<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 JULY 31, 1998
-------------
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 6,418,732 shares
- ---------------------------- ----------------------------------
Class Outstanding as of August 28, 1998
(This document contains 15 pages)
1
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Statements of Income for the
Three and Nine Months Ended July 31, 1998 and 1997...........................................3
Consolidated Balance Sheets as of
July 31, 1998 and October 31, 1997...........................................................4
Consolidated Statements of Cash Flows for the
Nine Months Ended July 31, 1998 and 1997.....................................................5
Notes to Consolidated Financial Statements.................................................6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................................9-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................................................14
Item 2. Changes in Securities.......................................................................14
Item 3. Defaults Upon Senior Securities.............................................................14
Item 4. Submission of Matters to a Vote of Security Holders.........................................14
Item 5. Other Information...........................................................................14
Item 6. Exhibits and Reports on Form 8-K............................................................14
SIGNATURES ...........................................................................................15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues by product line:
PLATO-Registered Trademark- Education ..... $10,601 $10,674 $25,035 $21,163
Aviation Training ......................... 1,464 669 3,846 2,867
-------- -------- -------- --------
Total revenues .......................... 12,065 11,343 28,881 24,030
Cost of revenues ............................ 1,415 1,761 4,352 3,892
-------- -------- -------- --------
Gross profit ............................ 10,650 9,582 24,529 20,138
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative expense 6,699 8,577 19,059 22,426
Product development and customer support .. 1,900 2,285 5,734 5,758
------- ------- ------- -------
Total operating expenses ................ 8,599 10,862 24,793 28,184
------- ------- ------- -------
Operating income (loss) ............... 2,051 (1,280) (264) (8,046)
Interest expense ............................ 592 505 1,369 984
Interest income and other expense, net ...... (127) (57) 198 51
------- ------- ------- -------
Income (loss) before income taxes ..... 1,586 (1,728) (1,831) (9,081)
Credit for income taxes ..................... -- (648) -- (3,405)
-------- -------- -------- --------
Net income (loss) ..................... $ 1,586 $(1,080) $(1,831) $(5,676)
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share:
Basic ................................... $ 0.25 $ (0.17) $ (0.29) $ (0.91)
-------- -------- -------- --------
-------- -------- -------- --------
Diluted ................................. $ 0.23 $ (0.17) $ (0.29) $ (0.91)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares outstanding:
Basic ................................... 6,417 6,229 6,407 6,212
-------- -------- -------- --------
-------- -------- -------- --------
Diluted ................................. 6,873 6,229 6,407 6,212
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1998 1997
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 880 $ 537
Accounts receivable, less allowances of $802 and .............. 18,081 18,305
$7,020, respectively
Inventories ................................................... 775 990
Prepaid expenses and other current assets ..................... 628 688
--------- ---------
Total current assets ........................................ 20,364 20,520
Equipment and leasehold improvements, less accumulated
depreciation of $4,595 and $4,092, respectively ............... 1,240 1,271
Product development costs, less accumulated amortization of
$4,164 and $2,562, respectively 6,340 5,989
Other assets .................................................... 1,078 1,308
--------- ---------
$ 29,022 $ 29,088
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 3,349 $ 3,472
Accrued employee salaries and benefits ........................ 2,664 3,199
Accrued liabilities ........................................... 3,562 4,072
Revolving loan ................................................ 14,479 11,908
Deferred revenue .............................................. 2,470 1,949
--------- ---------
Total current liabilities ................................... 26,524 24,600
Long-term debt .................................................. 3,050 3,050
Deferred revenue, less current portion .......................... 485 519
Other liabilities ............................................... 103 172
Stockholders' equity:
Common stock, $.01 par value, 25,000 shares authorized;
6,539 shares issued and 6,419 shares outstanding in 1998;
6,450 shares issued and 6,405 shares outstanding in 1997 .... 64 64
Paid in capital ............................................... 22,857 22,074
Treasury stock at cost, 120 and 45 shares, respectively ....... (1,176) (469)
Accumulated deficit ........................................... (22,491) (20,660)
Foreign currency translation adjustment ....................... (394) (262)
