<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934.
For the fiscal year ended October 31, 1996
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________
Commission File Number 0-20842
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TRO Learning, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 36-3660532
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
1721 Moon Lake Blvd., Suite 555 Hoffman Estates, IL 60194
- ----------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847)781-7800
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months and (2) has been subject to such filing requirements
for the past ninety days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
The number of shares of Registrant's common stock, par value $.01 per share,
outstanding as of January 3, 1997: 6,178,880 shares. The aggregate market
value of common stock (based on closing price on January 3, 1997) held by
non-affiliates of the Registrant was approximately $43,685,000.
Index for exhibits is located on page 56.
1
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on March 25, 1997 (the "1997 Proxy Statement") is
incorporated herein by reference in Part III of this Form 10-K. Pursuant to
Regulation 14A under the Securities Exchange Act of 1934, the 1997 Proxy
Statement will be filed with the Securities and Exchange Commission within 120
days after the close of the Company's fiscal year.
2
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS
--------
GENERAL:
TRO Learning, Inc. (the Company) is the leading developer and marketer of
microcomputer-based, interactive, self-paced instructional and testing systems
used in a wide variety of adult settings. Offering comprehensive educational
courseware specifically designed for young adult and adult learners, the
Company's PLATO-Registered Trademark- Learning Systems are marketed to middle
schools and high schools, community colleges, job training programs,
correctional institutions, government-funded programs, and corporations. The
Company's TRO Aviation Training systems are marketed to airlines worldwide for
use by commercial airline pilots, maintenance crews, and cabin personnel.
COMPANY HISTORY:
The Company was incorporated in July 1989 as Edu Corp., and in October 1992 it
changed its name to TRO Learning, Inc. The Company's wholly-owned operating
subsidiary is The Roach Organization, Inc. (TRO). TRO has two wholly-owned
subsidiaries, one in Canada, TRO Learning (Canada), Inc., and one in the United
Kingdom, TRO Learning (U.K.) Ltd.
In September 1989, the Company acquired most of the assets of Control Data
Corporation's (Control Data) computer-based education, training and testing
business. Under the Company's senior management team, the marketing focus of
the business was redirected from sales of hardware and data processing services
to the delivery of solution-oriented courseware and training services to
education providers in a wide variety of settings. In addition, the Company
initiated a new business strategy of developing a library of courseware to
market to commercial airlines. The Company made significant additional
investments in organizational infrastructure and personnel for sales and
marketing. At the same time, the Company reduced general and administrative
expenses through implementation of cost controls and streamlined operations. The
Company also made substantial investments in the development and introduction of
new products and services, as well as the enhancement of its existing courseware
for education and training applications.
During fiscal 1992, the Company discontinued two businesses, the NASD testing
center business and the end user computer training distribution business. In
addition, in September 1993, the Company entered into a Certification and
Testing Services Agreement with Sylvan Learning Systems (SLS), whereby SLS
agreed to assume and perform the Company's rights and obligations under its
Certification and Testing Services contracts. See Note 8 of Notes to
Consolidated Financial Statements.
3
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
COMPANY STRATEGY:
The Company's strategy is to address the needs of adult and young adult learners
by providing a broad range of interactive, multimedia, self-paced educational
and training courseware delivered on personal computers. The critical elements
of the Company's business strategy are as follows:
TARGET ADULT AND YOUNG ADULT MARKET OPPORTUNITIES. The Company targets growing
market niches that serve adult and young adult learners rather than pre-school
and elementary school-aged children. These market niches, including the
corporate workplace environment, have specific educational and training
requirements that can be addressed by the Company's computer-based products and
services. The Company's courseware incorporates themes and graphic images
appropriate to adult and young adult learners.
PROVIDE COMPREHENSIVE, SOLUTION-ORIENTED COURSEWARE AND SERVICES. Drawing upon
its extensive library of computer-based courseware, the Company's education and
training specialists work closely with clients to design a program of
instruction which meets their specific educational and training needs. The
Company offers its products in modular form and flexible formats that can be
tailored to a wide variety of applications.
EMPHASIZE SALES OF HIGH MARGIN COURSEWARE. Since the acquisition from Control
Data in 1989, the Company has redirected the marketing focus of the business
from hardware and data processing services, which have generally experienced
declining profit margins, to solution-oriented education and training courseware
and services which generate higher profit margins and greater opportunities for
growth.
COMMITMENT TO ON-GOING COURSEWARE DEVELOPMENT AND SUPPORT. Since the
acquisition, the Company has made substantial investments in developing and
enhancing courseware for education and training applications and is committed to
maintaining a diverse and comprehensive curriculum. The Company uses the design
and structural advantages inherent in its proprietary software development
systems to design and produce new courseware and services to meet the changing
needs of its clients and prospects.
INTERNET/INTRANET DELIVERY:
The Company is focused on developing the broadest delivery system for its
instructional management system and courseware library. The rapid acceptance and
worldwide accessibility of the Internet offers the potential of just-in-time
learning and expanded access to PLATO education and training products. Internet
delivery is also very supportive of the sales and marketing focus on
4
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
INTERNET/INTRANET DELIVERY, CONTINUED
organizations providing a wide range of education and training services
throughout the community. Corporations and many of the larger school districts
and training organizations have developed intranets to share information and
communication. The expanding availability of intranets offers a platform for the
delivery and distribution of education and training across the organization to
any location. With the availability of high-speed telecommunications links
between facilities, intranets are a very powerful delivery system for PLATO
education and training.
MARKET OVERVIEW:
Many competitive, social, and political trends over the past few years have led
to significant demand for technology-based education and training:
- Identification by numerous government and private studies that basic
skills and training deficiencies are a major threat to American
industry's ability to achieve its goals and compete internationally.
This trend has been accompanied by increased governmental and private-
sector spending on basic skills and job skills training.
- In industry, pressure to improve cost-efficiency and access to training
and education has led to a willingness to adopt non-traditional training
methods.
- The acceleration of technological changes requires ongoing workforce
retraining and skills enhancement.
- Widely reported declines in standardized test scores and an increased
demand by states and school districts for measurable results of such
programs has increased concern over training and educational program
effectiveness.
- Legislative initiatives and governmental mandates (such as welfare,
prison reform, and regulatory requirements in the aviation industry)
has increased the demand for education and training outside traditional
educational settings.
- Dramatic improvements in the price and performance of hardware has made
it feasible for more institutions to purchase microcomputers of
adequate power to deliver effective educational and training courseware
products.
5
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
MARKET OVERVIEW, CONTINUED
- Advances in instructional design, programming, and presentation
technologies have made it possible to develop courseware and software
cost-effectively.
- The development of multimedia software has heightened the interest in
education and training, both for business and education as well as for
the consumer market.
A prominent example of these trends is the PLATO Learning System, which combines
extensive courseware and curriculum management software with networked hardware
and system management software. The Company believes sales will grow at a
faster rate in the adult and young adult markets than in the traditional primary
school markets. The adult and young adult segments of the education markets are
receiving increased levels of funding as schools, government, and private sector
programs seek to reduce school drop-out rates and to provide basic skills and
education. Further, private sector employers have begun to provide their
employees with remedial and basic literacy skills training as well as specific
job-related training. The Company believes there is significant growth
potential in this market sector.
The demand for pilot and other airline personnel training is driven by
several factors, including new aircraft acquisition, retrofitting existing
equipment, and cross-training on various types of equipment. The Federal
Aviation Administration (FAA) and foreign government regulators, as well as
competitive factors, require commercial pilots and other flight personnel to
be certified on new and upgraded equipment. Technological advances in
aircraft, new aircraft acquisitions, and personnel promotions create an
ongoing demand for high quality, standardized, flexible, and cost-effective
training. Retrofitting existing aircraft to update equipment and to meet new
regulatory requirements creates further industry need for training pilots,
maintenance and in-flight personnel.
The Company uses microcomputer-based educational technology to address these
trends. This technology offers a number of advantages in both traditional and
non-traditional educational settings, including self-pacing, interactive
instruction, standardized curricula, individual tailoring of programs, remote
service delivery, scheduling flexibility, and ready measurement of performance
providing instantaneous student feedback. In addition, educational technology
enables instructors to manage curricula and provide individualized tutoring
rather than provide the same instruction for all students.
6
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
PRODUCTS AND SERVICES:
The Company develops and markets microcomputer-based, interactive, self-paced
instructional and testing systems. The Company also delivers its PLATO Education
courseware products to customers over the Internet or intranets. Although the
design and specific features of a system depend upon the particular needs of
each client, a learning system typically includes a library of educational
courseware, instruction management software, a delivery system, and consulting
services. The Company provides educational courseware and services to middle
and high schools, community colleges, job training programs, correctional
institutions, and similar government-funded training programs, as well as to
private industry. It also provides pilot, maintenance, in-flight services and
safety training to the aviation industry, using courseware developed by the
Company covering the principal portion of the modern fleet of Boeing, Airbus,
Fokker, Saab, Canadair Regional Jet and BAe Jetstream Limited aircraft, as well
as MD-80 maintenance training for the McDonnell-Douglas aircraft.
In general, the PLATO Learning System offers educators an effective supplement
or alternative to traditional, instructor-led education. A typical learning
system installation consists of 10 to 30 workstations, educational courseware,
management software, and hardware and typically sells for $50,000 to $200,000.
PLATO Learning Systems are currently installed at over 3,400 sites with an
aggregate of approximately 39,000 workstations. The Company's PLATO clients
include New York City Board of Education; State of Tennessee Board of Regents;
California Department of Corrections; Montana Department of Corrections; AT&T;
Abbott Laboratories; Honeywell; Georgia Pacific; Kimberly-Clark; Printpack;
Saturn; USAA; Siemens; Bethlehem Steel; Houston Community College; Victoria
Independent School District; Garland Independent School District; Dayton Public
Schools; Polk County Schools; Glendale Union High School District; Weber County
Schools; New Hampshire Technical College System; Florida Correctional
Educational School Authority; and Open Learning Agency (Canada).
The Company's Aviation Training systems address the training needs of the
aviation industry. In fiscal 1996, the Company's average training system sale
was approximately $300,000. The Company has installed Aviation Training systems
at over 80 sites worldwide with an aggregate of more than 1,350 workstations.
The Company's Aviation Training system clients include United, American,
Northwest, Lufthansa, All Nippon, SAS, Garuda, Singapore, Olympic, KLM, Flight
Safety International, Crossair, Kuwait, Air China, China Eastern, Malaysia,
Alitalia, GAMCO, Gulf Air, LOT Polish Airlines, Turkish Airlines, Malev,
TransAsia, ANK, Asiana, Cathay Pacific, British Aerospace and the CAA. In
fiscal 1996, the Company derived approximately 52% of its Aviation Training
revenues from sales to non U.S.-based air carriers. See Note 9 to Notes to
Consolidated Financial Statements for information relating to sales by
geographic areas.
7
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
PRODUCTS AND SERVICES, CONTINUED
COURSEWARE:
The PLATO Learning System courseware library has over 5,000 hours of on-line
instruction, including in excess of 3,300 lessons and 8,500 objectives. PLATO
offers a comprehensive curriculum developed specifically for adult and young
adult learners. The Company's aviation courseware library consists of over
1,200 hours of on-line instruction and simulation of aviation related training
topics. This curriculum, consisting of over 60 comprehensive courses, covers a
principal portion of the complete line of modern aircraft manufactured by
Boeing, Airbus, Fokker, Canadair Regional Jet, and Saab, as well as some of the
McDonnell Douglas aircraft. In addition to pilot transition training, the
Company has an extensive line of in-flight services and safety and survival
courses, one maintenance training program, and air traffic control training
programs. The following tables set forth the current PLATO curriculum and
aviation courseware.
8
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
PRODUCTS AND SERVICES, CONTINUED
PLATO LEARNING SYSTEM COURSEWARE AND SOFTWARE OFFERINGS
PLATO COURSEWARE: THIRD PARTY COURSEWARE:
- ---------------- ----------------------
COMMUNICATION Reading Horizons
Reading 1 and 2 Mindplay Writing Series
Writing Series English Discoveries (ESL)
Communication Projects for the Real World
Reading for Information Job Skills for the Real World
Writing in the Workplace Basic Skills for the Real World
Advanced Reading Strategies Rediscover Science 6 - 9 and 9 - 12
Towards Algebra
MATHEMATICS Business Software Training Series
Math Fundamentals Substances Abuse Series
Math Fundamentals (Spanish Edition) Blueprint Reading
Applied Math Mastering Geometric Dimensioning and
Data Skills Tolerancing
Pre-Algebra Technical Skills Series
Beginning, Intermediate and Health, Safety and Environmental Series
Advanced Algebra Ultrakey Keyboarding
Beginning and Intermediate Algebra
(Spanish Edition) PLATO SOFTWARE PRODUCTS
Geometry and Measurement 1 and 2 PLATO Curriculum Manager
Trigonometry PLATO Pathways Instructional Management
Calculus 1 and 2 System for Windows
PLATO Remote Administration
SCIENCE PLATO Records Transfer and Consolidation
Science Fundamentals Utility
Chemistry 1 and 2 PCD3 Authoring System
Physics 1 and 2 PLATO S.T.A.R.
SOCIAL STUDIES
Social Studies
TECHNOLOGY
Quality Fundamentals
LIFE SKILLS
Life and Job Skills
Parenting Skills
9
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
PRODUCTS AND SERVICES, CONTINUED
COURSEWARE, Continued
TRO AVIATION COURSEWARE
FLIGHT IN-FLIGHT SERVICES
- ------ ------------------
Airbus: A300-600 747-400 Transition Training
A310 Basic Service
A320 Key Position
A321 Recurrent Emergency Training
A320 FMGS LOFT Trainer 757 Transition Training
A330 Cocktail Services
A340 In-flight/Postflight Responsibilities
Boeing: 737-200 to 737-300 Differences Preflight Responsibilities
737-300/400/500 New Tech Cart
737-300 FMGS LOFT Trainer* Single Aisle Cabin and Galley Systems
747-400 767 Cabin and Galley Systems
747-400 Systems Simulations 747 Equipment and Systems
747-400 Freighter Differences DC-10 Cabin and Galley Systems*
757 Purser Control Center (PCC)
757/767 FMGS LOFT Trainer Cabin Intercom Data Systems (CIDS)
767
Canadair: Regional Jet* SYSTEMS AND OPERATIONS
Fokker: F50 Traffic Collision and Avoidance
(TCAS) Systems
F100 Category (CAT) II & III Operations
Saab: 2000* North Atlantic Navigation
2000 FMGS LOFT Trainer* South Atlantic Navigation
KNS 660 Area Navigation
MAINTENANCE TRAINING International Flight Operations
McDonnell-Douglas: MD-80 Head Up Guidance System (HUGS)*
Jet Aircraft Maintenance Fundamentals* ACARS*
Ramp Services ETOPS*
A340 CMCS Simulation Aircraft Performance*
B747-400 CMS Simulation Collins 4200 PMS*
Navigation Trainer*
GENERAL AVIATION
Beech Baron SAFETY AND SURVIVAL
Beech Bonanza F33 and A36 First Aid*
Piper Arrow General Safety and Emergency*
Piper Cheyenne IIIA A320 Safety and Emergency*
PPL/CPL Curriculum A 340 Safety and Emergency*
767 Safety and Emergency*
Dangerous Goods*
Airline Security*
Basic Cabin Crew Courses*
AIR TRAFFIC CONTROL
CAA NERC System
________________________ Central Flow Management
* in development
10
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
PRODUCTS AND SERVICES, CONTINUED
PLATO COURSEWARE AND SOFTWARE:
Each PLATO course teaches a set of skills which has been defined in terms of
measurable performance. The course teaches the skill through a progression
of tutorials and practice lessons with diagnostic feedback. Learners have
access to assessments which target instruction. After each sequence of
tutorial and practice, a test follows which verifies the learner's
achievement. The PLATO Curriculum Manager (described below) can identify the
specific skills each individual learner needs to master, and prescribe
instruction the student needs. Teachers can adapt PLATO courseware to their
own lesson plans because of its modular design. While PLATO can be used
effectively with minimal teacher support, the Company believes that the
greatest learning gains are achieved when teachers use PLATO to transform
their role in the classroom from mere information presenter to that of tutor,
manager, and counselor.
PLATO courseware is correlated to many national standardized tests.
Increasingly, educators are being judged according to their students' progress
as measured by a number of these tests. Product correlation, therefore, has
become an important factor in how educators evaluate the usefulness and
effectiveness of an integrated learning system and its courseware. Some of the
major standardized tests to which PLATO courseware is closely aligned are:
Adult Basic Literacy Exam (ABLE) Comprehensive Adult Student Assessment
American College Test (ACT) System (CASAS)
California Achievement Test (CAT) General Education Development Exam (GED)
California Basic Education Skills
Test (CBEST) Scholastic Aptitude Test (SAT)
Canadian Adult Achievement Test
(CAAT) Test of Achievement and Proficiency (TAP)
Test of Adult Basic Education (TABE)
An independent evaluation conducted comparing PLATO computer-based education
with traditional classroom instruction showed that PLATO computer-based
education resulted in 10% greater learning gains with approximately half the
instruction time. In addition, surveys and third party evaluations have shown
that learners prefer PLATO over conventional classroom instruction because it is
success-oriented, places the learner in control, does not waste time, sustains
interest, supports learning on demand, and is private.
11
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
PRODUCTS AND SERVICES, CONTINUED
PLATO COURSEWARE AND SOFTWARE, Continued
In late 1992, the Company undertook major upgrades and enhancements to its
products. The new PLATO products represent a significant redesign of the
Company's core PLATO curricula. Completed in 1995, the new PLATO products have
four major elements:
INSTRUCTIONAL IMPROVEMENTS. Hundreds of instructional improvements have been
incorporated throughout the lessons based on learner and client feedback and
subject-matter expert input. The new PLATO courseware is fully compatible with
the existing PLATO curriculum structure so that learners encounter a smooth
transition from old to new.
A NEW USER INTERFACE. Streamlined screens and graphically-based function
buttons that can be activated by either the keyboard or mouse improve learner
interaction and control and give PLATO courseware a new look and feel.
A NEW GRAPHIC LOOK. New graphics in the new PLATO products are instructionally
integrated and visually appealing to our target audience of young adult and
adult learners. The graphics were carefully designed and created to contribute
to the instructional objectives and to enhance the learning experience.
Animation and color combine to make the new PLATO products what the Company
believes to be the premier computer-based instructional system on the market
today.
NEW INSTRUCTOR OPTIONS. New features have been added that allow instructors to
easily preview and review all aspects of each lesson, including a review of all
questions. This "page down" mode will be extremely helpful in facilitating
instructor familiarization with PLATO lessons.
Building on an excellent foundation, these new features significantly enhance
and further improve the effectiveness and acceptance of PLATO. In 1995 and
1996, the Company completed the development of a major new program designed
to enhance the foundation skills of workers in support of the high
performance workplace required by business and industry to be competitive in
today's global economy. PLATO-Registered Trademark- WorkSkills focuses on
developing the reading, math, writing, and communication skills necessary
for worker success, using a series of skill-building lessons structured in
skill levels to accommodate the different competencies necessary to perform
specific job functions. The PLATO WorkSkills curricula have broad
applicability in the school and job training markets as well, fully
complementing the core PLATO courseware library. The development of PLATO
WorkSkills was the result of extensive consultation with a wide range of
large and small companies representing many business sectors, as well as with
state and local secondary and adult
12
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
PRODUCTS AND SERVICES, CONTINUED
PLATO COURSEWARE AND SOFTWARE, Continued
educators, both individually and through an advisory group process. The new
curricula will further enhance the Company's leadership position in the
education and training market.
TRO AVIATION COURSEWARE:
Substantially all of the Aviation Training library of courseware was developed
over the last six years. This courseware offers a high-quality, cost-effective
method of meeting the training requirements imposed by regulatory bodies and is
perceived as desirable for competitive reasons. The courseware can also be
modified to accommodate different equipment configurations and is customized to
individual airline operating policies.
