UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
FORM 10-QSB
(MARK ONE)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF EXCHANGE ACT
For the transition period from ________ to _________
Commission File Number 0-13741
ITC LEARNING CORPORATION
------------------------
(Name of small business issuer as specified in its charter)
Maryland 52-1078263
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13515 Dulles Technology Drive
Herndon, Virginia 20171
-----------------------
(Address of principal executive offices)
(703) 713-3335
--------------
(Issuer's telephone number)
-------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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. [x] Yes [ ] No
As of March 31, 2001, 3,964,078 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format (check one): [ ] Yes [x] No
ITC LEARNING CORPORATION
FORM 10-QSB
INDEX
Part I - Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2001 and 2000.................... 1
Condensed Consolidated Balance Sheets as of
March 31, 2001 and December 31, 2000.......................... 2
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2001 and 2000.................... 4
Notes to Condensed Consolidated Financial Statements.......... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 8
Part II - Other Information
Item 1. Legal Proceedings............................................. 12
Item 2. Changes in Securities and Use of Proceeds..................... 12
Item 3. Defaults Upon Senior Securities............................... 12
Item 4. Submission of Matters to a Vote of Security Holders........... 12
Item 5. Other Information............................................. 12
Item 6. Exhibits and Reports on Form 8-K.............................. 12
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months
Ended March 31,
2001 2000
---- ----
Net revenues.................................................... $ 732,633 $ 751,180
Cost of sales................................................... 312,285 597,550
--------- -----------
Gross margin......................................... 420,348 153,630
Selling, general and administrative expense..................... 928,226 1,489,750
--------- -----------
Operating loss.................................................. (507,878) (1,336,120)
Interest income................................................. 841 3,311
Interest expense................................................ (169,672) (181,405)
Cash flow from partnerships..................................... 20,882 62,256
Loss on sale of product line.................................... (44,232) --
--------- -----------
Loss from continuing operations before discontinued operations
before income taxes.................................. (700,059) (1,451,958)
Discontinued operations (Note 2)
Loss from discontinued operations.................... -- (183,228)
--------- -----------
Net loss........................................................ $(700,059) $(1,635,186)
========= ===========
Loss per share - basic and diluted:
Loss from continuing operations...................... $(0.18) $ (0.37)
Discontinued operations.............................. -- $ (0.05)
--------- -----------
Net loss............................................. $(0.18) $ (0.42)
See accompanying notes to condensed consolidated financial statements.
1
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
March 31, December 31,
2001 2000
---- ----
Current assets:
Cash and cash equivalents........ $ 184,720 $ 6,782
Accounts receivable, net......... 590,525 871,205
Due from affiliates.............. 159,925 111,043
Inventories, net................. 224,432 274,204
Prepaid expenses................. 445,006 504,721
Deferred financing
costs, net..................... 20,682 29,545
----------- -----------
Total current assets......... 1,625,290 1,797,500
Note receivable 750,000 750,000
Property and equipment:
Video and computer
equipment...................... 2,041,617 2,042,322
Furniture and fixtures........... 188,176 188,176
Leasehold improvements........... 55,318 55,319
----------- -----------
2,285,111 2,285,817
Less accumulated
depreciation and
amortization................... (2,088,514) (2,017,799)
----------- -----------
Net property and
equipment................... 196,597 268,018
Capitalized program development
costs, net of accumulated
amortization of $5,405,942 and
$6,139,346 at March 31, 2001 and
December 31, 2000, respectively... 993,601 891,237
Prepaid royalty and other
non-current assets................ 1,573,318 1,578,143
----------- -----------
Total assets............ $ 5,138,806 5,284,898
=========== ===========
See accompanying notes to condensed consolidated financial statements.
