U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1997
Commission File Number 0-13741
ITC LEARNING CORPORATION
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(FORMERLY KNOWN AS INDUSTRIAL TRAINING CORPORATION)
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(Exact name of small business issuer as specified in its charter)
Maryland 52-1078263
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
13515 Dulles Technology Drive, Herndon, Virginia 20171
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(Address of principal executive offices)
(703) 713-3335
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Issuer's telephone number
Check whether the issuer (1) has 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 issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X; No
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As of June 30, 1997, 3,897,034 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format: Yes ; No X
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TABLE OF CONTENTS
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PART I PAGE
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Item 1 Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 1997 and 1996 1
Condensed Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 2
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1997 and 1996 4
Notes to Condensed Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II
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Item 1 Legal Proceedings 9
Item 2 Changes in Securities 9
Item 3 Defaults Upon Senior Securities 9
Item 4 Submission of Matters to a Vote of Security Holders 9
Item 5 Other Information 9
Item 6 Exhibits and Reports on Form 8-K 9
PART I
ITEM 1. FINANCIAL STATEMENTS
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the 3 Months Ended June 30, For the 6 Months Ended June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Net revenues $ 4,487,286 $ 7,605,160 $ 9,209,263 $11,320,881
Cost of sales 2,287,877 4,771,966 4,670,826 7,417,404
----------- ----------- ----------- -----------
Gross margin 2,199,409 2,833,194 4,538,437 3,903,477
Selling, general, and
administrative expense 3,427,765 2,409,555 6,533,204 4,339,969
Equity in earnings of affiliates (13,600) (49,275) (39,114) (112,357)
----------- ----------- ----------- -----------
Income (loss) before interest
and income taxes (1,214,756) 472,914 (1,955,653) (324,135)
Interest income, net 44,174 107,665 83,333 242,521
----------- ----------- ----------- -----------
Income (loss)
before income taxes (1,170,582) 580,579 (1,872,320) (81,614)
Income taxes (benefit) (422,000) 232,000 (668,000) (33,000)
----------- ----------- ----------- -----------
Net income (loss) $ (748,582) $ 348,579 $(1,204,320) $ (48,614)
=========== =========== =========== ===========
Net income (loss) per
common share (note 2) $ (0.19) $ (0.10) $ (0.31) $ (0.01)
=========== =========== =========== ===========
Weighted average number
of shares outstanding 3,897,034 3,635,322 3,897,022 3,608,086
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
1
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1997 1996
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(Unaudited)
Current assets:
Cash and cash equivalents $ 2,771,928 $ 2,697,566
Accounts receivable, net (note 3) 5,071,605 7,641,066
Due from affiliates 61,118 36,768
Inventories 1,135,433 1,018,383
Prepaid expenses 240,205 190,402
Income tax receivable 496,826 689,104
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Total current assets 9,777,115 12,273,289
Long-term receivable (note 4) 1,028,883 1,589,916
Property and equipment:
Video and computer equipment 3,716,717 3,361,923
Furniture and fixtures 720,289 747,146
Leasehold improvements 98,350 95,422
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4,535,356 4,204,491
Less accumulated depreciation and amortization (3,356,527) (2,963,197)
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Net property and equipment 1,178,829 1,241,294
Capitalized program development costs, net 4,520,547 4,226,525
Intangible assets 3,740,741 3,975,840
Other 527,858 67,461
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$20,773,973 $23,374,325
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See accompanying notes to condensed consolidated financial statements.
2
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1997 1996
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(Unaudited)
Current liabilities:
Line of credit (note 5) $ -- $ 515,000
Current installments of long-term debt 67,220 130,745
Accounts payable 1,114,453 1,331,079
Due to affiliates 361,595 335,797
Accrued compensation and benefits 987,874 826,764
Deferred revenues 1,279,895 1,458,945
Other accrued expenses 1,316,842 1,619,326
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Total current liabilities 5,127,879 6,217,656
Deferred lease obligations 107,864 113,020
Deferred income taxes -- 353,522
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Total liabilities 5,235,743 6,684,198
Stockholders' equity:
Common stock, $.10 par value, 12,000,000 shares
authorized; 3,897,034 and 3,896,924 issued
and outstanding in 1997 and 1996, respectively 389,703 389,693
Additional paid-in capital 16,068,294 16,067,366
Note receivable from ESOP (92,192) (143,677)
Retained earnings (deficit) (827,575) 376,745
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Total stockholders' equity 15,538,230 16,690,127
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Total liabilities and stockholders' equity $20,773,973 $23,374,325
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See accompanying notes to condensed consolidated financial statements.
