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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 March 31, 1998
Commission File Number 0-13741
ITC LEARNING CORPORATION
(Exact name of small business issuer as specified in its charter)
Maryland 52-1078263
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
13515 Dulles Technology Drive, Herndon, Virginia 20171
(Address of principal executive offices)
(703) 713-3335
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 March 31, 1998, 3,867,409 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 Ended March 31, 1998 and 1997 1
Condensed Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II
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Item 1 Legal Proceedings 14
Item 2 Changes in Securities 14
Item 3 Defaults Upon Senior Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
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PART I
ITEM 1. FINANCIAL STATEMENTS
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For Three Months Ended March 31,
1998 1997
---- ----
Net revenues $ 2,834,698 $ 4,721,977
Cost of sales 1,324,997 2,198,988
----------- -----------
Gross margin 1,509,701 2,522,989
Selling, general and administrative expense 2,413,416 3,289,400
Equity in earnings of affiliates (62,800) (25,514)
----------- -----------
Loss before interest and income taxes (840,915) (740,897)
Interest income, net 87,739 39,159
----------- -----------
Loss before income taxes (753,176) (701,738)
Income tax benefit -- (246,000)
----------- -----------
Net loss $ (753,176) $ (455,738)
=========== ===========
Loss per common share (note 2) $ (0.19) $ (0.12)
=========== ==========
Weighted average number of
common shares outstanding 3,876,171 3,897,011
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See accompanying notes to condensed consolidated financial statements.
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ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1998 1997
---- ----
(Unaudited)
Current assets:
Cash and cash equivalents $ 2,648,118 $ 4,885,672
Accounts receivable, net (note 3) 4,297,260 6,167,592
Due from affiliates 150,445 33,092
Inventories 307,021 357,374
Prepaid expenses 113,592 123,042
Income taxes receivable 175,206 175,206
Other current assets 7,522 11,912
------------ -----------
Total current assets 7,699,164 11,753,890
Long-term receivable (note 4) 854,175 836,882
Note receivable (note 5) 914,573 922,940
Property and equipment:
Video and computer equipment 1,439,484 1,336,735
Furniture and fixtures 143,261 125,259
Leasehold improvements 21,313 21,313
------------ -----------
1,604,058 1,483,307
Less accumulated depreciation and amortization (913,393) (802,989)
------------ -----------
Net property and equipment 690,665 680,318
Capitalized program development costs, net 3,702,994 3,947,086
Investment in affiliate (note 6) 1,000,000 --
Intangible assets (note 7) 3,385,411 1,631,299
Other 12,190 12,340
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Total assets $ 18,259,172 $19,784,755
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See accompanying notes to condensed consolidated financial statements.
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ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31 December 31,
1998 1997
---- ----
(Unaudited)
Current liabilities:
Line of credit (note 8) $ -- $ --
Current installments of long-term debt (note 9) 100,000 100,000
Accounts payable 774,970 740,353
Due to affiliates 251,689 293,561
Accrued compensation and benefits 1,143,813 1,281,691
Deferred revenues 340,386 422,787
Other accrued expenses 889,767 1,236,012
Income taxes payable 362,067 335,102
------------ -----------
Total current liabilities 3,862,692 4,409,506
Deferred lease obligations 55,385 60,296
Long-term debt (note 9) 378,922 400,000
------------ -----------
Total liabilities 4,296,999 4,869,802
Stockholders' equity:
Common stock, $.10 par value, 12,000,000 shares
authorized; 3,867,409 and 3,897,074 shares
issued and outstanding in 1998 and
1997, respectively 386,741 389,708
Additional paid-in capital 15,875,495 16,090,816
Note receivable from ESOP (516,177) (541,677)
Retained earnings (deficit) (1,809,759) (1,056,583)
Accumulated other comprehensive income (note 10) 25,873 32,689
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Total stockholders' equity 13,962,173 14,914,953
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Total liabilities and stockholders' equity $ 18,259,172 $19,784,755
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See accompanying notes to condensed consolidated financial statements.
