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 APRIL 30, 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
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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 6,442,611 shares
- - ---------------------------- ----------------
Class Outstanding as of June 1, 1999
(This document contains 13 pages)
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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 April 30, 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
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Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Statements of Income for the
Three and Six Months Ended April 30, 1999 (Restated) and 1998................3
Consolidated Balance Sheets as of
April 30, 1999 (Restated) and October 31, 1998...............................4
Consolidated Statements of Cash Flows for the
Six Months Ended April 30, 1999 and 1998.....................................5
Notes to Consolidated Financial Statements (Restated)........................6
SIGNATURES...........................................................................13
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3
PART I. FINANCIAL INFORMATION
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(RESTATED) (RESTATED)
Revenues by product line:
PLATO(R)Education.............................................. $ 9,545 $ 8,391 $ 15,206 $ 14,434
Aviation Training.............................................. -- 1,222 -- 2,382
-------- -------- -------- --------
Total revenues............................................... 9,545 9,613 15,206 16,816
Cost of revenues ................................................. 1,402 1,347 2,363 2,937
-------- -------- -------- --------
Gross profit ................................................ 8,143 8,266 12,843 13,879
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative............................ 6,297 6,418 11,843 12,360
Product development and customer support....................... 1,384 1,812 2,720 3,834
-------- -------- -------- --------
Total operating expenses .................................... 7,681 8,230 14,563 16,194
-------- -------- -------- --------
Operating income (loss).................................... 462 36 (1,720) (2,315)
Interest expense.................................................. 474 490 1,089 954
Interest income and other expense, net............................ 42 62 91 148
-------- -------- -------- --------
Loss before income taxes................................... (54) (516) (2,900) (3,417)
Credit for income taxes........................................... -- -- -- --
-------- -------- -------- --------
Net loss................................................... (54) (516) (2,900) (3,417)
Preferred stock accretion (restated)..................... (670) -- (670) --
-------- -------- -------- --------
Net loss available to common
stockholders (restated).................................. $ (724) $ (516) $ (3,570) $ (3,417)
======== ======== ======== ========
Basic and diluted earnings per share (restated)................... $ (0.11) $ (0.08) $ (0.56) $ (0.53)
======== ======== ======== ========
Weighted average common shares outstanding: 6,439 6,404 6,427 6,402
======== ======== ======== ========
See Notes to Consolidated Financial Statements
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TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
APRIL 30, OCTOBER 31,
1999 1998
-------------- ---------------
(RESTATED)
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 154 $ 466
Accounts receivable, less allowances of $976 and
$920, respectively.................................................... 15,142 16,427
Inventories............................................................. 696 648
Prepaid expenses and other current assets............................... 826 1,121
-------------- ---------------
Total current assets.................................................. 16,818 18,662
Equipment and leasehold improvements, less accumulated
depreciation of $3,518 and $3,204, respectively......................... 1,151 1,073
Product development costs, less accumulated amortization of $5,941
and $4,768, respectively................................................ 6,593 6,380
Other assets............................................................... 1,317 1,292
-------------- ---------------
$ 25,879 $ 27,407
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 2,099 $ 2,895
Accrued employee salaries and benefits.................................. 1,915 2,647
Accrued liabilities..................................................... 1,564 2,130
Revolving loan.......................................................... 8,363 9,321
Deferred revenue........................................................ 2,695 3,290
-------------- ---------------
Total current liabilities............................................. 16,636 20,283
Long-term debt............................................................. 3,050 3,050
Deferred revenue, less current portion..................................... 804 405
-------------- ---------------
Total liabilities..................................................... 20,490 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 April 30, 1999 (restated)............................... 3,978 ---
Stockholders' equity:
Common stock, $.01 par value, 25,000,000 shares authorized; 6,562,000 shares
issued and 6,440,000 shares outstanding at
April 30, 1999; 6,535,000 shares issued and 6,415,000 shares
outstanding at October 31, 1998....................................... 64 64
Paid in capital (restated).............................................. 23,575 22,956
Treasury stock at cost, 122,000 and 120,000 shares, respectively........ (1,186) (1,176)
Accumulated deficit (restated).......................................... (20,492) (17,592)
Accumulated other comprehensive loss.................................... (550) (583)
-------------- ---------------
Total stockholders' equity............................................ 1,411 3,669
-------------- ---------------
$ 25,879 $ 27,407
============== ===============
See Notes to Consolidated Financial Statements
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5
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED
APRIL 30,
------------------------------
1999 1998
------------ -------------
Cash flows from operating activities:
Net loss $ (2,900) $ (3,417)
------------ -------------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization.............................................. 1,465 1,402
Provision for doubtful accounts............................................ 562 375
Disposal of fixed assets................................................... 2 ---
(Increase) decrease in assets:
Accounts receivable...................................................... 723 3,089
Inventories.............................................................. (48) (60)
Prepaid expenses and other current and noncurrent assets................. 270 (282)
Increase (decrease) in liabilities:
Accounts payable......................................................... (796) 596
Accrued liabilities, accrued employee salaries and
benefits and other liabilities......................................... (1,298) (836)
Deferred revenue......................................................... (196) (106)
------------ -------------
Total adjustments...................................................... 684 4,178
------------ -------------
Net cash provided by (used in) operating activities.................. (2,216) 761
------------ -------------
Cash flows from investing activities:
Capital expenditures......................................................... (376) (254)
Capitalization of product development costs.................................. (1,386) (1,409)
------------ -------------
Net cash used in investing activities.................................... (1,762) (1,663)
------------ -------------
Cash flows from financing activities:
Net proceeds from short-term borrowings...................................... 1,482 944
Repayment of long-term debt.................................................. (2,441) (250)
Net proceeds from issuance of convertible redeemable preferred stock......... 4,529 ---
Net proceeds from issuance of common stock................................... 61 103
------------ -------------
Net cash provided by financing activities.................................. 3,631 797
------------ -------------
Effect of foreign currency on cash.............................................. 35 (27)
------------ -------------
Net decrease in cash and cash equivalents....................................... (312) (132)
Cash and cash equivalents at beginning of period................................ 466 537
------------ -------------
Cash and cash equivalents at end of period...................................... $ 154 $ 405
============ =============
Cash paid for interest expense.................................................. $ 856 $ 1,018
============ =============
See Notes to Consolidated Financial Statements
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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.
