<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------------
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF EXCHANGE ACT
For the transition period from ________ to _________
COMMISSION FILE NUMBER 0-13741
ITC LEARNING CORPORATION
------------------------
(Name of small business issuer as specified in its charter)
MARYLAND 52-1078263
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13515 DULLES TECHNOLOGY DRIVE
HERNDON, VIRGINIA 20171
-----------------------
(Address of principal executive offices)
(703) 713-3335
--------------
(Issuer's telephone number)
---------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
12, 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. [X] Yes [ ]
No
As of September 30, 1999, 3,964,078 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
<PAGE> 2
ITC LEARNING CORPORATION
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 1999
and 1998 (Unaudited)............................................................... 1
Condensed Consolidated Balance Sheets as of
September 30, 1999 (Unaudited) and December 31, 1998 (Audited).................... 2-3
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 (Unaudited).......................... 4
Notes to Condensed Consolidated Financial Statements (Unaudited)................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................... 11
<CAPTION>
PART II - OTHER INFORMATION
<S> <C> <C>
Item 1. Legal Proceedings.................................................................. 17
Item 2. Changes in Securities.............................................................. 17
Item 3. Defaults Upon Senior Securities.................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders................................ 17
Item 5. Other Information.................................................................. 17
Item 6. Exhibits and Reports on Form 8-K................................................... 17
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues.......................... $ 3,102,150 $ 4,053,955 $ 14,273,729 $ 10,928,910
Cost of sales......................... 2,220,530 2,837,768 6,733,204 6,566,057
------------- ------------- ------------- -------------
Gross margin.......................... 881,620 1,216,187 7,540,525 4,362,853
Sales and marketing expense........... 1,582,673 1,644,414 4,777,734 4,369,146
General and
administrative expense............. 1,545,022 1,508,948 4,356,325 4,479,197
Equity in earnings of affiliates...... (37,101) (19,949) (149,408) (176,902)
------------- ------------- ------------- -------------
Loss before interest
and income taxes.................. (2,208,974) (1,917,226) (1,444,126) (4,308,588)
Interest income....................... 21,003 47,522 67,969 234,192
Interest expense...................... (79,053) (26,321) (239,959) (62,356)
------------- ------------- ------------- -------------
Loss before income taxes.............. (2,267,024) (1,896,025) (1,616,116) (4,136,752)
Income tax expense (benefit).......... -- -- -- (222,516)
------------- ------------- ------------- -------------
Net loss.............................. $ (2,267,024) $ (1,896,025) $ (1,616,116) $ (3,914,236)
============= ============= ============= =============
Net loss per common share:
Basic and diluted................. $ (0.58) $ (0.48) $ (0.42) $ (1.00)
============= ============= ============= =============
Weighted average number
of shares outstanding............. 3,881,382 3,991,629 3,890,415 3,909,630
============= ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
1
<PAGE> 4
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 296,478 $ 267,045
Accounts receivable, net (notes 2, 4 and 5)..................... 5,445,125 5,992,902
Due from affiliates............................................. 168,247 117,023
Inventory, net (notes 4 and 5).................................. 448,725 588,971
Prepaid expenses................................................ 212,785 136,730
Income taxes receivable......................................... 58,094 279,747
------------- -------------
Total current assets........................................ 6,629,454 7,382,418
Note receivable (note 3)............................................. 747,628 753,420
Property and equipment (note 5):
Video and computer equipment.................................... 2,535,455 2,162,078
Furniture and fixtures.......................................... 211,062 206,313
Leasehold improvements.......................................... 59,074 35,092
------------- -------------
2,805,591 2,403,483
Less accumulated depreciation and amortization.................. (1,826,060) (1,354,854)
------------- -------------
Net property and equipment.................................. 979,531 1,048,629
Capitalized program development costs, net........................... 5,335,106 5,393,182
Intangible assets, net............................................... 3,644,766 4,060,150
Other ............................................................... 23,012 8,966
------------- -------------
Total assets ....................................................... $ 17,359,497 $ 18,646,765
============= =============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
2
<PAGE> 5
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Current liabilities:
Line of credit (note 4)......................................... $ 2,549,729 $ 647,000
Current installments of long-term debt (note 5)................. 204,540 287,283
Accounts payable................................................ 1,611,781 1,973,004
Due to affiliates............................................... 198,807 314,247
Accrued compensation and benefits............................... 456,423 281,234
Deferred revenues............................................... 364,809 420,005
Other accrued expenses.......................................... 921,625 1,650,980
Income taxes payable............................................ 746 10,161
------------- -------------
Total current liabilities................................... 6,308,460 5,583,914
Deferred lease obligations........................................... 8,424 25,511
Long-term debt (note 5).............................................. 954,520 1,439,216
------------- -------------
Total liabilities........................................... 7,271,404 7,048,641
Stockholders' equity (note 5):