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ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For Three Months Ended March 31,
1998 1997
---- ----
Cash flows from operating activities:
Net loss $ (753,176) $ (455,738)
Reconciling items:
Depreciation and amortization 516,585 697,661
Common stock issued to employees 4,119 938
Foreign currency translation adjustment (6,816) --
Changes in assets and liabilities:
Decrease in accounts receivable 1,871,345 1,290,236
Decrease (increase) in inventories 50,353 (41,593)
Decrease in prepaid expenses 9,450 33,111
Increase in income tax receivable -- (246,000)
Decrease in due to affiliates, net (159,225) (112,507)
Decrease (increase) in other assets 12,907 (2,078)
Increase (decrease) in accounts payable (8,447) 41,027
Increase (decrease) in accrued expenses (552,061) 46,951
Decrease in deferred lease obligations (4,911) (2,473)
Net effect of acquired operating assets
and liabilities 42,297 --
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Net cash provided by operating activities 1,022,420 1,249,535
Cash flows from investing activities:
Acquisition, net of cash acquired (1,485,338) --
Investment in affiliate (1,000,000) --
Capitalized program development costs (120,839) (439,356)
Capital expenditures (98,624) (175,170)
----------- -----------
Net cash used in investing activities (2,704,801) (614,526)
Cash flows from financing activities:
Repayments under line-of-credit (25,000) (515,000)
Principal payments under term loans (21,078) (31,459)
Repurchase of common stock (534,595) --
Employee stock option note collections 25,500 24,449
----------- -----------
Net cash used in financing activities (555,173) (522,010)
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Net increase (decrease) in cash (2,237,554) 112,999
Cash and cash equivalents at beginning of period 4,885,672 2,697,566
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Cash and cash equivalents at end of period $ 2,648,118 $ 2,810,565
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See accompanying notes to condensed consolidated financial statements.
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ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1) SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The condensed consolidated financial statements of ITC Learning Corporation
("ITC" or the "Company") include the accounts of its wholly owned subsidiaries,
Activ Training, Ltd. ("Activ"), ITC Australasia Pty. Ltd. ("ITCA"), Turn-Key
Training Technologies, Inc. ("Turn-Key"), and ComSkill Learning Centers, Inc.
("ComSkill"). Significant intercompany accounts and transactions have been
eliminated in consolidation. In the opinion of management 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. Certain prior year amounts have been reclassified to improve
comparability to current year presentation. The interim condensed consolidated
financial statements should be read in conjunction with the Company's December
31, 1997 and 1996 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
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue
Recognition, which supercedes SOP 91-1. The provisions of SOP 97-2 took effect
in fiscal years beginning after December 15, 1997 and clarify rules of revenue
recognition related to customer acceptance, upgrades and post-contract customer
support. The Company implemented SOP 97-2 for transactions entered into
beginning January 1, 1998, and has determined that there has been no material
impact on revenue recognized under these provisions.
In March 1998, the AICPA issued SOP 98-4, which defers for one year the
implementation of certain provisions of SOP 97-2. The issuance of SOP 98-4 had
no material effect on revenue recognized in the first quarter of 1998.
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 when delivery
has occurred, collection is probable and the fee is fixed. 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
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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) NET LOSS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings
Per Share ("Statement 128"). Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to Statement 128
requirements.
3) ACCOUNTS RECEIVABLE
Accounts receivable include the following:
March 31, December 31,
1998 1997
---- ----
Trade accounts receivable $ 3,624,175 $ 5,412,822
Current portion of long-term receivable (note 4) 909,575 909,575
Unbilled contract receivables 46,497 98,162
Less allowance for doubtful accounts (284,116) (254,728)
----------- ------------
Trade accounts receivable, net 4,296,131 6,165,831
Other receivables 1,129 1,761
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$ 4,297,260 $ 6,167,592
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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:
March 31,
1998
----
Receivable from DeKalb County (GA) Board of Education $ 2,350,000
Related dealer fees payable (518,380)
Less amounts classified as current, net of related dealer fees (909,575)
Less amount representing interest (67,870)
------------
$ 854,175
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5) NOTE RECEIVABLE
On November 20, 1997, the Company entered into a stock purchase agreement with
Anderson Holdings, an investor group headed by a former employee of the Company,
to sell all of the Company's stock in Anderson Soft-Teach in exchange for
$4,000,000 cash, a promissory note in the amount of $950,000, and forgiveness of
AST's outstanding intercompany obligations to ITC. Under the terms of the stock
purchase agreement, ITC and AST entered into a reciprocal agreement to sell each
other's products over the remainder of 1997 and all of 1998. Royalties earned by
AST for sales of their products under this agreement are applied to the
principal value of the note. As of March 31, 1998, the note's principal had been
reduced by $35,000 for such royalties. Under the terms of the note, AST will
make quarterly interest payments to ITC at an interest rate of 8% and will pay
the remaining principal balance at the end of four years.