Currently, development is underway on a number of new courses, including the
Saab 2000, Canadair Regional Jet, BAe Jetstream Limited, Jet Aircraft
Maintenance Fundamentals, Safety and Emergency, LOFT trainers for B737 and Saab
aircraft and various small systems courses. The Company continues to update and
enhance its courseware for flight crew training for a significant portion of the
modern fleet manufactured by Boeing, Airbus, and Fokker, in-flight services
training for cabin crews, and technical service and repair modules for aircraft
maintenance personnel.
Each aviation course provides detailed tutorials covering the various systems
found in the aircraft. In addition to the tutorials, competency-based drill and
practice procedure simulations provide the students with a realistic,
interactive, criterion-referenced training environment. Within the Company's
flight crew courses, cockpit performance objectives are taught through high
fidelity graphics and the use of a high resolution monitor. Digital audio
provides supplementary information and allows the duplication of oral warnings
and other audio messages found in the actual aircraft. Students learn system
operation, malfunction procedures, and aircraft performance in a highly
realistic training environment. Students interact directly with the training
materials, practicing aircraft procedures by the use of touch screens. The
realism of the courseware is designed to provide a high degree of skill transfer
from the training environment to the actual operation of the aircraft.
Aviation flight courseware is structured for training flight crews for a
specific aircraft type. These flight courses take approximately 35 to 55 hours
to complete. A typical airline will conduct ground school training using the
courses for 14 days. The course generally constitutes the trainee's first step
of training. Because the high definition graphics provide a realistic
environment, the controls look familiar when the trainee enters a flight
simulator or aircraft.
13
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TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
PRODUCTS AND SERVICES, CONTINUED
INSTRUCTION MANAGEMENT SOFTWARE:
Both the Company's aviation and PLATO courseware are managed by sophisticated
computer-based software called the Curriculum Manager. It provides an
effective means of monitoring learner progress and recording and reporting
performance data. The Curriculum Manager provides access to courseware as
well as administrative control of the integrated learning system, and gives
instructors the flexibility to design customized learning paths to meet
individual learner needs, program objectives and/or alignments. Through the
Curriculum Manager, courseware can be presented as published or restructured
to correspond to specific program requirements or teaching strategies.
Instructors also have the flexibility to customize the criteria for learner
access and mastery of courses. The Curriculum Manager also allows learners to
work on their individual lesson plans while other learners are working
independently on the system. Learners are not required to be assigned a
specific workstation on the network since the system identifies them from
their sign-on and password.
The Company has just completed the development of a new, state-of-the-art,
highly sophisticated Windows-based instructional management system,
PLATO-Registered Trademark- Pathways, that will replace the current DOS-based
Curriculum Manager for systems that support the Windows operating system. PLATO
Pathways incorporates a new, easy to use graphical user interface to allow
administrators and instructors to create customized learning paths and monitor
student progress. A new suite of reports, including graphical and comparative
reports, have been designed into the new system. PLATO Pathways includes step by
step help sequences to guide administrators and instructors to perform specific
functions easily. Because PLATO Pathways is Windows based, third-party programs
compatible with MS DOS-TM- or MS Windows 3.x-TM- or Windows-TM- 95 can be
integrated easily into lesson plans to enhance the learning process.
DELIVERY SYSTEMS:
The PLATO delivery system is configured to use personal computers (PC's)
running MS-DOS-TM- or MS-Windows/DOS-TM-. While the PLATO system can run on
a stand-alone PC with a CD-ROM drive, the vast majority of installations use
a local area network (LAN) with a file server computer and from 10 to 30
workstation PC's. The PLATO system may be physically housed in a single room
or laboratory setting or dispersed among several rooms within a building or
buildings in a campus setting. Additionally, PLATO LAN-based systems may be
configured with remote administration software enabling any number of distant
learning locations and workstations to be connected to a central site via
telecommunications software and hardware. Courseware is stored on the file
server
14
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
PRODUCTS AND SERVICES, CONTINUED
DELIVERY SYSTEMS, Continued
on a high speed hard disk or, for single PC's and CD-ROM server networks, on
a CD-ROM. The students access the file server through the LAN and the
network software accesses the courseware as needed. The instructor can
monitor the system and the students via any workstation or using a dedicated
administrator's workstation, printing test results or other data on a network
printer.
A typical Aviation Training system is configured to use 486 and
Pentium-TM-personal computers with 20 inch, high resolution, touch sensitive
monitors and digital audio. While the Aviation Training courseware can be
delivered on a stand-alone PC, most installations use a LAN running on Novell
NetWare-TM-consisting of a file server computer, an administrator's
workstation, and from two to 20 user workstations. The Company's Aviation
Training systems are designed for maximum flexibility and employ industry
standard hardware and operational software for compatibility, ease of
maintenance and ease of expansion.
PLATO ON THE INTERNET/INTRANET:
During 1996, the Company initiated a project to develop the capability to
deliver the PLATO courseware library over the Internet. The initial
implementation of the system was piloted in Tennessee in partnership with
Tennessee Tomorrow, Inc., a public private partnership involved with economic
development. The test included delivery to medium and large businesses and
community training organizations in the state. In addition to delivery via the
Internet, the Company has successfully piloted this system on several client
Intranets.
Based on the positive results of the Tennessee pilot, the Company began
development of a new platform for the delivery of PLATO courseware via the
Internet. The new platform includes a Windows based learning folder that allows
seamless access to both local computer and World Wide Web based learning
resources. The product includes delivery of the PLATO library over the Internet
using the new PLATO Pathways instructional management system, access to Web
links and off line resources, and discussion groups. Program coordinators, who
manage learner activity, have special access to new web- based tools for
creating and managing learner activity, managing discussion groups and
generating administrative reports on learner usage and progress. In addition,
provisions have been made for adding third-party Web and non-Web based products
to enhance the breadth and scope of the learning experience.
15
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
PRODUCTS AND SERVICES, CONTINUED
CONSULTING SERVICES:
Pre-sale and post-sale support services provided by the Company's education
specialists assist in the successful implementation of the Company's programs.
Education specialists help clients to prepare the site for the installation of
the computer hardware and software, monitor the actual installation process, and
provide on-site consultation and training for lab managers, instructors and
administrators in the use and integration of courseware within their programs.
The Company's education specialists maintain ongoing contact with each client,
providing consultative and support services to ensure the success of their
programs.
SALES AND MARKETING:
The Company's strategy is to use its own sales force in North America and the
U.K. In Aviation Training, the Company utilizes agents in many foreign
countries to supplement its marketing service and support activities. The
Company has established exclusive distribution agreements with distributors
experienced in education product distribution in the following countries:
Singapore, Malaysia, Korea, Taiwan, United Arab Emirates, Brunei, Panama, Costa
Rica and South Africa. The Company targets potentially large and high growth
market niches to which the Company's existing and future products can be
effectively sold. The Company's marketing and sales efforts are designed to
increase market penetration and reinforce the Company's reputation for product
quality, customer satisfaction, and service.
As of October 31, 1996, 72 account managers in the U.S. and in Canada are
responsible for PLATO system sales and for maintaining an active relationship
with both current and potential clients. Sixty education specialists are
responsible for training clients and implementing PLATO Learning Systems. The
Company plans to continue to expand its sales and service organization in 1997
to approximately 80 account managers and 70 education specialists.
Beginning in fiscal 1996, as a strategy to extend PLATO Education's sales and
marketing reach to smaller educational institutions and businesses, the Company
entered into contracts with organizations that form consortiums to take
advantage of volume buying power. Through these consortium arrangements, the
Company is able to leverage the consortium sponsor's endorsement of PLATO
products to its members and offer PLATO courseware at a discount based upon
large volume commitments. The Company will recognize revenue under consortium
arrangements principally as courseware is delivered.
16
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
SALES AND MARKETING, CONTINUED
In addition, as a strategy to extend PLATO Education's sales and marketing
reach to businesses and other constituencies served by community colleges,
the Company enters into contracts with PLATO Education Partners (PEP's).
Under these arrangements, the PEP's, principally community colleges, market
PLATO courseware and consulting services to small and medium sized businesses
within the local community to meet the education and training needs of their
employees. Within this strategy, the Company has also identified other
organizations as Internet Marketing Partners to specifically market licenses
for delivery of PLATO over the Internet. When the PEP commits to a minimum
level of purchases of PLATO licenses or usage over a period of time, the
Company expects generally to recognize revenue ratably over the contract term.
The Company is also pursuing marketing relationships with Internet providers to
make available the PLATO courseware library to consumers and businesses. The
Company expects to recognize revenue from such sales principally as usage
occurs.
The Company reaches potential clients and reinforces its market image by
attending and making presentations at national, regional and state conventions
and conferences, sponsoring instructional and teaching seminars, and publicity
in trade journals. It conducts extensive direct mail and telemarketing
campaigns to targeted prospects within each market segment to secure leads and
promote increased awareness of the Company and the PLATO courseware. In
addition, the Company has developed and maintains a comprehensive web site on
the Internet's World Wide Web, which allows for the dissemination of news and
information about the Company's products, services, and clients.
The Company has relationships with many industry associations, such as the
American Association of Community and Junior Colleges, the National Alliance of
Business, and the Corrections Education Association. Additional marketing
activities to promote the effectiveness of PLATO products to potential clients
include the publication of formal evaluation data, program and application
reports, and the distribution of press/news releases to appropriate sources.
The Company's Aviation Training products and services are marketed directly
to airlines and training centers around the world through account managers
based in Minneapolis and in London. Sales regions for the consolidated U.S.
and U.K. operations include North America, South America, Asia/Pacific,
Europe, Africa, and the Middle East. The Company participates in the major
international air shows.
17
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
SALES AND MARKETING, CONTINUED
In addition to direct sales activities, the Company markets to its prospective
aviation clients by direct mail, including publication and distribution of its
AVIATION NEWSLETTER and AVIATION PRODUCT UPDATE. Major trade publications also
include articles about the Company's Aviation Training products and services.
These publications are effective in reinforcing the Company's position as one of
the leaders in aviation training.
COMPETITION:
In all of its markets, the Company competes primarily against more traditional
methods of education and training. Such methods are principally live classroom
instruction. The Company has seen increased acceptance of multimedia-based,
computer-aided methods of training and education due to, among other reasons,
their flexibility, cost-efficiency, and demonstrated effectiveness.
Within the education and training services market, the Company competes
primarily on the basis of the depth and recognized quality of its courseware and
its ability to deliver a flexible, cost-effective, and customized solution to a
client's education and training needs on a timely basis. Based on recent
competitive situations in which the Company has participated, the Company
believes that product depth, quality, and effectiveness are more important
competitive factors than price.
Within the academic computer-based education market, the Company competes most
directly with other learning system providers, including Viacom and Jostens
Learning. While these companies are focused primarily on the elementary school
market, they compete to some degree with the Company in the adult and young
adult market. Although Viacom is significantly larger than the Company, PLATO
courseware offers a comprehensive curriculum developed specifically for adult
and young adult learners. In the post-secondary and training markets there are
many regional and specialized competitors.
The Company's competition in computer-based aviation training services comes
from three distinct sources: airframe manufacturers, airlines' internal training
departments, and other computer-based training companies. Major airframe
manufacturers such as Airbus, Boeing, and McDonnell-Douglas occasionally provide
their own training programs with the purchase of the aircraft. Often, airlines
accept these courses because they are included in the purchase price of the
aircraft.
Internal training departments of airlines also compete with the Company's
Aviation Training services. The Company believes that airlines have developed
their own training programs because the quality of the training provided by the
airframe manufacturers has been inconsistent. Internally
18
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
COMPETITION, CONTINUED
developed programs vary from stand-up instruction, to slide, audio and video
tape, and computer-aided training programs. Large airlines, for example,
American Airlines and Delta Airlines, have significant internal resources to
develop courseware. The Company's major external competitor for Aviation
Training services is Attachematc Corporation. The majority of this competitor's
courseware, which is principally owned by third parties and marketed by
Attachematc, uses older technology and was developed in a lower resolution than
the Company's courseware.
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
The technological aspects of product development, maintenance, and client
support are in many ways similar for all of the Company's products. The
Company's product development and customer support group currently consists of
over 93 full-time employees based in the U.S. and 27 employees based in the
United Kingdom.
The Company's product development and systems development group develops,
enhances, and maintains the courseware, curriculum management software, and
delivery system platforms employing a rigorous multi-phased product
development methodology and process management system. While based on both
classical instructional design concepts and models, as well as traditional
systems development management techniques, the product development
methodology has been constructed to specifically address the creation of
individualized, learner-controlled, interactive instruction using the full
multimedia capabilities of today's personal computing and other related
technologies. The integral quality control and assurance mechanisms and
procedures of the development methodology enhance the instructional
effectiveness and content integrity of the resulting product. They also help
to ensure that the most appropriate and highest quality production values are
achieved in the development of all software graphics, audio, video, and text.
Central to the courseware development process are three proprietary software
tools: the PLATO instructional management system, PLATO PATHWAYS - designed
for system control, the tracking and reporting of student performance and
administration; MICRO PLATO AUTHORING SYSTEM (MPAS) - software used in the
enhancement and maintenance of existing PLATO courseware; and PLATO
CURRICULUM DESIGN, DEVELOPMENT AND DELIVERY (PCD3) SYSTEM - a proprietary yet
flexible MS-DOS-TM- based development tool.
The Company is soon to release its first major new PLATO Education product
specifically developed for Windows. The Advanced Reading Strategies (ARS) course
has been developed with the Company's new WinPLATO architecture using the
Asymetrix ToolBook Author system. Five
19
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT, CONTINUED
new Windows courses for the education and workplace environments are planned for
1997.
The Company's technical support group provides a full range of support services
in an effort to ensure a client's satisfaction with the quality and
effectiveness of its products and services. In addition, staff engineers
continuously evaluate and recommend new technology that not only improves system
performance and capability, but also reduces cost. Before release, each
individual product undergoes a series of separate tests before it is approved
and made available for client use.
The Company does not develop any operating system software, as distinct from its
courseware
products, nor does it manufacture any hardware components. The Company
assembles ("integrates") standard hardware components and off-the-shelf software
products into an appropriately configured platform for the Company's proprietary
courseware and management system which is then integrated and fully tested for
24 to 48 hours under normal operating conditions.
Full-time professionals, with general technical expertise and extensive
operational knowledge of the Company's products, provide pre-sales technical
consultation and support to the Company's field sales organization and are
responsible for the final technical review and approval of all proposed delivery
platforms and installation configurations. These professionals also consult and
coordinate with the client, account manager, and installation team regarding
site preparation, schedule system installation and confirm full acceptance.
They also monitor client satisfaction, maintenance, and other support
requirements.
All manufacturers' warranties are passed through to the Company's clients.
After the warranty periods are over, the Company offers maintenance contracts
through third-party service organizations. The Company contracts with
outside vendors, primarily BancTec Services Corp., for hardware installation
and maintenance services for its client sites. In addition, the Company
distributes a limited amount of third-party courseware and also purchases
various off-the-shelf software and hardware products from Novell, Microsoft,
and other vendors.
The Company provides its clients with a 24-hour, toll-free, problem resolution
and support "hotline" service. Through the use of a remote diagnostics tool and
on-line access to the Company's "Client Profile" database, full-time client
support specialists can address client issues and successfully resolve most
problems during the initial call. Depending on the nature of the problem, the
hotline staff may dispatch a service engineer to the client site, document the
problem and refer it to the appropriate specialist for resolution, or call for
immediate on-line support from more senior technical personnel.
20
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT, CONTINUED
The Company has supplier relationships with several hardware and software
vendors. Although these relationships are important to the Company, management
believes that, in the event that such products or services were to cease to be
available, alternative sources could be found on terms acceptable to the
Company.
PROPRIETARY RIGHTS:
The Company regards its courseware and software as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark,
trade secret laws, license and distribution agreements, employee and
third-party non-disclosure agreements, and other methods to protect its
proprietary rights. The Company owns the federal registration of the PLATO
trade-mark. In addition, in 1989 Control Data assigned to the Company
federally-registered copyrights in the PLATO courseware. The Company has not
recorded the assignment of these copyrights because it believes the
additional statutory rights resulting from recordation are not necessary for
the protection of the Company's rights therein. The Company has federal
copyrights in all PLATO and aviation courseware produced since 1989. The
Company has not applied for trademark registration at the state level, but
has instead relied on its federal registrations and state common law rights
to protect its proprietary information. The Company has registered
trademarks in the United States and overseas for PLATO. The Company regards
these registrations as material to its business. The Company licenses some
courseware and software from third-party developers and incorporates them
into the Company's courseware offerings and integrated learning systems.
Pursuant to a settlement agreement entered into in October 1992, the Company
has granted certain limited courseware and software licenses to Drake and
Control Data Systems, Inc. (CDSI). The licenses will permit Drake and CDSI
to market certain earlier versions of portions of the PLATO courseware in
certain specified situations. The Company believes that the limited
licenses granted to Drake and CDSI will have no material adverse impact on
its future business.
BACKLOG:
The Company's backlog consists of orders for the delivery of goods and
services in future periods. The total Company backlog was approximately
$17.5 million at October 31, 1996 and $8.8 million at October 31, 1995. The
backlog for PLATO and Aviation Training was $14.2 million and $3.3 million,
respectively, at October 31, 1996. From time to time, the Company may have
longer-term contracts in its backlog for the delivery of both Aviation
Training as well as PLATO Learning
21
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS, CONTINUED
--------
BACKLOG, CONTINUED
Systems. At October 31, 1996, approximately $4.2 million of such orders
(included in the foregoing backlog figure at October 31, 1996) are expected to
be delivered subsequent to fiscal 1997.
CYCLICALITY:
The Company's quarterly operating results fluctuate as a result of a number of
factors including the business and sales cycle, the amount and timing of new
product introductions by the Company, product shipments, client funding issues,
marketing expenditures, product development expenditures, and promotional
programs. In addition, certain of the Company's PLATO Education and Aviation
Training clients experience cyclical variations in funding which can impact the
Company's revenue patterns. The Company's quarterly revenues can also fluctuate
based upon spending patterns, budget cycles, and the fiscal year ends of these
clients. The Company historically has experienced higher levels of revenues in
its fourth fiscal quarter.
EMPLOYEES:
As of October 31, 1996, the Company employed 351 people on a full-time basis,
including 93 in product development and operations, 195 in sales and marketing,
35 in technical support, and 28 in finance and administration.
ITEM 2. FACILITIES
The Company leases approximately 50,000 square feet of office and warehouse
space in Edina and Bloomington, Minnesota for its corporate headquarters and
5,400 square feet of office space for its executive offices in Hoffman Estates,
Illinois. The Company's Canadian subsidiary leases 2,700 square feet for its
principal offices in Toronto, and the United Kingdom subsidiary occupies 8,000
square feet in Berkshire, England. The Company also maintains sales offices in
Dallas, Houston, San Antonio and Texarkana, Texas; Skippack, Pennsylvania;
Alexandria, Virginia; Huntington Beach and Newport Beach, California; Norcross,
Georgia; Westport, Connecticut; Lenexa, Kansas; Chicago, Illinois; Nashville,
Tennessee; and Charlotte, North Carolina. In Canada, the Company maintains
offices in Vancouver, British Columbia; Bedford, Nova Scotia; Winnipeg,
Manitoba; and Edmonton, Alberta.
22
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 2. FACILITIES, CONTINUED
The leases for the Company's offices in Edina and Bloomington, Minnesota expire
March 31, 1998 and the lease for the executive offices in Hoffman Estates,
Illinois expires August 31, 2000. See Note 6 of Notes to Consolidated Financial
Statements.
The Company's leased facilities are adequate to meet its business requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation that is expected to have a material
adverse effect on the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter ended October
31, 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers of the Company are as follows:
William R. Roach Chairman of the Board, President
and Chief Executive Officer
G. Thomas Ahern Vice President, U.S. Sales, PLATO
Education
Sharon R. Fierro Senior Vice President, Chief
Financial Officer, Treasurer
and Secretary
Wellesley R. Foshay Vice President, Quality Assurance
and Standards
Michael A. Hill Senior Vice President, Sales &
Marketing, PLATO Education
David H. LePage Vice President, Systems
Development, Client Support and
Operations
Mary Jo Murphy Vice President, Corporate
Controller and Chief Accounting
Officer
John Murray Vice President, Product Development
Carl Thompson Vice President, Aviation Sales and
Operations
23
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT, CONTINUED
Executive officers are appointed by, and serve at the discretion of, the Board
of Directors.
