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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 March 31, 1998
Commission File Number 0-13741
ITC LEARNING CORPORATION
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
Maryland 52-1078263
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
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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
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As of March 31, 1998, 3,867,409 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format: Yes ; No X
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TABLE OF CONTENTS
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<TABLE>
PART I PAGE
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Item 1 Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1998 and 1997 1
Condensed Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II
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Item 1 Legal Proceedings 14
Item 2 Changes in Securities 14
Item 3 Defaults Upon Senior Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
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PART I
ITEM 1. FINANCIAL STATEMENTS
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For Three Months Ended March 31,
1998 1997
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Net revenues $ 2,834,698 $ 4,721,977
Cost of sales 1,324,997 2,198,988
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Gross margin 1,509,701 2,522,989
Selling, general and administrative expense 2,413,416 3,289,400
Equity in earnings of affiliates (62,800) (25,514)
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Loss before interest and income taxes (840,915) (740,897)
Interest income, net 87,739 39,159
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Loss before income taxes (753,176) (701,738)
Income tax benefit -- (246,000)
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Net loss $ (753,176) $ (455,738)
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Loss per common share (note 2) $ (0.19) $ (0.12)
=========== ==========
Weighted average number of
common shares outstanding 3,876,171 3,897,011
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
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(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,648,118 $ 4,885,672
Accounts receivable, net (note 3) 4,297,260 6,167,592
Due from affiliates 150,445 33,092
Inventories 307,021 357,374
Prepaid expenses 113,592 123,042
Income taxes receivable 175,206 175,206
Other current assets 7,522 11,912
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Total current assets 7,699,164 11,753,890
Long-term receivable (note 4) 854,175 836,882
Note receivable (note 5) 914,573 922,940
Property and equipment:
Video and computer equipment 1,439,484 1,336,735
Furniture and fixtures 143,261 125,259
Leasehold improvements 21,313 21,313
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1,604,058 1,483,307
Less accumulated depreciation and amortization (913,393) (802,989)
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Net property and equipment 690,665 680,318
Capitalized program development costs, net 3,702,994 3,947,086
Investment in affiliate (note 6) 1,000,000 --
Intangible assets (note 7) 3,385,411 1,631,299
Other 12,190 12,340
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Total assets $ 18,259,172 $19,784,755
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See accompanying notes to condensed consolidated financial statements.
2
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ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31 December 31,
1998 1997
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(Unaudited)
<S> <C> <C>
Current liabilities:
Line of credit (note 8) $ -- $ --
Current installments of long-term debt (note 9) 100,000 100,000
Accounts payable 774,970 740,353
Due to affiliates 251,689 293,561
Accrued compensation and benefits 1,143,813 1,281,691
Deferred revenues 340,386 422,787
Other accrued expenses 889,767 1,236,012
Income taxes payable 362,067 335,102
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Total current liabilities 3,862,692 4,409,506
Deferred lease obligations 55,385 60,296
Long-term debt (note 9) 378,922 400,000
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Total liabilities 4,296,999 4,869,802
Stockholders' equity:
Common stock, $.10 par value, 12,000,000 shares
authorized; 3,867,409 and 3,897,074 shares
issued and outstanding in 1998 and
1997, respectively 386,741 389,708
Additional paid-in capital 15,875,495 16,090,816
Note receivable from ESOP (516,177) (541,677)
Retained earnings (deficit) (1,809,759) (1,056,583)
Accumulated other comprehensive income (note 10) 25,873 32,689
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Total stockholders' equity 13,962,173 14,914,953
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Total liabilities and stockholders' equity $ 18,259,172 $19,784,755
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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<CAPTION>
For Three Months Ended March 31,
1998 1997
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Cash flows from operating activities:
Net loss $ (753,176) $ (455,738)
Reconciling items:
Depreciation and amortization 516,585 697,661
Common stock issued to employees 4,119 938
Foreign currency translation adjustment (6,816) --
Changes in assets and liabilities:
Decrease in accounts receivable 1,871,345 1,290,236
Decrease (increase) in inventories 50,353 (41,593)
Decrease in prepaid expenses 9,450 33,111
Increase in income tax receivable -- (246,000)
Decrease in due to affiliates, net (159,225) (112,507)
Decrease (increase) in other assets 12,907 (2,078)
Increase (decrease) in accounts payable (8,447) 41,027
Increase (decrease) in accrued expenses (552,061) 46,951
Decrease in deferred lease obligations (4,911) (2,473)
Net effect of acquired operating assets
and liabilities 42,297 --
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Net cash provided by operating activities 1,022,420 1,249,535
Cash flows from investing activities:
Acquisition, net of cash acquired (1,485,338) --
Investment in affiliate (1,000,000) --
Capitalized program development costs (120,839) (439,356)
Capital expenditures (98,624) (175,170)
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Net cash used in investing activities (2,704,801) (614,526)
Cash flows from financing activities:
Repayments under line-of-credit (25,000) (515,000)
Principal payments under term loans (21,078) (31,459)
Repurchase of common stock (534,595) --
Employee stock option note collections 25,500 24,449
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Net cash used in financing activities (555,173) (522,010)
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Net increase (decrease) in cash (2,237,554) 112,999
Cash and cash equivalents at beginning of period 4,885,672 2,697,566
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Cash and cash equivalents at end of period $ 2,648,118 $ 2,810,565
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1) SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The condensed 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"), and ComSkill Learning Centers, Inc.
("ComSkill"). Significant intercompany accounts and transactions have been
eliminated in consolidation. In the opinion of management 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. Certain prior year amounts have been reclassified to improve
comparability to current year presentation. The interim condensed consolidated
financial statements should be read in conjunction with the Company's December
31, 1997 and 1996 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
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, upgrades and post-contract customer
support. The Company implemented SOP 97-2 for transactions entered into
beginning January 1, 1998, and has determined that there has been no material
impact on revenue recognized under these provisions.
In March 1998, the AICPA issued SOP 98-4, which defers for one year the
implementation of certain provisions of SOP 97-2. The issuance of SOP 98-4 had
no material effect on revenue recognized in the first quarter of 1998.