Common stock, $0.10 par value, 12,000,000 shares
authorized; 3,964,078 and 3,958,245 shares issued
and outstanding in 1999 and 1998, respectively.............. 396,408 395,826
Additional capital.............................................. 16,547,350 16,502,127
Note receivable from ESOP....................................... (370,302) (439,677)
Retained earnings (deficit)..................................... (6,465,741) (4,849,625)
Accumulated other comprehensive income (note 7)................. (19,622) (10,527)
------------- -------------
Total stockholders' equity.................................. 10,088,093 11,598,124
------------- -------------
Total liabilities and stockholders' equity........................... $ 17,359,497 $ 18,646,765
============= =============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
3
<PAGE> 6
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................. $ (1,616,116) $ (3,914,236)
Reconciling items:
Provision for doubtful accounts................................. 150,000 127,500
Depreciation and amortization................................... 2,830,776 1,774,230
Common stock issued to employees................................ -- 4,119
Foreign currency translation adjustment......................... (9,095) (31,108)
Changes in operating assets and liabilities:
Decrease in accounts receivable............................. 397,777 2,962,891
Decrease in inventories..................................... 140,246 118,118
Increase in prepaid expenses................................ (76,055) (79,702)
Decrease in income taxes receivable......................... 209,567 21,492
Decrease in long term receivable............................ 3,832 143,207
Increase (decrease) in accounts payable..................... (361,223) 1,118,775
Decrease in due to affiliates, net.......................... (166,664) (202,143)
Increase (decrease) in accrued compensation and benefits.... 175,189 (522,953)
Decrease in accrued expenses................................ (729,355) (490,909)
Decrease in deferred revenues............................... (55,196) (132,264)
Decrease in deferred lease obligations...................... (17,087) (14,733)
Decrease in income tax payable.............................. (9,415) (233,005)
Net effect of acquired operating assets and liabilities..... -- (206,533)
------------- -------------
Net cash provided by operating activities............................ 867,181 442,746
Cash flows from investing activities:
Capitalized program development costs........................... (1,886,112) (280,026)
Capital expenditures............................................ (402,106) (528,581)
Acquisitions, net of cash acquired and notes payable............ -- (3,148,471)
------------- -------------
Net cash used for investing activities............................... (2,288,218) (3,957,078)
Cash flows from financing activities:
Borrowings under line of credit................................. 9,736,729 3,809,935
Repayments under line of credit................................. (7,834,000) (3,834,935)
Principal payments on long-term debt............................ (567,439) (62,837)
Issuance of common stock........................................ 45,805 223,603
Repurchase of common stock...................................... -- (535,848)
Employee stock ownership plan note collections.................. 69,375 76,500
------------- -------------
Net cash provided by (used for) financing activities................. 1,450,470 (323,582)
------------- -------------
Net increase (decrease) in cash...................................... 29,433 (3,837,914)
Cash and cash equivalents, beginning of period....................... 267,045 4,885,672
------------- -------------
Cash and cash equivalents, end of period............................. $ 296,478 $ 1,047,758
============= =============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
4
<PAGE> 7
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of ITC Learning Corporation ("ITC"
or the "Company") include the accounts of its wholly owned subsidiaries Activ
Training, Ltd. ("Activ"), ITC Australasia Pty. Ltd. ("ITCA"), Turn-Key Training
Technologies, Inc. ("Turn-Key"), ITC Canada Limited, and ComSkill Learning
Centers, Inc. ("ComSkill").
The Company is a full-service training company specializing in the
development, production, marketing and sale of multimedia and
technology-delivered training solutions designed to improve employee skills in
business, industry, education and government. The Company operates in four
reportable segments: U.S., Canada, Australia and the United Kingdom.
Significant intercompany accounts and transactions have been eliminated in
consolidation. In the opinion of the Company's management, the interim
condensed consolidated financial statements include all adjustments, consisting
of only normal recurring adjustments, necessary for a fair presentation of the
results for the interim periods. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. Certain prior
year amounts have been reclassified to improve comparability to current year
presentations. The interim condensed consolidated financial statements should
be read in conjunction with the Company's December 31, 1998 and 1997 audited
financial statements included with the Company's filing on Form 10-KSB. The
interim operating results are not necessarily indicative of the operating
results for the full fiscal year.
Revenues and Costs
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue
Recognition, which supercedes SOP 91-1. The provisions of SOP 97-2 took effect
in fiscal years beginning after December 15, 1997 and clarify rules of revenue
recognition related to customer acceptance, product upgrades and post-contract
customer support. In March 1998, the AICPA issued SOP 98-4, which defers for
one year the implementation of certain provisions of SOP 97-2. The Company
implemented SOP 97-2 as amended by SOP 98-4 for transactions entered into
beginning January 1, 1998. In December 1998, the AICPA issued SOP 98-9, which
extends the deferral date of implementation of certain provisions of SOP 97-2
to 2000 for the Company and amends the method of revenue recognition in some
circumstances. The Company does not anticipate that the adoption of this SOP
will have a significant impact on its results of operations or financial
position.
