UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 25, 1998
ITC LEARNING CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 0-13741 52-1078263
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification Number)
13515 DULLES TECHNOLOGY DRIVE
HERNDON, VIRGINIA 20171-3413
(Address of principal executive offices)
Registrant's telephone number, including area code: (703) 713-3335
NONE
(Former name and address, if changed since last report)
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
The following financial statements and pro forma financial information
concerning the Company are being provided in accordance with the instructions to
this item not later than 60 days from the date of the Company's Form 8-K
previously filed on October 13, 1998.
a) Financial Statements of Business Acquired
Consolidated Financial Statements of Mentor Networks Inc. for the Years Ended
December 31, 1997 and 1996 (Audited) and the Six Months Ended June 30, 1998
and 1997 (Unaudited)
b) Pro Forma Financial Information
ITC Learning Corporation Pro Forma Consolidated Statements of Operations
(Unaudited) for the Twelve Months Ended December 31, 1997 and the Nine
Months Ended September 30, 1998
Notes to Pro Forma Consolidated Statements of Operations (Unaudited)
c) Exhibits
2.1 Assignment of Rights Under Offer from ITC Learning Corporation to ITC
Canada Limited dated September 1, 1998, incorporated by reference to
the Company's Form 8-K filed October 13, 1998 with the Securities and
Exchange Commission ("SEC") (Commission File No. 0-13741).*
2.2 Receiver's Bill of Sale from Grant Thornton Limited to ITC Canada
Limited dated September 16, 1998, incorporated by reference to the
Company's Form 8-K filed October 13, 1998 with the SEC (Commission
File No. 0-13741).*
2.3 Assignment of Lease from Grant Thornton Limited to ITC Canada Limited
dated September 16, 1998, incorporated by reference to the Company's
Form 8-K filed October 13, 1998 with the SEC (Commission File No.
0-13741).*
2.4 Assignments of Courseware from Grant Thornton Limited to ITC Canada
Limited dated September 16, 1998, incorporated by reference to the
Company's Form 8-K filed October 13, 1998 with the SEC (Commission
File No. 0-13741).*
2.5 Assignments of Intellectual Property Rights from Grant Thornton
Limited to ITC Canada Limited dated September 16, 1998, incorporated
by reference to the Company's Form 8-K filed October 13, 1998 with
the SEC (Commission File No.
0-13741).*
2.6 Assignment of Trademarks from Grant Thornton Limited to ITC Canada
Limited dated September 23, 1998, incorporated by reference to the
Company's Form 8-K filed October 13, 1998 with the SEC (Commission
File No. 0-13741).*
2.7 Principal Agreement between ITC Canada Limited and Nova Scotia
Business Development Corporation dated September 16, 1998,
incorporated by reference to the Company's Form 8-K filed October 13,
1998 with the SEC (Commission File No.
0-13741).*
2.8 Promissory Note in the Amount of Cdn. $2,000,000 Executed by ITC
Canada Limited dated September 16, 1998, incorporated by reference to
the Company's Form 8-K filed October 13, 1998 with the SEC
(Commission File No. 0-13741).*
2.9 Demand Debenture between ITC Canada Limited and Nova Scotia Business
Development Corporation dated September 18, 1998, incorporated by
reference to the Company's Form 8-K filed October 13, 1998 with the
SEC (Commission File No. 0-13741).*
2.10 Debenture Pledge Agreement in the Amount of Cdn. $3,600,000 between
ITC Canada Limited and Nova Scotia Business Development Corporation
dated September 18, 1998, incorporated by reference to the Company's
Form 8-K filed October 13, 1998 with the SEC (Commission File No.
0-13741).*
2
2.11 General Security Agreement between ITC Canada Limited and Nova Scotia
Business Development Corporation dated September 18, 1998,
incorporated by reference to the Company's Form 8-K filed October 13,
1998 with the SEC (Commission File No.
0-13741).*
2.12 Guarantee of Obligation by ITC Learning Corporation dated September
22, 1998, incorporated by reference to the Company's Form 8-K filed
October 13, 1998 with the SEC (Commission File No. 0-13741).*
2.13 Agreement between ITC Learning Corporation and Nova Scotia Business
Development Corporation dated September 22, 1998, incorporated by
reference to the Company's Form 8-K filed October 13, 1998 with the
SEC (Commission File No. 0-13741).*
2.14 Royalty Agreement among ITC Canada Limited, ITC Learning Corporation
and Grant Thornton Limited dated September 18, 1998, incorporated by
reference to the Company's Form 8-K filed October 13, 1998 with the
SEC (Commission File No.
0-13741).*
2.15 Inter-Lender Agreement among ITC Canada Limited, Nova Scotia Business
Development Corporation and Wachovia Bank, N.A. dated September 23,
1998, incorporated by reference to the Company's Form 8-K filed
October 13, 1998 with the SEC (Commission File No. 0-13741).*
23.1 Independent Auditors' Consent
* These exhibits are incorporated herein by reference to the corresponding
exhibit in the Company's Form 8-K (Commission File No. 0-13741) filed with
the Securities and Exchange Commission on October 13, 1998.
