SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----- -----
COMMISSION FILE NUMBER 0-20842
TRO LEARNING, INC.
-------------------
(Exact name of Registrant as specified in its charter)
Delaware 36-3660532
- - --------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1721 Moon Lake Boulevard, Suite 555, Hoffman Estates, IL 60194
- - -------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 781-7800
--------------
Not Applicable
---------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.01 par value 6,415,340 shares
- - ---------------------------- ----------------
Class Outstanding as of March 1, 1999
(This document contains 19 pages)
1
TRO LEARNING, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Statements of Income for the
Three Months Ended January 31, 1999 and 1998 . . . . . . . . . . . 3
Consolidated Balance Sheets as of
January 31, 1999 and October 31, 1998. . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the
Three Months Ended January 31, 1999 and 1998 . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . . .12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . .17
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . .17
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . .17
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . .17
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . .17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . .17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
2
PART I. FINANCIAL INFORMATION
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
JANUARY 31,
------------------------
1999 1998
-------- --------
Revenues by product line:
PLATO-Registered Trademark- Education. . . . . . $5,661 $6,043
Aviation Training. . . . . . . . . . . . . . . . --- 1,160
-------- --------
Total revenues . . . . . . . . . . . . . . . 5,661 7,203
Cost of revenues. . . . . . . . . . . . . . . . . . 961 1,590
-------- --------
Gross profit . . . . . . . . . . . . . . . . 4,700 5,613
-------- --------
Operating expenses:
Selling, general and administrative. . . . . . . 5,546 5,942
Product development and customer support . . . . 1,336 2,022
-------- --------
Total operating expenses . . . . . . . . . . 6,882 7,964
-------- --------
Operating loss . . . . . . . . . . . . . (2,182) (2,351)
Interest expense. . . . . . . . . . . . . . . . . . 615 464
Interest income and other expense, net. . . . . . . 49 86
-------- --------
Loss before income taxes . . . . . . . . . . (2,846) (2,901)
Credit for income taxes . . . . . . . . . . . . . . --- ---
-------- --------
Net loss . . . . . . . . . . . . . . . . . . $(2,846) $(2,901)
-------- --------
-------- --------
Earnings per share:
Basic and diluted. . . . . . . . . . . . . . . . $ (0.44) $ (0.45)
-------- --------
-------- --------
Weighted average common shares outstanding:
Basic and diluted. . . . . . . . . . . . . . . . 6,415 6,400
-------- --------
-------- --------
See Notes to Consolidated Financial Statements
3
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
JANUARY 31, OCTOBER 31,
1999 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . $ 399 $ 466
Accounts receivable, less allowances of $ 979 and
$920, respectively . . . . . . . . . . . . . . . 13,205 16,427
Inventories. . . . . . . . . . . . . . . . . . . . . 656 648
Prepaid expenses and other current assets. . . . . . 901 1,121
----------- -----------
Total current assets . . . . . . . . . . . . . . 15,161 18,662
Equipment and leasehold improvements, less accumulated
depreciation of $3,355 and $3,204, respectively. . . 1,194 1,073
Product development costs, less accumulated
amortization of $5,305 and $4,768, respectively. . . 6,553 6,380
Other assets . . . . . . . . . . . . . . . . . . . . . . 1,056 1,292
----------- -----------
$23,964 $27,407
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . $ 1,583 $ 2,895
Accrued employee salaries and benefits . . . . . . . 1,642 2,647
Accrued liabilities. . . . . . . . . . . . . . . . . 1,595 2,130
Revolving loan . . . . . . . . . . . . . . . . . . . 7,438 9,321
Deferred revenue . . . . . . . . . . . . . . . . . . 2,721 3,290
----------- -----------
Total current liabilities. . . . . . . . . . . . 14,979 20,283
Long-term debt . . . . . . . . . . . . . . . . . . . . . 3,050 3,050
Deferred revenue, less current portion . . . . . . . . . 470 405
----------- -----------