Revenues include both off-the-shelf and custom courseware sales,
courseware licenses, consulting service revenues and hardware revenues. The
Company recognizes revenues from off-the-shelf product and hardware sales as
units are shipped. The Company permits the customer the right to return the
courseware within 30 days of purchase. In the event that sales returns are
material, the Company adjusts revenue accordingly. Revenues from sales of
custom training programs that are developed and produced under specific
contracts with customers, including contracts with affiliated joint ventures
and limited partnerships, are recognized on a percentage of completion basis as
related costs are incurred during the production period. Gross revenues from
sales of affiliated joint venture and limited partnership copyrighted
courseware are included in the Company's
5
<PAGE> 8
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
financial statements, as are related production, selling and distribution
costs. Amounts due to co-owners of the affiliated venture/partnerships related
to such courseware sales are reflected as royalties and included in cost of
sales in the financial statements. Revenues from courseware licenses are
recognized upon the delivery of the initial copy of each product licensed, and
related duplication costs are accrued based on estimates. Revenues from
consulting services are recognized as services are performed.
Net Income (Loss) Per Common Share
Basic earnings per common share is computed by dividing net income(loss) by
the weighted average number of common shares outstanding during the period.
Diluted earnings per common share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding plus the effect of
stock options and other potentially dilutive common stock equivalents. The
dilutive effect of stock options and other potentially dilutive common stock
equivalents is determined using the treasury stock method based on the Company's
average stock price.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the associated amounts of revenues and
expenses during the reporting period. Actual results could differ from the
estimates.
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable include the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Trade accounts receivable.................................... $ 5,539,425 $ 6,014,595
Unbilled contract receivables................................ 2,314 37,728
Less allowance for doubtful accounts......................... (150,000) (89,421)
------------ ------------
Trade accounts receivable, net........................... 5,391,739 5,962,902
Other receivables............................................ 53,386 30,000
------------ ------------
$ 5,445,125 $ 5,992,902
============ ============
</TABLE>
NOTE 3 - NOTE RECEIVABLE
On November 20, 1997 the Company entered into a stock purchase agreement
with Anderson Holdings Inc. to sell all of the Company's stock in its Anderson
Soft-Teach subsidiary ("AST") in exchange for $4,000,000 cash, a promissory note
in the amount of $950,000, and forgiveness of AST's outstanding intercompany
obligations to ITC. Under the terms of the note, AST makes quarterly interest
payments to ITC at an interest rate of 8%, and will repay the principal balance
in 2001.
6
<PAGE> 9
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 4 - LINE OF CREDIT
On August 11, 1999, the Company entered into a new line of credit agreement
with its principal lender for a two-year term. The new agreement provided the
Company with $4,000,000 of borrowing capacity. The Company collateralized the
credit facility by granting the bank a security interest in the assets of the
Company. The agreement requires maintenance of certain financial ratios (minimum
working capital and tangible net worth) and contains certain restrictive
covenants, which limit borrowings and the ability to merge or dispose of assets.
At September 30, 1999 and December 31, 1998, the balances outstanding on
the line of credit were $2,550,000 and $647,000, respectively. Interest on the
facility is calculated at the U.S. prime rate plus 1% and is payable monthly on
any outstanding balance.
On October 29, 1999, the Company signed a Forbearance Agreement with its
principal lender to avoid the declaration of default with respect to certain
covenants and conditions in its August 11, 1999 line of credit agreement,
including maximum debt to tangible net worth and minimum tangible net worth
requirements.
The Forbearance Agreement increased the Company's interest rate to prime
plus 3% and reduced the Company's borrowing capacity per the following schedule:
<TABLE>
<CAPTION>
Date Range Maximum Borrowing Capacity
---------- --------------------------
<S> <C>
10/31/99 - 11/14/99 $ 1,950,000
11/15/99 - 11/29/99 $ 1,650,000
11/30/99 - 12/14/99 $ 1,450,000
12/15/99 - 12/30/99 $ 1,000,000
12/31/99 - Thereafter $ 250,000
</TABLE>
Additionally, the Forbearance Agreement stipulates a restructuring fee in
an amount not to exceed $100,000 due in full upon the earlier of (i) payment in
full of all outstanding balances of the line of credit or (ii) December 31,
1999. The Agreement also requires the Company to obtain capital infusion in
accordance with the following schedule:
<TABLE>
<CAPTION>
Date Required Amount of Capital Infusion Required
------------- -----------------------------------
<S> <C>
10/31/99 $ 165,000
11/15/99 $ 150,000
11/30/99 $ 150,000
12/15/99 $ 200,000
12/31/99 $ 200,000
-----------
$ 865,000
===========
</TABLE>
As of November 12, 1999, the capital infusion requirement has been satisfied.