3
CONSOLIDATED FINANCIAL STATEMENTS
MENTOR NETWORKS INC.
FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996 (AUDITED)
AND THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 (UNAUDITED)
4
AUDITORS' REPORT [NOTE 16]
To the Directors of
MENTOR NETWORKS INC.
We have audited the consolidated balance sheets of MENTOR NETWORKS INC. ("the
Company") as at December 31, 1997 and 1996 and the consolidated statements of
loss and deficit and changes in financial position for each of the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1997
and 1996 and the results of its operations and the changes in its financial
position for each of the years then ended in accordance with generally accepted
accounting principles in Canada.
Halifax, Canada Ernst & Young, LLP
March 18, 1998 Chartered Accountants
(except notes 15, 16 and 17 which are
as of November 23, 1998)
COMMENTS BY AUDITORS FOR US READERS
ON CANADA-US REPORTING CONFLICTS
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by significant uncertainties such as that referred to in
the attached balance sheets as at December 31, 1997 and 1996 and as described in
Note 2 of the financial statements. The above opinion is expressed in accordance
with Canadian reporting standards which do not permit a reference to such an
uncertainty in the auditors' report when the uncertainty is adequately disclosed
in the financial statements.
Halifax, Canada Ernst & Young, LLP
March 18, 1998 Chartered Accountants
(except notes 15, 16 and 17 which are
as of November 23, 1998)
5
MENTOR NETWORKS INC.
CONSOLIDATED BALANCE SHEETS
(See Basis of Presentation - Note 2)
As At As At
June 30, December 31,
1998 1997 1996
(ALL AMOUNTS IN CANADIAN DOLLARS) $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS [NOTE 10]
CURRENT
Cash and cash equivalents [NOTE 5] 195,221 128,627 3,430,851
Accounts receivable 99,623 234,500 113,141
Inventory 41,706 32,944 --
Prepaid expenses and deposits 34,310 70,088 19,343
- ------------------------------------------------------------------------------------------------------------------------------------
370,860 466,159 3,563,335
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed assets [NOTE 4] 687,973 771,615 235,594
Production costs, net of accumulated
amortization of (June 30, 1998 - $2,504,693;
1997 - $1,459,166; 1996 - $477,434) 1,589,243 1,707,512 842,960
Deferred financing costs -- -- 90,894
Intellectual property, net of accumulated
amortization of (June 30, 1998 - $93,329;
1997 - $13,333; 1996 - nil) [NOTE 12] 1,506,671 1,586,667 1,600,000
- ------------------------------------------------------------------------------------------------------------------------------------
4,154,747 4,531,953 6,332,783
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LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
CURRENT
Accounts payable, accrued liabilities
and deferred revenue 2,233,378 1,390,573 773,521
Current portion of long-term debt [NOTE 10] 3,679,998 710,000 --
Due to directors, officers and shareholders [NOTE 6] -- -- 118,388
- ------------------------------------------------------------------------------------------------------------------------------------
5,913,376 2,100,573 891,909
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt [NOTE 10] 849,357 3,363,236 --
- ------------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' (DEFICIENCY) EQUITY
Share capital [NOTE 7] 15,185,394 13,255,394 8,437,878
Special warrants [NOTE 8] -- -- 4,859,538
Deficit (17,793,380) (14,187,250) (7,856,542)
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' (deficiency) equity (2,607,986) (931,856) 5,440,874
- ------------------------------------------------------------------------------------------------------------------------------------
4,154,747 4,531,953 6,332,783
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SEE ACCOMPANYING NOTES
Commitments & Contingencies [NOTES 11, 15 AND 17]
6
MENTOR NETWORKS INC.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
For the Six Months For the Year
Ended June 30, Ended December 31,
1998 1997 1997 1996
(All Amounts in Canadian Dollars) $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
SALES
Products 676,614 270,299 433,690 5,971
Services 134,050 -- 196,873 195,573
- ------------------------------------------------------------------------------------------------------------------------------------
810,664 270,299 630,563 201,544
COST OF SALES
Products 161,804 147,146 19,606 785
Services 107,450 -- 177,727 169,219
- ------------------------------------------------------------------------------------------------------------------------------------
269,254 147,146 197,333 170,004
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 541,410 123,153 433,230 31,540
Other income [NOTE 9] 8,132 23,274 14,880 47,080
- ------------------------------------------------------------------------------------------------------------------------------------
549,542 146,427 448,110 78,620
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES
General and administration 758,893 1,099,778 2,236,519 1,262,101
Sales and marketing 1,931,687 1,165,635 2,343,809 341,318
Depreciation and amortization 1,230,484 536,955 1,623,615 530,826
Professional fees 78,911 129,905 245,564 194,240
Interest and bank charges 155,697 24,017 329,311 --
- ------------------------------------------------------------------------------------------------------------------------------------
4,155,672 2,956,290 6,778,818 2,328,485
- ------------------------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD (3,606,130) (2,809,863) (6,330,708) (2,249,865)
Deficit, beginning of period (14,187,250) (7,856,542) (7,856,542) (5,606,677)
- ------------------------------------------------------------------------------------------------------------------------------------