William R. Roach, age 56, has been Chairman of the Board of Directors, President
and Chief Executive Officer of the Company since its founding in 1989. Prior to
founding the Company, from 1987 to 1988, Mr. Roach was President and Chief
Executive Officer of Applied Learning International, Inc. (ALI), a training and
education company and successor to Advanced Systems, Inc. (ASI), and a Director
and Senior Vice President of ALI's parent, National Education Corporation
(NEC). From 1981 to 1987, Mr. Roach was the Chief Executive Officer of ASI, a
New York Stock Exchange listed training and education company which was acquired
by NEC in 1987. After leaving ALI in 1988, Mr. Roach led a group of investors
in pursuing an acquisition in the field of training and education.
G. Thomas Ahern, age 38, has served in his present capacity as Vice
President, U.S. Sales, PLATO Education since December 1992. Previously, he
was Regional Vice President, Sales for the Company since its founding in
1989. From January 1989 to September 1989, Mr. Ahern was National Sales
Manager for the training and education group of Control Data Corporation, a
computer hardware, software and data services company.
Sharon R. Fierro, age 43, has served in her present capacity since January
1993. She joined the Company in 1989 as Vice President, Chief Financial
Officer and Treasurer. From 1988 to 1989, Ms. Fierro was Controller for the
Central Region of Wang Laboratories, Inc., a computer hardware company.
Previously, Ms. Fierro held the position of Corporate Controller and Chief
Accounting Officer with ALI, ASI and Playboy Enterprises, Inc. Ms. Fierro, a
Certified Public Accountant, was formerly an Audit Manager for Ernst & Young.
Wellesley R. Foshay, Ph.D., age 49, has served as Vice President, Quality
Assurance and Standards since the Company's founding in 1989. From 1987 to
1989, Dr. Foshay was Senior Director, Quality Assurance, Standards and Training
for ALI.
Michael A. Hill, age 50, has served as Senior Vice President, Sales and
Marketing, PLATO Education, since April 1996. Previously, he was Vice President,
PLATO Education Sales and Marketing and has held various sales management
positions with the Company since November 1989. From April 1989 to November
1989, Mr. Hill was Eastern Regional Manager for Learning Tree International, a
leading provider of instructor-led technical training. From 1987 to 1989, he
was Regional Vice President, Central Region for ALI.
24
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT, CONTINUED
David H. LePage, age 50, has served in his present capacity, Vice President,
Systems Development, Client Support and Operations, since the Company's
founding in 1989. From 1972 to 1989, Mr. LePage was General Manager, Systems
Development and Technical Support for the training and education group of
Control Data Corporation.
Mary Jo Murphy, age 40, joined the Company in August 1993 as Vice President,
Corporate Controller and Chief Accounting Officer. From 1986 to 1992, she was
Corporate Controller for Krelitz Industries, Inc., a drug distribution company.
Ms. Murphy, a Certified Public Accountant, was formerly an Audit Supervisor for
Coopers & Lybrand.
John Murray, age 41, joined the Company in 1989 as Managing Director of the
United Kingdom subsidiary. He has held his current position, Vice President,
Product Development, since April 1996. From November 1994 to March 1996, Mr.
Murray was Vice President, Aviation Sales and Operations. He served as Vice
President, Eastern Aviation Sales and Operations, from 1991 to 1994. From
1986 to 1989, Mr. Murray was Manager of Training Systems Group for Control
Data Limited.
Carl E. Thompson, age 33, has served in his present capacity as Vice President,
Aviation Sales and Operations and Managing Director of the United Kingdom
Aviation Training subsidiary since April 1996. From November 1994 to March 1996
has was General Manager of the U.K. subsidiary. From May 1993 to October 1994 he
was Manager - Customer Support, of Aviation Training. Prior to joining TRO, Mr.
Thompson was Business Manager for CSS Limited, a computer services company.
25
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION:
The Company's common stock is publicly traded over-the-counter under the NASDAQ
National Market System symbol, TUTR.
High and low bid quotation for each quarter during the years ended October 31,
1996 and 1995, under the NASDAQ National Market System were as follows:
Fiscal 1996
----------------------------------------------
First Second Third Fourth
------- ------ ------ ------
High 16-3/4 17 19-3/4 19-1/2
Low 5-15/16 10 12-3/8 14-1/4
Fiscal 1995
----------------------------------------------
First Second Third Fourth
------- ------ ------ ------
High 7-3/8 7-1/4 7-3/4 10-1/2
Low 3-3/4 5 4 5-1/2
Over-the-counter market quotations reflect inter-dealer prices, without
retail markup, markdown or commission, and may not necessarily reflect actual
transactions.
HOLDERS:
There were approximately 3,500 stockholders of record as of January 3, 1997
(includes individual participants in security position listings).
DIVIDENDS:
The Company has not declared or paid dividends on its common stock. The
Company's ability to pay dividends is restricted by its revolving loan
agreement with Sanwa Business Credit Corporation (see Note 3 of Notes to
Consolidated Financial Statements). While future dividend payments are at
the discretion of the Board of Directors, the Company is growth-oriented and
there is no present intention to pay a cash dividend on its common stock.
26
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Income Statement data:
Revenues by product line:
PLATO Education ....................... $36,980 $30,613 $22,591 $17,333 $14,006
Aviation Training ..................... 4,425 6,724 5,774 9,200 8,858
------- ------- ------- ------ -------
Total revenues ......................... 41,405 37,337 28,365 26,533 22,864
Gross profit ........................... 35,192 29,669 22,587 21,419 16,978
Selling, general and administrative
expenses .............................. 27,537 19,027 15,494 11,144 9,135
Product development and customer
support ............................... 5,307 4,487 7,515 4,671 4,238
Restructuring charges and other ........ -- -- 800 -- (130)
Operating income (loss) ................ 2,348 6,155 (1,222) 5,604 3,735
Interest expense ....................... (723) (300) (344) (102) (557)
Provision (credit) for income taxes .... 564 2,157 (533) 1,950 1,206
Income (loss) from continuing
operations ............................ 982 3,752 (889) 3,785 2,158
Income (loss) from discontinued
operations ............................ -- -- (1,250) (738) 320
Per share of common stock
(Pro forma basis for 1993 and 1992):
Income (loss) from continuing
operations ............................ 0.15 0.60 (0.14) 0.63 0.48
Income (loss) from discontinued
operations ............................ -- -- (0.20) (0.12) 0.07
Net income ............................. 0.15 0.60 0.53 0.76 0.86
Balance Sheet data:
Total assets ........................... 42,327 33,660 26,931 21,312 9,717
Long-term debt ......................... -- -- -- -- 4,271
</TABLE>
27
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW:
The Company is the leading developer and marketer of microcomputer-based,
interactive, self-paced instructional and testing systems used in a wide
variety of adult settings. Offering comprehensive educational courseware
specifically designed for young adult and adult learners, the Company's
PLATO-Registered Trademark- Learning Systems are marketed to middle schools
and high schools, community colleges, job training programs, correctional
institutions, government-funded programs, and corporations. The Company's
TRO Aviation Training systems are marketed to airlines worldwide for use by
commercial airline pilots, maintenance crews, and cabin personnel.
FISCAL 1996 COMPARED TO FISCAL 1995:
REVENUES:
Total revenues of $41,405,000 for 1996 increased by $4,068,000 or 11% as
compared to $37,337,000 in 1995. The following highlights the growth in
PLATO Education revenues (in 000's):
<TABLE>
<CAPTION>
PLATO Education Aviation Training Total Year
----------------- ---------------- ------------------
1996 1995 1996 1995 1996 1995
------- ------- ------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Courseware license and support $31,252 $25,612 $4,183 $4,599 $35,435 $30,211
Hardware, third party courseware and other 5,728 5,001 242 2,125 5,970 7,126
------- ------- ------- ------ -------- -------
Total revenues $36,980 $30,613 $4,425 $6,724 $41,405 $37,337
------- ------- ------- ------ -------- -------
------- ------- ------- ------ -------- -------
</TABLE>
As summarized in the above table, PLATO Education revenues of $36,980,000 for
fiscal 1996 increased by $6,367,000 or 21% as compared to 1995. This increase
can be attributed to increased market penetration resulting from the
expansion of the PLATO Education sales force and new products.
Aviation Training revenues of $4,425,000 decreased by $2,299,000 or 34% from
the prior year, due principally to a decline in low margin hardware sales,
reflecting the Company's focus on the sale of high margin courseware
products. The decline in Aviation Training courseware revenues reflects a
general weakness in the aviation industry.
The Company's quarterly operating results fluctuate as a result of a number
of factors including the business and sales cycle, the amount and timing of
new product introductions by the Company, product shipments, client funding
issues, marketing expenditures, product development expenditures and
promotional programs. The Company historically has experienced significantly
higher levels of revenues in its fourth fiscal quarter.
28
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
FISCAL 1996 COMPARED TO FISCAL 1995, CONTINUED
GROSS PROFIT:
Gross profit for 1996 increased by $5,523,000 or 19% to $35,192,000 as
compared to $29,669,000 for 1995. This increase was due principally to PLATO
Education revenue growth and a favorable mix of courseware revenue. The
Company's gross margin was 85% for 1996 as compared to 79% for 1995.
Increased courseware revenues and a decline in hardware revenues resulted in
a significantly improved gross margin for 1996.
PLATO Education gross margin for 1996 was 86% compared to 84% for 1995.
Aviation Training gross margin was 76% for 1996 compared to 57% for 1995.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE:
Selling, general, and administrative expense for 1996 increased by $8,510,000
or 45% to $27,537,000 as compared to $19,027,000 for 1995. PLATO Education
sales and marketing expenses, including commissions, increased $6,264,000,
principally as a result of the growth in sales volume and the planned
expansion of the sales and service organization. In addition, in the fourth
quarter of 1996, the Company recorded a provision for doubtful accounts of
approximately $1,700,000.
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
Product development and customer support expense for 1996 increased by
$820,000 or 18% to $5,307,000 as compared to $4,487,000 for 1995. Product
development expense of $2,947,000 increased by $366,000, or 14%, as a result
of increased Aviation Training product development spending as well as a
slight increase in PLATO Education spending. During fiscal 1996, the Company
developed a new, state-of-the-art, Windows-based instructional management
system that will replace the current DOS-based curriculum manager for systems
that support the Windows operating system. These costs were offset by a
decrease in spending due to the completion of the PLATO WorkSkills curricula.
Customer support expense for PLATO Education of $2,097,000 increased by
$438,000, or 26%, as a result of increased revenue levels and the broadening
customer base.
OPERATING INCOME:
Operating income for 1996 was $2,348,000 as compared to $6,155,000 for 1995.
This decline was due primarily to PLATO Education increased revenues and
gross profit being more than offset by increased sales and marketing and
customer support expenses.
29
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
FISCAL 1996 COMPARED TO FISCAL 1995, CONTINUED
INTEREST EXPENSE:
Interest expense was $723,000 for 1996 as compared to $300,000 for 1995.
Interest expense increased due to a higher level of borrowings under the
Company's revolving loan agreement during 1996. In addition, the sale of
certain installment receivables at a discount resulted in the recognition of
interest expense in the second quarter of fiscal 1996 (see Note 2 of Notes to
Consolidated Financial Statements).
FISCAL 1995 COMPARED TO FISCAL 1994:
REVENUES:
Total revenues for 1995 increased by $8,972,000 or 32% to $37,337,000 as
compared to $28,365,000 in 1994. PLATO Education revenues of $30,613,000 for
1995 increased by $8,022,000 or 36% from the prior year. This growth is
attributable to increased market penetration resulting principally from the
expansion of the PLATO Education sales force. Sales volume has increased due
to increased sales force productivity, the continued acceptance of the PLATO
Basic and Advanced Skills curricula in traditional and new markets, as well
as the introduction of the new PLATO WorkSkills curricula. Aviation Training
revenues of $6,724,000 increased by $950,000 or 16% from the prior year.
This increase reflects a slight improvement from the conditions experienced
in this marketplace in 1994.
The Company's quarterly operating results fluctuate as a result of a number
of factors including the business and sales cycle, the amount and timing of
new product introductions by the Company, product shipments, client funding
issues, marketing expenditures, product development expenditures and
promotional programs. The Company historically has experienced significantly
higher levels of revenues in its fourth fiscal quarter.
GROSS PROFIT:
Gross profit for 1995 increased by $7,082,000 or 31% to $29,669,000 as
compared to $22,587,000 for 1994. This increase was principally due to
revenue growth. The Company's gross margin was 79% for 1995 as compared to
80% for 1994.
30
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
FISCAL 1995 COMPARED TO FISCAL 1994, CONTINUED
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE:
Selling, general, and administrative expense for 1995 increased by $3,533,000
or 23% to $19,027,000 as compared to $15,494,000 for 1994. PLATO Education
sales and marketing expenses, including commissions, increased $4,379,000,
principally as a result of the growth in sales volume and the planned
expansion of the sales and service organization. This increase was partially
offset by a decrease in Aviation Training expenses.
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
Product development and customer support expense for 1995 decreased by
$3,028,000 or 40% to $4,487,000 as compared to $7,515,000 for 1994. This
decrease was due principally to the completion of a major upgrade and
enhancement of the PLATO Basic and Advanced Skills curricula, the costs of
which were expensed in 1994. The PLATO Education product development costs
incurred in fiscal 1994 and prior represented costs for the development of
current generation products, including upgrades and enhancements. All such
costs are expensed as incurred. In 1995, the costs associated with the
development of a new generation product, PLATO WorkSkills, were capitalized.
Such costs are being amortized on a straight-line basis over three years.
The PLATO WorkSkills curricula addresses the new workplace market as well as
certain education markets, particularly high schools and colleges which are
increasingly focusing on career preparation.
Customer support expense for PLATO Education of $1,659,000 increased by
$527,000, or 47%, as a result of increased revenue levels and the broadening
customer base.
OPERATING INCOME (LOSS):
Operating income for 1995 was $6,155,000 as compared to the operating loss of
$1,222,000 for 1994. This improvement was due primarily to PLATO Education
increased revenues and gross profit, and decreased product development
expense, offset by increased sales and marketing expenses. The operating
results also reflect the positive impact of the restructuring of the Aviation
Training operations in the first quarter of fiscal 1995. As a result of this
action, the Company reduced its fiscal 1995 operating expenses by
approximately $1,400,000 when compared to the prior year.
31
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES:
As of October 31, 1996, the Company's principal sources of liquidity included
cash and cash equivalents of $475,000, net accounts receivable of $24,163,000
and its line of credit. The Company has total installment receivables of
$14,932,000 at October 31, 1996, of which $13,023,000 are due within one year
and are included in net accounts receivable. The increase in accounts
receivable and installment receivables of $5,445,000 is a function of the
growth in revenues as well as an increase in deferred payment terms offered
to customers. These deferred billings more closely align customer billings
with their funding cycles. During the year ended October 31, 1996, the
Company sold certain installment receivables for net cash proceeds of
approximately $599,000 (see Note 2 of Notes to Consolidated Financial
Statements).
Net cash used in the Company's operating activities was $4,223,000 in 1996,
$4,782,000 in 1995, and $5,241,000 in 1994. Cash flows from operations were
used principally to fund the Company's working capital requirements as it
continues to grow by investing in new products and expanding its PLATO
Education sales and service organization. In addition to cash flows from
operations, the Company has resources available under its revolving loan
agreement to provide borrowings up to a maximum of $10,000,000.
Substantially all of the Company's assets are pledged as collateral under the
agreement. Borrowings are limited by the available borrowing base, as
defined, consisting primarily of certain accounts receivable and inventory.
The agreement, dated August 2, 1995, has a three-year commitment with an
option to extend for an additional two years. Interest is payable at the
prime rate plus 1.5%, or the LIBOR rate plus 3.25%, as determined by the
Company, and a commitment fee is payable based on the unused portion of the
line. The agreement provides for financial covenants which require a minimum
level of operating profit and a minimum liabilities to equity ratio. The
Company did not comply with the financial covenant requiring a minimum level
of operating profit for the year ended October 31, 1996. On January 23, 1997,
the loan agreement was amended to waive compliance with such covenant for the
period ending October 31, 1996. There are also restrictions on dividends,
investments, additional indebtedness, and the sale of assets, as defined in
the agreement. At October 31, 1996, borrowings of $8,612,000 were
outstanding at a weighted average interest rate of 8.9%. The Company had
sufficient collateral as of October 31, 1996 to borrow up to the maximum line
of credit. (See Note 3 of Notes to Consolidated Financial Statements).
In January 1997, the Company amended its revolving loan agreement to provide
for a maximum $12,500,000 line of credit from January 6, 1997 through March 15,
1997 to meet its working capital needs. Effective March 15, 1997, the maximum
line of credit under this agreement is reduced to
32
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
$10,000,000. The Company is currently reviewing financing alternatives to
meet its short and long-term needs.
The Company's net cash flow used in investing activities was $1,020,000 in
1996, principally for capital expenditures. The Company's net cash flow
provided by investing activities was $1,557,000 in 1995 and $3,905,000 in
1994, principally from the sale of marketable securities to fund working
capital needs. The Company's capital expenditures totaled $1,033,000,
$668,000 and $1,210,000 in 1996, 1995 and 1994, respectively. At October 31,
1996, the Company had no material commitments for capital expenditures.
The Company's net cash flow provided by financing activities was $5,429,000
in 1996, and $3,319,000 in 1995, principally from borrowings under the line
of credit. In 1994, the Company's net cash flow provided by financing
activities was $89,000.
Realization of net deferred tax assets recorded is dependent upon the Company
earning approximately $20 million of taxable income in future years.
Management believes that existing levels of pretax earnings are sufficient to
generate this level of income. In prior years, the primary differences
between pre-tax earnings for financial reporting purposes and taxable income
for income tax purposes included revenue recognition, the capitalization of
product development costs and various reserves. Net operating loss
carryforwards do not start expiring until 2004.
From time to time, the Company evaluates making acquisitions of products or
businesses that complement the Company's core business. The Company has no
present understandings, commitments, or agreements with respect to any
material acquisitions of other businesses, products, or technologies.
However, the Company may consider and acquire other complementary businesses,
products, or technologies in the future.
The Company maintains adequate cash reserves, short-term investments and
credit facilities to meet its anticipated working capital, capital
expenditure, and business investment requirements.
33
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
------
<S> <C> <C>
(a)(1) Consolidated Financial Statements:
Report of Independent Accountants ...................................... 35
Consolidated Balance Sheets as of October 31, 1996 and 1995 ............ 36
Consolidated Statements of Income for the years ended
October 31, 1996, 1995 and 1994 ........................................ 37
Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1996, 1995 and 1994 ........................................ 38
Consolidated Statements of Cash Flows for the years ended
October 31, 1996, 1995 and 1994 ........................................ 39
Notes to Consolidated Financial Statements ............................. 40-49
(2) Consolidated Financial Statement Schedule for the years ended
October 31, 1996, 1995 and 1994:
Report of Independent Accountants on Consolidated Financial Statement
Schedule ............................................................. 53
Schedule II. Valuation and Qualifying Accounts and Reserves ............ 54
</TABLE>
All other schedules called for under Regulation S-X are not submitted because
they are not applicable, or not required; or because the required information
is not material or is included in the consolidated financial statements or
notes thereto.
34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors
TRO Learning, Inc.
