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Previous: AMERIQUEST TECHNOLOGIES INC, 10-Q, EX-27, 2000-08-14 |
Next: ITC LEARNING CORP, 10QSB, EX-27, 2000-08-14 |
UNITED STATES
(MARK ONE)
| [X] |
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
| For the quarterly period ended June 30, 2000 | ||
| [ ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF EXCHANGE ACT | |
| For the transition period from to | ||
| Commission File Number 0-13741 | ||
ITC LEARNING CORPORATION
|
Maryland (State or other jurisdiction of incorporation or organization) |
52-1078263 (IRS Employer Identification No.) |
|
|
13515 Dulles Technology Drive Herndon, Virginia 20171 (Address of principal executive offices) (703) 713-3335 (Issuer’s telephone number) |
||
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
As of June 30, 2000, 3,964,078 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
ITC LEARNING CORPORATION
FORM 10-QSB
INDEX
| Page | ||||||||||
| Part I | Financial Information. | |||||||||
| Item 1. | Financial Statements (Unaudited) | |||||||||
| Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2000 and 1999 | 1 | |||||||||
| Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 | 2-3 | |||||||||
| Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999 | 4 | |||||||||
| Notes to Condensed Consolidated Financial Statements | 5 | |||||||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition
and Results of Operations |
11 | ||||||||
| Part II | Other Information. | |||||||||
| Item 1. | Legal Proceedings | 16 | ||||||||
| Item 2. | Changes in Securities and Use of Proceeds | 16 | ||||||||
| Item 3. | Defaults Upon Senior Securities | 16 | ||||||||
| Item 4. | Submission of Matters to a Vote of Security Holders | 16 | ||||||||
| Item 5. | Other Information | 16 | ||||||||
| Item 6. | Exhibits and Reports on Form 8-K | 17 | ||||||||
PART I — FINANCIAL INFORMATION
ITEM 1. Financial Statements
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the | For the | ||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| 2000 | 1999 | 2000 | 1999 | ||||||||||||||
| Net revenues | $ | 1,507,618 | $ | 5,469,195 | $ | 3,330,003 | $ | 11,171,579 | |||||||||
| Cost of sales | 1,199,935 | 1,955,446 | 2,326,710 | 4,512,674 | |||||||||||||
| Gross margin | 307,683 | 3,513,749 | 1,003,293 | 6,658,905 | |||||||||||||
| Selling, general and administrative expense | 2,193,320 | 3,130,975 | 4,389,306 | 6,006,364 | |||||||||||||
| Equity in earnings of affiliates | (24,410 | ) | (47,160 | ) | (86,666 | ) | (112,307 | ) | |||||||||
| Income (loss) before interest and income taxes | (1,861,227 | ) | 429,934 | (3,299,347 | ) | 764,848 | |||||||||||
| Interest income | 4,600 | 41,462 | 8,150 | 46,967 | |||||||||||||
| Interest expense | (202,310 | ) | (97,334 | ) | (402,926 | ) | (160,906 | ) | |||||||||
| Income (loss) before income taxes | (2,058,937 | ) | 374,062 | (3,694,123 | ) | 650,909 | |||||||||||
| Income tax expense (benefit) | — | — | — | — | |||||||||||||
| Net income (loss) | $ | (2,058,937 | ) | $ | 374,062 | $ | (3,694,123 | ) | $ | 650,909 | |||||||
| Net income (loss) per common share: | |||||||||||||||||
| Basic and diluted | $ | (0.53 | ) | $ | 0.10 | $ | (0.94 | ) | $ | 0.17 | |||||||
See accompanying notes to condensed consolidated financial statements.
1
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
| June 30, | December 31, | |||||||||
| 2000 | 1999 | |||||||||
| (Unaudited) | ||||||||||
| Current assets: | ||||||||||
| Cash and cash equivalents | $ | 308,563 | $ | 535,178 | ||||||
| Accounts receivable, net (note 2) | 1,898,841 | 4,482,511 | ||||||||
| Due from affiliates | 91,388 | 175,533 | ||||||||
| Inventories, net of reserve of $22,500 at June 30, 2000 and December 31, 1999 | 176,340 | 338,900 | ||||||||
| Prepaid expenses | 152,257 | 153,724 | ||||||||
| Income taxes receivable | 69,246 | 70,258 | ||||||||
| Deferred financing costs, net | 47,273 | 65,000 | ||||||||
| Total current assets | 2,743,908 | 5,821,104 | ||||||||
| Note receivable (note 3) | 447,447 | 537,628 | ||||||||
| Property and equipment: | ||||||||||
| Video and computer equipment | 2,658,501 | 2,666,316 | ||||||||
| Furniture and fixtures | 210,786 | 210,994 | ||||||||
| Leasehold improvements | 61,146 | 61,340 | ||||||||
| 2,930,433 | 2,938,650 | |||||||||
| Less accumulated depreciation and amortization | (2,304,853 | ) | (2,020,237 | ) | ||||||
| Net property and equipment | 625,580 | 918,413 | ||||||||
| Capitalized program development costs, net of accumulated amortization of $7,583,544 and $6,282,102 at June 30, 2000 and December 31, 1999, respectively | 4,119,804 | 5,097,679 | ||||||||
| Intangible assets, net of accumulated amortization of $1,913,834 and $1,617,499 at June 30, 2000 and December 31, 1999, respectively | 3,208,309 | 3,504,645 | ||||||||
| Other | 10,351 | 10,927 | ||||||||
| Total assets | $ | 11,155,399 | $ | 15,890,396 | ||||||
See accompanying notes to condensed consolidated financial statements.