DEFICIT, END OF PERIOD (17,793,380) (10,666,405) (14,187,250) (7,856,542)
- ------------------------------------------------------------------------------------------------------------------------------------
LOSS PER SHARE (0.20) (0.18) (0.41) (0.31)
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SEE ACCOMPANYING NOTES
7
MENTOR NETWORKS INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN FINANCIAL POSITION
For the Six Months For the Year
Ended June 30, Ended December 31,
1998 1997 1997 1996
(All Amounts in Canadian Dollars) $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
OPERATING ACTIVITIES
Net loss for the period (3,606,130) (2,809,863) (6,330,708) (2,249,865)
Add items not resulting in a current outflow
of cash
Depreciation and amortization 1,230,484 536,955 1,623,615 530,826
Loss on disposal of fixed assets -- -- 13,218 --
- ------------------------------------------------------------------------------------------------------------------------------------
(2,375,646) (2,272,908) (4,693,875) (1,719,039)
Changes in non-cash working capital
balances related to operations:
Accounts receivable and prepaid expenses 170,655 (160,953) (172,104) (63,654)
Inventory (8,762) -- (32,944) --
Accounts payable, accrued liabilities
and deferred revenue 842,805 (16,838) 617,052 (137,756)
Due to directors, officers and shareholders -- (118,312) (118,388) (525,712)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (1,370,948) (2,569,011) (4,400,259) (2,446,161)
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of intellectual property [NOTE 12] -- -- -- (1,600,000)
Purchase of fixed assets (21,319) (655,488) (700,355) (128,140)
Production costs (927,258) (1,304,116) (2,323,718) (726,771)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (948,577) (1,959,604) (3,024,073) (2,454,911)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of loan payable -- -- -- (100,000)
Long-term debt, net 456,119 1,500,000 4,073,236 --
Deferred financing costs -- (62,357) 48,872 (90,894)
Issuance of special warrants,
net of issue costs of 1996 - $640,462 -- -- -- 4,859,538
Net proceeds from issuance of
share capital [NOTE 7] 1,930,000 -- -- 3,661,895
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 2,386,119 1,437,643 4,122,108 8,330,539
- ------------------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS DURING THE PERIOD 66,594 (3,090,972) (3,302,224) 3,429,467
Cash and cash equivalents, beginning of period 128,627 3,430,851 3,430,851 1,384
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 195,221 339,879 128,627 3,430,851
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SEE ACCOMPANYING NOTES
8
MENTOR NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN CANADIAN DOLLARS)
For the Years Ended December 31, 1997 and 1996
And the Six Months Ended June 30, 1998 and 1997 (Unaudited)
1. NATURE OF BUSINESS
Mentor Networks Inc. (the "Company") develops computer-based, interactive
multimedia instructional courseware which it markets to end users by direct
sales and through value added resellers. The Company also provides
instructor-led training services to corporate clients.
2. BASIS OF PRESENTATION
These consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles in Canada on
the "going concern" basis, which presumes that the Company will be able to
realize its assets and discharge its liabilities in the normal course of
business for the foreseeable future. All amounts are shown in Canadian
dollars.
As at December 31, 1997, the Company has a working capital deficiency of
$1,634,414 and an aggregate shareholder deficiency of $931,856, resulting
from significant operating losses in the current and previous years.
The ability of the Company to continue as a going concern is contingent
upon significant short-term revenue growth and, or obtaining additional
financing. These financial statements do not include any adjustments to the
amounts and classification of assets and liabilities that might be
necessary should the Company be unable to continue in business.
On July 20, 1998, the Company was placed into Receivership as described in
note 15.
For the interim periods of June 30, 1998 and 1997, management has made all
necessary adjustments consisting of only normal recurring adjustments,
necessary for fair presentation of the results for the interim periods. The
interim operating results are not necessarily indicative of the operating
results for the full fiscal year.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in
the preparation of these consolidated financial statements:
BASIS OF CONSOLIDATION
The accompanying financial statements consolidate the accounts of the
Company and its wholly-owned subsidiaries, High Performance Group (Canada)
Inc. ("HPG") and Mentor Networks (US) Inc.
REVENUE RECOGNITION
Revenue from software sales is recognized upon shipment, unless the
contract requires extensive testing or on-site installation in which case
the sale is recognized when the software is ready for use and accepted by
the customer.
Revenue from services is recognized when services are performed.
9
MENTOR NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN CANADIAN DOLLARS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
FIXED ASSETS
Fixed assets are recorded at cost and depreciated as follows:
Computer equipment 30% declining balance
Furniture, fixtures and equipment 20% declining balance
Computer software 50% straight-line
Leasehold improvements Straight-line over lease term
PRODUCTION COSTS
Production costs, to the extent that these costs meet the generally
accepted accounting criteria for capitalization are deferred. Such costs
are amortized on commencement of commercial production over a period of one
year, on a straight-line basis.