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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
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TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
2. ACCOUNTS RECEIVABLE:
Accounts receivable include net installment receivables of $9,936,000 and
$10,496,000 at April 30, 1999 and October 31, 1998, respectively. Installment
receivables to be billed after one year were $618,000 and $575,000 at April 30,
1999 and October 31,1998, respectively, and are included in other assets on the
consolidated balance sheets.
3. DEBT:
New Revolving Loan Agreement:
On February 26, 1999, the Company entered into a new revolving loan agreement,
with a new lender, that provides for a maximum $15 million line of credit
through February 26, 2002. Substantially all of the Company's assets are pledged
as collateral under the agreement. Borrowings are limited by the available
borrowing base, as defined, consisting of certain accounts receivable and
inventory, and bear interest at the prime rate plus 1% or the London Interbank
Offered Rate (LIBOR) plus 3%, as determined by the Company pursuant to the
agreement. A commitment fee is payable quarterly based on the unused portion of
the line of credit. The agreement contains restrictive financial covenants
(including Minimum Net Worth, Minimum Earnings Before Interest Taxes
Depreciation and Amortization (EBITDA), and Minimum Interest Coverage) and
restrictions on borrowings, asset sales and dividends, as defined.
Upon entering the new agreement, the Company terminated its previous revolving
loan agreement. All outstanding borrowings and accrued interest were repaid with
funds advanced under the new line of credit.
At April 30, 1999, borrowings of $8,363,000 were outstanding at an interest rate
of 8.2%.
In May 1999, the revolving loan agreement was amended to provide up to $2
million of additional borrowing capacity over the borrowing base through July
31, 1999.
Long-Term Debt:
At April 30, 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.
8
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TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
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 $471,000, resulting in net proceeds of $4,529,000 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.
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
9
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TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
4. CONVERTIBLE REDEEMABLE PREFERRED STOCK (RESTATED), CONTINUED
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 April 30, 1999, there had been no
conversions of the Series C Preferred.
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.
Additional offering costs of $49,000 were recorded for the three months ended
April 30, 1999. The carrying value of the Series C Preferred will be increased
for amortization of the beneficial conversion feature as discussed above.
Amortization was $670,000 for the three and six months ended April 30, 1999.
5. INCOME TAXES:
No tax benefit has been recorded at April 30, 1999 for the current year to date
loss as the Company is unable to demonstrate that, more likely than not, it will
be able to realize its deferred tax asset.
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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 SIX MONTHS ENDED
---------------------------- -----------------------------
APRIL 30, APRIL 30, APRIL 30, APRIL 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net loss.......................................... $ (54) $ (516) $ (2,900) $ (3,417)
Foreign currency translation adjustments.......... (11) 58 33 (29)
------------- ------------- ------------- -------------
Total comprehensive loss................... $ (65) $ (458) $ (2,867) $ (3,446)
============= ============= ============= =============
Accumulated other comprehensive loss 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 April 30,
1999 was as follows (in thousands):
CONVERTIBLE
REDEEMABLE PAID IN ACCUMULATED
PREFERRED STOCK CAPITAL DEFICIT
---------------- ---------------- ----------------
Balance, previously reported...................... $ 4,166 $ 23,419 $ (20,524)
Adjustment - beneficial conversion feature........ (826) 826 ---
Adjustment - amortization of beneficial
conversion feature........................... 670 (670) ---
Adjustment - reverse accretion to stated value.... (32) --- 32
---------------- ---------------- ----------------
Balance, restated................................. $ 3,978 $ 23,575 $ (20,492)
================ ================ ================
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TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
8. QUARTERLY RESTATEMENTS, CONTINUED:
The effect of the restatements on the consolidated statements of income for the
three and six months ended April 30, 1999 was as follows (in thousands, except
per share amounts):
THREE MONTHS SIX MONTHS
ENDED ENDED
APRIL 30, 1999 APRIL 30, 1999
----------------- ------------------
Net loss available to common stockholders,
previously reported.......................... $ (86) $ (2,932)
Adjustment - amortization of beneficial
conversion feature........................... (670) (670)
Adjustment - reverse accretion to stated value.... 32 32
----------------- ------------------
Net loss available to common stockholders,
restated..................................... $ (724) $ (3,570)
================= ==================
Basic and diluted earnings per share,
previously reported.......................... $ (0.01) $ (0.46)
Adjustment - amortization of beneficial
conversion feature.......................... (0.11) (0.11)
Adjustment - reverse accretion to stated value.... 0.01 0.01
----------------- ------------------
Basic and diluted earnings per share, restated.... $ (0.11) $ (0.56)
================= ==================
12
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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)
13