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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended
December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from
________ to _________
Commission File Number 0-13741
ITC LEARNING CORPORATION
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(Name of small business issuer in its charter)
MARYLAND 52-1078263
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
13515 DULLES TECHNOLOGY DRIVE
HERNDON, VIRGINIA 20171 20171
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(Address of principal executive offices) (Zip Code)
(703) 713-3335
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Issuer's telephone number
Securities registered under Section 12(b) of the Exchange Act:
None None
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(Title of each Class) (Name of each exchange
on which registered)
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.10 PAR VALUE
-----------------------------
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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for the year ended December 31, 1998 were $18,426,151.
Aggregate market value of voting stock held by non-affiliates and outstanding at
February 25, 1999 was $17,547,695. Amount was computed using the average bid and
ask price as of February 25, 1999, which was $5.06. As of February 25, 1999
3,958,245 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
Company's Definitive Proxy Statement for its 1999 Annual Meeting of
Stockholders.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
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ITC LEARNING CORPORATION
FORM 10-KSB
INDEX
<TABLE>
<CAPTION>
PART I PAGE
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<S> <C> <C>
Item 1. Description of Business..............................................................1
Item 2. Description of Properties............................................................4
Item 3. Legal Proceedings ...................................................................5
Item 4. Submission of Matters to a Vote of Security Holders .................................5
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.............................6
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................6
Item 7. Financial Statements................................................................11
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................................34
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...............................35
Item 10. Executive Compensation..............................................................36
Item 11. Security Ownership of Certain Beneficial Owners and Management......................36
Item 12. Certain Relationships and Related Transactions......................................37
Item 13. Exhibits and Reports on Form 8-K....................................................37
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Development 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.
As one of many organizations in a $60 billion training market, according to
International Data Corporation's 1997 Report, ITC embarked on a strategy to
position itself as a broad-based education and training solution provider to
organizations worldwide. Over the past 20 years, ITC had been primarily focused
on a single market, Process and Manufacturing training. While Process and
Manufacturing training opportunities have proven beneficial to ITC, the Company
realized in order to capitalize on growth in the training and education market,
it needed to expand and enhance its core competencies. The components of ITC's
new strategy include the following:
- Training and courseware management system
- Expanded portfolio of products
- Multiple delivery platforms
- Support services for customers
- Increased distribution capabilities
Training and Courseware Management System
On March 25, 1998, the Company acquired Turn-Key Training Technologies,
Inc. ("Turn-Key"), a developer and distributor of performance-based
administrative software. Turn-Key's proprietary administrative software program,
AdminSTAR(TM), provides organizations with the ability to manage all aspects of
a training environment, including skills assessment, creation of individual or
group development plans, scheduling of training, facilities and equipment, and
tracking of student performance, as well as a wide variety of management and
reporting tools required by corporate training executives. As a result of the
acquisition, ITC retained Phillip Camillo, Turn-Key's founder and president, as
well as the development and sales support staff.
During the first quarter of 1999, the Company released AdminSTAR 5.0, the
latest version of AdminSTAR, which incorporates many of the fundamental features
and characteristics of previous versions, while adding some additional
functionality. AdminSTAR 5.0 provides organizations with the ability to link
overall corporate goals with the relevant skills of the organization, to assess
the organization's ability to meet those goals in relation to current skills of
its workforce, and to administer and track results-based training necessary to
achieve its goals.
In March of 1999, the Company plans to release STARLEARNER(TM), a member of
the AdminSTAR family. STARLEARNER provides learners with the ability to access
their training management system via the Internet, intranet or local area
network, obtain corporate or departmental business updates, perform skill
surveys, review and edit their individual development plans, and enroll into
training activities. Additionally,
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through an arrangement with Macromedia, Inc. using its courseware management
tool, Pathware(TM), STARLEARNER can now launch and track independent third party
vendor courseware, making STARLEARNER one of the most complete and sophisticated
training management systems available today.
Expanded Portfolio of Products
Since the Company was established in 1977, ITC has developed over 350
multimedia training titles. Given the exponential growth that the training
market is currently experiencing, and in order to service its customers' ongoing
needs, the Company expanded its product offerings.
In July of 1998, the Company partnered with NIIT (USA) Inc., a subsidiary
of NIIT, Ltd., for distribution rights to a comprehensive library of over 250
Information Technology ("IT") training products. The library of products include
such topics as Microsoft Certified Software Engineer (MCSE), client/server
computing, Java, Unix, C, C++, and Windows NT. The IT products are delivered in
a CD-ROM networkable format and are currently being converted to an Internet
delivered platform by NIIT. As of February 1999, over 30 IT courses were
available via the Internet. These product offerings provide ITC with an
extensive high-quality curriculum for the high-tech computer professional who is
searching for Microsoft certification and high-end technical programming skills.
On September 25, 1998, ITC, through its wholly-owned subsidiary, ITC Canada
Ltd., acquired certain assets of Mentor Networks Inc. ("Mentor"). As a result of
the acquisition, ITC acquired additional courseware consisting of Microsoft(R)
Office PC Skills training products, as well as soft-skills training products
which focus on training organizations in the areas of customer service,
telesales, collections, leadership and human resources. In addition to the new
portfolio of products, ITC also acquired Mentor's software development team
which further expands its development capabilities.
Multiple Delivery Platforms
In June 1998, the Company acquired certain assets of iNEX Corporation
("iNEX") in order to expand its delivery platform capabilities. iNEX, an on-line
training company, created interactive software and systems enabling
organizations to improve employee performance via the Internet and corporate
intranets. Learners are able to access course modules similar to those delivered
via CD-ROM and to experience interactive learning and assessment applications
that deliver graphics, animation, and multimedia streaming. Customers access the
training courseware and training applications with Java(TM) enabled browsers
such as Netscape Navigator(TM) or Microsoft Internet Explorer(TM).
ITC's development team, with staff located in Saugatuck, Michigan, Halifax,
Nova Scotia, and Herndon, Virginia, now totals approximately 45 employees and is
primarily focused on the design, development and production of new training
courses, as well as the conversion of existing courseware to a Web-based format.
In February of 1999, the Company released a Web-based version of its Regulatory
Compliance library. The comprehensive library of regulatory training titles that
meet OSHA compliance requirements include topics such as Hazardous
Communications, Confined Space Entry, Respiratory Protection, and Ergonomics.
With the release of the Web-based regulatory titles, ITC now offers its
customers over 45 training titles that can be accessed via the Internet or
corporate intranets. During 1999, the Company plans to continue its development
efforts by developing new training titles as well as continuing to convert
existing courseware to a Web-based format.
Support Services for Customers
The Company views support services for customers as an integral part of its
corporate strategy. The Company offers a wide variety of support services to its
customers. Such services include telephone support, implementation services,
facility or training center management, installation services and training
consultation. Additionally, with the Company's expanded development
capabilities, ITC provides customers with custom courseware development, if
required. Customers are now requiring training companies to be full-service
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training consultants when it comes to addressing their needs. ITC believes it
has the breadth of products and services necessary to meet customer training
solution requirements. This is a forward-looking statement. See Forward-looking
Statements and Risk Factors for Further Discussion.
Increased Distribution Capabilities
During 1998, the Company increased its distribution capabilities. The
Company made significant investments in its Business Alliance Partner ("BAP")
program which is intended to increase market coverage and bring additional
industry knowledgeable resources to increase sales. ITC currently has over sixty
BAPs selling and distributing its portfolio of products. During 1998, the
Company also invested in expanding its direct sales force by tripling its number
of sales representatives. These sales representatives, who are geographically
based, work closely with the BAPs to further increase market coverage.
Description of Business
ITC is an education and training solutions integrator specializing in the
development, production, marketing and sale of multimedia and technology-based
training courseware for corporate, educational and governmental organizations.
ITC courseware uses the power of full-motion video, audio and text as a learning
tool on a personal computer ("PC") platform. These courses combine high quality
video and sound with the PC's capability for graphics and automatic
recordkeeping. Standard multimedia platforms for ITC products include both AVI
and MPEG CD-ROM digital video format. In addition, the Company offers certain
training products that can be delivered via a corporate intranet or the
Internet. The majority of the Company's multimedia products are sold under the
Company's registered trademark ACTIV(R). These products are focused in five
primary areas, as represented by the five ACTIV(R) Learning Libraries: the
"ACTIV(R) PC Skills Learning Library," the "ACTIV(R) Regulatory Compliance
Training Library," the "ACTIV(R) Basic Skills Learning Library," the "ACTIV(R)
Technical Skills Learning Library," and the "ACTIV(R) INVOLVE(R) Instrumentation
Learning Library." The Company also distributes products under the trademarks
Desktop Coach(TM) and AdminSTAR(TM). The Company distributes its IT training
products through a distribution agreement with NIIT (USA) Inc.
The Company operates in four reportable segments: U.S., Canada, Australia,
and the United Kingdom. The Company's segments are managed separately due to
differences in operating environments, customer base and technological capacity.
See footnote 12 to the consolidated financial statements - Segment Information.
Distribution of the Company's products in each of its segments is managed
through a number of channels. Primarily, the Company employs a direct salesforce
which is responsible for sales of the Company's training solutions throughout
the U.S., Canada, Australia and the United Kingdom, with the exception of those
territories which have been licensed to certain resellers as exclusive
territories for distribution of its products. In certain other U.S. and foreign
markets, the Company uses its Business Alliance Partners to distribute its
products.
All of the Company's internally developed or acquired training programs are
proprietary and are protected by copyright. The Company's libraries include
approximately 600 training programs, of which 350 were developed by the Company.
Certain of the Company's "Basic Skills" and "Technical Skills" products are
owned by limited partnerships in which the Company acts as a general partner; in
some cases, the Company also participates as a limited partner.
In addition to selling multimedia training courseware, the Company sells
related hardware products. The Company uses many IBM compatible hardware systems
for the delivery of its products. In addition to being an authorized IBM
Industry Remarketer and a Value Added Reseller, the Company utilizes the
products of Compaq, Hewlett Packard, Gateway 2000, DELL and other computer
hardware manufacturers. Such hardware is integrated with ITC's courseware to
provide a full-service solution to meet the training needs of ITC's customers.
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No customer accounted for more than 10% of consolidated net courseware
sales in 1998 and no material part of the business is dependent upon a single
customer or a few customers, the loss of any one or several of which would have
a materially adverse effect on the Company.
All materials used in the Company's products are available from numerous
sources of supply. The Company does not foresee any shortage of such materials.
Furthermore, ITC does not believe the loss of any single supplier would have a
material adverse effect on its results of operations or financial position.
Competition
The education and training market is highly fragmented, with no single
institution or company holding a dominant share. These companies include
providers of traditional instructor-led training, multimedia developers and
sellers, textbook publishers and others. Currently, there are several developers
of interactive multimedia training products, and management believes the number
of these companies will continue to increase. Some of these are larger and have
greater resources than ITC, while others offer only specialized training
materials.
The Company believes its expanded portfolio of products, increased delivery
capabilities, and increased distribution channels combined with its ability to
effectively manage and administer an education and training environment, has
positioned the Company to successfully compete in the growing education and
training market. This is a forward-looking statement. See Forward-looking
Statements and Risk Factors for Further Discussion.
Employees
At December 31, 1998, the Company and its subsidiaries employed a total of
143 people, all of whom are full-time. This represents an increase of 69
employees since December 31, 1997, due primarily to acquisitions that occurred
during 1998. The Company utilizes free-lance and temporary personnel who are
familiar with ITC's development and production process to support increased
personnel requirements that arise from time to time. The Company is not a party
to any collective bargaining agreements, and believes that relations with its
employees are good.
ITEM 2. DESCRIPTION OF PROPERTIES
All ITC properties are leased by the Company. The table below sets forth
certain information regarding these facilities as of December 31, 1998.
<TABLE>
<CAPTION>
Approximate
Location Square Footage
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<S> <C>
Herndon, VA(1)................................................................................. 26,225
Atlanta, GA.................................................................................... 3,405
Saugatuck, MI.................................................................................. 1,400
Halifax, Nova Scotia........................................................................... 19,356
Toronto, Ontario............................................................................... 1,800
Bedford, England............................................................................... 3,935
Melbourne, Australia........................................................................... 225
Sydney, Australia.............................................................................. 384
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</TABLE>
(1) Corporate headquarters/and support.
