<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, 1999
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 6,868,221 SHARES
- - ---------------------------- -----------------
Class Outstanding as of August 31, 1999
(This document contains 22 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, 1999 and 1998.............................3
Consolidated Balance Sheets as of
July 31, 1999 and October 31, 1998.............................................4
Consolidated Statements of Cash Flows for the
Nine Months Ended July 31, 1999 and 1998.......................................5
Notes to Consolidated Financial Statements.....................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................21
Item 2. Changes in Securities.........................................................21
Item 3. Defaults Upon Senior Securities...............................................21
Item 4. Submission of Matters to a Vote of Security Holders...........................21
Item 5. Other Information.............................................................21
Item 6. Exhibits and Reports on Form 8-K..............................................21
SIGNATURES......................................................................................22
</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,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues by product line:
PLATO(R)Education................................. $ 12,624 $ 10,601 $ 27,830 $ 25,035
Aviation Training................................. --- 1,464 --- 3,846
------------ ------------ ------------ ------------
Total revenues.................................. 12,624 12,065 27,830 28,881
Cost of revenues..................................... 1,593 1,415 3,956 4,352
------------ ------------ ------------ ------------
Gross profit.................................... 11,031 10,650 23,874 24,529
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative............... 6,736 6,699 18,579 19,059
Product development and customer support.......... 1,403 1,900 4,123 5,734
------------ ------------ ------------ ------------
Total operating expenses........................ 8,139 8,599 22,702 24,793
------------ ------------ ------------ ------------
Operating income (loss)....................... 2,892 2,051 1,172 (264)
Interest expense..................................... 331 415 1,420 1,369
Interest income and other expense, net............... 38 50 129 198
------------ ------------ ------------ ------------
Income (loss) before income taxes............. 2,523 1,586 (377) (1,831)
Provision (credit) for income taxes.................. --- --- --- ---
------------ ------------ ------------ ------------
Net income (loss)............................. 2,523 1,586 (377) (1,831)
Preferred stock accretion................... (24) --- (56) ---
------------ ------------ ------------ ------------
Net income (loss) available to common
stockholders................................ $ 2,499 $ 1,586 $ (433) $ (1,831)
============ ============ ============ ============
Earnings per share:
Basic ............................................ $ 0.38 $ 0.25 $ (0.07) $ (0.29)
============ ============ ============ ============
Diluted........................................... $ 0.34 $ 0.23 $ (0.07) $ (0.29)
============ ============ ============ ============
Weighted average common shares outstanding:
Basic ............................................ 6,598 6,417 6,484 6,407
============ ============ ============ ============
Diluted........................................... 7,755 6,873 6,484 6,407
============ ============ ============ ============
</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,
1999 1998
------------ --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 59 $ 466
Accounts receivable, less allowances of $1,177 and
$920, respectively.................................................... 17,753 16,427
Inventories............................................................. 612 648
Prepaid expenses and other current assets............................... 827 1,121
-------------- ---------------
Total current assets.................................................. 19,251 18,662
Equipment and leasehold improvements, less accumulated
depreciation of $3,634 and $3,204, respectively......................... 1,318 1,073
Product development costs, less accumulated amortization of $6,557
and $4,768, respectively................................................ 6,626 6,380
Other assets............................................................... 1,270 1,292
-------------- ---------------
$ 28,465 $ 27,407
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 1,305 $ 2,895
Accrued employee salaries and benefits.................................. 1,979 2,647
Accrued liabilities..................................................... 1,264 2,130
Revolving loan.......................................................... 8,690 9,321
Deferred revenue........................................................ 3,722 3,290
-------------- ---------------
Total current liabilities............................................. 16,960 20,283
Long-term debt............................................................. 3,050 3,050
Deferred revenue, less current portion..................................... 421 405
Other liabilities.......................................................... 120 ---
-------------- ---------------
Total liabilities..................................................... 20,551 23,738
-------------- ---------------
Convertible redeemable preferred stock, net of unamortized
discount and issuance costs............................................. 2,996 ---
-------------- ---------------
Stockholders' equity:
Common stock, $.01 par value, 25,000 shares authorized;
6,820 shares issued and 6,698 shares outstanding in 1999;
6,535 shares issued and 6,415 shares outstanding in 1998.............. 67 64