See Note 8 - Subsequent Events.
7
<PAGE> 10
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 5 - LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following: September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
8.5% note payable to the Company's principal lender due in $ - $ 415,549
monthly principal and interest installments of
$10,258 through December 2002, collateralized by the
assignment of interest in the Company's accounts receivable,
inventory and property and equipment. Per the Company's line
of credit agreement dated August 11, 1999, the Company's
8.5% note payable was reclassified to a current liability
and accounted for as part of its line of credit balance.
(See note 4 - Line of Credit.)
8.0% note payable to Nova Scotia Business Development 1,159,060 1,310,950
Corporation ("NSBDC") due in monthly interest installments
(beginning October 31, 1998) and quarterly principal
installments (beginning March 31, 1999), maturing in
December 2003. The NSBDC has a subordinated interest
position to the Company's principal lender, in the
receivables and inventory of ITC Canada Limited.
Additionally, the NSBDC's interest in the fixed assets and
intellectual property of ITC Canada Limited ranks pari passu
with the Company's principal lender. ------------ ------------
1,159,060 1,726,499
(204,540) (287,283)
Less amount classified as current ------------ ------------
$ 954,520 $ 1,439,216
============ ============
</TABLE>
8
<PAGE> 11
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 6 - SEGMENT INFORMATION
The following tables identify revenues and profit or loss by reportable
segment for the quarters and the nine months ended September 30, 1999 and 1998
(amounts in thousands):
QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
United United
States Canada Kingdom Australia Total
- ---------------------------------------------------------------------------------------------------------------
Revenues from external customers...... $2,214 $264 $476 $148 $3,102
Intersegment revenues................. 316 42 -- -- 358
Segment loss before taxes............. (1,484) (440) (81) (262) (2,267)
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
QUARTER ENDED SEPTEMBER 30, 1998
- ---------------------------------------------------------------------------------------------------------------
United United
States Canada(1) Kingdom Australia Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers...... $3,197 $53 $533 $271 $4,054
Intersegment revenues................. 349 -- -- -- 349
Segment income (loss) before taxes.... (1,902) (27) 138 (105) (1,896)
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
(1) Canadian subsidiary commenced operations September 25, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999
- ---------------------------------------------------------------------------------------------------------------
United United
States Canada Kingdom Australia Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers...... $10,416 $1,447 $1,729 $682 $14,274
Intersegment revenues................. 1,523 291 -- -- 1,814
Segment loss before taxes............. (351) (848) (179) (238) (1,616)
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
- ---------------------------------------------------------------------------------------------------------------
United United
States Canada(1) Kingdom Australia Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers...... $7,882 $53 $2,035 $959 $10,929
Intersegment revenues................. 1,159 -- -- -- 1,159
Segment income (loss) before taxes.... (4,367) (27) 309 (52) (4,137)
- ---------------------------------------------------------------------------------------------------------------
(1) Canadian subsidiary commenced operations September 25, 1998.
</TABLE>
9
<PAGE> 12
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 7 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive loss, net of related tax, for the nine
months ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
---- ----
<S> <C> <C>
Net loss..................................................... $ (1,616,116) $ (3,914,236)
Foreign currency translation adjustment...................... (9,095) (31,108)
------------ ------------
Comprehensive income (loss) $ (1,625,211) $ (3,945,344)
============ ============
<CAPTION>
The components of accumulated other comprehensive income, net of related tax, at September 30, 1999
and December 31, 1998 are as follows:
September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Cumulative foreign currency translation adjustment........... $ (19,622) $ (10,527)
============ ============
</TABLE>
NOTE 8 - SUBSEQUENT EVENTS
On October 29, 1999, the Company signed a Forbearance Agreement with its
principal lender to avoid the declaration of default with respect to certain
covenants and conditions in its August 11, 1999 line of credit agreement,
including maximum debt to tangible net worth and minimum tangible net worth
requirements. See Note 4 - Line of Credit for further discussion.
On November 1, 1999, a private-equity fund committed to make up to a
$1,000,000 investment in the Company, which was fully funded by November 12,
1999. The investment is in the form of a 5.5% subordinated debenture
convertible into common stock at $2.00 per share with 291,500 warrants
exercisable at $2.00 per share. The debenture and warrants will mature on
October 31, 2000.
10
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview of Business
ITC Learning Corporation ("ITC" or the "Company") develops, markets and
sells multimedia and technology-delivered training solutions designed to
improve employee skills in business, industry, education and government. ITC
was incorporated under the laws of the State of Maryland on January 28, 1977.
