UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
------------------------
(Name of small business issuer as specified in its charter)
MARYLAND 52-1078263
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13515 DULLES TECHNOLOGY DRIVE
HERNDON, VIRGINIA 20171
-----------------------
(Address of principal executive offices)
(703) 713-3335
-------------
(Issuer's telephone number)
----------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. |X| Yes |_| No
As of September 30, 2000, 3,964,078 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
<PAGE>
ITC LEARNING CORPORATION
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 2000 and 1999.....1
Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999.........................2-3
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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.........................................12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................17
Item 2. Changes in Securities and Use of Proceeds.........................17
Item 3. Defaults Upon Senior Securities...................................17
Item 4. Submission of Matters to a Vote of Security Holders...............17
Item 5. Other Information.................................................17
Item 6. Exhibits and Reports on Form 8-K..................................18
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Net revenues.............. $ 823,436 $ 3,102,150 $ 4,153,439 $14,273,729
Cost of sales............. 835,748 2,220,530 3,162,458 6,733,204
--------- ----------- ----------- ------------
Gross margin.............. (12,312) 881,620 990,981 7,540,525
Sales and marketing expense 538,265 1,582,673 1,838,123 4,777,734
General and administrative
expense................ 1,456,792 1,545,022 4,546,239 4,356,325
Equity in earnings of
affiliates............. (20,882) (37,101) (107,547) (149,408)
Loss before interest
and income taxes....... (1,986,487) (2,208,974) (5,285,834) (1,444,126)
Interest income........... 6,580 21,003 14,730 67,969
Interest expense.......... (228,647) (79,053) (631,573) (239,959)
Gain on sale of product
line 250,000 -- 250,000 --
--------- ----------- ----------- -----------
Loss before income taxes.. (1,958,554) (2,267,024) (5,652,677) (1,616,116)
Income tax expense
(benefit) -- -- -- --
--------- ----------- ----------- -----------
Net loss.................. $(1,958,554) $(2,267,024) $(5,652,677) $(1,616,116)
----------- ----------- ----------- -----------
Net loss per common share:
Basic and diluted..... $ (0.50) $ (0.58) $ (1.44) $ (0.42)
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
September 30, December 31,
2000 1999
---- ----
Current assets:
Cash and cash equivalents................... $ 246,819 $ 535,178
Accounts receivable, net (note 2)........... 940,129 4,482,511
Due from affiliates......................... 112,269 175,533
Inventories, net of reserve of $22,500 at
September 30, 2000 and December 31, 1999 90,864 338,900
Prepaid expenses (note 8)................... 951,986 153,724
Income taxes receivable..................... 68,192 70,258
Deferred financing costs, net............... 38,409 65,000
----------- -----------
Total current assets..................... 2,448,668 5,821,104
Note receivable (note 3)....................... 344,828 537,628
Property and equipment:
Video and computer equipment................ 2,510,955 2,666,316
Furniture and fixtures...................... 191,309 210,994
Leasehold improvements...................... 59,336 61,340
----------- -----------
2,761,600 2,938,650
Less accumulated depreciation and amortization (2,314,795) (2,020,237)
Net property and equipment............... 446,805 918,413
Capitalized program development costs, net
of accumulated amortization of $8,050,019 and
$6,282,102 at September 30, 2000 and
December 31, 1999, respectively............. 2,634,429 5,097,679
Intangible assets, net of accumulated amortization of
$1,547,535 and $1,617,499 at September 30, 2000
and December 31, 1999, respectively......... 1,779,245 3,504,645
Prepaid royalties and other.................... 1,602,534 10,927
----------- -----------
Total assets................................ $ 9,256,509 $15,890,396
=========== ===========
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
September 30, December 31,
2000 1999
---- ----
Current liabilities:
Line of credit (note 4)..................... $ -- $ 663,838
Current installments of long-term debt (note 5) 2,362,578 277,160
Accounts payable............................ 2,078,997 2,193,676
Due to affiliates........................... 52,525 187,070
Accrued compensation and benefits........... 233,801 167,218
Deferred revenues........................... 300,204 373,144
Other accrued expenses...................... 1,058,262 2,260,240
Income taxes payable ....................... 42,750 6,128
---------- -----------
Total current liabilities................ 6,129,117 6,128,474
Deferred lease obligations..................... 17,837 12,119
Long-term debt (note 5)........................ 1,074,068 2,313,604
---------- -----------
Total liabilities........................ 7,221,022 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 September 30, 2000 and
December 31, 1999........................ 396,408 396,408