Paid in capital......................................................... 24,631 22,956
Treasury stock at cost, 122 and 120 shares, respectively................ (1,186) (1,176)
Accumulated deficit..................................................... (18,025) (17,592)
Accumulated other comprehensive loss.................................... (569) (583)
-------------- ---------------
Total stockholders' equity............................................ 4,918 3,669
-------------- ---------------
$ 28,465 $ 27,407
============== ===============
</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,
------------------------------
1999 1998
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................................... $ (377) $ (1,831)
------------ -------------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization.............................................. 2,241 2,166
Provision for doubtful accounts............................................ 1,033 561
Loss on disposal of fixed assets........................................... 8 2
(Increase) decrease in assets:
Accounts receivable...................................................... (2,359) (337)
Inventories.............................................................. 36 215
Prepaid expenses and other current and noncurrent assets................. 316 290
Increase (decrease) in liabilities:
Accounts payable......................................................... (1,590) (123)
Accrued liabilities, accrued employee salaries and
benefits and other liabilities......................................... (1,414) (1,147)
Deferred revenue......................................................... 448 487
------------ -------------
Total adjustments...................................................... (1,281) 2,114
------------ -------------
Net cash provided by (used in) operating activities.................. (1,658) 283
------------ -------------
Cash flows from investing activities:
Capital expenditures......................................................... (706) (536)
Capitalization of product development costs.................................. (2,035) (1,953)
------------ -------------
Net cash used in investing activities.................................... (2,741) (2,489)
------------ -------------
Cash flows from financing activities:
Net proceeds from short-term borrowings...................................... 1,810 2,971
Repayment of long-term debt.................................................. (2,441) (400)
Net proceeds from issuance of convertible redeemable preferred stock......... 4,499 ---
Net proceeds from issuance of common stock................................... 109 110
------------ -------------
Net cash provided by financing activities.................................... 3,977 2,681
------------ -------------
Effect of foreign currency on cash.............................................. 15 (132)
------------ -------------
Net increase (decrease) in cash and cash equivalents............................ (407) 343
Cash and cash equivalents at beginning of period................................ 466 537
------------ -------------
Cash and cash equivalents at end of period...................................... $ 59 $ 880
============ =============
Cash paid for interest expense.................................................. $ 1,266 $ 1,585
============ =============
</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's PLATO Learning Systems are marketed 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
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Form 10-K
for the fiscal year ended October 31, 1998.
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. Post customer support is recognized ratably
over the contract period. Deferred revenue represents the portion of billings
made or payments received in advance of services being performed or products
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 technological feasibility of new courseware products to be
sold, leased, or otherwise marketed are expensed as incurred. Once technological
feasibility 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.
EARNINGS PER SHARE:
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.
COMPREHENSIVE INCOME:
As of November 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS 130"), as required.
SFAS 130 establishes new rules for the reporting of comprehensive income and its
components. Foreign currency translation adjustments, which prior to adoption
were reported separately in stockholders' equity, are required to be included in
other comprehensive income in the consolidated financial statements. The
adoption of SFAS 130 does not impact the Company's net income (loss) or total
stockholders' equity.
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 $8,591,000 and
$10,496,000 at July 31, 1999 and October 31, 1998, respectively. Installment
receivables to be billed after one year were $774,000 and $575,000 at July 31,
1999 and October 31,1998, 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:
NEW REVOLVING LOAN AGREEMENT:
On February 26, 1999, the Company entered into a new revolving loan agreement,
with a new lender, that provides for a maximum $15 million line of credit
through February 26, 2002. Substantially all of the Company's assets are pledged
as collateral under the agreement. Borrowings are limited by the available
borrowing base, as defined, consisting of certain accounts receivable and
inventory, and bear interest at the prime rate plus 1% or the London Interbank
Offered Rate (LIBOR) plus 3%, as determined by the Company pursuant to the
agreement. A commitment fee is payable quarterly based on the unused portion of
the line of credit. The agreement contains restrictive financial covenants
(including Minimum Net Worth, Minimum Earnings Before Interest Taxes
Depreciation and Amortization (EBITDA), and Minimum Interest Coverage) and
restrictions on borrowings, asset sales and dividends, as defined.
