<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 APRIL 30, 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 6,416,639 shares
- ---------------------------- ----------------
Class Outstanding as of May 27, 1998
(This document contains 16 pages)
1
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Statements of Income for the
Three and Six Months Ended April 30, 1998 and 1997. . . . . . . . 3
Consolidated Balance Sheets as of
April 30, 1998 and October 31, 1997 . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the
Six Months Ended April 30, 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. . . . . . . . . . . . . . . 14-15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
</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 SIX MONTHS ENDED
APRIL 30, APRIL 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues by product line:
PLATO-Registered Trademark- Education. . . . . . . . . . . $ 8,391 $ 6,224 $14,434 $10,489
Aviation Training. . . . . . . . . . . . . . . . . . . . . 1,222 1,376 2,382 2,198
------- ------- ------- -------
Total revenues. . . . . . . . . . . . . . . . . . . . . 9,613 7,600 16,816 12,687
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . 1,347 1,351 2,937 2,131
------- ------- ------- -------
Gross profit. . . . . . . . . . . . . . . . . . . . . . 8,266 6,249 13,879 10,556
------- ------- ------- -------
Operating expenses:
Selling, general and administrative expense. . . . . . . . 6,418 7,733 12,360 13,849
Product development and customer support . . . . . . . . . 1,812 1,863 3,834 3,473
------- ------- ------- -------
Total operating expenses. . . . . . . . . . . . . . . . 8,230 9,596 16,194 17,322
------- ------- ------- -------
Operating income (loss) . . . . . . . . . . . . . . . 36 (3,347) (2,315) (6,766)
Interest expense . . . . . . . . . . . . . . . . . . . . . . 393 251 777 479
Interest income and other expense, net . . . . . . . . . . . 159 54 325 108
------- ------- ------- -------
Loss before income taxes. . . . . . . . . . . . . . . (516) (3,652) (3,417) (7,353)
Credit for income taxes. . . . . . . . . . . . . . . . . . . --- (1,371) --- (2,757)
------- ------- ------- -------
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (516) $(2,281) $(3,417) $(4,596)
------- ------- ------- -------
Basic and diluted earnings per share . . . . . . . . . . . . $(0.08) $ (0.37) $ (0.53) $ (0.74)
------- ------- ------- -------
Weighted average common shares outstanding . . . . . . . . . 6,404 6,225 6,402 6,203
------- ------- ------- -------
</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>
APRIL 30, OCTOBER 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . $ 405 $ 537
Accounts receivable, less allowances of $1,003 and
$7,020, respectively. . . . . . . . . . . . . . . . . . . . . . . 14,841 18,305
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,050 990
Prepaid expenses and other current assets. . . . . . . . . . . . . . 801 688
-------- --------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . 17,097 20,520
Equipment and leasehold improvements, less accumulated
depreciation of $4,449 and $4,092, respectively. . . . . . . . . . . 1,159 1,271
Product development costs, less accumulated amortization of
$3,600 and $2,562, respectively. . . . . . . . . . . . . . . . . . . 6,360 5,989
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,477 1,308
-------- --------
$ 26,093 $ 29,088
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,068 $ 3,472
Accrued employee salaries and benefits . . . . . . . . . . . . . . . 2,794 3,199
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 3,719 4,072
Revolving loan . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,602 11,908
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 1,871 1,949
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 25,054 24,600
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,050 3,050
Deferred revenue, less current portion . . . . . . . . . . . . . . . . 491 519
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 127 172
Stockholders' equity:
Common stock, $.01 par value, 25,000 shares authorized;
6,537 shares issued and 6,417 shares outstanding in 1998;
6,450 shares issued and 6,405 shares outstanding in 1997. . . . . 64 64
Paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . 22,851 22,074
Treasury stock at cost, 120 and 45 shares, respectively. . . . . . . (1,176) (469)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . (24,077) (20,660)
Foreign currency translation adjustment. . . . . . . . . . . . . . . (291) (262)
-------- --------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . (2,629) 747
-------- --------
$ 26,093 $ 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>
SIX MONTHS ENDED
APRIL 30,
----------------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,417) $(4,596)