2
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
(Unaudited)
March 31, December 31,
2001 2000
---------- ------------
Current liabilities:
Current installments of long-term debt, related party... 2,201,142 2,100,425
Current installments of long-term debt.................. 500,000 500,000
Accounts payable........................................ 1,729,278 1,657,440
Due to affiliates....................................... 65,708 70,708
Accrued compensation and benefits....................... 172,970 208,993
Deferred revenues....................................... 922,729 1,054,604
Other accrued expenses.................................. 1,226,742 1,089,555
----------- -----------
Total current liabilities............................ 6,818,569 6,681,725
Deferred lease obligations -- 16,956
Long-term debt, related party 70,393 70,393
Long-term debt 354,782 354,782
Net liabilities of discontinued operations (note 2)....... 1,168,313 757,359
----------- -----------
Total liabilities........................... 8,412,057 7,881,215
Stockholders' deficit:
Common stock, $0.10 par value, 12,000,000 shares
authorized; 3,964,078 shares issued and outstanding.. 396,408 396,408
Additional capital...................................... 18,039,810 18,039,810
Note receivable from ESOP............................... (243,752) (266,877)
Retained deficit........................................ (21,465,717) (20,765,658)
----------- -----------
Total stockholders' deficit.......................... (3,273,251) (2,596,317)
Total liabilities and stockholders' deficit............... $ 5,138,806 $ 5,284,898
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
2001 2000
---- ----
Cash flows from operating activities:
Net loss................................................ $(700,059) $(1,635,186)
Reconciling items:
Provision for doubtful accounts....................... 15,000 --
Depreciation and amortization......................... 306,879 665,745
Loss on the sale of product line...................... 44,232 --
Divestitures and disposals, net....................... (57,583) 279,788
Changes in operating assets and liabilities:
Decrease in accounts receivable.................... 265,680 1,094,144
Decrease in inventories............................ 49,772 53,116
Decrease in prepaid expenses....................... 59,715 37,366
Increase in due from affiliates, net............... (53,882) (20,454)
Decrease in other assets........................... 4,825 1,248
Increase (decrease) in accounts payable............ 71,838 (534,163)
Increase (decrease) in accrued expenses............ 101,164 (231,323)
Decrease in deferred revenues...................... (131,875) (151,150)
(Decrease) increase in deferred lease obligations.. (16,956) 3,378
--------- -----------
Net cash used for operating activities.................. (41,250) (437,491)
Cash flows from investing activities:
Proceeds on sale of product line...................... 200,000 --
Capitalized product development costs................. -- (168,509)
Capital expenditures.................................. (3,937) --
--------- -----------
Net cash provided by (used for) investing activities.... 196,063 (168,509)
Cash flows from financing activities:
Repayments under line of credit....................... -- (663,838)
Proceeds from issuance of long-term debt.............. -- 802,393
Employee stock ownership plan note collections........ 23,125 23,125
--------- -----------
Net cash provided by financing activities.......... 23,125 161,680
--------- -----------
Net increase (decrease) in cash 177,938 (444,320)
Cash and cash equivalents, beginning of period.......... 6,782 446,832
--------- -----------
Cash and cash equivalents, end of period................ $ 184,720 $ 2,512
========= ===========
See accompanying notes to condensed consolidated financial statements.
4
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The Company is a full-service training company specializing in the
development, production, marketing and sale of multimedia and technology-
delivered training solutions designed to improve employee skills in business,
industry, education and government. Due to the sale of the Company's
international subsidiaries, the Company operates in only one business segment,
serving customers throughout the United States.
The consolidated financial statements of ITC Learning Corporation ("ITC" or
the "Company") include the accounts of its wholly owned subsidiaries, Turn-Key
Training Technologies, Inc., and ComSkill Learning Centers, Inc. ("ComSkill"),
both inactive. The Company has accounted for ITC Australasia, Pty. Ltd., ITC
Canada Limited, and Activ Training, Ltd. as discontinued operations. In the
opinion of the Company's management, the interim consolidated financial
statements include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. The
interim consolidated financial statements should be read in conjunction with the
Company's December 31, 2000 audited financial statements included with the
Company's filing on Form 10-KSB filed with the Securities and Exchange
Commission on April 18, 2001. The interim operating results are not necessarily
indicative of the operating results for the full fiscal year.