Upon entering the new agreement, the Company terminated its previous revolving
loan agreement. All outstanding borrowings and accrued interest were repaid with
funds advanced under the new line of credit.
In May 1999, the revolving loan agreement was amended to provide up to $2
million of additional borrowing capacity over the borrowing base through July
31, 1999.
At July 31, 1999, borrowings of $8,690,000 were outstanding at an interest rate
of 8.3% and the unused borrowing capacity was $4,297,000.
LONG-TERM DEBT:
At July 31, 1999, the Company's long-term debt consisted of $3,050,000 of 10%
subordinated convertible debentures with interest payable semiannually. At the
option of the holder, the debentures are convertible into the Company's common
stock at $9.60 per share. The Company may redeem the debentures at 101% of
principal, plus interest, subject to certain terms and conditions. The
debentures have a scheduled maturity in 2004 and are subject to mandatory
redemption at 25% of principal annually beginning in 2001.
4. CONVERTIBLE REDEEMABLE PREFERRED STOCK:
On January 13, 1999, the Company issued 540 shares of its Series C Convertible
Redeemable Preferred Stock (the "Series C Preferred"); as well as warrants to
purchase 125,000 shares of the Company's common stock at $8.72 per share for an
aggregate purchase price of $5 million. The proceeds, net of transaction fees,
were approximately $4,499,000 and were used to repay existing
8
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
4. CONVERTIBLE REDEEMABLE PREFERRED STOCK, CONTINUED
borrowings. A value of $394,000 has been assigned to the warrants using the
Black-Scholes stock option pricing model.
Each share of the Series C Preferred has a par value of $0.01 and a stated value
of $10,000. The Series C Preferred ranks senior to the Company's common stock,
has no voting rights, and is not entitled to any dividends.
The Series C Preferred, as amended, is convertible into shares of the Company's
common stock, at the option of the holder, up to ten years from the issue date.
Conversion is mandatory for all such securities still outstanding on January 13,
2009. The number of common shares to be issued is determined by dividing the
stated value of the Series C Preferred being converted by the conversion price.
The conversion price of the Series C Preferred is equal to the lower of (a)
$9.51 per share or (b) the applicable percentage of the average of the three
lowest closing prices of the Company's common stock during the 30 trading days
immediately prior to the date of conversion. The applicable percentage is
adjusted over time from 90% to 82%. There is a minimum conversion price of $4.69
per share, subject to adjustment based on the Company's financial performance.
If fiscal year 1999 pretax income does not meet established thresholds, the
minimum conversion price will be adjusted to as low as $3.17 per share.
Certain conversion restrictions exist in the event such conversion would result
in (a) the holders' beneficial ownership being more than 4.99% of the Company's
outstanding common stock or (b) the issuance of more than 20% of the Company's
outstanding common stock. The Company may redeem the Series C Preferred in cash
at any time, provided the average closing price of the Company's common stock
during the defined period prior to such redemption is greater than $15.85 per
share. The redemption price is based on the number of common shares that would
be received upon conversion at such time and from 125% to 156% of the average
closing price of the Company's common stock during the defined period prior to
such time.
The Series C Preferred is subject to redemption in cash, at the option of the
holder, upon certain events, as defined, including a change in control of the
Company and a trading suspension of the Company's common stock on NASDAQ or a
subsequent market. The redemption price is equal to the greater of (a) 115% of
the stated value or (b) the number of common shares that would be received upon
conversion at such time multiplied by the closing price of the Company's common
stock prior to redemption, as defined. As these events are outside of the
Company's control and redemption would be in cash, the Series C Preferred is
presented between total liabilities and stockholders' equity on the consolidated
balance sheet, as required by the Securities and Exchange Commission. Upon
conversion of the Series C Preferred into common shares, the related amounts
will be classified as stockholders' equity.
