1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A AMENDMENT NUMBER 1 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1999 ---------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- -------- COMMISSION FILE NUMBER 0-20842 ------- TRO LEARNING, INC. ------------------ (Exact name of Registrant as specified in its charter) Delaware 36-3660532 - - -------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1721 Moon Lake Boulevard, Suite 555, Hoffman Estates, IL 60194 - - -------------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (847) 781-7800 -------------- Not Applicable -------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, $.01 par value 6,415,340 shares - - ---------------------------- ---------------- Class Outstanding as of March 1, 1999 (This document contains 12 pages) 1 2 TRO LEARNING, INC. AND SUBSIDIARIES FORM 10-Q/A REASON FOR AMENDMENT The Registrant hereby amends Part I. Item 1. of its Quarterly Report on Form 10-Q for the quarterly period ended January 31, 1999. The Registrant has restated its consolidated financial statements for the quarters ended January 31, 1999, April 30, 1999, and July 31, 1999 to (i) account for the beneficial conversion feature associated with the Series C Convertible Redeemable Preferred Stock ("Series C Preferred") issued in January 1999, (ii) remove the accretion to the stated value of the Series C Preferred previously charged to accumulated deficit given that the mandatory redemption rights are contingent rights, and (iii) present the outstanding common stock obtained upon conversion, which is also subject to the mandatory redemption features of the Series C Preferred, outside of stockholders' equity. See Notes 4 and 8 of Notes to Consolidated Financial Statements. INDEX Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited): Consolidated Statements of Income for the Three Months Ended January 31, 1999 and 1998.................................................3 Consolidated Balance Sheets as of January 31, 1999 (Restated) and October 31, 1998.............................................4 Consolidated Statements of Cash Flows for the Three Months Ended January 31, 1999 and 1998.................................................5 Notes to Consolidated Financial Statements (Restated)........................................6 SIGNATURES....................................................................................................12 2 3 PART I. FINANCIAL INFORMATION TRO LEARNING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED JANUARY 31, ---------------------------------------- 1999 1998 ------------------ ------------------ Revenues by product line: PLATO(R)Education............................................. $ 5,661 $ 6,043 Aviation Training............................................. --- 1,160 ------------------ ------------------ Total revenues............................................ 5,661 7,203 Cost of revenues ................................................. 961 1,590 ------------------ ------------------ Gross profit.............................................. 4,700 5,613 ------------------ ------------------ Operating expenses: Selling, general and administrative........................... 5,546 5,942 Product development and customer support...................... 1,336 2,022 ------------------ ------------------ Total operating expenses.................................. 6,882 7,964 ------------------ ------------------ Operating loss....................................... (2,182) (2,351) Interest expense ................................................. 615 464 Interest income and other expense, net............................. 49 86 ------------------ ------------------ Loss before income taxes........................................... (2,846) (2,901) Credit for income taxes............................................ --- --- ------------------ ------------------ Net loss ................................................. $ (2,846) $ (2,901) ================== ================== Earnings per share: Basic and diluted............................................. $ (0.44) $ (0.45) ================== ================== Weighted average common shares outstanding: Basic and diluted............................................. 6,415 6,400 ================== ================== See Notes to Consolidated Financial Statements 3 4 TRO LEARNING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) JANUARY 31, OCTOBER 31, 1999 1998 ------------ ------------ (RESTATED) ASSETS Current assets: Cash and cash equivalents.......................................... $ 399 $ 466 Accounts receivable, less allowances of $ 979 and $920, respectively............................................ 13,205 16,427 Inventories........................................................ 656 648 Prepaid expenses and other current assets.......................... 901 1,121 -------------- --------------- Total current assets........................................... 15,161 18,662 Equipment and leasehold improvements, less accumulated depreciation of $3,355 and $3,204, respectively.................... 1,194 1,073 Product development costs, less accumulated amortization of $5,305 and $4,768, respectively.................................... 6,553 6,380 Other assets............................................................ 1,056 1,292 -------------- --------------- $ 23,964 $ 27,407 ============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................... $ 1,583 $ 2,895 Accrued employee salaries and benefits............................. 1,642 2,647 Accrued liabilities................................................ 1,595 2,130 Revolving loan..................................................... 7,438 9,321 Deferred revenue................................................... 2,721 3,290 -------------- --------------- Total current liabilities...................................... 14,979 20,283 Long-term debt.......................................................... 3,050 3,050 Deferred revenue, less current portion.................................. 470 405 -------------- --------------- Total liabilities.............................................. 