Total liabilities. . . . . . . . . . . . . . . . 18,499 23,738
----------- -----------
Convertible redeemable preferred stock, net of
unamortized discount and issuance costs. . . . . . . 4,184 ---
Stockholders' equity:
Common stock, $.01 par value, 25,000 shares
authorized; 6,535 shares issued and 6,415 shares
outstanding in 1999 and 1998 . . . . . . . . . . 64 64
Paid-in capital. . . . . . . . . . . . . . . . . . . 23,370 22,956
Treasury stock at cost, 120 shares in 1999 and 1998. (1,176) (1,176)
Accumulated deficit. . . . . . . . . . . . . . . . . (20,438) (17,592)
Accumulated other comprehensive income . . . . . . . (539) (583)
----------- -----------
Total stockholders' equity . . . . . . . . . . . 1,281 3,669
----------- -----------
$23,964 $27,407
----------- -----------
----------- -----------
See Notes to Consolidated Financial Statements
4
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED
JANUARY 31,
-----------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $(2,846) $(2,901)
-------- --------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 681 661
Provision for doubtful accounts. . . . . . . . . . . . . . 312 75
Loss on disposal of fixed assets . . . . . . . . . . . . . 2 ---
Changes in assets and liabilities:
Decrease in accounts receivable . . . . . . . . . . . . 2,911 1,361
Increase in inventories . . . . . . . . . . . . . . . . (8) (50)
Decrease in prepaid expenses and other current and
noncurrent assets. . . . . . . . . . . . . . . . . . 456 169
Increase (decrease) in accounts payable . . . . . . . . (1,312) 1,478
Decrease in accrued liabilities and accrued
employee salaries and benefits . . . . . . . . . . . (1,540) (1,170)
Decrease in deferred revenue. . . . . . . . . . . . . . (504) (15)
-------- --------
Total adjustments. . . . . . . . . . . . . . . . . . 998 2,509
-------- --------
Net cash used in operating activities . . . . . . (1,848) (392)
-------- --------
Cash flows from investing activities:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . (277) (123)
Capitalization of product development costs . . . . . . . . . (709) (742)
-------- --------
Net cash used in investing activities. . . . . . . . . . . (986) (865)
-------- --------
Cash flows from financing activities:
Net proceeds from short-term borrowings . . . . . . . . . . . 558 641
Book overdraft. . . . . . . . . . . . . . . . . . . . . . . . --- 211
Repayment of long-term debt . . . . . . . . . . . . . . . . . (2,441) (100)
Net proceeds from issuance of convertible preferred stock . . 4,578 ---
Net proceeds from issuance of common stock. . . . . . . . . . 20 38
-------- --------
Net cash provided by financing activities. . . . . . . . . 2,715 790
-------- --------
Effect of foreign currency on cash . . . . . . . . . . . . . . . 52 (70)
-------- --------
Net decrease in cash and cash equivalents. . . . . . . . . . . . (67) (537)
Cash and cash equivalents at beginning of period . . . . . . . . 466 537
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . $ 399 $ ---
-------- --------
-------- --------
Cash paid for interest expense . . . . . . . . . . . . . . . . . $ 447 $ 674
-------- --------
-------- --------
See Notes to Consolidated Financial Statements
5
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 customer support is recognized ratably
over the contract period. Deferred revenue represents the portion of billings
made or payments received in advance of services being performed or products
being delivered.
PRODUCT DEVELOPMENT, ENHANCEMENT, AND MAINTENANCE COSTS:
The Company develops education and training products, referred to hereafter as
courseware products. Costs incurred in the development of the Company's current
generation courseware products and related enhancements and routine maintenance
thereof are expensed as incurred. All costs incurred by the Company in
establishing the technological feasibility of new courseware products to be
sold, leased, or otherwise marketed are expensed as incurred. Once
technological feasibility has been established, costs incurred in the
development of new generation courseware products are capitalized.
6
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. Since the
Company incurred a net loss for all periods presented, potential common shares
are antidilutive and excluded from the calculation, and basic and diluted
earnings per share are the same.