9
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
4. CONVERTIBLE REDEEMABLE PREFERRED STOCK, CONTINUED
The initial carrying value will increase to the aggregate stated value of
$5,400,000 over the ten- year term of the Series C Preferred. This accretion of
the discount and issuance costs will be reflected as a charge to accumulated
deficit in the consolidated balance sheet and will reduce net income (loss)
available to common stockholders for purposes of calculating basic earnings per
share.
Concurrent with the issuance of the Series C Preferred, the Company issued
warrants to purchase 125,000 shares of the Company's common stock at $9.51
per share. These warrants expire five years from the issue date. The value
assigned to these warrants of $394,000 has been reflected as an increase to
paid-in capital and a component of the discount on the Series C Preferred in
the consolidated balance sheet.
Additionally, on July 16, 1999, the Company issued warrants to purchase
approximately 63,000 shares of the Company's common stock at $8.72 per share
related to the issuance of the Series C Preferred. These warrants expire five
years from the issue date. A value of $148,000 has been assigned to these
warrants using the Black-Scholes stock option pricing model. This value has also
been reflected as an increase to paid-in capital and a component of the discount
on the Series C Preferred in the consolidated balance sheet.
During the quarter ended July 31, 1999, approximately 133 shares of the Series C
Preferred were converted by the holders into approximately 259,000 shares of the
Company's common stock. The book value of the shares converted was approximately
$1,017,000 and this amount was transferred from convertible redeemable preferred
stock to paid-in capital on the consolidated balance sheet.
5. INCOME TAXES:
No tax benefit has been recorded at July 31, 1999 for the current year to date
loss as the Company is unable to demonstrate that, more likely than not, it will
be able to realize its deferred tax asset.
10
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
6. COMPREHENSIVE INCOME (LOSS):
Total comprehensive income (loss) was as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- --------------------------
JULY 31, JULY 31, JULY 31, JULY 31,
1999 1998 1999 1998
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Net income (loss)..................................... $ 2,523 $ 1,586 $ (377) $ (1,831)
Foreign currency translation adjustments.............. (19) (103) 14 (132)
------------- ------------- ------------- -----------
Total comprehensive income (loss).............. $ 2,504 $ 1,483 $ (363) $ (1,963)
============= ============= ============= ===========
</TABLE>
Accumulated other comprehensive loss is included as a separate component of
stockholders' equity on the consolidated balance sheets.
7. EARNINGS PER SHARE:
Earnings per share is calculated as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC:
- - ------
Net income (loss) available to common
stockholders......................................... $ 2,499 $ 1,586 $ (433) $ (1,831)
=========== =========== =========== ===========
Weighted average common shares outstanding.............. 6,598 6,417 6,484 6,407
=========== =========== =========== ===========
Basic earnings per share................................ $ 0.38 $ 0.25 $ (0.07) $ (0.29)
=========== =========== =========== ===========
DILUTED:
- - --------
Net income (loss) available to common stockholders $ 2,499 $ 1,586 $ (433) $ (1,831)
Preferred stock accretion............................... 24 --- --- ---
Convertible debentures interest......................... 76 --- --- ---
----------- ----------- ----------- -----------
Net income (loss) for diluted earnings per share........ $ 2,599 $ 1,586 $ (433) $ (1,831)
=========== =========== =========== ===========
Weighted average common shares outstanding.............. 6,598 6,417 6,484 6,407
Potential common shares:
Stock options and warrants........................... 44 138 --- ---
Convertible preferred stock.......................... 795 --- --- ---
Convertible debentures............................... 318 318 --- ---
----------- ----------- ----------- -----------
Weighted average common and potential common
shares outstanding for diluted earnings per share..... 7,755 6,873 6,484 6,407
=========== =========== =========== ===========
Diluted earnings per share.............................. $ 0.34 $ 0.23 $ (0.07) $ (0.29)
=========== =========== =========== ===========
</TABLE>
11
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
7. EARNINGS PER SHARE, CONTINUED
Since the Company incurred a net loss for the nine months ended July 31, 1999
and 1998, potential common shares are antidilutive and excluded from the
calculation of earnings per share.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
OVERVIEW
- - --------
The Company is a leading developer and marketer of microcomputer-based,
interactive, self-paced instructional systems. Offering more than 2,000 hours
of comprehensive academic and applied skills courseware designed for
adolescents and adults, the Company's PLATO -Registered Trademark- Learning
Systems are marketed to middle schools and high schools, colleges, job
training programs, correctional institutions, military education programs and
corporations. The PLATO Learning System is delivered via networks, CD-ROM,
the Internet and private Intranets.