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 when delivery
has occurred, collection is probable and the fee is fixed. 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
5
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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) NET LOSS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings
Per Share ("Statement 128"). Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to Statement 128
requirements.
3) ACCOUNTS RECEIVABLE
Accounts receivable include the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
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<S> <C> <C>
Trade accounts receivable $ 3,624,175 $ 5,412,822
Current portion of long-term receivable (note 4) 909,575 909,575
Unbilled contract receivables 46,497 98,162
Less allowance for doubtful accounts (284,116) (254,728)
----------- ------------
Trade accounts receivable, net 4,296,131 6,165,831
Other receivables 1,129 1,761
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$ 4,297,260 $ 6,167,592
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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:
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<CAPTION>
March 31,
1998
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Receivable from DeKalb County (GA) Board of Education $ 2,350,000
Related dealer fees payable (518,380)
Less amounts classified as current, net of related dealer fees (909,575)
Less amount representing interest (67,870)
------------
$ 854,175
============
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5) NOTE RECEIVABLE
On November 20, 1997, the Company entered into a stock purchase agreement with
Anderson Holdings, an investor group headed by a former employee of the Company,
to sell all of the Company's stock in Anderson Soft-Teach 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 stock
purchase agreement, ITC and AST entered into a reciprocal agreement to sell each
other's products over the remainder of 1997 and all of 1998. Royalties earned by
AST for sales of their products under this agreement are applied to the
principal value of the note. As of March 31, 1998, the note's principal had been
reduced by $35,000 for such royalties. Under the terms of the note, AST will
make quarterly interest payments to ITC at an interest rate of 8% and will pay
the remaining principal balance at the end of four years.
6) INVESTMENT IN AFFILIATE
On January 30, 1998, the Company announced that it invested $1,000,000 in the
stock of Mentor Networks, Inc. ("Mentor"). For its investment, ITC acquired 8%
of the outstanding stock of Mentor with an option to acquire an additional 12%.
The Company had previously acquired the rights to distribute Mentor's products
exclusively in the United States.
7) ACQUISITION
On March 25, 1998, the Company completed the acquisition of Turn-Key Training
Technologies, Inc. ("Turn-Key"), a developer and distributor of
performance-based administrative software. Pursuant to the acquisition
agreement, ITC purchased all of the outstanding stock of Turn-Key for $700,000
in cash. Additionally, ITC paid $600,000 and issued 100,000 shares of its common
stock to Philip L. Camillo, Turn-Key's founder and president, in connection with
a long-term non-competition agreement. As a result of the acquisition, the
Company recorded intangible assets of approximately $1,795,000, consisting of
the non-competition agreement and goodwill. These assets will be amortized over
periods of seven years and ten years, respectively.
8) LINE OF CREDIT
At March 31, 1998, the Company had no amounts outstanding relating to its
$3,000,000 and $250,000 revolving bank lines of credit, which bear interest at
the bank's prime lending rate. Borrowings under the lines are collateralized by
the Company's accounts receivable and inventory.
In connection with the acquisition of Turn-Key, the Company assumed a line of
credit with an outstanding balance of $25,000 at March 25, 1998. In March 1998,
this amount was repaid and the related line of credit was terminated.
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9) LONG-TERM DEBT
Long-term debt consists of the following:
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<CAPTION>
March 31, December 31,
1998 1997
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<C> <C> <C>
8.5% note payable to financial institution due in $ 478,922 $ 500,000
monthly principal and interest installments of
$10,258 through December 2002, collateralized
by the assignment of interest in the shares of
the Company's common stockheld by the
ESOP, accounts receivable, inventory and
property and equipment
Less current installments (100,000) (100,000)
--------- ---------
$ 378,922 $ 400,000
========= =========
</TABLE>
10) COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components. Statement 130 requires that foreign currency translation
adjustments, which prior to adoption were reported separately as a component of
stockholders' equity, be included in other comprehensive income. Prior year
financial statements have been reclassified to conform with the requirements of
Statement 130.
The components of comprehensive income, net of related tax, for the three-month
periods ended March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
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<S> <C> <C>
Net loss $(753,176) $(455,738)
Foreign currency translation adjustment (6,816) --
--------- --------
Comprehensive income (loss) $(759,992) $(455,738)
========== =========
</TABLE>
The components of accumulated other comprehensive income, net of related tax, at
March 31, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
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<S> <C> <C>
Foreign currency translation adjustment $ 25,873 $ 32,689
========= =========
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements made by the Company's management may be considered to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Act of 1995. Forward-looking statements are based on various factors
and assumptions that include known and unknown risks and uncertainties. Actual
results could differ materially from those described in the forward looking
statements as a result of the risks set forth in the following discussion. These
risks include, but are not limited to, the Company's ability to continue to
expand its sales and marketing organization, the Company's ability to identify
and acquire additional training courseware to add to its product portfolio, the
ability to successfully deploy its courseware over the Internet and corporate
intranets, and the Company's ability to continue to control costs in relation to
further revenues.
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, mix of
ITC-developed products and third party products, the mix of sales from the
Company's direct and indirect distribution channels and the introduction and
acceptance of new products.
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.
OVERVIEW
ITC Learning Corporation ("ITC" or the "Company") is a leading provider of
self-directed multimedia learning solutions that improve employee skills in
business, education and government. The Company's products, which include the
largest library of interactive CD-ROM programs available today, have improved
productivity in major corporations and school systems across America. These
products have also enabled local communities to open learning opportunities to
the general public through the use of multimedia learning centers. The Company
has a worldwide customer base of approximately 5,000 organizations.
During 1997, the Company embarked on a new strategy intended to position itself
as a broad-based education and training integrator of an expanded line of
multimedia training products. In addition to broadening its own courseware
library, ITC intends to seek strategic alliances with publishers of training
software in the areas of customer service, leadership, financial skills and
other "soft skills" training topics. These products represent approximately 75%
of the $60 billion training market, according to International Data
Corporation's August 1997 industry report.
