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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 June 30, 1998
Commission File Number 0-13741
ITC LEARNING CORPORATION
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(Exact name of small business issuer as specified in its charter)
Maryland 52-1078263
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
13515 Dulles Technology Drive, Herndon, Virginia 20171
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(Address of principal executive offices)
(703) 713-3335
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Issuer's telephone number
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X; No
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As of June 30, 1998, 3,912,873 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format: Yes ; No X
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TABLE OF CONTENTS
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PART I PAGE
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Item 1 Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 1998 and 1997 1
Condensed Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 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 15
Item 2 Changes in Securities 15
Item 3 Defaults Upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
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PART I
ITEM 1. FINANCIAL STATEMENTS
ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the 3 Months Ended June 30, For the 6 Months Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
Net revenues $ 4,040,257 $ 4,487,286 $ 6,874,955 $ 9,209,263
Cost of sales 2,403,292 2,081,568 3,728,289 4,280,556
----------- ----------- ----------- -----------
Gross margin 1,636,965 2,405,718 3,146,666 4,928,707
Sales and marketing expense 1,687,852 1,294,813 2,724,732 2,546,621
General and
administrative expense 1,593,713 2,339,261 2,970,249 4,376,853
Equity in earnings of affiliates (94,153) (13,600) (156,953) (39,114)
----------- ----------- ----------- -----------
Loss before interest
and income taxes (1,550,447) (1,214,756) (2,391,362) (1,955,653)
Interest income, net 62,896 44,174 150,635 83,333
----------- ----------- ----------- -----------
Loss before income taxes (1,487,551) (1,170,582) (2,240,727) (1,872,320)
Income tax benefit (222,515) (422,000) (222,515) (668,000)
----------- ----------- ----------- -----------
Net loss $(1,265,036) $ (748,582) $(2,018,212) $(1,204,320)
=========== =========== =========== ===========
Net loss per
common share (note 2) $ (0.33) $ (0.19) $ (0.52) $ (0.31)
=========== =========== =========== ===========
Weighted average number
of shares outstanding 3,890,339 3,897,034 3,890,389 3,897,022
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
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ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1998 1997
---- ----
(Unaudited)
Current assets:
Cash and cash equivalents $ 2,220,881 $ 4,885,672
Accounts receivable, net (note 3) 4,686,473 6,167,592
Due from affiliates 163,386 33,092
Inventories 321,183 357,374
Prepaid expenses 491,655 123,042
Income taxes receivable 153,714 175,206
Other current assets 7,491 11,912
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Total current assets 8,044,783 11,753,890
Long-term receivable (note 4) -- 836,882
Note receivable (note 5) 863,551 922,940
Property and equipment:
Video and computer equipment 1,771,152 1,336,735
Furniture and fixtures 206,313 125,259
Leasehold improvements 33,392 21,313
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2,010,857 1,483,307
Less accumulated depreciation and amortization (1,035,746) (802,989)
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Net property and equipment 975,111 680,318
Capitalized program development costs, net 3,411,937 3,947,086
Investment in affiliate (note 6) 1,000,000 --
Intangible assets (note 7) 3,666,412 1,631,299
Other 12,690 12,340
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Total assets $ 17,974,484 $ 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
June 30, December 31,
1998 1997
---- ----
(Unaudited)
Current liabilities:
Line of credit (note 8) $ 63,000 $ --
Current installments of long-term debt (note 9) 100,000 100,000
Accounts payable 1,467,712 740,353
Due to affiliates 299,169 293,561
Accrued compensation and benefits 1,186,273 1,281,691
Deferred revenues 284,089 422,787
Other accrued expenses 1,165,126 1,236,012
Income taxes payable 114,120 335,102
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Total current liabilities 4,679,489 4,409,506
Deferred lease obligations 50,474 60,296
Long-term debt (note 9) 358,215 400,000
------------ ------------
Total liabilities 5,088,178 4,869,802
Stockholders' equity:
Common stock, $.10 par value, 12,000,000 shares
authorized; 3,912,873 and 3,897,074 shares
issued and outstanding in 1998 and
1997, respectively 391,288 389,708
Additional paid-in capital 16,075,612 16,090,816
Note receivable from ESOP (490,677) (541,677)
Retained earnings (deficit) (3,074,795) (1,056,583)
Accumulated other comprehensive income (note 10) (15,122) 32,689
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Total stockholders' equity 12,886,306 14,914,953
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Total liabilities and stockholders' equity $ 17,974,484 $ 19,784,755
============ ============
See accompanying notes to condensed consolidated financial statements.