In September 1998, the Company announced the sale of its Aviation Training
business (which marketed PC-based instructional systems to airlines worldwide
for use by commercial airline pilots, maintenance crews and cabin personnel)
and will focus exclusively on its PLATO brand going forward.
RESULTS OF OPERATIONS
- - ---------------------
THIRD QUARTER FISCAL 1999 COMPARED TO THIRD QUARTER FISCAL 1998
REVENUES:
The following table highlights revenues by product line (in 000's):
<TABLE>
<CAPTION>
PLATO EDUCATION AVIATION TRAINING TOTAL
--------------------- --------------------- ---------------------
1999 1998 1999 1998 1999 1998
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Courseware and professional services $ 11,488 $ 9,929 $ --- $ 1,464 $ 11,488 $ 11,393
Hardware, third-party courseware and other 1,136 672 --- --- 1,136 672
---------- --------- ---------- --------- ---------- ---------
Total revenues $ 12,624 $ 10,601 $ --- $ 1,464 $ 12,624 $ 12,065
========== ========= ========== ========= ========== =========
</TABLE>
PLATO Education courseware and professional services revenue, the driver of the
Company's operations, increased $1,559,000, or 16% as compared to the prior
year. Sales to both new and existing customers accounted for the increase. Total
PLATO Education revenues were $12,624,000 in the third quarter of 1999, an
increase of $2,023,000, or 19%, from the prior year.
Aviation Training revenues were $1,464,000 in the third quarter of fiscal 1998.
Total revenues of $12,624,000 for the third quarter of fiscal 1999 increased 5%
from $12,065,000 for the third quarter of fiscal 1998.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
RESULTS OF OPERATIONS, CONTINUED
- - ---------------------
THIRD QUARTER FISCAL 1999 COMPARED TO THIRD QUARTER FISCAL 1998, CONTINUED
GROSS PROFIT:
PLATO Education gross profit for the third quarter of fiscal 1999 increased
$1,499,000, or 16%, from the prior year, and gross margin decreased slightly
from 90% to 87%.
Aviation Training gross profit was $1,118,000 for the third quarter of fiscal
1998. Total gross profit for the third quarter of fiscal 1999 increased $381,000
from the third quarter of fiscal 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE:
Selling, general, and administrative expense for the third quarter of fiscal
1999 increased $37,000 to $6,736,000 as compared to $6,699,000 for the third
quarter of fiscal 1998.
PLATO Education expenses increased $417,000 due primarily to the increased
provision for doubtful accounts. Aviation Training expenses were $380,000 in the
third quarter of fiscal 1998.
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT EXPENSE:
Product development and customer support expense for the third quarter of fiscal
1999 decreased $497,000, or 26%, to $1,403,000 as compared to $1,900,000 for the
third quarter of fiscal 1998.
PLATO Education product development expenses increased $70,000 due primarily to
increased amortization of previously capitalized costs. Aviation Training
expenses were $575,000 in the third quarter of fiscal 1998.
OPERATING INCOME:
Operating income was $2,892,000 for the third quarter of fiscal 1999 as compared
to $2,051,000 for the comparable period of the prior year. Operating income for
PLATO Education was $1,888,000 for the third quarter of fiscal 1998, while
Aviation Training had operating income of $163,000. The improvement in PLATO
Education operating results for the third quarter of fiscal 1999 was due
primarily to the increased mix of higher margin courseware and professional
services revenue offset by the approximate 6% increase in operating expenses.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
RESULTS OF OPERATIONS, CONTINUED
- - ---------------------
INTEREST EXPENSE:
Interest expense was $331,000 for the third quarter of fiscal 1999 as compared
to $415,000 for the third quarter of fiscal 1998. The decreased level of bank
borrowings at lower interest rates as well as decreased amortization of fees
related to the Company's loan agreements contributed equally to the decrease in
interest expense.