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
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
2. ACCOUNTS RECEIVABLE:
Accounts receivable include net installment receivables of $7,734,000 and
$10,496,000 at January 31, 1999 and October 31, 1998, respectively. Installment
receivables billable after one year were $348,000 and $575,000 at January 31,
1999 and October 31, 1998, respectively, and are included in other assets on the
consolidated balance sheets.
3. DEBT:
REVOLVING LOAN:
At January 31, 1999, the Company's revolving loan agreement, as amended,
provided for a maximum $18 million line of credit through February 28, 1999. The
agreement also provided for additional line of credit borrowings up to a maximum
$4,500,000 from time to time during certain periods of the remaining term of the
agreement. Substantially all of the Company's assets were pledged as collateral
under the agreement. Borrowings under the line were limited by the available
borrowing base, as defined, consisting primarily of certain accounts receivable
and inventory, and interest was at the prime rate plus 1.5% to 2%, as defined.
At January 31, 1999, borrowings of $7,438,000 were outstanding at an interest
rate of 9.5%.
In addition, the revolving loan agreement provided for a $3 million term loan at
an interest rate of 15%. The remaining term loan balance was repaid during the
first quarter of 1999.
NEW REVOLVING LOAN AGREEMENT:
On February 26, 1999, the Company entered into a new revolving loan agreement,
with a new lender, that provides for a maximum $15 million line of credit
through February 26, 2002. Substantially all of the Company's assets are
pledged as collateral under the agreement. Borrowings are limited by the
available borrowing base, as defined, consisting of certain accounts receivable
and inventory, and bear interest at the prime rate plus 1% or the London
Interbank Offered Rate (LIBOR) plus 3%, as determined by the Company pursuant to
the agreement. A commitment fee is payable quarterly based on the unused
portion of the line of credit. The agreement contains restrictive financial
covenants (including Minimum Net Worth, Minimum Earnings Before Interest Taxes
Depreciation and Amortization (EBITDA), and Minimum Interest Coverage) and
restrictions on borrowings, asset sales and dividends, as defined.
Upon entering the new agreement, the Company terminated its previous revolving
loan agreement. All outstanding borrowings and accrued interest were repaid
with funds advanced under the new line of credit.
8
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
3. DEBT, CONTINUED:
LONG-TERM DEBT:
At January 31, 1999, the Company's long-term debt consisted of $3,050,000 of 10%
subordinated convertible debentures with interest payable semiannually. At the
option of the holder, the debentures are convertible into the Company's common
stock at $9.60 per share. The Company may redeem the debentures at 101% of
principal, plus interest, subject to certain terms and conditions. The
debentures have a scheduled maturity in 2004 and are subject to mandatory
redemption at 25% of principal annually beginning in 2001.
4. CONVERTIBLE REDEEMABLE PREFERRED STOCK:
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 proceeds, net of transaction fees, were
approximately $4,578,000 and were used to repay existing borrowings. A value of
$394,000 has been assigned to the warrants using the Black-Scholes stock option
pricing model.
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 into shares of the Company's
common stock, at the option of the holder, 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 is
adjusted over time from 90% to 82%. There is a minimum conversion price of
$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 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 not greater than
9
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
4. CONVERTIBLE REDEEMABLE PREFERRED STOCK, CONTINUED:
$15.85 per share. The redemption price is based on the number of common shares
that would be received upon conversion at such time and from 125% to 156% of the
average closing price of the Company's common stock during the defined period
prior to such time.
The Series C Preferred is 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 a
subsequent 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 is
presented between total liabilities and stockholders' equity on the consolidated
balance sheet, as required by the Securities and Exchange Commission. Upon
conversion of the Series C Preferred into common shares, the related amounts
will be classified as stockholders' equity.
The initial carrying value of $4,184,000 at January 31, 1999 will increase to
the aggregate stated value of $5,400,000 over the ten-year term of the Series C
Preferred. This accretion will be reflected as a charge to retained earnings in
the consolidated balance sheet and will reduce net income (loss) available to
common stockholders for purposes of calculating basic earnings per share.