During the first quarter of 1998, the Company continued to concentrate its
efforts on product development and increasing its distribution capabilities. The
Company completed the development of its "Using the Internet" courseware
product, and began development of a network-deliverable version of its
Regulatory Compliance courseware library. In March, the Company positioned
itself to be at the forefront of true multimedia distance learning by entering
into a partnership with NeTpower, Inc. ("NeTpower"). Through the use of
NeTpower's NeTstream(TM) video streaming servers employing Advancing Streaming
Format ("ASF") from Microsoft(R), the Company's courseware content will
eventually be deployed to the desktop via the Internet and intranets without
current technology limitations.
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In an effort to increase its distribution capabilities, the Company made
significant investments in its Business Alliance Partner ("BAP") program which
is intended to increase both market coverage and bring additional industry
knowledgeable resources to drive sales. The Company also invested in expanding
its direct sales force and intends to triple its number of sales representatives
and to continue the expansion of the BAP program in 1998.
In January 1998, the Company announced that it invested $1 million in the stock
of Mentor Networks, Inc. ("Mentor"). For its investment, ITC acquired 8% of the
outstanding stock of Mentor with an option to acquire an additional 12%. The
Company had previously acquired the rights to distribute Mentor's products
exclusively in the United States. Mentor, based in Nova Scotia, specializes in
the development and distribution of interactive multimedia courseware. Mentor's
product offerings include the Microsoft Office suite of PC Skills training
products and Professional Skills training products in the areas of customer
service, telesales, collections, leadership training and human resources.
In March 1998, the Company completed the acquisition of Turn-Key Training
Technologies, Inc. ("Turn-Key"), a developer and distributor of
performance-based training administration software. The purchase price for all
of the outstanding common stock of Turn-Key was $700,000 in cash. ITC also
agreed to employ the founder and president of Turn-Key, and paid him $600,000
cash and issued 100,000 shares of ITC common stock in consideration of his
employment and certain extended non-competition covenants. Turn-Key is located
in Grand Rapids, Michigan and will be operated as a wholly-owned subsidiary of
ITC. Turn-Key's proprietary administration software, AdminSTAR(R), provides
customers with the capability for personal skills assessment, creation of
individual development plans, management of the training process for corporate
training departments, and a broad array of reporting capabilities. Turn-Key's
customers included the Coca Cola Corporation, NASA, Shaw Industries, the U.S.
Department of Defense (The Pentagon) and others.
RESULTS OF OPERATIONS
Revenues
For the quarter ending March 31, 1998, the Company recorded total revenues of
$2,835,000, as compared to revenues for the first quarter of 1997 of $4,722,000,
representing a decrease of $1,887,000 or 40%. The decline in revenues was
primarily attributable to the inclusion of $1,182,000 of sales generated by
Anderson Soft-Teach ("AST") during the first quarter of 1997. ITC sold AST
during the fourth quarter of 1997 for approximately $5.0 million. Total revenues
for the first quarter of 1998 decreased $705,000 or 20% from the first quarter
of 1997, excluding revenues generated by AST. The Company is using proceeds from
the sale of AST to fund investments in new product lines, internally and through
acquisitions and strategic alliances, and in sales and marketing resources.
These investments are intended to enable the Company to implement a shift in
strategy from being strictly a publisher of training courseware to being a
distributor of more broad-based training solutions.
While the Company made many of the investments it planned for the first quarter
of 1998, the expected return in revenue performance was not achieved as quickly
as anticipated. Sales in the Company's core markets declined relative to the
first quarter of 1997, most notably Commercial Sales with a shortfall of
$513,000 and Education & State Government Sales which declined by $203,000. The
remaining shortfalls in revenue compared to last year are attributable to lower
sales from hardware systems and custom courseware products.
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Cost of Sales and Gross Margin
Cost of sales include the cost of materials (CD-ROMs and related packaging and
documentation) and hardware, shipping costs, royalties to third parties, sales
commissions, third party dealer fees, and the amortization of capitalized
program development costs. Total cost of sales for the first quarter of 1998 was
$1,325,000, as compared to $2,199,000 for the first quarter of 1997. Gross
margin for the first quarter of 1998 was $1,510,000, as compared to $2,523,000
for the first quarter of 1997. The decline of $1,013,000 or 40% is completely
attributable to the revenue shortfall. As a percentage of revenue, gross margin
was consistent with first quarter 1997 levels at 53%.
Gross margin percentage remained consistent with first quarter 1997 levels due
primarily to favorable variances experienced in multimedia and hardware material
costs, sales-related commission expenses and lower amortization of program
development costs.
Selling, General & Administrative Expense
Selling expenses consist primarily of salaries of sales personnel and related
overhead costs such as facilities and travel, advertising, and marketing and
promotional expenses. Selling expenses for the quarter ending March 31, 1998,
were $1,037,000, as compared to $1,252,000 for the same period in 1997. The
decrease in selling expense of $215,000 or 17% resulted primarily from the
elimination of $365,000 in expense related to AST incurred during the first
quarter of 1997. Excluding the impact of AST, the Company's selling-related
expenses increased $150,000 or 17% relative to the first quarter of 1997. This
variance reflects the increased level of investment made in the Company's sales
and marketing programs in the first quarter of 1998.
General and administrative expenses consist of the costs of the Company's
executive management and support functions such as customer assurance, product
development and fulfillment, human resources, and finance and administration.
General and administrative expenses for the three months ending March 31, 1998,
were $1,376,000, as compared to $2,037,000 incurred during the first quarter of
1997, representing a decrease of $661,000 or 32%. The decline from first quarter
1997 is primarily due to the sale of AST and the elimination of $336,000 in
overhead related expenses. Additionally, tighter control of discretionary
spending in response to the revenue shortfall and the overall shift in emphasis
in investment from infrastructure to sales and marketing account for the
remaining variance.
Loss before income taxes and net loss
First quarter operations for 1998 resulted in a loss before income taxes of
$753,000. This compares with a loss of $702,000 during the same three-month
period in 1997. The increase in loss before taxes of $51,000 is due principally
to the revenue shortfall, partially offset by overall cost containment and
focused investment on sales and marketing. While the sale of AST had an adverse
impact on the Company's revenues for the first quarter of 1998, the net effect
on the Company's operating results was an increase of $204,000 before income
taxes, based on performance in the first quarter of 1997.