We have audited the accompanying consolidated balance sheets of TRO Learning,
Inc. and Subsidiaries as of October 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended October 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of TRO
Learning, Inc. and Subsidiaries as of October 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements, the Company
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" in fiscal 1994.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
December 23, 1996, except for
Note 3, for which the date is
January 23, 1997
35
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
October 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................................... $ 475 $ 231
Accounts receivable, less allowances of $510 and $584, respectively ................ 24,163 17,603
Inventories ........................................................................ 1,097 1,045
Prepaid expenses and other current assets .......................................... 1,051 934
--------- ---------
Total current assets ........................................................... 26,786 19,813
Equipment and leasehold improvements, less accumulated depreciation
of $3,250 and $2,479, respectively ................................................. 1,368 1,341
Product development costs, less accumulated amortization of $680 and $84,
respectively ....................................................................... 5,528 2,767
Deferred tax asset ................................................................... 5,906 5,575
Other assets ......................................................................... 2,739 4,164
--------- ---------
$42,327 $33,660
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................... $2,588 $2,247
Accrued employee salaries and benefits ............................................. 3,079 2,469
Accrued liabilities ................................................................ 3,705 3,281
Revolving loan ..................................................................... 8,612 3,448
Deferred tax liability ............................................................. 1,845 950
Deferred revenue ................................................................... 1,137 1,066
--------- ---------
Total current liabilities ...................................................... 20,966 13,461
Deferred revenue, less current portion ............................................... 296 152
Other liabilities .................................................................... 253 545
Stockholders' equity:
Common stock, $.01 par value, 25,000 shares authorized; 6,190 shares issued and
6,167 shares outstanding in 1996; 6,100 shares issued and 6,072 shares
outstanding in 1995 .............................................................. 62 61
Paid in capital .................................................................... 21,634 21,345
Accumulated deficit ................................................................ (443) (1,425)
Treasury stock at cost, 23 and 28 shares, respectively ............................. (208) (183)
Foreign currency translation adjustment ............................................ (233) (296)
--------- ---------
Total stockholders' equity ..................................................... 20,812 19,502
--------- ---------
$42,327 $33,660
--------- ---------
--------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
36
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended October 31,
---------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues by product line:
PLATO Education ..................................................... $36,980 $30,613 $22,591
Aviation Training ................................................... 4,425 6,724 5,774
--------- --------- ---------
Total revenues .................................................... 41,405 37,337 28,365
Cost of revenues ...................................................... 6,213 7,668 5,778
--------- --------- ---------
Gross profit ...................................................... 35,192 29,669 22,587
--------- --------- ---------
Operating expenses:
Selling, general and administrative expense ......................... 27,537 19,027 15,494
Product development and customer support ............................ 5,307 4,487 7,515
Restructuring charges ............................................... --- --- 800
--------- --------- ---------
Total operating expenses .......................................... 32,844 23,514 23,809
--------- --------- ---------
Operating income (loss) ......................................... 2,348 6,155 (1,222)
Interest expense ...................................................... (723) (300) (344)
Interest income and other expense, net ................................ (79) 54 144
--------- --------- ---------
Income (loss) from continuing operations before income taxes .... 1,546 5,909 (1,422)
Provision (credit) for income taxes ................................... 564 2,157 (533)
--------- --------- ---------
Income (loss) from continuing operations ........................ 982 3,752 (889)
Discontinued operations:
Loss on disposal (net of tax benefit of $750 in 1994) ............... --- --- (1,250)
--------- --------- ---------
Loss from discontinued operations ................................. --- --- (1,250)
--------- --------- ---------
Income (loss) before cumulative effect of change in
accounting principle .......................................... 982 3,752 (2,139)
Cumulative effect of change in accounting for income taxes ............ --- --- 5,500
--------- --------- ---------
Net income ...................................................... $982 $3,752 $3,361
--------- --------- ---------
--------- --------- ---------
Income (loss) per common and common equivalent share:
Income (loss) from continuing operations ............................ $0.15 $0.60 $(0.14)
Loss from discontinued operations ................................... --- --- (0.20)
--------- --------- ---------
Income (loss) before cumulative effect of change in
accounting principle .............................................. 0.15 0.60 (0.34)
Cumulative effect of change in accounting for income taxes .......... --- --- 0.87
--------- --------- ---------
Net income ........................................................ $0.15 $0.60 $0.53
--------- --------- ---------
--------- --------- ---------
Weighted average common and common equivalent shares
outstanding ....................................................... 6,643 6,280 6,287
--------- --------- ---------
--------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
37
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock Foreign
----------------- Currency Total
Paid in Accumulated Treasury Translation Stockholders'
Shares Amount Capital Deficit Stock Adjustment Equity
------ ------ ------- ----------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, November 1, 1993 ............ 6,033 $60 $21,203 $(8,538) --- $(386) $12,339
Net income .......................... --- --- --- 3,361 --- --- 3,361
Exercise of stock options
and warrants and shares
issued under employee
stock purchase plan ............... 40 1 88 --- --- --- 89
Changes in exchange rates ........... --- --- --- --- --- 152 152
------ ------ ------- ----------- -------- ----------- -------------
Balances, October 31, 1994 ............ 6,073 61 21,291 (5,177) --- (234) 15,941
Net income .......................... --- --- --- 3,752 --- --- 3,752
Exercise of stock options
and shares issued under
employee stock
purchase plan ..................... 27 --- 54 --- --- --- 54
Repurchase of shares ................ (28) --- --- --- (183) --- (183)
Changes in exchange rates ........... --- --- --- --- --- (62) (62)
------ ------ ------- ----------- -------- ----------- -------------
Balances, October 31, 1995 ............ 6,072 61 21,345 (1,425) (183) (296) 19,502
Net income .......................... --- --- --- 982 --- --- 982
Exercise of stock options
and shares issued under
employee stock
purchase plan ..................... 99 1 289 --- 50 --- 340
Repurchase of shares ................ (4) --- --- --- (75) --- (75)
Changes in exchange rates ........... --- --- --- --- --- 63 63
------ ------ ------- ----------- -------- ----------- -------------
Balances, October 31, 1996 ............ 6,167 $62 $21,634 $(443) $(208) $(233) $20,812
------ ------ ------- ----------- -------- ----------- -------------
------ ------ ------- ----------- -------- ----------- -------------
</TABLE>
See Notes to Consolidated Financial Statements
38
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $982 $3,752 $3,361
------- ------- -------
Adjustments to reconcile net income to net cash used in operating activities:
Cumulative effect of change in accounting for income taxes ........... --- --- (5,500)
Deferred income taxes ................................................ 564 2,157 (1,283)
Amortization of deferred revenue ..................................... --- (251) (773)
Depreciation and amortization ........................................ 1,466 807 500
Disposal of fixed assets ............................................. 180 41 ---
Provision for doubtful accounts ...................................... 2,120 300 ---
Changes in assets and liabilities:
Increase in accounts receivable .................................... (8,680) (6,153) (2,889)
(Increase) decrease in inventories ................................. (52) 141 (272)
(Increase) decrease in prepaid expenses and other current
and noncurrent assets ............................................ 1,255 (1,746) (1,175)
Increase in product development costs .............................. (3,356) (2,851) ---
Increase (decrease) in accounts payable ............................ 341 144 (575)
Increase (decrease) in accrued liabilities, accrued employee salaries
and benefits and other liabilities ............................... 742 (522) 2,476
Increase (decrease) in deferred revenue ............................ 215 (601) 889
------- ------- -------
Total adjustments ................................................ (5,205) (8,534) (8,602)
------- ------- -------
Net cash used in operations ...................................... (4,223) (4,782) (5,241)
------- ------- -------
Cash flows from investing activities:
Decrease in marketable securities ...................................... --- 2,225 5,115
Proceeds from disposal of fixed assets ................................. 13 --- ---
Capital expenditures ................................................... (1,033) (668) (1,210)
------- ------- -------
Net cash provided by (used in) investing activities ................. (1,020) 1,557 3,905
------- ------- -------
Cash flows from financing activities:
Net proceeds from short term borrowings ................................ 5,164 3,448 ---
Net proceeds from the issuance of common stock ......................... 290 54 89
Purchase of treasury stock ............................................. (25) (183) ---
------- ------- -------
Net cash provided by financing activities ............................ 5,429 3,319 89
------- ------- -------
Effect of foreign currency on cash ....................................... 58 (63) 148
------- ------- -------
Net increase (decrease) in cash and cash equivalents ..................... 244 31 (1,099)
Cash and cash equivalents at beginning of period ......................... 231 200 1,299
------- ------- -------
Cash and cash equivalents at end of period ............................... $475 $231 $200
------- ------- -------
------- ------- -------
Cash paid for interest expense ........................................... $829 $293 $73
</TABLE>
See Notes to Consolidated Fianancial Statements
39
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS:
TRO Learning, Inc. and its subsidiaries (the Company) develop and market
microcomputer-based, interactive, self-paced instructional and educational
systems. The Company markets such systems primarily to educational institutions
and private industry.
PRINCIPLE OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of TRO
Learning, Inc. and its subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
THE USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. Credit risk is minimized
as a result of the large number of the Company's customers. The Company
performs evaluations of its customers' credit worthiness and generally requires
no collateral from its customers. Although many of the Company's educational
customers are dependent upon various government funding sources, and are subject
to non-appropriation of funds, the Company does not believe there is
concentration of risk associated with any specific governmental program or
funding source. As of October 31, 1996, the Company had no significant
concentrations of credit risk.
CASH EQUIVALENTS:
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Such investments are
carried at cost, which approximates fair value.
40
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INVENTORIES:
Inventories are stated at the lower of cost (first in, first out) or market.
Inventories consist principally of goods purchased for resale.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements are stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets. Upon retirement or disposition, cost and related accumulated
depreciation are removed from the accounts, and any gain or loss is included in
the results of operations.
OTHER ASSETS:
Other assets include principally intangible assets and installment receivables
with terms greater than one year.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of the Company's debt is estimated to approximate the carrying
value of these liabilities based upon borrowing rates currently available to the
Company for borrowings with similar terms.
REVENUE RECOGNITION:
Revenue from the sale of education and training courseware licenses, support
services, and related computer hardware is recognized when courseware, hardware,
and related services are delivered at which time future service costs, if any,
are accrued. Future service costs represent the Company's problem resolution and
support "hotline" service for a one year period. Deferred revenue represents
the portion of billings made or payments received in advance of services being
performed or products being delivered.
PRODUCT DEVELOPMENT, ENHANCEMENT, AND MAINTENANCE COSTS:
The Company develops education and training products, referred to hereafter as
courseware products.
Costs incurred in the development of the Company's current generation courseware
products and related enhancements and routine maintenance thereof are expensed
as incurred. All costs incurred
41
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PRODUCT DEVELOPMENT, ENHANCEMENT, AND MAINTENANCE COSTS, Continued
by the Company in establishing the marketability of its new courseware products
to be sold, leased, or otherwise marketed are expensed as incurred. Once
marketability has been established, costs incurred in the development of new
generation courseware products are capitalized.
Amortization is provided over the estimated useful life of the new courseware
products, generally three years, using the straight-line method. Amortization
begins when the product is available for general release to customers.
Unamortized capitalized costs determined to be in excess of the net realizable
value of the product are expensed at the date of such determination.
INCOME TAXES:
Effective November 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
In addition, the amount of any future tax benefits are reduced by a valuation
allowance to the extent such benefits are not expected to be realized.
As of November 1, 1993, the Company recorded a tax benefit of $5,500,000, or
$.87 per share, which represents the net increase to the deferred tax asset as
of that date. This amount has been
reflected in the consolidated statements of income as the cumulative effect of a
change in accounting principle.
COMPUTATION OF INCOME (LOSS) PER SHARE:
Primary income (loss) per share is based upon the weighted average number of
shares of common stock outstanding and, where dilutive, common equivalent shares
from stock options (using the treasury stock method). Fully diluted income
(loss) per share is not presented since the results are equivalent to primary
income (loss) per share.
FOREIGN CURRENCY TRANSLATION:
Results of operations for foreign entities are translated using the average
exchange rates during the period. Assets and liabilities are translated using
the exchange rate in effect at the balance sheet date. Resulting translation
adjustments are recorded in a separate component of stockholders' equity,
foreign currency translation adjustment.
42
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
2. ACCOUNTS RECEIVABLE:
Accounts receivable include installment receivables of $13,023,000 and
$7,987,000 at October 31, 1996 and 1995, respectively. Installment receivables
with terms greater than one year were $1,909,000 and $3,024,000 at October 31,
1996 and 1995, respectively, and are included in other assets on the
consolidated balance sheets.
During the years ended October 31, 1996 and 1995, the Company sold certain
installment receivables, on a non-recourse basis, to financial institutions.
Approximately $735,000 and $1,081,000 of receivables were sold at their
discounted present value of approximately $599,000 and $981,000 in fiscal 1996
and 1995, respectively, at an effective rate of 8.6% and 9.3%, respectively.
The difference between the gross receivable amount and the proceeds has been
recorded as interest expense in the consolidated statements of income.
3. DEBT:
On August 2, 1995, the Company entered into a revolving loan agreement with
Sanwa Business Credit Corporation which provided for a maximum line of credit of
$10,000,000. In July 1996, the Company amended its revolving loan agreement to
provide for a maximum $11,500,000 line of credit from August 1, 1996 through
October 31, 1996 to meet its cyclical working capital needs. Effective November
1, 1996, the maximum line of credit is $10,000,000. Substantially all of the
Company's assets are pledged as collateral under the agreement. Borrowings are
limited by the available borrowing base, as defined, consisting primarily of
certain accounts receivable and inventory. The agreement has a three-year
commitment with an option to extend for an additional two years. Interest is
payable at the prime rate plus 1.5% or the LIBOR rate plus 3.25%, as determined
by the Company, and a commitment fee is payable based on the unused portion of
the line. The agreement provides for financial covenants which require a
minimum level of operating profit and a minimum liabilities to equity ratio.
The Company did not comply with the financial covenant requiring a minimum level
of operating profit for the year ended October 31, 1996. On January 23, 1997,
the loan agreement was amended to waive compliance with such covenant for the
period ending October 31, 1996. There are also restrictions on dividends,
investments, additional indebtedness, and the sale of assets, as defined in the
agreement. At October 31, 1996, borrowings of $8,612,000 were outstanding at a
weighted average interest rate of 8.9%. At October 31, 1995, borrowings of
$3,448,000 were outstanding at an interest rate of 9.125%. The Company had
sufficient collateral as of October 31, 1996 to borrow up to the maximum line of
credit.
In January 1997, the Company amended its revolving loan agreement to provide for
a maximum $12,500,000 line of credit from January 6, 1997 through March 15, 1997
to meet its working capital needs. Effective March 15, 1997, the maximum line of
credit under this agreement is reduced to $10,000,000. The Company is currently
reviewing financing alternatives to meet its short and long-term needs.
43
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
4. INCOME TAXES:
The components of income (loss) from continuing operations before provision for
income taxes are as follows (in thousands):
Year Ended October 31,
-------------------------------------
1996 1995 1994
------ ------ --------
United States ..................... $2,066 $6,646 $(220)
Foreign ........................... (520) (737) (1,202)
------ ------ --------
$1,546 $5,909 $(1,422)
------ ------ --------
------ ------ --------
The provision (credit) for income taxes related to continuing operations
consisted of (in thousands):
Year Ended October 31,
-------------------------------------
1996 1995 1994
------ ------ --------
Current:
Federal ......................... $703 $2,260 $(75)
Foreign ......................... (178) (269) (408)
State and local ................. 39 166 (50)
------ ------ --------
$564 $2,157 $(533)
------ ------ --------
------ ------ --------
The provision (credit) for income taxes for the years ended October 31, 1996,
1995 and 1994, differs from the amount computed by applying the U.S. federal
statutory income tax rate to income (loss) from continuing operations before
income taxes. The principal reasons for the differences are as follows (in
thousands):
Year Ended October 31,
------------------------------------
1996 1995 1994
------ -------- -------
U.S. federal statutory rate at 34% ..... $525 $2,009 $(483)
State taxes, net of U.S. federal
income tax ........................... 52 166 (50)
Other .................................. (13) (18) ---
------ -------- -------
$564 $2,157 $(533)
------ -------- -------
------ -------- -------
44
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
4. INCOME TAXES, CONTINUED
At October 31, 1996, the Company had a federal net operating loss carryforward
of $15,800,000 and a foreign net operating loss carryforward of $3,900,000.
These net operating loss carryforwards do not start expiring until 2004.
The components of the deferred tax asset at October 31, are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
Temporary Tax Temporary Tax
Difference Effected Difference Effected
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Current:
Revenue recognition ........................ $(8,285) $(3,065) $(2,793) $(1,034)
Accrued liabilities and reserves ........... 3,297 1,220 228 84
---------- -------- ---------- --------
Total current deferred tax liability ..... (4,988) (1,845) (2,565) (950)
---------- -------- ---------- --------
Long-term:
Net operating loss carryforwards ........... 18,516 6,851 13,116 4,853
Product development expense recognition .... (2,668) (987) 1,131 419
Discontinued operations reserve ............ 1,000 370 1,606 594
Equipment basis difference ................. 646 239 698 258
Revenue recognition ........................ (1,024) (379) (1,572) (581)
Other ...................................... (356) (188) 87 32
---------- -------- ---------- --------
Total long-term deferred tax asset ....... 16,114 5,906 15,066 5,575
---------- -------- ---------- --------
$11,126 $4,061 $12,501 $4,625
---------- -------- ---------- --------
---------- -------- ---------- --------
</TABLE>
Management has not recorded a valuation allowance against deferred tax assets as
a result of expected future taxable income.
5.STOCK OPTIONS:
The Company has adopted stock option plans that authorize the granting of
options to directors, officers, and key employees to purchase unissued common
stock of the Company subject to certain conditions, such as continued
employment. The option price is equal to the fair market value of the
Company's common stock at the date of grant. Such options become exercisable
ratably over three years and expire ten years from the date of grant. These
plans authorize the granting of options to purchase up to 1,254,000 shares of
common stock.
45
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
5. STOCK OPTIONS, CONTINUED
OUTSTANDING OPTIONS
---------------------------------------
NUMBER PRICE AGGREGATE
OF SHARES RANGE PRICE
---------- ----------- ----------
Balance, November 1, 1993 .......... 587,000 $ 03-8.00 $2,989,000
Options granted .................. 135,000 8.00-8.25 1,113,000
Options terminated ............... (7,000) .83-8.25 (48,000)
Options exercised ................ (2,000) .83 (2,000)
---------- ----------- ----------
Balance, October 31, 1994 .......... 713,000 .03-8.25 4,052,000
Options granted .................. 259,000 4.38-8.31 1,758,000
Options terminated ............... (16,000) .83-8.25 (64,000)
Options exercised ................ (19,000) .74-.83 (15,000)
---------- ----------- ----------
Balance, October 31, 1995 .......... 937,000 .03-8.31 5,731,000
Options granted .................. 196,000 8.00-17.50 2,589,000
Options terminated ............... (21,000) .83-8.31 (145,000)
Options exercised ................ (96,000) .74-8.31 (275,000)
---------- ----------- ----------
Balance, October 31, 1996 .......... 1,016,000 $ .03-17.50 $7,900,000
---------- ----------- ----------
---------- ----------- ----------
At October 31, 1996 and 1995, options to purchase 693,000 and 581,000 shares of
common stock were exercisable, respectively.
6. COMMITMENTS:
The Company leases its production, sales and administration facilities.
Commitments for future minimum rental payments under noncancelable leases for
the next five years ending October 31, are as follows (in thousands):
1997 ..................... 1,297
1998 ....................... 822
1999 ....................... 469
2000 ....................... 179
2001 ........................ 16
Certain of these leases contain renewal options, escalation clauses and
requirements that the Company pay taxes, insurance and maintenance costs. Rent
expense totaled $1,413,000, $1,251,000, and $1,473,000 for the years ended
October 31, 1996, 1995, and 1994, respectively.
46
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
6. COMMITMENTS, CONTINUED
In September 1995, the Company entered into a product distribution agreement for
exclusive rights to market and distribute certain products to be bundled with
the Company's PLATO products. In consideration for this license, the Company
agreed to pay royalties through October 31, 1997. There is a minimum royalty
guaranteed for sales of the product for the period November 1, 1996 through
October 31, 1997. Payments of $800,000 are due no later than June 30, 1997.
In April 1995, the Company entered into an agreement for rights to distribute
certain products. In consideration for this license, the Company agreed to pay
royalties through April 1997. The minimum guaranteed royalty payment of $750,000
is due no later than April 1997. The agreement was amended in December 1996 to
extend the period of contract through April 30, 1999. For each of the two years
ended April 30, 1998 and 1999, the guaranteed minimum royalty is $625,000.
Revenue from the sale of these products is recognized when the products are
delivered to the customer, at which time costs are accrued for the earned
royalty.
7. RESTRUCTURING CHARGES:
Restructuring charges of $800,000 for the year ended October 31, 1994, consisted
principally of transition, severance, and facility downsizing costs associated
with the consolidation of the Company's U.S. and U.K. Aviation Training
operations.
