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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
COMMISSION FILE NUMBER 0-20842
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TRO LEARNING, INC.
------------------
(Exact name of Registrant as specified in its charter)
Delaware 36-3660532
- -------- ----------
(State or other jurisdiction of incorporation or organization) (IRS Employer
Identification Number)
1721 Moon Lake Blvd., Suite 555 Hoffman Estates, IL 60194
- ---------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 781-7800
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
---------------------------------------
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 twelve months and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
The number of shares of the Registrant's common stock, par value $.01 per share,
outstanding as of December 10, 1997 was: 6,405,346 shares.
The aggregate market value of common stock (based on the closing price on
December 10, 1997) held by non-affiliates of the Registrant was approximately
$28,948,000.
Index for exhibits is located on page 55.
This document contains 59 pages.
1
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on April 16, 1998 (the "1998 Proxy Statement") is
incorporated herein by reference in Part III of this Form 10-K. Pursuant to
Regulation 14A under the Securities Exchange Act of 1934, the 1998 Proxy
Statement will be filed with the Securities and Exchange Commission within 120
days after the close of the Company's fiscal year.
NOTE REGARDING FORWARD LOOKING INFORMATION
This Form 10-K contains forward looking statements identified by the use of
"believes", "expects", "anticipates", and similar expressions. Such statements
are subject to risk and uncertainties that could cause actual results to differ
from those contemplated by the forward looking statement. Such risks and
uncertainties include any change in the market acceptance of the Company's
products and services, the risk of failure of the Company's technology to remain
at market standards, the risk of the Company being able to finance its business
operations, and other similar business and market risks. Readers are cautioned
not to place undue reliance on such forward looking statements.
2
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Item 2. Facilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 4. Submission of Matters to Vote of Security Holders . . . . . . . . . 24
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 6. Selected Consolidated Financial Data. . . . . . . . . . . . . . . . 29
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . 30
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . . . 54
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . . . 54
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . 54
Item 12. Security Ownership of Certain Beneficial Owners and Management. . . 54
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . . 54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. . 55
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
3
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS
GENERAL:
TRO Learning, Inc. (the Company) is a leading developer and marketer of
microcomputer-based, interactive, self-paced instructional systems used in a
wide variety of adult settings. Offering comprehensive educational
courseware specifically designed for young adult and adult learners, the
Company's PLATO-Registered Trademark- Learning Systems are marketed to middle
schools and high schools, community colleges, job training programs,
correctional institutions, government-funded programs, the military, and
corporations. The Company's TRO Aviation Training Systems are marketed to
airlines worldwide for use by commercial airline pilots, maintenance crews,
and cabin personnel.
COMPANY HISTORY:
The Company was incorporated in July 1989 as Edu Corp., and in October 1992
it changed its name to TRO Learning, Inc. The Company's wholly-owned
operating subsidiary is The Roach Organization, Inc. (TRO). TRO has two
wholly-owned subsidiaries, one in Canada, TRO Learning (Canada), Inc., and
one in the United Kingdom, TRO Learning (U.K.) Ltd.
In September 1989, the Company acquired most of the assets of Control Data
Corporation's (Control Data) computer-based education, training and testing
business. Under the Company's senior management team, the marketing focus of
the business was redirected from sales of hardware and data processing
services to the delivery of solution-oriented courseware and training
services to education providers in a wide variety of settings. In addition,
the Company initiated a new business strategy of developing a library of
courseware to market to commercial airlines. The Company made significant
additional investments in organizational infrastructure and personnel for
sales and marketing. At the same time, the Company reduced general and
administrative expenses through implementation of cost controls and
streamlined operations. The Company also made substantial investments in the
development and introduction of new products and services, as well as the
enhancement of its existing courseware for education and training
applications.
During fiscal 1992, the Company discontinued two businesses, the NASD testing
center business and the end user computer training distribution business. In
addition, in September 1993, the Company entered into a Certification and
Testing Services Agreement with Sylvan Learning Systems (SLS), whereby SLS
agreed to assume and perform the Company's rights and obligations under its
Certification and Testing Services contracts.
4
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
COMPANY STRATEGY:
The Company's strategy is to address the needs of adult and young adult learners
by providing a broad range of interactive, multimedia, self-paced educational
and training courseware delivered on personal computers. The critical elements
of the Company's business strategy are as follows:
TARGET ADULT AND YOUNG ADULT MARKET OPPORTUNITIES. The Company targets growing
market niches that serve adult and young adult learners rather than pre-school
and elementary school-aged children. These market niches, including the
corporate workplace environment, have specific educational and training
requirements that can be addressed by the Company's computer-based products and
services. The Company's courseware incorporates themes, graphics and media
appropriate to adult and young adult learners.
PROVIDE COMPREHENSIVE, SOLUTION-ORIENTED COURSEWARE AND SERVICES. Drawing upon
its extensive library of computer-based courseware, the Company's education and
training specialists work closely with clients to design a program of
instruction which meets their specific educational and training needs. The
Company offers its products in modular form and flexible formats that can be
tailored to a wide variety of applications.
EMPHASIZE SALES OF HIGH MARGIN COURSEWARE. Since the acquisition from Control
Data in 1989, the Company has redirected the marketing focus of the business
from hardware and data processing services, which have generally experienced
declining profit margins, to solution-oriented education and training courseware
and services which generate higher profit margins and greater opportunities for
growth.
COMMITMENT TO ON-GOING COURSEWARE DEVELOPMENT AND SUPPORT. Since the
acquisition, the Company has made substantial investments in developing and
enhancing courseware for education and training applications and is committed to
maintaining a diverse and comprehensive curriculum. The Company uses the design
and structural advantages inherent in its proprietary software development
systems to design and produce new courseware and services to meet the changing
needs of its clients and prospects.
INTERNET/INTRANET DELIVERY:
The Company is focused on developing the broadest delivery system for its
instructional management system and courseware library. The rapid acceptance and
worldwide accessibility of the Internet, as well as the increased acceptance of
a technology-based distance learning model, offers the potential of just-in-time
learning and expanded access to PLATO education and training products. Internet
delivery is also very supportive of the sales and marketing focus on
organizations
5
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
INTERNET/INTRANET DELIVERY, CONTINUED
providing a wide range of education and training services throughout the
community, allowing for new distribution channels to complement the direct sales
model.
Corporations and many of the larger school districts and training organizations
have developed intranets to share information and communication. The expanding
availability of intranets offers a platform for the delivery and distribution of
education and training across the organization to any location. With the
availability of high-speed telecommunications links between facilities,
intranets are a powerful delivery system for PLATO education and training.
MARKET OVERVIEW:
Many competitive, social, and political trends over the past few years have led
to significant demand for technology-based education and training:
- Identification by numerous government and private studies that
basic skills and training deficiencies are a major threat to
American industry's ability to achieve its goals and compete
internationally. This trend has been accompanied by increased
governmental and private-sector spending on basic skills and job
skills training.
- In industry, pressure to improve cost-efficiency and access to
training and education has led to a willingness to adopt
non-traditional training methods.
- The acceleration of technological changes requires ongoing
workforce retraining and skills enhancement.
- Widely reported declines in standardized test scores and an
increased demand by states and school districts for measurable
results of such programs have increased concern over training and
educational program effectiveness.
- Legislative initiatives and governmental mandates (such as
welfare, prison reform, and regulatory requirements in the
aviation industry) have increased the demand for education and
training outside traditional educational settings.
- Dramatic improvements in the price and performance of hardware
have made it feasible for more institutions to purchase
microcomputers of adequate power to deliver effective educational
and training courseware products.
6
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
MARKET OVERVIEW, CONTINUED
- Advances in instructional design, programming, and presentation
technologies have made it possible to develop courseware and
software cost-effectively.
- The development of multimedia software has heightened the
interest in education and training, both for business and
education as well as for the consumer market.
A prominent example of these trends is the PLATO Learning System, which combines
extensive courseware and curriculum management software with networked hardware
and system management software. The Company believes sales will grow at a
faster rate in the adult and young adult markets than in the traditional primary
school markets. The adult and young adult segments of the education markets are
receiving increased levels of funding as schools, government, and private sector
programs seek to reduce school drop-out rates and to provide basic skills and
education. Further, private sector employers continue to provide their
employees with remedial and basic literacy skills training as well as specific
job-related training.