6) INVESTMENT IN AFFILIATE
On January 30, 1998, the Company announced that it invested $1,000,000 in the
stock of Mentor Networks, Inc. ("Mentor"). For its investment, ITC acquired 8%
of the outstanding stock of Mentor with an option to acquire an additional 12%.
The Company had previously acquired the rights to distribute Mentor's products
exclusively in the United States.
7) ACQUISITION
On March 25, 1998, the Company completed the acquisition of Turn-Key Training
Technologies, Inc. ("Turn-Key"), a developer and distributor of
performance-based administrative software. Pursuant to the acquisition
agreement, ITC purchased all of the outstanding stock of Turn-Key for $700,000
in cash. Additionally, ITC paid $600,000 and issued 100,000 shares of its common
stock to Philip L. Camillo, Turn-Key's founder and president, in connection with
a long-term non-competition agreement. As a result of the acquisition, the
Company recorded intangible assets of approximately $1,795,000, consisting of
the non-competition agreement and goodwill. These assets will be amortized over
periods of seven years and ten years, respectively.
8) LINE OF CREDIT
At March 31, 1998, the Company had no amounts outstanding relating to its
$3,000,000 and $250,000 revolving bank lines of credit, which bear interest at
the bank's prime lending rate. Borrowings under the lines are collateralized by
the Company's accounts receivable and inventory.
In connection with the acquisition of Turn-Key, the Company assumed a line of
credit with an outstanding balance of $25,000 at March 25, 1998. In March 1998,
this amount was repaid and the related line of credit was terminated.
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9) LONG-TERM DEBT
Long-term debt consists of the following:
March 31, December 31,
1998 1997
---- ----
8.5% note payable to financial institution due in $ 478,922 $ 500,000
monthly principal and interest installments of
$10,258 through December 2002, collateralized
by the assignment of interest in the shares of
the Company's common stockheld by the
ESOP, accounts receivable, inventory and
property and equipment
Less current installments (100,000) (100,000)
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$ 378,922 $ 400,000
========= =========
10) COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components. Statement 130 requires that foreign currency translation
adjustments, which prior to adoption were reported separately as a component of
stockholders' equity, be included in other comprehensive income. Prior year
financial statements have been reclassified to conform with the requirements of
Statement 130.
The components of comprehensive income, net of related tax, for the three-month
periods ended March 31, 1998 and 1997 are as follows:
March 31, March 31,
1998 1997
---- ----
Net loss $(753,176) $(455,738)
Foreign currency translation adjustment (6,816) --
--------- --------
Comprehensive income (loss) $(759,992) $(455,738)
========== =========
The components of accumulated other comprehensive income, net of related tax, at
March 31, 1998 and December 31, 1997 are as follows:
March 31, December 31,
1998 1997
---- ----
Foreign currency translation adjustment $ 25,873 $ 32,689
========= =========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. Actual
results could differ materially from those described in the forward looking
statements as a result of the risks set forth in the following discussion. These
risks include, but are not limited to, the Company's ability to continue to
expand its sales and marketing organization, the Company's ability to identify
and acquire additional training courseware to add to its product portfolio, the
ability to successfully deploy its courseware over the Internet and corporate
intranets, and the Company's ability to continue to control costs in relation to
further revenues.
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. These include the size and timing of orders and shipments, mix of
ITC-developed products and third party products, the mix of sales from the
Company's direct and indirect distribution channels and the introduction and
acceptance of new products.
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.
OVERVIEW
ITC Learning Corporation ("ITC" or the "Company") is a leading provider of
self-directed multimedia learning solutions that improve employee skills in
business, education and government. The Company's products, which include the
largest library of interactive CD-ROM programs available today, have improved
productivity in major corporations and school systems across America. These
products have also enabled local communities to open learning opportunities to
the general public through the use of multimedia learning centers. The Company
has a worldwide customer base of approximately 5,000 organizations.
