<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Quarterly period ended September 30, 1997
Commission File Number 0-13741
ITC LEARNING CORPORATION
-----------------------------------------------------------------
(FORMERLY KNOWN AS INDUSTRIAL TRAINING CORPORATION)
(Exact name of small business issuer as specified in its charter)
MARYLAND 52-1078263
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
13515 Dulles Technology Drive, Herndon, Virginia 20171
------------------------------------------------------
(Address of principal executive offices)
(703) 713-3335
-------------------------
Issuer's telephone number
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
As of September 30, 1997, 3,897,034 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PART I PAGE
- ------ ----
<S> <C> <C>
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 1997 and 1996 1
Condensed Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 2
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1997 and 1996 4
Notes to Condensed Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II
- -------
Item 1 Legal Proceedings 10
Item 2 Changes in Securities 10
Item 3 Defaults Upon Senior Securities 10
Item 4 Submission of Matters to a Vote of Security Holders 10
Item 5 Other Information 10
Item 6 Exhibits and Reports on Form 8-K 10
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months, For the Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $7,088,571 $5,537,255 $16,297,834 $16,858,136
Cost of sales 5,173,711 4,216,647 9,844,537 11,634,049
---------- ---------- ----------- -----------
Gross margin 1,914,860 1,320,608 6,453,297 5,224,087
Selling, general, and
administrative expense 2,420,161 2,332,357 8,953,365 6,672,337
Equity in earnings of affiliates (159,389) (56,163) (198,503) (168,520)
Interest income, net (55,140) (125,553) (138,473) (368,074)
---------- ---------- ----------- -----------
2,205,632 2,150,641 8,616,389 6,135,743
---------- ---------- ----------- -----------
Loss before income taxes (290,772) (830,033) (2,163,092) (911,656)
Income tax benefit (48,000) (332,000) (716,000) (365,000)
---------- ---------- ----------- -----------
Net loss $ (242,772) $ (498,033) $(1,447,092) $ (546,656)
========== ========== =========== ===========
Net loss per common
share (note 2) $ (0.06) $ (0.14) $ (0.37) $ (0.15)
========== ========== =========== ===========
Weighted average number
of shares outstanding 3,897,034 3,632,455 3,897,027 3,595,064
========== ========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,406,570 $ 2,697,566
Accounts receivable, net (note 3) 5,326,039 7,641,066
Due from affiliates 100,194 36,768
Inventories (note 6) 4,123,849 1,018,383
Prepaid expenses 364,502 190,402
Income tax receivable 278,595 689,104
Other current assets 7,239 0
----------- -----------
Total current assets 12,606,988 12,273,289
Long-term receivable (note 4) 1,015,978 1,589,916
Property and equipment:
Video and computer equipment 3,790,507 3,361,923
Furniture and fixtures 725,500 747,146
Leasehold improvements 102,215 95,422
----------- -----------
4,618,222 4,204,491
Less accumulated depreciation and amortization (3,557,723) (2,963,197)
----------- -----------
Net property and equipment 1,060,499 1,241,294
Capitalized program development costs, net 4,576,124 4,226,525
Intangible assets 3,653,526 3,975,840
Other 558,715 67,461
----------- -----------
$23,471,830 $23,374,325
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Line of credit (note 5) $ 0 $ 515,000
Current installments of long-term debt 34,515 130,745
Accounts payable 1,124,244 1,331,079
Due to affiliates 321,580 335,797
Accrued compensation and benefits 745,269 826,764
Deferred revenues (note 6) 4,711,373 1,458,945
Other accrued expenses 1,156,199 1,619,326
----------- -----------
Total current liabilities 8,093,180 6,217,656
Deferred lease obligations 102,829 113,020
Deferred income taxes 0 353,522
----------- -----------
Total liabilities 8,196,009 6,684,198
Stockholders' equity:
Common stock, $.10 par value, 12,000,000 shares
authorized; 3,897,034 and 3,896,924 issued
and outstanding in 1997 and 1996, respectively 389,703 389,693
Additional paid-in capital 16,068,686 16,067,366
Note receivable from ESOP (67,177) (143,677)
Retained earnings (deficit) (1,070,347) 376,745
Foreign currency translation adjustment (45,044) 0
----------- -----------
Total stockholders' equity 15,275,821 16,690,127
----------- -----------
Total liabilities and stockholders' equity $23,471,830 $23,374,325
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For Nine Months Ended September 30,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,447,092) $ (546,656)
Reconciling items:
Deferred tax benefit (716,000) --
Depreciation and amortization 2,642,781 3,114,957
Increase (decrease) in reserve for doubtful accounts 106,515 (145,409)
Salespeople awards of common shares 938 --
Foreign currency translation adjustment (45,044) --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 2,208,512 (2,961,499)
Decrease (increase) in inventories (3,105,466) 151,968
Increase in prepaid expenses (174,100) (65,474)
Decrease (increase) in other assets 17,910 (7,651)
Decrease (increase) in income taxes receivable 253,976 (435,200)
Decrease (increase) in long term receivable 573,938 (1,561,129)