Net of income tax effects, the 1997 loss was $456,000 or $0.12 per share as the
Company recognized an interim tax benefit of $246,000. The tax benefit
represented unused net operating loss ("NOL") carry-backs available at the end
of 1996. As of December 31, 1997, no NOL carry-backs were available and, as a
result, the Company recorded no interim income tax benefit in the first quarter
of 1998. The net loss for the three months ending March 31, 1998 was $753,000 or
$0.19 per share.
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Cash Flow, Liquidity and Capital Resources
Working capital as of March 31, 1998, was $3,836,000, as compared to $7,344,000
at December 31, 1997. The decrease of $3,508,000 or 48% is principally due to
investments in cash to acquire Turn-Key Training Technologies, Inc.
("Turn-Key"), to acquire an equity position in Mentor Networks, Inc. ("Mentor")
and to repurchase the Company's common stock. The total cash outlay for these
transactions was $3,018,000. The remaining reduction in working capital is the
result of changes in working capital accounts.
Net cash provided by operations was $1,022,000 for the first quarter of 1998, as
compared to $1,250,000 for the same period in 1997. The difference of $228,000
is principally attributable to the increased net loss experienced during the
first quarter of 1998. Net loss adjusted for non-cash items (principally
depreciation and amortization) was $239,000 for the three months ending March
31, 1998, as compared to a gain of $243,000 for the first quarter of 1997. A
reduction in accounts receivable of $1,871,000 was largely responsible for the
net operating cash inflow and was partially offset by a decrease in accrued
expenses, principally the payment of dealer fees due on sales from the fourth
quarter of 1997 of $552,000.
Net cash used in investing activities for the first quarter of 1998 was
$2,705,000, as compared to $615,000 for the same period in 1997. Principal
investing activities for the quarter were the aforementioned acquisition of
Turn-Key and investment in Mentor. Amounts capitalized for development of new
courseware programs were $121,000 for the first quarter of 1998, as compared to
$439,000 in 1997. Capital expenditures, principally the purchase of computer
equipment for new sales personnel, were $99,000 in 1998, as compared to $175,000
in 1997.
Net cash used in financing activities was $555,000 for the three months ending
March 31, 1998, as compared to $522,000 in 1997. The major outlay of cash
associated with financing activities was the repurchase of approximately 130,000
shares of the Company's common stock to fund the Company's Employee Stock
Ownership Plan ("ESOP"). Approximately 17,000 of these shares were repurchased
on the open market and the remainder through a private transaction. The stock
repurchase transactions used approximately $535,000 in cash. Since November
1997, the Company has repurchased approximately 230,000 shares of stock in
accordance with its stock repurchase plan. The remaining outflow of cash was due
to the repayment of a line of credit assumed in the acquisition of Turn-Key and
payment of debt associated with the ESOP.
Management believes that the cash generated from operations combined with the
Company's existing resources and available lines of credit are adequate to meet
ITC's working capital needs and other financing requirements for 1998.
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, upgrades and post-contract customer
support. The Company implemented SOP 97-2 for transactions entered into
beginning January 1, 1998, and has determined that there is no material impact
on revenue recognized under these provisions.
In March 1998, the AICPA issued SOP 98-4, which defers for one year the
implementation of certain provisions of SOP 97-2. The issuance of SOP 98-4 had
no material effect on revenue recognized in the first quarter of 1998.
12
<PAGE> 15
IMPLICATIONS OF THE YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
courseware products or internal computer software that have time-sensitive
programs may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. Similar failures in the Company's courseware could result in an
impairment of revenue recognition due to significant future obligations,
impairment of future sales of the Company's products, or potential product
liability.
The Company began an assessment of the implications of the Year 2000 during late
1997. As of March 31, 1998, the process of evaluating the Company's courseware
products was substantially complete. Current versions of the Company's
administrative courseware products have been determined to be Year 2000
compliant and are certifiable as such to current users of the products.
Subsequent versions of these products will continue to be designed to be Year
2000 compliant as well. The Company is also in the process of obtaining written
certifications from the vendors of software products purchased for internal use.
The ongoing impact of Year 2000 compliance on the Company's future results of
operations, capital spending and business operations is not expected to be
material.
13
<PAGE> 16
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
On January 14, 1998, the Company filed a report on Form 8-K relating to the
appointment of Carl D. Stevens as Chief Executive Officer.
On April 3, 1998, the Company filed a report on Form 8-K relating to the
acquisition of Turn-Key Training Technologies, Inc.
14
<PAGE> 17
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/Carl D. Stevens DATE 4/30/98
-------------------------------------- -------------------
Carl D. Stevens, President and
Chief Executive Officer
BY /s/Christopher E. Mack DATE 4/30/98
-------------------------------------- -------------------
Christopher E. Mack, Vice President,
Treasurer, and Chief Financial Officer
BY /s/John D. Dobey DATE 4/30/98
-------------------------------------- -------------------
John D. Dobey, Corporate Controller
15
<PAGE> 18
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
3.1 Amended Articles of Incorporation of the Company, incorporated by
reference to the Company's Form 10-QSB for the quarter ended June 30,
1996 and Exhibit 3.3 to the Company's 10-QSB for the quarter ended June
30, 1997, 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.
4.2 Registration Rights and Shareholders' Agreement, incorporated by
reference to the Company's Form 8-K filed January 13, 1997 with the
SEC (Commission File No. 0-13741).
10.6 Employment Agreements with Management
(d) Robert F. VanStry, incorporated by reference to Pre-Effective
Amendment No. 1 to the Registration Statement on Form SB-2
filed August 16, 1995 with the SEC (Commission File No. 33-61393).
(g) Christopher E. Mack, incorporated by reference to the Company's
10-KSB for the year ended December 31, 1996 filed March 14, 1997
with the SEC (Commission File No. 0-13741).
(i) Carl D. Stevens, incorporated by reference to the Company's 10-QSB
for the quarter ended March 31, 1997 filed April 25, 1997 with the
SEC (Commission File No. 0-13741).
