interest rate of 8.2%. In May 1999, the revolving loan agreement was amended to provide up to $2 million of additional borrowing capacity over the borrowing base through July 31, 1999. Net cash used in the Company's investing activities was $1,762,000 for the first six months of fiscal 1999 for capital expenditures and capitalized product development costs. Net cash provided by financing activities was $3,631,000 for the first six months of fiscal 1999. Net proceeds received from short-term borrowings and the issuance of convertible redeemable preferred stock (see Note 4 of Notes to Consolidated Financial Statements) were offset by the repayment of the term loan. The Company entered into a new revolving loan agreement with a new lender in February 1999. This new facility offers the Company a longer-term banking relationship with a lower interest and fee structure compared to the previous revolving loan agreement (see Note 3 of Notes to Consolidated Financial Statements). The Company continues to explore alternatives to meet its anticipated working capital, capital expenditure, and business investment requirements. YEAR 2000 Many existing computer systems use only the last two digits to identify a year. Consequently, as the year 2000 approaches, many systems do not yet recognize the difference between the years 1900 and 2000. This, as well as other date-related processing issues, may cause systems to fail or malfunction. As a result, the Year 2000 (Y2K) issue may affect the Company's products and normal business activities. The Company began addressing the Y2K issue in early 1998 and has assembled a Y2K evaluation team that is endorsed by, and includes members of, senior management. A budget has been prepared for Y2K costs and progress reports are presented to senior management on a regular basis. The Y2K evaluation team has developed and implemented a comprehensive Y2K readiness plan for the Company's products and operations. The objectives of the Y2K evaluation team are as follows: - - - Develop a Y2K compliance standard for the Company's PLATO courseware and software products and determine compliance with that standard; - - - Advise on compliance of third party courseware, operating system, and hardware products based on representations by vendors of these products; 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - ------------------------------------------------------------------------------- YEAR 2000, CONTINUED: - - - Determine compliance for the Company's internal systems (including information technology (IT) systems, such as financial and order entry systems, and non-IT systems, such as telephones and other office equipment); - - - Determine the Y2K readiness of key business partners that the Company relies on for normal business operations. The Company has developed a compliance standard based on common testing methodology. Existing PLATO courseware and software products are currently being reviewed to determine compliance with that standard. The most current compliance and remediation information is maintained on the Company's Internet web site. PLATO products currently under development are being designed to be Y2K compliant. The Company also sells various third party courseware, operating system, and hardware products. Y2K compliance information has been received from key vendors of third party courseware products and this information is maintained on the Company's Internet web site. Web links to key vendors of third party operating system and hardware products are also provided. The Company has taken, and will continue to take, actions necessary to resolve Y2K issues with its internal IT and non-IT systems, including planned replacements and upgrades. Major computers, applications, and related equipment have been reviewed and are either compliant or software upgrades have been ordered and will be installed in 1999. The Company's accounting and data processing system was not Y2K compliant and was recently upgraded to a version that the vendor has indicated is Y2K compliant. The Company relies on key business partners for its normal business operations and has contacted them regarding Y2K readiness. While the Company is confident these partners are preparing for the year 2000, it has no control over their preparations and there is no assurance that they will be successful in addressing all Y2K issues. While the Company's Y2K costs incurred to date have not been material, additional costs will be incurred as Y2K readiness is completed in mid-1999. Based on information currently available, management expects these additional costs to be immaterial as well. While the Company is dedicating existing internal resources toward attaining Y2K readiness, there is no assurance that it will be successful in addressing all Y2K issues. If the Company does not achieve Y2K readiness, there could be significant adverse effects on its results of