The demand for pilot and other airline personnel training is driven by several
factors, including new aircraft acquisition, retrofitting existing equipment,
and cross-training on various types of equipment. The Federal Aviation
Administration (FAA) and foreign government regulators, as well as competitive
factors, require commercial pilots and other flight personnel to be certified on
new and upgraded equipment. Technological advances in aircraft, new aircraft
acquisitions, and personnel promotions create an ongoing demand for high
quality, standardized, flexible, and cost-effective training. Retrofitting
existing aircraft to update equipment and to meet new regulatory requirements
creates further industry need for training pilots, maintenance and in-flight
personnel.
The Company uses microcomputer-based educational technology to address these
trends. This technology offers a number of advantages in both traditional and
non-traditional educational settings, including self-pacing, interactive
instruction, standardized curricula, individual tailoring of programs, remote
service delivery, scheduling flexibility, and ready measurement of performance
providing instantaneous student feedback. In addition, educational technology
enables instructors to manage curricula and provide individualized tutoring
rather than provide the same instruction for all students.
7
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
PRODUCTS AND SERVICES:
The Company develops and markets microcomputer-based, interactive, self-paced
instructional systems. The Company also delivers its PLATO Education courseware
products to customers over the Internet or intranets. Although the design and
specific features of a system depend upon the particular needs of each client, a
learning system typically includes a library of educational courseware,
instructional management software, a delivery system, and consulting services.
The Company provides educational courseware and services to middle and high
schools, community colleges, job training programs, correctional institutions,
government-funded training programs, the military and private industry. It also
provides courseware for the aviation industry, developed by the Company in
partnership with aircraft operators. The suite of courseware currently
available encompasses the majority of modern aircraft types manufactured by
Boeing, Airbus, Fokker, Saab, Bombadier, ATR, British Aerospace and
McDonnell-Douglas. Solutions are offered for all aspects of an airline's
training requirements for flight crews (pilot and cabin staff) and ground
personnel (aircraft maintenance and support services).
In general, the PLATO Learning System offers educators an effective supplement
or alternative to traditional, instructor-led education. A typical learning
system installation consists of 10 to 30 workstations, educational courseware,
instructional management software, and hardware and typically sells for $50,000
to $200,000. PLATO Learning Systems are currently installed at over 3,000 sites
with an aggregate of approximately 52,000 workstations. The Company's PLATO
clients include New York City Board of Education, State of Tennessee Board of
Regents, California Department of Corrections, Montana Department of
Corrections, AT&T, Abbott Laboratories, Honeywell, Georgia Pacific,
Kimberly-Clark, Printpack, Saturn, USAA, Siemens, Bethlehem Steel, Houston
Community College, Victoria Independent School District, Garland Independent
School District, Dayton Public Schools, Polk County Schools, Glendale Union High
School District, Weber County Schools, New Hampshire Technical College System,
Florida Correctional Educational School Authority, and Open Learning Agency
(Canada).
The Company's Aviation Training Systems address the training needs of the
aviation industry through the analysis, design and development of courseware
specific to a particular training requirement; and through the resale of its
library of courseware titles. In fiscal 1997, the average Aviation Training
System sale was in excess of $300,000. Over the past seven years, the Company
has sold to more than 90 of the world's major airlines and key companies within
the aviation industry and its courseware can be found on over 1,400
workstations. The Company's Aviation Training clients include United Airlines,
American Airlines, Lufthansa, SAS, Singapore Airlines, Flight Safety
International, Crossair, Kuwait Airways, Malaysia Airlines, Gulf Air, Cathay
Pacific Airways, Braathens SAFE, CST Berlin, Czeskolovenske Aerolinie, Hughes
Flight Training, Icare and SAAB Aircraft. In fiscal 1997, the Company derived
approximately 88% of its
8
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
PRODUCTS AND SERVICES, CONTINUED
Aviation Training revenues from sales to non U.S.-based air carriers. See Note
7 of Notes to Consolidated Financial Statements for geographic area information.
COURSEWARE:
The PLATO Learning System courseware library has over 5,000 hours of on-line
instruction, including in excess of 3,300 lessons and 8,500 objectives. PLATO
offers a comprehensive curriculum developed specifically for adult and young
adult learners. The Company's Aviation courseware library consists of over
2,000 hours of on-line, highly-interactive instruction and simulation of
aviation-related topics. This library is being increased by over 250 hours of
new courseware each year developed by the in-house development team. The
library covers a range of topics for pilot transition and recurrent training,
in-flight cabin services (including safety and survival courses), maintenance
and air traffic control. The following tables set forth the current
PLATO and Aviation courseware.
9
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
PRODUCTS AND SERVICES, CONTINUED
COURSEWARE, Continued
PLATO LEARNING SYSTEM COURSEWARE AND SOFTWARE OFFERINGS
PLATO COURSEWARE: THIRD PARTY COURSEWARE:
- ---------------- ----------------------
COMMUNICATION Reading Horizons
Reading 1 and 2 Mindplay Writing Series
Writing Series English Discoveries (ESL)
Communication Projects for the Real World
Reading for Information Job Skills for the Real World
Writing in the Workplace Basic Skills for the Real World
Advanced Reading Strategies Rediscover Science 6-9 and 9-12
Towards Algebra
MATHEMATICS Business Software Training Series
Math Fundamentals Substances Abuse Series
Math Fundamentals (Spanish Edition) Blueprint Reading
Applied Math Mastering Geometric Dimensioning and
Data Skills Tolerancing
Pre-Algebra Technical Skills Series
Beginning, Intermediate and Advanced Health, Safety and Environmental Series
Algebra Ultrakey Keyboarding
Beginning and Intermediate Algebra
(Spanish Edition) PLATO SOFTWARE PRODUCTS
Geometry and Measurement 1 and 2 PLATO Curriculum Manager
Trigonometry PLATO Pathways Instructional Management
Calculus 1 and 2 System for Windows
PLATO Remote Administration
SCIENCE PLATO Records Transfer and Consolidation
Science Fundamentals Utility
Chemistry 1 and 2 PCD3 Authoring System
Physics 1 and 2 PLATO S.T.A.R.
SOCIAL STUDIES
Social Studies
TECHNOLOGY
Quality Fundamentals
LIFE SKILLS
Life and Job Skills
Parenting Skills
10
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
PRODUCTS AND SERVICES, CONTINUED
COURSEWARE, Continued
TRO AVIATION COURSEWARE
FLIGHT IN-FLIGHT SERVICES
Airbus: A300-600 B747-700 and B757 Transition
Training
A310 Basic Service
A320 Key Position
A321 Recurrent Emergency Training
A320 FMGS LOFT Trainer Cocktail Services
A330 Preflight/Inflight/Postflight
Responsibilities
A340 New Tech Cart
Boeing: B737-200 to B737-300 Differences Single Aisle Cabin and Galley
Systems
B737-300/400/500 Cabin and Galley Systems: B767 and
DC-10
B737-300 FMGS LOFT Trainer B747 Equipment and Systems
B747-400 Purser Control Center (PCC)
B747-400 Systems Simulations Cabin Intercom Data Systems (CIDS)
B747-400 Freighter Difference
B757 SYSTEMS AND OPERATIONS
B757/767 FMGS LOFT Trainer Traffic Collision and Avoidance
(TCAS) Systems
B767 Category (CAT) II and III
Operations
Canadair: Regional Jet North Atlantic Navigation
Fokker: F50 South Atlantic Navigation
F100 KNS 660 Area Navigation
Saab 2000 International Flight Operations
2000 FMGS LOFT Trainer Head Up Guidance System (HUGS)*
ACARS
MAINTENANCE TRAINING ETOPS*
McDonnell-Douglas MD-80 Aircraft Performance
Jet Aircraft Maintenance Fundamentals* Collins 4200 and 6000* FMS Trainer
Ramp Services Navigation Trainer*
A340 CMCS Simulation
B747-400 CMS Simulation SAFETY AND SURVIVAL
First Aid
GENERAL AVIATION General Safety and Emergency
Beech Baron Safety and Emergency: A320/330/340
Beech Bonanza F33 and A36 Safety and Emergency:
B737/747/767/777
Piper Arrow Dangerous Goods
Piper Cheyenne IIIA Airline Security
Eagle (PPL) Basic Cabin Crew Courses
AIR TRAFFIC CONTROL
CAA NERC System
Central Flow Management
_____________________________________________
* in development
11
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
PRODUCTS AND SERVICES, CONTINUED
PLATO COURSEWARE AND SOFTWARE:
Each PLATO course teaches a set of skills which has been defined in terms of
measurable performance. The course teaches the skill through a progression of
tutorials and practice lessons with diagnostic feedback. New courseware
developed has added an instructional model focused on problem-solving. Learners
have access to assessments which target instruction. After each sequence of
tutorial and practice, a test follows which verifies the learner's achievement.