The Company's training solutions include a state-of-the-art training management
system, approximately 600 training titles, CD-ROM, Internet, intranet and
videotape delivery capabilities and customer support and implementation
services. The Company's portfolio of products is one of the largest libraries
of interactive CD-ROM and technology-delivered training programs available
today, having improved productivity in major corporations, government agencies
and school systems across the United States. ITC's training programs combine
full-motion video, audio, animation, graphics, and text into a single learning
presentation. The Company has a worldwide customer base of approximately 5,000
organizations.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Forward-Looking Statements
Certain statements made by the Company's management may be considered to
be "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are based on various
factors and assumptions that include known and unknown risks and uncertainties.
The words "believe," "expect," "anticipate" and "project," and similar
expressions identify forward-looking statements, which speak only as of the
date the statement was made. Such statements may include, but not be limited
to, projections of revenues, income or loss, expenses, plans, as well as
assumptions relating to the foregoing. Forward-looking statements are
inherently subject to risks and uncertainties, some of which cannot be
predicted or quantified. Future results could differ materially from those
described in forward-looking statements as a result of the risks set forth in
the following discussion, among others.
Risk Factors
The Company has experienced adverse results of operations during 1998 and
1999, resulting in erosion of its working capital. Anticipated current cash
flows are largely dependent upon the Company's ability to achieve its sales and
gross profit objectives. Achievement of these objectives is subject to various
risk factors related to, among other things: incremental sales results; the
Company's ability to control costs in relation to revenues; the Company's
ability to mitigate the negative impact of its recent reduction in force; and
the Company's ability to obtain replacement working capital financing. The
Company is also considering alternative sources of liquidity, such as: public or
private offerings of debt or equity securities in addition to the $1,000,000
which the Company raised in November 1999; development of alternative
sources of bank financing; further cost reductions; and sale of Company assets.
No assurances can be provided that the Company's adverse operating results will
not continue, that its gross profit objectives will be achieved, and that the
Company will be successful in obtaining further sources of liquidity.
During the fourth quarter of 1999, the Company implimented a reduction in
force eliminating approximately 70 of its 140 employees, consisting primarily of
its content development operations. Management believes it has retained the
necessary resources to fully support its current business operations, although
no assurances can be provided that it will do so.
A number of factors could also contribute to significant fluctuations in
operating results, which may result in volatility in the price of the Company's
common stock. These include the size and timing of orders and shipments, the
mix of ITC-developed products and third party products, the mix of sales from
the Company's direct and indirect distribution channels, and the degree to
which the market understands and accepts the Company's role as a provider of
training solutions.
In addition, the Company faces certain general business risks which could
materially and adversely impact future operating results. These include, but
are not limited to, changes in economic conditions, the cost of labor and raw
materials, changes in technology and general competitive factors.
11
<PAGE> 14
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 ("THIRD QUARTER OF 1999") COMPARED WITH
THE THREE MONTHS ENDED SEPTEMBER 30, 1998 ("THIRD QUARTER OF 1998")
Revenues
Revenues for the third quarter of 1999 totaled $3,102,000, as compared to
$4,054,000 for the third quarter of 1998, representing a decrease of $952,000 or
23%. The decrease in overall revenues for the quarter was attributable to
decreased hardware sales, and lower courseware sales of the Company's core
courseware libraries, offset by increased revenue from products and business
acquired during 1998. Sales revenue associated with several large transactions
failed to materialize during the third quarter of 1999 as expected. The majority
of those opportunities continue to be pursued. Revenue generated from products
and businesses acquired in 1998 was $322,000 and $169,000 during the third
quarter of 1999 and the third quarter of 1998, respectively.
During the third quarter of 1999, the Company recorded $534,000 in
hardware revenues, as compared to $1,373,000 recorded during the third quarter
of 1998, representing a decrease of $839,000, primarily the result of decreased
demand for the hardware component of the Company's training solution.
Cost of Sales and Gross Margin
Cost of sales for the third quarter of 1999, which includes courseware and
hardware costs, totaled $2,221,000, resulting in gross margin of $882,000 or
28% of total revenues, as compared to cost of sales of $2,838,000 resulting in
gross margin of $1,216,000 or 30% of total revenues for the third quarter of
1998, a decrease in gross margin of $334,000 and a decrease in gross margin
percentage of 2%. Included in courseware cost of sales is product development
cost amortization charges which are relatively fixed. The decrease in cost of
sales and total gross margin was primarily due to decreased revenues during the
third quarter of 1999 as compared to the third quarter of 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $3,128,000 for the
third quarter of 1999, as compared to $3,153,000 for the third quarter of 1998,
representing a decrease of $25,000 or 1%.
Selling expenses consist primarily of salaries of sales personnel, travel,
advertising, marketing and promotional expenses. Selling expenses for the third
quarter of 1999 totaled $1,583,000, as compared to $1,644,000 for the third
quarter of 1998. The decrease in selling expenses of $61,000 or 4% was due to
an overall reduction in marketing expenditures, offset by higher direct sales
costs as a result of business acquired during 1998. Selling expenses as a
percentage of revenues increased to 51% in the third quarter of 1999 from 41%
in the third quarter of 1998 primarily due to lower revenues during the third
quarter of 1999 as compared to the third quarter of 1998, in relation to static
sales and marketing costs.