Increase (decrease) in accounts payable (206,835) 1,522,842
Increase (decrease) in due to affiliates, net (77,643) 183,952
Increase (decrease) in accrued compensation and benefits (81,495) 181,548
Increase in deferred revenues 3,252,428 683,156
Increase (decrease) in other accrued expenses (463,127) 147,661
Decrease in income taxes payable -- (105,000)
Decrease in deferred lease obligation (10,191) (12,335)
----------- -----------
Net cash from operating activities 2,733,005 145,731
Cash flows from investing activities:
Deferred program development costs (2,075,540) (3,750,374)
Capital expenditures (413,731) (346,597)
----------- -----------
Net cash used in investing activities (2,489,271) (4,096,971)
Cash flows from financing activities:
Repayments under line of credit (515,000) --
Principal payments of long-term debt (96,230) (88,710)
Issuance of common stock -- 129,513
Employee stock ownership plan note collections 76,500 80,500
----------- -----------
Net cash provided by (used in) financing activities (534,730) 121,303
----------- -----------
Net increase (decrease) in cash (290,996) (3,829,937)
Cash and cash equivalents at beginning of period 2,697,566 10,348,762
----------- -----------
Cash and cash equivalents at end of period $ 2,406,570 $ 6,518,825
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
1) SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
---------------------
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries Activ Training, Ltd ("Activ"), ITC
Australasia Pty. Ltd. ("ITCA"), Anderson Soft-Teach ("AST") and ComSkill
Learning Centers, Inc. ("ComSkill"). Significant intercompany accounts and
transactions have been eliminated in consolidation. In the opinion of the
Company, 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. The interim condensed consolidated financial statements should be read
in conjunction with the Company's December 31, 1996 and 1995 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.
b) Revenues and Cost
-----------------
Revenues include both off-the-shelf and custom courseware sales, courseware
licenses, consulting service revenues and hardware revenues. The Company
recognizes revenues on off-the-shelf product and hardware sales as units are
shipped. The Company permits the customer the right to return the courseware
within 30 days of purchase. In the event that sales returns are material, the
Company adjusts revenue accordingly. Revenues from sales of custom training
programs that are developed and produced under specific contracts with
customers, including contracts with affiliated joint ventures and limited
partnerships, are recognized on the percentage of completion basis as related
costs are incurred during the production period. Gross revenues from sales of
affiliated joint venture and limited partnership copyrighted courseware are
included in the Company's financial statements, as are related production,
selling and distribution costs. Amounts due to co-owners of the affiliated
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.
2) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirement for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of Statement No. 128 on the
calculation of primary and fully diluted earnings per share for the quarters
ended March 31, 1997, June 30, 1997 and September 30, 1997 is not expected to be
material.
5
<PAGE>
3) ACCOUNTS RECEIVABLE
Accounts receivable include the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------- ----------
<S> <C> <C>
Trade accounts receivable $4,877,262 $6,738,762
Current portion of long-term receivable, net (Note 3) 845,934 1,012,287
Unbilled contract receivables 5,321 182,025
Less allowance for doubtful accounts (402,663) (296,148)
---------- ----------
Trade accounts receivable, net 5,325,854 7,636,926
Other receivables 185 4,140
---------- ----------
$5,326,039 $7,641,066
========== ==========
</TABLE>
4) LONG-TERM RECEIVABLE
During the second quarter of 1996, the Company entered into a contract with the
DeKalb County (GA) Board of Education ("DeKalb") for the sale of a district-wide
multicopy courseware license, hardware and certain future services. The total
contract amount of $5,060,000 is payable in four installments, $1,535,000 upon
contract execution, and the remaining $3,525,000 in three equal annual
installments beginning in June, 1997. The June 1997 installment was received in
accordance with the provisions of the contract and the effect of the payment is
reflected in the financial statements. The long-term portion of the net
receivable has been discounted assuming a 6% interest rate.
Components of long-term receivable include the following:
September 30,
1997
----
Receivable from DeKalb County (GA) Board of Education $2,350,000
Related dealer fees payable (401,768)
Less amounts classified as current, net of related dealer fees (845,934)
Less amount representing interest (86,320)
----------
$1,015,978
==========
5) NOTE PAYABLE TO BANK
At September 30, 1997, the Company had no amounts outstanding relating to its
$3,000,000 revolving bank line of credit, which bears interest at the bank's
prime lending rate. Borrowings under the line are collateralized by the
Company's accounts receivable and inventory.