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ITC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For 6 Months Ended June 30,
1998 1997
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Cash flows from operating activities:
Net loss $(2,018,212) $(1,204,320)
Reconciling items:
Depreciation and amortization 1,123,422 1,530,418
Increase in allowance for doubtful accounts 82,500 103,796
Sales awards of treasury shares 4,119 938
Foreign currency translation adjustment (47,811) --
Changes in operating assets and liabilities:
Decrease in accounts receivable 2,262,002 3,026,698
Decrease (increase) in inventories 36,191 (117,050)
Increase in prepaid expenses (368,613) (49,803)
Decrease (increase) in income taxes receivable 21,492 (629,648)
Decrease in other assets 63,460 8,007
Increase (decrease) in accounts payable 684,295 (216,626)
Increase (decrease) in due to affiliates, net (124,686) 1,448
Decrease in deferred revenues (138,698) (179,050)
Decrease in other accrued expenses (185,001) (141,374)
Decrease in income taxes payable (222,982) --
Decrease in deferred lease obligations (9,822) (5,156)
Net effect of acquired operating assets and liabilities (39,866) --
----------- -----------
Net cash from operating activities 1,121,790 2,128,278
Cash flows from investing activities:
Deferred program development costs (221,704) (1,196,011)
Capital expenditures (425,423) (330,865)
Acquisitions, net of cash acquired (1,654,621) --
Investment in affiliate (1,000,000) --
----------- -----------
Net cash used in investing activities (3,301,748) (1,526,876)
Cash flows from financing activities:
Borrowings (repayments) against line of credit 38,000 (515,000)
Principal payments of long-term debt (41,785) (63,525)
Issuance of common stock 3,800 --
Repurchase of common stock (535,848) --
Employee stock ownership plan note collections 51,000 51,485
----------- -----------
Net cash provided by (used in) financing activities (484,833) (527,040)
----------- -----------
Net increase (decrease) in cash (2,664,791) 74,362
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 $ 2,220,881 $ 2,771,928
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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ITC LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 the Company's management, 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 presentations. 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, product upgrades and post-contract
customer support. In March 1998, the AICPA issued SOP 98-4, which defers for one
year the implementation of certain provisions of SOP 97-2. The Company
implemented SOP 97-2 as amended by SOP 98-4 for transactions entered into
beginning January 1, 1998, and has determined that there has been no material
impact on revenue recognized in the first six months of 1998 under these
provisions.
Revenues include both off-the-shelf and custom courseware sales, courseware
licenses, consulting service revenues and hardware revenues. The Company
recognizes revenues on off-the-shelf product and hardware sales as units are
shipped. The Company permits the customer the right to return the courseware
within 30 days of purchase. In the event that sales returns are material, the
Company adjusts revenue accordingly. Revenues from sales of custom training
programs that are developed and produced under specific contracts with
customers, including contracts with affiliated joint ventures and limited
partnerships, are recognized on the percentage of completion basis as related
costs are incurred during the production period. Gross revenues from sales of
affiliated joint venture and limited partnership copyrighted courseware are
included in the Company's financial statements, as are related production,
selling and distribution costs. Amounts due to co-owners of the affiliated
venture/partnerships related to such courseware sales are reflected as royalties
and included in cost of sales in the financial statements. Revenues from
courseware licenses are recognized upon the delivery of the initial copy of each
product licensed, and related duplication costs are accrued based on estimates.
Revenues from consulting services are recognized as services are performed.
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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 the requirements of
Statement 128.