(j) Philip L. Camillo
27.1 Financial Data Schedule
<PAGE> 1
Exhibit 4.1
[LOGO]
<TABLE>
<S> <C>
NUMBER SHARES
AA SPECIMEN
COMMON STOCK COMMON STOCK
</TABLE>
ITC LEARNING CORPORATION
Incorporated under the laws of the State of Maryland
<TABLE>
<S> <C>
THIS CERTIFIES that CUSIP 45031S 10 6
See reverse
for certain definitions
</TABLE>
SPECIMEN
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF TEN CENTS ($.10) EACH
OF THE COMMON STOCK OF ITC LEARNING CORPORATION transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this certificate properly endorsed. This certificate is not valid
until countersigned and registered by the Transfer Agent.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
[SEAL]
Authorized Signature:
/s/Anne J. Fletcher /s/Carl D. Stevens
Secretary President &
Chief Executive Officer
Countersigned and Registered: American Securities Transfer & Trust, Inc.
P.O. Box 1596
Denver, Colorado 80201
By:
-------------------------------------
Transfer Agent & Registrar Authorized Signature
<PAGE> 2
ITC LEARNING CORPORATION
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
TEN COM - as tenants in UNIF GIFT MIN ACT - Custodian
common -------------------------
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
Act
----------------------
JT TEN - as joint tenants with right of (State)
survivorship and not as tenants
in common
Additional abbreviations may also be used though not in the above list.
The Corporation will furnish without charge to each stockholder who so requests
the powers, designations, preferences and relative, participating optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions or such preferences and/or rights.
Requests may be directed to the office of the Corporation or to the Transfer
Agent.
For value received,_______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
- --------------------------------------------------------------------------------
Please print or typewrite name and address including postal zip code of assignee
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and
appoint
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated
-------------------------------------
---------------------------
Notice: The signature to this assignment must correspond with the name as
written upon the face of the Certificate in every particular.
<PAGE> 1
EXHIBIT 10.6
EXHIBIT B
EMPLOYMENT AND NON-COMPETITION AGREEMENT
Employment and Non-Competition Agreement ("Agreement") entered into
as of this 25th day of March 1998 ("Effective Date"), by and between ITC
Learning Corporation, a Maryland Corporation ("Employer") and Philip L. Camillo,
a resident of the State of Michigan ("Employee").
Employee currently serves as President of Turn-Key Training Technologies,
Inc. ("T3"). Pursuant to that Stock Purchase Agreement dated March 25th, 1998,
by and among Employer, Employee, and the other stockholders of T3 ("Purchase
Agreement"), Employer will acquire all of the outstanding stock of T3. The Board
of Directors of Employer believes it is in the best interests of Employer to
enter into this Agreement with Employee in order to assure continuity with
respect to certain operations of T3. Accordingly, Employer and Employee, each
intending to be legally bound hereby, agree as follows:
1. Term.
The term of this Agreement and Employee's employment hereunder shall
commence on March 25th, 1998 ("Commencement Date") and shall continue for a
period of three (3) years from the Commencement Date ("Term"), unless terminated
earlier in accordance with Section 5 of this Agreement or extended by mutual
written agreement of Employer and Employee (such term to be designated the
"Employment Period"). The provisions of Sections 6, 7 and 8 shall survive any
termination of this Agreement and shall remain in full force and effect and
shall be binding upon Employee and his estate, legal representatives, heirs,
successors and assigns.
2. Duties.
(a) General Duties. Employee shall be employed by Employer and report to
the Chief Executive Officer or such other executive
<PAGE> 2
as Employer may designate, on the terms and conditions set forth in this
Agreement. Employee shall be responsible for (i) management of the day to day
operations of T3 including, but not limited to, the production, marketing,
distribution and sale of software programs designed or functioning to monitor
training programs for businesses and other organizations (collectively, the
"Business") and/or (ii) such other duties and responsibilities reasonably
prescribed by the Board of Directors of Employer. Employee agrees to (i) devote
substantially all of his time, attention, skill and energies to the business of
Employer; (ii) faithfully and diligently perform such duties and exercise such
powers as may from time to time be assigned to him; (iii) comply with all
policies and procedures from time to time adopted by Employer; (iv) use all
reasonable efforts to promote the interest, reputation, business and welfare of
Employer; and (v) follow the reasonable and lawful directions given to him by
the Chief Executive Officer or the Board of Directors of Employer.
(b) Corporate Opportunities. Employee agrees that he will not take
personal advantage of any business opportunities that arise during his
employment with Employer and which may be of benefit to Employer. All material
facts regarding such opportunities must be promptly reported to the Chief
Executive Officer for consideration by Employer.
(c) Exception for CAMEO Multimedia Productions, Inc. Employee is a 33%
shareholder and chairman of the board of directors, but not an employee, of
CAMEO Multimedia Productions, Inc. ("CAMEO"). CAMEO is in the business of (i)the
design, development, promotion, marketing and sale of educational and
entertainment software intended for the consumer retail market, including
current products as follows: "Dream Venture," "Caring for Planet Earth Series,"
and "NASA Space Adventure," (ii) the custom design and sale of software products
and related materials for use by an individual customer. The foregoing to the
contrary notwithstanding, Employee is and shall be permitted during the Term of
the Agreement to consult with and provide services to CAMEO and its successors
and assigns, either directly or indirectly, as an employee, independent
contractor, officer, shareholder, agent, representative or in any like or
similar capacity, but only if the CAMEO's business and such activities do not
materially interfere with the performance of the Employee's substantially full
time obligations to the Employer. For the purposes of this section, the CAMEO's
business shall also include
2
<PAGE> 3
any expansion of the business described in (i) and (ii), above, provided that
the expansion does not then compete with the Employer, unless the Employer
otherwise consents, which consent will not unreasonably be withheld. Moreover,
Employee shall be permitted during the four year period following the Term that
is referred to in Section 6(a)(ii) to consult with and provide services, as and
to the extent described above, to CAMEO or any like or similar business. Nothing
herei8n shall be construed as expanding the restrictions in section 6(a)(ii) of
this Agreement.