6) DEFERRED REVENUES
During the third quarter of 1997, the Company was selected by the DeKalb County
(GA) Board of Education (DeKalb) to furnish 3,120 personal computers to the
schools within the DeKalb School district. The total sale was valued at
$5,749,560. The computers are being installed during the third and fourth
quarters of 1997. As of September 30, 1997, 1,260 computers have been
installed. Accordingly, the Company has remaining balances of $3,122,220 in
hardware computer inventory and $3,457,620 in deferred revenues associated with
this transaction.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
a) Revenues
--------
For the quarter ending September 30, 1997, the Company recorded total revenues
of $7,089,000 as compared to revenues of $5,537,000 which were recorded for the
same period in 1996. The increase of $1,552,000 or 28% is attributable to
increases in both courseware sales ($970,000 or 27%) and hardware sales
($582,000 or 30%) over the comparable period in 1996. Revenues from the
Company's multimedia training courseware sales totaled $4,537,000 for the third
quarter of 1997 as compared to $3,567,000 for the same period in 1996. The
increase was attributable to a higher level of revenues associated with the
Company's MS Office and other PC application courseware products as compared to
1996. Revenues from international operations generated $992,000 for the
quarter, representing a decline of $18,000 or 2% from the third quarter of 1996.
Hardware revenues for the third quarter of 1997 were $2,552,000, representing an
increase of $582,000 or 30% over 1996. The increase in hardware revenues for
the quarter is attributable to hardware deliveries made during the third quarter
in accordance with the Company's August 1997 contract with DeKalb County (GA)
Board of Education (DeKalb). The contract is intended to place a personal
computer in each classroom within the county's school district and is valued at
$5,750,000. As of September 30, 1997, $2,292,000 in revenue has been recognized
under this contract. The balance of the contract is expected to be recorded
during the fourth quarter of 1997.
For the nine months ending September 30, 1997, revenues totaled $16,298,000, as
compared to $16,858,000 for the same period in 1996, representing a decrease of
$560,000 or 3%. Multimedia courseware revenues totaled $13,122,000 for the nine
months ended September 30, 1997, representing a decrease of $333,000 or 2% from
1996. The decrease in multimedia courseware sales is primarily attributable to
the inclusion of $3,418,000 of courseware revenues associated with the Company's
1996 sale to DeKalb. Excluding the impact of the DeKalb sale in 1996, ITC's
year-to-date 1997 multimedia courseware sales increased from 1996 by $3,085,000
or 31%. The increase from 1996 in courseware revenues excluding DeKalb is the
result of improved levels of sales of the Company's PC application products and
year-to-date revenues from international operations which totaled $2,829,000.
This represented an increase of $924,000 or 49% over the same period in 1996.
The dramatic increase in international sales is due principally to the results
of ITC Australasia ("ITCA") which was acquired at the end of the third quarter
of 1996 and strong revenues generated by Activ Training Ltd. during the first
six months of 1997.
Hardware revenues for the first nine months of 1997 totaled $3,176,000 as
compared with $3,403,000 for the same period in 1996, representing a decrease of
$227,000 or 7%. In spite of the revenue recognized under the DeKalb hardware
contract this quarter, overall hardware revenues have declined significantly
from last year as a greater portion of this year's courseware sales have been to
existing customers who have already upgraded their computer equipment to
accommodate the requirements of ITC's multimedia courseware. Excluding the
impact of the DeKalb contract this year, hardware sales have decreased by
$2,519,000 or 74%.
b) Costs and Expenses
------------------
Gross margin for the three months ending September 30, 1997 was $1,915,000 as
compared to $1,321,000 for the same period in 1996. The increase of $594,000 or
45% is primarily due to the increased courseware sales during the quarter and
lower overall amortization from program development costs.
7
<PAGE>
Gross margin for the first nine months of 1997 totaled $6,453,000, as compared
to $5,224,000 for 1996. The increase of $1,229,000 or 24% is primarily
attributable to a higher proportion of courseware sales relative to total sales
and lower amortization charges for program development costs.
Selling, general and administrative expenses for the third quarter of 1997 were
$2,420,000, representing an increase of $88,000 or 4% over the same period in
1996. The increase is attributable to the operating costs associated with AST
and ITCA which were acquired during 1996. This increase is partially offset by
reductions in overall general and administrative costs compared to last year as
the integration of AST's staff support functions was successfully completed
during the third quarter. Accordingly, the Company has started to realize the
cost savings from the transition.
Selling, general and administrative costs for the first nine months of 1997 were
$8,953,000 as compared to $6,672,000 in 1996, representing an increase of
$2,281,000 or 34%. The increase is again attributable to the costs associated
with the aforementioned acquisitions as well as the cost of duplicative staff
functions between ITC and AST. While savings are now being achieved as the
result of staff reductions and centralization of activities, significant savings
will not be realized until the fourth quarter of 1997 and beyond.