3) ACCOUNTS RECEIVABLE
Accounts receivable include the following:
June 30, December 31,
1998 1997
---- ----
Trade accounts receivable $ 4,247,301 $ 5,412,822
Current portion of long-term receivable (note 4) 543,317 909,575
Unbilled contract receivables 221,683 98,162
Less allowance for doubtful accounts (329,116) (254,728)
----------- -----------
Trade accounts receivable, net 4,683,185 6,165,831
Other receivables 3,288 1,761
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$ 4,686,473 $ 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 1997 and 1998 installments were
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. As the final
payment is scheduled to be received in June 1999, the resulting balance has been
classified as current.
Components of long-term receivable include the following:
June 30,
1998
----
Receivable from DeKalb County (GA) Board of Education $ 1,175,000
Related dealer fees payable (584,984)
Less amounts classified as current, net of related dealer fees (543,317)
Less amount representing interest (46,699)
-----------
$ --
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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 June 30, 1998, the note's principal had been
reduced by $86,000 for such royalties. Under the terms of the note, AST makes
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 AND SUBSEQUENT EVENTS
On January 30, 1998, the Company 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.
During the second quarter of 1998, ITC restructured the terms of its
distribution agreement with Mentor. Certain terms of the agreement were
revised, including the revenue sharing arrangement and extension of the
agreement through June of 2001. In consideration, ITC issued Mentor a prepaid
order totaling $300,000 for product relating to pending third quarter 1998
sales. Additionally, the Company elected to forego its option to acquire the
previously mentioned 12% ownership position.
On July 20, 1998, the Company was notified by Mentor that its secured lender,
the Nova Scotia Business Development Corporation (NSBDC) had placed Mentor into
Receivership. The Receiver appointed by the NSBDC promptly initiated efforts to
locate a purchaser for Mentor. ITC responded and is in discussions with the
Receiver, the NSBDC, and Mentor's management and shareholders to assure access
to Mentor's products and to devise a plan to terminate the Receivership and
continue Mentor's business operations. Among the plans being considered are
several that would result in ITC's obtaining greater control over Mentor's
operations through a further ITC investment in Mentor or ITC's participation in
a liquidation or sale of Mentor's assets. It is possible that Mentor will be
acquired by other firms that responded to the Receiver's request. The outcome
of these ongoing discussions with the Receiver and the NSBDC and access to
Mentor product supply remain uncertain. The financial statements do not
reflect any adjustment of ITC investment in Mentor as the ultimate outcome is
unknown.
7) ACQUISITION
On March 25, 1998, the Company acquired 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.
On June 18, 1998, the Company acquired certain assets of iNEX Corporation
("iNEX") for cash and stock valued at $466,000. In exchange for its investment,
ITC acquired iNEX's technology-based delivery platforms, intellectual property
rights, content, certain other assets and ten employees. As a result of the
acquisition, the Company recorded intangible assets of $374,000. These assets
will be amortized over of period of ten years.
8) LINE OF CREDIT
At June 30, 1998, the Company had a balance of $63,000 outstanding relating to
its $3,000,000 and $250,000 revolving bank lines of credit, each of which bear
interest at the bank's prime lending rate. Borrowings under the lines are
collateralized by the Company's accounts receivable and inventory.
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9) LONG-TERM DEBT
Long-term debt consists of the following:
June 30, December 31,
1998 1997
---- ----
8.5% note payable to financial institution due in $ 458,215 $ 500,000
monthly principal and interest installments of $10,258 through
December 2002, collateralized by the assignment of interest in the shares of the
Company's common stock held by the ESOP, accounts receivable, inventory and
property and equipment
Less amount classified as current (100,000) (100,000)
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$ 358,215 $ 400,000
========= =========
10) COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted SFAS 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 restated to
conform with the requirements of Statement 130.