18,499 23,738 -------------- --------------- Convertible redeemable preferred stock, net of unamortized discounts and issuance costs; $10,000 stated value per share; 540 shares authorized, issued and outstanding; involuntary liquidation value of $6,210 at January 31, 1999 (restated)........................... 3,358 --- Stockholders' equity: Common stock, $.01 par value, 25,000,000 shares authorized; 6,535,000 shares issued and 6,415,000 shares outstanding....... 64 64 Paid-in capital (restated)......................................... 24,196 22,956 Treasury stock at cost, 120,000 shares............................. (1,176) (1,176) Accumulated deficit................................................ (20,438) (17,592) Accumulated other comprehensive income............................. (539) (583) -------------- --------------- Total stockholders' equity..................................... 2,107 3,669 -------------- --------------- $ 23,964 $ 27,407 ============== =============== See Notes to Consolidated Financial Statements 4 5 TRO LEARNING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS) THREE MONTHS ENDED JANUARY 31, ---------------------------------- 1999 1998 --------------- ---------------- Cash flows from operating activities: Net loss................................................................ $ (2,846) $ (2,901) --------------- ---------------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization....................................... 681 661 Provision for doubtful accounts..................................... 312 75 Loss on disposal of fixed assets.................................... 2 --- Changes in assets and liabilities: Decrease in accounts receivable................................ 2,911 1,361 Increase in inventories........................................ (8) (50) Decrease in prepaid expenses and other current and noncurrent assets.......................................... 456 169 Increase (decrease) in accounts payable........................ (1,312) 1,478 Decrease in accrued liabilities and accrued employee salaries and benefits............................................... (1,540) (1,170) Decrease in deferred revenue................................... (504) (15) --------------- ---------------- Total adjustments.......................................... 998 2,509 --------------- ---------------- Net cash used in operating activities.................. (1,848) (392) --------------- ---------------- Cash flows from investing activities: Capital expenditures.................................................... (277) (123) Capitalization of product development costs............................. (709) (742) --------------- ---------------- Net cash used in investing activities............................... (986) (865) --------------- ---------------- Cash flows from financing activities: Net proceeds from short-term borrowings................................. 558 641 Book overdraft.......................................................... --- 211 Repayment of long-term debt............................................. (2,441) (100) Net proceeds from issuance of convertible preferred stock............... 4,578 --- Net proceeds from issuance of common stock.............................. 20 38 --------------- ---------------- Net cash provided by financing activities........................... 2,715 790 --------------- ---------------- Effect of foreign currency on cash........................................... 52 (70) --------------- ---------------- Net decrease in cash and cash equivalents.................................... (67) (537) Cash and cash equivalents at beginning of period............................. 466 537 --------------- ---------------- Cash and cash equivalents at end of period................................... $ 399 $ --- =============== ================ Cash paid for interest expense............................................... $ 447 $ 674 =============== ================ See Notes to Consolidated Financial Statements 5 6 TRO LEARNING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Nature of Business: TRO Learning, Inc. and its subsidiaries (the "Company") develop and market microcomputer-based, interactive, self-paced instructional systems. The Company's PLATO Learning Systems are marketed primarily to educational institutions and private industry. Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Form 10-K for the fiscal year ended October 31, 1998. The financial information furnished reflects, in the opinion of the Company, all adjustments of a normal, recurring nature necessary for a fair statement of the results for the interim periods presented. Because of cyclical and other factors, the results for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year. Revenue Recognition: Revenue from the sale of education and training courseware licenses, computer hardware, and related support services, is recognized when courseware, hardware, and related services are delivered. Post contract support is recognized ratably over the contract period. Deferred revenue represents the portion of billings made or payments received in advance of services being performed or products being delivered. Product Development, Enhancement, and Maintenance Costs: The Company develops education and training products, referred to hereafter as courseware products. Costs incurred in the development of the Company's current generation courseware products and related enhancements and routine maintenance thereof are expensed as incurred. All costs incurred by the Company in establishing the technological feasibility of new courseware products to be sold, leased, or otherwise marketed are expensed as incurred. Once technological feasibility has been established, costs incurred in the development of new generation courseware products are capitalized. 