2
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
| June 30, | December 31, | |||||||||
| 2000 | 1999 | |||||||||
| (Unaudited) | ||||||||||
| Current liabilities: | ||||||||||
| Line of credit (note 4) | $ | — | $ | 663,838 | ||||||
| Current installments of long-term debt (note 5) | 2,240,153 | 277,160 | ||||||||
| Accounts payable | 1,947,648 | 2,193,676 | ||||||||
| Due to affiliates | 91,762 | 187,070 | ||||||||
| Accrued compensation and benefits | 224,792 | 167,218 | ||||||||
| Deferred revenues | 221,167 | 373,144 | ||||||||
| Other accrued expenses | 1,316,336 | 2,260,240 | ||||||||
| Income taxes payable | 4,569 | 6,128 | ||||||||
| Total current liabilities | 6,046,427 | 6,128,474 | ||||||||
| Deferred lease obligations | 18,718 | 12,119 | ||||||||
| Long-term debt (note 5) | 1,143,218 | 2,313,604 | ||||||||
| Total liabilities | 7,208,363 | 8,454,197 | ||||||||
| Stockholders’ equity: | ||||||||||
| Common stock, $0.10 par value, 12,000,000 shares authorized; 3,964,078 and 3,964,078 shares issued and outstanding at June 30, 2000 and December 31, 1999 | 396,408 | 396,408 | ||||||||
| Additional capital | 17,083,716 | 16,975,959 | ||||||||
| Note receivable from ESOP | (313,127 | ) | (359,377 | ) | ||||||
| Retained deficit | (13,257,832 | ) | (9,563,709 | ) | ||||||
| Accumulated other comprehensive gain (loss) (note 7) | 37,871 | (13,082 | ) | |||||||
| Total stockholders’ equity | 3,947,036 | 7,436,199 | ||||||||
| Total liabilities and stockholders’ equity | $ | 11,155,399 | $ | 15,890,396 | ||||||
See accompanying notes to condensed consolidated financial statements.
3
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months | ||||||||||
| Ended June 30, | ||||||||||
| 2000 | 1999 | |||||||||
| Cash flows from operating activities: | ||||||||||
| Net income (loss) | $ | (3,694,123 | ) | $ | 650,909 | |||||
| Reconciling items: | ||||||||||
| Provision for doubtful accounts | 165,000 | 200,000 | ||||||||
| Depreciation and amortization | 2,101,555 | 1,948,688 | ||||||||
| Foreign currency translation adjustment | 50,953 | 23,813 | ||||||||
| Changes in operating assets and liabilities: | ||||||||||
| Decrease (increase) in accounts receivable | 2,418,670 | (955,613 | ) | |||||||
| Decrease in notes receivable | 90,181 | — | ||||||||
| Decrease (increase) in inventories | 162,560 | (249,839 | ) | |||||||
| Decrease (increase) in prepaid expenses | 1,467 | (107,683 | ) | |||||||
| Decrease in income taxes receivable | 1,012 | 209,276 | ||||||||
| Increase in due from affiliates, net | (11,163 | ) | (204,812 | ) | ||||||
| Decrease in other assets | 576 | 7,659 | ||||||||
| Decrease in accounts payable | (246,028 | ) | (625,663 | ) | ||||||
| Decrease in accrued expenses | (878,114 | ) | (735,922 | ) | ||||||
| Increase (decrease) in deferred revenues | (151,977 | ) | 43,945 | |||||||
| Increase (decrease) in deferred lease obligations | 6,599 | (20,781 | ) | |||||||
| Increase (decrease) in income tax payable | (1,559 | ) | 30,204 | |||||||
| Net cash provided by operating activities | 15,609 | 214,181 | ||||||||
| Cash flows from investing activities: | ||||||||||
| Capitalized program development costs | (323,568 | ) | (1,238,713 | ) | ||||||
| Capital expenditures | — | (252,379 | ) | |||||||
| Net cash used for investing activities | (323,568 | ) | (1,491,092 | ) | ||||||
| Cash flows from financing activities: | ||||||||||
| Borrowings under line of credit | — | 6,861,000 | ||||||||
| Repayments under line of credit | (663,838 | ) | (5,459,000 | ) | ||||||
| Proceeds from issuance of long-term debt | 862,712 | — | ||||||||
| Principal payments on long-term debt | (163,780 | ) | (124,566 | ) | ||||||
| Employee stock ownership plan note collections | 46,250 | 46,250 | ||||||||
| Net cash provided by financing activities | 81,344 | 1,323,684 | ||||||||
| Net increase (decrease) in cash | (226,615 | ) | 46,773 | |||||||
| Cash and cash equivalents, beginning of period | 535,178 | 267,045 | ||||||||
| Cash and cash equivalents, end of period | $ | 308,563 | $ | 313,818 | ||||||
See accompanying notes to condensed consolidated financial statements.
4
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of ITC Learning Corporation (“ITC” or the “Company”) include the accounts of its wholly owned subsidiaries Activ Training, Ltd. (“Activ”), ITC Australasia Pty. Ltd. (“ITCA”), Turn-Key Training Technologies, Inc. (“Turn-Key”), ITC Canada Limited, and ComSkill Learning Centers, Inc. (“ComSkill”).
