<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 March 31, 2000, 3,964,078 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
<PAGE> 2
ITC LEARNING CORPORATION
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999...........................................1
Condensed Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999...............................................2-3
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 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
<CAPTION>
<S> <C> <C>
Item 1. Legal Proceedings...................................................................14
Item 2. Changes in Securities and Use of Proceeds...........................................14
Item 3. Defaults Upon Senior Securities.....................................................14
Item 4. Submission of Matters to a Vote of Security Holders.................................14
Item 5. Other Information...................................................................14
Item 6. Exhibits and Reports on Form 8-K....................................................14
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
2000 1999
---- ----
<S> <C> <C>
Net revenues......................................................... $ 1,822,385 $ 5,702,384
Cost of sales........................................................ 1,126,775 2,557,228
------------- -------------
Gross margin.................................................... 695,610 3,145,156
Selling, general and administrative expense.......................... 2,195,986 2,875,389
Equity in earnings of affiliates..................................... (62,256) (65,147)
------------- -------------
Total costs and expenses........................................ 2,133,730 2,810,242
Income (loss) before interest and income taxes....................... (1,438,120) 334,914
Interest income...................................................... 3,550 5,505
Interest expense..................................................... (200,616) (63,572)
------------- -------------
Income (loss) before income taxes.................................... (1,635,186) 276,847
Income tax expense................................................... -- --
------------- -------------
Net income (loss).................................................... $ (1,635,186) $ 276,847
============= =============
Income (loss) per common share:
Basic........................................................... $ (0.42) $ 0.07
============= =============
Diluted......................................................... $ (0.42) $ 0.07
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 407,260 $ 535,178
Accounts receivable, net (note 2)............................... 2,816,452 4,482,511
Due from affiliates............................................. 115,901 175,533
Inventories, net of reserve of $22,500
at March 31, 2000 and December 31, 1999..................... 285,784 338,900
Prepaid expenses................................................ 35,949 153,724
Income taxes receivable......................................... 69,446 70,258
Deferred financing costs, net................................... 56,136 65,000
------------- -------------
Total current assets........................................ 3,786,928 5,821,104
Note receivable (note 3)............................................. 537,628 537,628
Property and equipment:
Video and computer equipment.................................... 2,658,851 2,666,316
Furniture and fixtures.......................................... 210,943 210,994
Leasehold improvements.......................................... 61,293 61,340
------------- -------------
2,931,087 2,938,650
Less accumulated depreciation and amortization.................. (2,179,199) (2,020,237)
------------- -------------
Net property and equipment.................................. 751,888 918,413
Capitalized program development costs, net
of accumulated amortization of $6,939,875 and
$6,282,102 at March 31, 2000 and
December 31, 1999, respectively................................. 4,654,310 5,097,679
Intangible assets, net of accumulated amortization of
$1,764,061 and $1,617,499 at March 31, 2000
and December 31, 1999, respectively............................. 3,358,081 3,504,645
Other ............................................................... 9,679 10,927
------------- -------------
Total assets.................................................... $ 13,098,514 $ 15,890,396
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Current liabilities:
Line of credit (note 4)......................................... $ -- $ 663,838
Current installments of long-term debt (note 5)................. 472,090 277,160
Accounts payable................................................ 1,710,117 2,193,676
Due to affiliates............................................... 106,984 187,070
Accrued compensation and benefits............................... 224,759 167,218
Deferred revenues............................................... 242,943 373,144
Other accrued expenses.......................................... 1,596,026 2,260,240
Income taxes payable ........................................... 2,640 6,128
------------- -------------
Total current liabilities................................... 4,355,559 6,128,474
Deferred lease obligations........................................... 15,497 12,119
Long-term debt (note 5).............................................. 2,756,398 2,313,604
------------- -------------
Total liabilities........................................... 7,127,454 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 in
2000 and 1999, respectively................................. 396,408 396,408
Additional capital.............................................. 17,083,716 16,975,959
Note receivable from ESOP....................................... (336,252) (359,377)
Retained deficit................................................ (11,198,895) (9,563,709)
Accumulated other comprehensive loss (note 7)................... 26,083 (13,082)