The Company believes its facilities are suitable, adequate and well
utilized. The Company's leased premises consist of commercial office space,
warehouse, and production.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property the subject of,
any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company has not submitted any matters to a vote of security holders
since the May 1998 Annual Meeting of Stockholders.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock is traded on the NASDAQ Stock Market, Inc.,
National Market System (NMS), under the symbol ITCC.
The following table states the high and low quotation information by
quarter for the Company's common stock based on actual trading, as reported by
NASDAQ/NMS.
<TABLE>
<CAPTION>
1997: High Low
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First Quarter................................................................$6.25 $4.00
Second Quarter............................................................... 6.00 4.00
Third Quarter................................................................ 5.63 4.56
Fourth Quarter............................................................... 5.25 3.63
1998:
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First Quarter................................................................ 5.30 3.63
Second Quarter............................................................... 8.25 4.75
Third Quarter................................................................ 7.50 2.50
Fourth Quarter............................................................... 4.63 2.75
</TABLE>
Holders
As of December 31, 1998, there were 1,008 holders of record of the
Company's common stock, the Company's only class of stock.
Dividends
Stockholders of the Company's common stock are entitled to receive ratably
such dividends as may be declared by the Board of Directors out of funds legally
available. There has been no declaration of dividends since 1984.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Revenues
During 1998, total revenues for ITC were $18,426,000 as compared to
$25,582,000 in 1997, representing a decrease of $7,156,000 or 28%. Courseware
revenues, which includes sales of off-the-shelf courseware, custom courseware
and consulting services, fees, royalties and videotape training products,
totaled $14,134,000, as compared to $18,720,000 in 1997, representing a decrease
of $4,586,000 or 24%. Revenues from the sales of hardware systems totaled
$4,293,000 in 1998 as compared to $6,862,000 in 1997, representing a decrease of
$2,569,000 or 37%.
The decrease in courseware revenues for 1998 as compared to 1997 was
primarily attributable to the inclusion of revenues generated by Anderson
Soft-Teach ("AST") during 1997. Revenues generated by AST
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during 1997 totaled $4,346,000. ITC sold AST during the fourth quarter of 1997.
The remaining decrease in courseware revenue is due to lower multimedia
courseware sales from the Company's principal markets.
The lower hardware revenues in 1998 as compared to 1997 were primarily due
to an award of a $5.8 million contract with the DeKalb County (Ga.) Board of
Education to supply in excess of 3,000 personal computers and laptops to the
school district during 1997.
Cost of Sales and Gross Margin
Cost of sales for 1998, which includes courseware and hardware costs,
totaled $11,133,000 resulting in a gross margin of $7,293,000 or 40% of total
revenues, as compared to cost of sales of $16,202,000 and gross margin of
$9,380,000 or 37% of total revenues in 1997. Excluding revenue and costs
associated with hardware sales, courseware gross margin in 1998 totaled
$6,956,000 or 49% as compared to $9,066,000 or 48% in 1997, a decrease of
$2,110,000 and an increase in gross margin percentage of 1%. The decrease in
gross margin is principally due to the 1998 courseware revenue shortfall.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $11,509,000 for 1998
as compared to $12,038,000 for 1997, representing a decrease of $529,000 or 4%.
Selling expenses consist primarily of salaries of sales personnel, travel,
advertising, marketing and promotional expenses. Selling expenses for 1998
totaled $6,299,000, as compared to $4,936,000 for 1997. Selling expenses related
to AST for 1997 were $1,670,000. The increase in selling expenses, net of AST
selling expenses, was $3,033,000 or 93% which reflects the increased investment
in the Company's direct sales force, the cost of expanding the Company's BAP
channels, and focused investment in developing new marketing programs during
1998.
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 1998 as
compared to 1997 were $5,210,000 and $7,102,000, respectively. General and
administrative expenses related to AST for 1997 were $1,348,000. The decrease in
general and administrative expenses, net of AST general and administrative
expenses, was $544,000 or 9% which is indicative of management's commitment to
tighter control of discretionary costs in response to the 1998 revenue
shortfall, and an overall shift from investment in infrastructure to sales and
marketing.
Gain on Sale of Subsidiary
On November 20, 1997 the Company sold all of the stock of its AST
subsidiary to an investor group for $4,000,000 in cash, a promissory note in the
amount of $950,000 and forgiveness of AST's intercompany debt to ITC. The
Company realized a pre-tax gain of approximately $732,000 for 1997, after
deducting the carrying value of its investment in AST and its costs of
divestiture from the proceeds realized on the sale.
ITC acquired AST in December of 1996 for approximately $5,800,000 in cash
and stock. At the end of 1996, ITC recorded a charge of $2,500,000 associated
with the purchase price, representing the value of acquired in-process research
and development. When taking into consideration both the acquisition in 1996 and
the sale in 1997, the Company incurred a loss on its investment in AST of
approximately $1,800,000.
Income Taxes
The Company recognized a net income tax benefit of $233,000 during 1998,
which was the result of a reduction in the Company's international tax liability
from 1997. The Company recorded no income tax benefit during 1997.
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Net Loss
During 1998, the Company experienced a loss before income taxes of
$4,026,000 and a net loss of $3,793,000 or $0.99 per share. This compares to a
loss before income taxes and a net loss of $1,433,000 in 1997. The higher
pre-tax loss in 1998 of $2,593,000 is the result of lower courseware sales and
the resulting shortfall in gross margin of $2,087,000, higher interest expense
of $294,000 and the exclusion of $732,000 of gain associated with the sale of
AST, all of which was partially offset by lower general and administrative
expenses of $544,000.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1998 was $1,799,000 as compared to
$7,344,000 at December 31, 1997, a decrease of $5,545,000 or 76%. The decrease
is primarily due to investments made using cash to acquire Turn-Key, certain
assets of iNEX, certain assets of Mentor, and cash used to repurchase a portion
of the Company's common stock. The total cash outlay for these transactions was
$3,304,000, net of cash acquired and acquired notes payable. The remaining
reduction in working capital was the result of a higher net loss for 1998 as
compared to 1997, and normal changes in working capital accounts.
Cash used for operating activities totaled $63,000 during 1998, as compared
to cash provided by operating activities of $2,017,000 in 1997, a decrease of
$2,080,000 or 103%. The decrease is principally due to the larger net loss
incurred in 1998, as compared to 1997.
Net cash used for investing activities during 1998 totaled $4,883,000 as
compared to net cash provided by investing activities of $715,000 in 1997. The
total decrease of $5,598,000 from 1997 is due to the aforementioned acquisitions
of Turn-Key, certain assets of iNEX, and certain assets of Mentor, partially
offset by lower overall capital expenditures of $854,000 and the exclusion of
the cash provided by the 1997 sale of AST of $3,149,000.
Net cash provided by financing activities totaled $327,000 in 1998 as
compared to $544,000 of net cash used for financing activities during 1997. The
total increase of $871,000 is principally due to net borrowings under the
Company's existing line of credit of $622,000 and proceeds received from the
exercise of common stock options totaling $224,000. The line of credit balance
at December 31, 1998 is $647,000 and permits the Company to borrow up to
$3,000,000 under certain conditions. The line of credit matures at June 30, 1999
and the Company has historically been able to renew the borrowing for an
additional one year term.
The Company experienced adverse results of operations during 1998
principally attributable to costs and diversion of management's time associated
with the Company's extensive restructuring efforts and three acquisitions
completed during the year. The Company believes that its existing cash, the
anticipated cash flows from 1999 operations and borrowings available on the
line of credit should provide sufficient resources to fund its activities in
1999. 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. Achievement of these objectives is
subject to various risk factors related to, among other thing: incremental
sales resulting from expansion of distribution capabilities; the Company's
ability to deploy its courseware over the Internet and corporate intranets;
successful integration of businesses acquired during 1998, and the Company's
ability to control costs in relation to future revenues. The Company
nevertheless believes that its sales and gross profit objectives are achievable
in light of recent acquisitions, the introduction of new products including
AdminSTAR 5.0 in 1999, and the refocusing of sales and marketing resources. If
the Company is unable to meet these objectives, it will consider alternative
sources of liquidity, such as public or private offerings of equity or debt
securities; expansion of existing or development of alternative sources of bank
financing; the curtailment of certain capital expenditures and discretionary
expenditures (such as travel, consulting and salaries); and various other
courses of action.
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 and has determined that there is no material impact on
revenue recognized in 1998 under these provisions.
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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. 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 $200,000 to $400,000, of
which $125,000 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.
9
<PAGE> 12
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
The Company experienced adverse results of operations during 1998
principally attributable to costs and diversion of management's time associated
with the Company's extensive restructuring efforts and three acquisitions
completed during the year. The Company believes that its existing cash, the
anticipated cash flows from 1999 operations and borrowings available on the line
of credit should provide sufficient resources to fund its activities in 1999.
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. Achievement of these objectives is subject
to various risk factors related to, among other things: incremental sales
resulting from expansion of distribution capabilities; the Company's ability to
deploy its courseware over the Internet and corporate intranets; successful
integration of businesses acquired during 1998, and the Company's ability to
control costs in relation to future revenues. The Company nevertheless believes
that its sales and gross profit objectives are achievable in light of recent
acquisitions, the introduction of new products including AdminSTAR 5.0 in 1999,
and the refocusing of sales and marketing resources. If the Company is unable to
meet these objectives, it will consider alternative sources of liquidity, such
as public or private offerings of equity or debt securities; expansion of
existing or development of alternative sources of bank financing; the
curtailment of certain capital expenditures and discretionary expenditures (such
as travel, consulting and salaries); and various other courses of action.
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, the introduction and
acceptance of new products, 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.
