<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1997
----------------
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
TRO LEARNING, INC.
------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3660532
- -------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1721 Moon Lake Boulevard, Suite 555, Hoffman Estates, IL 60194
- -------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 781-7800
--------------
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
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 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.01 par value 6,224,414
- ---------------------------- --------------------
Class Outstanding as of February 28, 1997
(This document contains 13 pages)
1
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
INDEX
-----
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Statements of Income for the
Three Months Ended January 31, 1997 and 1996. . . . . . 3
Consolidated Balance Sheets as of
January 31, 1997 and October 31, 1996 . . . . . . . . . 4
Consolidated Statements of Cash Flows for the
Three Months Ended January 31, 1997 and 1996. . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . 8-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 11
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . 11
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . . . 11
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 11-12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2
<PAGE>
PART I. FINANCIAL INFORMATION
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share data)
Three Months Ended
January 31,
-------------------------
1997 1996
---------- ------------
Revenues by product line:
PLATO-Registered Trademark- Education . . . . . . $ 4,265 $ 4,545
Aviation Training . . . . . . . . . . . . . . . . 822 1,864
----------- -----------
Total revenues. . . . . . . . . . . . . . . . . 5,087 6,409
Cost of revenues. . . . . . . . . . . . . . . . . 779 1,214
----------- -----------
Gross profit. . . . . . . . . . . . . . . . . . 4,308 5,195
----------- -----------
Operating expenses:
Selling, general and administrative expense . . . 6,116 5,472
Product development and customer support. . . . . 1,610 1,260
----------- -----------
Total operating expenses. . . . . . . . . . . . 7,726 6,732
----------- -----------
Operating loss. . . . . . . . . . . . . . . . (3,418) (1,537)
Interest expense. . . . . . . . . . . . . . . . . . (228) (118)
Interest income and other expense, net. . . . . . . (54) (24)
----------- -----------
Loss before income taxes. . . . . . . . . . . (3,700) (1,679)
Credit for income taxes . . . . . . . . . . . . . . (1,386) (630)
----------- -----------
Net loss. . . . . . . . . . . . . . . . . . . $ (2,314) $ (1,049)
----------- -----------
----------- -----------
Loss per common and common equivalent share:
Primary -
Net loss. . . . . . . . . . . . . . . . . . . $ (0.37) $ (0.17)
----------- -----------
----------- -----------
Weighted average common and common equivalent
shares outstanding. . . . . . . . . . . . . 6,182 6,081
----------- -----------
----------- -----------
See Notes to Consolidated Financial Statements
3
<PAGE>
TRO LEARNING,INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)
January 31, October 31,
1997 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ --- $ 475
Accounts receivable, less allowances of $508 and
$510, respectively. . . . . . . . . . . . . . . . . 21,641 24,163
Inventories . . . . . . . . . . . . . . . . . . . . . 1,241 1,097
Prepaid expenses and other current assets . . . . . . 1,213 1,051
---------- ----------
Total current assets. . . . . . . . . . . . . . . . 24,095 26,786
Equipment and leasehold improvements, less
accumulated depreciation of $3,425 and
$3,250, respectively. . . . . . . . . . . . . . . . . 1,374 1,368
Product development costs, less accumulated
amortization of $976 and $680, respectively . . . . . 5,957 5,528
Deferred tax asset. . . . . . . . . . . . . . . . . . . 7,292 5,906
Other assets. . . . . . . . . . . . . . . . . . . . . . 2,108 2,739
---------- ----------
$ 40,826 $ 42,327
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . $ 2,128 $ 2,588
Accrued employee salaries and benefits. . . . . . . . 2,039 3,079
Accrued liabilities . . . . . . . . . . . . . . . . . 3,424 3,705
Revolving loan. . . . . . . . . . . . . . . . . . . . 11,213 8,612
Deferred tax liability. . . . . . . . . . . . . . . . 1,845 1,845
Deferred revenue. . . . . . . . . . . . . . . . . . . 1,307 1,137
---------- ----------