However, it is reasonably possible that future commercial production and
the generation of revenues may not be realized due to many factors
including competition and the availability of sources of capital and
financing to meet marketing demands. Therefore, the amount of production
costs deferred may change materially in the near term.
DEFERRED FINANCING COSTS
Deferred financing costs represent loan financing costs and certain share
issue costs. Deferred loan financing costs are written-off in the year loan
proceeds are received. Deferred share issue costs are charged against share
capital at the time of the share transaction.
INVENTORY
Inventory is primarily comprised of finished goods, which is valued at the
lower of cost and replacement cost, with cost determined on an average cost
basis.
FOREIGN CURRENCY
Foreign currency denominated assets and liabilities are translated into
Canadian dollars at exchange rates prevailing at the balance sheet date for
monetary items and at exchange rates prevailing at the transaction date for
non-monetary items. Gains or losses on translation are included in income.
INTELLECTUAL PROPERTY
Intellectual property is recorded at cost and amortized on a straight line
basis over ten years, commencing in December, 1997. However, it is
reasonably possible that future commercial production and the generation of
revenues may not be realized due to many factors including competition and
the availability of sources of capital and financing to meet marketing
demands. Therefore, the value of intellectual property may change
materially in the near term.
FINANCIAL INSTRUMENTS
The Company's primary financial instruments consist of cash and
equivalents, accounts receivable, current liabilities and long-term debt.
The differences between the carrying values and the fair market values of
the primary financial instruments are not material due to the short-term
maturities and, or credit terms of those instruments.
10
MENTOR NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN CANADIAN DOLLARS)
INCOME TAXES
The Company follows the deferral method of income tax allocation whereby
the provision for income taxes may differ from the amount of taxes
currently payable as a result of including amounts in income for tax
purposes during different periods than they are included in income for
accounting purposes.
4. FIXED ASSETS
Fixed assets consist of the following:
June 30, December 31,
(Unaudited)
1998 1997 1996
----------------------------- ---------------------------- ---------------------------
Net Net Net
Accum. Book Accum. Book Accum. Book
Cost Deprec. Value Cost Deprec. Value Cost Deprec. Value
$ $ $ $ $ $ $ $ $
Computer equipment 591,460 258,645 332,815 571,098 202,297 368,801 292,145 113,037 179,108
Furniture, fixtures and
equipment 353,154 79,556 273,598 358,480 50,255 308,225 78,159 33,151 45,008
Computer software 82,346 51,740 30,606 76,062 39,002 37,060 35,043 23,565 11,478
Leasehold improvements 73,241 22,287 50,954 73,242 15,713 57,529 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
1,100,201 412,228 687,973 1,078,882 307,267 771,615 405,347 169,753 235,594
- ------------------------------------------------------------------------------------------------------------------------------------
5. CASH AND CASH EQUIVALENTS
Cash and cash equivalents is comprised of cash and other highly liquid
short-term investments, including bankers acceptances and treasury bills.
6. DUE TO DIRECTORS, OFFICERS AND SHAREHOLDERS
The amounts due to directors, officers and shareholders are non interest
bearing and have no specific terms of repayment.
7. SHARE CAPITAL
[a] AUTHORIZED
The Company's authorized share capital consists of an unlimited number of
common shares.
11
MENTOR NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN CANADIAN DOLLARS)
7. SHARE CAPITAL (CONT'D)
[b] ISSUED AND OUTSTANDING
Summarized below are the Company's issued and outstanding common shares:
Stated
Shares Value
# $
- ------------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING AS AT DECEMBER 31, 1995 5,630,192 4,775,983
Issued for cash 978,212 978,212
Issued for cancellation of share options [i] 140,000 --
Issued for the acquisition of shares
of High Performance Group (Canada) Inc. [ii] 2,000,000 2,000,000
Issued for cash [iii] 700,000 700,000
Less share issue costs -- (16,317)
- ------------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1996 9,448,404 8,437,878
Conversion of special warrants into
common shares [iv] 5,500,000 4,859,538
Issued on conversion of penalty warrants [v] 550,000 --
Less share issue costs -- (42,022)
- ------------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1997 15,498,404 13,255,394
Issued for cash (unaudited) [vi] 1,930,000 1,930,000
- ------------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING AT JUNE 30, 1998 (UNAUDITED) 17,428,404 15,185,394
- ------------------------------------------------------------------------------------------------------------------------------------
[i] During 1996, the Company issued 140,000 common shares to a key
contractor in exchange for cancellation of 240,000 share options.
[ii] During 1996, the Company issued 2,000,000 common shares in exchange
for all of the issued and outstanding shares in the capital stock
of HPG, as described in note 12.
[iii] On October 28, 1996, and contemporaneously with the closing of the
offering of special warrants as described in note (8), the Company
received cash of $700,000 for the subscription of 700,000 common
shares of the Company. These shares were issued on October 28,
1996. Of the 700,000 common shares, 466,900 were issued to a
current director and the principal shareholder, 158,100 were issued
to a company controlled by a current director and the principal
shareholder, and 75,000 were issued to officers of the Company.