The components of comprehensive income, net of related tax, for the six-month
periods ending June 30, 1998 and 1997 are as follows:
June 30, June 30,
1998 1997
---- ----
Net loss $(2,018,212) $(1,204,320)
Foreign currency translation adjustment (47,811) --
----------- -----------
Comprehensive income (loss) $(2,066,023) $(1,204,320)
=========== ===========
The components of accumulated other comprehensive income, net of related tax, at
June 30, 1998 and December 31, 1997 are as follows:
June 30, December 31,
1998 1997
Cumulative foreign currency translation adjustment $ (15,122) $ 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 and uncertainties 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 and to negotiate favorable distribution agreements for these
products, the Company's ability to successfully deploy its courseware over the
Internet and corporate intranets, the Company's ability to control costs in
relation to future revenues, and the Company's ability to capitalize on market
opportunities.
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, the mix
of ITC-developed products and third party products, the mix of sales from the
Company's direct and indirect distribution channels, the introduction and
acceptance of new products, and the degree to which the market understands and
accepts the Company's role as a provider of training solutions.
In addition, the Company faces certain general business risks which could
materially and adversely impact future operating results. These include, but are
not limited to, changes in economic conditions, the cost of labor and raw
materials, changes in technology and general competitive factors.
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, government agencies and school systems
across America. These products also enable 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 began 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 six months of 1998, the Company continued to concentrate its
efforts on product development and increasing its distribution capabilities. The
Company completed development of its "Using the Internet" courseware product and
a network-deliverable version of its Regulatory Compliance courseware library.
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In an effort to increase its distribution capabilities, the Company made, and
will continue to make, 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.
The Company currently has over 50 BAP's selling and distributing its portfolio
of products.
In January 1998, the Company 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.
During the second quarter of 1998, ITC restructured the terms of its
distribution agreement with Mentor. Certain terms of the agreement were
revised, including the revenue sharing arrangement and extension of the
agreement through June of 2001. In consideration, ITC issued Mentor a prepaid
order totaling $300,000 for product relating to pending third quarter 1998
sales. Additionally, the Company elected to forego its option to acquire the
previously mentioned 12% ownership position.
On July 20, 1998, the Company was notified by Mentor that its secured lender,
the Nova Scotia Business Development Corporation (NSBDC) had placed Mentor into
Receivership. The Receiver appointed by the NSBDC promptly initiated efforts
to locate a purchaser for Mentor. ITC responded and is in discussions with the
Receiver, the NSBDC, and Mentor's management and shareholders to assure access
to Mentor's products and to devise a plan to terminate the Receivership and
continue Mentor's business operations. Among the plans being considered are
several that would result in ITC's obtaining greater control over Mentor's
operations through a further ITC investment in Mentor or ITC's participation in
a liquidation or sale of Mentor's assets. It is possible that Mentor will be
acquired by other firms that responded to the Receiver's request. The outcome
of these ongoing discussions with the Receiver and the NSBDC and access to
Mentor product supply remain uncertain. The financial statements do not
reflect any adjustment of ITC investment in Mentor as the ultimate outcome is
unknown.
In March 1998, the Company acquired 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-competitive covenants. Turn-Key is located in Saugatuck, Michigan and
operates as a wholly-owned subsidiary of ITC. Turn-Key's proprietary
administration software, AdminSTAR(TM), 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. As a result of the acquisition, the Company recorded
$1,795,000 of intangible assets consisting of goodwill and non-competition.
In June 1998, the Company completed a marketing agreement which granted ITC
exclusive, worldwide distribution rights to GE Multimedia Services' interactive
training programs and established GE Multimedia Services as a development
resource for customized programs needed by ITC's customer base. The programs
covered under the distribution agreement include training in the operation and
maintenance of GE Gas Turbines, Steam Turbines and Generators for the more than
12,000 worldwide GE Power Systems customers.
In June 1998, the Company completed the acquisition of iNEX Corporation's
("iNEX") on-line training business for cash and stock totaling approximately
$466,000. For its investment, the Company acquired certain assets of iNEX
including computer hardware and software, intellectual property rights,
courseware content, certain other assets and ten employees, consisting of
management, technical and development personnel. The acquisition of these assets
is expected to enable the Company to deliver its courseware libraries via the
Internet and corporate intranet platforms. As a result of the acquisition, the
Company recorded $374,000 of intangible assets.