--------- ---------
Total stockholders' equity .................................. (1,140) 747
--------- ---------
$ 29,022 $ 29,088
--------- ---------
--------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
------------------------------
1998 1997
------------ --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................. $(1,831) $(5,676)
------- -------
Adjustments to reconcile net loss to net cash used in operating
activities:
Deferred income taxes ................................................... -- (3,405)
Depreciation and amortization ........................................... 2,166 1,872
Provision for doubtful accounts ......................................... 561 1,712
Disposal of fixed assets ................................................ 2 2
Changes in assets and liabilities:
Increase (decrease) in accounts receivable ............................ (337) 1,728
(Increase) decrease in inventories .................................... 215 (77)
(Increase) decrease in prepaid expenses and other current
and noncurrent assets ............................................... 290 (267)
Increase in product development costs ................................. (1,953) (1,603)
Decrease in accounts payable .......................................... (123) (75)
Decrease in accrued liabilities, accrued employee salaries and
benefits and other liabilities ...................................... (1,147) (555)
Increase in deferred revenue .......................................... 487 827
------- -------
Total adjustments ................................................... 161 159
------- -------
Net cash used in operating activities ............................. (1,670) (5,517)
------- -------
Cash flows from investing activities:
Capital expenditures ...................................................... (536) (648)
------- -------
Net cash used in investing activities ................................. (536) (648)
------- -------
Cash flows from financing activities:
Net proceeds from short term borrowings ................................... 2,971 352
Proceeds from issuance of long term debt .................................. -- 6,050
Repayment of long term debt ............................................... (400) --
Net proceeds from issuance of common stock ................................ 110 79
------- -------
Net cash provided by financing activities ............................... 2,681 6,481
------- -------
Effect of foreign currency on cash ........................................... (132) (60)
------- -------
Net increase in cash and cash equivalents .................................... 343 256
Cash and cash equivalents at beginning of period ............................. 537 475
------- -------
Cash and cash equivalents at end of period ................................... $ 880 $ 731
------- -------
------- -------
Cash paid for interest expense ............................................... $ 1,400 $ 862
------- -------
------- -------
</TABLE>
See Notes to Consolidated Financial Statements
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 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, 1997.
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, computer
hardware, and related support services, is recognized when courseware, hardware,
and related services are delivered. Upon delivery, 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 technical feasibility of new courseware products to be sold,
leased, or otherwise marketed are expensed as incurred. Once technical
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
feasibility 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.
EARNINGS PER SHARE:
The Company has adopted Statement of Financial Accounting Standards 128 (SFAS
128), "Earnings Per Share", as required, effective November 1, 1997. SFAS 128
requires presentation of basic and diluted earnings per share, including a
restatement of all prior periods presented. Basic earnings per share is
calculated based only upon the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated based
upon the weighted average number of common and, where dilutive, potential common
shares outstanding during the period. Potential common shares include options,
warrants and convertible securities. Since the Company incurred a net loss for
all periods presented, potential common shares are antidilutive and excluded
from the calculation, and basic and diluted earnings per share are the same.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified in the consolidated financial
statements to conform to the current year presentation.
2. ACCOUNTS RECEIVABLE:
Accounts receivable include net installment receivables of $8,876,000 and
$6,264,000 at July 31, 1998 and October 31, 1997, respectively. Installment
receivables with terms greater than one year were $352,000 and $565,000 at July
31, 1998 and October 31,1997, respectively, and are included in other assets on
the consolidated balance sheets.
7
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
3. DEBT:
The Company's revolving loan agreement as amended provides for a maximum $18
million line of credit and $3 million term loan through February 28, 1999.
Effective April 16, 1998, the agreement also provides for additional line of
credit borrowings up to a maximum $4,500,000 (increased from $3,500,000) from
time to time during certain periods of the remaining term of the agreement.