ITC is a worldwide provider of education and training software to professionals in business, education and government organizations. Incorporated under the laws of the state of Maryland in 1977 the Company develops, markets and delivers specific libraries of interactive multimedia computer-based training (“CBT”) courseware designed for CD-ROM, intranet and Internet delivery, thus enabling organizations to effectively and efficiently deliver training to improve individual and organizational performance. The Company operates in four reportable segments: U.S., Canada, Australia and the United Kingdom.
Significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the interim condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Certain prior year amounts have been reclassified to improve comparability to current year presentations. The interim condensed consolidated financial statements should be read in conjunction with the Company’s December 31, 1999 audited financial statements included with the Company’s filing on Form 10-KSB. The interim operating results are not necessarily indicative of the operating results for the full fiscal year.
The Company’s financial statements have been presented on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. The Company experienced a net loss in the six months ended June 30, 2000, and the years ended 1999 and 1998. Although the Company expects operating results to improve, there can be no assurances that the Company will not experience adverse results of operation in the future. The Company believes that its existing cash, anticipated cash flows from 2000 operations, proceeds from sale of non-core Company assets, and planned capital fund raising activities should provide sufficient resources to fund its activities in 2000. However, the timing of aforementioned capital infusion is critical, as the Company is currently receiving pressure from some of its larger suppliers. Anticipated cash flows from 2000 operations are largely dependent upon the Company’s ability to achieve its sales and gross profit objectives for its currently existing products and new products to be launched in 2000. 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; the Company’s ability to control costs in relation to future revenues, the acceptance of the Company’s new CBT courseware management system and the Company’s ability to raise capital. If the Company is unable to meet these objectives, it will consider 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, including the possible sale of the Company. These are forward-looking statements. See Forward-Looking Statements and Risk Factors for Further Discussion.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
June 30, 2000
(Unaudited)
Revenues and Costs
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. 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.
Net Income (Loss) Per Common Share
Basic earnings per common share is computed based on the weighted average number of common shares outstanding during the year. Diluted earnings per common share is computed based on the weighted average number of common shares outstanding plus the effect of stock options and other potentially dilutive common stock equivalents. The dilutive effect of stock options and other potentially dilutive common stock equivalents is determined using the treasury stock method based on the Company’s average stock price.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
June 30, 2000
(Unaudited)
The details of the earnings per share calculation for the three and six months ended June 30, 2000 and 1999 follow:
| Income | Per Share | |||||||||||||
| (Loss) | Shares | Amount | ||||||||||||
| Three months ended June 30, 2000 | ||||||||||||||
| Loss per share of common stock – basic | $ | (2,058,937 | ) | 3,910,756 | $ | (0.53 | ) | |||||||
| Dilutive securities: | ||||||||||||||
| Stock options | — | — | — | |||||||||||
| Loss per share of common stock – diluted | $ | (2,058,937 | ) | 3,910,756 | $ | (0.53 | ) | |||||||
| Three months ended June 30, 1999 | ||||||||||||||
| Earnings per share of common stock – basic | $ | 374,062 | 3,879,923 | $ | 0.10 | |||||||||
| Dilutive securities: | ||||||||||||||
| Stock options | — | 48,982 | — | |||||||||||
| Earnings per share of common stock – diluted | $ | 374,062 | 3,928,905 | $ | 0.10 | |||||||||
| Income | Per Share | |||||||||||||
| (Loss) | Shares | Amount | ||||||||||||
| Six months ended June 30, 2000 | ||||||||||||||
| Loss per share of common stock – basic | $ | (3,694,123 | ) | 3,910,756 | $ | (0.94 | ) | |||||||
| Dilutive securities: | ||||||||||||||
| Stock options | — | — | — | |||||||||||
| Loss per share of common stock – diluted | $ | (3,694,123 | ) | 3,910,756 | $ | (0.94 | ) | |||||||
| Six months ended June 30, 1999 | ||||||||||||||
| Earnings per share of common stock – basic | $ | 650,909 | 3,884,923 | $ | 0.17 | |||||||||
| Dilutive securities: | ||||||||||||||
| Stock options | — | 49,014 | — | |||||||||||
| Earnings per share of common stock – diluted | $ | 650,909 | 3,933,937 | $ | 0.17 | |||||||||
NOTE 2 — ACCOUNTS RECEIVABLE
Accounts receivable include the following:
| June 30, | December 31, | ||||||||
| 2000 | 1999 | ||||||||
| Trade accounts receivable | $ | 2,551,970 | $ | 4,717,097 | |||||
| Unbilled contract receivables | — | 200,000 | |||||||
| Less allowance for doubtful accounts | (667,644 | ) | (502,644 | ) | |||||
| Trade accounts receivable, net | 1,884,326 | 4,414,453 | |||||||
| Other receivables | 14,515 | 68,058 | |||||||
| $ | 1,898,841 | $ | 4,482,511 | ||||||
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
June 30, 2000
(Unaudited)
NOTE 3 — NOTE RECEIVABLE
On November 20, 1997, the Company entered into a stock purchase agreement with Anderson Holdings Inc., to sell all of the Company’s stock in its wholly owned subsidiary Anderson Soft-Teach (“AST”). Pursuant to the transaction, ITC accepted an 8% promissory note in the amount of $950,000. Under the terms of the note, interest payments are due quarterly, with the remaining principal balance due in 2001.