[iv] OnFebruary 25, 1997 receipts for a final prospectus qualifying the
common shares issuable upon the exercise of special warrants were
issued by the Securities Commissions of Ontario and Nova Scotia.
Aggregate consideration for the conversion, received in October
1996, was $5,500,000 before deducting the agent's fee of $440,000
and other expenses of $200,462.
[v] On October 28, 1997, under the terms of the October 28, 1996 issue
of special warrants as described in note (8), 5,500,000 penalty
warrants were automatically exercised for no additional
consideration into 0.1 common shares for each penalty warrant held.
[vi] On January 20, 1998, the Company issued 1,930,000 common shares for
cash consideration of $1,930,000.
12
MENTOR NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN CANADIAN DOLLARS)
[c] SHARE OPTIONS
Certain directors, employees, and service providers of the Company have
been granted 1,475,750 stock options to acquire common shares of the
Company at $1.00 per share exercisable at various time until November,
2003.
8. SPECIAL WARRANTS
On October 28, 1996, the Company issued 5,500,000 special warrants on a
private placement basis at a price of $1.00 per special warrant. Aggregate
consideration for the offering was $5,500,000 before deducting the agent's
fee of $440,000 and other expenses of $200,462.
Each special warrant was exercisable, without further consideration, into
one common share of the Company and one Penalty Warrant, described below,
at any time up until the earlier of: [i] the fifth business day after the
date on which a receipt for a final prospectus qualifying the common shares
issuable upon exercise of the special warrants for distribution is issued
by the last of the Securities Commissions or similar regulatory authorities
in each of the provinces in which purchasers of the special warrants are
resident; and [ii] February 25, 1997 which represents 120 days after the
closing of the offering. Any special warrants not exercised on or prior to
this time were exercised by the agent on behalf of the holders thereof.
Receipts for a final prospectus qualifying the common shares issuable upon
the exercise of the special warrants were issued by the Securities
Commissions of Ontario and Nova Scotia on February 25, 1997.
Because the shares were not publicly listed on or before October 28, 1997,
a Penalty Warrant was automatically exercised for no additional
consideration into 0.1 common share for each Penalty Warrant held.
As additional remuneration, the agent was granted options for 550,000
special warrants with an exercise price of $1.00 per special warrant and a
term of two years from October 28, 1996, the date of closing of the
offering.
9. OTHER INCOME
June 30, June 30, December 31,
1998 1997 1997 1996
$ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Interest income 8,132 23,274 25,390 15,852
Gain on foreign currency exchange -- -- 2,708 --
Government research and development credits -- -- -- 31,228
Loss on disposal of fixed assets -- -- (13,218) --
- ------------------------------------------------------------------------------------------------------------------------------------
8,132 23,274 14,880 47,080
- ------------------------------------------------------------------------------------------------------------------------------------
13
MENTOR NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN CANADIAN DOLLARS)
10. LONG-TERM DEBT [NOTE 15]
June 30, December 31,
1998 1997 1996
$ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
MENTOR
Nova Scotia Business Development Corporation (NSBDC) loan, bearing
interest at 8.5% compounded semi-annually, interest payable monthly,
monthly principal payments of $50,000, commencing February 1, 1998,
maturing March 1, 2002. The Company was in default on payments of this
loan as of June 30, 1998 and therefore the entire amount has been
classified as current. 2,200,000 2,500,000 --
NSBDC non interest bearing repayable contribution toward relocation
costs, repayable in 2002, may be forgiven if certain conditions are met,
no portion of this contribution is classified as current. 73,236 73,236 --
NSBDC loan, bearing interest at 9.00% compounded semi-annually, interest
payable monthly, monthly principal payment of $10,000, commencing June
30, 1998, maturing July 31, 2002. 490,000 -- --
ATLANTIC CANADA OPPORTUNITIES AGENCY (ACOA) loan, repayable by monthly
principal payments of $8,333.33 commencing January 1, 1999, interest on
overdue payments calculated at 3% higher than the Bank's rate at the time 326,119 -- --
HPG
NSBDC loan, bearing interest at 9.5% compounded semi-annually, interest
payable monthly, monthly principal payments of $20,000 commencing May 1,
1998, maturing August 1, 2002. The Company was in default on payments of
this loan as of June 30, 1998 and therefore the entire amount has been
classified as current. 940,000 1,000,000 --
NSBDC non interest bearing repayable contribution toward product
development costs, repayable in 2001, may be forgiven if certain
conditions are met, no portion of this contribution is
classified as current. 500,000 500,000 --
- ------------------------------------------------------------------------------------------------------------------------------------
4,529,355 4,073,236 --
Less current portion (3,679,998) (710,000) --
- ------------------------------------------------------------------------------------------------------------------------------------
849,357 3,363,236 --
- ------------------------------------------------------------------------------------------------------------------------------------
14
MENTOR NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN CANADIAN DOLLARS)
10. LONG-TERM DEBT [NOTE 15] (CONT'D)
As collateralization of these loans, the Company has provided a first fixed
charge on leaseholds, and a floating charge on remaining assets including
but not limited to intellectual property, courseware, accounts receivable
and inventory [NOTE 5].