Total current liabilities . . . . . . . . . . . . . 21,956 20,966
Deferred revenue, less current portion. . . . . . . . . 372 296
Other liabilities . . . . . . . . . . . . . . . . . . . 234 253
Stockholders' equity:
Common stock, $01 par value; 25,000 shares
authorized; 6,268 shares issued and 6,223 shares
outstanding in 1997; 6,190 shares issued and 6,167
shares outstanding in 1996; . . . . . . . . . . . . 62 62
Paid in capital. . . . . . . . . . . . . . . . . . 21,729 21,634
Accumulated deficit . . . . . . . . . . . . . . . . . (2,757) (443)
Treasury stock at cost, 45 and 23 shares,
respectively. . . . . . . . . . . . . . . . . . . . (469) (208)
Foreign currency translation adjustment . . . . . . . (301) (233)
---------- ----------
Total stockholders' equity. . . . . . . . . . . . . 18,264 20,812
---------- ----------
$ 40,826 $ 42,327
---------- ----------
---------- ----------
See Notes to Consolidated Financial Statements
4
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three Months
Ended January 31,
--------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . $(2,314) $(1,049)
---------- ----------
Adjustments to reconcile net loss to net cash used
in operating activities:
Deferred income taxes. . . . . . . . . . . . . . . . (1,386) (630)
Depreciation and amortization. . . . . . . . . . . . 503 291
Provision for doubtful accounts. . . . . . . . . . . 202 220
Disposal of fixed assets . . . . . . . . . . . . . . --- 4
Changes in assets and liabilities:
Decrease in accounts receivable. . . . . . . . . . 2,320 2,113
Increase in inventories. . . . . . . . . . . . . . (144) (127)
(Increase) decrease in prepaid expenses and
other current and noncurrent assets. . . . . . . 456 (347)
Increase in product development costs. . . . . . . (726) (669)
Decrease in accounts payable . . . . . . . . . . . (460) (565)
Decrease in accrued liabilities, accrued
employee salaries and benefits and
other liabilities. . . . . . . . . . . . . . . . (1,340) (371)
Increase (decrease) in deferred revenue. . . . . . 246 (137)
---------- ----------
Total adjustments. . . . . . . . . . . . . . . . (329) (218)
---------- ----------
Net cash used in operating activities. . . . . (2,643) (1,267)
---------- ----------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . (207) (392)
---------- ----------
Net cash used in investing activities. . . . . . . (207) (392)
---------- ----------
Cash flows from financing activities:
Net proceeds from short term borrowings. . . . . . . 2,601 1,752
Purchase of treasury stock . . . . . . . . . . . . . (261) ---
Net proceeds from issuance of common stock . . . . . 95 40
---------- ----------
Net cash provided by financing activities. . . . . 2,435 1,792
---------- ----------
Effect of foreign currency on cash. . . . . . . . . . . (60) (166)
---------- ----------
Net increase (decrease) in cash and cash equivalents. . (475) (33)
Cash and cash equivalents at beginning of period. . . . 475 231
---------- ----------
Cash and cash equivalents at end of period. . . . . . . $ --- $ 198
---------- ----------
---------- ----------
Cash paid for interest expense. . . . . . . . . . . . . $227 $115
5
<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.
BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Accordingly, these
quarterly consolidated financial statements should be read in conjunction with
the financial statements and the notes thereto included in the Company's Form
10-K for the fiscal year ended October 31, 1996.
The financial information furnished reflects, in the opinion of the Company, all
adjustments of a normal, recurring nature necessary for a fair statement of the
results for the interim periods presented. Because of cyclical and other
factors, the results for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year.
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 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.
6
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PRODUCT DEVELOPMENT, ENHANCEMENT, AND MAINTENANCE Costs, Continued
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.
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.
2. ACCOUNTS RECEIVABLE:
Accounts receivable include installment receivables of $10,786,000 and
$13,023,000 at January 31, 1997 and October 31, 1996, respectively. Installment
receivables with terms greater than one year were $1,293,000 and $1,909,000 at
January 31, 1997 and October 31,1996, respectively, and are included in other
assets on the consolidated balance sheets.