In July 1998, the Company acquired the rights to distribute NIIT (USA) Inc.'s
("NIIT") library of over 250 Information Technology ("IT") courseware products.
These IT product offerings provide ITC with an extensive high-quality curriculum
for high-tech computer professionals in such topics as Microsoft Certified
Software Engineer (MCSE), Oracle, Client/Server Computing, Java, Unix, C, C++,
Windows NT, and many others. NIIT's products are currently available in a CD-ROM
format and are expected to be web-enabled within the next six to nine months.
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RESULTS OF OPERATIONS
Revenues
Revenues for the three months ended June 30, 1998 totaled $4,040,000, as
compared to $4,487,000 for the same period in 1997, representing a decrease of
$447,000 or 10%. The decline in revenues was attributable to the inclusion of
$1,386,000 of revenues generated by Anderson Soft-Teach ("AST") during the
second quarter of 1997. ITC sold AST during the fourth quarter of 1997.
Excluding AST revenues, total revenues for the second quarter of 1998 increased
$939,000 or 30% over the second quarter of 1997. The increase was principally
the result of higher sales generated by the Company's Education & State
Government division which accounted for $799,000 of the increase as well as a
$200,000 increase from the International division as compared to the same period
in 1997.
As compared to the first quarter of 1998, total revenues increased $1,206,000 or
43%. The increase was primarily due to higher revenue from the Company's
Education and State Government division (an increase of $858,000) and revenues
from Turn-Key Training Technologies (an increase of $114,000). In addition, the
Company recognized increased hardware revenues of $254,000 during the second
quarter of 1998 as compared to the first quarter of 1998.
Revenues for the six months ending June 30, 1998 totaled $6,875,000 as compared
to $9,209,000 for the same period in 1997, representing a decrease of $2,334,000
or 25%. The decrease in revenues is attributable to the inclusion of $2,568,000
of revenues generated by AST during the first six months of 1997. Excluding AST
revenues from 1997, total revenues increased $234,000 or 4% as compared to the
first six months of 1997. The increase is primarily attributable to a higher
level of revenues recognized from the Company's International division (an
increase of $191,000) during the first six months of 1998 as compared to last
year.
Cost of Sales and Gross Margin
Cost of sales includes the cost of materials (CD-ROMs and related packaging and
documentation), hardware costs, royalties for the sale of third party products,
sales commissions, dealer fees, and the amortization of capitalized product
development costs. Total cost of sales for the second quarter was $2,403,000,
resulting in a gross margin of $1,637,000 or 41% of total revenues. This
compares to cost of sales of $2,081,000 and gross margin of $2,406,000 or 54% of
total revenues in the second quarter of 1997. The lower overall gross margin is
largely the result of a change in the channel mix from direct sales to Business
Alliance Partner (BAP) sales which carry a higher commission or dealer fee, and
of increased sales of third party products which result in royalties ranging
from 25% to 50% of courseware sales. These trends are expected to continue as
the Company expands its BAP program and derives a greater portion of its revenue
from dealer sales and third party sales. While both elements of ITC's product
and channel mix will result in a lower gross margin return on sales, the Company
believes they are critical to leveraging the Company's sales and marketing
investment to achieve significant revenue growth.
As compared to the first quarter of 1998, total cost of sales increased by
$1,078,000. Meanwhile, gross margin for the second quarter of 1998 increased
$127,000 relative to the first quarter of 1998. The higher cost of sales was the
result of an increase in hardware-related sales, higher commissions and dealer
fees associated with the increase of BAP-related sales and higher royalty
expense resulting from the increase in the sale of third party products, as
compared to the first quarter of 1998.
For the first six months of 1998, cost of sales totaled $3,728,000 resulting in
a gross margin of $3,147,000 or 46% of sales. This compares to cost of sales of
$4,280,000 and gross margin of $4,929,000 or 54% of sales for the first six
months of 1997. The decline in gross margin of
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$1,782,000 and the decline in gross margin percentage is primarily attributable
to the revenue shortfall but also reflects the trends in channel mix and third
party product sales noted above. As with the second quarter results, these
trends are expected to continue as the Company expects to increase its revenues
by expanding its BAP program and its sales of third party products.