10
<PAGE> 13
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX PAGE
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Report of Independent Auditors............................................................... 12
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997................................................................... 13
Consolidated Balance Sheets as of December 31, 1998 and 1997................................. 14-15
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998 and 1997............................................................. 16
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997................................................................... 17
Notes to Consolidated Financial Statements................................................... 18-34
</TABLE>
11
<PAGE> 14
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ITC Learning Corporation
We have audited the accompanying consolidated balance sheets of ITC
Learning Corporation as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ITC Learning
Corporation at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Washington, D.C. Ernst & Young LLP
February 26, 1999
12
<PAGE> 15
ITC LEARNING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
Revenues, net:
<S> <C> <C>
Courseware...................................................... $ 14,133,634 $ 18,720,292
Hardware ....................................................... 4,292,517 6,861,861
------------- ----------------
Total revenues, net (note 3)................................ 18,426,151 25,582,153
Costs and expenses:
Courseware cost of sales........................................ 7,177,634 9,654,736
Hardware cost of sales.......................................... 3,955,167 6,547,324
Selling, general and administrative expenses.................... 11,509,268 12,038,439
Equity in earnings of affiliates................................ (208,031) (288,129)
------------- -------------
Total costs and expenses.................................... 22,434,038 27,952,370
Gain on sale of subsidiary (note 8).................................. -- 732,238
------------- -------------
Loss before interest and income tax benefit.......................... (4,007,887) (1,637,979)
Interest income...................................................... 280,045 208,771
Interest expense..................................................... (297,863) (4,120)
------------- -------------
Loss before income tax benefit....................................... (4,025,705) (1,433,328)
Income tax benefit (note 7).......................................... 232,663 --
------------- -------------
Net loss ............................................................ $ (3,793,042) $ (1,433,328)
============= =============
Net loss per common share, basic and diluted (note 1)................ $ (0.99) $ (0.37)
============= =============
Weighted average number of shares outstanding........................ 3,845,333 3,885,462
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 16
ITC LEARNING CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents....................................... $ 267,045 $ 4,885,672
Accounts receivable, net (notes 2, 4 and 5)..................... 5,992,902 6,167,592
Due from affiliates (note 3).................................... 117,023 33,092
Inventories, net of reserve of $0 and $199,809
at December 31, 1998 and 1997,
respectively (notes 4 and 5)................................ 588,971 357,374
Prepaid expenses................................................ 136,730 123,042
Income taxes receivable (note 7)................................ 279,747 175,206
Other current assets............................................ -- 11,912
------------- -------------
Total current assets........................................ 7,382,418 11,753,890
Long-term receivable (notes 2, 4 and 5).............................. -- 836,882
Note receivable (note 8)............................................. 753,420 922,940
Property and equipment (note 5):
Video and computer equipment.................................... 2,162,078 1,336,735
Furniture and fixtures.......................................... 206,313 125,259
Leasehold improvements.......................................... 35,092 21,313
------------- -------------
2,403,483 1,483,307
Less accumulated depreciation and amortization.................. (1,354,854) (802,989)
------------- -------------
Net property and equipment.................................. 1,048,629 680,318
Capitalized program development costs, net of accumulated
amortization of $3,666,097 and $1,847,481
at December 31, 1998 and 1997,
respectively.................................................... 5,393,182 3,947,086
Intangible assets, net of accumulated amortization of
$1,061,993 and $676,111 at December 31, 1998
and 1997, respectively (note 8)................................. 4,060,150 1,631,299
Other ............................................................... 8,966 12,340
------------- -------------
Total assets.................................................... $ 18,646,765 $ 19,784,755
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 17
ITC LEARNING CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
---- ----
Current liabilities:
<S> <C> <C>
Line of credit (note 4)......................................... $ 647,000 $ --
Current installments of long-term debt (note 5)................. 287,283 100,000
Accounts payable................................................ 1,973,004 740,353
Due to affiliates (note 3)...................................... 314,247 293,561
Accrued compensation and benefits............................... 281,234 1,281,691
Deferred revenues............................................... 420,005 422,787
Other accrued expenses.......................................... 1,650,980 1,236,012
Income taxes payable (note 7)................................... 10,161 335,102
------------- -------------
Total current liabilities................................... 5,583,914 4,409,506
Deferred lease obligations........................................... 25,511 60,296
Long-term debt (note 5).............................................. 1,439,216 400,000
------------- -------------
Total liabilities........................................... 7,048,641 4,869,802
Stockholders' equity (notes 5, 6, 8, and 10):
Common stock, $0.10 par value, 12,000,000 shares
authorized; 3,958,245 and 3,897,074 shares
issued and outstanding in 1998 and
1997, respectively.......................................... 395,826 389,708
Additional capital.............................................. 16,502,127 16,090,816
Note receivable from ESOP....................................... (439,677) (541,677)
Retained earnings (deficit)..................................... (4,849,625) (1,056,583)
Accumulated other comprehensive income (note 13)................ (10,527) 32,689
------------- -------------
Total stockholders' equity.................................. 11,598,124 14,914,953
------------- -------------
Total liabilities and stockholders' equity........................... $ 18,646,765 $ 19,784,755
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 18
ITC LEARNING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK NOTE RETAINED OTHER TOTAL
------------ ADDITIONAL RECEIVABLE EARNINGS COMPREHENSIVE STOCKHOLDERS'
SHARES PAR VALUE CAPITAL FROM ESOP (DEFICIT) INCOME (LOSS) EQUITY
------ --------- ------- --------- --------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997........... 3,896,924 $ 389,693 $16,067,366 $(143,677) $376,745 $ - $16,690,127
Note Payments................ - - 392 102,000 - - 102,392
Shares repurchased........... (103,322) (10,332) (467,532) - - - (477,864)
New shares issued:
Common stock issued
to employees........... 150 15 922 - - - 937
Common stock
contributed to ESOP.... 103,322 10,332 489,668 (500,000) - - -
Net loss..................... - - - - (1,433,328) - (1,433,328)
Cumulative effect of
foreign currency
translation adjustment.... - - - - - 32,689 32,689
-------
Comprehensive loss........... - - - - - - (1,400,639)
----------
-----------------------------------------------------------------------------------------------------
Balance at
December 31, 1997......... 3,897,074 389,708 16,090,816 (541,677) (1,056,583) 32,689 14,914,953
-----------------------------------------------------------------------------------------------------
Note payments................ - - 4,119 102,000 - - 106,119
Shares repurchased........... (132,165) (13,217) (522,631) - - - (535,848)
Stock options issued
below market.............. - - 211,250 - - - 211,250
New shares issued:
Common stock
issued through the
exercise of options.... 32,400 3,240 169,440 - - - 172,680
Common stock
issued in acquisitions. 146,364 14,636 499,669 - - - 514,305
Common stock issued
on warrant exercise.... 14,572 1,459 49,464 - - - 50,923
Net loss..................... - - - - (3,793,042) - (3,793,042)
Cumulative effect of
foreign currency
translation adjustment.... - - - - - (43,216) (43,216)
--------
Comprehensive loss........... - - - - - - (3,836,258)
----------
-----------------------------------------------------------------------------------------------------
Balance at
December 31, 1998......... 3,958,245 $ 395,826 $16,502,127 $(439,677) $(4,849,625) $ (10,527) $11,598,124
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 19
ITC LEARNING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................. $ (3,793,042) $ (1,433,328)
Reconciling items:
Provision for doubtful accounts................................. (144,439) (41,420)
Depreciation and amortization................................... 2,756,363 2,725,367
Compensation expense............................................ 211,250 --
Common stock issued to employees................................ 4,119 937
Foreign currency translation adjustment......................... (43,216) 32,689
Changes in operating assets and liabilities:
Decrease in accounts receivable............................. 1,182,512 1,282,961
Decrease (increase) in inventories.......................... (231,597) 349,450
Decrease (increase) in prepaid expenses..................... (13,688) 46,026
Increase in due from affiliates, net........................ (63,245) (38,560)
Decrease in other assets.................................... 184,806 40,857
Increase (decrease) in accounts payable..................... 1,189,587 (489,293)
Decrease in accrued expenses................................ (626,571) (316,490)
Decrease in deferred revenues............................... (2,782) (487,501)
Decrease in deferred lease obligations...................... (34,785) (23,875)
Increase (decrease) in income tax payable................... (431,482) 368,681
Net effect of acquired operating assets and liabilities..... (206,533) --
------------- -------------
Net cash provided by (used for) operating activities................. (62,743) 2,016,501
Cash flows from investing activities:
Capitalized program development costs........................... (927,650) (1,983,392)
Capital expenditures............................................ (651,383) (449,934)
Sale of subsidiary, net of cash relinquished.................... -- 3,148,676
Acquisitions, net of cash acquired and notes payable............ (3,304,154) --
------------- -------------
Net cash provided by (used for) investing activities................. (4,883,187) 715,350
Cash flows from financing activities:
Borrowings under line of credit................................. 7,544,935 --
Repayments under line of credit................................. (6,922,935) (515,000)
Proceeds from long-term debt.................................... -- 500,000
Principal payments on long term debt............................ (84,452) (130,745)
Repurchase of common stock...................................... (535,848) (500,000)
Issuance of common stock........................................ 223,603 --
Employee stock ownership plan note collections.................. 102,000 102,000
------------- -------------
Net cash provided by (used for) financing activities........ 327,303 (543,745)
------------- -------------
Net increase (decrease) in cash...................................... (4,618,627) 2,188,106
Cash and cash equivalents, beginning of year......................... 4,885,672 2,697,566
------------- -------------
Cash and cash equivalents, end of year............................... $ 267,045 $ 4,885,672
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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"). Significant intercompany accounts and transactions
have been eliminated in consolidation. The Consolidated Statement of Operations,
Statement of Stockholders' Equity and Statement of Cash Flows also reflect the
results of operations and subsequent sale of the Company's Anderson Soft-Teach
subsidiary ("AST"), which was acquired on December 31, 1996 and divested on
November 20, 1997.
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.
The Company experienced adverse results of operations during 1998
principally attributable to costs and diversion of management's time associated
with the Company's extensive restructuring efforts and three acquisitions
completed during the year. The Company believes that its existing cash, the
anticipated cash flows from 1999 operations and borrowings available on the line
of credit should provide sufficient resources to fund its activities in 1999.
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. Achievement of these objectives is subject
to various risk factors related to, among other things: incremental sales
resulting from expansion of distribution capabilities; the Company's ability to
deploy its courseware over the Internet and corporate intranets; successful
integration of businesses acquired during 1998, and the Company's ability to
control costs in relation to future revenues. The Company nevertheless believes
that its sales and gross profit objectives are achievable in light of recent
acquisitions, the introduction of new products including AdminSTAR 5.0 in 1999,
and the refocusing of sales and marketing resources. If the Company is unable to
meet these objectives, it will consider alternative sources of liquidity, such
as public or private offerings of equity or debt securities; expansion of
existing or development of alternative sources of bank financing; the
curtailment of certain capital expenditures and discretionary expenditures (such
as travel, consulting and salaries); and various other courses of action.
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, and has determined that there has been no material
impact on revenue recognized during 1998 under these provisions. In December
1998, the AICPA issued SOP 98-9, which extends the deferral date of
18
<PAGE> 21
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
Capitalized Program Development Costs
Certain costs of developing and producing off-the-shelf courseware have
been capitalized. Capitalized costs include direct labor, materials, product
masters, subcontractors, consultants, and applicable overhead. These capitalized
costs are amortized on a straight-line basis over the estimated useful lives of
the related programs which range from three to five years. The related
amortization expense is included in the cost of sales and amounts to
approximately $1,819,000 and $1,578,000 in 1998 and 1997, respectively.
Periodically, the Company assesses the net realizable value of program
development costs by reviewing past sales performances, current and planned
future marketing activities, specific sales promotions and strategic
distribution arrangements. Based on this assessment, the Company determines each
product's prospects for future sales, and, if necessary, adjusts asset values to
net realizable value.
Cash and Cash Equivalents
Cash and cash equivalents include cash and other highly liquid investments
having original maturities of less than three months.
Inventories
Inventories primarily consist of multimedia courseware and related computer
hardware, and are stated at the lower of cost or market. Cost is determined
using the average cost method.
Property and Equipment
Property, equipment and leasehold improvements are stated at cost.
Depreciation on property and equipment is computed on a straight-line basis over
estimated useful lives of three to five years. Leasehold improvements are
amortized on a straight-line basis over the shorter of the lease term or
estimated useful lives of
19
<PAGE> 22
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the related assets. Depreciation and leasehold amortization expense amounted to
approximately $552,000 and $759,000 in 1998 and 1997, respectively.
During 1997, the Company recorded an adjustment to remove the cost of
property and equipment which was fully depreciated. The result of the adjustment
was a reduction of approximately $2,844,000 in both cost and accumulated
depreciation.
Investments in Affiliates
Investments in affiliated joint ventures and limited partnerships are
accounted for using the equity method and, accordingly, the initial cost of the
investments are adjusted for the Company's proportionate share of joint venture
and partnership undistributed earnings or losses.
Income Taxes
The Company provides for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes. Deferred income taxes result primarily from
differences between financial statement and income tax treatment of program
development costs, revenue recognition and net operating loss carryforwards.
Net Loss Per Common Share
Basic earnings per common share is computed based upon the weighted average
number of common shares outstanding during the year. Diluted earnings per common
share is computed based on common shares outstanding plus the effect of dilutive
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 effect on weighted average shares outstanding of
securities that could potentially dilute basic earnings per share that were not
included in the computation of diluted earnings per share, because to do so
would have been antidilutive for the periods presented, were 56,127 and 4,789 of
stock options and warrants for 1998 and 1997, respectively.
Intangible Assets
Intangible assets include allocations of the purchase price of acquisitions
to workforce investments, leasehold premises, and goodwill. These assets are
being amortized using the straight-line method over estimated useful lives of
two to fifteen years. Amortization expense for 1998 and 1997 amounted to
approximately $386,000 and $389,000, respectively. As part of its ongoing
review, management takes into consideration any events and circumstances which
might indicate an impairment to the carrying amount of intangible assets.
Factors that management uses to evaluate continuing value include sales from
acquired product lines, employee turnover, and development of related customer
and distribution networks that were in place at the date of the acquisition.
20
<PAGE> 23
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
As a result of the sale of AST (see Note 8), the Company reduced net
intangible assets by $1,956,000, which represents the amount originally recorded
when AST was purchased, less $224,000 in amortization expense incurred in 1997.
Research and Development
Research and development costs consist of software-related expenditures
incurred during the course of planned research and investigation aimed at
developing new products or processes. The Company expenses all research and
development costs as they are incurred. Research and development costs of
$548,748 and $764,000 were incurred during 1998 and 1997, respectively, and are
included in selling, general and administrative expenses.