8. DISCONTINUED OPERATIONS:
Discontinued operations represent the Company's Certification and Testing
Services business which was discontinued in fiscal 1993. In September 1993, the
Company entered into a Certification and Testing Services Agreement with Sylvan
Learning Systems, Inc. (SLS) whereby SLS agreed to assume and perform the
Company's rights and obligations under its Certification and Testing Services
(CTS) contracts. The agreement provided for SLS to become a permitted assignee
of, or party to, all CTS contracts or extensions or successor contracts. In
consideration for the rights to the CTS contracts, SLS agreed to pay the Company
a royalty on certain future contract revenues in excess of a specified minimum
over the period from September 1993, through September 1997. In the event
specified minimum contract revenues are not achieved, the Company is obligated
to pay SLS a royalty on the shortfall. The Company anticipates a shortfall in
the specified minimum contract revenues. The loss from discontinued operations
for the year ended October 31, 1994, related principally to the amount of
royalty due SLS in 1996 and 1997.
47
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
9. INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION:
The Company operates in one industry segment, namely education and training.
Revenues from affiliates are recorded at established intercompany selling prices
which are based upon cost plus mark-up. Information about the Company's
operations in different geographic areas is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues from unaffiliated customers(1):
United States ............................... $33,217 $27,471 $22,974
Canada ...................................... 2,955 2,871 2,502
United Kingdom .............................. 5,233 6,995 2,889
------- ------- -------
$41,405 $37,337 $28,365
------- ------- -------
------- ------- -------
Revenues from affiliates:
United States ............................... $2,104 $2,191 $1,634
United Kingdom .............................. --- --- 58
------- ------- -------
$2,104 $2,191 $1,692
------- ------- -------
------- ------- -------
Operating income (loss):
United States ............................... $3,006 $6,546 $(463)
Canada ...................................... (528) (364) (31)
United Kingdom .............................. (130) (27) (728)
------- ------- -------
$2,348 $6,155 $(1,222)
------- ------- -------
------- ------- -------
Total assets:
United States ............................... $35,497 $27,392 $22,360
Canada ...................................... 2,322 2,052 1,639
United Kingdom .............................. 4,508 4,216 2,932
------- ------- -------
$42,327 $33,660 $26,931
------- ------- -------
------- ------- -------
</TABLE>
(1) As discussed in Note 7, the Company's U.S. Aviation Training operations
were consolidated into the U.K. operations at the beginning of fiscal 1995.
Included in U.S. revenues for fiscal 1994 was $2,885,000 of Aviation
Training revenues.
48
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- ------------------------------------------------------------------------------
10. STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options and other
equity instruments to employees based on new fair value accounting rules.
Although expense recognition for employee stock-based compensation is not
mandatory, SFAS 123 requires companies that choose not to adopt the new fair
value accounting to disclose pro-forma net income and earnings per share under
the new method. This new accounting principle is effective for the Company's
fiscal year ending October 31, 1997. The Company believes that adoption is not
expected to have a material impact on its financial condition as the Company
will not adopt the fair value accounting, but will instead comply with the
disclosure requirements.
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
(In thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1995
------------------------------------------------ -----------------------------------------------
JAN 31 APR 30 JUL 31 OCT 31 TOTAL JAN 31 APR 30 JUL 31 OCT 31 TOTAL
------- ------ ------- ------- ------- ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues by product line:
PLATO Education $4,545 $6,021 $10,917 $15,497 $36,980 $3,519 $5,038 $7,742 $14,314 $30,613
Aviation Training 1,864 720 484 1,357 4,425 1,828 1,279 1,169 2,448 6,724
------- ------ ------- ------- ------- ------ ------ ------ ------- -------
Total revenues 6,409 6,741 11,401 16,854 41,405 5,347 6,317 8,911 16,762 37,337
Gross profit 5,195 6,109 9,422 14,466 35,192 4,048 4,662 7,074 13,885 29,669
Net income (loss) $(1,049) $ (988) $ 725 $ 2,294 $ 982 $ (626) $ (616) $ 546 $ 4,448 $ 3,752
------- ------ ------- ------- ------- ------ ------ ------ ------- -------
------- ------ ------- ------- ------- ------ ------ ------ ------- -------
Income (loss) per
common and common
equivalent share:
Net income (loss) $(0.17) $(0.16) $0.11 $0.34 $0.15 $(0.10) $(0.10) $0.09 $0.71 $0.60
------- ------ ------- ------- ------- ------ ------ ------ ------- -------
------- ------ ------- ------- ------- ------ ------ ------ ------- -------
Weighted average
common and common
equivalent shares
outstanding 6,081 6,100 6,713 6,719 6,643 6,067 6,062 6,276 6,300 6,280
------- ------ ------- ------- ------- ------ ------ ------ ------- -------
------- ------ ------- ------- ------- ------ ------ ------ ------- -------
</TABLE>
49
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART II
- ------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
- ------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
See the information with respect to the Directors of the Registrant which is
set forth in the section entitled "Election of Directors" of the Company's
1997 Proxy Statement, which is incorporated herein by reference. See the
information set forth in the section entitled "Compliance with Section 16(a)
of the Securities Exchange Act of 1934" in the 1997 Proxy Statement, which is
incorporated herein by reference. The 1997 Proxy Statement will be filed
with the Securities and Exchange Commission within 120 days after the close
of the Company's fiscal year.
For information regarding Executive Officers of the Registrant, see Item 4A
of this Report, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See the information set forth in the sections entitled "Director
Compensation", "Executive Compensation", and "Compensation Committee
Interlocks and Insider Participation" in the 1997 Proxy Statement, which is
incorporated herein by reference. Such incorporation by reference shall not
be deemed to specifically incorporate by reference the information referred
to in Item 402(a)(8) of Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information set forth in the section entitled "Security Ownership of
Certain Beneficial Owners and Management" in the 1997 Proxy Statement, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the information set forth in the section entitled "Certain Relationships and
Transactions" in the 1997 Proxy Statement, which is incorporated herein by
reference.
50
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART III
- ------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Information called for by this item is set forth in Item 8.
(a) Documents filed as a part of this report:
1. Financial Statements - See Index to Financial Information on page 34.
2. Financial Statement Schedules - See Index to Financial Information on
page 34.
(b) Reports on Form 8-K:
None
- -C- Exhibits:
The following documents are filed herewith or incorporated herein by reference
and made a part of this Form 10-K.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
3.01 Certificate of Incorporation of the Company (1)
3.02 Bylaws of the Company (1)
4.01 Form of stock certificate of the Company (1)
10.01 Revolving Loan and Security Agreement between Sanwa Business Credit
Corporation and The Roach Organization, Inc. and TRO Learning
(Canada), Inc., dated August 2, 1995 (3)
10.02 Registration Agreement (1)
10.03 Exchange Agreement (1)
10.04 1993 Outside Director Stock Option Plan+ (2)
10.05 Warrants of the Registrant (1)
10.06 Series B Preferred Stock Purchase Agreement, as amended, and
agreements relating thereto (1)
10.08 Lease for Edina, Minnesota office (3)
10.10 Settlement Agreement with Control Data (1)
10.11 Form of Indemnification Agreement (1)
10.12 Stock Purchase Warrant of TRO (1)
10.13 Certification and Testing Services Agreement between the Company and
Sylvan Learning Systems, Inc. dated August 31, 1993. Incorporated by
reference to the corresponding exhibit to the Company's Annual Report
on Form 10-K for the year ended October 31, 1993 (File Number
0-20842).
10.14 1993 Stock Option Plan. Incorporated by reference to Exhibit A to the
Company's 1994 Proxy Statement (File Number 0-20842). +
10.15 Severance and Non Competition Agreement with William R. Roach + (2)
10.16 Severance and Non Competition Agreement with Sharon Fierro + (2)
10.17 First Amendment to Revolving Loan and Security Agreement between Sanwa
Business Credit Corporation and The Roach Organization, Inc. and TRO
Learning (Canada), Inc., dated April 26, 1996.
10.18 Second Amendment to Revolving Loan and Security Agreement between
Sanwa Business Credit Corporation and The Roach Organization, Inc.
and TRO Learning (Canada), Inc., dated August 1, 1996.
10.19 Third Amendment to Revolving Loan and Security Agreement between Sanwa
Business Credit Corporation and The Roach Organization, Inc. and TRO
Learning (Canada), Inc., dated January 6, 1997.
10.20 Fourth Amendment to Revolving Loan and Security Agreement between
Sanwa Business Credit Corporation and The Roach Organization, Inc.
and TRO Learning (Canada), Inc., dated January 23, 1997.
51
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1996
PART III
- ------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K,
CONTINUED
11.01 Statement re: computation of per share earnings
21.01 Subsidiaries of the Registrant (1)
23.01 Consent of Coopers & Lybrand L.L.P. with respect to Registration
Statements on Form S-8
24.01 Powers of Attorney
(1) Incorporated by reference to the corresponding exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-54296).
(2) Incorporated by reference to the corresponding exhibit on the Company's
Annual Report on Form 10-K for the year ended October 31, 1994 (File
Number 0-20842).
(3) Incorporated by reference to the corresponding exhibit on the
Company's Annual Report on Form 10-K for the year ended October 31,
1995 (File Number 0-20842).
+ Management contract or compensatory plan, contract or arrangement.
52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors
TRO Learning, Inc.
Our report on the consolidated financial statements of TRO Learning, Inc. and
Subsidiaries is included on page 35 of this Form 10-K. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedule listed in the index on page 34 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
December 23, 1996, except for
Note 3, for which the date is
January 23, 1997
53
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED OCTOBER 31, 1994, 1995, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) END OF PERIOD
- --------------------------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Deducted in the balance
sheets from the assets to
which they apply:
Allowance for doubtful
accounts:
For the year ended
October 31, 1994 $241 --- $188(b) 66 (a) $363
For the year ended
October 31, 1995 363 300 --- 79 (a) 584
For the year ended
October 31, 1996 584 2,120 264(b) (2,458)(a) 510
Allowance for
inventory obsolescence:
For the year ended
October 31, 1994 450 --- 22(b) 84 (a) 388
For the year ended
October 31, 1995 388 125 --- 22 (a) 491
For the year ended
October 31, 1996 491 150 --- 185 (a) 456
(a) Amounts written off, net of recoveries.
(b) Amounts reclassified.
</TABLE>
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on January 27,
1997.
TRO LEARNING, INC.
By /s/ William R. Roach
------------------------------------
William R. Roach
Chairman of the Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on January 27, 1997.
Signature: Title:
/s/William R. Roach
- ------------------------ Chairman of the Board, President and Chief Executive
William R. Roach Officer (principal executive officer)
/s/Sharon Fierro
- ------------------------ Senior Vice President, Chief Financial Officer,
Sharon Fierro Treasurer and Secretary (principal financial officer)
/s/ Mary Jo Murphy
- ------------------------ Vice President, Corporate Controller and Chief
Mary Jo Murphy Accounting Officer (principal accounting officer)
*
- ----------------------- Director
Jack R. Borsting
*
- ----------------------- Director
Tony J. Christianson
*
- ---------------------- Director
John L. Krakauer
*
- ---------------------- Director
Vernon B. Lewis
*
- ---------------------- Director
John Patience
* By /s/Mary Jo Murphy
-------------------------
Mary Jo Murphy
Attorney-in Fact
55
<PAGE>
INDEX TO EXHIBITS
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ----------------------- ----
3.01 Certificate of Incorporation of the Company (1)
3.02 Bylaws of the Company (1)
4.01 Form of stock certificate of the Company (1)
10.01 Revolving Loan and Security Agreement between Sanwa
Business Credit Corporation and The Roach Organization,
Inc. and TRO Learning (Canada), Inc., dated August 2,
1995 (3)
10.02 Registration Agreement (1)
10.03 Exchange Agreement (1)
10.04 1993 Outside Director Stock Option Plan + (2)
10.05 Warrants of the Registrant (1)
10.06 Series B Preferred Stock Purchase Agreement, as amended,
and agreements relating thereto (1)
10.08 Lease for Edina, Minnesota office (3)
10.10 Settlement Agreement with Control Data (1)
10.11 Form of Indemnification Agreement (1)
10.12 Stock Purchase Warrant of TRO (1)
10.13 Certification and Testing Services Agreement between
the Company and Sylvan Learning Systems, Inc. dated
August 31, 1993. Incorporated by reference to the
corresponding exhibit to the Company's Annual Report on
Form 10-K for the year ended October 31, 1993 (File
Number 0-20842).
10.14 1993 Stock Option Plan. Incorporated by reference to
Exhibit A to the Company's 1994 Proxy Statement (File
Number 0-20842). +
10.15 Severance and Non Competition Agreement with William R.
Roach + (2)
10.16 Severance and Non Competition Agreement with Sharon
Fierro + (2)
10.17 First Amendment to Revolving Loan and Security
Agreement between Sanwa Business Credit Corporation
and The Roach Organization, Inc. and TRO Learning
(Canada), Inc. dated April 26, 1996.
10.18 Second Amendment to Revolving Loan and Security
Agreement between Sanwa Business Credit Corporation and
The Roach Organization, Inc. and TRO Learning (Canada),
Inc. dated August 1, 1996.
10.19 Third Amendment to Revolving Loan and Security Agreement
between Sanwa Business Credit Corporation and The Roach
Organization, Inc. and TRO Learning (Canada), Inc.
dated January 6, 1997.
10.20 Fourth Amendment to Revolving Loan and Security
Agreement between Sanwa Business Credit Corporation and
The Roach Organization, Inc. and TRO Learning (Canada),
Inc. dated January 23, 1997.
11.01 Statement re: computation of per share earnings
21.01 Subsidiaries of the Registrant (1)
23.01 Consent of Coopers & Lybrand L.L.P. with respect to
Registration Statements on Form S-8.
24.01 Powers of Attorney
(1) Incorporated by reference to the corresponding exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-54296).
(2) Incorporated by reference to the corresponding exhibit to the
Company's Annual Report on Form 10-K for the year ended October
31, 1994 (File Number 0-20842).
(3) Incorporated by reference to the corresponding exhibit to the
Company's Annual Report on Form 10-K for the year ended October
31, 1995 (File Number 0-20842).
+ Management contract or compensatory plan, contract or
arrangement.
56
<PAGE>
FIRST AMENDMENT
TO REVOLVING LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO REVOLVING LOAN AND SECURITY AGREEMENT (together
with all appendices, exhibits, schedules and attachments hereto, collectively
this "Amendment") is made and entered into as of April 26, 1996, by and
between THE ROACH ORGANIZATION, INC., a Delaware corporation and TRO LEARNING
(CANADA), INC., a Canadian corporation (collectively, "Borrower") and SANWA
BUSINESS CREDIT CORPORATION, a Delaware corporation ("Lender").
RECITALS
WHEREAS, Borrower and Lender entered into that certain Revolving Loan
and Security Agreement (the "Loan Agreement") dated as of August 2, 1995
together with documents ancillary thereto;
WHEREAS, Borrower has requested and Lender has agreed to extend a
seasonal facility to accommodate Borrower's operating needs;
NOW THEREFORE, for and in consideration of the premises, the mutual
covenants hereinafter set forth and other good and valuable consideration,
the receipt and sufficiency of which the parties hereby acknowledge, it
hereby is agreed as follows:
ARTICLE I
RECITALS AND DEFINITIONS
1.1 Borrower represents and warrants that the foregoing recitals are
true and correct and constitute an integral part of this Amendment and
Borrower and Lender hereby agree that all of the recitals of this Amendment
are hereby incorporated herein and made a part hereof.
1.2 Unless otherwise defined herein or the context otherwise requires,
all capitalized terms used herein shall have the same meanings as ascribed to
them in the Loan Agreement.
ARTICLE II
AMENDMENT OF THE LOAN AGREEMENT
2.1 Section 2.1 hereby is amended by the inclusion of the following
sentence at the end of the first full paragraph of Section 2.1:
<PAGE>
"In addition to the foregoing, Lender shall make available to
Borrower a seasonal overadvance facility (the "Seasonal Overadvance
Facility") in an amount not to exceed Two Million and No/100 Dollars
($2,000,000.00) for the period of time commencing on April 1 and ending
on July 31 of each calendar year during the Term and One Million and
No/100 Dollars ($1,000,000.00) for the period of time commencing on
August 1 and ending on October 31 of each calendar year during the Term.
Borrower shall pay interest on the amount outstanding under the Seasonal
Overadvance Facility equal to two hundred (200) basis points in excess
of the Prime Rate.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Borrower hereby makes the following representations and warranties
to Lender, which representations and warranties shall constitute the
continuing covenants of Borrower and shall remain true and correct until all
of Borrower's Liabilities are paid and performed in full:
a. The representations and warranties of Borrower contained in the
Loan Agreement and the Ancillary Agreements are true and correct on and as
of the date hereof as though made on and as of such date;
b. No Event of Default or event which, but for the lapse of time
or the giving of notice, or both, would constitute an Event of Default under
the Loan Agreement has occurred and is continuing or would result from the
execution and delivery of this Amendment;
c. Borrower is in full compliance with all of the terms,
conditions and all provisions of the Loan Agreement and the Ancillary
Agreements;
d. This Amendment and all Ancillary Agreements required hereunder
to be executed by Borrower and delivered to Lender, have been duly
authorized, executed and delivered on Borrower's behalf pursuant to all
requisite corporate authority and this Amendment and each of the Ancillary
Agreements required hereunder to be executed and delivered by Borrower to
Lender constitute the legal, valid and binding obligations of Borrower
enforceable in accordance with their terms, except as enforceability thereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to creditors' rights; and
e. Borrower hereby acknowledges and agrees that Borrower has no
defense, offset or counterclaim to the payment of said principal, interest,
fees or other Liabilities and hereby waives and relinquishes any such
defense, offset or counterclaim and Borrower hereby releases Lender and its
respective officers, directors, agents, affiliates, successors and assigns
from any claim, demand or cause of action, known or unknown,
-2-
<PAGE>
contingent or liquidated, which may exist or hereafter be known to exist
relating to any matter prior to the date hereof.
ARTICLE IV
RATIFICATION
Except as expressly amended hereby, the Loan Agreement and all Ancillary
Agreements executed in connection therewith shall remain in full force and
effect. The Loan Agreement, as amended hereby, and all rights and powers
created thereby and thereunder or under such Ancillary Agreements, are in all
respects ratified and confirmed. From and after the date hereof, the Loan
Agreement shall be deemed amended and modified as herein provided but, except
as so amended and modified, the Loan Agreement shall continue in full force
and effect and the Loan Agreement and this Amendment shall be read, taken and
construed as one and the same instrument. On and after the date hereof, the
term "Agreement" as used in the Loan Agreement and all other references to
the Loan Agreement therein, in any other instrument, document or writing
executed by Borrower or any guarantor or furnished to Lender by Borrower or
any guarantor in connection therewith or herewith shall mean the Loan
Agreement as amended by this Amendment.
ARTICLE V
MISCELLANEOUS
5.1 Borrower agrees to promptly pay or reimburse all out-of-pocket
costs and expenses of Lender, including without limitation, reasonable
attorneys' and paralegals' fees, costs, expenses, search fees, title
insurance fees, costs and expenses, filing and recording fees incurred by
Lender in connection with the negotiation, preparation, execution, delivery
and enforcement of this Amendment and all other matters pertaining hereto.
5.2 This Amendment may be signed in any number of counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
5.3 Except as otherwise specified herein, this Amendment embodies the
entire agreement and understanding between Lender and Borrower with respect
to the subject matter hereof and supersedes all prior agreements, consents
and understandings relating to such subject matter.
5.4 The headings in this Amendment have been inserted for convenience
only and shall be given no substantive meaning or significance in construing
the terms of this Amendment.
-3-
<PAGE>
5.5 This Amendment shall inure to the benefit of Lender and its
successors and assigns and shall be binding upon and inure to the successors
and assigns of Borrower, except that Borrower may not assign any of its
rights in and to this Amendment.
IN WITNESS WHEREOF, Borrower and Lender have caused this First Amendment
to Revolving Loan and Security Agreement to be executed and delivered as of
the day and year written above.
THE ROACH ORGANIZATION, INC.
