<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 MARCH 31, 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
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 March 31, 1999, 3,958,245 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 (Unaudited)
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998.....................................1
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998.........................................2-3
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998.....................................4
Notes to Condensed Consolidated Financial Statements...........................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................14
Item 2. Changes in Securities and Use of Proceeds.....................................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
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1999 1998
---- ----
<S> <C> <C>
Net revenues............................................... $ 5,702,384 $ 2,834,698
Cost of sales.............................................. 2,557,228 1,324,997
------------------ ------------------
Gross margin......................................... 3,145,156 1,509,701
Selling, general and administrative expense................ 2,875,389 2,413,416
Equity in earnings of affiliates........................... (65,147) (62,800)
------------------ ------------------
Total costs and expenses............................. 2,810,242 2,350,616
Income (loss) before interest and income taxes............. 334,914 (840,915)
Interest income............................................ 5,505 105,711
Interest expense........................................... (63,572) (17,972)
------------------ ------------------
Income (loss) before income taxes.......................... 276,847 (753,176)
Income tax expense......................................... -- --
------------------ ------------------
Net income (loss).......................................... $ 276,847 $ (753,176)
------------------ ------------------
Income (loss) per common share:
Basic................................................ $ 0.07 $ (0.19)
------------------ ------------------
Diluted.............................................. $ 0.07 $ (0.19)
================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 596,609 $ 267,045
Accounts receivable, net (notes 2, 4 and 5).......... 5,910,954 5,992,902
Due from affiliates.................................. 178,244 117,023
Inventories, net (notes 4 and 5)..................... 597,317 588,971
Prepaid expenses..................................... 121,564 136,730
Income taxes receivable.............................. 69,847 279,747
------------------ ------------------
Total current assets........................... 7,474,535 7,382,418
Note receivable (note 3)................................... 753,420 753,420
Property and equipment (note 5):
Video and computer equipment......................... 2,317,083 2,162,078
Furniture and fixtures............................... 206,513 206,313
Leasehold improvements............................... 37,950 35,092
------------------ ------------------
2,561,546 2,403,483
Less accumulated depreciation and amortization....... (1,501,783) (1,354,854)
------------------- ------------------
Net property and equipment..................... 1,059,763 1,048,629
Capitalized program development costs, net................. 5,232,967 5,393,182
Intangible assets, net..................................... 3,922,797 4,060,150
Other ..................................................... 8,341 8,966
------------------ ------------------
Total assets............................................... $ 18,451,823 $ 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>
March 31, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Current liabilities:
Line of credit (note 4).............................. $ 1,728,000 $ 647,000
Current installments of long-term debt (note 5)...... 287,283 287,283
Accounts payable..................................... 786,949 1,973,004
Due to affiliates.................................... 241,602 314,247
Accrued compensation and benefits.................... 553,541 281,234
Deferred revenues.................................... 507,611 420,005
Other accrued expenses............................... 998,374 1,650,980
Income taxes payable................................. 7,400 10,161
------------------ ------------------
Total current liabilities...................... 5,110,760 5,583,914
Deferred lease obligations................................. 15,197 25,511
Long-term debt (note 5).................................... 1,422,030 1,439,216
------------------ ------------------
Total liabilities.............................. 6,547,987 7,048,641
Stockholders' equity (note 5):
Commonstock, $0.10 par value, 12,000,000 shares
authorized; 3,958,245 and 3,958,245 shares
issued and outstanding in 1999 and
1998, respectively............................. 395,826 395,826
Additional capital................................... 16,502,127 16,502,127
Note receivable from ESOP............................ (416,553) (439,677)
Retained earnings (deficit).......................... (4,572,778) (4,849,625)
Accumulated other comprehensive income (note 7)...... (4,786) (10,527)
------------------ ------------------
Total stockholders' equity..................... 11,903,836 11,598,124
------------------ ------------------
Total liabilities and stockholders' equity................. $ 18,451,823 $ 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 Three Months
Ended March 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $ 276,847 $ (753,176)
Reconciling items:
Provision for doubtful accounts..................................... 15,000 37,500
Depreciation and amortization....................................... 908,497 516,585
Common stock issued to employees.................................... -- 4,119
Foreign currency translation adjustment............................. 5,741 (6,816)
Changes in operating assets and liabilities:
Decrease in accounts receivable............................... 66,948 1,833,845
Decrease (increase) in inventories............................ (8,346) 50,353
Decrease in prepaid expenses.................................. 15,164 9,450
Increase in due from affiliates, net.......................... (133,866) (159,225)
Decrease in other assets...................................... 210,525 12,907
Decrease in accounts payable.................................. (1,186,055) (8,447)
Decrease in accrued expenses.................................. (380,296) (552,061)
Decrease in deferred revenues................................. 87,606 --
Decrease in deferred lease obligations........................ (10,314) (4,911)
Decrease in income tax payable................................ (2,761) --