The PLATO Curriculum Manager (described below) can identify the specific skills
each individual learner needs to master, and prescribe instruction the student
needs. Teachers can adapt PLATO courseware to their own lesson plans because of
its modular design. While PLATO can be used effectively with minimal teacher
support, the Company believes that the greatest learning gains are achieved when
teachers use PLATO to transform their role in the classroom from mere
information presenter to that of tutor, manager, and counselor.
PLATO courseware is correlated to many national standardized tests.
Increasingly, educators are being judged according to their students' progress
as measured by a number of these tests. Product correlation, therefore, has
become an important factor in how educators evaluate the usefulness and
effectiveness of an integrated learning system and its courseware. Some of the
major standardized tests to which PLATO courseware is closely aligned are:
Adult Basic Literacy Exam (ABLE) Comprehensive Adult Student
American College Test (ACT) Assessment System (CASAS)
California Achievement Test (CAT) General Education Development Exam
California Basic Education Skills Test (GED)
(CBEST) Scholastic Aptitude Test (SAT)
Canadian Adult Achievement Test (CAAT) Test of Achievement and Proficiency
(TAP)
Test of Adult Basic Education
(TABE)
An independent evaluation conducted comparing PLATO computer-based education
with traditional classroom instruction showed that PLATO computer-based
education resulted in 10% greater learning gains with approximately half the
instruction time. In addition, surveys and third party evaluations have shown
that learners prefer PLATO over conventional classroom instruction because it is
success-oriented, places the learner in control, does not waste time, sustains
interest, supports learning on demand, and is private.
12
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
PRODUCTS AND SERVICES, CONTINUED
PLATO COURSEWARE AND SOFTWARE, Continued
In late 1992, the Company undertook major upgrades and enhancements to its
products. The new PLATO products represent a significant redesign of the
Company's core PLATO curricula. Completed in 1995, the new PLATO products have
four major elements:
INSTRUCTIONAL IMPROVEMENTS. Hundreds of instructional improvements have been
incorporated throughout the lessons based on learner and client feedback and
subject-matter expert input. The new PLATO courseware is fully compatible with
the existing PLATO curriculum structure so that learners encounter a smooth
transition from old to new.
A NEW USER INTERFACE. Streamlined screens and graphically-based function
buttons that can be activated by either the keyboard or mouse improve learner
interaction and control and give PLATO courseware a new look and feel.
A NEW GRAPHIC LOOK. New graphics are instructionally integrated and visually
appealing to our target audience of young adult and adult learners. The
graphics were carefully designed and created to contribute to the instructional
objectives and to enhance the learning experience. Animation and color combine
to make the new PLATO products what the Company believes to be the premier
computer-based instructional system on the market today.
NEW INSTRUCTOR OPTIONS. New features have been added that allow instructors to
easily preview and review all aspects of each lesson, including a review of all
questions. This "page down" mode will be extremely helpful in facilitating
instructor familiarization with PLATO lessons.
Building on an excellent foundation, these new features significantly enhance
and further improve the effectiveness and acceptance of PLATO. In 1995 and 1996,
the Company completed the development of a major new program designed to enhance
the foundation skills of workers in support of the high performance workplace
required by business and industry to be competitive in today's global economy.
PLATO-Registered Trademark- WorkSkills focuses on developing the reading, math,
writing, and communication skills necessary for worker success, using a series
of skill-building lessons structured in skill levels to accommodate the
different competencies necessary to perform specific job functions. The PLATO
WorkSkills curricula have broad applicability in the school and job training
markets as well, fully complementing the core PLATO courseware library. The
development of PLATO WorkSkills was the result of extensive consultation with a
wide range of large and small companies representing many business sectors, as
well as with state and local
13
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
PRODUCTS AND SERVICES, CONTINUED
PLATO COURSEWARE AND SOFTWARE, Continued
secondary and adult educators, both individually and through an advisory group
process. The new curricula will further enhance the Company's leadership
position in the education and training market.
In the past year, the first Windows-based curriculum, Advanced Reading
Strategies, was released. It builds on the PLATO instructional model and adds
extensive problem-based activities to enhance and extend learning, consistent
with new trends in education and training. New courseware under development
builds on this instructional architecture, adding extensive media, including
animation, audio and video, and extending the problem-based applications.
TRO AVIATION COURSEWARE:
Substantially all of the Aviation Training courseware library has been developed
over the last seven years. This courseware offers high-quality, cost-effective
methods of meeting the training requirements imposed, in particular, by
regulatory authorities. The demands placed on the aviation industry by these
authorities make the use of computer-based training an efficient and
cost-effective way of covering these training requirements. Courseware can be
customized to accommodate different equipment configurations and individual
airline operating policies. The Aviation Training group follows industry
standard training analysis techniques and has received ISO 9001 certification
for quality procedures.
Courseware development begins with an initial analysis of the customer's
training requirement, including the overall job and skills required, the
relevant regulations, the target student population and a financial analysis of
the costs of various training approaches (including the cost of not training).
Following initial analysis, the design phase begins, during which time the
details required in the courseware modules are gradually developed. At all
times, the customer's training authority describes, checks and approves the
technical content before it becomes finalized on screen, or supported with audio
material. The development team includes specialists in video, computer audio,
graphics and animation. Many of the courseware packages can be presented in
different languages.
14
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
PRODUCTS AND SERVICES, CONTINUED
TRO AVIATION COURSEWARE, Continued
Courseware developed includes tutorials and competency-based drill and practice
procedure simulations, providing students with a realistic, highly-interactive,
criterion-referenced training environment.
Development tools, including many of the new Windows-based packages, enable
courseware to be produced efficiently and to facilitate customization and
maintenance. The Company is constantly reviewing new development tools and its
development specialists are active in networking within the market place to
ensure that only the most up-to-date, efficient and cost-effective tools are
utilized. The Company also monitors some of the most advanced computer
techniques, such as virtual reality. If these technologies become viable
training tools, the Company is positioned to take full advantage of them.
New regulations are continuously forcing aircraft operators into new training
activities. One such area covers the training and licensing of aircraft
maintenance staff. In response to this requirement, TRO partnered with
Lufthansa to analyze, design and produce the Jet Aircraft Maintenance
Fundamentals (JAMF) courseware package of some 130 hours. These regulations
will eventually be adopted worldwide and TRO will initially be the only company
to offer a fully comprehensive course covering the majority of topics demanded
by the regulators. Additionally, there are a number of PLATO courses that have
been identified to support some of the basic educational requirements of the new
regulations.
Another new area for Aviation Training is the introduction of Ab Initio
courseware for new pilot students. An exclusive marketing contract has been
signed to market this courseware worldwide. Topics ranging from Theory of
Flight Meteorology and Power Plant to Navigation Principles are covered in this
150-hour package, which is delivered on CD-ROM and uses all relevant multi-media
training techniques. The courseware addresses the topics required for basic
pilot licenses from most of the regulatory authorities throughout the world.
INSTRUCTION MANAGEMENT SOFTWARE:
Both the Company's PLATO and Aviation courseware are managed by sophisticated
computer-based software called the Curriculum Manager. It provides an effective
means of monitoring learner progress and recording and reporting performance
data. The Curriculum Manager provides access to courseware as well as
administrative control of the integrated learning system, and gives instructors
the flexibility to design customized learning paths to meet individual learner
needs, program objectives and/or alignments. Through the Curriculum Manager,
courseware can be
15
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
PRODUCTS AND SERVICES, CONTINUED
INSTRUCTION MANAGEMENT SOFTWARE, Continued
presented as published or restructured to correspond to specific program
requirements or teaching strategies. Instructors also have the flexibility to
customize the criteria for learner access and mastery of courses. The
Curriculum Manager also allows learners to work on their individual lesson plans
while other learners are working independently on the system. Learners are not
required to be assigned a specific workstation on the network since the system
identifies them from their sign-on and password.