Additional capital.......................... 17,083,716 16,975,959
Note receivable from ESOP................... (290,002) (359,377)
Retained deficit............................ (15,216,386) (9,563,709)
Accumulated other comprehensive gain
(loss) (note 7) 61,751 (13,082)
---------- -----------
Total stockholders' equity............... 2,035,487 7,436,199
---------- -----------
Total liabilities and stockholders' equity..... $9,256,509 $15,890,396
========== ===========
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months
Ended September 30,
2000 1999
---- ----
Cash flows from operating activities:
Net loss....................................... $ (5,652,677) $ (1,616,116)
Reconciling items:
Provision for doubtful accounts............. 180,000 150,000
Depreciation and amortization............... 5,325,639 2,830,776
Foreign currency translation adjustment..... 74,833 (9,095)
Changes in operating assets and liabilities:
Decrease in accounts receivable.......... 3,362,382 397,777
Decrease in inventories.................. 248,036 140,246
Increase in prepaid expenses and other... (2,390,444) (76,055)
Decrease in income taxes receivable...... 2,066 209,567
Decrease in long term receivable......... 192,800 3,832
Decrease in accounts payable............. (114,678) (361,223)
Decrease in due to affiliates, net....... (71,281) (166,664)
Increase in accrued compensation and
benefits 66,583 175,189
Decrease in accrued expenses............. (1,179,533) (729,355)
Decrease in deferred revenues............ (72,940) (55,196)
Increase (decrease) in deferred
lease obligations 5,718 (17,087)
Increase (decrease) in income tax payable 36,622 (9,415)
------------ ------------
Net cash provided by operating activities...... 13,126 867,181
Cash flows from investing activities:
Capitalized program development costs....... (358,513) (1,886,112)
Capital expenditures........................ -- (402,106)
------------ ------------
Net cash used for investing activities......... (358,513) (2,288,218)
Cash flows from financing activities:
Borrowings under line of credit............. -- 9,736,729
Repayments under line of credit............. (663,838) (7,834,000)
Principal payments on long-term debt........ (311,221) (567,439)
Proceeds from issuance of long-term debt.... 962,712 --
Issuance of common stock.................... -- 45,805
Employee stock ownership plan note collections 69,375 69,375
------------ ------------
Net cash provided by financing activities...... 57,028 1,450,470
------------ ------------
Net increase (decrease) in cash................ (288,359) 29,433
Cash and cash equivalents, beginning of period. 535,178 267,045
------------ ------------
Cash and cash equivalents, end of period....... $ 246,819 $ 296,478
============ ============
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine months ended September 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 for the remainder of 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
<PAGE>
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
The details of the earnings per share calculation for the three and nine
months ended September 30, 2000 and 1999 follow:
<TABLE>
<CAPTION>
Income Per Share
(LOSS) SHARES AMOUNT
------ ------ ------
<S> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 2000
Loss per share of common stock - basic........ $(1,958,554) 3,905,755 $ (0.50)
Dilutive securities:
Stock options.............................. -- -- --
----------- --------- ----------
Loss per share of common stock - diluted...... $(1,958,554) 3,905,755 $ (0.50)
----------- --------- ----------
THREE MONTHS ENDED SEPTEMBER 30, 1999
Earnings per share of common stock - basic $(2,267,024) 3,881,382 $ (0.58)
Dilutive securities: -- -- --
Stock options................... ----------- --------- ----------
Earnings per share of common stock - diluted $(2,267,024) 3,881,382 $ (0.58)
------------ --------- ----------
</TABLE>
6
<PAGE>
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
Income Per Share
(Loss) Shares Amount
------- ------ ---------
<S> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 2000
Loss per share of common stock - basic $(5,652,677) 3,915,755 $ (1.44)
Dilutive securities:
Stock options................... -- -- --
----------- --------- ------------
Loss per share of common stock - diluted $(5,652,677) 3,915,755 $ (1.44)
------------ ------------ ------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
Earnings per share of common stock - basic $(1,616,116) 3,890,415 $ (0.42)
Dilutive securities:
Stock options................... -- -- --
----------- --------- ------------
Earnings per share of common stock - diluted $(1,616,116) 3,890,415 $ (0.42)
------------ ---------- ------------
</TABLE>
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable include the following:
September 30, December 31,
2000 1999
---- ----
Trade accounts receivable................. $1,435,330 $4,717,097
Unbilled contract receivables............. 17,940 200,000
Less allowance for doubtful accounts...... (681,369) (502,644)
---------- ----------
Trade accounts receivable, net........ 771,901 4,414,453
Other receivables......................... 168,228 68,058
---------- ----------
$ 940,129 $4,482,511
========== ==========
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.