Interest income, net of interest expense was $55,000 for the third quarter of
1997 and $138,000 for the first nine months of 1997, as compared to $126,000 for
the third quarter of 1996 and $368,000 for the first nine months of 1996. The
decrease is the result of lower interest-bearing cash balances available to the
Company throughout 1997.
c) Net loss
--------
The third quarter 1997 operations resulted in a loss before taxes of $291,000.
The loss is partially offset by an interim tax benefit of $48,000 resulting in a
net loss for the quarter of $243,000 or $0.06 per share. This quarter's result
is compared to a pre-tax loss of $830,000 for the same period in 1996 and a net
loss of $498,000 or $0.14 per share.
Year-to-date operating results have resulted in a pre-tax loss of $2,163,000, as
compared to a loss of $912,000 recorded for the first nine months of 1996. The
1997 loss is partially offset by an interim tax benefit of $716,000, resulting
in a net loss of $1,447,000 or $0.37 per share. This compares to a net loss of
$547,000 or $0.15 per share recorded in 1996.
d) Cash Flow, Liquidity and Capital Resources
------------------------------------------
Working capital as of September 30, 1997 was $4,514,000, as compared to
$6,056,000 at December 31, 1996, representing a decrease of $1,542,000. The
reduction in working capital is due to lower accounts receivable balances,
including the installment payment received from DeKalb County in June of 1997,
and the reinvestment of cash proceeds in ongoing product development activities
and reduction of debt acquired in the purchase of AST.
Cash flows from operations were $2,733,000 for the first nine months of 1997.
The effect of non-cash charges totaling $1,989,000 more than offset the net loss
for the year to date of $1,447,000. Changes in other working capital accounts,
principally accounts receivable, resulting in a net inflow of cash of $2,191,000
are responsible for the remaining increases in cash from operations. Cash flows
from operations were used to fund investment activities totaling $2,489,000.
This included the ongoing product development efforts consisting primarily of
Microsoft Office 97 and other capital expenditures. Cash used in financing
activities was $535,000 and consists primarily of the repayment of debt acquired
in the AST acquisition.
8
<PAGE>
Management believes that the cash generated from operations combined with the
Company's existing resources and available line of credit are adequate to meet
ITC's working capital needs and other financing requirements for 1997.
e) Subsequent Events
-----------------
Effective October 14, 1997, the Company's Board of Directors accepted the
resignation of Steven L. Roden.
9
<PAGE>
PART II
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
See attached Exhibit Index.
(b) Reports on Form 8-K
None.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ITC LEARNING CORPORATION
(Registrant)
BY /s/ James H. Walton DATE 11/4/97
-------------------------------------------- -----------------------
James H. Walton
Chief Executive Officer
BY /s/ Carl D. Stevens DATE 11/4/97
-------------------------------------------- -----------------------
Carl D. Stevens
President and Chief Operating Officer
BY /s/ Christopher E. Mack DATE 11/4/97
-------------------------------------------- -----------------------
Christopher E. Mack
Vice President of Finance and Administration
and Treasurer
BY /s/ John D. Dobey DATE 11/4/97
-------------------------------------------- -----------------------
John D. Dobey
Controller
11
<PAGE>
INDEX TO EXHIBITS
EXHIBIT PAGE
NO. DESCRIPTION NO.
- --------------------------------------------------------------------------------
3.1 Amended Articles of Incorporation of the Company, incorporated by
reference to the Company's Form 10-QSB for the quarter ended June 30,
1996 filed with the Securities and Exchange Commission ("SEC")
(Commission File No. 33-61393).
3.2 Restated By-Laws of the Company, incorporated by reference to the
Company's Form 10-KSB for the fiscal year ended December 31, 1995,
filed March 15,1996 with the SEC (Commission File No. 0-13741).
27.1 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S 10-QSB AS FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,406,570
<SECURITIES> 0
<RECEIVABLES> 5,728,702
<ALLOWANCES> (402,663)
<INVENTORY> 4,123,849
<CURRENT-ASSETS> 12,606,988
<PP&E> 4,618,222
<DEPRECIATION> (3,557,723)
<TOTAL-ASSETS> 23,471,830
<CURRENT-LIABILITIES> 8,093,180
<BONDS> 0
0
0
<COMMON> 389,703
<OTHER-SE> 14,886,118
<TOTAL-LIABILITY-AND-EQUITY> 23,471,830
<SALES> 7,088,571
<TOTAL-REVENUES> 7,088,571
<CGS> 5,173,711
<TOTAL-COSTS> 2,205,632
<OTHER-EXPENSES> 2,205,632
<LOSS-PROVISION> 56,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (290,772)
<INCOME-TAX> (48,000)
<INCOME-CONTINUING> (242,772)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (242,772)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