Borrowings under the line bear interest at the prime rate plus 1.5%. The term
loan has an annual interest rate of 15%. Effective August 20, 1998, the term
loan is subject to a mandatory prepayment of $1,000,000 on or before November
30, 1998. At July 31, 1998, borrowings of $11,879,000 under the line were
outstanding at an interest rate of 10% and the term loan balance was $2,600,000.
The Company is currently reviewing alternatives to meet its short and long term
financing requirements.
4. INCOME TAXES:
In line with the Company's decision to fully reserve its deferred tax asset at
the end of fiscal 1997, no tax benefit has been recorded at July 31, 1998 for
the current year to date loss.
5. NONCASH FINANCING ACTIVITIES:
Pursuant to the Company's various stock incentive and stock option plans,
participants may elect to exercise stock options through a noncash transaction.
Upon exercise, the Company immediately repurchases shares, at the current market
price, equal to the participants aggregate exercise price and tax liability. The
acquired shares are recorded as treasury stock at cost.
During the nine months ended July 31, 1998 the Company acquired 75,000 shares
totaling $707,000 through noncash exercise transactions. During the nine months
ended July 31, 1997, the Company acquired 21,000 shares totaling $261,000
through noncash exercise transactions.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
THIRD QUARTER FISCAL 1998 COMPARED TO THIRD QUARTER FISCAL 1997
REVENUES:
Total revenues for the third quarter of fiscal 1998 of $12,065,000 increased 6%
or $722,000 as compared to $11,343,000 for the third quarter of fiscal 1997. The
following table highlights revenues by product line (in 000's):
<TABLE>
<CAPTION>
PLATO EDUCATION AVIATION TRAINING TOTAL
---------------------- ------------------ ----------------------
1998 1997 1998 1997 1998 1997
------- -------- ------ ---- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Courseware license and support $ 9,617 $ 8,828 $1,464 $648 $11,081 $ 9,476
Hardware, third party courseware and other 984 1,846 -- 21 984 1,867
------- -------- ------- ---- ------- -------
Total revenues $10,601 $10,674 $1,464 669 $12,065 $11,343
------- -------- ------- ---- ------- -------
------- -------- ------- ---- ------- -------
</TABLE>
PLATO Education revenues were comparable to the prior year. Increased courseware
license and support revenues of $789,000 were offset by decreased hardware and
third party courseware revenues of $862,000.
Aviation Training revenues increased $795,000 or 119% due to increased
courseware revenues in the third quarter of fiscal 1998.
GROSS PROFIT:
Gross profit for the third quarter of fiscal 1998 increased $1,068,000 or 11% to
$10,650,000 as compared to $9,582,000 for the third quarter of fiscal 1997. The
Company's gross margin was 88% for the third quarter of fiscal 1998 as compared
to 84% for the third quarter of fiscal 1997. Increased courseware revenues
contributed to the increase in gross profit and gross margin for the third
quarter of fiscal 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE:
Selling, general, and administrative expense for the third quarter of fiscal
1998 decreased $1,878,000 or 22% to $6,699,000 as compared to $8,577,000 for the
third quarter of fiscal 1997. This decrease was principally due to the reduction
in PLATO Education selling expenses of $1,018,000, resulting primarily from the
restructuring of operations initiated in late fiscal 1997, and the decrease in
the provision for doubtful accounts of $624,000.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS, CONTINUED
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
Product development and customer support expense for the third quarter of
fiscal 1998 decreased $385,000 or 17% to $1,900,000 as compared to $2,285,000
for the third quarter of fiscal 1997. PLATO Education product development
expense decreased $275,000 due primarily to reduced spending and increased
capitalization of costs as compared to the same period of the prior year.
OPERATING INCOME (LOSS):
Operating income was $2,051,000 for the third quarter of fiscal 1998 as
compared to an operating loss of $1,280,000 for the third quarter of fiscal
1997. The improvement in operating results is due principally to the
increased mix of courseware revenues and the positive impact of the
restructuring of operations initiated in late fiscal 1997.