Under the terms of the stock purchase agreement, ITC and AST entered into a reciprocal agreement to sell each other’s products. Royalties earned by AST for sales of their products under this agreement will be applied to the principal value of the note.
NOTE 4 — LINE OF CREDIT
On January 21, 2000, the Company satisfied its outstanding debt, and all associated fees and expenses under its line of credit agreement. The Company is currently operating without a short-term credit facility.
NOTE 5 — LONG-TERM DEBT
Long-term debt at June 30, 2000 and December 31, 1999 consists of the following:
| June 30, | December 31, | |||||||
| 2000 | 1999 | |||||||
| Non-related party debt: | ||||||||
| 8.0% senior note due 2003 | $ | 1,014,151 | $ | 1,177,930 | ||||
| 5.5% note due 2001, net of unamortized discount of $148,485 | 851,515 | 795,834 | ||||||
| 9.5% note due 2001, net of unamortized discount of $392,545 | 807,455 | 617,000 | ||||||
| Subtotal – non-related party debt | 2,673,121 | 2,590,764 | ||||||
| Related party debt: | ||||||||
| 7.0% notes due 2002, net of unamortized discount of $62,885 | 399,507 | — | ||||||
| 8.0% notes due 2000, net of unamortized discount of $14,575 | 310,743 | — | ||||||
| Subtotal – related party debt | 710,250 | — | ||||||
| Total debt | 3,383,371 | 2,590,764 | ||||||
| Less current maturities | (2,240,153 | ) | (277,160 | ) | ||||
| Long-term debt, net | $ | 1,143,218 | $ | 2,313,604 | ||||
The 8.0% note payable is due in monthly interest installments and quarterly principal installments, and matures in June 2003. The note has a subordinated interest position to the Company’s principal lender, in the receivables and inventory of ITC Canada Limited. Additionally, the note carries a security interest in the fixed assets and intellectual property of ITC Canada Limited, which ranks pari passu with the Company’s principal lender.
The 5.5% convertible subordinated note payable is due on April 2, 2001. The note is secured by the assets of the Company and is subordinated to existing and future indebtedness of the Company. Interest and principal are due in full at maturity. The note is convertible into shares of common stock of the Company, up to the maturity date, at a price of $2.00 per share. The note was issued with warrants which grant the holders the right to acquire 291,500 shares of the Company’s common stock at a per share price of $2.00. The warrants
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
June 30, 2000
(Unaudited)
expire on April 2, 2001. The warrants were determined to have a value of $245,000, which was recorded as additional capital. The resulting debt discount is being amortized over the holding period of the note.
The 9.5% convertible subordinated note payable is due on April 2, 2001. The note is secured by the assets of the Company and is subordinated to existing and future indebtedness of the Company. Interest and principal are due in full at maturity. The note may be converted into shares of common stock of the Company at any time up to maturity date, at a price of $1.75 per share. The note was issued with warrants, which grant the holders the right to acquire 349,800 shares of the Company’s common stock at a price of $1.75 per share. The warrants expire on April 1, 2002. The warrants were determined to have a value of $508,000, which was recorded as additional capital. The resulting debt discount is being amortized over the holding period of the note.
During the first quarter of 2000, the Company issued 7.0% convertible subordinated notes payable to certain Officers and Directors of the Company, and various other related parties, in the amount of $462,392, due on June 30, 2002. Interest is payable semi-annually and principal is due in full at maturity. The notes may be converted into shares of common stock of the Company at any time up to maturity date, at a price of $2.75 per share. The notes were issued with warrants that grant the holders the right to acquire 46,239 shares of the Company’s common stock, at a price of $2.75 per share. The warrants expire on June 30, 2001. The warrants were determined to have a value of $78,607, which was recorded as additional capital. The resulting debt discount is being amortized over the holding period of the notes.
On January 20, 2000 the Company issued 8.0% notes payable to certain Officers and Directors of the Company, and various other related parties, in the amount of $325,318, due upon the Company closing a line of credit of at least $1,000,000. As of June 30, 2000, the Company has not secured a line of credit, and has extended the due date of the notes until the repayment of the notes will not materially and adversely affect the Company’s business operations. Interest and principal are due in full at maturity. The notes were issued with warrants that grant the holders the right to acquire 15,900 shares of the Company’s common stock, at a price of $2.63 per share. The warrants expire January 31, 2002. The warrants were determined to have a value of $29,150, which was recorded as additional capital. The resulting debt discount is being amortized over the holding period of the notes.