The Company's financial statements have been presented on a going concern
basis, which contemplates the realization of assets and settlement of
liabilities and commitments in the normal course of business. The Company
continued to experience significant losses in the three months ended March 31,
2001 as it did during the years ended December 31, 2000 and 1999. Although the
Company expects operating results to improve, there can be no assurances that
the Company will not continue to experience adverse results of operation in the
future. The Company believes that its existing cash and the anticipated cash
flows from 2001 operations will not be sufficient to enable the Company to
sustain its current and planned operations. The Company will need to raise
additional funding either through the sale of its common stock or debentures in
2001. Anticipated cash flows from 2001 operations are largely dependent upon the
Company's ability to achieve its sales and gross profit objectives for its
currently existing products and new products to be launched in 2001. Achievement
of these objectives is subject to various risk factors related to, among other
things: incremental sales resulting from expansion of distribution capabilities;
the Company's ability to deploy its courseware over the Internet and corporate
intranets; the Company's ability to control costs in relation to future
revenues; and the Company's ability to raise capital. If the Company is unable
to meet these objectives, it will consider expansion of existing or development
of alternative sources of financing; the curtailment of certain capital
expenditures and discretionary expenditures (such as travel, consulting and
salaries); and various other courses of action.
The Company is developing its sales and marketing strategies and is actively
pursuing additional equity financing to provide the necessary funds for working
capital until sales levels are sufficient to provide adequate cash flow.
Management believes that actions presently being taken to revise the Company's
operating and financial requirements provide the opportunity for the Company to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern.
The Company received a temporary extension on the debt payments due on its
5.5% and 9.5% convertible subordinated debentures due April 2, 2001 until May 1,
2001, while the Company negotiates with the debenture and other debt and note
holders for either a further extension or for a conversion of these notes into
our
5
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2001
(Unaudited)
common stock. As part of these negotiations, the Company has offered inducements
to the note holders to convert the notes into common stock and/or extend the
maturity date, including adjusting the exchange ratio and detachable warrant
exercise price to better reflect the current market price of the Company's
common stock. Since May 1, 2001, the Company has received an additional
extension from the debenture holder through June 15, 2001. However, there are no
assurances that the Company will be successful achieving a further extension of
this debt, or any conversion to common stock, and the debt may become due in
full at June 15, 2001. If successful, the Company believes that by taking these
actions, it will, at a minimum, be relieved of the immediate pressure it faces
in trying to repay this debt, with the hope that by providing inducements to
note holders, the Company will also receive additional investment capital. These
are forward-looking statements. See Forward-looking Statements and Risk Factors
for Further Discussion.
NOTE 2 - DISCONTINUED OPERATIONS AND THE SALE OF REGULATORY COMPLIANCE LIBRARY
Discontinued Operations
As part of the Company's business strategy to focus its primary resources on
its core industrial markets, it initialized a strategy to dispose of its foreign
operations during the fourth quarter of 2000. The foreign operations, which were
wholly-owned subsidiaries of the Company, were primarily focused on the sales
and distribution of the Company's PC Skills, Information Technology, and soft
skills products. The foreign operations did not have a principal focus on the
distribution of the Company's core industrial products and, as such, the Board
of Directors approved the sale of these subsidiaries.
On December 15, 2000, the Company completed an agreement selling its London-
based subsidiary, Activ, to the current Activ management team. Total
consideration for the transaction was $1,000,000, of which $250,000 was paid at
closing with the balance being due over a five-year period. The remaining
$750,000 is in the form of a secured, non-interest bearing promissory note,
whereby Activ will pay ITC an additional royalty on each sale made by Activ over
the next five years until the balance is paid in full. If the additional royalty
payments over the next five years do not sufficiently pay off the outstanding
debt, then the balance outstanding at the end of the term becomes due in full.
Activ has been the primary international distributor of ITC products in the
United Kingdom, Europe, Africa and the Middle East. Pursuant to the agreement,
ITC and Activ will maintain a strategic business partnership whereby Activ will
remain ITC's exclusive sales distributor in the United Kingdom, Europe, Africa
and the Middle East. The Company recorded a loss of $654,000 on the sale of
Activ.