11. COMMITMENTS [NOTES 2 AND 15]
The Company has entered into several operating leases for its premises
requiring future annual rental payments over the next five years as
follows:
$
- --------------------------------------------------------------------------------
1998 37,870
1999 86,390
2000 97,041
2001 107,692
2002 and thereafter 65,089
- --------------------------------------------------------------------------------
The rental payments are exclusive of taxes and operating costs.
In addition, the Company has entered into a contract for the production of
multimedia applications which will require payments by the Company of
approximately $140,000 in 1998.
12. ACQUISITION
Effective September 20, 1996, the Company acquired all of the shares of HPG
in exchange for 2,000,000 common shares of the Company. Prior to the
acquisition, HPG was controlled by a group which consisted of directors,
officers and shareholders of the Company. HPG develops and markets training
products. Upon acquisition, HPG's assets consisted of $400,000 in cash and
intellectual property which was estimated to have a fair market value of
$1,600,000. The transaction was recorded using the purchase method of
accounting.
15
MENTOR NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN CANADIAN DOLLARS)
13. SEGMENTED INFORMATION
The Company is primarily engaged in the computer software industry in North
America. Operations and identifiable assets by geographic region are as
follows:
June 30, June 30, December 31,
(Unaudited) (Unaudited)
1998 1997 1997 1996
$ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
Segmented sales
United States 689,064 229,754 464,036 200,149
Canada 121,600 40,545 166,527 1,395
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated sales 810,664 270,299 630,563 201,544
- ------------------------------------------------------------------------------------------------------------------------------------
Segmented contribution to loss
Canada (3,427,582) (2,325,549) (5,431,515) (2,192,032)
United States (178,548) (484,314) (899,193) (57,833)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss for the year (3,606,130) (2,809,863) (6,330,708) (2,249,865)
- ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets
Canada 4,114,009 4,844,516 4,493,280 6,265,560
United States 40,738 43,179 38,673 67,223
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 4,154,747 4,887,695 4,531,953 6,332,783
- ------------------------------------------------------------------------------------------------------------------------------------
14. INCOME TAXES
The Company has a balance of income tax losses available for future use of
$9,886,000 as at December 31, 1997, the benefit of which is not recorded in
these financial statements.
These losses will expire if not claimed for tax purposes as follows:
2003 $5,175,000
2004 4,711,000
----------
$9,886,000
==========
16
MENTOR NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN CANADIAN DOLLARS)
15. SUBSEQUENT EVENTS
On January 20, 1998, the Company received cash of USD$1,000,000 for the
issue of 1,430,000 common shares of the Company. Contemporaneously with the
transaction the Company received cash of CDN$1,000,000 for the issue of
500,000 common shares of the Company plus $500,000 in debt financing from
the NSBDC. The NSBDC loan bears interest at 9% compounded semi-annually,
interest payable monthly, monthly principal payments of $10,000 commencing
March 1, 1998, maturing August 1, 2002.
On July 20, 1998, the Company was placed into Receivership by its secured
lender, NSBDC, for defaulting on the terms of the Company's loans.
On September 25, 1998, ITC Learning Corporation ("ITC"), a US-based
training and education company, purchased the assets, excluding certain
working capital amounts, from the Receiver for $3,000,000 consisting of a
$1,000,000 cash payment plus a $2,000,000 promissory note payable to the
NSBDC repayable over five years and bearing interest at 8% per annum.
Additionally, ITC agreed to pay the NSBDC up to $1,600,000 in certain
future royalty payments based on the ongoing performance of the assets
acquired.
16. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES
In certain respects, Canadian generally accepted accounting principles
("Canadian GAAP") differ from United States generally accepted accounting
principles ("US GAAP").
(a) CONSOLIDATED BALANCE SHEETS
The issuance of 140,000 common shares of the Company during the year
ended December 31, 1996 with a fair value of approximately $140,000
as consideration for services rendered by a key contractor as
described in note 7 would have been recorded under US GAAP at the
fair value of the common shares issued. The effect of this
transaction would be to increase share capital and the deficit for US
GAAP purposes by $140,000 as at June 30, 1998, December 31, 1997 and
December 31, 1996.
(b) CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
Under US GAAP, the purchase of intellectual property by the Company
for consideration of 1.6 million common shares of the Company, as
described in Note 12, would not be reflected in the consolidated
statements of changes in financial position. The effect of this
adjustment would be to reduce cash provided by financing activities
and cash used in investing activities for US GAAP purposes by $1.6
million for the year ended December 31, 1996.