Sales & Marketing, and General & Administrative Expense
Sales and marketing expense consists primarily of salaries of sales personnel
and related overhead costs such as facilities and travel, and advertising,
marketing and promotional expenses. Sales and marketing expense for the quarter
ending June 30, 1998 totaled $1,688,000, as compared to $1,295,000 for the
second quarter of 1997. The increase in selling related expenses of $393,000 or
30% reflects the increased investment in the Company's direct sales force, the
cost of expanding the Company's BAP channels, and a focused investment in
developing new marketing programs for the Company during the second quarter.
As compared to the first quarter of 1998, sales and marketing related expenses
increased $651,000 or 63%. The increase reflects the rapid ramp-up of the direct
sales force that took place during the first six months of 1998 and the
increased investment in marketing-related programs.
General and administrative expense consists of the uncapitalized costs of
researching new technologies and developing new products and the costs of the
Company's executive management and support functions such as customer
assurance, product fulfillment, human resources, and finance and
administration. General and administrative expenses for the three months ending
June 30, 1998 totaled $1,594,000, as compared to $2,339,000 incurred during the
second quarter of 1997, representing a decrease of $745,000 or 32%. General and
administrative expenses decreased from last year despite a one-time non-cash
charge of $211,000 related to a grant of incentive stock options to the
Company's President and Chief Executive Officer. Excluding the impact of this
charge, general and administrative expense decreased from the second quarter
of last year by $956,000 or 41%. This decrease in overhead expenses is the
result of tighter control of discretionary costs in response to the revenue
shortfall and the overall shift in emphasis in investment from infrastructure
to sales and marketing.
For the first six months of 1998, general and administrative expenses totaled
$2,970,000, as compared to $4,377,000 for the same period in 1997. The decrease
of $1,407,000 or 32% ($1,618,000 or 37% before the charge related to the
Company's CEO stock options grant), is primarily due to the elimination of
$783,000 in overhead-related expenses associated with AST as well as the trends
mentioned above.
Loss before income taxes and net loss
Operations for the second quarter of 1998 resulted in a pre-tax loss of
$1,488,000, as compared to a pre-tax loss of $1,171,000 for the same period in
1997. The pre-tax loss in 1998 is partially offset by an income tax benefit of
$223,000 which is the result of a reduction in the Company's international
income tax liability. The resulting net loss of $1,265,000 or $0.33 per share
compares with a net loss of $749,000 or $0.19 per share in the second quarter of
1997.
For the six months ending June 30, 1998, the Company experienced a loss before
taxes of $2,241,000 and a net loss of $2,018,000 or $0.52 per share. This
compares with a pre-tax loss of $1,872,000 and net loss of $1,204,000 or $0.31
per share for the first six months of 1997. The higher
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net loss for 1998 is the result of a pre-tax loss which was higher than last
year by $369,000 and a reduced net income tax benefit of $445,000 relative to
last year. The higher pre-tax loss is the result of the gross margin shortfall
of $1,782,000, partially offset by lower and more focused levels of investment
in selling, general and administrative expense.
Cash Flow, Liquidity and Capital Resources
Working capital as of June 30, 1998 was $3,365,000, as compared to $7,344,000 at
December 31, 1997. The decrease of $3,979,000 or 54% is principally due to
investments of cash made to acquire Turn-Key Training Technologies, Inc.
("Turn-Key"), iNEX Corporation ("iNEX"), and a minority investment in Mentor
Networks Inc. ("Mentor"), and cash disbursed to repurchase the Company's common
stock. The total cash outlay for these transactions was $3,230,000. The
remaining reduction in working capital is the result of the higher year-to-date
operating loss and normal changes in working capital accounts.