By: /s/ Sharon Fierro
-------------------------
Name: Sharon Fierro
--------------------
Title: SR VP & CFO
--------------------
TRO LEARNING (CANADA), INC.
By: /s/ Sharon Fierro
-------------------------
Name: Sharon Fierro
--------------------
Title: SR VP & CFO
--------------------
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Chester R. Zara
-------------------------
Name: Chester R. Zara
--------------------
Title: V.P.
--------------------
-4-
<PAGE>
REAFFIRMATION OF GUARANTY
THE UNDERSIGNED PARTY, as guarantor of the above Borrower pursuant to
its Guaranty of Payment and Performance made as of August 2, 1995,
acknowledges the terms and conditions set forth in this First Amendment To
Revolving Loan And Security Agreement and ratifies and reaffirms its guaranty
obligation as set forth in the foregoing guaranty agreement, as reaffirmed.
DATED: As of April 26, 1996
TRO LEARNING, INC.
By: /s/ Sharon Fierro
-------------------------
Name: Sharon Fierro
--------------------
Title: SRVP & CFO
--------------------
Address: 1721 Moon Lake Boulevard
Suite 555
Hoffman Estates, IL 60194
Attention: William R. Roach
-5-
<PAGE>
SECOND AMENDMENT
TO REVOLVING LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO REVOLVING LOAN AND SECURITY AGREEMENT (together
with all appendices, exhibits, schedules and attachments hereto, collectively
this "Amendment") is made and entered into as of August 1, 1996, by and
between THE ROACH ORGANIZATION, INC., a Delaware corporation and TRO LEARNING
(CANADA), INC., a Canadian corporation (collectively, "Borrower") and SANWA
BUSINESS CREDIT CORPORATION, a Delaware corporation ("Lender").
RECITALS
WHEREAS, Borrower and Lender entered into that certain Revolving Loan
and Security Agreement (the "Loan Agreement") dated as of August 2, 1995, as
amended by that certain First Amendment to Revolving Loan and Security
Agreement dated as of April 26, 1996 (collectively, the "Loan and Security
Agreement") together with documents ancillary thereto; and
WHEREAS, Borrower has requested and Lender has agreed to increase the
Total Facility (defined in the Loan Agreement) by One Million Five Hundred
Thousand and No/100 Dollars ($1,500,000.00) for the period commencing
August 1, 1996 and ending on October 31, 1996 to accommodate Borrower's
operating needs;
NOW THEREFORE, for and in consideration of the premises, the mutual
covenants hereinafter set forth and other good and valuable consideration,
the receipt and sufficiency of which the parties hereby acknowledge, it
hereby is agreed as follows:
ARTICLE I
RECITALS AND DEFINITIONS
1.1 Borrower represents and warrants that the foregoing recitals are
true and correct and constitute an integral part of this Amendment and
Borrower and Lender hereby agree that all of the recitals of this Amendment
are hereby incorporated herein and made a part hereof.
1.2 Unless otherwise defined herein or the context otherwise requires,
all capitalized terms used herein shall have the same meanings as ascribed to
them in the Loan Agreement.
<PAGE>
ARTICLE II
AMENDMENT OF THE LOAN AGREEMENT
2.1 Section 2.1 of the Loan Agreement hereby is deleted in its entirety
and replaced with the following:
"2.1 TOTAL FACILITY. Provided there does not then exist an Event of
Default or Default, and subject to the terms and conditions set
forth in this Agreement, Lender agrees to make available for
Borrower's use from time to time during the term of this Agreement,
upon Borrower's request therefor, certain loans and other financial
accommodations (the "Total Facility"). The Total Facility shall
consist of a revolving line of credit consisting of advances against
Eligible Accounts, Eligible Installment Accounts and Eligible
Inventory (the "Revolving Loan") evidenced by an Amended and
Restated Revolving Note, in the form attached hereto as Exhibit 2.1,
in an aggregate principal amount not to exceed, at any time
outstanding, (A) during the period commencing on August 1, 1996 and
ending on October 31, 1996, the lesser of (i) Eleven Million Five
Hundred Thousand and No/100 Dollars ($11,500,000.00), or (ii) the
Borrowing Base as reflected in a certificate executed by a duly
authorized officer of Borrower and delivered to Lender on the
Closing Date and by 11:00 a.m. (Chicago Time) on each Tuesday
thereafter during the Term as of the close of business on the
immediately preceding Friday, except to the extent provided in
Section 6.2 herein, and (B) during the period commencing on
November 1, 1996 and for all times thereafter during the Term the
lesser of (i) Ten Million Dollars ($10,000,000.00) or (ii) the
Borrowing Base as reflected in a certificate executed by a duly
authorized officer of Borrower and delivered to Lender on the
Closing Date and by 11:00 A.M. (Chicago time) on each Tuesday
thereafter during the Term as of the close of business on the
immediately preceding Friday, except to the extent provided in
Section 6.2 herein. As used in this Agreement, "Borrowing Base"
shall mean and, at any particular time and from time to time, be
equal to the sum of (a) eighty-five percent (85%) (or such lesser
percentage as the Lender may, at any time and from time to time,
determine in the exercise of its reasonable credit judgment) of
Eligible Accounts, as determined by Lender PLUS (b) seventy
percent (70%) (or such lesser percentage as the Lender may, at any
time and from time to time, determine in the exercise of its
reasonable credit judgment) of Eligible Installment Accounts, as
determined by Lender PLUS (c) sixty percent (60%) (or such lesser
percentage as Lender may at any time and from time to time,
determine in the exercise of its reasonable credit judgment) of
Eligible Inventory, as determined by Lender. Notwithstanding the
foregoing, the following limitations shall apply: (1) the aggregate
amount of advances against Eligible Installment Accounts shall not
exceed, at any time, the lesser of (x) Five Million and No/100
Dollars ($5,000,000.00) or (y) fifty percent (50%) of the Maximum
Amount then in effect, and (2) the aggregate amount of advances
-2-
<PAGE>
against Eligible Inventory shall not exceed, at any time, the
lesser of (x) One Million Five Hundred Thousand and No/100 Dollars
($1,500,000.00) or (y) fifteen percent (15%) of the Maximum Amount
then in effect. In addition to the foregoing, Lender shall make
available to Borrower an over advance facility (the "Over Advance
Facility") in an amount not to exceed Five Hundred Thousand and
No/100 Dollars ($500,000.00), provided that there shall be no
outstanding indebtedness under the Over Advance Facility for a
period of not less than thirty (30) consecutive days during each
Contract Year. In addition to the foregoing, Lender shall also
make available to Borrower a seasonal overadvance facility (the
"Seasonal Overadvance Facility") in an amount not to exceed Two
Million and No/100 Dollars ($2,000,000.00) for the period of time
commencing on April 1 and ending on July 31 of each calendar year
during the Term and One Million and No/100 Dollars ($1,000,000.00)
for the period of time commencing on August 1 and ending on
October 31 of each calendar year during the Term.
In the event Lender decreases the advance percentages to be applied
to Eligible Accounts, Eligible Installment Accounts and Eligible
Inventory which are contained in this Section 2.1, such decrease
shall become effective immediately for the purpose of calculating
the amount which Lender agrees to advance, or allow to remain
outstanding, against Eligible Accounts, Eligible Installment
Accounts and Eligible Inventory."
2.2 Section 2.3(A)(i) of the Loan Agreement hereby is deleted in its
entirety and replaced with the following:
"(A)(i) So long as no Event of Default has occurred and is
continuing, the Borrower shall pay to the Lender interest on the
Total Facility as follows: (w) Borrower shall pay interest on the
principal balance of the amount outstanding under the Over Advance
Facility equal to two hundred (200) basis points in excess of the
Prime Rate; (x) Borrower shall pay interest on the principal balance
of the amount outstanding under the Seasonal Over Advance Facility
equal to two hundred (200) basis points in excess of the Prime Rate;
(y) Borrower shall pay interest on that portion outstanding of the
principal balance of the Revolving Loan which exceeds Ten Million
and No/100 Dollars ($10,000,000.00) pursuant to Section 2.1 equal
to two hundred (200) basis points in excess of the Prime Rate; and
(z) Borrower shall pay interest on the outstanding principal balance
of the Revolving Loan which does not exceed Ten Million Dollars
($10,000,000.00) at the applicable Designated Rate; provided,
however, that upon the occurrence and during the continuation of an
Event of Default, Lender may, at its option, raise the interest rate
charged on the Liabilities to the Default Rate with respect to the
Liabilities from the date of the occurrence of
-3-
<PAGE>
the Default until the earlier of (1) the Default is cured or waived
by Lender or (2) the Liabilities are paid in full. Notwithstanding
the provisions of the previous sentences, Borrowers shall receive a
ten (10) day period (commencing on the date of the occurrence of
such application of the Default) to cure any non-monetary Default
before Lender shall have the right to raise the interest rate
charged on the Liabilities to the Default Rate. The applicable basis
for determining the rate of interest with respect to the Revolving
Loan shall be selected by the Borrower initially at the time a
request for an advance is given pursuant to Section 12.3(J). The
basis for determining the interest rate with respect to the
Revolving Loan may be charged from time to time by Borrower pursuant
to subsection 2.3(E)."
2.3 Section 2.1(E)(i) of the Loan Agreement is deleted in its entirety
and replaced with the following:
"(i) convert at any time all or any part of any outstanding Base
Rate Revolving Loan (except for loans pursuant to (x) the Seasonal
Over Advance Facility; (y) the Over Advance Facility; and (z) the
Revolving Loan to the extent of advances in excess of Ten Million
Dollars; each of which bear interest at the Prime Rate plus Two
Hundred (200) basis points; and may not be converted to LIBOR Rate
Loans) equal to Five Hundred Thousand and No/100 Dollars
($500,000.00) and integral multiples of One Hundred Thousand and
No/100 Dollars ($100,000.00) in excess of that amount from a Base
Rate Revolving Loan to a LIBOR Rate Revolving Loan or to convert a
LIBOR Rate Revolving Loan in amounts equal to Five Hundred Thousand
and No/100 Dollars ($500,000.00) and integral multiples of One
Hundred Thousand and No/100 Dollars ($100,000.00) in excess of that
amount from a LIBOR Rate Revolving Loan to a Base Rate Revolving
Loan; or"
2.4 Section 2.8 of the Loan Agreement is deleted in its entirety and
replaced with the following:
"2.8 NON-USE FEE: (A) During the period commencing on August 1, 1996
and ending on October 31, 1996, Borrower shall pay to Lender a
Non-Use Fee equal to one-half of one percent (0.50%) per annum of
the amount, if any, by which Eleven Million Five Hundred Thousand
Dollars ($11,500,000.00) has exceeded the average daily closing
balance of the Revolving Loan during each calendar quarter or
partial quarter during said period. The Non-Use Fee shall be
payable in arrears on the first day of each calendar quarter and
shall be calculated on the basis of a 360-day year for the actual
days elapsed.
(B) During the period commencing on November 1, 1996 and for
all times thereafter during the Term, Borrowers shall pay to
Lender a Non-Use Fee
-4-
<PAGE>
equal to one-half of one percent (0.50%) per annum of the amount,
if any, by which Ten Million Dollars ($10,000,000.00) has exceeded
the average daily closing balance of the Revolving Loan during
each calendar quarter or partial quarter during said period. The
Non-Use Fee shall be payable in arrears on the first day of each
calendar quarter and shall be calculated on the basis of a
360-day year for actual days elapsed."
ARTICLE III
REPRESENTATIONS AND WARRANTIES
------------------------------
3.1 Borrower hereby makes the following representations and
warranties to Lender, which representations and warranties shall constitute
the continuing covenants of Borrower and shall remain true and correct until
all of Borrower's Liabilities are paid and performed in full:
a. The representations and warranties of Borrower contained in
the Loan Agreement and the Ancillary Agreements are true and correct on and
as of the date hereof as though made on and as of such date;
b. No Event of Default or event which, but for the lapse of
time or the giving of notice, or both, would constitute an Event of Default
under the Loan Agreement has occurred and is continuing or would result from
the execution and delivery of this Amendment;
c. Borrower is in full compliance with all of the terms,
conditions and all provisons of the Loan Agreement and the Ancillary
Agreements;
d. This Amendment and all Ancillary Agreements required
hereunder to be executed by Borrower and delivered to Lender, have been duly
authorized, executed and delivered on Borrower's behalf pursuant to all
requisite corporate authority and this Amendment and each of the Ancillary
Agreements required hereunder to be executed and delivered by Borrower to
Lender constitute the legal, valid and binding obligations of Borrower
enforceable in accordance with their terms, except as enforceability thereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to creditors' rights; and
e. Borrower hereby acknowledges and agrees that Borrower has
no defense, offset or counterclaim to the payment of said principal,
interest, fees or other Liabilities and hereby waives and relinquishes any
such defense, offset or counterclaim and Borrower hereby releases Lender and
its respective officers, directors, agents, affiliates, successors and
assigns from any claim, demand or cause of action, known or unknown,
contingent or liquidated, which may exist or hereafter be known to exist
relating to any matter prior to the date hereof.
- 5 -
<PAGE>
ARTICLE IV
----------
RATIFICATION
-------------
Except as expressly amended hereby, the Loan Agreement and all Ancillary
Agreements executed in connection therewith shall remain in full force and
effect. The Loan Agreement, as amended hereby, and all rights and powers
created thereby and thereunder or under such Ancillary Agreements, are in all
respects ratified and confirmed. From and after the date hereof, the Loan
Agreement shall be deemed amended and modified as herein provided but, except
as so amended and modified, the Loan Agreement shall continue in full force
and effect and the Loan Agreement and this Amendment shall be read, taken and
construed as one and the same instrument. On and after the date hereof, the
term "Agreement" as used in the Loan Agreement and all other references to
the Loan Agreement therein, in any other instrument, document or writing
executed by Borrower or any guarantor or furnished to Lender by Borrower or
any guarantor in connection therewith or herewith shall mean the Loan
Agreement as amended by this Amendment.
ARTICLE V
----------
MISCELLANEOUS
-------------
5.1 Borrower agrees to promptly pay or reimburse all out-of-pocket
costs and expenses of Lender, including without limitation, reasonable
attorneys' and paralegals' fees, costs, expenses, search fees, title
insurance fees, costs and expenses, filing and recording fees incurred by
Lender in connection with the negotiation, preparation, execution, delivery
and enforcement of this Amendment and all other matters pertaining hereto.
Borrower also agrees to pay to Lender, contemporaneously herewith, a fee of
$25,000 in consideration for Lender's agreements contained herein.
5.2 This Amendment may be signed in any number of counterparts,
each of which shall be deemed to be an orignal, but all of which together
shall constitute one and the same instrument.
5.3 Except as otherwise specified herein, this Amendment embodies
the entire agreement and understanding between Lender and Borrower with
respect to the subject matter hereof and supersedes all prior agreements,
consents and understandings relating to such subject matter.
5.4 The headings in this Amendment have been inserted for
convenience only and shall be given no substantive meaning or significance in
construing the terms of this Amendment.
5.5 This Amendment shall inure to the benefit of Lender and its
successors and assigns and shall be binding upon and inure to the successors
and assigns of Borrower, except that Borrower may not assign any of its
rights in and to this Amendment.
- 6 -
<PAGE>
IN WITNESS WHEREOF, Borrower and Lender have caused this Second Amendment
to Revolving Loan and Security Agreement to be executed and delivered as of
the day and year written above.
THE ROACH ORGANIZATION, INC.
By:________________________________
Name:________________________
Title:_______________________
TRO LEARNING (CANADA), INC.
By:________________________________
Name:________________________
Title:_______________________
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Chester Zara
________________________________
Name: CHESTER R. ZARA
________________________
Title: V.P.
_______________________
-7-
<PAGE>
IN WITNESS WHEREOF, Borrower and Lender have caused this Second Amendment
to Revolving Loan and Security Agreement to be executed and delivered as of
the day and year written above.
THE ROACH ORGANIZATION, INC.
By: /s/ SHARON FIERRO
________________________________
Name: SHARON FIERRO
________________________
Title: SR VP & CFO
_______________________
TRO LEARNING (CANADA), INC.
By: /s/ SHARON FIERRO
________________________________
Name: SHARON FIERRO
________________________
Title: SR VP & CFO
_______________________
SANWA BUSINESS CREDIT CORPORATION
By:________________________________
Name:________________________
Title:_______________________
-7-
<PAGE>
REAFFIRMATION OF GUARANTY
THE UNDERSIGNED PARTY, as a guarantor of the above Borrower pursuant to
its Guaranty of Payment and Performance made as of August 2, 1995, as
reaffirmed by that Reaffirmation of Guaranty dated as of April 26, 1996,
acknowledges the terms and conditions set forth in this Second Amendment To
Revolving Loan And Security Agreement and ratifies and reaffirms its guaranty
obligation as set forth in the foregoing guaranty agreement, as reaffirmed.
DATED: As of August 1, 1996
TRO LEARNING, INC.
By: /s/ SHARON FIERRO
________________________________
Name: SHARON FIERRO
________________________
Title: SR VP & CFO
_______________________
Address: 1721 Moon Lake Boulevard
Suite 555
Hoffman Estates, IL 60194
Attention: William R. Roach
-8-
<PAGE>
THIRD AMENDMENT TO REVOLVING
LOAN AND SECURITY AGREEMENT
THIS THIRD AMENDMENT TO REVOLVING LOAN AND SECURITY AGREEMENT (together
with all appendices, exhibits, schedules and attachments hereto, collectively
this "Amendment") is made and entered into as of January 6, 1997, by and
between THE ROACH ORGANIZATION, INC., a Delaware corporation and TRO LEARNING
(CANADA), INC., a corporation organized under the laws of Canada
(collectively, the "Borrower") and SANWA BUSINESS CREDIT CORPORATION, a
Delaware corporation with its principal place of business at One South Wacker
Drive, Chicago, Illinois 60606 ("Lender").
RECITALS
WHEREAS, Borrower and Lender entered into that certain Revolving Loan
and Security Agreement dated as of August 2, 1995, as amended by that certain
First Amendment to Revolving Loan and Security Agreement dated as of April
26th 1996 and as further amended by that certain Second Amendment to
Revolving Loan and Security Agreement dated as of August 1, 1996
(collectively, the "Loan Agreement"), together with documents ancillary
thereto;
WHEREAS, Borrower wishes to increase the dollar cap on the Total
Facility from $10,000,000 to $12,500,000 for the period of time commencing on
January 1, 1997 and ending on March 14, 1997;
WHEREAS, Borrower and Lender acknowledge that the dollar cap on the
Total Facility shall return to $10,000,000 as of March 15, 1997;
WHEREAS, Borrower has advised Lender that there currently exists an
Event of Default under the Loan Agreement due to Borrower's failure to comply
with Section 10.1(B) of the Loan Agreement (Borrower's failure to maintain
Operating Profit measured quarterly) (the "Operating Profit Default");
WHEREAS, Borrower has requested Lender forbear from exercising any of
its rights and remedies available to it pursuant to the aforesaid Event of
Default;
WHEREAS, Lender is unable to commit to Borrower that it will forbear
from exercising its rights and remedies pursuant to the aforesaid Event of
Default, and makes no other agreements or promises to Borrower that it will
waive said Event of Default or forbear from exercising its rights and
remedies pursuant to said Event of Default;
<PAGE>
NOW THEREFORE, for and in consideration of the premises, the mutual
covenants hereinafter set forth and other good and valuable consideration,
the receipt and sufficiency of which the parties hereby acknowledge, the
parties hereby agree as follows:
ARTICLE
1.
RECITALS AND DEFINITIONS
1.1. Borrower represents and warrants that the foregoing recitals are
true and correct and constitute an integral part of this Amendment and
Borrower and Lender hereby agree that all of the recitals of this Amendment
are hereby incorporated herein and made a part hereof.
1.2. Unless otherwise defined herein or the context otherwise requires,
all capitalized terms used herein shall have the same meanings as ascribed to
them in the Loan Agreement.
ARTICLE
2.