INCOME TAXES:
In line with the Company's decision to fully reserve its deferred tax asset
at the end of fiscal 1997, no income taxes have been recorded in fiscal 1998.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
FIRST NINE MONTHS FISCAL 1998 COMPARED TO FIRST NINE MONTHS FISCAL 1997
REVENUES:
Total revenues for the first nine months of fiscal 1998 of $28,881,000 increased
$4,851,000 or 20% as compared to $24,030,000 for the first nine months of fiscal
1997. The following table highlights revenues by product line (in 000's):
<TABLE>
<CAPTION>
PLATO Education Aviation Training Total
------------------- ----------------- ------------------
1998 1997 1998 1997 1998 1997
------- ------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Courseware license and support $21,719 $17,170 $3,793 $2,695 $25,512 $19,865
Hardware, third party courseware and other 3,316 3,993 53 172 3,369 4,165
------- ------- ------ ------ ------- -------
Total revenues $25,035 $21,163 $3,846 $2,867 $28,881 $24,030
------- ------- ------ ------ ------- -------
------- ------- ------ ------ ------- -------
</TABLE>
PLATO Education revenues for the first nine months of fiscal 1998 increased
$3,872,000 or 18% as compared to the first nine months of fiscal 1997. This
increase was due primarily to the growth in courseware license and support
revenues, slightly offset by decreased hardware and third party courseware
revenues.
Aviation Training revenues for the first nine months of fiscal 1998 increased
$979,000 or 34% over the first nine months of fiscal 1997 primarily due to
increased courseware revenues.
GROSS PROFIT:
Gross profit for the first nine months of fiscal 1998 increased $4,391,000 or
22% to $24,529,000 as compared to $20,138,000 for the first nine months of
fiscal 1997. This increase was due principally to the growth in courseware
revenues. The Company's gross margin was 85% for the first nine months of
fiscal 1998 compared to 84% for the first nine months of fiscal 1997.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE:
Selling, general, and administrative expense for the first nine months of
fiscal 1998 decreased $3,367,000 or 15% to $19,059,000 as compared to
$22,426,000 for the first nine months of fiscal 1997. This decrease was
principally due to the reduction in PLATO Education selling expenses of
$2,387,000, resulting primarily from the restructuring of operations
initiated in late fiscal 1997, and the decrease in the provision for doubtful
accounts of $1,151,000, offset by increased PLATO Education commissions of
$601,000 resulting from the growth in revenues.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS, CONTINUED
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
Product development and customer support expense for the first nine months of
fiscal 1998 was comparable to the first nine months of fiscal 1997. Increased
Aviation Training product development expense of $306,000 was offset by a
decrease in PLATO Education product development expense of $231,000.
OPERATING LOSS:
The operating loss was $264,000 for the first nine months of fiscal 1998 as
compared to $8,046,000 for the first nine months of fiscal 1997. The
improvement in operating results is due principally to the increase in
courseware revenues and the positive impact of the restructuring of
operations initiated in late fiscal 1997.
INTEREST EXPENSE:
Interest expense for the first nine months of fiscal 1998 was $1,369,000 as
compared to $984,000 for the first nine months of fiscal 1997. Interest
expense increased due principally to the Company's long term debt incurred in
the second quarter of fiscal 1997.
INCOME TAXES:
In line with the Company's decision to fully reserve its deferred tax asset
at the end of fiscal 1997, no income taxes have been recorded in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1998, the Company's principal sources of liquidity included
cash and cash equivalents of $880,000, net accounts receivable of
$18,081,000, and its line of credit which expires February 28, 1999 unless
extended, renegotiated or replaced. The Company has net installment
receivables of $9,228,000 at July 31, 1998, of which $8,876,000 are due
within one year and are included in net accounts receivable.
Net cash used in the Company's operating activities was $1,670,000 in the
first nine months of fiscal 1998 as compared to $5,517,000 in the first nine
months of fiscal 1997. Cash flows from operations were used principally to
fund the Company's working capital requirements. In addition to cash flows
from operations, the Company has resources available under its revolving loan
agreement (see Note 3 of Notes to Consolidated Financial Statements). At July
31, 1998, borrowings of $11,879,000 were outstanding under the line of credit
at an interest rate of 10%.