7
<PAGE>
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 5 - LONG-TERM DEBT
Long-term debt at September 30, 2000 and December 31, 1999 consists of the
following:
September 30, December 31,
2000 1999
---- ----
NON-RELATED PARTY DEBT:
8.0% senior note due 2003...................... $ 866,709 $ 1,177,930
5.5% note due 2001, net of unamortized
discount of $120,644 879,356 795,834
9.5% note due 2001, net of unamortized
discount of $334,818 865,182 617,000
---------- ------------
Subtotal - non-related party debt.............. 2,611,247 2,590,764
RELATED PARTY DEBT:
7.0% notes due 2002, net of unamortized
discount of $55,024 407,369 --
8.0% notes due 2000, net of unamortized
discount of $7,288 418,030 --
---------- ------------
Subtotal - related party debt.................. 825,399 --
---------- ------------
Total debt..................................... 3,436,646 2,590,764
Less current maturities........................ (2,362,578) (277,160)
---------- ------------
Long-term debt, net............................ $1,074,068 $ 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 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.
8
<PAGE>
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 5 - LONG-TERM DEBT (CONTINUED)
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 nine months ended September 30, 2000 and 1999 (amounts
in thousands):
THREE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
United United
States Canada Kingdom Australia Total
--------------------------------------------------------------------------------
Revenues from external customers $534 $94 $145 $50 $823
Intersegment revenues........... 140 2 -- -- 142
Segment income (loss) before taxes (1,161) (519) (106) (173) (1,959)
--------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
United United
States Canada Kingdom Australia Total
--------------------------------------------------------------------------------
Revenues from external customers $2,214 $264 $476 $148 $3,102
Intersegment revenues........... 316 42 -- -- 358
Segment loss before taxes....... (1,484) (440) (81) (262) (2,267)
--------------------------------------------------------------------------------
NOTE 6 - SEGMENT INFORMATION (CONTINUED)
9
<PAGE>
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
United United
States Canada Kingdom Australia Total
--------------------------------------------------------------------------------
Revenues from external customers $1,993 $240 $1,371 $549 $4,153
Intersegment revenues........... 1,022 40 -- -- 1,062
Segment income (loss) before taxes (3,555) (1,677) (256) (165) (5,653)
--------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
United United
States Canada Kingdom Australia Total
--------------------------------------------------------------------------------
Revenues from external customers $10,416 $1,447 $1,729 $682 $14,274
Intersegment revenues........... 1,523 291 -- -- 1,814
Segment loss before taxes....... (351) (848) (179) (238) (1,616)
--------------------------------------------------------------------------------
NOTE 7 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of related tax, for the
nine months ended September 30, 2000 and 1999 are as follows:
September 30, September 30,
2000 1999
---- ----
Net loss.................................. $(5,652,677) $ (1,616,116)
Foreign currency translation adjustment... 74,833 (9,095)
----------- -------------
Comprehensive income (loss) $(5,577,844) $ (1,625,211)
============ =============
The components of accumulated other comprehensive income, net of related
tax, at September 30, 2000 and December 31, 1999 are as follows:
September 30, December 31,
2000 1999
---- ----
Cumulative foreign currency translation
adjustment $ 61,751 $ (13,082)
=========== =============
10
<PAGE>
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 8 - SALE OF PRODUCT LINE
Effective July 31, 2000, the Company completed the sale of its AdminSTAR(TM)
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.
As a result of the transaction, the Company recorded assets totaling
$2,542,182, a gain on the sale totaling $250,000, while eliminating $986,578 in
net capitalized product development costs and $1,392,158 in net capitalized
intangible assets.