NOTE 6 — SEGMENT INFORMATION
The following tables identify revenues and profit or loss by reportable segment for the three and six months ended June 30, 2000 and 1999 (amounts in thousands):
| United | United | |||||||||||||||||||
| Three months ended June 30, 2000 | States | Canada | Kingdom | Australia | Total | |||||||||||||||
| Revenues from external customers | $ | 692 | $ | 108 | $ | 460 | $ | 248 | $ | 1,508 | ||||||||||
| Intersegment revenues | 369 | 24 | — | — | 393 | |||||||||||||||
| Segment income (loss) before taxes | (1,472 | ) | (506 | ) | (121 | ) | 40 | (2,059 | ) | |||||||||||
| United | United | |||||||||||||||||||
| Three months ended June 30, 1999 | States | Canada | Kingdom | Australia | Total | |||||||||||||||
| Revenues from external customers | $ | 3,998 | $ | 566 | $ | 587 | $ | 318 | $ | 5,469 | ||||||||||
| Intersegment revenues | 707 | 249 | — | — | 956 | |||||||||||||||
| Segment income (loss) before taxes | 576 | (181 | ) | (51 | ) | 30 | 374 | |||||||||||||
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
June 30, 2000
(Unaudited)
| United | United | |||||||||||||||||||
| Six months ended June 30, 2000 | States | Canada | Kingdom | Australia | Total | |||||||||||||||
| Revenues from external customers | $ | 1,460 | $ | 146 | $ | 1,226 | $ | 498 | $ | 3,330 | ||||||||||
| Intersegment revenues | 882 | 40 | — | — | 922 | |||||||||||||||
| Segment income (loss) before taxes | (2,394 | ) | (1,158 | ) | (149 | ) | 7 | (3,694 | ) | |||||||||||
| United | United | |||||||||||||||||||
| Six months ended June 30, 1999 | States | Canada | Kingdom | Australia | Total | |||||||||||||||
| Revenues from external customers | $ | 8,202 | $ | 1,182 | $ | 1,253 | $ | 535 | $ | 11,172 | ||||||||||
| Intersegment revenues | 1,207 | 249 | — | — | 1,456 | |||||||||||||||
| Segment income (loss) before taxes | 1,134 | (409 | ) | (98 | ) | 24 | 651 | |||||||||||||
NOTE 7 — COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of related tax, for the six months ended June 30, 2000 and 1999 are as follows:
| June 30, | June 30, | |||||||
| 2000 | 1999 | |||||||
| Net income (loss) | $ | (3,694,123 | ) | $ | 650,909 | |||
| Foreign currency translation adjustment | 50,953 | 23,813 | ||||||
| Comprehensive income (loss) | (3,643,170 | ) | $ | 674,722 | ||||
The components of accumulated other comprehensive income, net of related tax, at June 30, 2000 and December 31, 1999 are as follows:
| June 30, | December 31, | |||||||
| 2000 | 1999 | |||||||
| Cumulative foreign currency translation adjustment | $ | 37,871 | $ | (13,082 | ) | |||
NOTE 8 — SUBSEQUENT EVENT
Effective July 31, 2000, the Company completed the sale of its AdminSTAR™ enterprise learning management system product line, to Learnframe, Inc., a provider of e-Learning technologies and services. The transaction, valued at $4,000,000, consists of a cash payment of $250,000, paid in 5 equal monthly installments beginning on the closing date, and $3,750,000 of prepaid royalties on the sale of Learnframe products over the next four years.
This sale follows the execution of an Original Equipment Manufacturer (“OEM”) and distribution agreement between ITC and Learnframe, dated May 22, 2000, giving ITC the right to private label and distribute Learnframe’s proprietary learning management system — Pinnacle Learning Manager.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
June 30, 2000
(Unaudited)
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results |
Overview of Business
ITC Learning Corporation is a worldwide provider of education and training software to professionals in business, education and government organizations. Incorporated under the laws of the state of Maryland in 1977 the Company develops, markets and delivers specific libraries of interactive multimedia CBT training courseware designed for CD-ROM, intranet and Internet delivery, thus enabling organizations to effectively and efficiently deliver training to improve individual and organizational performance.
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, availability of capital, 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’s financial statements have been presented on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. The Company experienced a net loss in the six months ended June 30, 2000, and the years ended 1999 and 1998. Although the Company expects operating results to improve, there can be no assurances that the Company will not experience adverse results of operation in the future. The Company believes that its existing cash, anticipated cash flows from 2000 operations, proceeds from sale of non-core Company assets, and planned capital fund raising activities should provide sufficient resources to fund its activities in 2000. However, the timing of aforementioned capital infusion is critical, as the Company is currently receiving pressure from some of its larger suppliers. Anticipated cash flows from 2000 operations are largely dependent upon the Company’s ability to achieve its sales and gross profit objectives for its currently existing products and new products to be launched in 2000. 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; the Company’s ability to control costs in relation to future revenues, the acceptance of the Company’s new CBT courseware management system and the Company’s ability to raise capital. If the Company is unable to meet these objectives, it will consider 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, including the possible sale of the Company. These are forward-looking statements. See Forward-Looking Statements and Risk Factors for Further Discussion.
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, but are not limited to, 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.
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In addition, the Company faces certain general business risks, which could materially and adversely impact future operating results. These include, but are not limited to, changes in economic conditions, the cost of labor and raw materials, changes in technology and general competitive factors.
RESULTS OF OPERATIONS
Three months ended June 30, 2000 (“Second Quarter of 2000”) compared to the three months ended June 30, 1999 (“Second Quarter of 1999”)
Revenues
Total revenues for the second quarter of 2000 totaled $1,508,000, as compared to $5,469,000 for the second quarter of 1999, representing a decrease of $3,961,000 or 72%. Courseware revenues, which include sales of off-the-shelf CBT products, custom CBT products, learning management system sales, consulting services, fees, royalties and videotape training products, totaled $1,502,000 during the second quarter of 2000, as compared to $5,205,000 for the second quarter of 1999. The decrease in revenues was primarily attributable to decreased sales of the Company’s learning management system — AdminSTAR™, and decreased courseware product sales within the Company’s U.S. and Canadian markets.