In December 2000, the Company entered into a Letter of Intent with a
Canadian-based company to acquire ITC Canada Limited. Under the terms of the
Letter of Intent, the acquirer would purchase the outstanding stock of ITC
Canada Limited in exchange for the assumption of the debt to the Nova Scotia
Business Development Corporation (NSBDC). The amount owed to the NSBDC as of
March 31, 2001 and December 31, 2000 totaled approximately $900,000, and is
included in the net assets of discontinued operations. The Company has not made
any principal or interest payments to the NSBDC since July of 2000. A condition
of the transaction is the consent of the NSBDC to the assumption of the debt,
which was obtained on December 12, 2000. The Company anticipates closing this
transaction during the second quarter of 2001.
On April 10, 2001, the Company also entered into an agreement to restructure
its ongoing business relationship with ITC Australasia Pty. Ltd. ("ITCA"), the
Company's Australian-based subsidiary. Under the terms of the agreement, ITCA
was assumed by the management team of ITCA, led by ITCA's Managing
6
ITC LEARNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2001
(Unaudited)
Director. ITCA will remain a non-exclusive distributor of ITC's products in the
Pacific Rim market. ITC will, however, utilize ITCA as its primary distributor
for this territory. ITC elected to enter into this agreement as opposed to
closing the operations.
In conjunction with the sale of ITC Australasia and the pending sale of ITC
Canada, the Company recorded a loss provision of $750,000, the expected
operating losses of these two companies from January 1, 2001 through the
anticipated final date of disposition. No additional loss on disposal has been
recorded since the Company expects to dispose of these companies for net book
value.
Prior financial statements for the quarter ended March 31, 2000 have been
restated to present the operations of these companies as discontinued
operations.
Sale of Regulatory Compliance
On February 28, 2001, the Company completed the sale of its Regulatory
Compliance Library to TE21, Inc., a distributor of the Company's products. The
Company received $200,000 in cash proceeds from the transaction and recorded a
loss on disposal of asset of approximately $44,000. ITC also entered into a
three-year distribution agreement with TE21, Inc. to continue the distribution
of the Regulatory Compliance Library by the Company.
NOTE 3 - SUBSEQUENT EVENTS
On May 8, 2001, the Company entered into a sublease agreement with a Company
in Northern Virginia for the Company's new corporate headquarters. The sublease,
which is still subject to sublessor's Landlord approval, is for approximately
7,000 square feet. The Company expects to receive final approval from the
sublessor's Landlord during May of 2001 and to complete the move to its new
headquarters during the month of May. Additionally, the Company has been in
negotiations with its existing Landlord regarding a termination fee for the
Company's existing space. The Company has accrued the amount it believes
necessary to terminate Company's existing facilities lease.
7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview of Business
ITC Learning Corporation ("ITC" or the "Company") is a technology-based
learning company that provides content, technology and support services to
facilitate effective staff and professional development for organizations
worldwide. Incorporated under the laws of the state of Maryland in 1977, the
Company develops, markets and delivers specific libraries of interactive
multimedia computer-based training ("CBT") courses designed for CD-ROM, intranet
and Internet delivery, thus enabling organizations to effectively and
efficiently deliver training to improve individual and organizational
performance.
The Company's proven training solutions integrate people, process, content
and technology to help organizations enable learning, transfer skills, increase
knowledge and maximize human performance. ITC's technology base has progressed
from videotape to videodisc to CD/ROM to the Internet--all with the basic
premise of improving job skills and workplace performance.