3
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For 6 Months Ended June 30,
1997 1996
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Cash flows from operating activities:
Net loss $(1,204,320) $ (48,614)
Reconciling items:
Provision for deferred taxes (668,000) (33,000)
Depreciation and amortization 1,530,418 1,958,984
Sales awards of treasury shares 938 --
Increase in allowance for doubtful accounts 103,796 76,816
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 2,465,665 (335,446)
Decrease (increase) in inventories (117,050) 166,465
Increase in prepaid expenses (49,803) (99,432)
Decrease (increase) in income taxes receivable 38,352 (70,200)
Decrease (increase) in long term receivable 561,033 (1,537,831)
Decrease (increase) in other assets 8,007 (7)
Increase (decrease) in accounts payable (216,626) 561,859
Increase in due to affiliates, net 1,448 206,399
Increase (decrease) in deferred revenues (179,050) 895,637
Increase (decrease) in other accrued expenses (141,374) 362,508
Decrease in income taxes payable -- (105,000)
Decrease in deferred lease obligations (5,156) (8,318)
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Net cash from operating activities 2,128,278 1,990,820
Cash flows from investing activities:
Deferred program development costs (1,196,011) (2,916,316)
Capital expenditures (330,865) (230,518)
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Net cash used in investing activities (1,526,876) (3,146,834)
Cash flows from financing activities:
Repayments under line of credit (515,000) --
Principal payments of long-term debt (63,525) (58,575)
Issuance of common stock -- 90,636
Employee stock ownership plan note collections 51,485 53,500
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Net cash provided by (used in) financing activities (527,040) 85,561
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Net increase (decrease) in cash 74,362 (1,070,453)
Cash and cash equivalents at beginning of period 2,697,566 10,348,762
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Cash and cash equivalents at end of period $ 2,771,928 $ 9,278,309
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See accompanying notes to condensed consolidated financial statements.
4
ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
1) SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
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The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries ComSkill Learning Centers, Inc.
("ComSkill"), Activ Training, Ltd ("Activ"), ITC Australasia Pty. Ltd. ("ITCA"),
and Anderson Soft-Teach ("AST"). Significant intercompany accounts and
transactions have been eliminated in consolidation. In the opinion of the
Company, the interim condensed 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 generally accepted accounting principles have been condensed or
omitted. The interim condensed consolidated financial statements should be read
in conjunction with the Company's December 31, 1996 and 1995 audited financial
statements included with the Company's filing on Form 10-KSB. The interim
operating results are not necessarily indicative of the operating results for
the full fiscal year.
b) Revenues and Cost
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Revenues include both off-the-shelf and custom courseware sales, courseware
licenses, consulting service revenues and hardware revenues. The Company
recognizes revenues on off-the-shelf product and hardware sales as units are
shipped. The Company permits the customer the right to return the courseware
within 30 days of purchase. In the event that sales returns are material, the
Company adjusts revenue accordingly. Revenues from sales of custom training
programs that are developed and produced under specific contracts with
customers, including contracts with affiliated joint ventures and limited
partnerships, are recognized on the percentage of completion basis as related
costs are incurred during the production period. Gross revenues from sales of
affiliated joint venture and limited partnership copyrighted courseware are
included in the Company's financial statements, as are related production,
selling and distribution costs. Amounts due to co-owners of the affiliated
venture/partnerships related to such courseware sales are reflected as royalties
and included in cost of sales in the financial statements. Revenues from
courseware licenses are recognized upon the delivery of the initial copy of each
product licensed, and related duplication costs are accrued based on estimates.
Revenues from consulting services are recognized as services are performed.
2) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirement for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of Statement No. 128 on the
calculation of primary and fully diluted earnings per share for the quarters
ended March 31, 1997 and June 30, 1997 is not expected to be material.
5
3) ACCOUNTS RECEIVABLE
Accounts receivable include the following:
June 30, December 31,
1997 1996
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Trade accounts receivable $4,583,007 $6,738,762
Current portion of long-term receivable, net (Note 3) 845,934 1,012,287
Unbilled contract receivables 1,031 182,025
Less allowance for doubtful accounts (399,944) (296,148)
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Trade accounts receivable, net 5,030,028 7,636,926
Other receivables 41,577 4,140
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$5,071,605 $7,641,066
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4) LONG-TERM RECEIVABLE
During the second quarter of 1996, the Company entered into a contract with the
DeKalb County (GA) Board of Education ("DeKalb") for the sale of a district-wide
multicopy courseware license, hardware and certain future services. The total
contract amount of $5,060,000 is payable in four installments, $1,535,000 upon
contract execution, and the remaining $3,525,000 in three equal annual
installments beginning in June, 1997. The June 1997 installment was received in
accordance with the provisions of the contract and the effect of the payment is
reflected in the financial statements. The long-term portion of the net
receivable has been discounted assuming a 6% interest rate.