Foreign Currency Translation
The Company owns international subsidiaries in Canada, the United Kingdom
and Australia. Each of these subsidiaries perform sales and marketing activities
for ITC's portfolio of products. The Canadian subsidiary is also involved in
product development activities. Under Statement of Financial Accounting
Standards No. 52, Foreign Currency Translation, the subsidiaries' financial
statements are translated from their local currencies using the corresponding
foreign currency exchange rate with the resulting difference recorded as a
component of consolidated stockholders' equity. Translation gains and losses
incurred during 1998 were not material. The Company believes its exposure to
foreign currency risk is not material.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options rather than the
alternative fair value accounting provided for under SFAS 123, "Accounting for
Stock Based Compensation." Under APB 25, because the exercise price of the
Company's employee stock options generally equals the market price of the
underlying stock on the date of grant, no compensation cost is recognized.
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.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities". The Company
expects to adopt the new Statement effective January 1, 2000. The Company does
not anticipate that the adoption of this Statement will have a significant
effect on its results of operations or financial position.
21
<PAGE> 24
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective December 31, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("Statement 131"). Statement 131 superseded FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of Statement 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information.
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income". Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholder's
equity. Statement 130 requires foreign currency translation adjustments, which
prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of Statement 130.
NOTE 2 - ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
Accounts receivable include the following at December 31:
1998 1997
---- ----
<S> <C> <C>
Trade accounts receivable.................................... $ 6,014,595 $ 5,412,822
Current portion of long-term receivable, net................. -- 909,575
Unbilled contract receivables................................ 37,728 98,162
Less allowance for doubtful accounts......................... (89,421) (254,728)
------------ ------------
Trade accounts receivable, net........................... 5,962,902 6,165,831
Other receivables............................................ 30,000 1,761
------------ ------------
$ 5,992,902 $ 6,167,592
============ ============
</TABLE>
During the second quarter of 1996, the Company entered into a contract with
the DeKalb County (GA) Board of Education ("DeKalb") for the sale of a
district-wide multicopy courseware license, hardware and certain future
services. The total contract amount of $5,060,000 was payable in four
installments, $1,535,000 upon contract execution, and the remaining $3,525,000
in three equal annual installments beginning in June 1997. The 1997 and 1998
installments were received in accordance with the provisions of the contract and
the effect of the payments are reflected in the financial statements. The final
payment of $1,175,000 due in June 1999 was discounted to $1,000,000 and
collected on December 22, 1998. Interest expense of $175,000 was recognized in
1998 as a result of the transaction.
NOTE 3 - INVESTMENTS IN AND DUE TO AFFILIATES
The Company is a participant in five separate limited partnerships with
Industrial Training Partners, Ltd. ("the ITP partnerships") and a joint venture
with DynCorp. In all of the ITP partnerships, the Company is a 5% general
partner and in certain partnerships the Company has acquired a limited
partnership interest as well. In the joint venture with DynCorp, the Company
has a 50% ownership interest. The ITP partnerships and the
22
<PAGE> 25
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 3 - INVESTMENTS IN AND DUE TO AFFILIATES (CONTINUED)
DynCorp joint venture were formed to develop and produce various series of
training programs. Under the contracts to market the programs for the
partnerships and joint venture, ITC receives 50%-70% of the sales price for the
costs of reproducing and marketing the training materials. In the case of the
joint venture agreement, the Company also receives an additional 25% for its
share of the joint venture profits. Sales of programs related to these
affiliates were approximately $1,359,000 and $1,729,000 in 1998 and 1997,
respectively.
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
December 31, 1998 and 1997, the balance outstanding on the line of credit was
$647,000 and $0, respectively. Interest on the facility is calculated at the
U.S. prime rate, which on December 31, 1998 was 7.75%, 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 and inventory. 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.
NOTE 5 - LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following: December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
8.5% note payable to the Company's principal lender due in $ 415,549 $ 500,000
monthly principal and interest installments of $10,258
through December 2002, collateralized by the assignment
of interest in the shares of the Company's common stock
held by the ESOP, accounts receivable, inventory and
property and equipment
8.0% note payable to Nova Scotia Business Development 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. ----------- -----------
1,726,499 500,000
Less amount classified as current (287,283) (100,000)
----------- -----------
$ 1,439,216 $ 400,000
=========== ===========
</TABLE>
23
<PAGE> 26
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 5 - LONG-TERM DEBT (CONTINUED)
Principal payments over the next five years and in aggregate are as follows:
<TABLE>
<S> <C> <C>
1999................................................................................. $ 287,283
2000................................................................................. 360,686
2001................................................................................. 369,462
2002................................................................................. 379,014
2003................................................................................. 261,400
Thereafter........................................................................... 68,654
-----------
$ 1,726,499
===========
</TABLE>
NOTE 6 - STOCK INCENTIVE PLANS AND STOCK WARRANTS
At December 31, 1998, the Company had outstanding options to purchase
common stock under three separate incentive stock option plans: the 1992
Directors' Incentive Stock Option Plan, the 1992 Key Employee Incentive Stock
Option Plan and the 1998 Incentive Stock Plan. Options granted under the 1992
Directors' Incentive Stock Option Plan may be qualified or non-qualified. From
time to time, the Company has granted other non-qualified options to certain
individuals. During 1998, the Company had outstanding 14,572 warrants to
purchase common stock. These warrants were exercised at $3.50 on July 30, 1998.
During the second quarter of 1998, the Company recorded a one-time non-cash
charge of $211,000 relating to a grant of incentive stock options to the
Company's President and Chief Executive Officer.
The Company, at December 31, 1998, had the following stock-based incentive
plans in effect, as outlined in the following table:
<TABLE>
<CAPTION>
Type of Total Shares Total Shares Plan
Description Options Available Remaining Expiration Date
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1992 Directors ISO Plan Qualified/Nonqualified 135,000 -- 4/30/02
1992 Key Employee ISO Plan Qualified/Nonqualified 315,000 75,834 4/30/02
1998 Incentive Stock Plan Qualified/Nonqualified 200,000 77,500 1/07/08
Non-Plan Options Nonqualified 60,000 -- N/A
--------- --------
710,000 153,334
========= ========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
These plans are intended to further the interests of the Company by
encouraging and providing for the acquisition of an equity interest in the
Company by non-employee directors, officers, and key employees through the grant
of awards with respect to shares of common stock. The option exercise price of
incentive stock options generally is not less than the fair market value of the
common stock on the date of grant.
24
<PAGE> 27
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 6 - STOCK INCENTIVE PLANS AND STOCK WARRANTS (CONTINUED)
The following table summarizes option activity for the years ended December
31, 1998 and 1997:
<TABLE>
<CAPTION>
Qualified Nonqualified Weighted
Incentive Stock Stock Average
Options Options Exercise Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1997......................... 147,000 111,000 $ 5.83
Options granted........................................ 115,000 108,000 5.06
Options cancelled...................................... (119,616) (76,384) 6.10
---------- ---------- ------
Outstanding at December 31, 1997....................... 142,384 142,616 5.14
Options granted........................................ 324,490 120,510 4.34
Options exercised...................................... (31,600) -- 5.46
Options cancelled...................................... (61,734) (80,000) 5.18
---------- ---------- ------
Outstanding at December 31, 1998....................... 373,540 183,126 $ 4.52
========== ========== ======
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Incentive stock options and nonqualified stock options exercisable were
57,298 and 25,999 at December 31, 1998 and 38,434 and 34,616 at December 31,
1997. The weighted average exercise price of exercisable incentive stock options
and nonqualified stock options was $4.74 and $4.88 at December 31, 1998 and
$5.49 and $6.50 at December 31, 1997.
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercisable
Outstanding Contractual Life Price Exercisable Price
---------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
Incentive Stock Options 373,540 4.6 years $4.59 57,298 $4.74
Nonqualified Stock Options 183,126 4.7 years $4.37 25,999 $4.88
---------- ----------
556,666 83,297
========== ==========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its plans.
Accordingly, no compensation expense has been recognized other than discussed
above for its stock option plans because stock options are generally granted
with an exercise price equal to the fair value of the stock on the grant date.
Had compensation cost for the Company's stock option plans been determined based
upon the fair value of the options at the grant date for awards under these
plans consistent with the methodology prescribed under Statement 123, the
Company's 1998 net income and earnings per share would not have been materially
affected. The fair value of the options granted was determined using the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0%, volatility of 88%, risk-free interest rate of 4.525% and an
expected life of five years.
25
<PAGE> 28
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 7 - INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Current:
<S> <C> <C>
Federal ................................................ $ -- $ --
State ................................................ -- --
Foreign ................................................ (232,663) 335,000
-------------- --------------
(232,663) 335,000
Deferred:
Federal ................................................ $ -- $ (193,000)
State ................................................ -- (142,000)
-------------- --------------
-- (335,000)
-------------- --------------
$ (232,663) $ --
============== ==============
</TABLE>
The difference between income tax expense (benefit) and the amount
determined by applying the federal statutory rate is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Federal statutory rate.......................................... $ (1,368,740) $ (487,000)
State income taxes, net of federal benefit...................... (161,000) (59,000)
Amortization of intangibles..................................... 84,440 63,000
Alternative Minimum Tax credit, NOL limitation
and foreign taxes............................................... 1,131,837 471,000
Tax effect of incentive stock options........................... 63,300 --
Other........................................................... 17,500 12,000
-------------- --------------
$ (232,663) $ --
============== ==============
</TABLE>
The following temporary differences give rise to the provision for deferred
taxes (benefit) at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Amortization of goodwill........................................ $ (22,800) $ --
Deferred lease obligation....................................... 13,300 --
Capitalized program development costs........................... (294,425) 241,000
Deferred revenues and accruals.................................. 190,000 279,000
Allowance for doubtful accounts................................. 60,000 5,000
Inventory reserves.............................................. 76,000 (49,000)
Net operating loss/capital loss and tax credit carryforwards, net (302,900) (549,000)
Accrued compensation............................................ 280,825 (259,000)
Other........................................................... -- (3,000)
-------------- --------------
$ -- $ (335,000)
============== ==============
</TABLE>
26
<PAGE> 29
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 7 - INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
are presented below.
<TABLE>
<CAPTION>
1998 1997
---- ----
Deferred tax assets:
<S> <C> <C>
Deferred revenues and accruals.................................. $ 114,000 $ 304,000
Allowance for doubtful accounts ................................ 36,000 96,000
Inventory reserves.............................................. -- 76,000
Accrued compensation ........................................... 56,175 337,000
Net operating and capital loss carryforwards.................... 3,684,600 2,450,000
Deferred lease obligation....................................... 9,700 23,000
Difference in depreciation...................................... 97,000 97,000
Amortization of goodwill........................................ 22,800 --
-------------- --------------
Total deferred tax assets.................................... 4,020,275 3,383,000
Less valuation allowance........................................ (2,848,700) (1,917,000)
-------------- --------------
Net deferred tax assets...................................... 1,171,575 1,466,000
-------------- --------------
Deferred tax liabilities:
Capitalized product development costs........................... (1,171,575) (1,466,000)
-------------- --------------
Total gross deferred tax liabilities......................... (1,171,575) (1,466,000)
-------------- --------------
Net deferred tax assets......................................... $ -- $ --
============== ==============
</TABLE>
At December 31, 1998, the Company had $5,800,000 in net operating loss
carryforwards available for income tax purposes of which $1,700,000 expire in
2012 and $4,100,000 expire in 2018. The Company also has a capital loss
carryforward available for income tax purposes in the amount of $2,506,000 that
expires in 2002. As there is no assurance of future earnings, a valuation
allowance reducing the amount of net deferred tax assets to equal deferred tax
liabilities has been recorded.
As a result of an acquisition, the Company has available approximately
$1,125,000 of additional net operating loss carryforwards that expire at varying
dates through 2007. Pursuant to Section 382 of the Internal Revenue Code, the
utilization of the net operating loss is limited to approximately $245,000 per
year. Due to the limitation on uses and other uncertainties relating to the
utilization of the remaining tax benefit of these deductions, a valuation
allowance has been recorded to substantially offset the net deferred tax asset
related to the acquisition. Similarly, the Company has fully reserved the
benefit of the tax loss carryforwards of Turn-Key and ITC Canada in the amounts
of $30,000 and $44,000, respectively.