3. DEBT:
The Company's revolving loan agreement provides for a maximum $12,500,000 line
of credit through March 6, 1997. Borrowings under the line bear interest at the
prime rate plus 1.5% or the LIBOR rate plus 3.25% as determined by the Company.
At January 31, 1997, there were borrowings of $11,213,000 outstanding at a
weighted average interest rate of 9.2% and the Company was in compliance with
all financial covenants.
Effective March 6, 1997, the Company amended its revolving loan agreement to
provide for a maximum $18,000,000 line of credit with substantially the same
terms. In addition, the amended agreement provides for a $3,000,000 term loan,
subject to the Company raising an additional $3,000,000 of capital by June 30,
1997. The Company is currently pursuing financing alternatives to provide
additional permanent capital, including a private placement of subordinated
convertible debentures.
7
<PAGE>
PART I. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
FIRST QUARTER FISCAL 1997 COMPARED TO FIRST QUARTER FISCAL 1996
REVENUES:
Total revenues for the first quarter of fiscal 1997 of $5,087,000 decreased by
$1,322,000 or 21% as compared to $6,409,000 for the first quarter of fiscal
1996. The following table highlights revenues by product line (in 000's):
<TABLE>
<CAPTION>
PLATO EDUCATION AVIATION TRAINING TOTAL
------------------------- ------------------------- ------------------------
1997 1996 1997 1996 1997 1996
---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Courseware license and support $ 3,569 $ 3,614 $ 799 $ 1,777 $ 4,368 $ 5,391
Hardware, third party courseware and other 696 931 23 87 719 1,018
---------- ---------- ---------- ---------- ---------- ---------
Total revenues $ 4,265 $ 4,545 $ 822 $ 1,864 $ 5,087 $ 6,409
---------- ---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------- ---------
</TABLE>
PLATO Education revenues decreased $280,000 or 6% compared to the prior year.
This decrease was due principally to a decline in low margin hardware revenues.
In addition, the first quarter results reflect the traditionally lower level of
new orders generated in the first quarter of the fiscal year.
Aviation Training revenues decreased $1,042,000 or 56% compared to the prior
year. This decrease is principally due to an unusually large contract signed in
the first quarter of fiscal 1996 for approximately $1,250,000.
GROSS PROFIT:
Gross profit for the first quarter of fiscal 1997 decreased by $887,000 or 17%
to $4,308,000 as compared to $5,195,000 for the first quarter of fiscal 1996.
This decrease was due principally to the decrease in Aviation Training revenues.
The Company's gross margin was 85% for the first quarter of fiscal 1997 as
compared to 81% for the first quarter of fiscal 1996, reflecting the increased
mix of PLATO Education and Aviation Training courseware sales.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE:
Selling, general, and administrative expense for the first quarter of fiscal
1997 increased by $644,000 or 12% to as compared to $5,472,000 for the first
quarter of fiscal 1996. This increase was due primarily to higher PLATO
Education sales and marketing expenses of $452,000 resulting from the planned
expansion of the sales and service organization and slightly higher corporate
administrative expenses.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
- --------------------------------------------------------------------------------
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
Product development and customer support expense for the first quarter of fiscal
1997 increased by $350,000 or 28% to $1,610,000 as compared to $1,260,000 for
the first quarter of fiscal 1996. This increase was due principally to
increased PLATO Education product development expense, which reflects an
increase in amortization of capitalized product development costs.
OPERATING LOSS:
The operating loss was $3,418,000 for the first quarter of fiscal 1997 as
compared to $1,537,000 for the first quarter of fiscal 1996. The first quarter
loss reflects the impact of a traditionally lower level of revenue in the first
half of the Company's fiscal year, as well as the absorption of an increased
fixed base of sales and marketing costs related to PLATO Education's expansion.