The Company has just completed the development of a new, state-of-the-art,
highly sophisticated Windows-based instructional management system,
PLATO-Registered Trademark- Pathways, that will replace the current DOS-based
Curriculum Manager for systems that support the Windows operating environment.
PLATO Pathways incorporates a new, easy to use graphical user interface allowing
administrators and instructors to create customized learning paths and monitor
student progress. A new suite of reports, including graphical and comparative
reports, has been designed into the new system. PLATO Pathways includes
step-by-step help sequences to guide administrators and instructors to perform
specific functions easily. Because PLATO Pathways is Windows-based, third-party
programs compatible with MS DOS-TM-, MS Windows 3.x-TM-, or Windows-TM- 95 can
be integrated easily into lesson plans to enhance the learning process.
DELIVERY SYSTEMS:
The PLATO delivery system is configured to use personal computers (PC's) running
MS-DOS-TM- or MS-Windows/DOS-TM-. While the PLATO system can run on a
stand-alone PC with a CD-ROM drive, the vast majority of installations use a
local area network (LAN) with a file server computer and 10 to 30 workstation
PC's. The PLATO system may be physically housed in a single room or laboratory
setting or dispersed among several rooms within a building or buildings in a
campus setting. Additionally, PLATO LAN-based systems may be configured with
remote administration software enabling any number of distant learning locations
and workstations to be connected to a central site via telecommunications
software and hardware. Courseware is stored on the file server on a high speed
hard disk or, for single PC's and CD-ROM server networks, on a CD-ROM. Students
access the file server through the LAN and the network software accesses the
courseware as needed. Instructors can monitor the system and the students via
any workstation, or using a dedicated administrator's workstation, printing test
results or other data on a network printer.
A typical Aviation Training System is configured to run on 486 and Pentium-TM-
multimedia PC's. Aviation Training courseware can run on stand-alone or
networked systems ranging from a few
16
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
PRODUCTS AND SERVICES, CONTINUED
DELIVERY SYSTEMS, Continued
workstations to a company-wide intranet with full administrative and student
monitoring capabilities. Since many airlines have large information technology
departments, the Company is becoming less involved in the supply and
installation of hardware, but still retains a worldwide customer consultation
and support capability when clients require it. There are also a growing number
of airlines reviewing the benefits of using laptop computers with courseware to
enable training at any time.
PLATO ON THE INTERNET/INTRANET:
During 1996, the Company initiated a project to develop the capability to
deliver the PLATO courseware library over the Internet. The initial
implementation of the system was piloted in Tennessee in partnership with
Tennessee Tomorrow, Inc., a public private partnership involved with economic
development. The test included delivery to medium and large businesses and
community training organizations in the state. In addition to delivery via the
Internet, the Company has successfully piloted this system on several client
Intranets.
Based on the positive results of the Tennessee pilot, the Company has introduced
the production version of PLATO courseware on the Internet. The new platform
includes a Windows-based learning folder that allows seamless access to both
local computer and World Wide Web-based learning resources. The product includes
delivery of the PLATO library over the Internet using the new PLATO Pathways
instructional management system, access to Web links and off line resources, and
discussion groups. Program coordinators, who manage learner activity, have
special access to new Web-based tools for creating and managing learner
activity, managing discussion groups and generating administrative reports on
learner usage and progress. In addition, provisions have been made for adding
third-party Web and non-Web based products to enhance the breadth and scope of
the learning experience.
Currently, TRO is delivering PLATO courseware on the Internet via a network of
PLATO Education Partners (described below), a regional telephone company
(BC-TEL), as well as several charter schools. In addition, the Company expects
to deliver PLATO courseware on the Internet via another regional telephone
company (Bell South) in 1998. The Company is currently adding new features such
as the ACT WorkKeys locator tests, a new Windows-based assessment system,
problem-based Web activities, and the Company's new Windows-based courseware
products.
17
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
PRODUCTS AND SERVICES, CONTINUED
CONSULTING SERVICES:
Pre-sale and post-sale support services provided by the Company's education
consultants assist in the successful implementation of the Company's programs.
Education consultants help clients prepare the site for installation of computer
hardware and software, monitor the actual installation process, and provide
on-site consultation and training for lab managers, instructors and
administrators in the use and integration of courseware within their programs.
The Company's education consultants maintain ongoing contact with each client,
providing consultative and support services to ensure the success of their
programs.
SALES AND MARKETING:
The Company's strategy is to use its own sales force in North America and the
U.K. In Aviation Training, the Company utilizes agents in many foreign
countries to supplement its marketing service and support activities. The
Company has established exclusive distribution agreements with distributors
experienced in education product distribution in the following countries:
Singapore, Malaysia, Korea, Taiwan, United Arab Emirates, Brunei, Panama, Costa
Rica and South Africa. The Company targets potentially large and high growth
market niches to which the Company's existing and future products can be
effectively sold. The Company's marketing and sales efforts are designed to
increase market penetration and reinforce the Company's reputation for product
quality, customer satisfaction, and service.
As of October 31, 1997, sixty-nine account managers are responsible for sales
of PLATO Learning Systems and for maintaining an active relationship with both
current and potential clients. Sixty-one education consultants are responsible
for training clients and implementing PLATO Learning Systems.
In addition, as a strategy to extend PLATO Education's sales and marketing reach
to businesses and other constituencies served by community colleges, the Company
enters into contracts with PLATO Education Partners (PEP's). Under these
arrangements, the PEP's, principally community colleges, market PLATO courseware
and consulting services to small and medium sized businesses within the local
community to meet the education and training needs of their employees. Within
this strategy, the Company has also identified other organizations as Internet
Marketing Partners to specifically market licenses for delivery of PLATO over
the Internet. When the PEP commits to a minimum level of purchases of PLATO
licenses or usage over a period of time, the Company expects generally to
recognize revenue ratably over the contract term.
18
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
SALES AND MARKETING, CONTINUED
The Company is also pursuing marketing relationships with Internet providers to
make available the PLATO courseware library to consumers and businesses. The
Company expects to recognize revenue from such sales principally as usage
occurs.
The Company reaches potential clients and reinforces its market image by
attending and making presentations at national, regional and state conventions
and conferences, sponsoring instructional and teaching seminars, and publicity
in trade journals. It conducts extensive direct mail and telemarketing
campaigns to targeted prospects within each market segment to secure leads and
promote increased awareness of the Company and the PLATO courseware. In
addition, the Company has developed and maintains a comprehensive web site on
the Internet's World Wide Web, which allows for the dissemination of news and
information about the Company's products, services, and clients.
The Company has relationships with many industry associations, such as the
American Association of Community and Junior Colleges, the National Alliance of
Business, and the Corrections Education Association. Additional marketing
activities to promote the effectiveness of PLATO products to potential clients
include the publication of formal evaluation data, program and application
reports, and the distribution of press/news releases to appropriate sources.
The Company's Aviation Training products and services are marketed directly to
airlines and training centers around the world through account managers based in
Minneapolis and in London. Sales regions for the consolidated U.S. and U.K.
operations include North America, South America, Asia/Pacific, Europe, Africa,
and the Middle East. The Company participates in the major international air
shows.
In addition to direct sales activities, the Company markets to its prospective
aviation clients by direct mail, including publication and distribution of its
AVIATION NEWSLETTER and AVIATION PRODUCT UPDATE. Major trade publications also
include articles about the Company's Aviation Training products and services.
These publications are effective in reinforcing the Company's position as one of
the leaders in aviation training.
COMPETITION:
In all of its markets, the Company competes primarily against more traditional
methods of education and training, principally live classroom instruction. The
Company has seen increased acceptance of multimedia-based, computer-aided
methods of training and education due to, among other reasons, their
flexibility, cost-efficiency, and demonstrated effectiveness.
19
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
COMPETITION, CONTINUED
Within the education and training services market, the Company competes
primarily on the basis of the depth and recognized quality of its courseware and
its ability to deliver a flexible, cost-effective, and customized solution to a
client's education and training needs on a timely basis. Based on recent
competitive situations in which it has participated, the Company believes that
product depth, quality, and effectiveness are more important competitive factors
than price.