------------- -------------
Total stockholders' equity.................................. 5,971,060 7,436,199
------------- -------------
Total liabilities and stockholders' equity........................... $ 13,098,514 $ 15,890,396
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................... $ (1,635,186) $ 276,847
Reconciling items:
Provision for doubtful accounts................................. 150,000 15,000
Depreciation and amortization................................... 1,057,731 908,497
Foreign currency translation adjustment......................... 39,165 5,741
Changes in operating assets and liabilities:
Decrease in accounts receivable............................. 1,516,059 66,948
Decrease (increase) in inventories.......................... 53,116 (8,346)
Decrease in income tax receivable........................... 812 --
Decrease in prepaid expenses................................ 117,775 15,164
Increase in due from affiliates, net........................ (20,454) (133,866)
Decrease in other assets.................................... 1,248 210,525
Decrease in accounts payable................................ (483,559) (1,186,055)
Decrease in accrued expenses................................ (599,110) (380,296)
Increase (decrease) in deferred revenues.................... (130,201) 87,606
Increase (decrease) in deferred lease obligations........... 3,378 (10,314)
Decrease in income tax payable.............................. (3,488) (2,761)
------------- -------------
Net cash provided by (used for) operating activities................. 67,286 (135,310)
Cash flows from investing activities:
Capitalized program development costs........................... (214,404) (464,004)
Capital expenditures............................................ -- (158,061)
------------- -------------
Net cash used for investing activities............................... (214,404) (622,065)
Cash flows from financing activities:
Borrowings under line of credit................................. -- 4,076,000
Repayments under line of credit................................. (663,838) (2,995,000)
Proceeds from issuance of long-term debt........................ 802,393 --
Principal payments on long-term debt............................ (142,480) (17,186)
Employee stock ownership plan note collections.................. 23,125 23,125
------------- -------------
Net cash provided by financing activities................... 19,200 1,086,939
------------- -------------
Net increase (decrease) in cash...................................... (127,918) 329,564
Cash and cash equivalents, beginning of period....................... 535,178 267,045
------------- -------------
Cash and cash equivalents, end of period............................. $ 407,260 $ 596,609
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 7
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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").
The Company is a full-service training company specializing in the
development, production, marketing and sale of multimedia and
technology-delivered training solutions designed to improve employee skills in
business, industry, education and government. The Company operates in four
reportable segments: U.S., Canada, Australia and the United Kingdom.
Significant intercompany accounts and transactions have been eliminated in
consolidation. In the opinion of the Company's management, the interim
condensed consolidated financial statements include all adjustments, consisting
of only normal recurring adjustments, necessary for a fair presentation of the
results for the interim periods. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. Certain prior
year amounts have been reclassified to improve comparability to current year
presentations. The interim condensed consolidated financial statements should
be read in conjunction with the Company's December 31, 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 three months ended March 31, 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, the
anticipated cash flows from 2000 operations, and additional planned capital fund
raising activities should provide sufficient resources to fund its activities in
2000. 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
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.
5
<PAGE> 8
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 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. In the event that sales returns are material, the
Company adjusts revenue accordingly. Revenues from sales of custom training
programs that are developed and produced under specific contracts with
customers, including contracts with affiliated joint ventures and limited
partnerships, are recognized on a percentage of completion basis as related
costs are incurred during the production period. Gross revenues from sales of
affiliated joint venture and limited partnership copyrighted courseware are
included in the Company's financial statements, as are related production,
selling and distribution costs. Amounts due to co-owners of the affiliated
venture/partnerships related to such courseware sales are reflected as royalties
and included in cost of sales in the financial statements. Revenues from
courseware licenses are recognized upon the delivery of the initial copy of each
product licensed, and related duplication costs are accrued based on estimates.
Revenues from consulting services are recognized as services are performed.
Net Income (Loss) Per Common Share
Basic earnings per common share is computed based on the weighted average
number of common shares outstanding during the year. Diluted earnings per common
share is computed based on the weighted average number of common shares
outstanding plus the effect of stock options and other potentially dilutive
common stock equivalents. The dilutive effect of stock options and other
potentially dilutive common stock equivalents is determined using the treasury
stock method based on the Company's average stock price.