Revenues generated from the sale of the Company’s AdminSTAR™ product were $18,000 in the second quarter of 2000 as compared to $2,218,000 in the second quarter of 1999. The decline in sales of the Company’s AdminSTAR™ product was the result of the Company’s decision during the first quarter of 2000 to cease supporting the development and sales efforts related to this product line. The Company’s subsequent decision to divest this product line was based on several factors, primarily relating to the depth and breadth of features AdminSTAR™ provides to its customers. AdminSTAR™ is an Enterprise-Level, non-scalable, software product designed to manage the intellectual capital (employee skills and development) throughout an organization. As an off-the-shelf CBT training company, ITC made the decision to seek a strategic buyer for AdminSTAR™ that could better support the development and sale of this enterprise-level software product. See Note 8 to the condensed consolidated financial statements — Subsequent Event relating to the sale of the AdminSTAR™ product line.
Courseware product revenues generated from the Company’s U.S. operation during the second quarter of 2000 were $621,000 as compared to $1,199,000 for the second quarter of 1999, representing a decrease of $578,000 or 48%. Courseware product revenues generated from the Company’s Canadian operation during the second quarter of 2000 were $108,000 as compared to $629,000 for the second quarter of 1999, representing a decrease of $521,000 or 83%. The decline in Courseware product revenues from the Company’s North American operations was the result of working capital constraints faced by the Company during the first six months of 2000, which hindered the Company’s ability to aggressively recruit, train and support both direct and indirect sales and marketing resources. The Company believes its sales and marketing organization can perform at a level sufficient to generate positive cash flow for the Company, and will continue to leverage its existing, and new sales and marketing resources to increase revenues. This is a forward-looking statement. See Forward-Looking Statements and Risk Factors for Further Discussion.
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Cost of Sales and Gross Margin
Cost of sales consists of the amortized costs of developing new course titles and updating the Company’s existing libraries, product material costs, fulfillment costs, reseller discount fees, sales commissions, third party product royalties and hardware costs. Cost of sales for the second quarter 2000 totaled $1,200,000 resulting in a gross margin of $308,000 or 20% of total revenues, as compared to cost of sales of $1,955,000 and gross margin of $3,514,000 or 64% of total revenues for the second quarter of 1999. The decrease in cost of sales of $755,000 in 2000 as compared to 1999 was the result of decreased sales volume. The decrease in gross margin of $3,206,000 and gross margin percentage of 44% was primarily attributable to decreased revenue in relation to fixed product development amortization costs, as well as changes in the mix of sales from the Company’s direct and indirect sales channels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $2,193,000 for the second quarter of 2000, as compared to $3,131,000 for the second quarter of 1999, representing a decrease of $938,000 or 30%.
Selling expenses consist primarily of salaries of sales personnel, travel, advertising, marketing and promotional expenses. Selling expenses for the second quarter of 2000 totaled $850,000, as compared to $1,609,000 for the second quarter of 1999, representing a decrease of $759,000 or 47%. The decrease in selling expenses in the second quarter of 2000 as compared to the second quarter of 1999 was primarily due to the Company’s reduction of North American sales and marketing personnel during the last half of 1999.
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 expense for the second quarter of 2000 totaled $1,343,000, as compared to $1,522,000 for the second quarter of 1999, representing a decrease of $179,000 or 12%. The decrease in general and administrative expenses in the second quarter of 2000 as compared to the second quarter of 1999 was primarily due to the effect of a reduction in North American administrative personnel during the fourth quarter of 1999.
Income Before Income Taxes and Net Income
Operations for the second quarter of 2000 resulted in a pre-tax and net loss of $2,059,000, or $0.53 per share, as compared to pre-tax and net income of $374,000, or $0.10 per share, for the second quarter of 1999. The higher pre-tax and net loss for the second quarter of 2000 was primarily due to decreased revenues and resulting gross margin as compared to the first quarter of 1999.
Six months ended June 30, 2000 (“first half of 2000”) compared to the six months ended June 30, 1999 (“first half of 1999”)
Revenues
Revenues for the first half of 2000 totaled $3,330,000 as compared to $11,172,000 for the first half of 1999, representing a decrease of $7,842,000 or 70%. The decrease in revenues was primarily attributable to decreased sales of the Company’s learning management system — AdminSTARTM, and decreased courseware product sales within the Company’s U.S. and Canadian markets.
Revenues generated from sales of the Company’s AdminSTAR TM product were $41,000 in the first half of 2000 as compared to $2,520,000 in the first half of 1999. The decline in sales of the Company’s AdminSTARTM product was the result of the Company’s decision during the first quarter of 2000 to cease supporting the development and sales efforts related to this product line. The Company’s subsequent decision to divest this product line was based on several factors, primarily relating to the depth and breadth of features AdminSTARTM provides to its customers. AdminSTARTM is an Enterprise-Level, non-scalable, software product designed to manage the intellectual capital (employee skills and development) throughout an organization. As an off-the-shelf CBT training provider, the Company made the decision to seek a strategic buyer for AdminSTARTM that could better support the development and sale of this enterprise-level software
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The Company believes the prepaid royalty component of the consideration received from the sale of the AdminSTAR™ product line to be significant revenue generating opportunity given the current demand from its existing customers to upgrade from the Company’s legacy CBT courseware management system. Following the execution of the OEM and distribution agreement, signed on May 22, 2000 between ITC and Learnframe, Inc., the Company had immediate access to a more sophisticated CBT courseware management system, for the purpose of upgrading its existing customer base. ITC believes there will be substantial interest from its existing customer base to upgrade from ITC’s legacy CBT courseware management system to the private labeled version of Learnframe’s Pinnacle Learning Manager product, and provide the Company with a substantial revenue generating opportunity. These are forward-looking statements. See Forward-Looking Statements and Risk Factors for Further Discussion.