Within the academic computer-based education market, the Company competes most
directly with other learning system providers, including Viacom and Jostens
Learning. While these companies are focused primarily on the elementary school
market, they compete to some degree with the Company in the adult and young
adult market. Although Viacom is significantly larger than the Company, PLATO
courseware offers a comprehensive curriculum developed specifically for adult
and young adult learners. In the post-secondary and training markets there are
many regional and specialized competitors.
The Company's competition in computer-based aviation training comes from three
distinct sources: airframe manufacturers, airlines' internal training
departments, and other computer-based training companies. Major airframe
manufacturers such as Airbus, Boeing, and McDonnell-Douglas occasionally provide
their own training programs with the purchase of the aircraft. Often, airlines
accept these courses because they are included in the purchase price of the
aircraft. Internal training departments of airlines also compete with the
Company. The Company believes that airlines have developed their own training
programs because the quality of training provided by airframe manufacturers has
been inconsistent. Large airlines, for example, American Airlines and Delta
Airlines, have significant internal resources to develop courseware. Internally
developed programs include stand-up instruction, audio and video tape, and
computer-aided training programs. The Company's major external competitor is
Attachematc Corporation. The majority of this competitor's courseware, which is
principally owned by third parties and marketed by Attachematc, uses older
technology and was developed in a lower resolution than the Company's
courseware.
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
The technological aspects of product development, maintenance, and client
support are in many ways similar for all of the Company's products.
The Company's product development and systems development group develops,
enhances, and maintains the courseware, curriculum management software, and
delivery system platforms employing a rigorous multi-phased product development
methodology and process management system. While based on both classical
instructional design concepts and models, as well as
20
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT, CONTINUED
traditional systems development management techniques, the product development
methodology has been constructed to specifically address the creation of
individualized, learner-controlled, interactive instruction using the full
multimedia capabilities of today's personal computing and other related
technologies. The integral quality control and assurance mechanisms and
procedures of the development methodology enhance the instructional
effectiveness and content integrity of the resulting product. They also help to
ensure that the most appropriate and highest quality production values are
achieved in the development of all software graphics, audio, video, and text.
Central to the courseware development process are three proprietary software
tools: the PLATO instructional management system, PLATO PATHWAYS - designed for
system control, the tracking and reporting of student performance and
administration; MICRO PLATO AUTHORING SYSTEM (MPAS) - software used in the
enhancement and maintenance of existing PLATO courseware; and PLATO CURRICULUM
DESIGN, DEVELOPMENT AND DELIVERY (PCD3) SYSTEM - a proprietary yet flexible
MS-DOS-TM- based development tool.
The Company recently released its first major new PLATO Education product
specifically developed for Windows. The Advanced Reading Strategies (ARS) course
has been developed with the Company's new WinPLATO architecture using the
Asymetrix ToolBook Author system. Seven new Windows courses for the education
and workplace environments are currently in development and will be released in
phases during 1998.
The Company's technical support group provides a full range of support services
in an effort to ensure a client's satisfaction with the quality and
effectiveness of its products and services. In addition, staff engineers
continuously evaluate and recommend new technology that not only improves system
performance and capability, but also reduces cost. Before release, each
individual product undergoes a series of separate tests before it is approved
and made available for client use.
The Company does not develop any operating system software, as distinct from its
courseware products, nor does it manufacture any hardware components. The
Company assembles ("integrates") standard hardware components and off-the-shelf
software products into an appropriately configured platform for the Company's
proprietary courseware and management system which is then integrated and fully
tested for 24 to 48 hours under normal operating conditions.
Full-time professionals, with general technical expertise and extensive
operational knowledge of the Company's products, provide pre-sales technical
consultation and support to the Company's field sales organization and are
responsible for the final technical review and approval of all proposed delivery
platforms and installation configurations. These professionals also consult and
21
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT, CONTINUED
coordinate with the client, account manager, and installation team regarding
site preparation, schedule system installation and confirm full acceptance.
They also monitor client satisfaction, maintenance, and other support
requirements.
All manufacturers' warranties are passed through to the Company's clients.
After the warranty periods are over, the Company offers maintenance contracts
through third-party service organizations. The Company contracts with outside
vendors, primarily BancTec Services Corp., for hardware installation and
maintenance services for its client sites. In addition, the Company distributes
a limited amount of third-party courseware and also purchases various
off-the-shelf software and hardware products from Novell, Microsoft, and other
vendors.
The Company provides its clients with a 24-hour, toll-free, problem
resolution and support "hotline" service. Through the use of a remote
diagnostics tool and on-line access to the Company's "Client Profile"
database, full-time client support specialists can address client issues and
successfully resolve most problems during the initial call. Depending on the
nature of the problem, the hotline staff may dispatch a service engineer to
the client site, document the problem and refer it to the appropriate
specialist for resolution, or call for immediate on-line support from more
senior technical personnel.
The Company has supplier relationships with several hardware and software
vendors. Although these relationships are important to the Company, management
believes that, in the event that such products or services were to cease to be
available, alternative sources could be found on terms acceptable to the
Company.
PROPRIETARY RIGHTS:
The Company regards its courseware and software as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark,
trade secret laws, license and distribution agreements, employee and third-party
non-disclosure agreements, and other methods to protect its proprietary rights.
The Company owns the federal registration of the PLATO trade-mark. In addition,
in 1989 Control Data assigned to the Company federally-registered copyrights in
the PLATO courseware. The Company has not recorded the assignment of these
copyrights because it believes the additional statutory rights resulting from
recordation are not necessary for the protection of the Company's rights
therein. The Company has federal copyrights in all PLATO and Aviation
courseware produced since 1989. The Company has not applied for trademark
registration at the state level, but has instead relied on its federal
registrations and state common law rights to protect its proprietary
information. The Company has registered trademarks in the United States and
overseas for PLATO. The Company regards these registrations as material to its
22
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 1. BUSINESS, CONTINUED
PROPRIETARY RIGHTS, CONTINUED
business. The Company licenses some courseware and software from third-party
developers and incorporates them into the Company's courseware offerings and
integrated learning systems.
Pursuant to a settlement agreement entered into in October 1992, the Company has
granted certain limited courseware and software licenses to Drake and Control
Data Systems, Inc. (CDSI). The licenses will permit Drake and CDSI to market
certain earlier versions of portions of the PLATO courseware in certain
specified situations. The Company believes that the limited licenses granted to
Drake and CDSI will have no material adverse impact on its future business.
BACKLOG:
The Company's backlog consists of orders for the delivery of goods and services
in future periods. The total Company backlog was approximately $11.7 million at
October 31, 1997 and $17.5 million at October 31, 1996. The backlog for PLATO
Education and Aviation Training was $8.5 million and $3.2 million,
respectively, at October 31, 1997. From time to time, the Company may have
longer-term contracts in its backlog for the delivery of Aviation Training and
PLATO Learning Systems. At October 31, 1997, approximately $1.6 million of such
orders (included in the foregoing backlog figure) are expected to be delivered
subsequent to fiscal 1998.
CYCLICALITY:
The Company's quarterly operating results fluctuate as a result of a number of
factors including the business and sales cycle, the amount and timing of new
product introductions by the Company, product shipments, client funding issues,
marketing expenditures, product development expenditures, and promotional
programs. In addition, certain of the Company's PLATO Education and Aviation
Training clients experience cyclical variations in funding which can impact the
Company's revenue patterns. The Company's quarterly revenues can also fluctuate
based upon spending patterns, budget cycles, and the fiscal year ends of these
clients. The Company historically has experienced higher levels of revenues in
its fourth fiscal quarter.
EMPLOYEES:
As of October 31, 1997, the Company employed 358 people on a full-time basis,
including 73 in product development and operations, 209 in sales and
marketing, 47 in technical support, and 29 in finance and administration.
23
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 2. FACILITIES
The Company leases approximately 50,000 square feet of office and warehouse
space in Edina and Bloomington, Minnesota for its corporate headquarters and
5,400 square feet of office space for its executive offices in Hoffman Estates,
Illinois. The Company's Canadian subsidiary leases 2,700 square feet for its
principal offices in Toronto, and the United Kingdom subsidiary occupies 8,000
square feet in Berkshire, England. The Company also maintains sales offices in
Dallas, Houston, San Antonio and Texarkana, Texas; Skippack, Pennsylvania;
Alexandria, Virginia; Huntington Beach, California; Ft. Lauderdale, Florida;
Westport, Connecticut; Lenexa, Kansas; Chicago, Illinois; Nashville, Tennessee;
and Charlotte, North Carolina. In Canada, the Company maintains sales offices
in Vancouver, British Columbia; Bedford, Nova Scotia; Winnipeg, Manitoba; and
Moncton, New Brunswick.