------- -------
Adjustments to reconcile net loss to net cash used in operating
activities:
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . --- (2,757)
Depreciation and amortization . . . . . . . . . . . . . . . . . . 1,402 1,120
Provision for doubtful accounts . . . . . . . . . . . . . . . . . 375 902
Disposal of fixed assets. . . . . . . . . . . . . . . . . . . . . --- 2
Changes in assets and liabilities:
Decrease in accounts receivable . . . . . . . . . . . . . . . . 3,089 4,126
(Increase) decrease in inventories . . . . . . . . . . . . . . (60) 97
(Increase) decrease in prepaid expenses and other current
and noncurrent assets. . . . . . . . . . . . . . . . . . . . (282) 383
Increase in product development costs . . . . . . . . . . . . . (1,409) (1,177)
Increase (decrease) in accounts payable . . . . . . . . . . . . 596 (321)
Decrease in accrued liabilities, accrued employee salaries and
benefits and other liabilities . . . . . . . . . . . . . . . (836) (1,876)
Increase (decrease) in deferred revenue . . . . . . . . . . . . (106) 502
------- -------
Total adjustments. . . . . . . . . . . . . . . . . . . . . . 2,769 1,001
------- -------
Net cash used in operating activities. . . . . . . . . . . (648) (3,595)
------- -------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . (254) (438)
------- -------
Net cash used in investing activities . . . . . . . . . . . . . (254) (438)
------- -------
Cash flows from financing activities:
Net proceeds from short term borrowings. . . . . . . . . . . . . . . 944 1,066
Proceeds from issuance of long term debt . . . . . . . . . . . . . . --- 3,050
Repayment of long term debt. . . . . . . . . . . . . . . . . . . . . (250) ---
Net proceeds from issuance of common stock . . . . . . . . . . . . . 103 59
------- -------
Net cash provided by financing activities . . . . . . . . . . . . 797 4,175
------- -------
Effect of foreign currency on cash . . . . . . . . . . . . . . . . . . (27) (86)
------- -------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . (132) 56
Cash and cash equivalents at beginning of period . . . . . . . . . . . 537 475
------- -------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . $ 405 $ 531
------- -------
------- -------
Cash paid for interest expense . . . . . . . . . . . . . . . . . . . . $ 863 $ 477
------- -------
------- -------
</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>
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 on the consolidated statements
of cash flows to conform to the current year presentation.
2. ACCOUNTS RECEIVABLE:
Accounts receivable include net installment receivables of $8,661,000 and
$6,264,000 at April 30, 1998 and October 31, 1997, respectively. Installment
receivables with terms greater than one year were $754,000 and $565,000 at April
30, 1998 and October 31,1997, respectively, and are included in other assets on
the consolidated balance sheets.
7
<PAGE>
3. DEBT:
The Company's revolving loan agreement provides for a maximum $18 million line
of credit and $3 million term loan through August 31, 1998. 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%. At April 30, 1998, borrowings of $9,852,000 under the
line were outstanding at an interest rate of 10% and the term loan balance was
$2,750,000. The Company was in compliance with all financial covenants at April
30, 1998.
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 April 30, 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 six months ended April 30, 1998 the Company acquired 75,000 shares
totaling $707,000 through noncash exercise transactions. During the six months
ended April 30, 1997, the Company acquired 21,000 shares totaling $261,000
through noncash exercise transactions.
6. LEGAL PROCEEDINGS:
On May 19, 1998, the United States District Court for the Northern District of
Illinois dismissed with prejudice the purported securities fraud class action
claim filed against the Company on December 15, 1997 for failure to state a
cause of action.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
SECOND QUARTER FISCAL 1998 COMPARED TO SECOND QUARTER FISCAL 1997
REVENUES:
Total revenues for the second quarter of fiscal 1998 of $9,613,000 increased 26%
or $2,013,000 as compared to $7,600,000 for the second 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 $7,480 $4,773 $1,222 $1,248 $8,702 $6,021
Hardware, third party courseware and other 911 1,451 --- 128 911 1,579
------ ------ ------ ------ ------ ------
Total revenues $8,391 $6,224 $1,222 $1,376 $9,613 $7,600
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
PLATO Education revenues increased $2,167,000 or 35% as compared to the prior
year primarily due to an increase in courseware license and support revenues of
$2,707,000 offset by a decrease in hardware revenues of approximately $569,000.