Concurrent with the issuance of the Series C Preferred, the Company issued
125,000 warrants to purchase the Company's common stock at $9.51 per share.
These warrants expire five years from the issue date. The value assigned to
these warrants of $394,000 has been reflected as an increase to paid-in capital
on the consolidated balance sheet at January 31, 1999.
5. INCOME TAXES:
No tax benefit has been recorded at January 31, 1999 for the first quarter loss,
as the Company is unable to demonstrate that, more likely than not, it will be
able to realize its deferred tax asset.
10
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
6. COMPREHENSIVE INCOME (LOSS):
Total comprehensive loss was as follows (in thousands):
THREE MONTHS ENDED
---------------------------
JANUARY 31, JANUARY 31,
1999 1998
------------ -------------
Net loss. . . . . . . . . . . . . . . . . . . $(2,846) $(2,901)
Foreign currency translation adjustments. . . 44 (87)
------------ -------------
Total comprehensive loss. . . . . . . . $(2,802) $(2,988)
------------ -------------
------------ -------------
Accumulated other comprehensive income is included as a separate component of
stockholders' equity on the consolidated balance sheets.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
OVERVIEW
The Company is a leading developer and marketer of microcomputer-based,
interactive, self-paced instructional systems. Offering more than 2,000 hours
of comprehensive academic and applied skills courseware designed for adolescents
and adults, the Company's PLATO-Registered Trademark- Learning Systems are
marketed to middle schools and high schools, colleges, job training programs,
correctional institutions, military education programs and corporations. The
PLATO Learning System is delivered via networks, CD-ROM, the Internet and
private Intranets.
In September 1998, the Company announced the sale of its Aviation Training
business (which marketed PC-based instructional systems to airlines worldwide
for use by commercial airline pilots, maintenance crews and cabin personnel) and
will focus exclusively on its PLATO brand going forward.
RESULTS OF OPERATIONS
FIRST QUARTER FISCAL 1999 COMPARED TO FIRST QUARTER FISCAL 1998
REVENUES:
The following table highlights revenues by product line (in 000's):
PLATO EDUCATION AVIATION TRAINING TOTAL
------------------- -------------------- -------------------
1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- --------
Courseware and professional services $5,070 $4,678 $ --- $1,107 $5,070 $5,785
Hardware, third-party courseware and other 591 1,365 --- 53 591 1,418
-------- -------- -------- -------- -------- --------
Total revenues $5,661 $6,043 $ --- $1,160 $5,661 $7,203
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
PLATO Education courseware and professional services revenue increased $392,000,
or 8%, while hardware and third-party courseware revenue decreased $774,000, or
56%, in line with the Company's plan to improve profitability. Total PLATO
Education revenues decreased $382,000 or 6% compared to the prior year.
Aviation Training revenues were $1,160,000 in the first quarter of fiscal 1998.
Total revenues of $5,661,000 for the first quarter of fiscal 1999 decreased
$1,542,000, or 21%, as compared to $7,203,000 for the first quarter of fiscal
1998.
GROSS PROFIT:
PLATO Education gross profit increased $112,000 from the prior year, and gross
margin increased to 83% from 76%, reflecting the increased mix of higher margin
courseware and professional services revenue.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
RESULTS OF OPERATIONS, CONTINUED
FIRST QUARTER FISCAL 1999 COMPARED TO FIRST QUARTER FISCAL 1998, CONTINUED
GROSS PROFIT, CONTINUED:
Aviation Training gross profit was $1,025,000 for the first quarter of fiscal
1998. Total gross profit for the first quarter of fiscal 1999 decreased
$913,000, or 16%, to $4,700,000 as compared to $5,613,000 for the first quarter
of fiscal 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE:
Selling, general, and administrative expense for the first quarter of fiscal
1999 decreased $396,000 or 7% to $5,546,000 as compared to $5,942,000 for the
first quarter of fiscal 1998.
PLATO Education expenses were comparable to the prior year. Aviation Training
expenses were $362,000 in the first quarter of fiscal 1998.