The Company maintains an extensive content portfolio of over 600 interactive
multimedia courses that cover such areas as: Industrial Mechanical Technical
Skills; Industrial Electrical Technical Skills; Instrumentation; Oil, Gas, &
Utility Process and Safety; Safety and Regulatory Compliance; Basic Literacy;
Personal Computer Skills; Information Technology; and Customer Service Skills
that are all fundamental to the learning needs of industrial-based
organizations. The Company either owns or licenses its content portfolio for
distribution. The Company has a worldwide customer base of over 5,000
organizations, using ITC's products and services to improve employee
productivity and skills, and an established international distribution network
in the United Kingdom and Australia.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Forward-looking Statements
Certain statements made by the Company's management may be considered to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Act of 1995. Forward-looking statements are based on various factors
and assumptions that include known and unknown risks and uncertainties. The
words "believe," "expect," "anticipate" and "project," and similar expressions
identify forward-looking statements, which speak only as of the date the
statement was made. Such statements may include, but not be limited to,
projections of revenues, income or loss, expenses, plans, as well as assumptions
relating to the foregoing. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
results could differ materially from those described in forward-looking
statements as a result of the risks set forth in the following discussion, among
others.
Risk Factors
The report of our independent Certified Public Accountants on our December
31, 2000 financial statements contains an explanatory paragraph for a going-
concern uncertainty. The Company experienced significant losses in 2000 and
1999. Although the Company expects operating results may improve, there can be
no assurances that the Company will not experience adverse results of operation
in the future. The Company believes that its existing cash and the anticipated
cash flows from 2001 operations will not be sufficient to enable the Company to
sustain its current and planned operations. The Company will need to raise
additional funding either through the sale of its common stock or debentures in
2001. Anticipated cash flows from 2001 operations are largely dependent upon the
Company's ability to achieve its sales and gross profit objectives for its
currently existing products and new products to be launched in 2001. Achievement
of these objectives is subject to various risk factors related to, among other
things: incremental sales resulting from expansion of distribution capabilities;
the Company's ability to deploy its courseware over the Internet and corporate
intranets; the Company's ability to control costs in relation to future
revenues; and the Company's ability to raise capital. If the Company is unable
to meet these objectives, it will consider expansion of existing or
8
development of alternative sources of financing; the curtailment of certain
capital expenditures and discretionary expenditures (such as travel, consulting
and salaries); and various other courses of action.
A number of factors could also contribute to significant fluctuations in
operating results, which may result in volatility in the price of the Company's
common stock. The Company also notes that the price of its common stock has
decreased significantly, currently trading for approximately $0.25 per share.
There are several risks of purchasing and holding shares of this nature.
Investors should consider investments in our common stock as speculative. In
making such an investment, the investor should be prepared to lose their entire
investment. Other factors include the size and timing of orders and shipments,
the mix of ITC-developed products and third party products, the mix of sales
from the Company's direct and indirect distribution channels, the introduction
and acceptance of new products, and the degree to which the market understands
and accepts the Company's role as a provider of training solutions.
In addition, the Company faces certain general business risks, which could
materially and adversely impact future operating results. These include, but are
not limited to, changes in economic conditions, the cost of labor and raw
materials, changes in technology and general competitive factors.
RESULTS OF OPERATIONS
Three months ended March 31, 2001 ("First Quarter of 2001") compared with
the three months ended March 31, 2000 ("First Quarter of 2000")
The March 31, 2001 and 2000 financial information reflects the operations of
our international subsidiaries as discontinued operations as more fully
discussed in Note 2 of Item 1.
Revenues
Total revenues, from continuing operations, totaled $733,000 for the first
quarter of 2001, as compared to $751,000 for the first quarter of 2000,
representing a decrease of $18,000 or 2%. Courseware revenues include sales of
off-the-shelf CBT products, custom CBT products, consulting services, fees,
royalties and videotape training products.
The Company primarily utilizes direct sales personnel, independent sales
agents and resellers to distribute the Company's products. During the first
quarter of 2001, the Company started to expand its sales and marketing
organization through the addition of two additional direct sales personnel. The
Company expects to continue this expansion throughout 2001, targeted within
geographic territories, provided the Company has sufficient resources for
expansion. The Company will continue to rely on independent sales agents and
resellers for product distribution while the Company expands its own direct
sales efforts.