The details of the earnings per share calculation for the quarters ended
March 31, 2000 and 1999 follow:
<TABLE>
<CAPTION>
Income Per Share
(Loss) Shares Amount
------ ------ ------
<S> <C> <C> <C>
QUARTER ENDED MARCH 31, 2000
Loss per share of common stock - basic............ $ (1,635,186) 3,905,756 $ (0.42)
Dilutive securities:
Stock options................................. -- -- --
------------- ----------- -------
Loss per share of common stock - diluted.......... $ (1,635,186) 3,905,756 $ (0.42)
-------------- ----------- -------
QUARTER ENDED MARCH 31, 1999
Earnings per share of common stock - basic........ $ 276,847 3,879,923 $ 0.07
Dilutive securities:
Stock options................................. -- 53,739 --
------------- ----------- -------
Earnings per share of common stock - diluted...... $ 276,847 3,933,662 $ 0.07
------------- ----------- -------
</TABLE>
6
<PAGE> 9
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED)
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable include the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Trade accounts receivable.................................... $ 3,391,937 $ 4,717,097
Unbilled contract receivables................................ 20,633 200,000
Less allowance for doubtful accounts......................... (652,644) (502,644)
------------ ------------
Trade accounts receivable, net........................... 2,759,926 4,414,453
Other receivables............................................ 56,526 68,058
------------ ------------
$ 2,816,452 $ 4,482,511
============ ============
</TABLE>
NOTE 3 - NOTE RECEIVABLE
On November 20, 1997, the Company entered into a stock purchase agreement
with Anderson Holdings Inc., to sell all of the Company's stock in its 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> 10
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED)
NOTE 5 - LONG-TERM DEBT
Long-term debt at March 31, 2000 and December 31, 1999 consists of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Non-related party debt:
- -----------------------
8.0% senior note due 2003............................................ $ 1,035,450 $ 1,177,930
5.5% note due 2001, net of unamortized discount of $176,325.......... 823,675 795,834
9.5% note due 2001, net of unamortized discount of $450,272.......... 749,728 617,000
------------- -------------
Subtotal - non-related party debt.................................... 2,608,853 2,590,764
Related party debt:
- -------------------
7.0% notes due 2002, net of unamortized discount of $78,607.......... 383,785 --
8.0% notes due 2000, net of unamortized discount of $29,150.......... 235,850 --
------------- -------------
Subtotal - related party debt ...................................... 619,635 --
------------- -------------
Total long-term debt................................................. 3,228,488 2,590,764
Less current maturities.............................................. (472,090) (277,160)
------------- -------------
Long-term debt, net.................................................. $ 2,756,398 $ 2,313,604
============= =============
</TABLE>
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 paid-in 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 no lower than $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 no lower than $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
debenture. The number of warrants can increase to 1,049,400 if certain
conditions are not met.
During the first quarter of 2000, the Company issued 7.0% convertible
subordinated notes payable, to certain Officers and Directors, and various other
related parties, in the amount of $462,392, due on June 30, 2002. Interest and
8
<PAGE> 11
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED)
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 $2.75
per share. The note was 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.