FIRST NINE MONTHS FISCAL 1999 COMPARED TO FIRST NINE MONTHS FISCAL 1998
REVENUES:
The following table highlights revenues by product line (in 000's):
<TABLE>
<CAPTION>
PLATO EDUCATION AVIATION TRAINING TOTAL
-------------------- ---------------------- --------------------
1999 1998 1999 1998 1999 1998
--------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Courseware and professional services $ 25,226 $ 22,185 $ --- $ 3,793 $ 25,226 $ 25,978
Hardware, third-party courseware and other 2,604 2,850 --- 53 2,604 2,903
--------- --------- --------- ---------- --------- ---------
Total revenues $ 27,830 $ 25,035 $ --- $ 3,846 $ 27,830 $ 28,881
========= ========= ========= ========== ========= =========
</TABLE>
PLATO Education courseware and professional services revenue, the driver of the
Company's operations, increased $3,041,000, or 14%, as compared to the prior
year. Sales to both new and existing customers accounted for the increase.
Hardware, third-party courseware and other revenue decreased 9%, in line with
the Company's plan to improve profitability. Total PLATO Education revenues
increased $2,795,000, or 11%, from the prior year.
Aviation Training revenues were $3,846,000 for the first nine months of fiscal
1998. Total revenues of $27,830,000 for the first nine months of fiscal 1999
decreased $1,051,000 from the prior year.
GROSS PROFIT:
PLATO Education gross profit for the first nine months of fiscal 1999 increased
$2,403,000, or 11%, from the comparable period in fiscal 1998, reflecting the
increased mix of higher margin courseware and professional services revenue.
Gross margin was 86% for both periods.
Aviation Training gross profit was $3,058,000 for the first nine months of
fiscal 1998. Total gross profit decreased $655,000 from the prior year.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
RESULTS OF OPERATIONS, CONTINUED
- - ---------------------
FIRST NINE MONTHS FISCAL 1999 COMPARED TO FIRST NINE MONTHS FISCAL 1998,
CONTINUED
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE:
Selling, general, and administrative expense for the first nine months of fiscal
1999 decreased $480,000, or 3%, to $18,579,000 as compared to $19,059,000 for
the first nine months of fiscal 1998.
PLATO Education expenses increased $611,000 due primarily to increased selling
expenses of $650,000 and the increased provision for doubtful accounts of
$474,000, offset by decreased commissions. Aviation Training expenses were
$1,091,000 for the first nine months of fiscal 1998.
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT EXPENSE:
Product development and customer support expense for the first nine months of
fiscal 1999 decreased $1,611,000 or 28% to $4,123,000 as compared to $5,734,000
for the first nine months of fiscal 1998.
PLATO Education product development expenses increased $216,000 due primarily to
increased amortization of previously capitalized costs. Aviation Training
expenses were $1,912,000 for the first nine months of fiscal 1998.
OPERATING INCOME (LOSS):
Operating income was $1,172,000 for the first nine months of fiscal 1999 as
compared to an operating loss of $264,000 for the first nine months of fiscal
1998. The PLATO Education operating loss was $319,000 for the first nine months
of fiscal 1998, while Aviation Training had operating income of $55,000. The
improvement in PLATO Education operating results for the first nine months of
fiscal 1999 was due principally to the increased mix of higher margin courseware
and professional services revenue, offset by the approximate 4% increase in
operating expenses.
INTEREST EXPENSE:
Interest expense for the first nine months of fiscal 1999 was $1,420,000 as
compared to $1,369,000 for the first nine months of fiscal 1998. This increase
was due principally to the accelerated amortization of fees related to the
Company's previous revolving loan agreement (see Note 3 of Notes to Consolidated
Financial Statements) offset by the lower level of bank borrowings in fiscal
1999.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
At July 31, 1999, the Company's principal sources of liquidity included cash and
cash equivalents of $59,000, net accounts receivable of $17,753,000, and its
line of credit. The Company had net installment receivables of $9,365,000 at
July 31, 1999, of which $8,591,000 is to be billed within one year and is
included in net accounts receivable on the consolidated balance sheet.