Net cash used in investing activities was $536,000 in the first nine months
of fiscal 1998 for capital expenditures.
12
<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 nine months of fiscal
1998 was $2,681,000 which primarily represents borrowings under the Company's
line of credit offset by principal payments on the term loan (see Note 3 of
Notes to Consolidated Financial Statements).
In November 1997, the Company announced that it had retained BancAmerica
ROBERTSON STEPHENS to advise it regarding strategic alternatives to enhance
shareholder value. The Company is currently reviewing financing alternatives
to meet its short and long term working capital, capital expenditure, and
business investment requirements.
In September 1998, the Company announced the sale of its Aviation Training
business.
YEAR 2000
The Company has taken action to understand the nature and extent of the work
required to make its systems and infrastructure Year 2000 compliant. In
addition, the Company is communicating with its major suppliers and service
providers to determine whether they are actively involved in projects to
ensure that their products and business systems will be Year 2000 compliant.
The Company anticipates that its Year 2000 issues will be addressed on a
timely basis and at a cost that will not be material to the Company's
operations or financial condition.
13
<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
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
10.22 Fourth Amendment to Amended and Restated Revolving
Loan and Security Agreement between Sanwa Business
Credit Corporation and The Roach Organization,
Inc. and TRO Learning (Canada), Inc. dated August
20, 1998.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the quarter ended July
31, 1998.
14
<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 September 4, 1998.
TRO LEARNING, INC.
By /s/ William R. Roach
----------------------------------------
Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
/s/ Andrew N. Peterson
----------------------------------------
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
(principal financial officer)
/s/ Mary Jo Murphy
----------------------------------------
Vice President, Corporate Controller and
Chief Accounting Officer
(principal accounting officer)
15
<PAGE>
FOURTH AMENDMENT TO AMENDED AND RESTATED
REVOLVING LOAN AND SECURITY AGREEMENT
THIS FOURTH AMENDMENT TO AMENDED AND RESTATED 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 20, 1998, 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").
WHEREAS, Borrower and Lender entered into that certain Amended and
Restated Revolving Loan and Security Agreement dated as of March 5, 1997 by
and between Borrower and Lenders, as amended by that certain First Amendment
to Amended and Restated Revolving Loan and Security Agreement dated as of
March 18, 1997, by that certain Second Amendment to Amended and Restated
Revolving Loan and Security Agreement dated as of December 8, 1997 and by
that certain Third Amendment to Amended and Restated Revolving Loan and
Security Agreement dated as of April 15, 1998 (as so amended the "LOAN
AGREEMENT") together with documents ancillary thereto, including, without
limitation that certain Amended and Restated Guaranty of Payment and
Performance dated as of March 5, 1997 made by TRO Learning Inc. ("GUARANTOR")
in favor of Lender; and
WHEREAS, Borrower has requested that Lender extend the Supplemental Over
Advance Facility, extend the term of the Loan Agreement and further amend the
Loan Agreement as provided herein and Guarantor has consented to such
amendment.
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.
<PAGE>
ARTICLE
2.
AMENDMENT OF THE LOAN AGREEMENT
2.1. Subsection 2.2(C) to the Loan Agreement is deleted in its entirety
and the following is substituted therefor:
(C) Subject to the provisions of Section 2.2(A) and in addition
to the Over Advance Facility, Lender shall make available to Borrower a
supplemental over advance facility (the "Supplemental Over Advance
Facility," each supplemental over advance being a "Supplemental Over
Advance") as follows:
<TABLE>
<CAPTION>
----------------------------------------------
Aggregate
Month Over Advance Available
----------------------------------------------
<S> <C>
December, 1997 $1,000,000
----------------------------------------------
January, 1998 $1,500,000
----------------------------------------------
February, 1998 $2,500,000
----------------------------------------------
March, 1998 $3,500,000
----------------------------------------------
April, 1998 $4,500,000
----------------------------------------------
May, 1998 $4,500,000
----------------------------------------------
June, 1998 $4,500,000
----------------------------------------------
July, 1998 $4,500,000
----------------------------------------------
August, 1998 $4,500,000
----------------------------------------------
September, 1998 $4,500,000
----------------------------------------------
October, 1998 $3,500,000
----------------------------------------------
November, 1998 $3,500,000
----------------------------------------------
December, 1998 0
----------------------------------------------
January, 1998 0
----------------------------------------------
February, 1998 0
----------------------------------------------
</TABLE>
Borrower agrees that the aggregate amount of Supplemental Over
Advances made by Lender shall never be greater than the dollar amount
set forth in the above table during each respective month. There shall
occur an immediate Event of Default in the event that the aggregate
amount of Supplemental Over Advances ever exceeds the respective dollar
amount set forth in the above table. In no event shall the aggregate
amount of Supplemental Over Advances ever exceed $4,500,000.