3. Compensation.
(a) Salary and Expenses.For the services to be rendered by Employee under
this Agreement, Employee shall be paid a base annual salary of one hundred ten
thousand dollars ($110,000). Salary payments shall be made on Employer's
regularly scheduled payroll dates. Employer will review salary increases to
Employee's base salary annually consistent with Employer's policy. Upon
submission of appropriate documentation or receipts, Employee shall also be
entitled to reimbursement for any reasonable and necessary business expenses he
incurs, in accordance with, and subject to, Employer's policies and procedures
regarding expense reimbursement.
(b) Further Consideration and Consideration for Non-Competition. In
consideration of accepting employment pursuant to this Agreement and the
agreement not to compete as set forth in section 6 below, Employer shall pay
Employee (i) upon execution of this Agreement, $600,000 in cash ("Cash
Consideration"); (ii) upon execution of this Agreement, 50,000 shares of common
stock of Employer, $.10 par value per share ("Common Stock") and (iii) on the
first anniversary of the date of execution of this Agreement, subject to the
Right of Setoff set forth in section 5.06 of the Purchase Agreement, an
additional 50,000 shares of Common Stock. The Common Stock referred to in
section 3(b)(i)and (ii) above shall be referred to herein collectively as the
"Stock Consideration."
(c) Revenue Based Compensation. Employee shall be eligible to receive
compensation during the Term based upon Employer's revenues from license and
maintenance fees (but not including fees from implementation services and
contract service fees) attributable to (i) products initially designed and
introduced by
3
<PAGE> 4
T3 (including without limitation, the AdminSTAR product) and any products
developed therefrom and (ii) any additional products developed by T3 subsequent
to Employer's purchase of T3 that were created under the direction or management
of Employee ("T3 Products"), as follows: (a) promptly after the end of each
month during the Term, Employer shall calculate the cumulative year to date
revenues from T3 Products less reasonable reserves for product returns and
non-payment ("T3 Product Revenues"); (b) Employee shall receive on a monthly
basis Revenue Based Compensation equal to (i) 2% of the first $500,000 of T3
Product Revenues, (ii) 3% of the next $500,000 of T3 Product Revenues; (iii) 4%
of the following $500,000 of T3 Product Revenues and (iv) 1% of any additional
T3 Product Revenues over $1,500,000.
4. Additional Benefits.
(a) Participation in Retirement and Benefit Plans. Employee shall be
entitled to participate in all Employer plans relating to pension, thrift,
bonus, stock options, stock ownership, deferred profit-sharing, group life
insurance, medical or disability coverage, education or other retirement or
employee benefits that Employer may adopt or maintain for the benefit of its
employees generally, and the Company's chief executive officer shall annually
consider and make recommendations regarding the award of any such discretionary
benefits and any salary increases; provided, however, that neither the chief
executive officer nor the Company shall be obligated to make any such
recommendation or award. If and to the extent that any such plans or programs
provide for waiting periods or length of service requirements or vesting
requirements or level of benefits based upon length of service, service by
Employee with T3 shall be deemed to have been service with Employer for purposes
of such plans or programs.
(b) Other Benefits. Employer shall be eligible to participate in any other
benefits that may be or become applicable to Employer's employees generally. In
addition, Employee shall be reimbursed for reasonable costs associated with (i)
a company automobile (up to $500 per month); (ii) a cellular telephone for
Business use; (iii) a laptop computer for Business use and (iv) a corporate
credit card for Business related expenses.
4
<PAGE> 5
5. Termination.
(a) Termination Other Than For Cause. (i) Employer may terminate
Employee's employment under this Agreement without cause at any time; and (ii)
Employee may terminate Employee's employment under this Agreement without cause
by giving Employer sixty (60) days written notice.
(b) Termination for Cause. Employer may terminate Employee's employment
effective immediately upon written notice or on any other date specified in such
notice in the event that Employee: (i) has been convicted of a felony; (ii) has
engaged in fraudulent or dishonest conduct in connection with the business of
Employer or any of its affiliates; (iii) has breached his fiduciary duty to
Employer; (iv) has not performed, has neglected or has engaged in irresponsible
actions with respect to his duties and responsibilities hereunder such that his
job performance has substantially deteriorated to the detriment of the Employer
and such conduct continues for more than ten (10) days following Employee's
receipt of written notice thereof; (v) has committed a material breach of any of
the provisions of this Agreement; or (vi) has engaged in a continuing course of
conduct or any repeated omissions that reflect adversely on the integrity and
reputation for honesty and fair dealing of Employer or its affiliates, any one
of which shall be deemed "Cause" for dismissal.
(c) Death or Disability. This Agreement shall terminate upon the death or
permanent disability of Employee. For purposes of this Agreement, permanent
disability shall be deemed to have occurred if Employee is prevented from
performing the essential duties of his position by reason of illness or injury
for a continuous period of ninety (90) days or for a total of one hundred twenty
(120) days in any twelve-month period.
(d) Effect of Termination. Upon termination of this Agreement by either
party pursuant to this Section 5, Employee shall be entitled to receive only the
compensation and benefits accrued but unpaid as of the date of termination and
shall not be entitled to additional compensation or benefits; provided, however,
that if Employee is terminated pursuant to section 5(a)(i), Employer shall pay
Employee at the rate of $144,000 per annum as severance for the remainder of the
Term ("Severance Pay"). Employer shall be entitled to deduct from any sums owed
5
<PAGE> 6
to Employee any sums due to Employer from Employee, and Employee hereby consents
to that deduction.
6. Non-Competition and Non-Solicitation.
(a) Non-Competition.
(i) Except to the extent contemplated in Section 2(c), Employee shall
not, during the Term, have any other employment except with the prior approval
of the Board of Directors and that without the written consent of the Board of
Directors, Employee agrees that during the Term he will not be affiliated with
any competitor, supplier or customer of Employer, as an officer, director,
partner, employee, agent, consultant (or similar capacity) or more than a 1%
stockholder. For all purposes of this Agreement, the term "affiliate" and the
concept of "an affiliate" shall have the same meaning as in Rule 405 under the
Securities Act of 1933.