operations, liquidity, and financial condition. For example: 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - ------------------------------------------------------------------------------- YEAR 2000, CONTINUED: - - - If the Company's PLATO products are not Y2K compliant, it could suffer increased costs, lost sales or other negative consequences resulting from customer dissatisfaction, including litigation. - - - If the Company's internal systems are not Y2K compliant, financial and customer information, orders and product shipments could be delayed and customer support could be interrupted. - - - If the Company's customers do not achieve Y2K readiness, sales and cash receipts may be delayed. - - - If the Company's key business partners and other third parties do not achieve Y2K readiness, its ability to receive supplies, ship products, process cash receipts, and conduct other ongoing business activities may be affected. Based on the progress the Company has made to date in addressing Y2K issues, management does not expect significant risks with its Y2K compliance at this time. As the Company's plan is to address its major Y2K issues prior to being affected by them, it has not developed comprehensive Y2K-related contingency plans. If progress deviates from plan or significant risks are identified, the Company will consider contingency plans as deemed necessary. This Y2K discussion is based on the Company's best estimates using the information that is currently available, and is subject to change. Actual results may differ materially from these estimates. 17 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any litigation that is expected to have a material adverse effect on the Company or its business. ITEM 2. CHANGES IN SECURITIES On January 13, 1999, the Company issued 540 shares of its Series C Convertible Preferred Stock and warrants to purchase 125,000 shares of the Company's common stock at $9.51 per share for an aggregate purchase price of $5 million (see Note 4 of Notes to Consolidated Financial Statements). ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Stockholders was held on April 6, 1999 at which stockholders voted on and approved the following: (a) The election of two Class III directors of the Company to serve until the 2002 Annual Meeting. The voting was as follows:
Name For Withheld ---- --- -------- Jack R. Borsting, Ph.D. 6,166,214 20,216 Tony J. Christianson 6,166,214 20,216
(b) The appointment of PricewaterhouseCoopers LLP as independent auditors for the Company for the fiscal year ending October 31, 1999. The voting was as follows:
For Against Withheld --- ------- -------- 6,002,880 7,933 175,617
ITEM 5. OTHER INFORMATION Not Applicable. 18 PART II. OTHER INFORMATION, CONTINUED ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Number Description ------ ----------- 10.03 First Amendment to Secured Credit Agreement among First Source Financial LLP, as lender, The Roach Organization, Inc. and TRO Learning (Canada), Inc., as borrower, dated March 24, 1999 10.04 Second Amendment to Secured Credit Agreement among First Source Financial LLP, as lender, The Roach Organization, Inc. and TRO Learning (Canada), Inc., as borrower, dated May 27, 1999 27 Financial Data Schedule
(b) Reports on Form 8-K: No reports on Form 8-K were filed for the quarter ended April 30, 1999. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on June 10, 1999. TRO LEARNING, INC. By /s/ William R. Roach --------------------------------------- Chairman of the Board, President and Chief Executive Officer (principal executive officer) /s/ John Murray --------------------------------------- Executive Vice President and Chief Financial Officer (principal financial officer) /s/ Mary Jo Murphy --------------------------------------- Vice President, Corporate Controller and Chief Accounting Officer (principal accounting officer) 20 EX-10.03 2 EXHIBIT 10.03 FIRST AMENDMENT TO AMENDED AND RESTATED SECURED CREDIT AGREEMENT This FIRST AMENDMENT TO SECURED CREDIT AGREEMENT AND RELATED DOCUMENTS (this "AMENDMENT"), dated as of March 24, 1999, is among THE ROACH ORGANIZATION, INC., a Delaware corporation, TRO LEARNING (CANADA), INC., a Canadian corporation ("TRO CANADA"; Roach and Tro Canada are hereinafter referred to, collectively, as "BORROWERS" and individually, as a "BORROWER") and FIRST SOURCE FINANCIAL LLP, an Illinois registered limited liability partnership ("LENDER") (this and all other capitalized terms used herein are defined in Section 1 of the Credit Agreement defined below). R E C I T A L S: A. Borrowers and Lender are parties to that certain Secured Credit Agreement dated as of February 26, 1999, (the "CREDIT AGREEMENT"), subject to the terms and conditions of which Lender has agreed to make loans and other financial accommodations to Borrowers. B. Borrower has requested and additional short-term overadvance in the amount of $1,000,000, and Lender is willing to agree to such request subject to the terms and conditions of this Amendment. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, and subject to the terms and conditions hereof, Borrowers and Lender hereby agree as follows: 1. DEFINITIONS. All capitalized terms used but not elsewhere defined in this Amendment shall have the respective meaning ascribed thereto in the Credit Agreement. 2. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is amended as follows: 2.01 The definition of "Overadvance Amount" appearing in Section 1.1 of the Credit Agreement is hereby deleted and the following definition is substituted in lieu thereof: ""OVERADVANCE AMOUNT" shall mean an amount equal to the sum of (x) $1,500,000 (the "BASE OVERADVANCE") and (y) during the period beginning March 24, 1999 and ending May 31, 1999, $1,000,000 (the "SPECIAL OVERADVANCE")." 2.02. Sections 4.1 of the Credit Agreement is hereby deleted and the following substituted in lieu thereof; "SECTION 4.1 INTEREST RATES. Subject to SECTION 4.3, Borrowers hereby jointly and severally promise to pay interest on the outstanding principal amount of each Loan for the period commencing on the date thereof until such Loan is paid in full, at a rate per annum determined by reference to the Prime Rate or the LIBOR Rate, respectively. The applicable basis for determining the rate of interest shall be selected by Borrowers at the time a borrowing is requested pursuant to SECTION 2.3 or at the time a Notice of LIBOR Activity is given pursuant to SECTION 4.4, as the case may be. If on any day any portion of any Loan is outstanding with respect to which notice has not been given to Lender in accordance with the terms of this Agreement specifying the basis for determining the rate of interest thereon, then for that day, such portion of such Loan shall be a Prime Rate Loan and shall bear interest at a rate determined by reference to the Prime Rate. Subject to SECTION 4.3, each Prime Rate Loan and LIBOR Rate Loan shall bear interest at a rate per annum determined as follows: (a) if it is a Prime Rate Loan, then at the sum of the Prime Rate in effect from time to time PLUS (i) one percent (1.0%) for Loans less than or equal to the Borrowing Base MINUS the Special Overadvance as computed and determined from time to time and (ii) three percent (3%) for all Loans greater than the Borrowing Base MINUS the Special Overadvance as computed and determined from time to time, or (b) if it is a LIBOR Rate Loan, then at the sum of the LIBOR Rate for the applicable Interest Period PLUS three percent (3.0%)." 2.03. Section 4.2 of the Credit Agreement is hereby amended by inserting a comma after the phrase "Prime Rate Loans" appearing therein. 3. CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment shall be subject to the satisfaction of all of the following conditions in a manner, form and substance satisfactory to Lender: (a) DELIVERY OF DOCUMENTS. The following shall have been delivered to Collateral Agent, each duly authorized and executed: (1) this Amendment; (2) such other instruments, documents, certificates, consents, waivers and opinions as Lender reasonably may request; and (3) TRO Learning, Inc. shall have executed and delivered to the Lender its consent to this Amendment in the form set forth below. (b) PAYMENT OF SPECIAL OVERADVANCE FEE. The Borrowers shall have paid to Lender a fee in the amount $25,000 for providing the Special Overadvance. Lender and Borrowers agree such fee shall be paid from the proceeds of a Loan which Borrowers hereby request Lender to make on the date hereof. (c) NO MATERIAL ADVERSE EFFECT. No Material Adverse Effect shall have occurred since the date of the most recent financial statements for Borrowers received by Lender. 2 (d) PAYMENT OF COSTS. Borrowers shall have paid or caused to be paid to Lender all out of pocket expenses of Lender relating to this Amendment and the transactions contemplated herein, including, without limitation, the expenses and reasonable fees of Lender's counsel. (e) SATISFACTION OF LENDER'S COUNSEL. All legal matters incident to the transactions contemplated hereby shall be reasonably satisfactory to counsel for Lender. The date on which all of the conditions set forth in this Paragraph 4 have been satisfied (or waived by Lender) is referred to herein as the "Effective Date." 4. REFERENCES. From and after the Effective Date, all references in the Credit Agreement and the Related Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement, as amended hereby. 