During 1997, the Company embarked on a new strategy intended to position itself
as a broad-based education and training integrator of an expanded line of
multimedia training products. In addition to broadening its own courseware
library, ITC intends to seek strategic alliances with publishers of training
software in the areas of customer service, leadership, financial skills and
other "soft skills" training topics. These products represent approximately 75%
of the $60 billion training market, according to International Data
Corporation's August 1997 industry report.
During the first quarter of 1998, the Company continued to concentrate its
efforts on product development and increasing its distribution capabilities. The
Company completed the development of its "Using the Internet" courseware
product, and began development of a network-deliverable version of its
Regulatory Compliance courseware library. In March, the Company positioned
itself to be at the forefront of true multimedia distance learning by entering
into a partnership with NeTpower, Inc. ("NeTpower"). Through the use of
NeTpower's NeTstream(TM) video streaming servers employing Advancing Streaming
Format ("ASF") from Microsoft(R), the Company's courseware content will
eventually be deployed to the desktop via the Internet and intranets without
current technology limitations.
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In an effort to increase its distribution capabilities, the Company made
significant investments in its Business Alliance Partner ("BAP") program which
is intended to increase both market coverage and bring additional industry
knowledgeable resources to drive sales. The Company also invested in expanding
its direct sales force and intends to triple its number of sales representatives
and to continue the expansion of the BAP program in 1998.
In January 1998, the Company announced that it invested $1 million in the stock
of Mentor Networks, Inc. ("Mentor"). For its investment, ITC acquired 8% of the
outstanding stock of Mentor with an option to acquire an additional 12%. The
Company had previously acquired the rights to distribute Mentor's products
exclusively in the United States. Mentor, based in Nova Scotia, specializes in
the development and distribution of interactive multimedia courseware. Mentor's
product offerings include the Microsoft Office suite of PC Skills training
products and Professional Skills training products in the areas of customer
service, telesales, collections, leadership training and human resources.
In March 1998, the Company completed the acquisition of Turn-Key Training
Technologies, Inc. ("Turn-Key"), a developer and distributor of
performance-based training administration software. The purchase price for all
of the outstanding common stock of Turn-Key was $700,000 in cash. ITC also
agreed to employ the founder and president of Turn-Key, and paid him $600,000
cash and issued 100,000 shares of ITC common stock in consideration of his
employment and certain extended non-competition covenants. Turn-Key is located
in Grand Rapids, Michigan and will be operated as a wholly-owned subsidiary of
ITC. Turn-Key's proprietary administration software, AdminSTAR(R), provides
customers with the capability for personal skills assessment, creation of
individual development plans, management of the training process for corporate
training departments, and a broad array of reporting capabilities. Turn-Key's
customers included the Coca Cola Corporation, NASA, Shaw Industries, the U.S.
Department of Defense (The Pentagon) and others.
RESULTS OF OPERATIONS
Revenues
For the quarter ending March 31, 1998, the Company recorded total revenues of
$2,835,000, as compared to revenues for the first quarter of 1997 of $4,722,000,
representing a decrease of $1,887,000 or 40%. The decline in revenues was
primarily attributable to the inclusion of $1,182,000 of sales generated by
Anderson Soft-Teach ("AST") during the first quarter of 1997. ITC sold AST
during the fourth quarter of 1997 for approximately $5.0 million. Total revenues
for the first quarter of 1998 decreased $705,000 or 20% from the first quarter
of 1997, excluding revenues generated by AST. The Company is using proceeds from
the sale of AST to fund investments in new product lines, internally and through
acquisitions and strategic alliances, and in sales and marketing resources.
These investments are intended to enable the Company to implement a shift in
strategy from being strictly a publisher of training courseware to being a
distributor of more broad-based training solutions.
While the Company made many of the investments it planned for the first quarter
of 1998, the expected return in revenue performance was not achieved as quickly
as anticipated. Sales in the Company's core markets declined relative to the
first quarter of 1997, most notably Commercial Sales with a shortfall of
$513,000 and Education & State Government Sales which declined by $203,000. The
remaining shortfalls in revenue compared to last year are attributable to lower
sales from hardware systems and custom courseware products.