AMENDMENT OF THE LOAN AGREEMENT
2.1. Section 1.55 ("MAXIMUM AMOUNT") is deleted in its entirety and the
following substituted therefor:
1.55 "MAXIMUM AMOUNT" SHALL MEAN AN AMOUNT EQUAL TO (a) $12,500,000
MINUS ALL PERMITTED PREPAYMENTS MADE BY BORROWER PURSUANT TO SECTION 2.6
HEREIN, FOR THE PERIOD OF TIME COMMENCING ON JANUARY 1, 1997 AND ENDING ON
MARCH 14, 1997; AND (b) $10,000,000 MINUS ALL PERMITTED PREPAYMENTS MADE BY
BORROWER PURSUANT TO SECTION 2.6 HEREIN, FOR THE PERIOD OF TIME COMMENCING ON
MARCH 15, 1997 AND FOR ALL TIMES THEREAFTER.
2.2. Section 2.1 (TOTAL FACILITY) hereby is deleted in its entirety and
the following substituted therefor:
2.1 TOTAL FACILITY. PROVIDED THERE DOES NOT THEN EXIST AN EVENT OF
DEFAULT OR DEFAULT, AND SUBJECT TO THE TERMS AND CONDITIONS SET FORTH IN THIS
AGREEMENT, LENDER AGREES TO MAKE AVAILABLE FOR BORROWER'S USE FROM TIME TO
TIME DURING THE TERM OF THIS AGREEMENT, UPON BORROWER'S REQUEST THEREFOR,
CERTAIN LOANS AND OTHER FINANCIAL ACCOMMODATIONS (THE "TOTAL FACILITY") AS
FOLLOWS:
(A) NOTWITHSTANDING THE OPERATING PROFIT DEFAULT, FOR THE PERIOD
COMMENCING ON JANUARY 1, 1997 AND ENDING ON MARCH 14, 1997, THE TOTAL
FACILITY SHALL CONSIST OF A REVOLVING LINE OF CREDIT CONSISTING OF ADVANCES
AGAINST ELIGIBLE ACCOUNTS, ELIGIBLE INSTALLMENT ACCOUNTS AND ELIGIBLE
INVENTORY (THE "REVOLVING LOAN") EVIDENCED BY A SUBSTITUTE REVOLVING NOTE, IN
THE FORM ATTACHED HERETO AS EXHIBIT 2.1(A), IN AN AGGREGATE
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<PAGE>
PRINCIPAL AMOUNT NOT TO EXCEED, AT ANY TIME OUTSTANDING, THE LESSER OF (i)
TWELVE MILLION FIVE HUNDRED THOUSAND DOLLARS ($12,500,000) OR (ii) THE
BORROWING BASE AS REFLECTED IN A CERTIFICATE EXECUTED BY A DULY AUTHORIZED
OFFICER OF BORROWER AND DELIVERED TO LENDER ON THE CLOSING DATE AND BY 11:00
A.M. (CHICAGO TIME) ON EACH TUESDAY THEREAFTER DURING THE TERM AS OF THE
CLOSE OF BUSINESS ON THE IMMEDIATELY PRECEDING FRIDAY, EXCEPT TO THE EXTENT
PROVIDED IN SECTION 6.2 HEREIN (THE "BORROWING BASE CERTIFICATE"). AS USED
IN THIS AGREEMENT FOR THIS PERIOD OF TIME, "BORROWING BASE" SHALL MEAN AND,
AT ANY PARTICULAR TIME AND FROM TIME TO TIME, BE EQUAL TO THE SUM OF (a)
EIGHTY-FIVE (85%) (OR SUCH LESSER PERCENTAGE AS THE LENDER MAY, AT ANY TIME
AND FROM TIME TO TIME, DETERMINED IN THE EXERCISE OF ITS REASONABLE CREDIT
JUDGMENT) OF ELIGIBLE ACCOUNTS AS DETERMINED BY LENDER PLUS (b) SEVENTY
PERCENT (70%) (OR SUCH LESSER PERCENTAGE AS THE LENDER MAY, AT ANY TIME AND
FROM TIME TO TIME, DETERMINED IN THE EXERCISE OF ITS REASONABLE CREDIT
JUDGMENT) OF ELIGIBLE INSTALLMENT ACCOUNTS AS DETERMINED BY LENDER PLUS (c)
SIXTY PERCENT (60%) (OR SUCH LESSOR PERCENTAGE AS LENDER MAY AT ANY TIME AND
FROM TIME TO TIME, DETERMINE IN THE EXERCISE OF ITS REASONABLE CREDIT
JUDGMENT) OF ELIGIBLE INVENTORY. NOTWITHSTANDING THE FOREGOING, THE FOLLOWING
LIMITATIONS SHALL APPLY: (1) AGGREGATE AMOUNT OF ADVANCES AGAINST ELIGIBLE
INSTALLMENT ACCOUNTS SHALL NOT EXCEED, AT ANY TIME, THE LESSOR OF (x) SIX
MILLION TWO HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($6,250,000) OR (y)
FIFTY PERCENT (50%) OF THE MAXIMUM AMOUNT THEN IN EFFECT; AND (2) THE
AGGREGATE AMOUNT OF ADVANCES AGAINST ELIGIBLE INVENTORY SHALL NOT EXCEED, AT
ANY TIME, THE LESSER OF (x) ONE MILLION FIVE HUNDRED THOUSAND AND NO/100
DOLLARS ($1,500,000) OR (y) FIFTEEN PERCENT (15%) OF THE MAXIMUM AMOUNT THEN
IN EFFECT; PROVIDED, HOWEVER, THAT NOTHING CONTAINED HEREIN SHALL BE DEEMED A
WAIVER OF THE OPERATING PROFIT DEFAULT OR PRECLUDE LENDER'S EXERCISE OF ITS
RIGHTS AND REMEDIES ARISING THEREFROM PRIOR TO MARCH 14, 1997.
(B) FOR THE PERIOD COMMENCING ON MARCH 15, 1997 AND CONTINUING AT
ALL TIMES THEREAFTER DURING THE TERM, THE TOTAL FACILITY SHALL CONSIST OF A
REVOLVING LINE OF CREDIT CONSISTING OF ADVANCES AGAINST ELIGIBLE ACCOUNTS,
ELIGIBLE INSTALLMENT ACCOUNTS AND ELIGIBLE INVENTORY EVIDENCED BY A
SUBSTITUTE REVOLVING NOTE, IN THE FORM ATTACHED HERETO AS EXHIBIT 2.1(B), IN
AN AGGREGATE PRINCIPAL AMOUNT NOT TO EXCEED, AT ANY TIME OUTSTANDING, THE
LESSOR OF (i) TEN MILLION DOLLARS ($10,000,000) OR (ii) THE BORROWING BASE AS
REFLECTED IN A BORROWING BASE CERTIFICATE. NOTWITHSTANDING THE FOREGOING, THE
FOLLOWING LIMITATIONS SHALL APPLY: (1) THE AGGREGATE AMOUNT OF ADVANCES
AGAINST ELIGIBLE INSTALLMENT ACCOUNTS SHALL NOT EXCEED, AT ANY TIME, THE
LESSOR OF (X) FIVE MILLION AND NO/100 DOLLARS ($5,000,000) OR (y) FIFTY
PERCENT (50%) OF THE MAXIMUM AMOUNT THEN IN EFFECT; AND (2) THE AGGREGATE
AMOUNT OF ADVANCES AGAINST ELIGIBLE INVENTORY SHALL NOT EXCEED, AT ANY TIME,
THE LESSER OF (x) ONE MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS
($1,500,000) OR (y) FIFTEEN PERCENT (15%) OF THE MAXIMUM AMOUNT THEN IN
EFFECT.
(C) SUBJECT TO THE PROVISIONS OF SECTION 2.1(A), IN ADDITION TO
THE FOREGOING, LENDER SHALL MAKE AVAILABLE TO BORROWER AN OVER ADVANCE
FACILITY (THE "OVER ADVANCE FACILITY") IN AN AMOUNT NOT TO EXCEED FIVE
HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000), PROVIDED THAT THERE SHALL BE
NO OUTSTANDING INDEBTEDNESS UNDER THE OVER
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<PAGE>
ADVANCE FACILITY FOR A PERIOD OF NOT LESS THAN THIRTY (30) CONSECUTIVE DAYS
DURING EACH CONTRACT YEAR. IN ADDITION TO THE FOREGOING, LENDER SHALL ALSO
MAKE AVAILABLE TO BORROWER A SEASONAL OVERADVANCE FACILITY (THE "SEASONAL
OVERADVANCE FACILITY") IN AN AMOUNT NOT TO EXCEED TWO MILLION AND NO/100
DOLLARS ($2,000,000) FOR THE PERIOD OF TIME COMMENCING ON APRIL 1 AND ENDING
ON JULY 31 OF EACH CALENDAR YEAR DURING THE TERM AND ONE MILLION AND NO/100
DOLLARS ($1,000,000) FOR THE PERIOD OF TIME COMMENCING ON AUGUST 1 AND ENDING
ON OCTOBER 31 OF EACH CALENDAR YEAR DURING THE TERM.
IN THE EVENT LENDER DECREASES THE ADVANCE PERCENTAGES TO BE APPLIED TO
ELIGIBLE ACCOUNTS AND ELIGIBLE INVENTORY WHICH ARE CONTAINED IN THIS SECTION
2.1, SUCH DECREASE SHALL BECOME EFFECTIVE IMMEDIATELY FOR THE PURPOSE OF
CALCULATING THE AMOUNT WHICH LENDER AGREES TO ADVANCE, OR ALLOW TO REMAIN
OUTSTANDING, AGAINST ELIGIBLE ACCOUNTS, ELIGIBLE INSTALLMENT ACCOUNTS AND
ELIGIBLE INVENTORY.
2.3 Section 2.3(A)(i) of the Loan Agreement hereby is deleted in its
entirety and replaced with the following:
(A)(i) SO LONG AS NO EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING,
THE BORROWER SHALL PAY TO THE LENDER INTEREST ON THE TOTAL FACILITY AS
FOLLOWS: (v) BORROWER SHALL PAY INTEREST ON THE PRINCIPAL BALANCE OF THE
AMOUNT OUTSTANDING UNDER THE OVER ADVANCE FACILITY EQUAL TO TWO HUNDRED (200)
BASIS POINTS IN EXCESS OF THE PRIME RATE; (w) BORROWER SHALL PAY INTEREST ON
THE PRINCIPAL BALANCE OF THE AMOUNT OUTSTANDING UNDER THE SEASONAL OVER
ADVANCE FACILITY EQUAL TO TWO HUNDRED (200) BASIS POINTS IN EXCESS OF THE
PRIME RATE; (x) BORROWER SHALL PAY INTEREST ON THAT PORTION OUTSTANDING OF
PRINCIPAL BALANCE OF THE REVOLVING LOAN WHICH EXCEEDS TWELVE MILLION FIVE
HUNDRED THOUSAND AND NO/100 DOLLARS ($12,500,000) PURSUANT TO SECTION 2.1(A)
EQUAL TO TWO HUNDRED (200) BASIS POINTS IN EXCESS OF THE PRIME RATE; (y)
BORROWER SHALL PAY INTEREST ON THE OUTSTANDING PRINCIPAL BALANCE OF THE
REVOLVING LOAN WHICH EXCEEDS TEN MILLION AND NO/100 DOLLARS ($10,000,000)
PURSUANT TO SECTION 2.1(B) EQUAL TO TWO HUNDRED (200) BASIS POINTS IN EXCESS
OF THE PRIME RATE; AND (z) BORROWER SHALL PAY INTEREST AT THE APPLICABLE
DESIGNATED RATE ON THE OUTSTANDING PRINCIPAL BALANCE OF THE REVOLVING LOAN
WHICH DOES NOT EXCEED: (I) TWELVE MILLION FIVE HUNDRED THOUSAND AND NO/100
DOLLARS ($12,500,000) DURING THE PERIOD OF TIME COMMENCING ON JANUARY 1, 1997
AND ENDING ON MARCH 14, 1997; AND (II) TEN MILLION AND NO/DOLLARS
($10,000,000) FOR THE PERIOD COMMENCING ON MARCH 15, 1997 AND CONTINUING AT
ALL TIMES THEREAFTER DURING THE TERM; PROVIDED, HOWEVER, THAT UPON THE
OCCURRENCE AND DURING THE CONTINUATION OF AN EVENT OF DEFAULT, LENDER MAY, AT
ITS OPTION, RAISE THE INTEREST RATE CHARGES ON THE LIABILITIES TO THE DEFAULT
RATE WITH RESPECT TO THE LIABILITIES FROM THE DATE OF THE OCCURRENCE OF THE
DEFAULT UNTIL THE EARLIER OF (1) THE DEFAULT IS CURED OR WAIVED BY LENDER OR
(2) THE LIABILITIES ARE PAID IN FULL. NOTWITHSTANDING THE PROVISIONS OF THE
PREVIOUS SENTENCES, BORROWER SHALL RECEIVE A TEN (10) DAY PERIOD (COMMENCING
ON THE DATE OF THE OCCURRENCE OF SUCH APPLICATION OF THE DEFAULT) TO CURE ANY
NON-MONETARY DEFAULT BEFORE LENDER SHALL HAVE THE RIGHT TO RAISE THE INTEREST
RATE CHARGED ON THE LIABILITIES TO THE DEFAULT RATE. THE APPLICABLE BASIS FOR
DETERMINING THE RATE OF INTEREST WITH RESPECT TO THE
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<PAGE>
REVOLVING LOAN SHALL BE SELECTED BY THE BORROWER INITIALLY AT THE TIME A
REQUEST FOR AN ADVANCE IS GIVEN PURSUANT TO SECTION 12.3(J). THE BASIS FOR
DETERMINING THE INTEREST RATE WITH RESPECT TO THE REVOLVING LOAN MAY BE
CHANGED FROM TIME TO TIME BY BORROWER PURSUANT TO SECTION 2.3(E).
2.4. Section 2.1(E)(i) of the Loan Agreement is deleted in its entirety
and replaced with the following:
(i) CONVERT AT ANY TIME ALL OR ANY PARTY OF ANY OUTSTANDING BASE RATE
REVOLVING LOAN (EXCEPT FOR LOANS PURSUANT TO (W) THE SEASONAL OVER ADVANCE
FACILITY; (X) THE OVER ADVANCE FACILITY; (Y) THE REVOLVING LOAN TO THE EXTENT
OF ADVANCES IN EXCESS OF TWELVE MILLION FIVE HUNDRED THOUSAND AND NO/100
DOLLARS ($12,500,000) PURSUANT TO SECTION 2.1(A); AND (Z) THE REVOLVING LOAN
TO THE EXTENT OF ADVANCES IN EXCESS OF TEN MILLION AND NO/100 DOLLARS
($10,000,000) PURSUANT TO SECTION 2.1(B), EACH OF WHICH BEAR INTEREST AT THE
PRIME RATE PLUS TWO HUNDRED (200) BASIS POINTS, AND MAY NOT BE CONVERTED TO
LIBOR RATE LOANS) EQUAL TO FIVE HUNDRED THOUSAND AND NO/100 DOLLARS
($500,000) AND INTEGRAL MULTIPLES OF ONE HUNDRED THOUSAND AND NO/100 DOLLARS
($100,000) IN EXCESS OF THAT AMOUNT FROM A BASE RATE REVOLVING LOAN TO A
LIBOR RATE REVOLVING LOAN OR TO CONVERT A LIBOR RATE REVOLVING LOAN IN
AMOUNTS EQUAL TO FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000) AND
INTEGRAL MULTIPLES OF ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000) IN
EXCESS OF THAT AMOUNT FROM A LIBOR RATE REVOLVING LOAN TO A BASE RATE
REVOLVING LOAN; OR
2.5. Section 2.8 of the Loan Agreement is deleted in its entirety and
replaced with the following:
2.8 NON-USE FEE. (A) DURING THE PERIOD COMMENCING ON JANUARY 1, 1997
AND ENDING ON MARCH 14, 1997, BORROWER SHALL PAY TO LENDER A NON-USE FEE
EQUAL TO ONE-HALF OF ONE PERCENT (0.50%) PER ANNUM OF THE AMOUNT, IF ANY, BY
WHICH TWELVE MILLION FIVE HUNDRED THOUSAND DOLLARS ($12,500,000) HAS EXCEEDED
THE AVERAGE DAILY CLOSING BALANCE OF THE REVOLVING LOAN DURING EACH CALENDAR
QUARTER OR PARTIAL QUARTER DURING SAID PERIOD. THE NON-USE FEE SHALL BE
PAYABLE IN ARREARS ON THE FIRST DAY OF EACH CALENDAR QUARTER AND SHALL BE
CALCULATED ON THE BASIS OF A 360-DAY YEAR FOR ACTUAL DAYS ELAPSED.
(B) DURING THE PERIOD COMMENCING ON MARCH 15, 1997 AND FOR ALL TIMES
THEREAFTER DURING THE TERM, BORROWER SHALL PAY TO LENDER A NON-USE FEE EQUAL
TO ONE-HALF OF ONE PERCENT (0.50%) PER ANNUM OF THE AMOUNT, IF ANY, BY WHICH
TEN MILLION DOLLARS ($10,000,000) HAS EXCEEDED THE AVERAGE DAILY CLOSING
BALANCE OF THE REVOLVING LOAN DURING EACH CALENDAR QUARTER OR PARTIAL QUARTER
DURING SAID PERIOD. THE NON-USE FEE SHALL BE PAYABLE IN ARREARS ON THE FIRST
DAY OF EACH CALENDAR QUARTER AND SHALL BE CALCULATED ON THE BASIS OF A
360-DAY YEAR FOR THE ACTUAL DAYS ELAPSED.
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<PAGE>
ARTICLE
3.
REPRESENTATIONS AND WARRANTIES
3.1. Borrower hereby makes the following representations and warranties
to Lender, which representations and warranties shall constitute the
continuing covenants of Borrower and shall remain true and correct until all
of Borrower's liabilities are paid and performed in full:
a. The representations and warranties of Borrower contained in
the Loan Agreement are true and correct on and as of the date hereof as
though made on and as of such date;
b. Except for Borrower's failure to maintain its Operating Profit
in compliance with Section 10.1(B) of the Loan Agreement (the "Operating
Profit Default"), no Event of Default or event which, but for the lapse of
time or the giving of notice, or both, would constitute an Event of Default
under the Loan Agreement has occurred and is continuing or would result from
the execution and delivery of this Amendment;
c. Except for the Operating Profit Default, Borrower is in full
compliance with all of the terms, conditions and all provisions of the Loan
Agreement and the other agreements;
d. This Amendment and all other agreements required hereunder to
be executed by Borrower and delivered to Lender, have been duly authorized,
executed and delivered on Borrower's behalf pursuant to all requisite
corporate authority and this Amendment and each of the other agreements
required hereunder to be executed and delivered by Borrower to Lender
constitute the legal, valid and binding obligations of Borrower enforceable
in accordance with their terms, except as enforceability thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to creditors' rights; and
e. Borrower hereby acknowledges and agrees that Borrower has no
defense, offset or counterclaim to the payment of said principal, interest,
fees or other liabilities and hereby waives and relinquishes any such
defense, offset or counterclaim and Borrower hereby releases Lender and its
respective officers, directors, agents, affiliates, successors and assigns
from any claim, demand or cause of action, known or unknown, contingent or
liquidated, which may exist or hereafter be known to exist relating to any
matter prior to the date hereof.
ARTICLE
4.
RATIFICATION
Except as expressly amended hereby, the Loan Agreement and all other
agreements executed in connection therewith shall remain in full force and
effect. The Loan Agreement, as
6
<PAGE>
amended hereby, and all rights and powers created thereby and thereunder or
under such other agreements, are in all respects ratified and confirmed. From
and after the date hereof, the Loan Agreement shall be deemed amended and
modified as herein provided but, except as so amended and modified, the Loan
Agreement shall continue in full force and effect and the Loan Agreement and
this Amendment shall be read, taken and construed as one and the same
instrument. On and after the date hereof, the term "Agreement" as used in the
Loan Agreement and all other references to the Loan Agreement therein, in any
other instrument, document or writing executed by Borrower or any guarantor
or furnished to Lender by Borrower or any guarantor in connection therewith
or herewith shall mean the Loan Agreement as amended by this Amendment.
ARTICLE
5.