The Company paid federal and state income taxes of $0 and $14,000 in 1998
and 1997 respectively. The Company also received refunds of federal and state
income taxes of approximately $23,000 and $577,000 in 1998 and 1997,
respectively.
27
<PAGE> 30
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 8 - ACQUISITIONS AND DIVESTITURES
On January 30, 1998, the Company invested $1,000,000 in the stock of Mentor
Networks Inc. ("Mentor"). For its investment, ITC acquired 8% of the outstanding
stock of Mentor with an option to acquire an additional 12%. The Company had
previously acquired the rights to distribute Mentor's products exclusively in
the United States. During the second quarter of 1998, ITC restructured the terms
of its distribution agreement with Mentor. Certain terms of the agreement were
revised, including the revenue sharing arrangement and extension of the
agreement through June of 2001.
On September 25, 1998, ITC, through its wholly-owned subsidiary, ITC Canada
Limited, acquired certain assets of Mentor and its wholly-owned subsidiary, High
Performance Group (Canada) Inc. ("HPG"). The assets included furniture, fixtures
and computer equipment, software products developed or owned by Mentor and HPG,
assignment of the leased premises in Halifax, Nova Scotia, the assignment of
certain contractual commitments, and the assignment of all trade names,
copyrights, patents and other intellectual property of both Mentor and HPG. The
purchase price totaled $1,981,000 and consisted of a cash payment of $661,000
and a five year promissory note bearing 8% interest payable to the NSBDC in the
amount of $1,320,000. Additionally, the Company agreed to pay the NSBDC up to
$1,058,000 in certain future royalty payments based on the ongoing performance
of the Mentor assets. As a result of the acquisition and its earlier investment,
the Company recorded approximately $2,827,000 of intangible assets primarily
consisting of workforce investment, leasehold premises and capitalized program
development costs. The intangible assets will be amortized over a period of
three years. The amounts presented above represent the U.S. equivalent based on
the relevant exchange rates at the time of acquisition.
On March 25, 1998, the Company acquired Turn-Key Training Technologies,
Inc. ("Turn-Key"), a developer and distributor of performance-based
administrative software. Pursuant to the acquisition agreement, ITC purchased
all of the outstanding stock of Turn-Key for $700,000 in cash. Additionally, ITC
paid $600,000 and issued 100,000 shares of its common stock valued at $312,000
to Philip L. Camillo, Turn-Key's founder and president, in connection with a
long-term non-competition agreement. As a result of the acquisition, the Company
recorded intangible assets of approximately $1,795,000, consisting of the
non-competition agreement and goodwill. These assets will be amortized over
periods of seven years and ten years, respectively.
On June 18, 1998, the Company acquired certain assets of iNEX Corporation
("iNEX") for cash of $211,000 and shares of stock valued at $202,000. In
exchange for its investment, ITC acquired iNEX's technology-based delivery
platforms, intellectual property rights, content, certain other assets and ten
employees. As a result of the acquisition, the Company recorded goodwill of
$374,000. These assets will be amortized over a period of ten years.
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 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. One of the Company's former
Directors was paid a fee of $150,000 for services provided in connection with
the sale of AST. As a result of the sale, the Company recorded a gain of
$732,000. When taking into consideration both the costs incurred on the initial
acquisition in 1996 and the subsequent gain on sale of AST in 1997, the Company
incurred an overall loss of approximately $1,800,000.
28
<PAGE> 31
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 8 - ACQUISITIONS AND DIVESTITURES (CONTINUED)
Under the terms of the stock purchase agreement, ITC and AST entered into a
reciprocal agreement to sell each other's products over the remainder of 1997
and all of 1998. Royalties earned by AST for sales of their products under this
agreement will be applied to the principal value of the note. As of December 31,
1998 and 1997, the note's principal had been reduced by $140,000 and $27,000 for
such royalties. Under the terms of the note, AST will make quarterly interest
payments to ITC at an interest rate of 8% and will pay the remaining principal
balance in 2001.
The following table sets forth proforma results of operations of the
Company for 1998 and 1997, as if Mentor had been acquired January 1, 1997. The
other 1998 acquisitions were not material to require proforma disclosure.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net revenues.................................................... $ 19,188,517 $ 26,017,182
============== ==============
Net loss........................................................ (5,647,589) (5,953,490)
============== ==============
Net loss per common share....................................... $ (1.47) $ (1.53)
============== ==============
</TABLE>
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases substantially all of its facilities and its
transportation equipment under operating lease agreements. The majority of the
operating leases contain renewal options that can be exercised after the initial
lease term. Renewal options are generally for periods of one to three years. All
operating leases will expire over the next five years, and management expects
that leases will be renewed or replaced by other leases in the normal course of
business. There are no material restrictions imposed by the lease agreements.
Future minimum rental payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 1998 are as follows:
<TABLE>
<S> <C> <C>
1999............................................................................. $ 688,668
2000............................................................................. 819,965
2001............................................................................. 756,748
2002............................................................................. 379,558
2003............................................................................. 25,596
------------
$ 2,670,535
============
</TABLE>
Rent expense under these operating lease agreements was approximately
$671,000 and $910,000 for 1998 and 1997, respectively.
29
<PAGE> 32
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 10 - STOCKHOLDERS' EQUITY
The Company instituted an Employee Stock Ownership Plan (ESOP) and Trust
for the benefit of substantially all employees effective January 1, 1992. To
establish the plan, ITC entered into a loan agreement with a bank and borrowed
$637,500 for the purchase of 200,000 shares of ITC common stock from DynCorp.
ITC pledged this stock to the bank to collateralize the loan. The provisions of
the ESOP require that, on an annual basis, the greater of 33,334 shares or the
amount of shares equal to five percent of total compensation of eligible
employees be allocated to employee accounts. Each participant then receives
shares based on their relative annual compensation.
In December 1997, the Company's Board of Directors approved the repurchase
of 100,000 shares of the Company's stock through a private purchase transaction.
To repurchase the shares, the Company entered into a loan agreement for $500,000
in December 1997, pledging the repurchased stock to collateralize the loan.
These shares were used to replenish the Company's ESOP plan which was depleted
after the allocation of shares for 1997. In 1998, the Company purchased an
additional 132,000 shares under favorable market prices and conditions, to be
allocated to the Company's ESOP plan in the future.
The Company accounts for the ESOP in accordance with SOP 93-6, "Employers'
Accounting for Employee Stock Ownership Plans". This statement requires that
compensation expense be measured based on the fair value of shares committed to
be released to plan participants. Under the "grandfather" provision of SOP 93-6,
the Company did not apply the SOP to shares purchased prior to December 31,
1996.
For the year ended December 31, 1998, the Company recognized compensation
expense of approximately $102,000, based on fair market value when the shares
were allocated to employees and interest expense associated with the Company's
ESOP loan. For the year ended December 31, 1997, the Company recognized
compensation expense of approximately $102,000, based on the cost of shares
allocated for the period and interest expense associated with the Company's ESOP
loan. Contributions to the ESOP were approximately $135,000 in 1997, including
approximately $6,000 of interest. Contributions to the ESOP were approximately
$123,000 in 1998, including approximately $39,000 of interest. All
"grandfathered" shares held by the ESOP at December 31, 1998 and 1997 are
considered outstanding in earnings per share calculations. Unallocated shares of
83,322 and 103,322 at December 31, 1998 and 1997 are not considered outstanding
in earnings per share calculations. The fair value of the 83,322 unallocated
shares at December 31, 1998 was approximately $312,000.
NOTE 11 - EMPLOYEE 401(K) PLAN
On January 1, 1991, the Company established a 401(k) Plan for the benefit
of substantially all of its employees. Employees can contribute from 1% to 15%
of their salary to the Plan subject to statutory limitations. At the discretion
of the Board of Directors, the Company can elect to make a contribution to the
Plan. The Company did not make contributions to the 401(k) Plan in either 1998
or 1997.
30
<PAGE> 33
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 12 - SEGMENT INFORMATION
Factors management used to identify reportable segments
The Company's reportable segments are business units located in distinct
geographic regions. The reportable segments are managed separately due to
differences in operating environments, customer base and technological capacity.
Measurement of segment profit or loss and segment assets
The Company evaluates performance and allocates resources based on profit
or loss before taxes from operations of each segment. The accounting policies of
each reportable segment are the same as those described in the summary of
significant accounting policies. Intersegment sales and transfers are eliminated
during consolidation and for segment reporting purposes.
Description of the types of products and services from which each reportable
segment derives its revenues
The Company has four reportable segments: U.S., Canada, United Kingdom and
Australia. The Company is primarily engaged in developing, marketing and selling
computer-based training software applications. Revenues for each reportable
segment are derived from sales of ITC's product portfolio, custom implementation
services and hardware sales, all of which relate to successfully implementing
each customer's organizational training solution.
The following tables show revenues, profit or loss and assets by reportable
segment for the years ended December 31, 1998 and 1997 (amounts in thousands):
Year ended December 31, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
United United
States Canada Kingdom Australia Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers............... $13,011 $739 $3,224 $1,452 $18,426
Intersegment revenues................. 2,187 111 - - 2,298
Interest expense...................... 232 66 - - 298
Depreciation and amortization
expense.......................... 2,405 310 25 16 2,756
Segment loss
before taxes..................... (3,761) (136) (7) (122) (4,026)
Segment assets........................ 12,087 3,838 2,051 671 18,647
- ----------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 34
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 12 - SEGMENT INFORMATION (CONTINUED)
Year ended December 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
United United
States Canada Kingdom Australia Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers............... $21,282 $ - $2,858 $1,442 $25,582
Intersegment revenues................. 1,318 - - - 1,318
Interest expense...................... 4 - - - 4
Depreciation and amortization
expense.......................... 2,692 - 5 29 2,726
Segment loss
before taxes..................... (1,812) - 251 128 (1,433)
Segment assets........................ 17,341 - 1,734 710 19,785
- ------------------------------------------------------------------------------------------------------
</TABLE>
Product and Services Information
The following tables show revenues by product and service group for each
reportable segment for the years ended December 31, 1998 and 1997:
Year ended December 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
United United
Product Groups States Canada Kingdom Australia Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Software
PC Skills.......................... $3,319 $ 104 $ 2,527 $ 1,452 $ 7,402
Basic Skills....................... 308 - 4 - 312
Regulatory......................... 891 - 6 - 897
Technical.......................... 1,891 120 321 - 2,332
Instrumentation.................... 528 - - - 528
AdminSTAR.......................... 428 - - - 428
Soft Skills........................ 613 515 - - 1,128
Other.............................. 448 - 190 - 638
Hardware.............................. 4,185 - 108 - 4,293
Services.............................. 400 - 68 - 468
---------------------------------------------------------------
$13,011 $ 739 $ 3,224 $ 1,452 $18,426
===============================================================
- -------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 35
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 12 - SEGMENT INFORMATION (CONTINUED)
Year ended December 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
United United
Product Groups States Canada Kingdom Australia Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Software
PC Skills.......................... $ 7,759 - $ 2,030 $ 1,395 $11,184
Basic Skills....................... 351 - 4 - 355
Regulatory......................... 1,385 - 95 - 1,480
Technical.......................... 2,641 - 249 - 2,890
Instrumentation.................... 734 - 67 - 801
Other.............................. 717 - 327 41 1,085
Hardware.............................. 6,771 - 86 6 6,863
Services.............................. 924 - - - 924
---------------------------------------------------------------
$21,282 - $ 2,858 $ 1,442 $25,582
===============================================================
- ------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 13 - COMPREHENSIVE LOSS
The components of comprehensive loss, net of related tax, for 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Net loss..................................................... $ (3,793,042) $ (1,433,328)
Foreign currency translation adjustment...................... (43,216) 32,689
------------- -------------
Comprehensive net loss....................................... $ (3,836,258) $ (1,400,639)
============= =============
The components of accumulated other comprehensive income, net of related
tax, at December 31, 1998 and December 31, 1997 are as follows:
Cumulative foreign currency translation adjustment........... $ (10,527) $ 32,689
============= =============
</TABLE>
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Financial data for the interim periods of 1998 and 1997 were as follows
(amounts in thousands except per share amounts):
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues..................................... $ 2,835 $ 4,040 $ 4,054 $ 7,497
Net income (loss)................................ (753) (1,265) (1,896) 121
Earnings (loss) per share: Basic and diluted.... (0.19) (0.33) (0.48) 0.01
</TABLE>
33
<PAGE> 36
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues..................................... $ 4,722 $ 4,487 $ 7,089 $ 9,284
Net income (loss)................................ (456) (749) (243) 15
Earnings (loss) per share: Basic and diluted.... (0.12) (0.19) (0.06) --
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
34
<PAGE> 37
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following sets forth information as of December 31, 1998 concerning the
Company's executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Daniel R. Bannister....................68 Director
Anne J. Fletcher.......................36 Secretary
Peter J. Li............................60 Director
Christopher E. Mack....................33 Vice President, Treasurer and Chief Financial Officer
John D. Sanders........................60 Chairman of the Board of Directors
Harvey L. Shuster......................54 Vice President
Carl D. Stevens........................52 President, Chief Executive Officer and Director
Richard E. Thomas......................72 Director
</TABLE>
Daniel R. Bannister, a Director since 1988, is Chairman of the Board of
DynCorp, a leading technology services firm. Previously, he served as President
and Chief Executive Officer of DynCorp, from 1985 until 1997. Mr. Bannister
serves on the boards of several technology service companies. He is also
Chairman of the Board of the American Management Association, a director of the
American Arbitration Association and the George Mason University Foundation.