(ii) Employee further agrees that during the Term and for a period of
four years following the Term, he will not, within North America, directly or
indirectly, as proprietor, partner, shareholder, director, officer, employee,
agent, consultant, or in any other capacity or manner whatsoever, engage in the
development or sales of (A) software programs designed or functioning to monitor
training programs, (B) products currently sold or marketed by Employer or any
subsidiary or affiliate of Employer or (C) any products developed, marketed or
sold by Employer or any subsidiary or affiliate of Employer during the Term. If
any court of competent jurisdiction shall determine this covenant to be
unenforceable as to either the term or scope imposed above, then this covenant
nevertheless shall be enforceable by such court as to such shorter term or such
lesser scope as may be determined by the court to be reasonable and enforceable.
(iii) Employee further agrees that during the Term and for a period
of two years following the Term he will not, directly or indirectly, participate
(on his own behalf or on behalf of any other corporation, venture or enterprise
engaged in commercial activities) in any matters that were the subject of
outstanding bids or solicitations by Employer or any subsidiary or affiliate of
Employer or of bids or solicitations in preparation by Employer or any
subsidiary or affiliate of Employer during the Term.
6
<PAGE> 7
(iv) Employee further agrees that during the Term (other than in the
ordinary course of business) and following the Term, he will not, directly or
indirectly, take with him or use any property, such as drawings, reports, data
or proposals, design or manufacturing information, research or development of
other activities, wage and salary information, customer lists or prospect lists,
records or the like of Employer or any subsidiary or affiliate of Employer
relating or peculiar to Employer or any such subsidiary or affiliate, or their
business or products, nor disclose to any others information of a proprietary or
privileged nature, without prior written consent of the Chief Executive Officer
or Board of Directors.
(v) Employee and Employer agree that during and after the Term, they
will not, directly or indirectly, disparage or cause others to disparage
Employer or Employee, as the case may be, or the management, personnel, products
or prospects of Employer.
(b) Non-Solicitation.
(i) Employee further agrees that during the Term he will not,
directly or indirectly, without the prior approval of the Chief Executive
Officer or Board of Directors, encourage any employees of Employer (including
any employees of any subsidiary or affiliate of Employer now existing or
hereafter formed) to leave the employ of Employer or any subsidiary or affiliate
of Employer for the purpose of seeking or obtaining employment in any other
activity with which Employee intends to become affiliated.
(ii) Employee further agrees that during the Term and for a period of
two years following the Term, regardless of the reasons for Employee's
termination, he will not, directly or indirectly, hire, attempt to hire or
encourage any employee of Employer to leave his or her employ with Employer or
any subsidiary or affiliate of Employer.
(c) Reasonableness. Employee further agrees that the provisions of this
section 6 are reasonable and of vital importance to Employer and incorporate
crucial policies and are a means of safeguarding Employer's valuable proprietary
rights and interests. Accordingly, Employee agrees that Employer shall be
7
<PAGE> 8
entitled to injunctive relief, in addition to all other remedies permitted by
law, to enforce the provisions of this section 6.
7. Confidentiality.
Employee shall not (for his own benefit or the benefit of any person or entity
other than Employer) use or disclose any of the trade secrets or other
confidential information of Employer or its affiliates, including T3. The term
"trade secrets or other confidential information" includes, by way of example,
matters of a technical nature, "know-how, " inventions, computer programs
(including documentation of such programs) and research projects, and matters of
a business nature, such as proprietary information about costs, profits,
markets, sales, lists of customers, vendor lists, designs, plans, financial
reserves, and other information related to Employer's current or future business
activities to the extent not available to the public, and all information to
which Employee has access during his employment with Employer which belongs or
relates to a third party and which would constitute "trade secrets or other
confidential information" if it belonged or related to Employer. After
termination of this Agreement, Employee shall not use or disclose trade secrets
or other confidential information unless such information becomes a part of the
public domain other than through a breach of this Agreement or is disclosed to
Employee by a third party who is entitled to receive and disclose such
information. Upon termination of this Agreement, or earlier at the request of
the Chief Executive Officer of Employer, Employee shall return to Employer all
documents, files, diskettes and other information storage media containing trade
secrets or confidential information of Employer, and shall not retain any copies
of those materials.
8. Performance of Employee Obligations.
In the event that Employee breaches any of his obligations set forth in Sections
6 or 7 of this Agreement, Employer shall have the right to obtain an injunction
or decree of specific performance from any court of competent jurisdiction to
restrain him from violating those obligations or to compel him to perform those
obligations, in addition to any other rights Employer may have against Employee.
8
<PAGE> 9
9. Representations and Warranties of Employee.
Employee represents and warrants that he has been advised by Employer to consult
an attorney in connection with the execution of this Agreement and that Employee
has done so. Employee further represents and warrants that:
(a) General. Employee is able to enter this Agreement and that such
ability is not limited or restricted by any agreements or understandings between
him and other persons or organizations.
(b) Investment Purpose. Employee is acquiring the Stock Consideration for
investment, and not with a view to the sale or other distribution thereof within
the meaning of the Securities Act of 1933, as amended ("Securities Act").
Employee has no present intention of selling or otherwise disposing of all or
any portion of the Stock Consideration.
(c) Securities Representations. Employee (i) has such knowledge,
sophistication and experience in business and financial matters that he is
capable of evaluating the merits and risks of ownership of Employer's Common
Stock, (b) fully understands the nature, scope and duration of the limitations
on transfer contained in this Agreement and (c) can bear the economic risk of
ownership of Employer's Common Stock and a complete loss of the value of the
Common Stock to be received pursuant to this Agreement. Employee has had an
adequate opportunity to ask questions and receive answers from the officers of
Employer concerning the business, operations and financial condition of
Employer. Employee does not have any contract, undertaking, agreement, written
or oral, with any other person to transfer or grant participations in the Common
Stock to be acquired by Employee hereunder.
10. Restrictions on Transfer.
The Common Stock received by Employee pursuant to this Agreement may not
be sold, assigned, pledged, hypothecated or transferred, or any interest therein
conveyed to any other person, except in accordance with the registration
provisions of the federal and state securities laws or applicable exemptions
therefrom. Employer shall use its reasonable efforts to make on a timely basis
all periodic filings required under the Securities
9
<PAGE> 10
Exchange Act of 1934 in order to facilitate, when permissible, sales of the
Common Stock received by the Employee pursuant to this Agreement.