2
<PAGE>
2.2. Section 2.7 of the Agreement is hereby deleted in its entirety and
the following is substituted therefor:
2.7 TERM OF AGREEMENT. This Agreement shall be in effect from the
Origination Date, through and including February 28, 1999 (the "Term"),
subject to earlier termination by Lender upon the occurrence of a
Default as provided in Section 11.1. Upon the effective date of
termination, all of the Liabilities shall become immediately due and
payable without presentment, notice or demand, except as otherwise
provided herein. Notwithstanding any termination, until all of the
Liabilities shall have been fully paid and satisfied, Lender shall be
entitled to retain its security interest in the Collateral. Borrower
shall continue to remit collections of Accounts and proceeds of
Collateral as provided in this Agreement, and Lender shall retain all of
its rights and remedies under this Agreement.
2.3. The following subsection shall be added as a new subsection 2.8(D)
to the Loan Agreement:
(C) On or before November 30, 1998, Borrower shall make a
mandatory prepayment on the Term Loan of $1,000,000. Such mandatory
prepayment shall not be subject to a prepayment penalty or premium and
shall be applied to the scheduled installments of principal on the Term
Loan in the inverse order of maturity.
2.4. Subsection 10.1(B) is hereby deleted in its entirety and the
following is substituted therefor:
(D) Borrower shall maintain Operating Profit, measured quarterly
on the last day of each fiscal quarter of Borrower, as follows:
<TABLE>
----------------------------------------------
<S> <C>
First Quarter: 1998 ($2,900,000)
----------------------------------------------
Second Quarter: 1998 ($450,000)
----------------------------------------------
Third Quarter: 1998 $2,000,000
----------------------------------------------
Fourth Quarter: 1998 $4,850,000
----------------------------------------------
First Quarter: 1999 ($2,900,000)
----------------------------------------------
</TABLE>
3
<PAGE>
ARTICLE
3.
FEES
3.1. EARNED FEE. Borrower shall pay to Lender the non-sales success fee
in the amount of Two Hundred Thousand and no/100 Dollars ($200,000.00), which
fee was earned pursuant to the terms of the Second Amendment to Amended and
Restated Revolving Loan and Security Agreement and shall be paid concurrently
with Borrower's execution of this Amendment.