Anne J. Fletcher is Secretary of ITC. Ms. Fletcher is an attorney with the
law firm of Michaels, Wishner & Bonner, P.C. in Washington, D.C. Ms. Fletcher
served as in-house general counsel to ITC from 1994-1996. Prior to joining ITC,
she was engaged in the private practice of law for six years in Fairfax,
Virginia. Ms. Fletcher received her J.D. from George Mason University School of
Law and a B.A. from the State University of New York, College at Oswego.
Peter J. Li, a Director since July of 1998, is the Publisher and Chief
Executive Officer of the Peter Li Education Group, a leading education
publisher. Mr. Li currently serves on the Boards of Directors and committees of
several companies and associations in the education industry, including The
Education Press of America, Global Village Schools, National Catholic
Educational Exhibitors, The National School Supply, The Equipment Association,
Software Publishers Association and The School of Education at The University of
Dayton (OH). Mr. Li received a degree in Journalism from Duquesne University.
Christopher E. Mack, prior to being named Chief Financial Officer in
January 1998, served as the Company's Vice President of Finance and
Administration and Treasurer since April 1997. Mr. Mack served as the Company's
Chief Operating Officer from November 1996 to April 1997. Prior to being named
COO, Mr. Mack served as the Company's Controller from December 1993 to November
1996. Prior to joining ITC in December 1993, Mr. Mack served as Assistant
Controller of Bardon, Inc., an international construction materials firm. Mr.
Mack holds a B.S. in Accounting from Shepherd College and is a C.P.A.
35
<PAGE> 38
John D. Sanders, Ph.D., a director since 1997, is Chairman of the Board of
Directors and serves as a business consultant to emerging technology companies.
He was Chairman and Chief Executive Officer of TechNews, Inc., publishers of
Washington Technology, from 1988 to 1996, prior to its sale to The Washington
Post Company. Since 1968, he has been a Registered Representative of Wachtel &
Co., Inc, a Washington, DC based investment banking firm. He received a B.E.E.
from University of Louisville in 1961 and M.S. and Ph.D. degrees in
electrical engineering from Carnegie-Mellon University in 1962 and 1965
respectively. Dr. Sanders also serves as a Director of Comtex Scientific
Corporation, Hadron, Inc, and Sensys Technologies, Inc.
Harvey L. Shuster is Vice President of ITC. Mr. Shuster joined ITC in 1993
as part of ITC's acquisition of Comsell Training, Inc., where he was Chief
Operating Officer. Since joining ITC, Mr. Shuster has served in various
capacities from operations to sales. Mr. Shuster has previous experience as
director of the MicroComputer Consulting Group for Coopers and Lybrand in the
Southeast U.S. Additionally, he was a founding member of Peachtree Software,
the microcomputing accounting software package that is now owned by ADP. He
holds a B.S. in Accounting from Temple University, an MBA in Finance from
Drexel University, and is a C.P.A.
Carl D. Stevens, a director since June 1997, joined ITC in February 1997 as
Senior Vice President of Marketing and Strategic Business Development. He was
later appointed President and Chief Operating Officer in June 1997, and was
appointed Chief Executive Officer effective December 1998. Prior to joining ITC,
Mr. Stevens was Program Director for Public Sector for IBM responsible for the
sale of personal computers into higher education, K-12, federal, state and local
governments. During his 26 year career with IBM, he held numerous field and
headquarters marketing and management positions. He was Branch Manager for the
Southeastern U.S., managed IBM's New Manager School for experienced managers,
held various management positions involving IBM's Personal Computer Remarketer
Channels, and was the Business Alliance Executive for IBM's Education and
Training Division. Mr. Stevens received his education from Indiana University,
where he majored in Marketing and Business Education.
Richard E. Thomas, a Director since 1982, is semi-retired, having served as
President of COMSAT RSI from 1994 until 1997. Prior to that, he was Chairman of
the Board, President and Chief Executive Officer of Radiation Systems, Inc.
("RSI"), a communications systems manufacturer, from 1978 until 1994, at which
time RSI was merged into COMSAT Corporation. Mr. Thomas was originally employed
by RSI as Vice President of Manufacturing Operations. From 1954 until 1965, Mr.
Thomas was employed by Washington Aluminum of Baltimore, Maryland, leaving as
Vice President and General Manager of the Technical Products Division.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 concerning compensation of the
Company's officers and directors is incorporated herein by reference to the
Company's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders
which will be filed pursuant to Regulation 14A within 120 days after the end of
the Company's last fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item 11 concerning the stock ownership of
management and five percent beneficial owners is incorporated herein by
reference to the Company's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders which will be filed pursuant to Regulation 14A within
120 days after the end of the Company's last fiscal year.
36
<PAGE> 39
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 concerning certain relationships and
related transactions is incorporated herein by reference to the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders which
will be filed pursuant to Regulation 14A within 120 days after the end of the
Company's last fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-KSB:
A. Financial Statements for the years ending December 31, 1998, and
1997: See Part II, Item 7
B. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------------------------------------------------------------------------------------------
<S> <C>
2.1 Assignment of Rights Under Offer from ITC Learning Corporation
to ITC Canada Limited dated September 1, 1998, incorporated by
reference to the Company's Form 8-K filed October 13, 1998
with the Securities and Exchange Commission ("SEC") (Commission
File No. 0-13741).
2.2 Receiver's Bill of Sale from Grant Thornton Limited to ITC
Canada Limited dated September 16, 1998, incorporated by
reference to the Company's Form 8-K filed October 13, 1998
with the SEC (Commission File No. 0-13741).
2.3 Assignment of Lease from Grant Thornton Limited to ITC Canada
Limited dated September 16, 1998, incorporated by reference to
the Company's Form 8-K filed October 13, 1998 with the SEC
(Commission File No. 0-13741).
2.4 Assignments of Courseware from Grant Thornton Limited to ITC
Canada Limited dated September 16, 1998, incorporated by
reference to the Company's Form 8-K filed October 13, 1998
with the SEC (Commission File No. 0-13741).
2.5 Assignments of Intellectual Property Rights from Grant Thornton
Limited to ITC Canada Limited dated September 16, 1998,
incorporated by reference to the Company's Form 8-K filed
October 13, 1998 with the SEC (Commission File No.
0-13741).
2.6 Assignment of Trademarks from Grant Thornton Limited to ITC
Canada Limited dated September 23, 1998, incorporated by
reference to the Company's Form 8-K filed October 13, 1998
with the SEC (Commission File No. 0-13741).
2.7 Principal Agreement between ITC Canada Limited and Nova Scotia
Business Development Corporation dated September 16, 1998,
incorporated by reference to the Company's Form 8-K filed
October 13, 1998 with the SEC (Commission File No. 0-13741).
2.8 Promissory Note in the Amount of Cdn. $2,000,000 Executed by ITC
Canada Limited dated September 16, 1998, incorporated by
reference to the Company's Form 8-K filed October 13, 1998
with the SEC (Commission File No. 0-13741).
</TABLE>
37
<PAGE> 40
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------------------------------------
<S> <C>
2.9 Demand Debenture between ITC Canada Limited and Nova Scotia
Business Development Corporation dated September 18, 1998,
incorporated by reference to the Company's Form 8-K filed
October 13, 1998 with the SEC (Commission File No. 0-13741).
2.10 Debenture Pledge Agreement in the Amount of Cdn. $3,600,000
between ITC Canada Limited and Nova Scotia Business Development
Corporation dated September 18, 1998, incorporated by reference
to the Company's Form 8-K filed October 13, 1998 with the SEC
(Commission File No. 0-13741).
2.11 General Security Agreement between ITC Canada Limited and Nova
Scotia Business Development Corporation dated September 18,
1998, incorporated by reference to the Company's Form 8-K filed
October 13, 1998 with the SEC (Commission File No. 0-13741).
2.12 Guarantee of Obligation by ITC Learning Corporation dated
September 22, 1998, incorporated by reference to the Company's
Form 8-K filed October 13, 1998 with the SEC (Commission File
No. 0-13741).
2.13 Agreement between ITC Learning Corporation and Nova Scotia
Business Development Corporation dated September 22, 1998,
incorporated by reference to the Company's Form 8-K filed
October 13, 1998 with the SEC (Commission File No. 0-13741).
2.14 Royalty Agreement among ITC Canada Limited, ITC Learning
Corporation and Grant Thornton Limited dated September 18, 1998,
incorporated by reference to the Company's Form 8-K filed
October 13, 1998 with the SEC (Commission File No.
0-13741).
2.15 Inter-Lender Agreement among ITC Canada Limited, Nova Scotia
Business Development Corporation and Wachovia Bank, N.A. dated
September 23, 1998, incorporated by reference to the Company's
Form 8-K filed October 13, 1998 with the SEC (Commission File
No. 0-13741).
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
(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).
</TABLE>
38
<PAGE> 41
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------------------------------------
<S> <C>
10.1 Stock Purchase Agreement dated November 20, 1997 by and between
ITC Learning Corporation and Anderson Holdings, Inc.,
incorporated by reference to the Company's 8-K filed December 8,
1997 with the SEC (Commission File No. 0-13741).
10.2 1992 Director Incentive Stock Option Plan, as amended,
incorporated by reference to the Company's 10-KSB for the year
ended December 31, 1996 filed March 14, 1997 with the SEC
(Commission File No. 0-13741).
10.3 1992 Key Employee Incentive Stock Option Plan, as amended,
incorporated by reference to the Company's 10-KSB for the year
ended December 31, 1996 filed March 14, 1997 with the SEC
(Commission File No. 0-13741).
10.4 Amended and restated ITC Learning Corporation Employee Stock
Ownership Plan and Trust Agreement dated December 2, 1997 (filed
herewith).
10.5 1998 Incentive Stock Plan dated May 8, 1998, incorporated by
reference to the Company's Registration Statement on Form S-8
filed May 8, 1998 with the SEC (Commission File No. 0-13741).
10.6 Form of stock option agreement dated May 8, 1998, incorporated
by reference to the Company's Registration Statement on Form S-8
filed May 8, 1998 with the SEC (Commission File No. 0-13741).
10.7 Employment Agreements with Management
(a) Christopher E. Mack, incorporated by reference to the
Company's 10-KSB for the year ended December 31, 1996 filed
March 14, 1997 with the SEC (Commission File No. 0-13741).
(b) Carl D. Stevens, incorporated by reference to the
Company's10-QSB for the quarter ended March 31, 1997 filed
April 25, 1997 with the SEC (Commission File No. 0-13741).
(c) Philip L. Camillo, incorporated by reference to the
Company's 10-QSB for the quarter ended March 31, 1998 filed
April 30, 1998 with the SEC (Commission File No. 0-13741).