Net effect of acquired operating assets and liabilities....... -- 42,297
------------------ ------------------
Net cash provided by (used for) operating activities...................... (135,310) 1,022,420
Cash flows from investing activities:
Capitalized program development costs............................... (464,004) (120,839)
Capital expenditures................................................ (158,061) (98,624)
Acquisitions, net of cash acquired and notes payable................ -- (2,485,338)
------------------ -------------------
Net cash used for investing activities.................................... (622,065) (2,704,801)
Cash flows from financing activities:
Borrowings under line of credit..................................... 4,076,000 --
Repayments under line of credit..................................... (2,995,000) (25,000)
Principal payments on long-term debt................................ (17,186) (21,078)
Repurchase of common stock.......................................... -- (534,595)
Employee stock ownership plan note collections...................... 23,125 25,500
------------------ ------------------
Net cash provided by (used for) financing activities.......... 1,086,939 (555,173)
------------------ ------------------
Net increase (decrease) in cash........................................... 329,564 (2,237,554)
Cash and cash equivalents, beginning of period............................ 267,045 4,885,672
------------------ ------------------
Cash and cash equivalents, end of period.................................. $ 596,609 $ 2,648,118
================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 7
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 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 based on the weighted
average number of common shares outstanding during the year. Diluted earnings
per common share is computed based on 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.
The details of the earnings per share calculation for the quarters ended
March 31, 1999 and 1998 follow:
<TABLE>
<CAPTION>
Income Per Share
(Loss) Shares Amount
------ ------ ------
<S> <C> <C> <C>
QUARTER ENDED MARCH 31, 1999
Earnings per share of common stock - basic............... $ 276,847 3,879,923 $ 0.07
Dilutive securities:
Stock options...................................... 53,739
--------------- --------------- -----------
Earnings per share of common stock - diluted............. $ 276,847 3,933,662 $ 0.07
--------------- --------------- -----------
QUARTER ENDED MARCH 31, 1998
Loss per share of common stock - basic................... $ (753,176) 3,876,171 $ (0.19)
Dilutive securities:
Stock options......................................
--------------- --------------- -----------
Loss per share of common stock - diluted................. $ (753,176) 3,876,171 $ (0.19)
---------------- --------------- -----------
</TABLE>
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.
6
<PAGE> 9
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable include the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Trade accounts receivable............................ $ 5,843,828 $ 6,014,595
Unbilled contract receivables........................ 94,561 37,728
Less allowance for doubtful accounts................. (104,571) (89,421)
---------------- ----------------
Trade accounts receivable, net................... 5,833,818 5,962,902
Other receivables.................................... 77,136 30,000
---------------- ----------------
$ 5,910,954 $ 5,992,902
================ ================
</TABLE>
NOTE 3 - NOTE RECEIVABLE
On November 20, 1997 the Company entered into a stock purchase agreement
with Anderson Holdings Inc., an investor group headed by a former employee of
the Company, 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.
NOTE 4 - LINE OF CREDIT
The Company has a credit agreement with a bank which provides for a
$3,000,000 secured revolving credit facility expiring on June 30, 1999. At March
31, 1999 and December 31, 1998, the balance outstanding on the line of credit
was $1,728,000 and $647,000, respectively. Interest on the facility is
calculated at the U.S. prime rate and is payable monthly on any outstanding
balance.
The Company collateralized the credit facility by granting the bank a
security interest in its accounts receivable. 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.
7
<PAGE> 10
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
8.5% note payable to the Company's principal lender due in $ 398,363 $ 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.
8.0% note payable to Nova Scotia Business Development 1,310,950 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.
---------------- ----------------
1,709,313 1,726,499
Less amount classified as current (287,283) (287,283)
---------------- ----------------
$ 1,422,030 $ 1,439,216
================ ================
</TABLE>
NOTE 6 - SEGMENT INFORMATION
The following tables show revenues and profit or loss by reportable
segment for the quarters ended March 31, 1999 and 1998 (amounts in thousands):
Quarter ended March 31, 1999
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
United United
States Canada Kingdom Australia Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers............. $4,204 $616 $665 $217 $5,702
Intersegment revenues................ 500 - - - 500
Segment income (loss)
before taxes................... 557 (227) (47) (6) 277
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
NOTE 6 - SEGMENT INFORMATION (CONTINUED)
Quarter ended March 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
United United
States Canada Kingdom Australia Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers............ $1,748 $ - $807 $280 $2,835
Intersegment revenues............... - - - - -
Segment income (loss)
before taxes.................. (1,361) - 473 135 (753)
- -------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 7 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of related tax, for
the three months ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
---- ----
<S> <C> <C>
Net income (loss)......................................... $ 276,847 $ (753,176)
Foreign currency translation adjustment................... 5,741 (6,816)
---------------- ----------------
$ 282,588 $ (759,992)
================ ================
</TABLE>
The components of accumulated other comprehensive income, net of related
tax, for the three months ended March 31, 1999 and December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Cumulative foreign currency translation adjustment........ $ (4,786) $ (10,527)
================ ================
</TABLE>
9
<PAGE> 12
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 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.