6 7 TRO LEARNING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: Product Development, Enhancement, and Maintenance Costs, Continued Amortization is provided over the estimated useful life of the new courseware products, generally three years, using the straight-line method. Amortization begins when the product is available for general release to customers. Unamortized capitalized costs determined to be in excess of the net realizable value of the product are expensed at the date of such determination. Earnings Per Share: Basic earnings per share is calculated based only upon the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated based upon the weighted average number of common and, where dilutive, potential common shares outstanding during the period. Potential common shares include options, warrants and convertible securities. Comprehensive Income: As of November 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), as required. SFAS 130 establishes new rules for the reporting of comprehensive income and its components. Foreign currency translation adjustments, which prior to adoption were reported separately in stockholders' equity, are required to be included in other comprehensive income in the consolidated financial statements. The adoption of SFAS 130 does not impact the Company's net income (loss) or total stockholders' equity. Reclassifications: Certain prior year amounts have been reclassified in the consolidated financial statements to conform to the current year presentation. 7 8 TRO LEARNING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. ACCOUNTS RECEIVABLE: Accounts receivable include net installment receivables of $7,734,000 and $10,496,000 at January 31, 1999 and October 31, 1998, respectively. Installment receivables billable after one year were $348,000 and $575,000 at January 31, 1999 and October 31, 1998, respectively, and are included in other assets on the consolidated balance sheets. 3. DEBT: Revolving Loan: At January 31, 1999, the Company's revolving loan agreement, as amended, provided for a maximum $18 million line of credit through February 28, 1999. The agreement also provided for additional line of credit borrowings up to a maximum $4,500,000 from time to time during certain periods of the remaining term of the agreement. Substantially all of the Company's assets were pledged as collateral under the agreement. Borrowings under the line were limited by the available borrowing base, as defined, consisting primarily of certain accounts receivable and inventory, and interest was at the prime rate plus 1.5% to 2%, as defined. At January 31, 1999, borrowings of $7,438,000 were outstanding at an interest rate of 9.5%. In addition, the revolving loan agreement provided for a $3 million term loan at an interest rate of 15%. The remaining term loan balance was repaid during the first quarter of 1999. New Revolving Loan Agreement: On February 26, 1999, the Company entered into a new revolving loan agreement, with a new lender, that provides for a maximum $15 million line of credit through February 26, 2002. Substantially all of the Company's assets are pledged as collateral under the agreement. Borrowings are limited by the available borrowing base, as defined, consisting of certain accounts receivable and inventory, and bear interest at the prime rate plus 1% or the London Interbank Offered Rate (LIBOR) plus 3%, as determined by the Company pursuant to the agreement. A commitment fee is payable quarterly based on the unused portion of the line of credit. The agreement contains restrictive financial covenants (including Minimum Net Worth, Minimum Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), and Minimum Interest Coverage) and restrictions on borrowings, asset sales and dividends, as defined. Upon entering the new agreement, the Company terminated its previous revolving loan agreement. All outstanding borrowings and accrued interest were repaid with funds advanced under the new line of credit. 8 9 TRO LEARNING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. DEBT, CONTINUED: Long-term Debt: At January 31, 1999, the Company's long-term debt consisted of $3,050,000 of 10% subordinated convertible debentures with interest payable semiannually. At the option of the holder, the debentures are convertible into the Company's common stock at $9.60 per share. The Company may redeem the debentures at 101% of principal, plus interest, subject to certain terms and conditions. The debentures have a scheduled maturity in 2004 and are subject to mandatory redemption at 25% of principal annually beginning in 2001. 4. CONVERTIBLE REDEEMABLE PREFERRED STOCK (RESTATED): On January 13, 1999, the Company issued 540 shares of its Series C Convertible Redeemable Preferred Stock (the "Series C Preferred") and warrants to purchase 125,000 shares of the Company's common stock at $9.51 per share for an aggregate purchase price of $5 million. The Company received proceeds of $5,000,000 and paid offering costs of $422,000, resulting in net proceeds of $4,578,000 for the Series C Preferred and warrants. The warrants were assigned a value of $394,000 resulting in an increase to paid in capital and a reduction to the carrying value of the Series C Preferred. Each share of the Series C Preferred has a par value of $0.01 and a stated value of $10,000. The Series C Preferred ranks senior to the Company's common stock, has no voting rights, and is not entitled to any dividends. The Series C Preferred, as amended, is convertible after 90 days into shares of the Company's common stock, at the option of the holder, and may be converted up to ten years from the issue date. Conversion is mandatory for all such securities still outstanding on January 13, 2009. The number of common shares to be issued is determined by dividing the stated value of the Series C Preferred being converted by the conversion price. The conversion price of the Series C Preferred is equal to the lower of (a) $9.51 per share or (b) the applicable percentage of the average of the three lowest closing prices of the Company's common stock during the 30 trading days immediately prior to the date of conversion. The applicable percentage decreases over time from 90% (after 90 days) to 82% (after 631 days from issuance). The minimum conversion price is $4.69 per share, subject to adjustment based on the Company's financial performance. If fiscal year 1999 pretax income does not meet established thresholds, the minimum conversion price will be adjusted to as low as $3.17 per share. Certain conversion restrictions exist in the event such conversion would result in (a) the holders' beneficial ownership being more than 4.99% of the Company's outstanding common stock or (b) the issuance of more than 20% of the Company's outstanding common stock. 