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Cost of Sales and Gross Margin
Cost of sales include the cost of materials (CD-ROMs and related packaging and
documentation) and hardware, shipping costs, royalties to third parties, sales
commissions, third party dealer fees, and the amortization of capitalized
program development costs. Total cost of sales for the first quarter of 1998 was
$1,325,000, as compared to $2,199,000 for the first quarter of 1997. Gross
margin for the first quarter of 1998 was $1,510,000, as compared to $2,523,000
for the first quarter of 1997. The decline of $1,013,000 or 40% is completely
attributable to the revenue shortfall. As a percentage of revenue, gross margin
was consistent with first quarter 1997 levels at 53%.
Gross margin percentage remained consistent with first quarter 1997 levels due
primarily to favorable variances experienced in multimedia and hardware material
costs, sales-related commission expenses and lower amortization of program
development costs.
Selling, General & Administrative Expense
Selling expenses consist primarily of salaries of sales personnel and related
overhead costs such as facilities and travel, advertising, and marketing and
promotional expenses. Selling expenses for the quarter ending March 31, 1998,
were $1,037,000, as compared to $1,252,000 for the same period in 1997. The
decrease in selling expense of $215,000 or 17% resulted primarily from the
elimination of $365,000 in expense related to AST incurred during the first
quarter of 1997. Excluding the impact of AST, the Company's selling-related
expenses increased $150,000 or 17% relative to the first quarter of 1997. This
variance reflects the increased level of investment made in the Company's sales
and marketing programs in the first quarter of 1998.
General and administrative expenses consist of the costs of the Company's
executive management and support functions such as customer assurance, product
development and fulfillment, human resources, and finance and administration.
General and administrative expenses for the three months ending March 31, 1998,
were $1,376,000, as compared to $2,037,000 incurred during the first quarter of
1997, representing a decrease of $661,000 or 32%. The decline from first quarter
1997 is primarily due to the sale of AST and the elimination of $336,000 in
overhead related expenses. Additionally, tighter control of discretionary
spending in response to the revenue shortfall and the overall shift in emphasis
in investment from infrastructure to sales and marketing account for the
remaining variance.
Loss before income taxes and net loss
First quarter operations for 1998 resulted in a loss before income taxes of
$753,000. This compares with a loss of $702,000 during the same three-month
period in 1997. The increase in loss before taxes of $51,000 is due principally
to the revenue shortfall, partially offset by overall cost containment and
focused investment on sales and marketing. While the sale of AST had an adverse
impact on the Company's revenues for the first quarter of 1998, the net effect
on the Company's operating results was an increase of $204,000 before income
taxes, based on performance in the first quarter of 1997.
Net of income tax effects, the 1997 loss was $456,000 or $0.12 per share as the
Company recognized an interim tax benefit of $246,000. The tax benefit
represented unused net operating loss ("NOL") carry-backs available at the end
of 1996. As of December 31, 1997, no NOL carry-backs were available and, as a
result, the Company recorded no interim income tax benefit in the first quarter
of 1998. The net loss for the three months ending March 31, 1998 was $753,000 or
$0.19 per share.
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Cash Flow, Liquidity and Capital Resources
Working capital as of March 31, 1998, was $3,836,000, as compared to $7,344,000
at December 31, 1997. The decrease of $3,508,000 or 48% is principally due to
investments in cash to acquire Turn-Key Training Technologies, Inc.
("Turn-Key"), to acquire an equity position in Mentor Networks, Inc. ("Mentor")
and to repurchase the Company's common stock. The total cash outlay for these
transactions was $3,018,000. The remaining reduction in working capital is the
result of changes in working capital accounts.
Net cash provided by operations was $1,022,000 for the first quarter of 1998, as
compared to $1,250,000 for the same period in 1997. The difference of $228,000
is principally attributable to the increased net loss experienced during the
first quarter of 1998. Net loss adjusted for non-cash items (principally
depreciation and amortization) was $239,000 for the three months ending March
31, 1998, as compared to a gain of $243,000 for the first quarter of 1997. A
reduction in accounts receivable of $1,871,000 was largely responsible for the
net operating cash inflow and was partially offset by a decrease in accrued
expenses, principally the payment of dealer fees due on sales from the fourth
quarter of 1997 of $552,000.
Net cash used in investing activities for the first quarter of 1998 was
$2,705,000, as compared to $615,000 for the same period in 1997. Principal
investing activities for the quarter were the aforementioned acquisition of
Turn-Key and investment in Mentor. Amounts capitalized for development of new
courseware programs were $121,000 for the first quarter of 1998, as compared to
$439,000 in 1997. Capital expenditures, principally the purchase of computer
equipment for new sales personnel, were $99,000 in 1998, as compared to $175,000
in 1997.