Aviation Training revenues decreased $154,000 or 11% as compared to the prior
year due principally to the absence of hardware revenues in the second quarter
of fiscal 1998.
GROSS PROFIT:
Gross profit for the second quarter of fiscal 1998 increased $2,017,000 or 32%
to $8,266,000 as compared to $6,249,000 for the second quarter of fiscal 1997.
This increase was due principally to revenue growth. The Company's gross margin
was 86% for the second quarter of fiscal 1998 as compared to 82% for the second
quarter of fiscal 1997. Increased courseware revenues contributed to the
increase in gross margin for the second quarter of fiscal 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE:
Selling, general, and administrative expense for the second quarter of fiscal
1998 decreased $1,315,000 or 17% to $6,418,000 as compared to $7,733,000 for the
second quarter of fiscal 1997. This decrease was primarily due to the decrease
in PLATO Education selling expenses of $1,259,000 as a result of the
restructuring of operations initiated in late fiscal 1997.
9
<PAGE>
RESULTS OF OPERATIONS, CONTINUED
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
Product development and customer support expense for the second quarter of
fiscal 1998 decreased $51,000 or 3% to $1,812,000 as compared to $1,863,000 for
the second quarter of fiscal 1997.
OPERATING INCOME (LOSS):
Operating income was $36,000 for the second quarter of fiscal 1998 as compared
to an operating loss of $3,347,000 for the second quarter of fiscal 1997. The
improvement in operating results is due principally to the increase in revenues
and the positive impact of the restructuring of operations initiated in late
fiscal 1997.
10
<PAGE>
RESULTS OF OPERATIONS
FIRST SIX MONTHS FISCAL 1998 COMPARED TO FIRST SIX MONTHS FISCAL 1997
REVENUES:
Total revenues for the first six months of fiscal 1998 of $16,816,000 increased
$4,129,000 or 33% as compared to $12,687,000 for the first six 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 $12,102 $ 8,342 $ 2,329 $ 2,047 $14,431 $10,389
Hardware, third party courseware and other 2,332 2,147 53 151 2,385 2,298
------- ------- ------- ------- ------- -------
Total revenues $14,434 $10,489 $2,382 $2,198 $16,816 $12,687
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
PLATO Education revenues for the first six months of fiscal 1998 increased
$3,945,000 or 38% as compared to the first six months of fiscal 1997. This
increase was due primarily to the growth in courseware license and support
revenues.
Aviation Training revenues for the first six months of fiscal 1998 increased
$184,000 or 8% over the first six months of fiscal 1997 primarily due to an
increase in courseware revenues slightly offset by a decrease in hardware
revenues.
GROSS PROFIT:
Gross profit for the first six months of fiscal 1998 increased $3,323,000 or 31%
to $13,879,000 as compared to $10,556,000 for the first six months of fiscal
1997. This increase was due principally to the growth in courseware revenues.
The Company's gross margin was 83% for the first six months of fiscal 1998 as
well as the first six months of fiscal 1997.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE:
Selling, general, and administrative expense for the first six months of fiscal
1998 decreased $1,489,000 or 11% to $12,360,000 as compared to $13,849,000 for
the first six months of fiscal 1997. PLATO Education selling expenses decreased
$1,896,000 as a result of the restructuring of operations initiated in late
fiscal 1997. PLATO Education commissions increased $449,000 resulting from
increased revenues.
11
<PAGE>
RESULTS OF OPERATIONS, CONTINUED
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
Product development and customer support expense for the first six months of
fiscal 1998 increased $361,000 or 10% to $3,834,000 as compared to $3,473,000
for the first six months of fiscal 1997. This increase was due principally to
increased Aviation Training product development spending of $322,000.
OPERATING LOSS:
The operating loss was $2,315,000 for the first six months of fiscal 1998 as
compared to $6,766,000 for the first six months of fiscal 1997. The improvement
in operating results is due principally to the increase in revenues and the
positive impact of the restructuring of operations initiated in late fiscal
1997.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1998, the Company's principal sources of liquidity included cash
and cash equivalents of $405,000, net accounts receivable of $14,841,000, and
its line of credit which expires August 31, 1998 unless extended, renegotiated
or replaced. The Company has net installment receivables of $9,415,000 at April
30, 1998, of which $8,661,000 are due within one year and are included in net
accounts receivable.