Cost of Sales and Gross Margin
Cost of sales consists of the amortized costs of developing new course
titles and updating the Company's existing libraries, product material costs,
fulfillment costs, reseller discount fees, sales commissions, third party and
product royalties. Cost of sales for the first quarter 2001 totaled $312,000
resulting in a gross margin of $420,000 or 57% of total revenues, as compared to
cost of sales of $598,000 and gross margin of $154,000 or 21% of total revenues
for the first quarter of 2000. The lower cost of sales and improved gross
margins are primarily due to the sales of Company-owned products and lower
amortization of program development costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $928,000 for the first
quarter of 2001, as compared to $1,490,000 for the first quarter of 2000,
representing a decrease of $562,000 or 38%.
Selling expenses consist primarily of salaries of sales personnel, travel,
advertising, marketing and promotional expenses. Selling expenses for the first
quarter of 2001 totaled $193,000, as compared to $181,000
9
for the first quarter of 2000. The increase in selling expenses of $12,000 or 7%
during the first quarter of 2001, as compared to the first quarter of 2000, is
primarily due to costs associated with industry trade show activities and
related sales-related travel expenses.
General and administrative expenses consist of the costs of developing new
products and the costs of the Company's executive management and support
functions such as customer assurance, product fulfillment, human resources, and
finance and administration. General and administrative expense for the first
quarter of 2001 totaled $735,000, as compared to $1,309,000 for the first
quarter of 2000. The decrease of $574,000 or 44% is due to lower personnel costs
and the curtailment of expenditures.
Net Loss
The net loss for the first quarter of 2001 resulted totaled $700,000, or
$0.18 per share, as compared to a net loss of $1,635,000, or $0.42 per share,
for the first quarter of 2000. The substantial decrease in the net loss is
primarily due to the curtailment of operating expenses and improved gross
margins. The net loss for the first quarter of 2000 included $183,000 of losses
associated with the Company's discontinued operations.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
During late 1999 and 2000, we took several actions to restructure our
operations, as previously described. We believe that these actions have improved
our operational efficiencies and provide us an improved chance of success in the
future. Nonetheless, further additional actions will be required for the Company
to sustain its operations. We entered into 2001 with a shortage of operating
cash and a significant amount of debt due to New River Capital Partners, LP
("NRC") and other convertible debenture and note holders. The NRC debt totaled
$2,200,000 plus accrued interest of approximately $160,000, and was due on April
2, 2001. We initially obtained an extension on this debt payment until May 1,
2001, and are negotiating with NRC and the other debenture and note holders for
either a further extension or for a conversion of these notes into our common
stock. As part of these negotiations, the Company has offered inducements to the
note holders to convert the notes into common stock and/or extend the maturity
date, including adjusting the exchange ratio and detachable warrant exercise
price to better reflect the current market price of the Company's common stock.
The Company has received an additional extension on this debt payment through
June 15, 2001. However, there are no assurances that the Company will be
successful in achieving a further extension of the NRC debt, or any conversion
to common stock, and the debt may become due in full at June 15, 2001. If
successful, the Company believes that by taking these actions, it will, at a
minimum, be relieved of the immediate pressure it faces in trying to repay this
debt, with the hope that by providing inducements to note holders, the Company
will also receive additional investment capital. These are forward-looking
statements. See Forward-looking Statements and Risk Factors for Further
Discussion.
During 2000, and into 2001, we have continued to reduce our operating
expenses. We have identified one final area, facility space, where we can obtain
a significant cost savings, while not impacting our operational capabilities.
During the first quarter of 2001, we continued to lease approximately 20,000
square feet in the Northern Virginia area. In May of 2001, we executed a
sublease agreement with a company in Northern Virginia for new office space. The
sublease, which is continent upon approval from the sublessor's Landord, is for
approximately 7,000 square feet. Management believes that this level of space is
sufficient for the Company's scaled down operations.. We are currently
negotiating with our landlord to terminate our existing lease and have accrued
the costs the Company believes necessary for the termination of the existing
lease. Should these current options no longer exist, the Company will take
alternative actions regarding facilities space. These are forward-looking
statements. See Forward-looking Statements and Risk Factors for Further
Discussion.