5. REPRESENTATIONS AND WARRANTIES. Borrowers hereby confirms to Lender that the representations and warranties set forth in the Credit Agreement and the Related Documents to which it is a party are true and correct as of the date hereof, except to the extent such representations and warranties expressly relate to an earlier date and except as disclosed in the schedules attached to the most recent Notice Prime Rate Activity. Notice of LIBOR Activity or LC Guaranty Request. Each Borrower represents and warrants to Lender that (a) it has full power and authority to execute and deliver this Amendment and to perform its obligations hereunder, (b) upon the execution and delivery hereof, this Amendment will be valid, binding and enforceable upon it in accordance with its terms, (c) the execution and delivery of this Amendment does not and will not contravene, conflict with, violate or constitute a default under (A) the organizational documents or operating agreement of any Borrower or (B) any applicable law, rule, regulation, judgment, decree or order of which such Borrower has knowledge or any agreement, indenture or instrument to which such Borrower is a party or is bound or which is binding upon or applicable to all or any portion of its property, (d) no Unmatured Event of Default or Event of Default presently exists and (e) no Material Adverse Effect has occurred since the date if the last financial statements delivered by Borrowers to Lender. 6. COSTS AND EXPENSES. Borrowers agree, jointly and severally, to reimburse Lender for all out of pocket expenses incurred in the preparation, negotiation and execution of this Amendment and the consummation of the transactions contemplated hereby, including, without limitation, the expenses and fees of counsel for Lender. 7. NO FURTHER AMENDMENTS; RATIFICATION OF LIABILITY. Except as amended hereby, the Credit Agreement and each of the Related Documents shall remain in full force and effect in accordance with their respective terms. Each Borrower hereby ratifies and confirms its liabilities, obligations and agreements under the Credit Agreement and the Related 3 Documents to which it is a party, all as amended by this Amendment, and the liens and security interests created thereby, and each acknowledges that (a) it has no defenses, claims or set-offs to the enforcement of such liabilities, obligations and agreements, (b) Lender has fully performed all obligations to Borrowers which it may have had or have on and as of the date hereof and (c) other than as specifically set forth herein, Lender does not waive, diminish or limit any term or condition contained in any of the Credit Agreement or the Related Documents. Lender's agreement to the terms of this Amendment or any other amendment of the Credit Agreement or Related Documents shall not be deemed to establish or create a custom or course of dealing among Lender and Borrowers. This Amendment and the documents executed and delivered pursuant to this Amendment contain the entire agreement among Lender and Borrowers with respect to the transactions contemplated by this Amendment. 8. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. 9. FURTHER ASSURANCES. Each Borrower covenants and agrees that it will at any time and from time to time do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acts, documents and instruments as reasonably may be required by Lender in order to effectuate fully the intent of this Amendment. 10. SEVERABILITY. If any term or provision of this Amendment or the application thereof to any party or circumstance shall be held to be invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, the validity, legality and enforceability of the remaining terms and provisions of this Amendment shall not in any way be affected or impaired thereby, and the affected term or provision shall be modified to the minimum extent permitted by law so as most fully to achieve the intention of this Amendment. 11. CAPTIONS. The captions in this Amendment are inserted for convenience of reference only and in no way define, describe or limit the scope or intent of this Amendment or any of the provisions hereof. [remainder of this page intentionally left blank] 4 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment at Chicago, Illinois as of the day and year first above written. THE ROACH ORGANIZATION, INC. By: /s/ Steven R. Schuster ------------------------------------- Steven R. Schuster Vice President TRO LEARNING (CANADA), INC. By: /s/ Steven Schuster ------------------------------------- Steven Schuster Vice President FIRST SOURCE FINANCIAL LLP By: First Source Financial, Inc. Its: Manager By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- 5 GUARANTOR'S CONSENT The undersigned, TRO Learning, Inc., has heretofore executed and delivered to the Lender a Guaranty dated as of February 26, 1999 and hereby consents to the Amendment to the Credit Agreement as set forth above and confirms that its Guaranty and all of the undersigned's obligations thereunder remain in full force and effect. The undersigned further agrees that the consent of the undersigned to any further amendments to the Credit Agreement shall not be required as a result of this consent having been obtained, except to the extent, if any, required by the Guaranty