9 10 TRO LEARNING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. CONVERTIBLE REDEEMABLE PREFERRED STOCK (RESTATED), CONTINUED: The conversion terms of the Series C Preferred include a beneficial conversion feature at the issue date. The most beneficial conversion price was determined to be 82% of the average of the three lowest closing prices of the Company's common stock during the 30 trading days prior to the issue date. As of the issue date, the Company allocated approximately $826,000 to the beneficial conversion feature resulting in an increase to paid in capital and a reduction to the carrying value of the Series C Preferred. The beneficial conversion feature is being recognized as a deemed dividend to the preferred stockholders over the 631 day period from the issue date to the date of the most beneficial conversion percentage using the greater of the effective interest method or the amount the holder can realize at each reporting date. The Company may redeem the Series C Preferred in cash at any time, provided the average closing price of the Company's common stock during the defined period prior to such redemption is greater than $15.85 per share. The redemption price is equal to the applicable percentage of the average closing price of the Company's common stock during the defined period prior to redemption. The applicable percentage is adjusted over time from 125% to 156%. The Series C Preferred, and shares of the Company's common stock obtained through conversions of the Series C Preferred and currently held by the holder, are subject to redemption in cash, at the option of the holder, upon certain events, as defined, including a change in control of the Company and a trading suspension of the Company's common stock on NASDAQ or another market. The redemption price is equal to the greater of (a) 115% of the stated value or (b) the number of common shares that would be received upon conversion at such time multiplied by the closing price of the Company's common stock prior to redemption, as defined. As these events are outside of the Company's control and redemption would be in cash, the Series C Preferred, and shares of the Company's common stock obtained through conversions of the Series C Preferred and currently held by the holder, are presented between total liabilities and stockholders' equity on the consolidated balance sheets, as required by the Securities and Exchange Commission. As of January 31, 1999, there had been no conversions of the Series C Preferred given the 90 day holding period requirement. The initial fair value of the Series C Preferred was $3,358,000 at the issue date (proceeds of $5,000,000 reduced by offering costs of $422,000, warrant valuation of $394,000, and the beneficial conversion feature of $826,000) and is presented outside of stockholders' equity given its mandatory redemption terms. The carrying value of the Series C Preferred will be increased for amortization of the beneficial conversion feature as discussed above. There was no amortization for the three months ended January 31, 1999. 5. INCOME TAXES: No tax benefit has been recorded at January 31, 1999 for the first quarter loss, as the Company is unable to demonstrate that, more likely than not, it will be able to realize its deferred tax asset. 10 11 TRO LEARNING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. COMPREHENSIVE INCOME (LOSS): Total comprehensive loss was as follows (in thousands): THREE MONTHS ENDED --------------------------------- JANUARY 31, JANUARY 31, 1999 1998 ---------------- ---------------- Net loss.......................................... $ (2,846) $ (2,901) Foreign currency translation adjustments.......... 44 (87) ---------------- ---------------- Total comprehensive loss................... $ (2,802) $ (2,988) ================ ================ Accumulated other comprehensive income is included as a separate component of stockholders' equity on the consolidated balance sheets. 7. EARNINGS PER SHARE: Since the Company incurred a net loss for all periods presented, potential common shares are antidilutive and excluded from the calculation of diluted earnings per share. 8. QUARTERLY RESTATEMENTS: The Company has restated its consolidated financial statements for the quarters ended January 31,1999, April 30, 1999, and July 31, 1999 to (i) account for the beneficial conversion feature associated with the Series C Preferred (see Note 4), (ii) remove the accretion to the stated value of the Series C Preferred previously charged to accumulated deficit given that the mandatory redemption rights are contingent rights, and (iii) present the outstanding common stock obtained upon conversion, which is also subject to the mandatory redemption features of the Series C Preferred, outside of stockholders' equity. The effect of the restatements on the consolidated balance sheet at January 31, 1999 was as follows (in thousands): CONVERTIBLE REDEEMABLE PREFERRED PAID IN STOCK CAPITAL ---------- ------- Balance, previously reported ........................ $ 4,184 $23,370 Adjustment-beneficial conversion feature ........... (826) 826 ------- ------- Balance, restated .................................. $ 3,358 $24,196 ======= ======= 11 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 9, 2000. TRO LEARNING, INC. By /s/William R. Roach -------------------------------- Chairman of the Board and Chief Executive Officer (principal executive officer) /s/John Murray -------------------------------- President, Chief Operating Officer and Acting Chief Financial Officer (principal financial officer) /s/Mary Jo Murphy -------------------------------- Vice President, Corporate Controller and Chief Accounting Officer (principal accounting officer) 12