MISCELLANEOUS
5.1. Borrower shall promptly pay to Lender a closing fee in the amount
of Ten Thousand and No/100 Dollars ($10,000), which fee shall be deemed fully
earned and nonrefundable at the execution by Borrower of this Amendment and
shall be paid concurrently with Borrower's execution of this Amendment. Such
fee shall compensate Lender for the reasonable costs associated with the
origination, structuring, processing, approving and closing of the increase
in the Revolving Loan commitment and the transactions contemplated by this
Amendment, including, but not limited to, administrative, out-of-pocket,
general overhead and lost opportunity costs, but not including any expenses
for which Borrower has agreed to reimburse Lender pursuant to any other
provisions of this Amendment or any other Ancillary Agreement, such as, by
way of example, reasonable legal fees and expenses.
5.2. Borrower agrees to promptly pay or reimburse all out-of-pocket
costs and expenses of Lender, including without limitation, reasonable
attorneys' fees, costs, expenses incurred by Lender in connection with the
negotiation, preparation, execution and delivery of this Amendment and all
other matters pertaining hereto.
5.3. This Amendment may be signed in any number of counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
5.4. Nothing contained herein shall be deemed a waiver or forbearance
or create a course of conduct or otherwise estop Lender from exercising its
rights due to the Operating Profit Default or any future Events of Default
under the Loan Agreement.
5.5. Except as otherwise specified herein, this Amendment embodies the
entire agreement and understanding between Lender and Borrower with respect
to the subject matter
7
<PAGE>
hereof and supersedes all prior agreements, consents and understandings
relating to such subject matter.
5.6. The headings in this Amendment have been inserted for convenience
only and shall be given no substantive meaning or significance in construing
the terms of this Amendment.
5.7. This Amendment shall inure to the benefit of Lender and its
successors and assigns and shall be binding upon and inure to the successors
and assigns of Borrower, except that Borrower may not assign any of its
rights in and to this Amendment.
IN WITNESS WHEREOF, Borrower and Lender have caused this Third Amendment
to Revolving Loan and Security Agreement to be executed and delivered as of
the day and year written above.
THE ROACH ORGANIZATION, INC.
By: /s/Sharon Fierro
--------------------------
Name: SHARON FIERRO
------------------------
Title: SR VP & CFO
-----------------------
TRO LEARNING CANADA, INC.
By: /s/Sharon Fierro
--------------------------
Name: SHARON FIERRO
------------------------
Title: SR VP & CFO
-----------------------
SANWA BUSINESS CREDIT CORPORATION
By: /s/Lawrence J. Placek
--------------------------
Name: LAWRENCE J. PLACEK
------------------------
Title: VICE PRES
-----------------------
AMENDMENT IS CONTINUED ON NEXT PAGE
8
<PAGE>
REAFFIRMATION OF
GUARANTY OF PAYMENT AND PERFORMANCE
THE UNDERSIGNED PARTY, as guarantor ("Guarantor") of the above Borrowers
pursuant to its Guaranty of Payment and Performance (the "Guaranty")
identified below, acknowledges the terms and conditions set forth in this
Third Amendment to Revolving Loan And Security Agreement and ratifies and
reaffirms its guaranty obligations as set forth in the Guaranty, as
reaffirmed. To further induce Lender to enter into this Amendment, Guarantor
hereby represents and warrants to Lender that it possesses no claims,
defenses, offsets, recoupment or counterclaims of any kind or nature against
or with respect to the enforcement of the Loan Agreement or any other
Ancillary Agreement, each as amended by this Amendment, or to the Guaranty
(collectively, the "Claims"), nor does Guarantor have any knowledge of any
facts that would or might give rise to any Claims. If facts now exist which
would or could give rise to any Claim against or with respect to the
enforcement of the Loan Agreement, any Ancillary Agreement, or the Guaranty,
Guarantor hereby unconditionally, irrevocably and unequivocally waives and
fully releases any and all such Claims as if such Claims where the subject of
a lawsuit, adjudicated to final judgment from which no appeal could be taken
and therein dismissed with prejudice.
DATED: As of January 6, 1997
TRO LEARNING, INC.
By: /s/Sharon Fierro
--------------------------
Name: SHARON FIERRO
------------------------
Title: SR VP & CFO
-----------------------
(Guaranty of Payment and Performance
dated as of August 2, 1995, as
reaffirmed from time to time)
9
<PAGE>
FOURTH AMENDMENT TO REVOLVING
LOAN AND SECURITY AGREEMENT
THIS FOURTH AMENDMENT TO REVOLVING LOAN AND SECURITY AGREEMENT (together
with all appendices, exhibits, schedules and attachments hereto, collectively
this "Amendment") is made and entered into as of January 23, 1997, by and
between THE ROACH ORGANIZATION, INC., a Delaware corporation and TRO LEARNING
(CANADA), INC., a corporation organized under the laws of Canada (collectively,
the "Borrower") and SANWA BUSINESS CREDIT CORPORATION, a Delaware corporation
with its principal place of business at One South Wacker Drive, Chicago,
Illinois 60606 ("Lender").
RECITALS
WHEREAS, Borrower and Lender entered into that certain Revolving Loan
and Security Agreement dated as of August 2, 1995, as amended by that certain
First Amendment to Revolving Loan and Security Agreement dated as of April 26,
1996 and as further amended by that certain Second Amendment to Revolving
Loan and Security Agreement dated as of August 1, 1996 and as further amended
by that certain Third Amendment to Revolving Loan and Security Agreement
dated as of January 6, 1997 (collectively, the "Loan Agreement"), together
with documents ancillary thereto;
WHEREAS, Borrower has advised Lender that there currently exists an
Event of Default under the Loan Agreement due to Borrower's failure to comply
with: (a) Section 10.1(B) of the Loan Agreement for the third and fourth
fiscal quarters ending July 31, 1996 and October 31, 1996 respectively
(Borrower's failure to maintain Operating Profit measured quarterly) (the
"Operating Profit Default"); (b) 10.1(H)(ii) and (iv)(the "Reporting
Default"); and (c) 10.2(J)(the "Indebtedness for Borrowed Money Default");
WHEREAS, Borrower has requested Lender to waive the Operating Profit
Default, the Reporting Default and the Indebtedness for Borrowed Money
Default (collectively, the "Events of Default") and to reset its financial
covenants for the fiscal year ending October 31, 1997;
WHEREAS, Lender has agreed to waive the Events of Default and to reset
Borrower's financial covenants upon Borrower's execution of this Amendment
and Guarantor's execution of the Reaffirmation of Guaranty of Payment and
Performance attached hereto;
NOW THEREFORE, for and in consideration of the premises, the mutual
covenants hereinafter set forth and other good and valuable consideration,
the receipt and sufficiency of which the parties hereby acknowledge, the
parties hereby agree as follows:
<PAGE>
ARTICLE
1.
RECITALS AND DEFINITIONS
1.1. Borrower represents and warrants that the foregoing recitals are
true and correct and constitute an integral part of this Amendment and
Borrower and Lender hereby agree that all of the recitals of this Amendment
are hereby incorporated herein and made a part hereof.
1.2. Unless otherwise defined herein or the context otherwise requires,
all capitalized terms used herein shall have the same meanings as ascribed to
them in the Loan Agreement.
ARTICLE
2.
AMENDMENT OF THE LOAN AGREEMENT
2.1. Section 10.1(B)(vii-x) are deleted in their entirety and following
substituted therefor:
(vii) 1997 - First Quarter: ($4,221,000)
(viii) 1997 - Second Quarter: ($6,938,000)
(ix) 1997 - Third Quarter: ($3,721,000)
(x) 1997 - Fourth Quarter: $7,875,000
ARTICLE
3.
REPRESENTATIONS AND WARRANTIES
3.1. Borrower hereby makes the following representations and warranties
to Lender, which representations and warranties shall constitute the
continuing covenants of Borrower and shall remain true and correct until all
of Borrower's liabilities are paid and performed in full:
a. The representations and warranties of Borrower contained in
the Loan Agreement are true and correct on and as of the date hereof as
though made on and as of such date;
b. Except for the Events of Default, no Event of Default or event
which, but for the lapse of time or the giving of notice, or both, would
constitute an Event of Default under the Loan Agreement has occurred and is
continuing or would result from the execution and delivery of this Amendment;
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<PAGE>
c. Except for the Events of Default, Borrower is in full
compliance with all of the terms, conditions and all provisions of the Loan
Agreement and the other agreements;
d. This Amendment and all other agreements required hereunder to
be executed by Borrower and delivered to Lender, have been duly authorized,
executed and delivered on Borrower's behalf pursuant to all requisite
corporate authority and this Amendment and each of the other agreements
required hereunder to be executed and delivered by Borrower to Lender
constitute the legal, valid and binding obligations of Borrower enforceable
in accordance with their terms, except as enforceability thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to creditors' rights; and
e. Borrower hereby acknowledges and agrees that Borrower has no
defense, offset or counterclaim to the payment of said principal, interest,
fees or other liabilities and hereby waives and relinquishes any such
defense, offset or counterclaim and Borrower hereby releases Lender and its
respective officers, directors, agents, affiliates, successors and assigns
from any claim, demand or cause of action, known or unknown, contingent or
liquidated, which may exist or hereafter be known to exist relating to any
matter prior to the date hereof.
ARTICLE
4.
RATIFICATION
Except as expressly amended hereby, the Loan Agreement and all other
agreements executed in connection therewith shall remain in full force and
effect. The Loan Agreement, as amended hereby, and all rights and powers
created thereby and thereunder or under such other agreements, are in all
respects ratified and confirmed. From and after the date hereof, the Loan
Agreement shall be deemed amended and modified as herein provided but, except
as so amended and modified, the Loan Agreement shall continue in full force
and effect and the Loan Agreement and this Amendment shall be read, taken and
construed as one and the same instrument. On and after the date hereof, the
term "Agreement" as used in the Loan Agreement and all other references to
the Loan Agreement therein, in any other instrument, document or writing
executed by Borrower or any guarantor or furnished to Lender by Borrower or
any guarantor in connection therewith or herewith shall mean the Loan
Agreement as amended by this Amendment.
3
<PAGE>
ARTICLE
-------
5.
MISCELLANEOUS
-------------
5.1. Borrower shall promptly pay to Lender a closing fee in the amount
of Five Thousand and No/100 Dollars ($5,000), which fee shall be deemed fully
earned and nonrefundable at the execution by Borrower of this Amendment and
shall be paid concurrently with Borrower's execution of this Amendment. Such
fee shall compensate Lender for the reasonable costs associated with the
origination, structuring, processing, approving and closing of the
transactions contemplated by this Amendment, including, but not limited to,
administrative, out-of-pocket, general overhead and lost opportunity costs,
but not including any expenses for which Borrower has agreed to reimburse
Lender pursuant to any other provisions of this Amendment or any other
Ancillary Agreement, such as, by way of example; reasonable legal fees and
expenses.
5.2. Borrower shall deliver to Lender for the months of November, 1996
and December, 1996 unaudited financial statements which comply with the
reporting requirements of Paragraph 10.1(H)(ii) of the Loan Agreement and
officer's certificates which comply with the reporting requirements of
Paragraph 10.1(H)(iv) of the Loan Agreement on or before February 28, 1997.
5.3. Borrower agrees to promptly pay or reimburse all out-of-pocket
costs and expenses of Lender, including without limitation, reasonable
attorneys' fees, costs, expenses incurred by Lender in connection with the
negotiation, preparation, execution and delivery of this Amendment and all
other matters pertaining hereto.
5.4. This Amendment may be signed in any number of counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
5.5. Lender's waiver is of the Events of Default only. Nothing
contained herein shall be deemed a waiver or forbearance or create a course
of conduct or otherwise estop Lender from exercising its rights due to any
other Event of Default under the Loan Agreement.
5.6. Except as otherwise specified herein, this Amendment embodies the
entire agreement and understanding between Lender and Borrower with respect
to the subject matter hereof and supersedes all prior agreements, consents
and understandings relating to such subject matter.
5.7. The headings in this Amendment have been inserted for convenience
only and shall be given no substantive meaning or significance in construing
the terms of this Amendment.
4
<PAGE>
5.8. This Amendment shall inure to the benefit of Lender and its
successors and assigns and shall be binding upon and inure to the successors
and assigns of Borrower, except that Borrower may not assign any of its
rights in and to this Amendment.
IN WITNESS WHEREOF, Borrower and Lender have caused this Fourth
Amendment to Revolving Loan and Security Agreement to be executed and
delivered as of the day and year written above.
THE ROACH ORGANIZATION, INC.
By: /s/Sharon Fierro
____________________________________
Name: Sharon Fierro
__________________________________
Title: SR VP & CFO
__________________________________
TRO LEARNING CANADA, INC.
By: /s/Sharon Fierro
____________________________________
Name: Sharon Fierro
__________________________________
Title: SR VP & CFO
__________________________________
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Laurence J. Placek
__________________________________
Name: Laurence J. Placek
________________________________
Title: Vice Pres
_______________________________
AMENDMENT IS CONTINUED ON NEXT PAGE
5
<PAGE>
REAFFIRMATION OF
GUARANTY OF PAYMENT AND PERFORMANCE
-----------------------------------
THE UNDERSIGNED PARTY, as guarantor ("Guarantor") of the above Borrowers
pursuant to its Guaranty of Payment and Performance (the "Guaranty")
identified below, acknowledges the terms and conditions set forth in this
Fourth Amendment to Revolving Loan And Security Agreement and ratifies and
reaffirms its guaranty obligations as set forth in the Guaranty, as
reaffirmed. To further induce Lender to enter into this Amendment, Guarantor
hereby represents and warrants to Lender that it possesses no claims,
defenses, offsets, recoupment or counterclaims of any kind or nature against
or with respect to the enforcement of the Loan Agreement or any other
Ancillary Agreement, each as amended by this Amendment, or to the Guaranty
(collectively, the "Claims"), nor does Guarantor have any knowledge of any
facts that would or might give rise to any Claims. If facts now exist which
would or could give rise to any Claim against or with respect to the
enforcement of the Loan Agreement, any Ancillary Agreement, or the Guaranty,
Guarantor hereby unconditionally, irrevocably and unequivocally waives and
fully releases any and all such Claims as if such Claims where the subject of
a lawsuit, adjudicated to final judgment from which no appeal could be taken
and therein dismissed with prejudice.
DATED: As of January 23, 1997
TRO LEARNING, INC.
By: /s/Sharon Fierro
____________________________
Name: Sharon Fierro
__________________________
Its: SR VP & CFO
__________________________
(Guaranty of Payment and Performance dated
as of August 2, 1995, as reaffirmed from
time to time)
6
<PAGE>
TRO LEARNING, INC.
COMPUTATION OF INCOME (LOSS) PER SHARE
AND EQUIVALENT SHARE OF COMMON STOCK
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------
1996 1995
-------- --------
AVERAGE SHARES OUTSTANDING:
1. Weighted average number of shares of
common stock outstanding during the
period............................................. 6,120 6,066
2. Net additional shares assuming stock
options and warrants exercised..................... 523 214
-------- --------
3. Weighted average number of shares and
equivalent shares of common stock
outstanding during the period...................... 6,643 6,280
-------- --------
-------- --------
INCOME:
4. Net income......................................... $982 $3,752
-------- --------
-------- --------
PER SHARE AMOUNTS:
Net income (line 4/line 3)........................... $0.15 $0.60
-------- --------
-------- --------
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
TRO Learning, Inc. and subsidiaries on Form S-8 (File Nos. 33-60998, 33-66946,
33-69588 and 33-70338) of our report dated December 23, 1996, except for Note 3,
for which the date is January 23, 1997, on our audits of the consolidated
financial statements and financial statement schedules of TRO Learning, Inc. and
Subsidiaries as of October 31, 1996 and 1995, and for each of the three years in
the period ended October 31, 1996, which report is included in the annual report
on Form 10-K.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
January 23, 1997
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director and/or Officer of TRO Learning, Inc., a
Delaware corporation (the "Company"), does hereby constitute and appoint
William R. Roach, Sharon Fierro and Mary Jo Murphy, his or her true and
lawful attorneys and agents, each with full power and authority (acting alone
and without the other) to execute in the name and on behalf of the
undersigned as such Director and/or Officer, the Company's Annual Report on
Form 10-K and related amendments, if any. The undersigned hereby grants unto
such attorneys and agents, and each of them, full power of substitution and
revocation in the premises and hereby ratifies and confirms all that such
attorneys and agents may do or cause to be done by virtue of these presents.
Dated this 12 day of January, 1997.
------
/s/ Jack R. Borsting
----------------------------------------
Jack R. Borsting
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director and/or Officer of TRO Learning, Inc., a
Delaware corporation (the "Company"), does hereby constitute and appoint
William R. Roach, Sharon Fierro and Mary Jo Murphy, his or her true and
lawful attorneys and agents, each with full power and authority (acting alone
and without the other) to execute in the name and on behalf of the
undersigned as such Director and/or Officer, the Company's Annual Report on
Form 10-K and related amendments, if any. The undersigned hereby grants unto
such attorneys and agents, and each of them, full power of substitution and
revocation in the premises and hereby ratifies and confirms all that such
attorneys and agents may do or cause to be done by virtue of these presents.
Dated this 3rd day of January, 1997.
-------
/s/ Tony J. Christianson
----------------------------------------
Tony J. Christianson
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director and/or Officer of TRO Learning, Inc., a
Delaware corporation (the "Company"), does hereby constitute and appoint
William R. Roach, Sharon Fierro and Mary Jo Murphy, his or her true and
lawful attorneys and agents, each with full power and authority (acting alone
and without the other) to execute in the name and on behalf of the
undersigned as such Director and/or Officer, the Company's Annual Report on
Form 10-K and related amendments, if any. The undersigned hereby grants unto
such attorneys and agents, and each of them, full power of substitution and
revocation in the premises and hereby ratifies and confirms all that such
attorneys and agents may do or cause to be done by virtue of these presents.
Dated this 10th day of January, 1997.
--------
/s/ John L. Krakauer
----------------------------------------
John L. Krakauer
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director and/or Officer of TRO Learning, Inc., a
Delaware corporation (the "Company"), does hereby constitute and appoint
William R. Roach, Sharon Fierro and Mary Jo Murphy, his or her true and
lawful attorneys and agents, each with full power and authority (acting alone
and without the other) to execute in the name and on behalf of the
undersigned as such Director and/or Officer, the Company's Annual Report on
Form 10-K and related amendments, if any. The undersigned hereby grants unto
such attorneys and agents, and each of them, full power of substitution and
revocation in the premises and hereby ratifies and confirms all that such
attorneys and agents may do or cause to be done by virtue of these presents.
Dated this 7th day of January, 1997.
-------
/s/ Vernon B. Lewis, Jr.
----------------------------------------
Vernon B. Lewis, Jr.
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director and/or Officer of TRO Learning, Inc., a
Delaware corporation (the "Company"), does hereby constitute and appoint
William R. Roach, Sharon Fierro and Mary Jo Murphy, his or her true and
lawful attorneys and agents, each with full power and authority (acting alone
and without the other) to execute in the name and on behalf of the
undersigned as such Director and/or Officer, the Company's Annual Report on
Form 10-K and related amendments, if any. The undersigned hereby grants unto
such attorneys and agents, and each of them, full power of substitution and
revocation in the premises and hereby ratifies and confirms all that such
attorneys and agents may do or cause to be done by virtue of these presents.
Dated this 6th day of January, 1997.
-------
/s/ John Patience
----------------------------------------
John Patience
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND IN THE
COMPANY'S FORM 10-K FOR THE YEAR ENDED OCTOBER 31, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<CASH> 475
<SECURITIES> 0
<RECEIVABLES> 24163
<ALLOWANCES> 510
<INVENTORY> 1097
<CURRENT-ASSETS> 26786
<PP&E> 1368
<DEPRECIATION> 3250
<TOTAL-ASSETS> 41432
<CURRENT-LIABILITIES> 20071
<BONDS> 0
0
0
<COMMON> 62
<OTHER-SE> 20750
<TOTAL-LIABILITY-AND-EQUITY> 41432
<SALES> 41405
<TOTAL-REVENUES> 41405
<CGS> 6213
<TOTAL-COSTS> 6213
<OTHER-EXPENSES> 32844
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 723
<INCOME-PRETAX> 1546
<INCOME-TAX> 564
<INCOME-CONTINUING> 982
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 982
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