Net cash used in financing activities was $555,000 for the three months ending
March 31, 1998, as compared to $522,000 in 1997. The major outlay of cash
associated with financing activities was the repurchase of approximately 130,000
shares of the Company's common stock to fund the Company's Employee Stock
Ownership Plan ("ESOP"). Approximately 17,000 of these shares were repurchased
on the open market and the remainder through a private transaction. The stock
repurchase transactions used approximately $535,000 in cash. Since November
1997, the Company has repurchased approximately 230,000 shares of stock in
accordance with its stock repurchase plan. The remaining outflow of cash was due
to the repayment of a line of credit assumed in the acquisition of Turn-Key and
payment of debt associated with the ESOP.
Management believes that the cash generated from operations combined with the
Company's existing resources and available lines of credit are adequate to meet
ITC's working capital needs and other financing requirements for 1998.
SOFTWARE REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue
Recognition, which supercedes SOP 91-1. The provisions of SOP 97-2 took effect
in fiscal years beginning after December 15, 1997 and clarify rules of revenue
recognition related to customer acceptance, upgrades and post-contract customer
support. The Company implemented SOP 97-2 for transactions entered into
beginning January 1, 1998, and has determined that there is no material impact
on revenue recognized under these provisions.
In March 1998, the AICPA issued SOP 98-4, which defers for one year the
implementation of certain provisions of SOP 97-2. The issuance of SOP 98-4 had
no material effect on revenue recognized in the first quarter of 1998.
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IMPLICATIONS OF THE YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
courseware products or internal computer software that have time-sensitive
programs may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. Similar failures in the Company's courseware could result in an
impairment of revenue recognition due to significant future obligations,
impairment of future sales of the Company's products, or potential product
liability.
The Company began an assessment of the implications of the Year 2000 during late
1997. As of March 31, 1998, the process of evaluating the Company's courseware
products was substantially complete. Current versions of the Company's
administrative courseware products have been determined to be Year 2000
compliant and are certifiable as such to current users of the products.
Subsequent versions of these products will continue to be designed to be Year
2000 compliant as well. The Company is also in the process of obtaining written
certifications from the vendors of software products purchased for internal use.
The ongoing impact of Year 2000 compliance on the Company's future results of
operations, capital spending and business operations is not expected to be
material.
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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
None.
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
On January 14, 1998, the Company filed a report on Form 8-K relating to the
appointment of Carl D. Stevens as Chief Executive Officer.
On April 3, 1998, the Company filed a report on Form 8-K relating to the
acquisition of Turn-Key Training Technologies, Inc.
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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/Carl D. Stevens DATE 4/30/98
-------------------------------------- -------------------
Carl D. Stevens, President and
Chief Executive Officer
BY /s/Christopher E. Mack DATE 4/30/98
-------------------------------------- -------------------
Christopher E. Mack, Vice President,
Treasurer, and Chief Financial Officer
BY /s/John D. Dobey DATE 4/30/98
-------------------------------------- -------------------
John D. Dobey, Corporate Controller
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INDEX TO 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 and Exhibit 3.3 to the Company's 10-QSB for the quarter ended June
30, 1997, filed with the Securities and Exchange Commission ("SEC")
(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).
4.1 Specimen Certificate for ITC Common Stock.
4.2 Registration Rights and Shareholders' Agreement, incorporated by
reference to the Company's Form 8-K filed January 13, 1997 with the
SEC (Commission File No. 0-13741).
10.6 Employment Agreements with Management
(d) Robert F. VanStry, incorporated by reference to Pre-Effective
Amendment No. 1 to the Registration Statement on Form SB-2
filed August 16, 1995 with the SEC (Commission File No. 33-61393).
(g) Christopher E. Mack, incorporated by reference to the Company's
10-KSB for the year ended December 31, 1996 filed March 14, 1997
with the SEC (Commission File No. 0-13741).
(i) Carl D. Stevens, incorporated by reference to the Company's 10-QSB
for the quarter ended March 31, 1997 filed April 25, 1997 with the
SEC (Commission File No. 0-13741).
(j) Philip L. Camillo
27.1 Financial Data Schedule