Courseware product revenues generated from the Company’s U.S. operation during the first half of 2000 were $1,319,000 as compared to $4,623,000 for the first half of 1999, representing a decrease of $3,304,000 or 71%. Courseware product revenues generated from the Company’s Canadian operation during the first half of 2000 were $147,000 as compared to $1,074,000 for the first half of 1999, representing a decrease of $927,000 or 86%. The decline in courseware product revenues from the Company’s North American operations was the result of working capital constraints faced by the Company during the first six months of 2000, which hindered the Company’s ability to aggressively recruit, train and support both direct and indirect sales and marketing resources. The Company believes its sales and marketing organization can perform at a level sufficient to generate positive cash flow for the Company, and will continue to leverage its existing, and new sales and marketing resources to increase revenues. This is a forward-looking statement. See Forward-Looking Statements and Risk Factors for Further Discussion.
Cost of Sales and Gross Margin
Cost of sales for the first half of 2000 totaled $2,327,000 resulting in a gross margin of $1,003,000 or 30% of total revenues, as compared to cost of sales of $4,513,000 resulting in gross margin of $6,659,000 or 60% of total revenues for the first half of 1999. The decrease in cost of sales of $2,186,000 in 2000 as compared to 1999 was the result of decreased sales volume. The decrease in gross margin of $5,656,000 and gross margin percentage of 30% was primarily attributable to decreased revenue in relation to fixed product development amortization costs, as well as changes in the mix of sales from the Company’s direct and indirect sales channels.
Effective July 31, 2000, the Company completed a transaction for the sale of its AdminSTAR™ product line to Learnframe, Inc. See Note 8 to the condensed and consolidated financial statements — Subsequent Event. The Company believes it will realize annual savings of approximately $348,000 in amortization charges as a result of the divestiture of this product line. This is a forward-looking statement. See Forward-Looking Statements and Risk Factors for Further Discussion.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $4,389,000 for the first half of 2000 as compared to $6,006,000 for the first half of 1999, representing a decrease of $1,617,000 or 27%.
Selling expenses for the first half of 2000 totaled $1,637,000 as compared to $3,195,000 for the first half of 1999, representing a decrease of $1,558,000 or 49%. The decrease in selling expenses during the first half of 2000 as compared to the first half of 1999 was primarily due to the Company’s reduction of sales and marketing personnel during the last half of 1999.
General and administrative expenses for the first half of 2000 totaled $2,752,000 as compared to $2,811,000 for the first half of 1999, representing a decrease of $59,000 or 2%. The decrease in general and administrative expenses during the first half of 2000 as compared to the first half of 1999 was primarily due the effect of a reduction in North American administrative personnel during the fourth quarter of 1999.
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Effective July 31, 2000, the Company completed a transaction for the sale of its AdminSTAR™ product line to Learnframe, Inc. See Note 8 to the condensed consolidated financial statements — Subsequent Event. The Company believes it will realize annual cost savings of approximately $267,000 in development and sales related expenses and $205,000 in depreciation and amortization expenses as a result of the divestiture of this product line. This is a forward-looking statement. See Forward-Looking Statements and Risk Factors for Further Discussion.
Income Before Income Taxes and Net Income
Operations for the first half of 2000 resulted in pre-tax and net loss of $3,694,000 or $0.94 per share, as compared to a pre-tax and net income of $651,000 or $0.17 per share for the first half of 1999. The higher pre-tax and net loss for the second half of 2000 was primarily due to decreased revenues and resulting gross margin as compared to the first half of 1999.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
Working capital deficit at June 30, 2000 was $3,303,000 as compared to a deficit of $307,000 at December 31, 1999, representing a decrease in working capital of $2,996,000, primarily due to the April 2, 2001 maturity date of $2,200,000 in convertible debt payable, as well as the Company’s negative operating performance for the first six months of 2000.
Cash provided by operating activities totaled $15,000 for the first half of 2000, as compared to $214,000 for the first half of 1999, representing a decrease of $199,000. The decrease was primarily due to increased turnover of operating assets in relation to operating liabilities during the second quarter of 2000, offset by lower net income as compared to the first half of 1999. Effective July 31, 2000, the Company completed a transaction for the sale of its AdminSTAR™ product line to Learnframe, Inc. See Note 8 to the condensed consolidated financial statements — Subsequent Event. The Company believes it will realize annual cash cost savings of approximately $267,000 in development and sales related expenses as a result of the divestiture of this product line. This is a forward-looking statement. See Forward-Looking Statements and Risk Factors for Further Discussion.
Cash used for investing activities totaled $323,000 for the first half of 2000, as compared to cash used for investing activities of $1,491,000 for the first half of 1999, representing a decrease of $1,168,000. The decrease was primarily due to decreased capital and product development expenditures during the first half of 2000 as compared to the first half of 1999.
Cash provided by financing activities totaled $81,000 for the first half of 2000, as compared to cash provided by financing activities of $1,324,000 for the first half of 1999, representing a decrease of $1,243,000. The decrease was primarily due to the Company’s decreased utilization and subsequent payoff of its line of credit, offset by the issuance of long-term notes payable during the first quarter of 2000.