referred to above. TRO LEARNING, INC. /s/ Steven R. Schuster ------------------------------- Steven R. Schuster Vice President 6 EX-10.04 3 EXHIBIT 10.04 SECOND AMENDMENT TO SECURED CREDIT AGREEMENT This SECOND AMENDMENT TO SECURED CREDIT AGREEMENT AND RELATED DOCUMENTS (this "AMENDMENT"), dated as of May 27, 1999, is among THE ROACH ORGANIZATION, INC., a Delaware corporation, TRO LEARNING (CANADA), INC., a Canadian corporation ("TRO CANADA"; Roach and TRO Canada are hereinafter referred to, collectively, as "BORROWERS" and individually, as a "BORROWER") and FIRST SOURCE FINANCIAL LLP, an Illinois registered limited liability partnership ("LENDER") (this and all other capitalized terms used herein are defined in Section 1 of the Credit Agreement defined below). R E C I T A L S: A. Borrowers and Lender are parties to that certain Secured Credit Agreement dated as of February 26, 1999, as amended (the "CREDIT AGREEMENT"), subject to the terms and conditions of which Lender has agreed to make loans and other financial accommodations to Borrowers. B. Borrower has requested an increase and extension of the Special Overadvance, and Lender is willing to agree to such request subject to the terms and conditions of this Amendment. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, and subject to the terms and conditions hereof, Borrowers and Lender hereby agree as follows: 1. DEFINITIONS. All capitalized terms used but not elsewhere defined in this Amendment shall have the respective meanings ascribed thereto in the Credit Agreement. 2. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is amended as follows: 2.01. The definition of "Overadvance Amount" appearing in Section 1.1 of the Credit Agreement is hereby deleted and the following definition is substituted in lieu thereof: ""OVERADVANCE AMOUNT" shall mean an amount equal to the sum of (x) $1,500,000 (the "BASE OVERADVANCE") and (y)(i) during the period beginning March 24, 1999 and ending May 31, 1999, $1,000,000, (ii) during the period beginning June 1, 1999 and ending June 30, 1999, $1,500,000 and (iii) during the period beginning July 1, 1999 and ending July 31, 1999, $2,000,000 (the amounts under clause (y) hereof are referred to as the "SPECIAL OVERADVANCE")." 3. CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment shall be subject to the satisfaction of all of the following conditions in a manner, form and substance satisfactory to Lender: (a) DELIVERY OF DOCUMENTS. The following shall have been delivered to Collateral Agent, each duly authorized and executed: (1) this Amendment; (2) such other instruments, documents, certificates, consents, waivers and opinions as Lender reasonably may request; and (3) TRO Learning, Inc. shall have executed and delivered to the Lender its consent to this Amendment in the form set forth below. (b) PAYMENT OF SPECIAL OVERADVANCE FEE. The Borrowers shall have paid to Lender a fee in the amount $28,500 for providing the extension of the Special Overadvance. Lender and Borrowers agree such fee shall be paid from the proceeds of a Loan which Borrowers hereby request Lender to make on the date hereof. (c) NO MATERIAL ADVERSE EFFECT. No Material Adverse Effect shall have occurred since the date of the most recent financial statements for Borrowers received by Lender. (d) PAYMENT OF COSTS. Borrowers shall have paid or caused to be paid to Lender all out of pocket expenses of Lender relating to this Amendment and the transactions contemplated herein, including, without limitation, the expenses and reasonable fees of Lender's counsel. (e) SATISFACTION OF LENDER'S COUNSEL. All legal matters incident to the transactions contemplated hereby shall be reasonably satisfactory to counsel for Lender. The date on which all of the conditions set forth in this Paragraph 3 have been satisfied (or waived by Lender) is referred to herein as the "Effective Date." 4. REFERENCES. From and after the Effective Date, all references in the Credit Agreement and the Related Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement, as amended hereby. 5. REPRESENTATIONS AND WARRANTIES. Borrowers hereby confirms to Lender that the representations and warranties set forth in the Credit Agreement and the Related Documents to which it is a party are true and correct as of the date hereof, except to the extent 2 such representations and warranties expressly relate to an earlier date and except as disclosed in the schedules attached to the most recent Notice Prime Rate Activity, Notice of LIBOR Activity or LC Guaranty Request. Each Borrower represents and warrants to Lender that (a) it has full power and authority to execute and deliver this Amendment and to perform its obligations hereunder, (b) upon the execution and delivery hereof, this Amendment will be valid, binding and enforceable upon it in accordance with its terms, (c) the execution and delivery of this Amendment does not and will not contravene, conflict with, violate or constitute a default under (A) the organizational documents or operating agreement of any Borrower or (B) any applicable law, rule, regulation, judgment, decree or order of which such Borrower has knowledge or any agreement, indenture or instrument to which such Borrower is a party or is bound or which is binding upon or applicable to all or any portion of its property, (d) no Unmatured Event of Default or Event of Default presently exists and (e) no Material Adverse Effect has occurred since the date if the last financial statements delivered by Borrowers to Lender. 