Components of long-term receivable include the following:
June 30,
1997
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Receivable from DeKalb County (GA) Board of Education $ 2,350,000
Related dealer fees payable (325,040)
Less amounts classified as current, net of related dealer fees (845,934)
Less amount representing interest (150,143)
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$ 1,028,883
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5) NOTE PAYABLE TO BANK
At June 30, 1997, the Company had no amounts outstanding relating to its
$3,000,000 revolving bank line of credit, which bears interest at the bank's
prime lending rate. Borrowings under the line are collateralized by the
Company's accounts receivable and inventory.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
a) Revenues
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For the quarter ending June 30, 1997, the Company recorded revenues of
$4,487,000 as compared to $7,605,000 for the same period in 1996. The decrease
of $3,118,000 or 41% is attributable to the second quarter 1996 sale of a
district-wide multicopy courseware license to the DeKalb County (GA) Board of
Education. The 1996 sale to DeKalb County included courseware, hardware and
future services and was valued at $5,060,000, of which $3,838,000 was recorded
during the second quarter. With the exception of the DeKalb sale, revenues
increased over the same period in 1996 by $720,000 or 19%. The increase was
principally due to the acquisition of Anderson Soft-Teach in December 1996 and
the Company's expanded international operations. International revenues for the
second quarter of 1997 were $763,000 as compared with $339,000 for the same
period in 1996, representing an increase of $424,000 or 125%.
For the quarter ending June 30, 1997, sales of the Company's off-the-shelf
multimedia training products were $3,907,000, representing a decrease of
$1,926,000 or 33% from 1996. Again, without the impact of the second quarter
1996 DeKalb sale, the Company realized an increase of $1,492,000 or 62% over
last year. Hardware sales for the second quarter of 1997 were $394,000 as
compared with $1,388,000 in 1996, a decrease of $994,000 or 72%, $420,000 of
which is attributable to DeKalb. Revenues from custom courseware and services
were $262,000 for the second quarter as compared with $164,000 for the second
quarter of 1996, an increase of $98,000 or 60%.
Total revenues for the six months ended June 30, 1997 were $9,209,000 as
compared with $11,321,000 for the same period in 1996. The decrease of
$2,112,000 is again explained by the effect on 1996 results of the DeKalb sale.
Without the impact of the 1996 DeKalb sale, revenues increased over 1996 by
$1,726,000 or 23%. Off-the-shelf courseware revenues for the six month period
were $8,049,000 as compared with $8,404,000 in 1996, a decrease of $355,000 or
4% (an increase of $3,063,000 or 61% without DeKalb).
Revenues from the Company's International division, which are included in the
aforementioned total, amounted to $1,693,000 for the first six months of 1997 as
compared to $895,000 for the same period in 1996, representing an increase of
$798,000 or 89%. The increase was principally due to the acquisition of Acumen
People and Productivity in the third quarter of 1996 and improving performance
at Activ Training, Ltd., ITC's London-based subsidiary.
Hardware revenues for the first six months of 1997 were $624,000 as compared
with $1,837,000 in 1996, a decrease of $1,213,000 or 66%. Revenues from custom
courseware and services were $715,000 for the first six months of 1997 as
compared to $761,000 in 1996, a decrease of $46,000 or 6%.
b) Costs and Expenses
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Gross margin for the second quarter of 1997 was $2,199,000 as compared with
$2,833,000 in 1996, a decrease of $634,000 or 22%. However, gross margin for
the six months ended June 30, 1997 totaled $4,538,000, an increase of $635,000
or 16% over the comparable period in 1996. The lower gross margin for the
second quarter of 1997 is primarily attributable to the favorable impact the
DeKalb sale had on second quarter 1996 operating results. On a year-to-date
basis, the Company's improved gross margins can be attributed to a higher
percentage of courseware sales relative to total sales as well as lower cost of
sales associated with material costs, product amortization and dealer fees.