(d) Michael Morrison, incorporated by reference to the Company's
10-QSB for the quarter ended June 30, 1998 filed August 13,
1998 with the SEC (Commission File No. 0-13741).
10.8 Lease dated October 21, 1993 for commercial office space in
Herndon, VA, as amended, incorporated by reference to the
Company's Form 10-KSB for the fiscal year ended December 31,
1995 filed March 15, 1996 with the SEC (Commission File No.
0-13741).
10.9 Lease dated November 30, 1995 for commercial office space in
Atlanta, GA, incorporated by reference to the Company's Form
10-KSB for the fiscal year ended December 31, 1995 filed March
15, 1996 with the SEC (Commission File No.
0-13741).
</TABLE>
39
<PAGE> 42
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------------------------------------
<S> <C>
21.1 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of Ernst & Young LLP, independent auditors (filed herewith).
27.1 Financial Data Schedule (filed herewith).
</TABLE>
The Company will undertake to furnish, upon written request, copies of all
exhibits filed with this form 10-KSB, for a fee of $10.
C. Reports on Form 8-K:
On January 14, 1998, the Company filed an 8-K to report the appointment
of Carl D. Stevens as Chief Executive Officer in addition to his duties
as President of ITC, replacing J.H. ("Bill") Walton.
On April 3, 1998, the Company filed an 8-K to report the acquisition of
Turn-Key Training Technologies, Inc.
On June 24, 1998, the Company filed an 8-K to report the acquisition of
certain assets of iNEX Corporation.
On October 13, 1998, the Company filed an 8-K to report the acquisition
of certain assets of Mentor Networks, Inc. and its wholly-owned
subsidiary, High Performance Group, by the Company's wholly-owned
subsidiary ITC Canada Limited.
On December 4, 1998, the Company filed an 8-K/A to report the financial
statements and pro-forma results of Mentor Networks, Inc. and its
wholly-owned subsidiary High Performance Group, as part of an
acquisition originally reported on an 8-K filed on October 13, 1998.
40
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ITC LEARNING CORPORATION
(Registrant)
<TABLE>
<S> <C>
BY /s/Carl D. Stevens DATE March 24, 1999
---------------------------------------------- -------------------------
Carl D. Stevens, President,
Chief Executive Officer and Director
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
BY /s/Christopher E. Mack DATE March 24, 1999
---------------------------------------------- -------------------------
Christopher E. Mack, Vice President,
Treasurer, and Chief Financial Officer
BY /s/Matthew C. Sysak DATE March 24, 1999
---------------------------------------------- -------------------------
Matthew C. Sysak, Corporate Controller
BY /s/Daniel R. Bannister DATE March 24, 1999
---------------------------------------------- -------------------------
Daniel R. Bannister, Director
BY /s/Peter J. Li DATE March 24, 1999
---------------------------------------------- -------------------------
Peter J. Li, Director
BY /s/John D. Sanders DATE March 24, 1999
---------------------------------------------- -------------------------
John D. Sanders, Chairman of the
Board of Directors
BY /s/Richard E. Thomas DATE March 24, 1999
---------------------------------------------- -------------------------
Richard E. Thomas, Director
</TABLE>
<PAGE> 44
<TABLE>
<S> <C>
CORPORATE HEADQUARTERS INTERNATIONAL OFFICES
ITC Learning Corporation Halifax, Nova Scotia
13515 Dulles Technology Drive (902) 421-5100
Herndon, VA 20171-3413
(800) 638-3757 London, England
(703) 713-3335 44 1234 34-0880
FAX: (703) 713-0065
Web-site: http://www.itclearning.com Melbourne, Australia
(613)9593-9955
U. S. OFFICES
Atlanta, GA Sydney, Australia
(770) 984-9881 (612) 9438-2500
Baltimore, MD Toronto, Ontario
(301) 441-9155 (905) 886-1584
Charlotte, NC STOCK REGISTRAR AND TRANSFER AGENT
(704) 364-1223 American Securities Transfer & Trust, Inc.
938 Quail Street
Chicago, IL Suite 101
(815) 439-1121 Lakewood, CO 80215
Denver, CO STOCK LISTING
(303) 805-5947 The NASDAQ Stock Market, Inc.
National Market System
Grand Rapids, MI NASDAQ/NMS Trading Symbol: ITCC
(616) 857-7200
MARKET-MAKERS
Milwaukee, WI Koonce Securities, Inc.
(414) 893-3900 Ferris, Baker Watts, Incorporated
Moors & Cabot
New York, NY
(718) 465-0865 ANNUAL MEETING
The Annual Meeting of shareholders will be held on May
Omaha, NE 5, 1999 at 3:00 pm at the Corporate Offices located at
(401) 343-0792 13515 Dulles Technology Drive, Herndon, Virginia
20171.
Rochester, NY
(716) 377-3431 SHAREHOLDER INQUIRIES
Communications concerning transfer requirements, lost
San Diego, CA certificates, and changes in address should be
(619) 509-3607 directed to the Stock Registrar and Transfer Agent.
Other inquiries may be directed to Christopher E.
San Francisco, CA Mack, CFO.
(415) 345-8145
PRINCIPAL BANK
Tampa, FL Wachovia Bank, N.A.
(941) 274-0005 Charlotte, NC
Washington, DC GENERAL COUNSELS
703-713-3335 Kirkpatrick & Lockhart LLP
Washington, D.C.
Michaels, Wishner & Bonner, P.C.
Washington, D.C.
INDEPENDENT AUDITORS
Ernst & Young LLP
Washington, D.C.
</TABLE>
<PAGE> 1
EXHIBIT 10.4
FIRST AMENDED AND RESTATED
ITC LEARNING CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
TRUST AGREEMENT
DATED AS OF DECEMBER 2, 1997
<PAGE> 2
TABLE OF CONTENTS
A. Definitions.......................................................... 2
B. The Trust Assets..................................................... 2
C. Investment........................................................... 3
D. Trustee's Powers..................................................... 4
E. Voting Company Stock................................................. 6
F. Nominees............................................................. 6
G. Records.............................................................. 7
H. Reports.............................................................. 7
I. Distributions........................................................ 7
J. Signatures........................................................... 8
K. Expenses............................................................. 8
L. Liability............................................................ 9
M. Amendment and Termination............................................ 9
N. Irrevocability....................................................... 9
O. Resignation or Removal of Trustee.................................... 10
P. Acceptance........................................................... 11
<PAGE> 3
FIRST AMENDED AND RESTATED
ITC LEARNING CORPORATION
EMPLOYED STOCK OWNERSHIP PLAN TRUST AGREEMENT
THIS TRUST AGREEMENT (this "Agreement") is originally dated as of March
11, 1992, and is hereby amended and restated as of December 2, 1997, by and
between ITC Learning Corporation, a Maryland corporation (formerly known as
Industrial Training Corporation) (the "Company"), and Robert F. VanStry and
Barbara Gibson, comprising the Board of Trustees of the Trust defined below
(collectively the "Trustee" and each individually an "individual Trustee").
WITNESSETH
WHEREAS, the Company has adopted the ITC Learning Corporation Employee
Stock Ownership Plan (the "Plan"), which consists of a leveraged employee stock
ownership plan and a stock bonus plan, effective as of January 1, 1992; and
WHEREAS, the Company has adopted the Plan in order to facilitate the
acquisition of equity ownership in the Company by the employees of the Company
and to carry out the general and specific provisions set forth in Article I of
the Plan, all in compliance with the provisions of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and the Internal Revenue Code
of 1986, as amended (the "Code");
WHEREAS, the Company has appointed the individual Trustees to serve as
the Board of Trustees under the Plan, and the individual Trustees have agreed to
so serve;
<PAGE> 4
WHEREAS, Arthur Rosenberg and Albert P. Anderson have resigned their
positions as Trustees on the Board of Trustees under the Plan and the Company
has accepted their respective resignations;
WHEREAS, the Company has appointed Barbara Gibson to serve as a Trustee
on the Board of Trustees under the Plan and Barbara Gibson has agreed to so
serve;
WHEREAS, the Company has designated the Plan and this Trust as
constituting a plan and trust intended to qualify under sections 401(a) and
4975(e)(7) of the Code and to be exempt from income taxation under section
501(a) of the Code; and
WHEREAS, the Company desires to amend and restate this Agreement to
reflect the current composition of the Board of Trustees under the Plan.
NOW THEREFORE, the parties do hereby agree that the following shall
constitute the Trust Agreement:
A. DEFINITIONS. The definitions of certain words in the Plan shall
apply to this Agreement wherever applicable. Each gender includes the others,
and the singular includes the plural.
B. THE TRUST ASSETS. Employer Contributions shall be paid to the
Trustee from time to time in accordance with the Plan. All contributions to the
Trust and all investments thereof, together with all accumulations, accruals,
earnings and income with respect thereto, shall be held by the Trustee in trust
hereunder as the Trust Assets. The Trust Assets shall be used to repay a Loan
and shall be invested by the Trustee in Company Stock, as provided in the Plan.
-2-
<PAGE> 5
The Trustee shall not be responsible for the administration of the Plan,
maintaining any records of Participants' Accounts under the Plan, or the
computation of or collection of contributions, but shall hold, invest, reinvest,
manage, administer, and distribute the Trust Assets, as directed by the
Committee and as provided herein, for the exclusive benefit of Participants (and
their Beneficiaries).
C. INVESTMENT.
(1) The Trustee shall invest and reinvest the Trust Assets primarily
in Company Stock by applying Employer Contributions paid to the Trust in cash to
make payments or prepayments of principal and interest on a Loan or by otherwise
applying Employer Contributions to purchase Company Stock, in accordance with
the terms of the Plan and this Agreement. Except as provided in Paragraph I
below, the Trustee may dispose of Company Stock only if the Committee so
approves in writing. The Trustee may also, as directed by the Committee, place
Trust Assets in savings accounts and certificates of deposit, short-term
securities, stocks and bonds of corporations, annuity contracts, any kind of
investment company or fund (open-end or otherwise), a common trust fund
(including a common trust fund maintained by the Trustee, the terms of which are
hereby incorporated by reference) for the investment of qualified employee
benefit trusts or in any other kind of realty or personalty desirable for the
Trust, without regard to whether or not such investment is an authorized or
appropriate investment for trustees under any state laws applicable thereto.
(2) Any purchase of Company Stock using the proceeds of a Loan to the
Trust shall be effected by the Trustee without direction from the Board of
Directors or the Committee pursuant to the Trustee's determination, in the
exercise of its reasonable judgment after
-3-
<PAGE> 6
consultation with such advisors as it reasonably deems necessary, that such
purchase transaction is in the best interests of the Participants and
Beneficiaries and that the purchase transaction and the terms and conditions of
such Loan are in compliance with all applicable provisions of the Code and
ERISA. As directed by the Committee, the Trustee shall refinance any Loan used
to acquire Company Stock and, in connection with any such refinancing, shall
repay any such Loan.
(3) The Trustee shall hold Company Stock for the benefit of
Participants until otherwise directed by the Committee pursuant to the
provisions of the Plan. Notwithstanding the foregoing, the Trustee shall, as
directed by the Committee, apply, use or distribute dividends declared and paid
in cash with respect to Company Stock then held in the Trust, separately with
respect to (i) dividends on then allocated shares of Company Stock and (ii)
dividends on then unallocated shares of Company Stock, each at the time such
cash dividends are paid, to: (w) make payments and prepayments of principal and
interest on a Loan; or (x) acquire additional shares of Company Stock; or (y)
distribute such dividends in cash to Participants pro rata based on the
respective number of shares of Company Stock then allocated to each
Participant's Account; or (z) hold and invest such amounts under the terms of
the Plan and this Agreement. In the event that cash dividends are used to
acquire additional shares of Company Stock, such acquisition shall be made by
the Trustee to the extent and in the manner permitted under the Code and ERISA.
(4) The Trustee may in good faith rely without liability upon the
valuation of Company Stock as determined by the Company or by an Independent
Appraiser.