During the first quarter of 2000, the Company issued 8.0% notes payable
to certain Officers and Directors, and various other related parties, in the
amount of $265,000, due on the earlier of April 30, 2000 or the Company closing
a line of credit of at least $1,000,000. As of March 31, 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 note was 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 show revenues and profit or loss by reportable segment
for the quarters ended March 31, 2000 and 1999 (amounts in thousands):
Quarter ended March 31, 2000
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
United United
States Canada Kingdom Australia Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers............... $ 768 $ 38 $ 766 $ 250 $ 1,822
Intersegment revenues................. 513 16 - - 529
Segment loss before taxes............. (922) (652) (28) (33) (1,635)
- ----------------------------------------------------------------------------------------------------------
Quarter ended March 31, 1999
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
United United
States Canada Kingdom Australia Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers............... $4,204 $616 $665 $217 $5,702
Intersegment revenues................. 500 - - - 500
Segment income (loss) before taxes.... 557 (227) (47) (6) 277
- ----------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED)
NOTE 7 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of related tax, for the
three months ended March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
---- ----
<S> <C> <C>
Net income (loss)............................................ $ (1,635,186) $ 276,847
Foreign currency translation adjustment...................... 39,165 5,741
------------ ------------
$ (1,596,021) $ 282,588
============ ============
</TABLE>
The components of accumulated other comprehensive income, net of related
tax, for the three months ended March 31, 2000 and December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Cumulative foreign currency translation adjustment........... $ 26,083 $ (13,082)
============ ============
</TABLE>
10
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview of Business
ITC Learning Corporation ("ITC" or the "Company") 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") courses 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, 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 three months ended March 31, 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 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 the size and timing of orders and shipments, the mix
of ITC-developed products and third party products, the mix of sales from the
Company's direct and indirect distribution channels, the introduction and
acceptance of new products, and the degree to which the market understands and
accepts the Company's role as a provider of training solutions.
In addition, the Company faces certain general business risks, which could
materially and adversely impact future operating results. These include, but are
not limited to, changes in economic conditions, the cost of labor and raw
materials, changes in technology and general competitive factors.
11
<PAGE> 14
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 ("FIRST QUARTER OF 2000") COMPARED WITH THE
THREE MONTHS ENDED MARCH 31, 1999 ("FIRST QUARTER OF 1999")
Revenues
Total revenues for the first quarter of 2000 totaled $1,822,000, as
compared to $5,702,000 for the first quarter of 1999, representing a decrease of
$3,880,000 or 68%. Courseware revenues, which include sales of off-the-shelf CBT
products, custom CBT products, consulting services, fees, royalties and
videotape training products, totaled $1,792,000 during the first quarter of
2000, as compared to $5,489,000 for the first quarter of 1999. The decrease in
revenues was primarily attributable to decreased sales of the Company's core CBT
products within its U.S. and Canadian markets, offset by increased CBT product
sales in the Company's U.K. and Australian markets.
The decrease in revenues within the U.S. and Canadian markets in the first
quarter of 2000 was due to several interrelated factors, including the residual
effect of many changes that occurred within the Company during the fourth
quarter of 1999. First, as a result of financial pressure being brought to bear
on the Company by its principal lender, due to the Company's third quarter 1999
negative operating results, the working capital position of the Company did not
allow for sufficient levels of sales and marketing expenditures during 2000.
Furthermore, in response to working capital shortages, the Company in October of
1999, made a significant reduction in its workforce, including a 60% reduction
of sales and marketing personnel, which further hindered sales and marketing
efforts during the first quarter of 2000. This reduction was not undertaken only
in an effort to reduce costs; but to refocus the Company's U.S. and Canadian
operation on its core industrial markets, to better leverage the Company's core
assets. The effect of the reduction contributed to reduced revenue levels in the
first quarter of 2000, as compared to previous quarters.
On March 9, 2000, the Company hired an industry specialized Vice President
of Sales and Marketing to lead the effort in rebuilding. During 2000, the
Company expects to continue adding industry specialized sales and marketing
resources, focused within its core vertical markets. As of March 31, 2000, 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. These are forward-looking statements. 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 first quarter 2000
totaled $1,127,000 resulting in a gross margin of $696,000 or 38% of total
revenues, as compared to cost of sales of $2,557,000 and gross margin of
$3,145,000 or 55% of total revenues for the first quarter of 1999. The decrease
in cost of sales of $1,430,000 in 2000 as compared to 1999 was the result of
decreased revenues and resulting cost of sales. The decrease in gross margin of
$2,449,000 and gross margin percentage of 17% was primarily attributable to
decreased revenue in relation to fixed product development amortization costs
incurred.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $2,196,000 for the
first quarter of 2000, as compared to $2,875,000 for the first quarter of 1999,
representing a decrease of $679,000 or 24%.