The Company's cash balances were reduced by $2,665,000 in the first six months
of 1998 as compared with a net increase in cash for the same period in 1997 of
$74,000. The difference in cash balances are the result of the aforementioned
investments made and stock repurchased during the first six months of 1998.
Net cash provided by operations was $1,122,000 for the first six months of 1998,
as compared to $2,128,000 generated for the same period in 1997. The difference
of $1,006,000 is primarily attributable to the increased net loss experienced in
1998, as compared to 1997. The net inflow of cash from operations is primarily
due to a decrease in accounts receivable of $2,262,000 and an increase in
accounts payable of $684,000. These are partially offset by the effect of
increases in prepaid expenses of $369,000, and decreases in other current
liabilities totaling $671,000.
Net cash used in investing activities for the first six months of 1998 totaled
$3,302,000, as compared to $1,527,000 for the same period in 1997. Principal
investing activities for the first half of the year were the acquisitions of
Turn-Key and iNEX and the investment in Mentor. Amounts capitalized for the
development of new courseware programs were $222,000 for the first six months of
1998, as compared to $1,196,000 in 1997, reflecting the Company's shift in
strategy from solely publishing courseware to marketing third party courseware
products in addition to the Company's own products. Capital expenditures,
principally the purchase of computer equipment and software for new sales
personnel and investments in product development equipment and software, were
$425,000 in 1998 as compared with $331,000 in 1997.
Net cash used in financing activities was $485,000 for the six months ending
June 30, 1998, as compared to $527,000 in 1997. The major outflow 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 $536,000 in cash.
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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, product upgrades and post-contract
customer support. In March 1998, the AICPA issued SOP 98-4, which defers for one
year the implementation of certain provisions of SOP 97-2. The Company
implemented SOP 97-2 as amended by SOP 98-4 for transactions entered into
beginning January 1, 1998 and has determined that there is no material impact on
revenue recognized in the first six months of 1998 under these provisions.
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 June 30, 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
and, in some cases, has made expenditures to upgrade software products to
versions which are certified to be Year 2000 compliant. 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
(a) The Company held its annual meeting of shareholders on May 7, 1998. There
were three agenda items submitted to a vote of security holders, including the
election of two directors to the Company's Board of Directors: (i) John D.
Sanders was elected to serve on the Board for a term of three years. The number
of votes cast in favor of Dr. Sander's election was 3,164,067, with 45,566 votes
against and 203,440 abstaining; (ii) Richard E. Thomas was elected to serve on
the Board for a term of three years. The number of votes cast in favor of Mr.
Thomas' election was 3,161,450, with 48,183 votes against and 203,440
abstaining. Daniel R. Bannister and Carl D. Stevens each continued in office
as a director after the annual meeting.
(b) The shareholders approved the adoption of the ITC Learning Corporation 1998
Incentive Stock Plan. The number of votes cast in favor of this proposal was
2,798,127, with 592,644 votes against and 22,302 abstaining.
(c) The shareholders ratified the appointment of Ernst & Young LLP as
independent auditors of the Company for the fiscal year ending December 31,
1998. There were 3,386,865 votes cast in favor of this item, with 6,512 votes
against and 19,696 abstaining.
No other matters were submitted to the security holders for a vote.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See attached Exhibit Index.
(b) Reports on Form 8-K
On June 24, 1998 the Company filed a report on Form 8-K relating to the
acquisition of iNEX Corporation's on-line training business.
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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 8/13/98
------------------------------------ --------------------
Carl D. Stevens, President and
Chief Executive Officer
BY /s/ Christopher E. Mack DATE 8/13/98
------------------------------------ --------------------
Christopher E. Mack, Vice President,
Treasurer, and Chief Financial Officer
BY /s/ John D. Dobey DATE 8/13/98
------------------------------------ --------------------
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 incorporated by
reference to the Company's 10-QSB for the quarter ended
March 31, 1998 filed May 1, 1998 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, incorporated by reference to the
Company's 10-QSB for the quarter ended March 31, 1998
filed May 1, 1998 with the SEC (Commission File No.
0-13741).
(k) Michael Morrison (included herewith)
27.1 Financial Data Schedule