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 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
A number of factors could 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, the introduction and
acceptance of new products, the Company's ability to renew or replace its
existing line of credit under favorable terms and conditions, 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 ("FIRST QUARTER OF 1999") COMPARED WITH THE
THREE MONTHS ENDED MARCH 31, 1998 ("FIRST QUARTER OF 1998")
Revenues
Revenues for the first quarter of 1999 totaled $5,702,000, as compared to
$2,835,000 for the first quarter of 1998, representing an increase of $2,867,000
or 101%. The increase in revenues was primarily attributable to increased sales
of the Company's core technology-delivered and multimedia courseware products.
Revenues
10
<PAGE> 13
from the Company's PC Skills, Regulatory, Technical and Basic Skills courseware
libraries remained strong during the first quarter of 1999, while revenues
generated from businesses acquired during 1998 increased to 13% of total
revenues and represented 25% of the total revenue growth for the period. During
1998, the Company made significant investments in the expansion of its sales and
marketing infrastructure as well as its Business Alliance Partner program. Those
investments, along with the Company's 1998 product acquisitions, were primarily
responsible for the significant revenue growth over the first quarter of 1998.
The Company believes that its revenue performance for the first quarter of 1999
is more indicative of revenue levels for the subsequent periods during 1999.
This is a forward-looking statement. See Forward-Looking Statements and Risk
Factors for Further Discussion.
During the first quarter of 1999, ITC recorded $176,000 in hardware
sales, as compared to $64,000 recorded during the first quarter of 1998,
representing an increase of $112,000.
Cost of Sales and Gross Margin
Cost of sales for the first quarter of 1999, which includes courseware
and hardware costs, totaled $2,557,000, resulting in gross margin of $3,145,000
or 55% of total revenues, as compared to cost of sales of $1,325,000 resulting
in gross margin of $1,510,000 or 53% of total revenues for the first quarter of
1998, an increase in gross margin of $1,635,000 and an increase in gross margin
percentage of 2%. The increase in total gross margin is principally due to
increased courseware revenues during the first quarter of 1999 as compared to
the first quarter of 1998. The slight increase in gross margin percentage was
due to normal fluctuations in the Company's distribution channel mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $2,875,000 for the
first quarter of 1999, as compared to $2,413,000 for the first quarter of 1998,
representing an increase of $462,000 or 19%.
Selling expenses consist primarily of salaries of sales personnel,
travel, advertising, marketing and promotional expenses. Selling expenses for
the first quarter of 1999 totaled $1,586,000, as compared to $1,037,000 for the
first quarter of 1998. The increase in selling expenses of $549,000 or 53%
during the first quarter of 1999 as compared to the first quarter of 1998 is
principally due to the expansion of the Company's direct sales force during
1998. Selling expenses as a percentage of revenues decreased to 28% in the
first quarter of 1999 from 37% in the first quarter of 1998 primarily due to
higher revenues and increased efficiencies associated with the Company's
marketing efforts.
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 first
quarter of 1999 as compared to the first quarter of 1998 were $1,289,000 and
$1,376,000, respectively. The decrease in general and administrative expenses
was $87,000 or 6%, which was primarily due to tighter control of discretionary
costs. General and administrative expenses as a percentage of revenues decreased
to 23% in the first quarter of 1999 from 49% in the first quarter of 1998.
Income Before Income Taxes and Net Income
Operations for the first quarter of 1999 resulted in pre-tax income of
$277,000, as compared to a pre-tax loss of $753,000 for the first quarter of
1998. The resulting net income of $277,000 or $0.07 per diluted share compares
with a net loss of $753,000 or $0.19 per share in the first quarter of 1998. The
higher pre-tax and net income for the first quarter of 1999 is primarily due to
increased courseware sales and resulting gross margin as compared to the first
quarter of 1998.
11
<PAGE> 14
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 1999 was $2,364,000 as compared to
$1,799,000 at December 31, 1998, an increase of $565,000 or 31%, primarily due
to the higher net income, and payment of various short-term liabilities during
the first quarter of 1999.