The leases for the Company's offices in Edina and Bloomington, Minnesota expire
March 31, 1999 and March 31, 2001, respectively and the lease for the executive
offices in Hoffman Estates, Illinois expires August 31, 2000. See Note 6 of
Notes to Consolidated Financial Statements.
The Company's leased facilities are adequate to meet its business requirements.
ITEM 3. LEGAL PROCEEDINGS
On December 15, 1997, a securities fraud class action was filed in the
United States District Court for the Northern District of Illinois against the
Company and two of its current and former executive officers. The purported
class action was filed on behalf of all persons who purchased common stock of
the Company during the period December 7, 1995 through June 10, 1997, seeking
damages for alleged violations of the federal securities laws. The complaint
in the purported class action alleges that throughout this time period,
defendants knowingly participated in a course of conduct involving
misrepresentation and concealment of adverse material information about the
business and finances of the Company. The complaint alleges that the course
of action followed by the defendants caused the plaintiff and other members
of the purported class to purchase the Company's securities at artificially
inflated prices. The complaint seeks damages suffered as a result of the
actions of the defendants, including costs, expenses and fees incurred in the
litigation.
The Company cannot predict the outcome of this litigation but believes it has
meritorious defenses to these allegations and intends to defend itself
vigorously.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter ended October
31, 1997.
24
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers of the Company are as follows:
William R. Roach Chairman of the Board, President and Chief
Executive Officer
G. Thomas Ahern Senior Vice President, PLATO Education Sales and
Marketing
Wellesley R. Foshay Vice President, Instructional Design and Cognitive
Learning
David H. LePage Vice President, Systems Development, Client
Support and Operations
Mary Jo Murphy Vice President, Corporate Controller and Chief
Accounting Officer
John Murray Senior Vice President, Operations
Andrew N. Peterson Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
Steven R. Schuster Vice President and Assistant Treasurer
John C. Super Vice President, Marketing
Carl Thompson Vice President, Aviation Sales and Operations
Executive officers are appointed by, and serve at the discretion of, the Board
of Directors.
William R. Roach, age 57, has been Chairman of the Board of Directors, President
and Chief Executive Officer of the Company since its founding in 1989. Prior to
founding the Company, from 1987 to 1988, Mr. Roach was President and Chief
Executive Officer of Applied Learning International, Inc. (ALI), a training and
education company and successor to Advanced Systems, Inc. (ASI), and a Director
and Senior Vice President of ALI's parent, National Education Corporation (NEC).
From 1981 to 1987, Mr. Roach was the Chief Executive Officer of ASI, a New York
Stock Exchange listed training and education company which was acquired by NEC
in 1987. After leaving ALI in 1988, Mr. Roach led a group of investors in
pursuing an acquisition in the field of training and education.
25
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT, CONTINUED
G. Thomas Ahern, age 39, was promoted to Senior Vice President, PLATO Education
Sales and Marketing in October 1997. From January to October 1997, he was Vice
President, PLATO Education Sales, North America, and from December 1992 to
October 1997 he served as Vice President, U.S. Sales, PLATO Education.
Previously, he was Regional Vice President, Sales for the Company since its
founding in 1989. From January 1989 to September 1989, Mr. Ahern was National
Sales Manager for the training and education group of Control Data Corporation,
a computer hardware, software and data services company.
Wellesley R. Foshay, Ph.D., age 50, has served as Vice President, Instructional
Design and Cognitive Learning since the Company's founding in 1989. From 1987
to 1989, Dr. Foshay was Senior Director, Quality Assurance, Standards and
Training for ALI.
David H. LePage, age 51, has served in his present capacity, Vice President,
Systems Develop-ment, Client Support and Operations, since the Company's
founding in 1989. From 1972 to 1989, Mr. LePage was General Manager, Systems
Development and Technical Support for the training and education group of
Control Data Corporation.
Mary Jo Murphy, age 41, joined the Company in August 1993 as Vice President,
Corporate Controller and Chief Accounting Officer. From 1986 to 1992, she was
Corporate Controller for Krelitz Industries, Inc., a drug distribution company.
Ms. Murphy, a Certified Public Accountant, was formerly an Audit Supervisor for
Coopers & Lybrand.
John Murray, age 42, joined the Company in 1989 as Managing Director of the
United Kingdom subsidiary. He has served in his present capacity, Senior Vice
President, Operations since October 1997. From April 1996 to October 1997 he
held the position of Vice President, Product Development. From November 1994 to
March 1996, Mr. Murray was Vice President, Aviation Sales and Operations. He
served as Vice President, Eastern Aviation Sales and Operations, from 1991 to
1994. From 1986 to 1989, Mr. Murray was Manager of Training Systems Group for
Control Data Limited.
Andrew N. Peterson, age 45, joined the Company in April 1997 as Senior Vice
President, Chief Financial Officer, Corporate Secretary and Treasurer. From 1995
to 1996 Mr. Peterson was Chief Financial Officer of TSR, Inc., a publishing
company. From 1986-1994 Mr. Peterson held the position of Chief Financial
Officer of Duplex Products, Inc., a business forms manufacturer. Mr. Peterson is
a Certified Public Accountant and holds an MBA from Northern Illinois
University.
Steven R. Schuster, age 37, joined the Company in December 1996 as Vice
President and Assistant Treasurer. From 1993 to 1996, he was Vice President for
Norwest Bank, a financial services company. Mr. Schuster was formerly the
Assistant Treasurer of St. Jude Medical, Inc.
26
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART I
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT, CONTINUED
John C. Super, age 50, joined the Company in 1990 as a Workplace Account
Manager. He has served in his present capacity as Vice President, Corporate
Marketing, since February 1997. From 1992 through 1996 he served as Vice
President, Strategic Sales and during 1991 as Vice President Sales, Eastern
Region. Prior to joining TRO, Mr. Super served in sales and management
capacities with Wicat Systems and Computer Curriculum Corporation.
Carl E. Thompson, age 35, has served in his present capacity as Vice President,
Aviation Sales and Operations and Managing Director of the United Kingdom
Aviation Training subsidiary since April 1996. From November 1994 to March 1996
has was General Manager of the U.K. subsidiary. From May 1993 to October 1994 he
was Manager - Customer Support, of Aviation Training. Prior to joining TRO, Mr.
Thompson was Business Manager for CSS Limited, a computer services company.
27
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION:
The Company's common stock is publicly traded on the NASDAQ National Market
System under the symbol, TUTR.
The following table presents the high and low closing prices for the Company's
common stock as reported by NASDAQ for each quarter during the years ended
October 31, 1997 and 1996:
FISCAL 1997
----------------------------------------
FIRST SECOND THIRD FOURTH
--------- -------- ------- ----------
High $ 21.88 $ 11.50 $ 12.13 $ 11.00
Low 10.00 7.06 7.00 7.25
FISCAL 1996
----------------------------------------
FIRST SECOND THIRD FOURTH
--------- -------- ------- ----------
High $ 16.75 $ 17.00 $ 19.75 $ 19.50
Low 5.94 10.00 12.38 14.25
HOLDERS:
There were approximately 4,100 stockholders of record as of December 10, 1997
(includes individual participants in security position listings).
DIVIDENDS:
The Company has not declared or paid dividends on its common stock. The
Company's ability to pay dividends is restricted by its revolving loan agreement
(see Note 3 of Notes to Consolidated Financial Statements). While future
dividend payments are at the discretion of the Board of Directors, the Company
is growth-oriented and there is no present intention to pay a cash dividend
on its common stock.