Net cash used in the Company's operating activities was $648,000 in the first
six months of fiscal 1998 as compared to $3,595,000 in the first six 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 April
30, 1998, borrowings of $9,852,000 were outstanding at an interest rate of 10%.
Net cash used in investing activities was $254,000 in the first six months of
fiscal 1998 for capital expenditures.
Net cash provided by financing activities in the first six months of fiscal 1998
was $797,000 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.
12
<PAGE>
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
See Note 6 of Notes to Consolidated Financial Statements.
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
The Company's Annual Meeting of Stockholders was held on April
16, 1998 at which stockholders voted on and approved the
following:
(a) The election of two Class II directors of the Company to
serve until the 2001 Annual Meeting. The voting was as
follows:
Name For Withheld
---- --- --------
Maj. Gen. Vernon B. Lewis, Jr. 6,233,587 50,745
John Patience 6,233,587 50,745
(a) The appointment of Coopers & Lybrand L.L.P. as independent
auditors for the Company for the fiscal year ending October
31, 1998. The voting was as follows:
For Against Withheld
--- ------- --------
6,226,215 42,315 15,802
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
10.21 Third 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 April
16, 1998.
</TABLE>
14
<PAGE>
PART II. OTHER INFORMATION, CONTINUED
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K, CONTINUED
(a) Exhibits, continued
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
On March 25, 1998, the Company filed a Current Report on
Form 8-K, dated March 24, 1998, to incorporate by reference
certain earnings per share information into the Company's
Registration Statement on Form S-3 filed on January 21,
1998.
15
<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 June 3, 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)
16
<PAGE>
THIRD AMENDMENT TO AMENDED AND RESTATED
REVOLVING LOAN AND SECURITY AGREEMENT
THIS THIRD 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 April
16, 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").
RECITALS
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 and by that certain Second Amendment to Amended and Restated
Revolving Loan and Security Agreement dated as of December 8, 1997 (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 increase the Supplemental Over
Advance Facility 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 and 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 $3,500,000
</TABLE>
BORROWER AGREES THAT THE AGGREGATE AMOUNT OF SUPPLEMENTAL OVER
ADVANCES MADE BY LENDER SHALL NEVER BE GREATER THAT 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.
ARTICLE
3.
FEES
3.1 FACILITY FEE. Borrower shall pay to Lender a facility fee in the
amount of Thirty Thousand and no/100 Dollars ($30,000.00), which fee shall be
deemed fully earned and nonrefundable at the execution by Borrower of this
Amendement 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, amending and closing
of the Supplemental Over Advance Facility and the transactions contemplated by
this Amendement, including, but not limited to, administrative, out-of-pocket,
general overhead and
2
<PAGE>
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 related agreement or document, such as, by way of example, reasonable
legal fees and expenses.
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. Except for the Covenant Defaults, 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 by known to exist relating to any matter prior to the date hereof.
3
<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.
4
<PAGE>
IN WITNESS WHEREOF, Borrower and Lender have caused this Third 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:/s/Lawrence J. Placek
-----------------------------------
Name: Lawrence J. Placek
---------------------------------
Title: VICE PRES
--------------------------------
5
<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 Third 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 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, and 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 April 16, 1998
TRO LEARNING, 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)
6
<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 APRIL 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<CASH> 405
<SECURITIES> 0
<RECEIVABLES> 14841
<ALLOWANCES> 1003
<INVENTORY> 1050
<CURRENT-ASSETS> 17097
<PP&E> 1159
<DEPRECIATION> 4449
<TOTAL-ASSETS> 26093
<CURRENT-LIABILITIES> 25054
<BONDS> 3050
0
0
<COMMON> 64
<OTHER-SE> (2693)
<TOTAL-LIABILITY-AND-EQUITY> 26093
<SALES> 16816
<TOTAL-REVENUES> 16816
<CGS> 2937
<TOTAL-COSTS> 2937
<OTHER-EXPENSES> 16194
<LOSS-PROVISION> 375
<INTEREST-EXPENSE> 777
<INCOME-PRETAX> (3417)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3417)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3417)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