6. COSTS AND EXPENSES. Borrowers agree, jointly and severally, to reimburse Lender for all out of pocket expenses incurred in the preparation, negotiation and execution of this Amendment and the consummation of the transactions contemplated hereby, including, without limitation, the expenses and fees of counsel for Lender. 7. NO FURTHER AMENDMENTS; RATIFICATION OF LIABILITY. Except as amended hereby, the Credit Agreement and each of the Related Documents shall remain in full force and effect in accordance with their respective terms. Each Borrower hereby ratifies and confirms its liabilities, obligations and agreements under the Credit Agreement and the Related Documents to which it is a party, all as amended by this Amendment, and the liens and security interests created thereby, and each acknowledges that (a) it has no defenses, claims or set-offs to the enforcement of such liabilities, obligations and agreements, (b) Lender has fully performed all obligations to Borrowers which it may have had or have on and as of the date hereof and (c) other than as specifically set forth herein, Lender does not waive, diminish or limit any term or condition contained in any of the Credit Agreement or the Related Documents. Lender's agreement to the terms of this Amendment or any other amendment of the Credit Agreement or Related Documents shall not be deemed to establish or create a custom or course of dealing among Lender and Borrowers. This Amendment and the documents executed and delivered pursuant to this Amendment contain the entire agreement among Lender and Borrowers with respect to the transactions contemplated by this Amendment. 8. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. 9. FURTHER ASSURANCES. Each Borrower covenants and agrees that it will at any time and from time to time do, execute, acknowledge and deliver, or will cause to be done, 3 executed, acknowledged and delivered, all such further acts, documents and instruments as reasonably may be required by Lender in order to effectuate fully the intent of this Amendment. 10. SEVERABILITY. If any term or provision of this Amendment or the application thereof to any party or circumstance shall be held to be invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, the validity, legality and enforceability of the remaining terms and provisions of this Amendment shall not in any way be affected or impaired thereby, and the affected term or provision shall be modified to the minimum extent permitted by law so as most fully to achieve the intention of this Amendment. 11. CAPTIONS. The captions in this Amendment are inserted for convenience of reference only and in no way define, describe or limit the scope or intent of this Amendment or any of the provisions hereof. [remainder of this page intentionally left blank] 4 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment at Chicago, Illinois as of the day and year first above written. THE ROACH ORGANIZATION, INC. By: --------------------------- Steven R. Schuster Vice President TRO LEARNING (CANADA), INC. By: --------------------------- Steven Schuster Vice President FIRST SOURCE FINANCIAL LLP By: First Source Financial, Inc. Its: Manager By: --------------------------- Name: ------------------------- Title: ------------------------ GUARANTOR'S CONSENT The undersigned, TRO Learning, Inc., has heretofore executed and delivered to the Lender a Guaranty dated as of February 26, 1999 and hereby consents to the Amendment as set forth above and confirms that its Guaranty and all of the undersigned's obligations thereunder remain in full force and effect. The undersigned further agrees that the consent of the undersigned to any further amendments to the Credit Agreement shall not be required as a result of this consent having been obtained, except to the extent, if any, required by the Guaranty referred to above. TRO LEARNING, INC. ----------------------------- Steven R. Schuster Vice President EX-27 4 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND IN THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS OCT-31-1999 APR-30-1999 154 0 15142 976 696 16818 1151 3518 25879 16636 3050 4166 0 64 1159 25879 15206 15206 2363 2363 14654 562 1089 (2900) 0 (2900) 0 0 0 (2900) (0.46) (0.46)
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