28
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART II
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ------------ ------------ ------------ -----------
INCOME STATEMENT DATA:
Revenues by product line:
PLATO Education. . . . . . . . . . . . $ 33,265 $ 36,980 $ 30,613 $ 22,591 $ 17,333
Aviation Training. . . . . . . . . . . 3,694 4,425 6,724 5,774 9,200
----------- ------------ ------------ ------------ -----------
Total revenues . . . . . . . . . . . . 36,959 41,405 37,337 28,365 26,533
Gross profit . . . . . . . . . . . . . 30,484 35,192 29,669 22,587 21,419
Selling, general and administrative
expense. . . . . . . . . . . . . . 36,988 27,537 19,027 15,494 11,144
Product development and customer
support. . . . . . . . . . . . . . 8,036 5,307 4,487 7,515 4,671
Operating income (loss). . . . . . . . (14,540) 2,348 6,155 (1,222) 5,604
Interest expense . . . . . . . . . . . (1,317) (723) (300) (344) (102)
Provision (credit) for income taxes. . 4,061 564 2,157 (533) 1,950
Income (loss) from continuing
operations . . . . . . . . . . . . (20,217) 982 3,752 (889) 3,785
Income (loss) from discontinued
operations . . . . . . . . . . . . --- --- --- (1,250) (738)
PER SHARE OF COMMON STOCK
(Pro forma basis for 1993):
Income (loss) from continuing
operations . . . . . . . . . . . . (3.24) 0.15 0.60 (0.14) 0.63
Loss from discontinued
operations . . . . . . . . . . . . -- --- --- (0.20) (0.12)
Net income (loss). . . . . . . . . . . (3.24) 0.15 0.60 0.53 0.76
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . 29,088 42,327 33,660 26,931 21,312
Total liabilities. . . . . . . . . . . 28,341 21,515 14,158 10,990 8,973
Stockholders' equity . . . . . . . . . 747 20,812 19,502 15,941 12,339
29
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART II
- --------------------------------------------------------------------------------
ITEM 7. 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 used in a wide variety of adult
settings. Offering comprehensive educational courseware specifically designed
for young adult and adult learners, the Company's PLATO-Registered Trademark-
Learning Systems are marketed to middle schools and high schools, community
colleges, job training programs, correctional institutions, government-funded
programs, the military and corporations. The Company's TRO Aviation Training
Systems are marketed to airlines worldwide for use by commercial airline pilots,
maintenance crews, and cabin personnel.
In November 1997, the Company announced that it had retained BancAmerica
ROBERTSON STEPHENS to advise it regarding strategic alternatives to enhance
shareholder value.
FISCAL 1997 COMPARED TO FISCAL 1996:
REVENUES:
Total revenues of $36,959,000 for 1997 decreased by $4,446,000 or 11% as
compared to $41,405,000 for 1996. The following table highlights revenues by
product line (in 000's):
PLATO Education AVIATION TRAINING TOTAL
-------------------- ------- ------- -----------------------
1997 1996 1997 1996 1997 1996
-------- -------- ------- ------- -------- --------
Courseware license and support . . . . . . . . $27,830 $31,252 $3,390 $4,183 $31,220 $35,435
Hardware, third party courseware and other . . 5,435 5,728 304 242 5,739 5,970
-------- -------- ------- ------- -------- --------
Total revenues. . . . . . . . . . . . . . $33,265 $36,980 $3,694 $4,425 $36,959 $41,405
-------- -------- ------- ------- -------- --------
-------- -------- ------- ------- -------- --------
As summarized in the above table, PLATO Education courseware license and support
revenues of $27,830,000 for 1997 decreased by $3,422,000 or 11% as compared to
1996. The majority of this decrease occurred in the fourth quarter of 1997 as
compared to 1996. The Company does not anticipate that this is a long term
trend.
Aviation Training revenues of $3,694,000 decreased by $731,000 or 17% from the
prior year, reflecting a general weakness in the aviation industry.
The Company's quarterly operating results fluctuate as a result of a number of
factors including the business and sales cycle, the amount and timing of new
product introductions by the Company, product shipments, client funding issues,
marketing expenditures, product development expenditures and promotional
programs. The Company historically has experienced higher levels
of revenues in its fourth fiscal quarter.
30
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART II
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
FISCAL 1997 COMPARED TO FISCAL 1996, CONTINUED
GROSS PROFIT:
Gross profit for 1997 decreased by $4,708,000 or 13% to $30,484,000 as compared
to $35,192,000 for 1996. This decrease was due principally to the decline in
PLATO Education courseware revenues. The Company's gross margin was 82% for
1997 as compared to 85% for 1996, reflecting the decline in courseware revenues.
PLATO Education gross margin for 1997 was 83% compared to 86% for 1996. Aviation
Training gross margin was 81% for 1997 compared to 76% for 1996.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE:
Selling, general, and administrative expense for 1997 increased by $9,451,000 or
34% to $36,988,000 as compared to $27,537,000 for 1996. This increase was
principally due to the additional provision for doubtful accounts of
approximately $5,132,000 recorded in 1997, when it was determined that payment
for numerous sales contracts would not be received. The majority of these sales
were to customers which are dependent upon various government funding sources,
and therefore subject to standard non-appropriation of funds. This one time
adjustment is not expected to recur in future years.
In addition, PLATO Education selling expense increased by approximately
$2,736,000, primarily for salaries, fringe benefits and travel due to the
expansion of the sales and service organization.
In late fiscal 1997, the Company initiated plans to restructure its operations
to achieve significant cost reductions and improve operating efficiencies.
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
Product development and customer support expense for 1997 increased by
$2,729,000 or 51% to $8,036,000 as compared to $5,307,000 for 1996. While PLATO
Education product development spending was comparable for 1997 as compared to
1996, product development expense increased principally as a result of
decreased capitalization and the increased effect of amortization of previously
capitalized costs.
31
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART II
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
FISCAL 1997 COMPARED TO FISCAL 1996, CONTINUED
OPERATING INCOME (LOSS):
Operating loss for 1997 was $(14,540,000) as compared to operating income of
$2,348,000 for 1996. This decline was due primarily to the decrease in PLATO
Education revenues and gross profit, and the increase in PLATO Education
selling, bad debt and product development expenses.
INTEREST EXPENSE:
Interest expense was $1,317,000 for 1997 as compared to $723,000 for 1996.
Interest expense increased due to the Company's long term debt incurred during
1997.
PROVISION FOR INCOME TAXES:
The Company took a non-cash tax charge of $4,061,000 in 1997 to record a
valuation allowance against the deferred tax asset. Such valuation allowance
has been provided based on the inherent uncertainty of predicting the
sufficiency of the future taxable income necessary to realize the benefit of the
net deferred tax asset in light of the Company's recent loss history and the
competitive nature of the industry in which the Company operates.
FISCAL 1996 COMPARED TO FISCAL 1995:
REVENUES:
Total revenues of $41,405,000 for 1996 increased by $4,068,000 or 11% as
compared to $37,337,000 in 1995. The following table highlights revenues by
product line (in 000's):
PLATO Education AVIATION TRAINING TOTAL
---------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995
--------- --------- --------- -------- --------- -------
Courseware license and support . . . . . . . . $31,252 $ 25,612 $ 4,183 $ 4,599 $ 35,435 $30,211
Hardware, third party courseware and other . . 5,728 5,001 242 2,125 5,970 7,126
--------- --------- --------- -------- --------- -------
Total revenues. . . . . . . . . . . . . . $36,980 $ 30,613 $ 4,425 $ 6,724 $ 41,405 $37,337
--------- --------- --------- -------- --------- -------
--------- --------- --------- -------- --------- -------
As summarized in the above table, PLATO Education revenues of $36,980,000 for
1996 increased by $6,367,000 or 21% as compared to 1995. This increase can be
attributed to increased market penetration resulting from the expansion of the
PLATO Education sales force and new products.
32
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART II
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
FISCAL 1996 COMPARED TO FISCAL 1995, CONTINUED
REVENUES, CONTINUED:
Aviation Training revenues of $4,425,000 decreased by $2,299,000 or 34% from the
prior year, due principally to a decline in low margin hardware sales,
reflecting the Company's focus on the sale of high margin courseware products.
The decline in Aviation Training courseware revenues reflects a general weakness
in the aviation industry.
The Company's quarterly operating results fluctuate as a result of a number of
factors including the business and sales cycle, the amount and timing of new
product introductions by the Company, product shipments, client funding issues,
marketing expenditures, product development expenditures and promotional
programs. The Company historically has experienced higher levels of revenues in
its fourth fiscal quarter.