NOTE 9 - SUBSEQUENT EVENT
In October of 2000, the Company entered into an agreement with two investors
to provide the Company with $500,000 of convertible debt financing. Under the
terms of the agreement, the debt may be converted into shares of common stock of
the Company at $1.00 per share. The maturity of the debt financing is December
31, 2001, bears a 10% annual interest rate and has 500,000 warrants associated
with the financing.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 nine months ended September 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 for the remainder of 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.
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 SEPTEMBER 30, 2000 ("THIRD QUARTER OF 2000") COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1999 ("THIRD QUARTER OF 1999")
REVENUES
Total revenues for the third quarter of 2000 totaled $823,000, as compared to
$3,102,000 for the third quarter of 1999, representing a decrease of $2,279,000
or 73%. 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 $771,000 during the
third quarter of 2000, as compared to $2,504,000 for the third quarter of 1999.
The decrease in total revenues was primarily attributable to lower product sales
within the North American markets as well as the United Kingdom and Australia.
As compared to the third quarter of 1999, the Company's North American sales and
marketing efforts have been substantially impacted by the Company's working
capital constraints, which hindered the Company's ability to aggressively
recruit, train and support both direct and indirect sales and marketing
resources. In the international markets, working capital constraints have
limited the Company's ability to expand sales and marketing activities and
continue efforts to develop new products for distribution. The Company does
believe that its existing 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
maintain and 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 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 third quarter 2000
totaled $836,000 resulting in a negative gross margin of $12,000, as compared to
cost of sales of $2,221,000 and gross margin of $882,000, for the third quarter
of 1999. The decrease in cost of sales of $1,385,000 in 2000 as compared to
1999, was the result of decreased sales volume. The decrease in gross margin of
$894,000, was primarily attributable to decreased revenue in relation to fixed
product development amortization costs, as well as changes in the mix of sales
form the Company's direct and indirect sales channels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses totaled $1,995,000 for the third
quarter of 2000, as compared to $3,128,000 for the third quarter of 1999,
representing a decrease of $1,133,000 or 36%.
Selling expenses consist primarily of salaries of sales personnel, travel,
advertising, marketing and promotional expenses. Selling expenses for the third
quarter of 2000 totaled $538,000, as compared to $1,583,000 for the third
quarter of 1999, representing a decrease of $1,045,000 or 66%. The decrease in
selling expenses in the third quarter of 2000 as compared to the third 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 third
quarter of 2000 totaled $1,457,000 as compared to $1,545,000 for the third
quarter of 1999, representing a decrease of $88,000 or 6%. The decrease in
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general and administrative expenses in the third quarter of 2000 as compared to
the third quarter of 1999 was primarily due to the effect of a reduction in
North American administrative personnel during the fourth quarter of 1999 and
other cost reduction measures taken by the Company during 2000.
INCOME BEFORE INCOME TAXES AND NET INCOME
Operations for the third quarter of 2000 resulted in a pre-tax and net loss
of $1,959,000, or $0.50 per share, as compared to pre-tax and net loss of
$2,267,000, or $0.58 per share, for the third quarter of 1999. The lower pre-tax
and net loss for the third quarter of 2000 was primarily due to a combination of
decreased operating costs and the recognition of a gain on the sale of the
Company's AdminSTAR(TM) product line, offset bY reduced revenues and resulting
gross margin, as compared to the third quarter of 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
REVENUES
Revenues for the nine months ended September 30, 2000 totaled $4,153,000 as
compared to $14,274,000 for the nine months ended September 30, 1999,
representing a decrease of $10,121,000 or 71%. The decrease in revenues was
primarily attributable to decreased sales of the Company's learning management
system - AdminSTAR(TM), and decreased courseware producT sales within the
Company's North American and international markets. As compared to the nine
months ended September 30, 1999, the Company's North American sales and
marketing efforts have been substantially impacted by the Company's working
capital constraints, which hindered the Company's ability to aggressively
recruit, train and support both direct and indirect sales and marketing
resources. In the international markets, working capital constraints have
limited the Company's ability to expand sales and marketing activities and
continue efforts to develop new products for distribution. The Company does
believe that its existing 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
maintain and 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 nine months ended September 30, 2000 totaled $3,162,000
resulting in a gross margin of $991,000, as compared to cost of sales of
$6,733,000 resulting in gross margin of $7,540,000 for the nine months ended
September 30, 1999. The decrease in cost of sales of $3,571,000 in 2000 as
compared to 1999 was the result of decreased sales volume and related variable
costs of sale. The decrease in gross margin of $6,549,000 was primarily
attributable to decreased revenue in relation to fixed product development
amortization costs, as well as changes in the mix of sales form the Company's
direct and indirect sales channels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses totaled $6,384,000 for the nine
months ended September 30, 2000 as compared to $9,134,000 for the nine months
ended September 30, 1999, representing a decrease of $2,750,000 or 30%.