The Company believes that its existing cash, anticipated cash flows from 2000 operations, proceeds from sale of non-core Company assets, and planned capital fund raising activities should provide sufficient resources to fund its activities in 2000. However, the timing of aforementioned capital infusion is critical, as the Company is currently receiving pressure from some of its larger suppliers. Anticipated cash flows from 2000 operations are largely dependent upon the Company’s ability to achieve its sales and gross profit objectives for its currently existing products and new products to be launched in 2000. 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; the Company’s ability to control costs in relation to future revenues, the acceptance of the Company’s new CBT courseware management system and the Company’s ability to raise capital. If the Company is unable to meet these objectives, it will consider 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, including the possible sale of the Company. These are forward-looking statements. See Forward-Looking Statements and Risk Factors for Further Discussion.
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PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on June 28, 2000. There were two agenda items submitted to a vote of security holders, the election of two directors to the Company’s Board of Directors, and to consent to New River Capital Partners, L.P. obtaining the right to receive shares of common stock under debentures and warrants exceeding 20% of the Company’s outstanding common stock, at an effective price per share below the greater of book value or market value at the time the debentures and warrants were issued. The number of votes cast in favor of Christopher E. Mack’s election was 3,232,324, with 6,129 votes against and 217,922 abstaining. The number of votes cast in favor of Thomas C. Byrne’s election was 3,226,759, with 11,874 votes against and 217,922 abstaining. The number of votes cast in favor of Charles L. Fred’s election was 3,236,675, with 1,778 votes against and 217,922 abstaining. John D. Sanders, Richard E. Thomas, Daniel R. Bannister, and Robert R. Spillane each continued in office as directors after the annual meeting.
The number of votes cast in favor of New River Capital Partners L.P. obtaining the right to receive shares of common stock under debentures and warrants exceeding 20% of the Company’s outstanding common stock, at an effective price per share below the greater of book value or market value at the time the debentures and warrants were issued was 1,343,990, with 259,904 votes against and 580 abstaining.
ITEM 5. Other Information
On May 23, 2000, the Company received notification from the Nasdaq National Stock Market, Inc. that based on its Form 10-QSB filed for the period ended March 31, 2000, the Company no longer met the minimum $4 million net tangible asset requirement for continued listing on the Nasdaq National Market under Maintenance Standard 1 as set forth in Marketplace Rule 4450(a)(3). In accordance with the requirements of the May 23, 2000 notification from Nasdaq, the Company submitted on June 7, 2000, its specific plan to achieve and sustain compliance with all Nasdaq National Market listing requirements.
On July 27, 2000, the Company received notification from the Nasdaq National Stock Market, Inc. that its plan of compliance had been accepted, contingent on the Company demonstrating, based on its Form 10-QSB filing for the period ended June 30, 2000 due to be filed with the Securities and Exchange Commission by August 14, 2000, compliance with all Nasdaq National Market listing requirements including an increased net tangible assets base of $5 million.
Based on the Company’s Form 10-QSB filing for the period ended June 30, 2000, the Company has not met the minimum $5 million net tangible asset requirement in accordance with the extension granted by Nasdaq on July 27, 2000. As a result of its noncompliance and to avoid immediate delisting, the Company has filed an appeal to the Nasdaq Listing Qualifications Panel pursuant to procedures set forth in the Nasdaq Marketplace Rule 4800 Series. Pending the outcome of the Nasdaq Listing Qualifications Panel hearing, the Company’s securities will continue to be listed on the Nasdaq National Market. In the event of an unfavorable decision from the Nasdaq Listing Qualifications Panel, the Company may apply to list its securities on the Nasdaq SmallCap Market.
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Under the terms of the July 27, 2000 extension granted by Nasdaq, the Company was required to maintain a net tangible asset base of $5,000,000 as of the filing of its Form 10-QSB for the period ended June 30, 2000. Based on the Company’s Form 10-QSB filing for the period ended June 30, 2000, the Company’s net tangible assets were $1,503,000, resulting in a shortfall of $3,497,000. Although the Company intended to comply with the requirements of the extension, it was unable to meet those requirements for the following reasons: (i) the Company was unable to close a sale transaction by June 30, 2000 on the sale of its AdminSTAR™ product line; (ii) the Company’s negative operating performance for the three months ended June 30, 2000 further deteriorated its net tangible asset base; (iii) the Company was unable to solicit favorable response from its convertible debt holders to convert their debt into equity; (iv) the Company was unable to raise additional equity capital. As such, the Company will pursue, through the Nasdaq Listing Qualifications Panel, an additional extension of time to meet the minimum net tangible asset requirement for continued listing on the Nasdaq National Market, however there are no assurances that the Company will be successful.
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
| Exhibit | ||
| Number | Description | |
| 27.1 | Financial Data Schedule (filed herewith). |
B. Reports on Form 8-K:
On May 5, 2000, the Company filed an 8-K with the Securities and Exchange Commission to report a change in the Company’s certifying accountants.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ITC LEARNING CORPORATION
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By: /s/ CHRISTOPHER E. MACK Christopher E. Mack, President Treasurer, and Chief Financial Officer |
DATE August 14, 2000 |
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By: /s/ MATTHEW C. SYSAK Matthew C. Sysak, Vice President of Finance and Administration, and Secretary |
DATE August 14, 2000 |
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