11. Piggyback Registration Rights.
(a) At any time within two (2) years of the date of execution of this
Agreement, in the event that Employer registers (including for this purpose a
registration effected by Employer for persons other than Employee) any shares of
its Common Stock under the Securities Act for sale within such two-year period
(other than registration of Common Stock for issuance or sale in connection with
(A) employee or non-employee director compensation or benefit programs, (B) an
exchange offer or an offering of securities solely to the existing shareholders
or employees of Employer, or (C) an acquisition, merger or other business
combination using a registration statement on Form S-4 or any successor or other
appropriate form), Employer shall give prompt written notice (which, in any
event, shall be given no less than 10 days prior to the filing of a registration
statement with respect to such offering) to Employee of Employer's intention to
do so and, upon the written request of Employee sent within 10 days after the
effective date of any such notice, Employer shall use its reasonable best
efforts to cause the Common Stock not otherwise saleable in accordance with Rule
144 under the Securities Act as to which Employer shall have so requested
registration, to be registered under the Securities Act, all to the extent
necessary to permit the sale in such offering of the Common Stock so registered
on behalf of Employee in the same manner as Employer (or persons other than
Employee, as the case may be) proposes to offer its shares of Common Stock.
(b) Employer shall use its reasonable best efforts to cause the managing
underwriter or underwriters of a proposed underwritten offering to permit the
Common Stock requested by Employee to be included in the registration for such
offering on the same terms and conditions as the shares of Common Stock of
Employer included therein. Notwithstanding the foregoing, if the managing
underwriter of underwriters of such offering deliver an opinion to Employer that
the total number of shares of Common Stock that Employer, and any other person,
intend to include in such offering will in the good faith opinion of such
managing underwriter or underwriters materially and adversely affect the success
of such offering, then the number of shares of Common
10
<PAGE> 11
Stock to be offered for the account of Employee shall be reduced to the extent
necessary to reduce the total number of shares of Common Stock to be included in
such offering to the number of shares recommended by such managing underwriter.
(c) Registration Expenses. All expenses incurred in connection with a
registration, filing or qualification pursuant to Section 11(a) hereof,
including, without limitation, registration, filing and qualification fees,
printers' and accounting fees, and the fees and disbursements of counsel for
Employer, shall be borne and paid by Employer, with the exception of fees and
disbursements of Employee's counsel, which shall be borne by Employee. In
addition, Employee shall bear and pay all underwriting discounts and selling
commissions attributable to sales of the Common Stock as to which Employee has
requested registration.
12. Miscellaneous.
(a) Notices. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to be properly delivered when
sent by first class registered or certified mail, postage prepaid and return
receipt requested, or delivered in person, addressed as follows:
If to Employer: ITC Learning Corporation
13515 Dulles Technology Drive
Herndon, Virginia 20171
Attn: Christopher E. Mack
If to Employee: Philip L. Camillo
3401 Tuscany S.E.
Grand Rapids, Michigan 49546
with copy to:
Randy Kolar, Esq.
Rhoades, McKee, Boer,
Goodrich & Titta
161 Ottawa Avenue N.W.
Grand Rapids, Michigan 49503
(b) Waiver. The waiver by any party to this Agreement of a breach of any
of the provisions of this Agreement shall not constitute a waiver of any
subsequent breach.
11
<PAGE> 12
(c) Severability. This Agreement shall be construed according to its fair
meaning and not strictly for or against either party. In the event that any
provision of this Agreement conflicts with the law under which this Agreement is
to be construed or if any such provision is held invalid by a court with
jurisdiction over the parties to this Agreement, such provision shall be deemed
to be restated to reflect as nearly as possible the original intentions of the
parties in accordance with applicable law, and the remainder of this Agreement
shall remain in full force and effect. If it is not possible to restate the
provision in a valid or legal manner, then that invalid or illegal portion shall
be deemed not a part of the Agreement and the remaining parts, terms and
provisions shall remain in full force and effect.
(d) Governing Law. This Agreement shall be governed by the laws of the
State of Maryland, without regard to its conflict of laws provisions. Employee
hereby irrevocably consents to, and waives any objection to the exercise of,
personal jurisdiction by the state and federal courts located in Maryland with
respect to any action or proceeding arising out of this Agreement.
(e) Assignment. This Agreement is not assignable by either party without
the written consent of the other; provided, however, that the provisions of this
Agreement shall be assignable to and shall inure to the benefit of and be
binding upon any affiliate or successor of Employer, whether by merger,
consolidation, or transfer of all or substantially all of its assets or
otherwise.
(f) Complete Agreement; Amendment. This Agreement supersedes any and all
prior discussions and understandings, whether written or oral, and represents
the complete agreement between the parties. This Agreement may not be amended,
modified or supplemented except by a written document signed by both parties.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first hereinabove written.
12
<PAGE> 13
ITC LEARNING CORPORATION
By: /s/Christopher E. Mack
------------------------
Christopher E. Mack
Chief Financial Officer
PHILIP L. CAMILLO
By: /s/Philip L. Camillo
--------------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,648,118
<SECURITIES> 0
<RECEIVABLES> 4,581,376
<ALLOWANCES> (284,116)
<INVENTORY> 307,021
<CURRENT-ASSETS> 7,699,164
<PP&E> 1,604,058
<DEPRECIATION> (913,393)
<TOTAL-ASSETS> 18,259,172
<CURRENT-LIABILITIES> 3,862,692
<BONDS> 0
0
0
<COMMON> 386,741
<OTHER-SE> 13,575,432
<TOTAL-LIABILITY-AND-EQUITY> 18,259,172
<SALES> 2,834,698
<TOTAL-REVENUES> 2,834,698
<CGS> 1,324,997
<TOTAL-COSTS> 3,675,613
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 37,500
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (753,176)
<INCOME-TAX> 0
<INCOME-CONTINUING> (753,176)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (753,176)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