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
Product development and customer support expense for the first quarter of fiscal
1999 decreased $686,000 or 34% to $1,336,000 as compared to $2,022,000 for the
first quarter of fiscal 1998.
PLATO Education expenses were comparable to the prior year. Aviation Training
expenses were $755,000 in the first quarter of fiscal 1998.
OPERATING LOSS:
The operating loss was $2,182,000 for the first quarter of fiscal 1999 as
compared to $2,351,000 for the prior year. The operating loss for PLATO
Education was $2,260,000 for the first quarter of fiscal 1998. The first
quarter loss reflects the impact of a traditionally lower level of revenue in
the first half of the Company's fiscal year. The improvement in PLATO Education
operating results was due primarily to the increased mix of higher margin
courseware revenues.
INTEREST EXPENSE:
Interest expense for the first quarter of fiscal 1999 was $615,000 as compared
to $464,000 for the first quarter of fiscal 1998. This increase was due
principally to the accelerated amortization of fees related to the Company's
revolving loan agreement which was replaced with a new loan agreement in
February 1999 (see Note 3 of Notes to Consolidated Financial Statements).
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1999, the Company's principal sources of liquidity included cash
and cash equivalents of $399,000, net accounts receivable of $13,205,000, and
its line of credit. The Company had net installment receivables of $8,082,000 at
January 31, 1999, of which $7,734,000 is billable within one year and is
included in net accounts receivable on the consolidated balance sheet.
Net cash used in the Company's operating activities was $1,848,000 in the first
quarter of fiscal 1999 as compared to $392,000 in the first quarter of fiscal
1998. Cash flows from operations, borrowings and capital were used principally
to fund the Company's working capital requirements. In addition to cash flows
from operations, the Company has resources available under its revolving loan
agreement (see Note 3 of Notes to Consolidated Financial Statements). At
January 31, 1999, borrowings of $7,438,000 were outstanding under the line of
credit at an interest rate of 9.5%.
Net cash used in the Company's investing activities was $986,000 in the first
quarter of fiscal 1999 for capital expenditures and capitalized product
development costs.
Net cash provided by financing activities was $2,715,000 in the first quarter of
fiscal 1999. Repayments of the term loan and short-term borrowings offset the
net proceeds received from the issuance of preferred stock in January 1999 (see
Note 4 of Notes to Consolidated Financial Statements).
The Company entered into a new revolving loan agreement with a new lender in
February 1999. This new facility offers the Company a longer-term banking
relationship with a lower interest and fee structure compared to the previous
revolving loan agreement (see Note 3 of Notes to Consolidated Financial
Statements).
The Company continues to explore alternatives to meet its anticipated working
capital, capital expenditure, and business investment requirements.
YEAR 2000:
Many existing computer systems use only the last two digits to identify a year.
Consequently, as the year 2000 approaches, many systems do not yet recognize the
difference between the years 1900 and 2000. This, as well as other date-related
processing issues, may cause systems to fail or malfunction. As a result, the
Year 2000 (Y2K) issue may affect the Company's products and normal business
activities.
The Company began addressing the Y2K issue in early 1998 and has assembled a Y2K
evaluation team that is endorsed by, and includes members of, senior management.
A budget has been prepared for Y2K costs and progress reports are presented to
senior management on a
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
YEAR 2000, CONTINUED:
regular basis. The Y2K evaluation team has developed and implemented a
comprehensive Y2K readiness plan for the Company's products and operations. The
objectives of the Y2K evaluation team are as follows:
- - - Develop a Y2K compliance standard for the Company's PLATO courseware and
software products and determine compliance with that standard;
- - - Advise on compliance of third party courseware, operating system, and
hardware products based on representations by vendors of these products;
- - - Determine compliance for the Company's internal systems (including
information technology (IT) systems, such as financial and order entry
systems, and non-IT systems, such as telephones and other office
equipment);
- - - Determine the Y2K readiness of key business partners that the Company
relies on for normal business operations.