INTEREST EXPENSE:
Interest expense for the first quarter of fiscal 1997 was $228,000 as compared
to $118,000 for the first quarter of fiscal 1996. Interest expense increased
due to a higher level of borrowings under the Company's revolving loan agreement
during the first quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1997, the Company's principal sources of liquidity included
net accounts receivable of $22,934,000, and its line of credit. The Company has
total installment receivables of $12,079,000 at January 31, 1997, of which
$10,786,000 are due within one year and are included in net accounts receivable.
Net cash used in the Company's operating activities was $2,643,000 in the first
quarter of fiscal 1997 as compared to $1,267,000 in the first quarter of fiscal
1996. 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. At January 31, 1997, borrowings of
$11,213,000 were outstanding at a weighted average interest rate of 9.2%.
Effective March 6, 1997, the Company amended its revolving loan agreement to
provide for a maximum $18,000,000 line of credit with substantially the same
terms. In addition, the amended agreement provides for a $3,000,000 term loan,
subject to the Company raising an additional $3,000,000 of capital by June 30,
1997. The Company is currently pursuing financing alternatives to provide
additional permanent capital, including a private placement of subordinated
convertible debentures.
Net cash used in the Company's investing activities in the first quarter of
fiscal 1997 was $207,000 for capital expenditures.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
Net cash provided by financing activities in the first quarter of fiscal 1997
was $2,435,000 which primarily represents borrowings under the Company's line of
credit.
The Company maintains adequate cash reserves, short-term investments, and credit
facilities to meet its anticipated working capital, capital expenditure, and
business investment requirements.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. 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 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibits Page
----------- ----------------------- ----
11 Statement Regarding Computation 12
of Per Share Income (Loss)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the quarter ended
January 31, 1997.
11
<PAGE>
SIGNATURES
----------
Pursuant to the requirements 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 March 12, 1997
TRO LEARNING, INC.
By /s/William R. Roach
------------------------------
William R. Roach
Chairman of the Board, President and Chief
Executive Officer
(principal executive officer)
/s/Sharon Fierro
------------------------------
Sharon Fierro
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
(principal financial officer)
/s/ Mary Jo Murphy
------------------------------
Mary Jo Murphy
Vice President, Corporate Controller and
Chief Accounting Officer
(principal accounting officer)
13
<PAGE>
EXHIBIT 11
TRO LEARNING, INC. AND SUBSIDIARIES
COMPUTATION OF INCOME (LOSS) PER SHARE
AND EQUIVALENT SHARE OF COMMON STOCK
(Unaudited, in thousands, except per share data)
Three Months
Ended January 31,
-------------------
1997 1996
-------- --------
AVERAGE SHARES OUTSTANDING:
1. Weighted average number of shares of common
stock outstanding during the period . . . . . 6,182 6,081
2. Net additional shares assuming stock options
exercised . . . . . . . . . . . . . . . . . . --- ---
---------- ----------
3. Weighted average number of shares and
equivalent shares of common stock outstanding
during the period . . . . . . . . . . . . . . 6,182 6,081
---------- ----------
---------- ----------
INCOME (LOSS):
4. Net loss . . . . . . . . . . . . . . . . . . . . $(2,314) $(1,049)
---------- ----------
---------- ----------
PER SHARE AMOUNTS:
Net loss (line 4/line 3). . . . . . . . . . . . . . . $(0.37) $(0.17)
---------- ----------
---------- ----------
12
<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-Q FOR THE QUARTER ENDED JANUARY 31, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> JAN-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 21641
<ALLOWANCES> 508
<INVENTORY> 1241
<CURRENT-ASSETS> 24095
<PP&E> 1374
<DEPRECIATION> 3425
<TOTAL-ASSETS> 40826
<CURRENT-LIABILITIES> 21956
<BONDS> 0
0
0
<COMMON> 62
<OTHER-SE> 18202
<TOTAL-LIABILITY-AND-EQUITY> 40826
<SALES> 5087
<TOTAL-REVENUES> 5087
<CGS> 779
<TOTAL-COSTS> 779
<OTHER-EXPENSES> 7780
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 228
<INCOME-PRETAX> (3700)
<INCOME-TAX> (1386)
<INCOME-CONTINUING> (2314)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2314)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