3.2. SUCCESS FEES. Upon the occurrence of a "Sale Event" (defined
herein), Borrower shall pay to Lender a sales success fee (a "SALES SUCCESS
FEE") in an amount equal to the greater of (i) Three Hundred Thousand and
no/100 Dollars ($300,000) and (ii) the product of (x) 100,000 MULTIPLIED BY
(y) the excess, if any, of the "Market Price" (defined herein) of a share of
Guarantor's common stock as of the date of any Sale Event over the Market
Price of a share of common stock of Guarantor as of December 8, 1997. For
purposes of this Section, the term "Market Price" day shall mean $6,625 and
the term "Sale Event" shall mean: (A) the closing of any sale of securities
of Guarantor to a person if, after such sale, such person, other than the
persons who were shareholders of Guarantor immediately prior to the
effectiveness of such transaction, would own or control securities which
possess in the aggregate the ordinary voting power to elect a majority of the
directors of Guarantor; or (B) the effectiveness of a merger, consolidation
or similar transaction involving Guarantor if, after such transaction, a
person in the aggregate, other than the persons who were shareholders of
Guarantor immediately prior to the effectiveness of such transaction, would
own or control securities which possess in the aggregate the ordinary voting
power to elect a majority of the surviving entity's directors; or (C) the
sale of all or substantially all of the assets of Guarantor to another entity
or person. Borrower shall pay to Lender a non-sales success fee (a
"NON-SALES SUCCESS FEE") in an amount equal to Two Hundred Thousand and
No/Dollars ($200,000) in the event that a Sales Event has not occurred prior
to the earlier of (a) December 31, 1998, or (b) the date on which Lender
accelerates the Liabilities pursuant to Section 11.2 of the Loan Agreement
which Non-sales Success Fee shall be credited against the Sales Success Fee
in the event a Sale Event occurs prior to February 28, 1999. Borrower shall
pay to Lender a supplemental non-sales success fee (a "SUPPLEMENTAL NON-SALES
SUCCESS FEE") in an amount equal to One Hundred Thousand and No/100 Dollars
($100,000) in the event that a Sales Event has not occurred prior to the
earlier of (a) February 28, 1999, or (b) the date on which Lender accelerates
the Liabilities pursuant to Section 11.2 of the Loan Agreement. Each of the
Sales Success Fee, the Non-sales Success Fee and the Supplemental Non-sales
Success Fee shall be a Liability secured by the Collateral and shall be
payable within three days of its determination and shall be separate and
distinct from the fee identified in Section 3.1.
4
<PAGE>
ARTICLE
4.
REPRESENTATIONS AND WARRANTIES
4.1. 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. 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 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 date hereof.
5
<PAGE>
ARTICLE
5.
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.
ARTICLE
6.
MISCELLANEOUS
6.1. 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.
6.2. 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.
6.3. 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.
6.4. 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 Fourth
Amendment to Amended and Restated Revolving Loan and Security Agreement to be
executed and delivered as of the day and year written above.
THE ROACH ORGANIZATION, INC.
By: /s/ Andrew N. Peterson
----------------------------
Name: Andrew N. Peterson
--------------------------
Title: Chief Financial Officer
--------------------------
TRO LEARNING (CANADA), INC.
By: /s/ Andrew N. Peterson
----------------------------
Name: Andrew N. Peterson
--------------------------
Title: Chief Financial Officer
--------------------------
SANWA BUSINESS CREDIT CORPORATION
By: ____________________________
Name: __________________________
Title: _________________________
7
<PAGE>
REAFFIRMATION OF AMENDED AND RESTATED
GUARANTY OF PAYMENT AND PERFORMANCE
THE UNDERSIGNED PARTY, as guarantor ("GUARANTOR") of the above Borrowers
pursuant to its Amended and Restated Guaranty of Payment and Performance (the
"GUARANTY") identified below, acknowledges the terms and conditions set forth
in this Fourth Amendment to Amended and Restated 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 of 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 the date first above written.
TRO LEARNING (CANADA), INC.
By: /s/ Andrew N. Peterson
----------------------------
Name: Andrew N. Peterson
--------------------------
Its: Chief Financial Officer
---------------------------
(Amended and Restated Guaranty of Payment
and Performance dated as of March 5, 1997)
8
<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 JULY 31,1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 880
<SECURITIES> 0
<RECEIVABLES> 18,081
<ALLOWANCES> 802
<INVENTORY> 775
<CURRENT-ASSETS> 20,364
<PP&E> 1,240
<DEPRECIATION> 4,595
<TOTAL-ASSETS> 29,022
<CURRENT-LIABILITIES> 26,524
<BONDS> 3,050
0
0
<COMMON> 64
<OTHER-SE> (1,204)
<TOTAL-LIABILITY-AND-EQUITY> 29,022
<SALES> 28,881
<TOTAL-REVENUES> 28,881
<CGS> 4,352
<TOTAL-COSTS> 4,352
<OTHER-EXPENSES> 24,793
<LOSS-PROVISION> 561
<INTEREST-EXPENSE> 1,369
<INCOME-PRETAX> (1,831)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,831)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