We believe that we have scaled back our operations as much as possible, and
if we are able to sustain at least $750,000 of sales of our product each
quarter, we will be able meet our current operating needs. This level of
operations does not provide us with the cash flow to pay "stale" accounts
payable, interest or principal to our debt holders, or for any unforeseen
expenditures. As such, we anticipate that, based on our present plans
10
and assumptions, our current cash balances and projected level of 2001
operations will not provide sufficient cash flow to enable us to sustain our
current and planned operations for at least the next 12 months. We will need to
raise additional funding, either through the sale of our common stock, or debt.
We are hopeful that when we complete negotiations with our current debt holders,
that the inducements we provide them will entice them to make additional
investments in the Company. Should they decide not to do so, we will need to
obtain financing from other unidentified sources. This could prove to be a very
difficult task, especially in light of the current status of downward trend
being experienced by technology related companies quoted on the OTC Bulletin
Board like us. Additional funding, whether obtained through public or private
debt or equity financing or from strategic alliances, may not be available when
needed or may not be available on terms acceptable to us. Failure to secure
additional financing, if and when needed, may have a material adverse effect on
our business, financial condition and results of operations. These are forward-
looking statements. See Forward-looking Statements and Risk Factors for Further
Discussion.
The report of our independent Certified Public Accountants on our December
31, 2000 financial statements contains an explanatory paragraph for a going-
concern uncertainty.
Working capital deficit at March 31, 2001 was $5,193,000 as compared to a
deficit of $4,884,000 at December 31, 2000, representing an increase of the
working deficit of $309,000 or 6%.
Cash used by operating activities totaled $41,000 for the first quarter of
2001, as compared to cash used by operating activities of $437,000 for the first
quarter of 2000, an improvement of $396,000. The decrease usage of cash was due
to a lower net loss experienced during the first quarter of 2001 as compared to
the first quarter of 2000, partially offset by lower depreciation and
amortization charges, the net impact of divestitures and disposals and changes
in net operating accounts.
Cash provided by investing activities totaled $196,000 for the first quarter
of 2001, as compared to cash used for investing activities of $169,000 for the
first quarter of 2000, an increase of $365,000. The increase in cash provided by
investing activities was primarily due to the proceeds from the sale of the
Company's Regulatory Compliance Library and the absence of capitalized
development costs during the first quarter of 2001.
Cash provided by financing activities totaled $23,000 for the first quarter
of 2001, as compared to cash provided by financing activities of $162,000 for
the first quarter of 2000, a decrease of $139,000. The decrease was primarily
attributable to the net effect of receipt of proceeds from the issuance of
convertible debentures by the Company during the first quarter of 2000 and the
repayment of borrowings under the Company's previous line of credit.
11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 15, 2001, the Company received a notice from its landlord and
a lease amendment and termination agreement. This notice indicated
that the landlord has instituted legal action against the Company for
repossession of the space at its Virginia location. The Company has
not been officially served with any action. The landlord has
proposed a lease amendment and termination agreement for the Company
to consider that stipulates a settlement payment of $170,000 to
satisfy all current and future obligations by the Company. The
Company is continuing negotiations with the landlord.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit No. Description
- -------------------------------------------------------------------------------
3.1 Amended Articles of Incorporation of the Company,
incorporated by reference to the Company's Form 10-QSB for
the quarter ended June 30, 1996 filed with the Securities and
Exchange Commission (Commission File No. 0-13741).
3.2 Amended By-Laws of the Company, incorporated by reference to
the Company's Form 10-KSB for the fiscal year ended December
31, 1997, filed March 13, 1998 with the SEC (Commission File
No. 0-13741).
B. Reports on Form 8-K:
Form 8-K/A filed on February 13, 2001 amending our Form 8-K
dated December 15, 2000 for the sale of Activ Training. Ltd.,
to include the financial information required by Item 7.
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ITC LEARNING CORPORATION
(Registrant)
By: /s/Christopher E. Mack DATE May 15, 2001
------------------------------- ------------
Christopher E. Mack, President,
Treasurer, and Chief Financial Officer
13