General and administrative expenses consist of the costs of developing new
products and the costs of the Company's executive management and support
functions such as customer assurance, product fulfillment, human resources, and
finance and administration. General and administrative expenses for the third
quarter of 1999 totaled $1,545,000, as compared to $1,509,000 for the third
quarter of 1998. The increase in general and administrative expenses of $36,000
or 2% was primarily due to general and administrative expenses associated with
the Company's Canadian subsidiary which commenced operations on September 25,
1998. General and administrative expenses as a percentage of revenue increased
to 50% in the third quarter of 1999 from 37% in the third quarter of 1998,
primarily due to lower revenues during the third quarter of 1999 as compared to
the third quarter of 1998, in relation to a static cost structure.
Income Before Income Taxes and Net Income
Operations for the third quarter of 1999 resulted in a pre-tax loss of
$2,267,000, as compared to a pre-tax loss of $1,896,000 for the third quarter
of 1998. The resulting net loss of $2,267,000 or $0.58 per share compares with
a net loss of $1,896,000 or $0.48 per share in the third quarter of 1998. The
higher pre-tax and
12
<PAGE> 15
net loss for the third quarter of 1999 was primarily due to decreased sales
revenues and resulting gross margin as compared to the third quarter of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues
Revenues for the nine months ended September 30, 1999 totaled $14,274,000
as compared to $10,929,000 for the comparable prior year period, representing
an increase of $3,345,000 or 31%. The increase was attributable to an overall
increase in sales of the Company's core technology-delivered multimedia
courseware products, offset by lower sales of hardware component systems.
Revenue from products and business acquired in 1998 amounted to $4,469,000
during the nine months ended September 30, 1999, as compared to $368,000 during
the comparable prior year period, representing an increase of $4,101,000.
During the nine months ended September 30, 1999, ITC recorded $973,000 in
hardware revenue, as compared to $1,754,000 recorded during the comparable
prior year period, representing an decrease of $781,000 or 45%. While the
Company continues to fulfill its customers' hardware requirements as a part of
its training solution, the Company does not anticipate significant revenue
growth from hardware sales. This is a forward-looking statement. See
Forward-Looking Statements and Risk Factors for Further Discussion.
Cost of Sales and Gross Margin
Cost of sales for the nine months ended September 30, 1999 totaled
$6,733,000 resulting in a gross margin of $7,541,000 or 53% of total revenues,
as compared to cost of sales of $6,566,000 resulting in gross margin of
$4,363,000 or 40% of total revenues for the comparable prior year period. The
increase in total gross margin of $3,178,000 was attributable to increased
revenues during the nine months ended September 30, 1999 over the comparable
prior year period. The increase in gross margin as a percentage of revenues for
the nine months ended September 30, 1999 over the comparable prior year period
was 13%, due to a shift in sales channel mix from resellers or third party
agents to direct sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $9,134,000 for the
nine months ended September 30, 1999 as compared to $8,848,000 for the
comparable prior year period, representing an increase of $286,000 or 3%.
Selling expenses for the nine months ended September 30, 1999 totaled
$4,778,000 as compared to $4,369,000 for the comparable prior year period,
representing an increase of $409,000 or 9%. The increase was due to the
expansion of sales and marketing efforts focused on products and businesses
acquired during 1998. For the nine months ended September 30, 1999, selling
expenses as a percentage of revenues decreased to 33% as compared to 40% for
the comparable prior year period. The decrease of 7% was the result of
achieving higher revenues during the nine months ended September 30, 1999 as
compared to the nine months ended September 30, 1998, while maintaining a
static cost structure.
General and administrative expenses for the nine months ended September
30, 1999 totaled $4,356,000 as compared to $4,479,000 for the comparable prior
year period, representing a decrease of $123,000 or 3%. The decrease was due to
lower personnel related costs, offset by higher general and administrative
expenses associated with the Company's Canadian subsidiary which commenced
operations on September 25, 1998. General and administrative expenses as a
percentage of revenues decreased to 31% during the nine months ended September
30, 1999 from 41% during the comparable prior year period. The decrease of 10%
was the result of achieving higher revenues during the nine months ended
September 30, 1999 as compared to the nine months ended September 30, 1998,
while maintaining a static cost structure.
13
<PAGE> 16
Income Before Income Taxes and Net Income
Operations for the nine months ended September 30, 1999 resulted in a
pre-tax loss of $1,616,000, as compared to a pre-tax loss of $4,137,000 for the
comparable prior year period. The resulting net loss of $1,616,000 or $0.42 per
share compares with a net loss of $3,914,000 or $1.00 per share during the
comparable prior year period. The increase in net income of $2,298,000 was due
to increased sales revenues and resulting gross margin as compared to the
prior year period.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 1999 was $321,000 as compared to
$1,799,000 at December 31, 1998, a decrease of $1,478,000 or 82%, primarily due
to increased utilization of the Company's line of credit during the nine months
ended September 30, 1999.