Cash used for operating activities totaled $135,000 for the first quarter
of 1999, as compared to cash provided by operating activities of $1,022,000 for
the first quarter of 1998, a decrease of $1,157,000. The decrease is due to
slower turnover of operating assets in relation to operating liabilities during
the first quarter of 1999 as compared to the first quarter of 1998.
Cash used for investing activities totaled $622,000 for the first quarter
of 1999, as compared to cash used for investing activities of $2,705,000 for the
first quarter of 1998, a decrease of $2,083,000. The decrease is primarily
attributable to the absence of acquisition activity in 1999 as compared to 1998,
partially offset by slightly higher product development and capital expenditure
costs.
Cash provided by financing activities totaled $1,087,000 for the first
quarter of 1999, as compared to cash used for financing activities of $555,000
for the first quarter of 1998, an increase of $1,642,000. The increase is
principally attributable to the Company's increased utilization of its line of
credit as compared to 1998, and a stock repurchase transaction which occurred
during the first quarter of 1998. The Company's line of credit matures June 30,
1999 and the Company has historically been able to renew the borrowing for an
additional one year term. The Company is negotiating with its principal lender
for the renewal of its existing credit facility and as a contingency, the
Company is also exploring other financing alternatives. The Company believes it
will secure a credit facility with favorable terms and conditions by June 30,
1999, although there is no assurance that it will do so. This is a
forward-looking statement. See Forward-Looking Statements and Risk Factors for
Further Discussions.
The Company believes that cash on hand, anticipated cash flows from 1999
operations and its existing line of credit or replacement financing will be
sufficient to meet the Company's cash requirements for at least the next twelve
months. Anticipated cash flows from 1999 operations are largely dependent upon
the Company's ability to achieve its sales and gross profit objectives for its
currently existing products, new products launched in 1999 and products
resulting from its 1998 acquisitions. However, the Company will continue to
evaluate alternative sources of liquidity available to it, including expansion
of existing or development of alternative sources of bank financing and equity
or debt securities offerings, to satisfy ongoing working capital and capital
expenditure 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.
12
<PAGE> 15
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. The Company appointed a Y2K readiness team, which meets
periodically to assess Y2K trends and developments. The Company's plan to
resolve the Year 2000 issue involves the following four phases: assessment,
remediation, testing, and implementation. Management estimates the total costs
to mitigate the Company's Y2K exposure will range from $300,000 to $400,000, of
which $205,000 has been incurred to date. The Company has substantially
completed its assessment of all software and hardware systems that could be
significantly impacted by the Year 2000. Based on these assessments, current
versions of the Company's administrative and courseware products and the
majority of the Company's operational software applications have been determined
to be Year 2000 compliant, and require no remediation. 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 are currently being 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.
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 would cause a significant disruption in the Company's ability to
process transactions, fulfill orders, support customers and administer its
business.
The Company has and will continue to utilize both internal and external
resources during the testing and implementation phases of its Year 2000 plan.
The testing and implementation phases of the Company's Year 2000 plan are
currently focused on courseware products and operational software applications.
The Company has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds, increasing inventories, and adjusting
staffing strategies.
13
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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.
14
<PAGE> 17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ITC LEARNING CORPORATION
(Registrant)
By: /s/Carl D. Stevens DATE May 3, 1999
---------------------------------------- -------------------
Carl D. Stevens, President,
Chief Executive Officer and Director
By: /s/Christopher E. Mack DATE May 3, 1999
---------------------------------------- -------------------
Christopher E. Mack, Vice President,
Treasurer, and Chief Financial Officer
By: /s/Matthew C. Sysak DATE May 3, 1999
---------------------------------------- -------------------
Matthew C. Sysak, Corporate Controller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S 10-QSB AS FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN
ITS ENTIRITY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 596,609
<SECURITIES> 0
<RECEIVABLES> 6,015,525
<ALLOWANCES> (104,571)
<INVENTORY> 597,317
<CURRENT-ASSETS> 7,474,535
<PP&E> 2,561,546
<DEPRECIATION> (1,501,783)
<TOTAL-ASSETS> 18,451,823
<CURRENT-LIABILITIES> 5,110,760
<BONDS> 0
0
0
<COMMON> 395,826
<OTHER-SE> 11,508,010
<TOTAL-LIABILITY-AND-EQUITY> 18,451,823
<SALES> 5,702,384
<TOTAL-REVENUES> 5,702,384
<CGS> 2,557,228
<TOTAL-COSTS> 2,810,242
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 276,847
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<INCOME-CONTINUING> 276,847
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<NET-INCOME> 276,847
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