17. CONTINGENCIES [NOTE 15]
As a result of the Company being insolvent and being placed into
Receivership on July 20, 1998, numerous legal claims have been, and may be,
filed against the Company. The outcome of these claims and their effect on
the financial position of the Company, if any, is not determinable at this
time. Accordingly, no amount has been accrued in these financial statements
with respect to the outcome of these claims which may materially affect the
financial position of the Company.
17
ITC LEARNING CORPORATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
The unaudited proforma balance sheet at September 30, 1998 is not presented as
the acquisition reported was purchased prior to September 30, 1998, and is
reflected in ITC Learning Corporation's unaudited balance sheet at September 30,
1998 included in ITC's Quarterly Report on Form 10-QSB for the quarter then
ended. The acquisition of assets of Mentor has been accounted for using the
purchase method of accounting.
The following unaudited consolidated proforma statements of operations for the
twelve months ended December 31, 1997 and the nine months ended September 30,
1998 give effect to the purchase of certain assets of Mentor Networks Inc.
("Mentor") on September 25, 1998 for US$1,981,000, including US$661,000 in cash
and a promissory note of US$1,320,000, as if the transaction had occurred on
January 1, 1997.
The unaudited proforma statements of operations are not necessarily indicative
of the results that would have occurred had the acquisition been completed on
the date indicated nor are purported to be indicative of future results.
18
ITC LEARNING CORPORATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
As Adjusted Retroactively for the Acquisition of Certain Assets
of Mentor Networks Inc. ("Mentor")
For the Period Ending December 31, 1997
ITC Mentor Pro Forma Consolidated
(Historical) (Historical)(1) Adjustments Pro Forma
Dr. (Cr.)
Revenues, net
Courseware and services $ 18,720,292 $ 435,029 $ -- $ 19,155,321
Hardware 6,861,861 -- -- 6,861,861
------------ ------------ ------------ ------------
Total revenues, net 25,582,153 435,029 -- 26,017,182
------------ ------------ ------------ ------------
Costs and expenses:
Courseware costs of sales 9,654,736 138,449 -- 9,793,185
Hardware costs of sales 6,547,324 -- -- 6,547,324
Selling, general and
administrative expenses 12,038,439 4,524,974 (99,461)(2) 16,463,952
Equity in earnings of affiliates (288,129) -- -- (288,129)
------------ ------------ ------------ ------------
Total costs and expenses 27,952,370 4,663,423 (99,461) 32,516,332
------------ ------------ ------------ ------------
Gain on sale of subsidiary 732,238 -- -- 732,238
------------ ------------ ------------ ------------
Loss before interest and
income tax benefit (1,637,979) (4,228,394) 99,461 (5,766,912)
Interest income, net 204,651 (213,231) (177,998)(3) (186,578)
Loss before income tax benefit (1,433,328) (4,441,625) (78,537) (5,953,490)
Income tax benefit -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (1,433,328) $ (4,441,625) $ (78,537) $ (5,953,490)
============ ============ ============ ============
Net loss per common share,
basic and diluted $ (0.37) $ (1.53)
Weighted average number
of shares outstanding 3,885,462 3,885,462
============ ============
See accompanying notes
19
ITC LEARNING CORPORATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
As Adjusted Retroactively for the Acquisition of Certain Assets
of Mentor Networks Inc. ("Mentor")
For the Period Ending September 30, 1998
ITC Mentor Pro Forma Consolidated
(Historical) (Historical)(1) Adjustments Pro Forma
Dr. (Cr.)
Net Revenues $ 10,928,910 $ 762,366 $ -- $ 11,691,276
Costs of sales 6,566,057 179,592 -- 6,745,649
------------ ------------ ------------ ------------
Gross margin 4,362,853 582,774 -- 4,945,627
Selling, general and
administrative expenses 8,848,343 2,401,880 (132,600)(2) 11,117,623
Equity in earnings of affiliates (176,902) 81,919 -- (89,917)
Interest income, net (171,836) 126,455 (40,333)(3) (90,780)
------------ ------------ ------------ ------------
8,499,605 2,610,254 (172,933) 10,936,926
Loss before income taxes (4,136,752) (2,027,480) 172,933 (5,991,299)
Income tax benefit 222,516 -- -- 222,516
------------ ------------ ------------ ------------
Net loss $ (3,914,236) $ (2,027,480) $ 172,933 (5,768,783)
============ ============ ============ ============
Net loss per common share,
basic and diluted $ (1.00) $ (1.48)
Weighted average number
of shares outstanding 3,909,630 3,909,630
============ ============
See accompanying notes
20
ITC LEARNING CORPORATION
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
The following pro forma adjustments have been made:
(1) Represents the historical results of operations of Mentor as previously
reported herein. Historical amounts for Mentor for the period ending
September 30, 1998 include amounts for the period ending June 30, 1998 as
reported herein, and have been adjusted to reflect the results of
operations through the date of acquisition. The Canadian dollar amounts
have been translated using an average exchange rate of $0.702 for the year
ending December 31, 1997 and $0.667 for the period ending September 30,
1998.