Cash provided by operating activities totaled $867,000 for the nine months
ended September 30, 1999, as compared to cash provided by operating activities
of $443,000 for the comparable prior year period, an increase of $424,000. The
increase was due to a higher net income offset by slower turnover of operating
assets in relation to operating liabilities.
Cash used for investing activities totaled $2,288,000 for the nine months
ended September 30, 1999, as compared to cash used for investing activities of
$3,957,000 for the comparable prior year period, a decrease of $1,669,000. The
decrease was primarily attributable to the absence of acquisition activity in
1999 as compared to 1998, partially offset by higher product development costs
relating to the Company's development of its Microsoft(R) Office 2000 suite of
courseware products, and enhancements, modifications and new development of its
AdminSTAR(TM) training management system.
Cash provided by financing activities totaled $1,450,000 for the nine
months ended September 30, 1999, as compared to cash used for financing
activities of $324,000 for the comparable prior year period, an increase of
$1,774,000. The increase is principally attributable to the Company's increased
utilization of its line of credit as compared to 1998, and the absence of a
stock repurchase transaction, which occurred during 1998.
During the third quarter of 1999, the Company executed a letter of intent
with Thoma Cressey Fund VI, LP ("TCEP"), a private equity fund managed by Thoma
Cressey Equity Partners, Inc., to invest $20 million in ITC. On October 9,
1999, TCEP notified the Company that it had elected to terminate the
contemplated transaction.
On October 15, 1999, the Company announced it was winding down its
multimedia content development operations. As such, the Company reduced its
total worldwide workforce by approximately 70 employees, which was approximately
half of the Company's existing workforce, consisting primarily of content
development operations. Management believes it has retained the necessary
resources to fully support its current business operations. This is a
forward-looking statement. See Forward-Looking Statements and Risk Factors for
Further Discussion.
On November 1, 1999, a private-equity fund committed to make up to a
$1,000,000 investment in the Company, which was fully funded by November 12,
1999. The investment is in the form of a 5.5% subordinated debenture
convertible into common stock at $2.00 per share with 291,500 warrants
exercisable at $2.00 per share. The debenture and warrants will mature on
October 31, 2000.
The Company believes that cash on hand, anticipated cash flows from fourth
quarter 1999 operations, its modified line of credit and the recent capital
infusion, should be sufficient to meet the Company's cash requirements through
December 31, 1999. Anticipated cash flows from fourth quarter 1999 operations
are largely dependent upon the Company's ability to achieve its sales and gross
profit objectives for its currently existing products. However, the Company
will continue to evaluate alternative sources of liquidity available to it,
including development of alternative sources of bank financing, equity or debt
securities offerings, further cost reductions, or sale of Company assets, to
satisfy ongoing working capital and capital expenditure
14
<PAGE> 17
requirements. These are forward-looking statements. See Forward-Looking
Statements and Risk Factors for Further Discussion.
SOFTWARE REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue
Recognition, which supercedes SOP 91-1. The provisions of SOP 97-2 took effect
in fiscal years beginning after December 15, 1997 and clarify rules of revenue
recognition related to customer acceptance, product upgrades and post-contract
customer support. In March 1998, the AICPA issued SOP 98-4, which defers for
one year the implementation of certain provisions of SOP 97-2. The Company
implemented SOP 97-2 as amended by SOP 98-4 for transactions entered into
beginning January 1, 1998.
In December 1998, the AICPA issued SOP 98-9, which extends the deferral
date of implementation of certain provisions of SOP 97-2 to 2000 for the
Company, and amends the method of revenue recognition in some circumstances.
The Company does not anticipate that the adoption of the SOP will have a
significant effect in its results of operations or financial position.
IMPLICATIONS OF YEAR 2000
The Year 2000 ("Y2K") issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's internal or external hardware or software packages that have
time-sensitive programs may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. Similar failures in the Company's courseware could result
in an impairment of revenue recognition due to significant future obligations,
impairment of future sales of the Company's products, or potential product
liability. In addition, disruptions in the economy generally resulting from
Year 2000 issues could have a material adverse affect on the Company.