Selling expenses consist primarily of salaries of sales personnel, travel,
advertising, marketing and promotional expenses. Selling expenses for the first
quarter of 2000 totaled $623,000, as compared to $1,362,000 for the first
quarter of 1999. The decrease in selling expenses of $739,000 or 54% during the
first
12
<PAGE> 15
quarter of 2000, as compared to the first quarter of 1999, is primarily due to
the Company's reduction of 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 first
quarter of 2000 totaled $1,573,000, as compared to $1,513,000 for the first
quarter of 1999.
Income Before Income Taxes and Net Income
Operations for the first quarter of 2000 resulted in a pre-tax and net loss
of $1,635,000, or $0.42 per share, as compared to pre-tax and net income of
$277,000, or $0.07 per share, for the first quarter of 1999. The higher pre-tax
and net loss for the first quarter of 2000 was primarily due to decreased
courseware sales and resulting gross margin as compared to the first quarter of
1999.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
Working capital deficit at March 31, 2000 was $569,000 as compared to a
deficit of $307,000 at December 31, 1999, representing an increase in the
working deficit of $262,000, primarily due to repayment of the Company's line of
credit and various other short-term liabilities through the issuance of short
and long-term notes payable.
Cash provided by operating activities totaled $67,000 for the first quarter
of 2000, as compared to cash used by operating activities of $135,000 for the
first quarter of 1999, an increase of $202,000. The increase was due to
increased turnover of operating assets in relation to operating liabilities
during the first quarter of 2000 as compared to the first quarter of 1999.
Cash used for investing activities totaled $214,000 for the first quarter
of 2000, as compared to cash used for investing activities of $622,000 for the
first quarter of 1999, a decrease of $408,000. The decrease was primarily
attributable to decreased capital and product development expenditures during
the first quarter of 2000 as compared to the first quarter of 1999.
Cash provided by financing activities totaled $19,000 for the first quarter
of 2000, as compared to cash provided by financing activities of $1,087,000 for
the first quarter of 1999, a decrease of $1,068,000. The decrease was primarily
attributable 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 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.
13
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
3.1 Amended Articles of Incorporation of the Company, incorporated
by reference to the Company's Form 10-QSB for the quarter ended
June 30, 1996 filed with the Securities and Exchange Commission
(Commission File No. 0-13741).
3.2 Amended By-Laws of the Company, incorporated by reference to the
Company's Form 10-KSB for the fiscal year ended December 31,
1997, filed March 13, 1998 with the SEC (Commission File No.
0-13741).
4.1 Specimen Certificate for ITC Common Stock, incorporated by
reference to the Company's 10-QSB for the quarter ended March
31, 1998, filed May 1, 1998 with the SEC (Commission File No.
0-13741).
14
<PAGE> 17
27.1 Financial Data Schedule (filed herewith).
B. Reports on Form 8-K:
None.
15
<PAGE> 18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ITC LEARNING CORPORATION
(Registrant)
<TABLE>
<S> <C> <C> <C>
By: /s/Christopher E. Mack DATE May 15, 2000
---------------------------------------------- -----------------------
Christopher E. Mack, President,
Treasurer, and Chief Financial Officer
By: /s/Matthew C. Sysak DATE May 15, 2000
---------------------------------------------- -----------------------
Matthew C. Sysak, Vice President of Finance
and Administration, and Secretary
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE REGISTRANT'S 10-QSB AS FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 407,260
<SECURITIES> 0
<RECEIVABLES> 3,391,937
<ALLOWANCES> (652,644)
<INVENTORY> 285,784
<CURRENT-ASSETS> 3,786,928
<PP&E> 2,931,087
<DEPRECIATION> (2,179,199)
<TOTAL-ASSETS> 13,098,514
<CURRENT-LIABILITIES> 4,355,559
<BONDS> 0
0
0
<COMMON> 396,408
<OTHER-SE> 5,574,652
<TOTAL-LIABILITY-AND-EQUITY> 13,098,514
<SALES> 1,822,385
<TOTAL-REVENUES> 1,822,385
<CGS> 1,126,775
<TOTAL-COSTS> 3,260,505
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 150,000
<INTEREST-EXPENSE> (197,066)
<INCOME-PRETAX> (1,635,186)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,635,186)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,635,186)
<EPS-BASIC> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