D. TRUSTEE'S POWERS. As directed by the Board of Directors or the
Committee, the Trustee shall have the authority and power to:
-4-
<PAGE> 7
(1) Sell, transfer, mortgage, pledge, lease, or otherwise dispose of,
or grant options with respect to any Trust Assets at public or private sale;
(2) Borrow funds (including from the Company or any stockholder of the
Company) to finance the acquisition of Company Stock, giving a note as Trustee
with such reasonable interest and security for the Loan as may be appropriate or
necessary; provided that (i) any such borrowing shall comply with the provisions
of Section 5.04 of the Plan, (ii) any collateral pledged by the Trustee shall be
limited to Company Stock acquired with the proceeds of such Loan and recourse
thereunder shall be limited to such Company Stock, and (iii) if permitted by
Treasury Regulation section 54.4975-7, all dividends, distributions, rights,
proceeds and other property at any time and from time to time received,
receivable or otherwise distributable in respect of, in exchange for, upon the
conversion of, or in substitution of such Company Stock and such collateral
shall be released from pledge as Loan principal is repaid;
(3) Vote any stocks (including Company Stock, as provided in Paragraph
E and in Article VIII of the Plan), bonds or other securities held in the Trust,
or otherwise consent to or request any action on the part of the issuer in
person or by proxy;
(4) Give general or specific proxies or powers of attorney with or
without powers of substitution;
(5) Participate in reorganizations, recapitalizations, consolidations,
mergers, and similar transactions with respect to Company Stock or any other
securities;
(6) Deposit such Company Stock or other securities in any voting
trust, or with any protective or like committee, or with a trustee or with
depositories designated thereby;
-5-
<PAGE> 8
(7) Exercise any option, subscription rights, put rights, and
conversion privileges;
(8) Sue, defend, compromise, arbitrate, or settle any suit or legal
proceeding to which the Trustee or the Plan is or is threatened to be made a
party or any claim due to the Trust Fund or on which the Trust Fund is liable;
(9) Contract or otherwise enter into transactions as Trustee with the
Company or any stockholder of the Company, for the purpose of acquiring or
selling Company Stock; and
(10) Perform all acts which the Trustee shall deem necessary or
appropriate and exercise any and all powers and authority of the Trustee under
this Agreement.
E. VOTING COMPANY STOCK. The Trustee shall vote and/or respond to a
tender or exchange offer with respect to shares of Company Stock held by the
Trustee as part of the Trust Assets in accordance with instructions received
from the Committee and with applicable provisions of the Plan. Without limiting
the generality of the foregoing, with respect to any matter submitted to the
stockholders of the Company, (i) the Trustee shall vote and/or tender shares
allocated to the Accounts of Participants in the manner instructed by such
Participants, and (ii) the Trustee shall vote and/or tender unallocated shares,
and allocated shares for which no instructions are received, in the same
proportion as it votes and/or tenders shares of Company Stock in respect of
which instructions had been received from Participants.
F. NOMINEES. The Trustee may register any securities or other
property held by it as Trust Assets hereunder in its own name or in the name of
its nominees with or without the addition of words indicating that such
securities are held in a fiduciary capacity, and may hold any
-6-
<PAGE> 9
securities in bearer form, but the books and records of the Trustee shall at all
times show that all such investments are part of the Trust.
G. RECORDS. The Trustee shall keep accurate and detailed accounts of
all investments, receipts and disbursements, and other transactions hereunder,
and all accounts, books, and records relating thereto shall be open to
inspection by any person designated by the Committee at all reasonable times.
The Trustee shall maintain such records, make such computations, and perform
such ministerial acts as the Committee may from time to time request.
H. REPORTS. Within a reasonable time after December 31, or following
the removal or resignation of any individual Trustee, and as of any other date
specified by the Committee, the Trustee shall file a report with the Committee.
This report shall show all purchases, sales, receipts, disbursements, and other
transactions effected by the Trustee during the year or period for which the
report is filed, and shall contain an exact description, the costs as shown on
the Trustee's books, and the fair market value as of the end of such period, of
every asset held in the Trust and the amount and nature of any debt obligation
owed by the Trust.
I. DISTRIBUTIONS. The Trustee shall make distributions from the Trust
as directed by the Committee, at such times and in such number of shares of
Company Stock, and such amounts of cash, if applicable, to the person entitled
thereto under the Plan. Any undistributed part of a Participant's Capital
Accumulation shall be retained in the Trust until the Committee directs its
distribution. Where distribution is directed in Company Stock, the Committee or
the Trustee shall cause the Company to issue an appropriate stock certificate or
certificates to the person entitled thereto, to be delivered to such person by
the Committee; provided that the Committee and the Trustee shall comply with any
applicable provisions of the
-7-
<PAGE> 10
Plan relating to the repurchase of such Company Stock by the Trust or by the
Company. In the event that all or a portion of a Participant's Capital
Accumulation is to be distributed in cash, it shall be paid by the Trustee
furnishing its check to the Committee for delivery to the Participant (or
Beneficiary). Shares of Company Stock distributed by the Trustee may include
such legend restrictions as the Company may reasonably require in order to
insure compliance with applicable federal or state securities laws.
J. SIGNATURES. All communications required hereunder from the Company
or the Committee to the Trustee shall be in writing signed by an officer of the
Company or a member of the Committee authorized to sign on its behalf. The
Committee shall authorize one or more individuals to sign on its respective
behalf all communications required hereunder. The Company shall at all times
keep the Trustee advised of the names and specimen signatures of all individuals
authorized to sign on behalf of the Company. The Trustee shall be fully
protected in relying on any such communication and shall not be required to
verify the accuracy or validity thereof unless it has reasonable grounds to
doubt the authenticity of any signature. If, after request, the Trustee does not
receive instructions from the Committee on any matter in which instructions are
required hereunder, the Trustee shall act or refrain from acting as it may
determine.
K. EXPENSES. The Trustee may employ suitable agents and counsel who
may be counsel for the Company. The reasonable expenses incurred by the Trustee
in the performance of its duties hereunder, and all other proper charges and
administrative expenses of the Plan and Trust shall be paid out of Trust Assets;
however, the Company may pay all or any portion of such expenses. An individual
Trustee shall not be entitled to compensation for services as Trustee hereunder.
-8-
<PAGE> 11
L. LIABILITY. The Trustee shall assume the responsibility and
liability for the prudence of investments under subparagraph C(3). Except as
provided in subparagraph C(3), the Trustee shall not be liable for the making,
retention, or sale of any investment or reinvestment made by it as herein
provided, nor for any loss to or diminution of the Trust Assets, nor for any
action it takes or refrains from taking in accordance with proper direction of
the Committee. The Company shall fully indemnify the Trustee and hold it
harmless from loss or liability, including reasonable legal fees, which the
Trustee sustains in discharging its duties and responsibilities under this
Agreement, unless such loss or liability results from the Trustee's willful
misconduct or gross negligence. Notwithstanding the foregoing, the
indemnification provided in this Paragraph shall be in addition to any rights of
indemnification which the Trustee may be entitled to under the provisions of the
Plan or otherwise. The Trustee shall not be required to pay interest on any part
of the Trust Assets which are held uninvested pursuant to the Committee's
direction.
M. AMENDMENT AND TERMINATION. The Company's Board of Directors shall
have the right at any time, by an instrument in writing, duly executed and
delivered to the Trustee, to modify, alter, or amend this Agreement, in whole or
in part, and/or to terminate the Plan and Trust, in accordance with the express
provisions of the Plan. In no event, however, shall the duties, powers, or
liabilities of the Trustee hereunder be changed without its prior written
consent.
N. IRREVOCABILITY. Subject to the provisions of Paragraph M above,
and Article XII of the Plan, this Trust is declared to be irrevocable and,
except as expressly permitted under the Plan, at no time shall any part of the
Trust Assets revert to any Employer or be used for or be diverted to purposes
other than for the exclusive benefit of Participants (and their
-9-
<PAGE> 12
Beneficiaries). However, the Company may, by notice in writing to the Trustee,
direct that all or part of the Trust Assets be transferred to a successor
trustee under a trust which is for the exclusive benefit of such Participants
(and their Beneficiaries) and which satisfies the requirements of section 401(a)
of the Code; and thereupon the Trust Assets, or any part thereof, subject to any
outstanding Loans and accrued interest attributable thereto, shall be paid over,
transferred, or assigned to said successor trustee, free from the Trust created
hereunder; provided, however, that no part of the Trust Assets may be used to
pay contributions of an Employer under any other plan maintained by it for the
benefit of its Employees.
O. RESIGNATION OR REMOVAL OF TRUSTEE.
(1) Any individual Trustee may resign at any time upon thirty (30)
days' written notice to the Company. Any individual Trustee may be removed at
any time by the Company upon thirty (30) days' written notice to that Trustee.
Upon the receipt of instructions or directions from the Committee with which an
individual Trustee is unable or unwilling to comply, an individual Trustee may
resign, upon notice in writing to the Company or the Committee given within a
reasonable time under the circumstances then prevailing, after the receipt of
such instructions or directions. Notwithstanding any other provisions hereof, in
the event that an individual Trustee resigns, that individual Trustee shall have
no liability to the Company, or any Participant (or Beneficiary), for failure to
comply with such instructions or directions.
(2) Upon resignation or removal of any individual Trustee, the Company
shall appoint a successor trustee or trustees. The successor trustee shall have
the same powers and duties as are conferred upon the Trustee hereunder. In the
event that the Trustee is replaced by an institutional Trustee, the Trustee
shall assign, transfer, and pay over to such successor trustee
-10-
<PAGE> 13
all the Trust Assets, together with such records or copies thereof as may be
necessary to the successor trustee.
P. ACCEPTANCE. The Trustee hereby accepts this Trust and agrees to
hold the existing Trust Assets, and all additions and accretions thereto,
subject to all the terms and conditions of this Agreement, which shall be
interpreted and construed under the laws of the Commonwealth of Virginia to the
extent that such laws are not superseded by the laws of the United States. In
the event any provision of this Agreement shall be held illegal or invalid for
any reason, the illegality or invalidity shall not affect the remaining
provisions of this Agreement, but shall be fully severable, and the Agreement
shall be construed and enforced as if the illegal or invalid provision had never
been inserted herein.
-11-
<PAGE> 14
IN WITNESS WHEREOF, the Company and the Board of Trustees have hereby agreed to
the terms of this Trust Agreement, executed the day and year first above
written.
ITC LEARNING CORPORATION
By:
----------------------------------------
Title:
----------------------------------------
BOARD OF TRUSTEES:
By: /s/ Robert F. VanStry
----------------------------------------
Robert F. VanStry, not in his individual
capacity but as Trustee
By: /s/ Barbara Gibson
----------------------------------------
Barbara Gibson, not in her individual
capacity but as Trustee
-12-
<PAGE> 1
EXHIBIT 21.1 - SUBSIDIARIES OF THE REGISTRANT
(a) Activ Training Limited
(b) ITC Australasia Pty. Ltd.
(c) Turn-Key Training Technologies, Inc.
(d) ITC Canada Limited
<PAGE> 1
EXHIBIT 23.1 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-18939) pertaining to the 1992 Key Employee Stock Option Plan and the
Registration Statement (Form S-8 No. 333-52281) pertaining to the 1998 Incentive
Stock Option Plan of our report dated February 26, 1999, with respect to the
consolidated financial statements of ITC Learning Corporation included in the
Annual Report (Form 10-KSB) for the year ended December 31, 1998.
Washington, D.C.
March 23, 1999 ERNST & YOUNG LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S 10-KSB AS FOR THE YEAR ENDED DDECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 267,045
<SECURITIES> 0
<RECEIVABLES> 6,082,323
<ALLOWANCES> (89,421)
<INVENTORY> 588,971
<CURRENT-ASSETS> 7,382,418
<PP&E> 2,403,483
<DEPRECIATION> (1,354,854)
<TOTAL-ASSETS> 18,646,765
<CURRENT-LIABILITIES> 5,583,914
<BONDS> 0
0
0
<COMMON> 395,826
<OTHER-SE> 11,202,298
<TOTAL-LIABILITY-AND-EQUITY> 18,646,765
<SALES> 18,426,151
<TOTAL-REVENUES> 18,426,151
<CGS> 11,132,801
<TOTAL-COSTS> 22,434,038
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (144,439)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,025,705)
<INCOME-TAX> 232,663
<INCOME-CONTINUING> (3,793,042)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,793,042)
<EPS-PRIMARY> (0.99)
<EPS-DILUTED> (0.99)
</TABLE>