The Company began an assessment of the implications of the Year 2000 issue
during late 1997. Since then, the Company has made substantial progress towards
eliminating its exposure to Y2K related issues. The Company's plan to resolve
the Year 2000 issue has involved the following four phases: assessment,
remediation, testing, and implementation. Through September 30, 1999, the
Company has completed all four phases of its plan as it relates to the
Company's courseware products and its operating infrastructure, and believes
its products and mission critical operating functions to be year 2000
compliant. Versions of the Company's legacy products, which are
analog-laserdisc delivered products, are not Year 2000 compliant. This is
primarily due to the authoring language that the products were developed in as
well as the operating systems and computer equipment that delivered the
laserdisc training programs. The Company does not plan to modify the
analog-laserdisc product to become Year 2000 compliant. The Company ceased
sales and marketing efforts of the analog-laserdisc products in 1996;
therefore, any impact on results of operations or financial position is not
expected to be material. Courseware and operating applications that were found
to be non-compliant have been reprogrammed or replaced. In addition, the
Company has gathered information about the Year 2000 compliance status of its
significant suppliers, vendors, and subcontractors and continues to monitor
their compliance, however the Company believes non-compliance of its suppliers
and vendors will not represent a significant threat due to the nature of its
raw materials and existing alternatives in the marketplace. These are
forward-looking statements. See Forward-Looking Statements and Risk Factors for
Further Discussion.
The most reasonably likely worst case scenario, relating to Y2K
compliance, would be failure of the Company's courseware products and its
internal operating infrastructure. Failure of the Company's courseware products
as a result of the Y2K bug, would require the Company to incur significant
remediation costs and could potentially result in significant litigation costs,
both which would have a material negative impact on the Company's results of
operations and financial position. Failure of the Company's operating
infrastructure
15
<PAGE> 18
would cause a significant disruption in the Company's ability to process
transactions, fulfill orders, support customers and administer its business.
The Company has contingency plans for all mission critical applications.
These contingency plans involve, among other actions, manual workarounds,
increasing inventories, and adjusting staffing strategies.
SUBSEQUENT EVENTS
On October 29, 1999, the Company signed a Forbearance Agreement with its
principal lender to avoid the declaration of default with respect to certain
covenants and conditions in its August 11, 1999 line of credit agreement,
including maximum debt to tangible net worth and minimum tangible net worth
requirements. See Note 4 - Line of Credit for further discussion. Management
believes it can adhere to the requirements prescribed in the Forbearance
Agreement. Additionally, management is aggressively pursuing alternative banking
arrangements and believes the acquisition of a short-term credit facility
sufficient to meet its current working capital requirements to be probable. This
is a forward-looking statement. See Forward-Looking Statements and Risk Factors
for Further Discussion.
On November 1, 1999, a private-equity fund committed to make up to a
$1,000,000 investment in the Company, which was fully funded by November 12,
1999. The investment is in the form of a 5.5% subordinated debenture
convertible into common stock at $2.00 per share with 291,500 warrants
exercisable at $2.00 per share. The debenture and warrants will mature on
October 31, 2000. Management believes the consummation of this investment
represents a significant opportunity for the Company with respect to the
development and ultimate funding of its growth strategy. This is a
forward-looking statement. See Forward-Looking Statements and Risk Factors for
Further Discussion.
16
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
3.1 Amended Articles of Incorporation of the Company, incorporated
by reference to the Company's Form 10-QSB for the quarter ended
June 30, 1996 filed with the Securities and Exchange Commission
("SEC") (Commission File No. 0-13741).
3.2 Amended By-Laws of the Company, incorporated by reference to
the Company's Form 10-KSB for the fiscal year ended December
31, 1997, filed March 13, 1998 with the SEC (Commission File
No. 0-13741).
4.1 Specimen Certificate for ITC Common Stock, incorporated by
reference to the Company's 10-QSB for the quarter ended March
31, 1998, filed May 1, 1998 with the SEC (Commission File No.
0-13741).
27.1 Financial Data Schedule (filed herewith).
B. Reports on Form 8-K:
None.
17
<PAGE> 20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ITC LEARNING CORPORATION
(Registrant)
<TABLE>
<S> <C>
By: /s/Carl D. Stevens DATE November 15, 1999
---------------------------------------------- ----------------------------
Carl D. Stevens, President,
Chief Executive Officer and Director
By: /s/Christopher E. Mack DATE November 15, 1999
---------------------------------------------- ----------------------------
Christopher E. Mack, Vice President,
Treasurer, and Chief Financial Officer
By: /s/Matthew C. Sysak DATE November 15, 1999
---------------------------------------------- ----------------------------
Matthew C. Sysak, Corporate Controller
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S 10-QSB AS FOR THE QUARTER ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 296,478
<SECURITIES> 0
<RECEIVABLES> 5,539,425
<ALLOWANCES> (150,000)
<INVENTORY> 448,725
<CURRENT-ASSETS> 6,629,454
<PP&E> 2,805,591
<DEPRECIATION> (1,826,060)
<TOTAL-ASSETS> 17,359,497
<CURRENT-LIABILITIES> 6,308,460
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<COMMON> 396,408
<OTHER-SE> 9,691,685
<TOTAL-LIABILITY-AND-EQUITY> 17,359,497
<SALES> 3,102,150
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<CGS> 2,220,530
<TOTAL-COSTS> 3,127,695
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