Net cash used in the Company's operating activities was $1,658,000 for the first
nine months of fiscal 1999 as compared to net cash provided of $283,000 for the
first nine months of fiscal 1998. Borrowings under short-term arrangements and
net proceeds from the issuance of convertible redeemable preferred stock were
used principally to fund the Company's working capital requirements in the first
nine months of fiscal 1999. 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, 1999, borrowings of
$8,690,000 were outstanding under the line of credit at an interest rate of 8.3%
and the unused borrowing capacity was $4,297,000.
Net cash used in the Company's investing activities was $2,741,000 for the first
nine months of fiscal 1999 for capital expenditures and capitalized product
development costs.
Net cash provided by financing activities was $3,977,000 for the first nine
months of fiscal 1999. Net proceeds received from short-term borrowings and the
issuance of convertible redeemable preferred stock (see Note 4 of Notes to
Consolidated Financial Statements) were offset by the repayment of the term
loan.
The Company entered into a new revolving loan agreement with a new lender in
February 1999. This new facility offers the Company a longer-term banking
relationship with a lower interest and fee structure compared to the previous
revolving loan agreement (see Note 3 of Notes to Consolidated Financial
Statements).
The Company continues to explore alternatives to meet its anticipated working
capital, capital expenditure, and business investment requirements.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
YEAR 2000
- - ---------
Many existing computer systems use only the last two digits to identify a year.
Consequently, as the year 2000 approaches, many systems do not yet recognize the
difference between the years 1900 and 2000. This, as well as other date-related
processing issues, may cause systems to fail or malfunction. As a result, the
Year 2000 (Y2K) issue may affect the Company's products and normal business
activities.
The Company began addressing the Y2K issue in early 1998 and has assembled a Y2K
evaluation team that is endorsed by, and includes members of, senior management.
A budget has been prepared for Y2K costs and progress reports are presented to
senior management on a regular basis. The Y2K evaluation team has developed and
implemented a comprehensive Y2K readiness plan for the Company's products and
operations. The objectives of the Y2K evaluation team are as follows:
- - - Develop a Y2K compliance standard for the Company's PLATO courseware and
software products and determine compliance with that standard;
- - - Advise on compliance of third party courseware, operating system, and
hardware products based on representations by vendors of these products;
- - - Determine compliance for the Company's internal systems (including
information technology (IT) systems, such as financial and order entry
systems, and non-IT systems, such as telephones and other office
equipment);
- - - Determine the Y2K readiness of key business partners that the Company
relies on for normal business operations.
The Company has developed a compliance standard based on common testing
methodology. Existing PLATO courseware and software products are currently being
reviewed to determine compliance with that standard. The most current compliance
and remediation information is maintained on the Company's Internet web site.
PLATO products currently under development are being designed to be Y2K
compliant.
The Company also sells various third party courseware, operating system, and
hardware products. Y2K compliance information has been received from key vendors
of third party courseware products and this information is maintained on the
Company's Internet web site. Web links to key vendors of third party operating
system and hardware products are also provided.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
YEAR 2000, CONTINUED:
- - ---------
The Company has taken, and will continue to take, actions necessary to resolve
Y2K issues with its internal IT and non-IT systems, including planned
replacements and upgrades. Major computers, applications, and related equipment
have been reviewed and are either compliant or software upgrades have been
ordered and will be installed in 1999. The Company's accounting and data
processing system was not Y2K compliant and was recently upgraded to a version
that the vendor has indicated is Y2K compliant.
The Company relies on key business partners for its normal business operations
and has contacted them regarding Y2K readiness. While the Company is confident
these partners are preparing for the year 2000, it has no control over their
preparations and there is no assurance that they will be successful in
addressing all Y2K issues.
While the Company's Y2K costs incurred to date have not been material,
additional costs will be incurred as Y2K readiness is completed. Based on
information currently available, management expects these additional costs to be
immaterial as well.
While the Company is dedicating existing internal resources toward attaining Y2K
readiness, there is no assurance that it will be successful in addressing all
Y2K issues. If the Company does not achieve Y2K readiness, there could be
significant adverse effects on its results of operations, liquidity, and
financial condition. For example:
- - - If the Company's PLATO products are not Y2K compliant, it could suffer
increased costs, lost sales or other negative consequences resulting from
customer dissatisfaction, including litigation.