Selling expenses for the nine months ended September 30, 2000 totaled
$1,838,000 as compared to $4,778,000 for the nine months ended September 30,
1999, representing a decrease of $2,940,000 or 62%. The decrease in selling
expenses during the nine months ended September 30, 2000 as compared to the nine
months ended September 30, 1999 was primarily due to the Company's reduction of
sales and marketing personnel during the last half of 1999.
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General and administrative expenses for the nine months ended September 30,
2000 totaled $4,546,000 as compared to $4,356,000 for the nine months ended
September 30, 1999, representing an increase of $190,000 or 4%. The increase in
general and administrative expenses during the nine months ended September 30,
2000 as compared to the nine months ended September 30, 1999 was primarily due
to increased depreciation and amortization expense related to the divestiture of
the Company's AdminSTAR(TM) product line, offset by thE effect of a reduction in
North American administrative personnel during the fourth quarter of 1999.
Effective July 31, 2000, the Company completed a transaction for the sale of
its AdminSTAR(TM) product line to Learnframe, Inc. See NOTE 8 TO THE CONDENSED
AND CONSOLIDATED FINANCIAL STATEMENTS - SALE OF PRODUCT LINE. 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 nine months ended September 30, 2000 resulted in pre-tax
and net loss of $5,653,000 or $1.44 per share, as compared to a pre-tax and net
loss of $1,616,000 or $0.42 per share for the nine months ended September 30,
1999. The higher pre-tax and net loss for the nine months ended September 30,
2000 was primarily due to decreased revenues and resulting gross margin as
compared to the nine months ended September 30, 1999.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
Working capital deficit at September 30, 2000 was $3,680,000 as compared to a
deficit of $307,000 at December 31, 1999, representing a decrease in working
capital of $3,373,000, 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 nine months of 2000.
Cash provided by operating activities totaled $13,000 for the nine months
ended September 30, 2000, as compared to $867,000 for the nine months ended
September 30, 1999, representing a decrease of $854,000. The decrease was
primarily due to increased turnover of operating assets in relation to operating
liabilities during the nine months ended September 30, 2000, offset by lower net
income as compared to the nine months ended September 30, 1999. Effective July
31, 2000, the Company completed a transaction for the sale of its AdminSTAR(TM)
product line to Learnframe, Inc. See NOTE 8 TO THE CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS - SALE OF PRODUCT LINE. 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 $359,000 for the nine months ended
September 30, 2000, as compared to cash used for investing activities of
$2,288,000 for the nine months ended September 30, 1999, representing a decrease
of $1,929,000. The decrease was primarily due to decreased capital and product
development expenditures during the nine months ended September 30, 2000 as
compared to the nine months ended September 30, 1999.
Cash provided by financing activities totaled $57,000 for the nine months
ended September 30, 2000, as compared to cash provided by financing activities
of $1,450,000 for the nine months ended September 30, 1999, representing a
decrease of $1,393,000. 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 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
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activities for the remainder of 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
None.
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
upon 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 had 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.
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 million 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(TM) 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 form its convertible debt holders to convert their debt into equity;
(iv) the Company was unable to raise additional equity capital.
On September 26, 2000, the Company received notification that, effective
immediately, shares of its common stock were no longer trading on the Nasdaq
National Market System as a result of the Company's failure to maintain the
required minimum net tangible assets. The Company's common stock is currently
trading on the OTC Bulletin Board System under the symbol-ITCC.BB.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
EXHIBIT NO. DESCRIPTION
--------------------------------------------------------------------------------
27.1 Financial Data Schedule (filed herewith).
B. Reports on Form 8-K:
None.
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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
(Registrant)
By: /s/CHRISTOPHER E. MACK DATE NOVEMBER 14, 2000
-------------------------------- ----------------------------
Christopher E. Mack, President,
Treasurer, and Chief Financial Officer