(2) Reflects the new basis and amortization period of intangibles associated
with the acquisition of certain assets of Mentor including deferred
program development costs, workforce investment, leasehold premises,
contractual commitments, customer base, intellectual property rights and
other intangible assets totaling US$2,827,000. Amounts are amortized over
three years. Depreciation expense associated with the acquisition of the
assets of Mentor includes furniture and fixtures and computer equipment
totaling US$166,750. Amounts are depreciated over three years.
(3) Interest income has been adjusted to reflect interest foregone as a result
of US$661,000 cash payment for the assets of Mentor. Interest expense has
been adjusted to reflect additional interest payments associated with
acquisition indebtedness of US$1,320,000 related to the purchase of
certain Mentor assets.
21
SIGNATURE
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 hereunto duly authorized.
ITC Learning Corporation
(Registrant)
By:/s/ Christopher E. Mack
-------------------------
Christopher E. Mack
Vice President, Treasurer
and Chief Financial Officer
Date: 12/4/98
-----------
22
INDEX OF EXHIBITS
The following Exhibits to this Report are incorporated herein by reference to
the corresponding exhibits in the Company's Form 8-K (Commission File No.
0-13741) filed with the Securities and Exchange Commission on October 13, 1998.
2.1 Assignment of Rights Under Offer from ITC Learning Corporation to ITC
Canada Limited dated September 1, 1998, incorporated by reference to
the Company's Form 8-K filed October 13, 1998 with the Securities and
Exchange Commission ("SEC") (Commission File No. 0-13741).*
2.2 Receiver's Bill of Sale from Grant Thornton Limited to ITC Canada
Limited dated September 16, 1998, incorporated by reference to the
Company's Form 8-K filed October 13, 1998 with the SEC (Commission
File No. 0-13741).*
2.3 Assignment of Lease from Grant Thornton Limited to ITC Canada Limited
dated September 16, 1998, incorporated by reference to the Company's
Form 8-K filed October 13, 1998 with the SEC (Commission File No.
0-13741).*
2.4 Assignments of Courseware from Grant Thornton Limited to ITC Canada
Limited dated September 16, 1998, incorporated by reference to the
Company's Form 8-K filed October 13, 1998 with the SEC (Commission
File No. 0-13741).*
2.5 Assignments of Intellectual Property Rights from Grant Thornton
Limited to ITC Canada Limited dated September 16, 1998, incorporated
by reference to the Company's Form 8-K filed October 13, 1998 with
the SEC (Commission File No.
0-13741).*
2.6 Assignment of Trademarks from Grant Thornton Limited to ITC Canada
Limited dated September 23, 1998, incorporated by reference to the
Company's Form 8-K filed October 13, 1998 with the SEC (Commission
File No. 0-13741).*
2.7 Principal Agreement between ITC Canada Limited and Nova Scotia
Business Development Corporation dated September 16, 1998,
incorporated by reference to the Company's Form 8-K filed October 13,
1998 with the SEC (Commission File No.
0-13741).*
2.8 Promissory Note in the Amount of Cdn. $2,000,000 Executed by ITC
Canada Limited dated September 16, 1998, incorporated by reference to
the Company's Form 8-K filed October 13, 1998 with the SEC
(Commission File No. 0-13741).*
2.9 Demand Debenture between ITC Canada Limited and Nova Scotia Business
Development Corporation dated September 18, 1998, incorporated by
reference to the Company's Form 8-K filed October 13, 1998 with the
SEC (Commission File No. 0-13741).*
2.10 Debenture Pledge Agreement in the Amount of Cdn. $3,600,000 between
ITC Canada Limited and Nova Scotia Business Development Corporation
dated September 18, 1998, incorporated by reference to the Company's
Form 8-K filed October 13, 1998 with the SEC (Commission File No.
0-13741).*
2.11 General Security Agreement between ITC Canada Limited and Nova Scotia
Business Development Corporation dated September 18, 1998,
incorporated by reference to the Company's Form 8-K filed October 13,
1998 with the SEC (Commission File No. 0-13741).*
2.12 Guarantee of Obligation by ITC Learning Corporation dated September
22, 1998, incorporated by reference to the Company's Form 8-K filed
October 13, 1998 with the SEC (Commission File No. 0-13741).*
23
2.13 Agreement between ITC Learning Corporation and Nova Scotia Business
Development Corporation dated September 22, 1998, incorporated by
reference to the Company's Form 8-K filed October 13, 1998 with the
SEC (Commission File No. 0-13741).*
2.14 Royalty Agreement among ITC Canada Limited, ITC Learning Corporation
and Grant Thornton Limited dated September 18, 1998, incorporated by
reference to the Company's Form 8-K filed October 13, 1998 with the
SEC (Commission File No.
0-13741).*
2.15 Inter-Lender Agreement among ITC Canada Limited, Nova Scotia Business
Development Corporation and Wachovia Bank, N.A. dated September 23,
1998, incorporated by reference to the Company's Form 8-K filed
October 13, 1998 with the SEC (Commission File No. 0-13741).*
23.1 Independent Auditors' Consent.
24