- - - If the Company's internal systems are not Y2K compliant, financial and
customer information, orders and product shipments could be delayed and
customer support could be interrupted.
- - - If the Company's customers do not achieve Y2K readiness, sales and cash
receipts may be delayed.
- - - If the Company's key business partners and other third parties do not
achieve Y2K readiness, its ability to receive supplies, ship products,
process cash receipts, and conduct other ongoing business activities may be
affected.
Based on the progress the Company has made to date in addressing Y2K issues,
management does not expect significant risks with its Y2K compliance at this
time. As the Company's plan is to address its major Y2K issues prior to being
affected by them, it has not developed
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
YEAR 2000, CONTINUED:
- - ---------
comprehensive Y2K-related contingency plans. If progress deviates from plan or
significant risks are identified, the Company will consider contingency plans as
deemed necessary.
This Y2K discussion is based on the Company's best estimates using the
information that is currently available, and is subject to change. Actual
results may differ materially from these estimates.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
- - ----------------------------------------------------------
INTEREST RATE RISK:
At July 31, 1999, the fair value of the Company's debt approximates market.
Market risk is estimated as the potential increase in fair value resulting from
a hypothetical one-half percent change in interest rates. The Company's
long-term debt is held at a fixed rate. As a result, risk relating to interest
fluctuation is considered minimal.
FOREIGN CURRENCY EXCHANGE RATE RISK:
The Company markets its products worldwide and has operations in Canada and the
United Kingdom. As a result, financial results could be affected by changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
Working funds necessary to facilitate the short-term operations of foreign
subsidiaries are kept in local currencies in which they do business.
Approximately 6% and 8% of total revenues were denominated in currencies other
than the U.S. dollar for the three and nine months ended July 31, 1999,
respectively.
NOTE REGARDING FORWARD LOOKING INFORMATION
- - ------------------------------------------
This Form 10-Q contains forward-looking statements identified by the use of
"believes", "expects", "anticipates", and similar expressions. Such statements
are subject to risk and uncertainties that could cause actual results to differ
from those contemplated by the forward-looking statement. Such risks and
uncertainties include any change in the market acceptance of the Company's
products and services, the risk of failure of the Company's technology to remain
at market standards, the risk of the Company being able to finance its business
operations, and other similar business and market risks. Readers are cautioned
not to place undue reliance on such forward-looking statements.
20
<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
---------------------
On January 13, 1999, the Company issued 540 shares of its Series C
Convertible Preferred Stock and warrants to purchase 125,000
shares of the Company's common stock at $9.51 per share for an
aggregate purchase price of $5 million. In addition, on July 16,
1999 the Company issued warrants to purchase approximately 63,000
shares of the Company's common stock at $8.72 per share (see Note
4 of Notes to Consolidated Financial Statements).
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
Number Description
------ -----------
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the quarter ended July
31, 1999.
21
<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 10, 1999.
TRO LEARNING, INC.
By /s/William R. Roach
----------------------------------------
Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
/s/John Murray
----------------------------------------
Executive Vice President and
Chief Financial Officer
(principal financial officer)
/s/Mary Jo Murphy
-----------------------------------------
Vice President, Corporate Controller and
Chief Accounting Officer
(principal accounting officer)
22
<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, 1999 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-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 59
<SECURITIES> 0
<RECEIVABLES> 17753
<ALLOWANCES> 1177
<INVENTORY> 612
<CURRENT-ASSETS> 19251
<PP&E> 1318
<DEPRECIATION> 3634
<TOTAL-ASSETS> 28465
<CURRENT-LIABILITIES> 16960
<BONDS> 3050
2996
0
<COMMON> 67
<OTHER-SE> 4850
<TOTAL-LIABILITY-AND-EQUITY> 28465
<SALES> 27830
<TOTAL-REVENUES> 27830
<CGS> 3956
<TOTAL-COSTS> 3956
<OTHER-EXPENSES> 22831
<LOSS-PROVISION> 1033
<INTEREST-EXPENSE> 1420
<INCOME-PRETAX> (377)
<INCOME-TAX> 0
<INCOME-CONTINUING> (377)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (377)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