7
Operating expenses for the second quarter of 1997 were $3,428,000 as compared
with $2,410,000 in the same period of 1996. The increase of $1,018,000 is
primarily due to the operating costs associated with the Company's 1996
acquisitions and expanded international operation. Actions have been taken to
consolidate the Anderson operation with the Company's core business and are
expected to result in operating cost savings during the second half of 1997 and
beyond. However, during the second quarter of 1997, the Company incurred
approximately $300,000 in operating expenses associated with the consolidation
efforts. Savings from the consolidation efforts during the remainder of 1997
are expected to offset the additional costs incurred during the second quarter.
The overall impact of the cost cutting measures is expected to yield annualized
savings of approximately $1.2 million, beginning in 1998.
c) Net Loss
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Operations in the second quarter of 1997 resulted in a loss before taxes of
$1,171,000 as compared with income before taxes of $581,000 in 1996. This loss
is partially offset by an interim tax benefit, resulting in a net loss of
$749,000 or $0.19 per share as compared with net income of $349,000 or $0.10 per
share in the second quarter of 1996. For the six months ended June 30, 1997,
the loss before taxes amounted to $1,872,000 compared to a loss of $82,000 in
1996. On an after-tax basis, the first six months of 1997 resulted in a net
loss of $1,204,000 or $0.31 per share as compared to a net loss of $49,000 or
$0.01 per share in 1996.
d) Cash Flow, Liquidity and Capital Resources
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Working capital at June 30, 1997 was $4,649,000 compared to $6,056,000 at
December 31, 1996, a decrease of $1,407,000. The decrease is primarily due to
an overall reduction in accounts receivable attributable to the collection of
the second payment on the DeKalb contract and increased focus on collections.
Cash proceeds in turn have been used to fund ongoing product development and to
reduce debt acquired in the Anderson acquisition.
Cash flows from operations were $2,128,000 for the first six months of 1996, as
the effect of non-cash charges totaling $967,000 and reductions in receivables
of $3,027,000 more than offset the net loss of $1,204,000 and increases in other
working capital accounts of $661,000. Cash provided by operations were offset
by investments totaling $1,527,000 for the ongoing development of MS Office '97
products and certain capital expenditures. Cash used in financing activities
includes the repayment of the line of credit assumed in the acquisition of
Anderson.
Management believes that the cash generated from operations combined with the
Company's existing resources and available line of credit are adequate to meet
ITC's working capital needs and other financing requirements for 1997.
8
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its annual meeting of shareholders on May 6, 1997. There
were three agenda items submitted to a vote of security holders, including the
election of two directors to the Company's Board of Directors: (i) Steven L.
Roden was elected to serve on the Board for a term of three years. The number
of votes cast in favor of Mr. Roden's election was 3,558,640, with 49,219 votes
against and 32,571 abstaining; (ii) James H. Walton was elected to serve on the
Board for a term of three years. The number of votes cast in favor of Mr.
Walton's election was 2,969,339, with 636,473 votes against and 34,618
abstaining.
(b) The shareholders approved the amendment to the Articles of Incorporation,
changing the Company's name to ITC Learning Corporation. The number of votes
cast in favor of this proposal was 3,475,162, with 143,355 votes against and
21,913 abstaining.
(c) The shareholders ratified the appointment of Ernst & Young LLP as
independent auditors of the Company for the fiscal year ending December 31,
1997. There were 3,585,926 votes cast in favor of this item, with 48,312 votes
against and 6,192 abstaining.
No other matters were submitted to the security holders for a vote.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See attached Exhibit Index.
(b) Reports on Form 8-K
None.
9
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ITC LEARNING CORPORATION
(Registrant)
BY /s/ James H. Walton DATE 8/1/97
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James H. Walton
Chief Executive Officer
BY /s/ Carl D. Stevens DATE 8/1/97
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Carl D. Stevens
President and Chief Operating Officer
BY /s/ Christopher E. Mack DATE 8/1/97
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Christopher E. Mack
Vice President of Finance and Administration
and Treasurer
BY /s/ John D. Dobey DATE 8/1/97
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John D. Dobey
Controller
10
INDEX TO EXHIBITS
EXHIBIT PAGE
NO. DESCRIPTION NO.
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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 ("SEC")
(Commission File No. 33-61393).
3.2 Restated By-Laws of the Company, incorporated by reference to the
Company's Form 10-KSB for the fiscal year ended December 31, 1995,
filed March 15,1996 with the SEC (Commission File No. 0-13741).
3.3 Articles of Amendment
4.1 Specimen Certificate for ITC Common Stock
10.6 Employment Agreements with Management
(e) Steven L. Roden
27.1 Financial Data Schedule