The Company has developed a compliance standard based on common testing
methodology. Existing PLATO courseware and software products are currently
being reviewed to determine compliance with that standard. The most current
compliance and remediation information is maintained on the Company's Internet
web site. PLATO products currently under development are being designed to be
Y2K compliant.
The Company also sells various third party courseware, operating system, and
hardware products. Y2K compliance information has been received from key
vendors of third party courseware products and this information is maintained on
the Company's Internet web site. Web links to key vendors of third party
operating system and hardware products are also provided.
The Company has taken, and will continue to take, actions necessary to resolve
Y2K issues with its internal IT and non-IT systems, including planned
replacements and upgrades. Major computers, applications, and related equipment
have been reviewed and are either compliant or software upgrades have been
ordered and will be installed in 1999. The Company's accounting and data
processing system was not Y2K compliant and was recently upgraded to a version
that the vendor has indicated is Y2K compliant.
The Company relies on key business partners for its normal business operations
and has contacted them regarding Y2K readiness. While the Company is confident
these partners are preparing for the year 2000, it has no control over their
preparations and there is no assurance that they will be successful in
addressing all Y2K issues.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
YEAR 2000, CONTINUED:
While the Company's Y2K costs incurred to date have not been material,
additional costs will be incurred as Y2K readiness is completed in mid-1999.
Based on information currently available, management expects these additional
costs to be immaterial as well.
While the Company is dedicating existing internal resources toward attaining Y2K
readiness, there is no assurance that it will be successful in addressing all
Y2K issues. If the Company does not achieve Y2K readiness, there could be
significant adverse effects on its results of operations, liquidity, and
financial condition. For example:
- - - If the Company's PLATO products are not Y2K compliant, it could suffer
increased costs, lost sales or other negative consequences resulting from
customer dissatisfaction, including litigation.
- - - If the Company's internal systems are not Y2K compliant, financial and
customer information, orders and product shipments could be delayed and
customer support could be interrupted.
- - - If the Company's customers do not achieve Y2K readiness, sales and cash
receipts may be delayed.
- - - If the Company's key business partners and other third parties do not
achieve Y2K readiness, its ability to receive supplies, ship products,
process cash receipts, and conduct other ongoing business activities may be
affected.
Based on the progress the Company has made to date in addressing Y2K issues,
management does not expect significant risks with its Y2K compliance at this
time. As the Company's plan is to address its major Y2K issues prior to being
affected by them, it has not developed comprehensive Y2K-related contingency
plans. If progress deviates from plan or significant risks are identified, the
Company will consider contingency plans as deemed necessary.
This Y2K discussion is based on the Company's best estimates using the
information that is currently available, and is subject to change. Actual
results may differ materially from these estimates.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any litigation that is expected to have
a material adverse effect on the Company or its business.
ITEM 2. CHANGES IN SECURITIES
On January 13, 1999, the Company issued 540 shares of its Series C
Convertible Preferred Stock 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 (see Note 4 of Notes to Consolidated
Financial Statements).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
------ -----------
10.01 Secured Credit Agreement, dated February 26, 1999,
among First Source Financial LLP, as lender, The Roach
Organization, Inc. and TRO Learning (Canada), Inc., as
borrowers
10.02 Security Agreement, dated February 26, 1999, among The
Roach Organization, Inc., TRO Learning (Canada), Inc.
and First Source Financial LLP
10.28 Certificate of Amendment to Certificate of Designations
for Series C Convertible Preferred Stock, dated March
5, 1999
27 Financial Data Schedule
17
PART II. OTHER INFORMATION, CONTINUED
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K, CONTINUED
(b) Reports on Form 8-K:
On January 25, 1999, the Company filed a Current Report on Form
8-K, dated January 22, 1999, to announce the completion of a $5
million private placement of convertible preferred stock.
18
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 15, 1999.
TRO LEARNING, INC.
By /s/William R. Roach
----------------------------------------
Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
/s/John Murray
----------------------------------------
Executive Vice President and
Chief Financial Officer
(principal financial officer)
/s/Mary Jo Murphy
----------------------------------------
Vice President, Corporate Controller and
Chief Accounting Officer
(principal accounting officer)
19