GROSS PROFIT:
Gross profit for 1996 increased by $5,523,000 or 19% to $35,192,000 as compared
to $29,669,000 for 1995. This increase was due principally to PLATO Education
revenue growth and a favorable mix of courseware revenue. The Company's gross
margin was 85% for 1996 as compared to 79% for 1995. Increased courseware
revenues and a decline in hardware revenues resulted in a significantly improved
gross margin for 1996.
PLATO Education gross margin for 1996 was 86% compared to 84% for 1995. Aviation
Training gross margin was 76% for 1996 compared to 57% for 1995.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE:
Selling, general, and administrative expense for 1996 increased by $8,510,000 or
45% to $27,537,000 as compared to $19,027,000 for 1995. PLATO Education sales
and marketing expenses, including commissions, increased $6,264,000, principally
as a result of the growth in sales volume and the planned expansion of the sales
and service organization. In addition, in the fourth quarter of 1996, the
Company recorded a provision for doubtful accounts of approximately $1,700,000.
33
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART II
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
FISCAL 1996 COMPARED TO FISCAL 1995, CONTINUED
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
Product development and customer support expense for 1996 increased by $820,000
or 18% to $5,307,000 as compared to $4,487,000 for 1995. Product development
expense of $2,947,000 increased by $366,000, or 14%, as a result of increased
Aviation Training product development spending as well as a slight increase in
PLATO Education spending. During fiscal 1996, the Company developed a new,
state-of-the-art, Windows-based instructional management system that will
replace the current DOS-based curriculum manager for systems that support the
Windows operating system. These costs were offset by a decrease in spending due
to the completion of the PLATO WorkSkills curricula. Customer support expense
for PLATO Education of $2,097,000 increased by $438,000, or 26%, as a result of
increased revenue levels and the broadening customer base.
OPERATING INCOME:
Operating income for 1996 was $2,348,000 as compared to $6,155,000 for 1995.
This decline was due primarily to PLATO Education increased revenues and gross
profit being more than offset by increased sales and marketing and customer
support expenses.
INTEREST EXPENSE:
Interest expense was $723,000 for 1996 as compared to $300,000 for 1995.
Interest expense increased due to a higher level of borrowings under the
Company's revolving loan agreement during 1996. In addition, the sale of certain
installment receivables at a discount resulted in the recognition of interest
expense in the second quarter of fiscal 1996 (see Note 2 of Notes to
Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES:
As of October 31, 1997, the Company's principal sources of liquidity included
cash and cash equivalents of $537,000, net accounts receivable of $18,305,000
and its line of credit. The Company has total installment receivables of
$6,829,000 at October 31, 1997, of which $6,264,000 are due within one year and
are included in net accounts receivable.
Net cash used in the Company's operating activities was $5,677,000 in 1997,
$4,223,000 in 1996, and $4,782,000 in 1995. Cash flows from operations were
used principally to fund the Company's working capital requirements. In
addition to cash flows from operations, the Company has
34
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART II
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
resources available under its revolving loan agreement to provide borrowings up
to a maximum of $18,000,000 (see Note 3 of Notes to Consolidated Financial
Statements). At October 31, 1997, borrowings of $8,908,000 were outstanding at
an interest rate of 10%. The agreement provides for financial covenants which
require a minimum level of operating profit and a minimum liabilities to equity
ratio. The Company did not comply with the financial covenants for the year
ended October 31, 1997. On December 8, 1997 the loan agreement was amended to
waive compliance with certain covenants for the period ended October 31, 1997,
to reset such covenants, to provide additional borrowings up to a maximum of
$3,500,000 from time to time during certain periods of the term of the loan
agreement and to extend the commitment through August 31, 1998. Additionally,
the amendment terminated the Company's option to incur LIBOR-based interest
loans and the option to automatically extend the commitment for an additional
two years.
The Company's net cash flow used in investing activities was $762,000 in 1997
and $1,020,000 in 1996 principally for capital expenditures. The Company's net
cash flow provided by investing activities was $1,557,000 in 1995, principally
from the sale of marketable securities to fund working capital needs. The
Company's capital expenditures totaled $762,000, $1,033,000, and $668,000 in
1997, 1996 and 1995, respectively. At October 31, 1997, the Company had no
material commitments for capital expenditures.
The Company's net cash flow provided by financing activities was $6,527,000 in
1997, principally from long term debt issued, and $5,429,000 in 1996 and
$3,319,000 in 1995, principally from borrowings under the line of credit.
The Company took a non-cash tax charge of $4,061,000 in 1997 to record a
valuation allowance against the deferred tax asset. Such valuation allowance
has been provided based on the inherent uncertainty of predicting the
sufficiency of the future taxable income necessary to realize the benefit of the
net deferred tax asset in light of the Company's recent loss history and the
competitive nature of the industry in which the Company operates. In prior
years the primary differences between pretax earnings for financial reporting
purposes and taxable income for income tax purposes included revenue
recognition, the capitalization of product development costs and various
reserves. The Company has net operating loss carryforwards of approximately
$27.5 million which do not start expiring until 2004.
35
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART II
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
From time to time, the Company evaluates making acquisitions of products or
businesses that complement the Company's core business. The Company has no
present understandings, commitments, or agreements with respect to any material
acquisitions of other businesses, products, or technologies. However, the
Company may consider and acquire other complementary businesses, products, or
technologies in the future.
The Company is currently reviewing financing alternatives to meet its short and
long-term working capital, capital expenditure, and business investment
requirements.
36
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART II
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
(a) (1) Consolidated Financial Statements:
Report of Independent Accountants. . . . . . . . . . . . . . . 38
Consolidated Balance Sheets as of October 31, 1997 and 1996. . 39
Consolidated Statements of Income for the years ended
October 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . 40
Consolidated Statements of Stockholders' Equity for the years
ended October 31, 1997, 1996 and 1995. . . . . . . . . . . . . 41
Consolidated Statements of Cash Flows for the years ended
October 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . 42
Notes to Consolidated Financial Statements . . . . . . . . . . 43-53
(2) Consolidated Financial Statement Schedule for the years
ended October 31, 1997, 1996 and 1995:
Report of Independent Accountants on Consolidated Financial
Statement Schedule . . . . . . . . . . . . . . . . . . . . . . 57
Schedule II. Valuation and Qualifying Accounts and Reserves. . 58
All other schedules called for under Regulation S-X are not submitted because
they are not applicable, or because the required information is not material or
is included in the consolidated financial statements or notes thereto.
37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
TRO Learning, Inc.
We have audited the accompanying consolidated balance sheets of TRO Learning,
Inc. and Subsidiaries as of October 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended October 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of TRO
Learning, Inc. and Subsidiaries as of October 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 1997 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
January 12, 1998
38
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OCTOBER 31,
-----------------------
1997 1996
---------- --------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 537 $ 475
Accounts receivable, less allowances of $7,020 and $510, respectively . . . . . . . . . . . . 18,305 24,163
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 990 1,097
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 688 1,051
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,520 26,786
Equipment and leasehold improvements, less accumulated depreciation
of $4,092 and $3,250, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,271 1,368
Product development costs, less accumulated amortization of $2,562 and $680, respectively . . . 5,989 5,528
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- 5,906
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,308 2,739
-------- --------
$29,088 $42,327
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,472 $ 2,588
Accrued employee salaries and benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,199 3,079
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,072 3,705
Revolving loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,908 8,612
Deferred tax liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- 1,845
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,949 1,137
-------- --------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,600 20,966
Long term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,050 ---
Deferred revenue, less current portion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519 296
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 253
Stockholders' equity:
Common stock, $.01 par value, 25,000 shares authorized;
6,450 shares issued and 6,405 shares outstanding in 1997;
6,190 shares issued and 6,167 shares outstanding in 1996 . . . . . . . . . . . . . . . . . 64 62
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,074 21,634
Treasury stock at cost, 45 and 23 shares, respectively. . . . . . . . . . . . . . . . . . . . (469) (208)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,660) (443)
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . (262) (233)
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747 20,812
-------- --------
$29,088 $42,327
-------- --------
-------- --------
See Notes to Consolidated Financial Statements
39
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED OCTOBER 31,
--------------------------------------
1997 1996 1995
---------- --------- ---------
Revenues by product line:
PLATO Education.............................................. $33,265 $36,980 $30,613
Aviation Training............................................ 3,694 4,425 6,724
---------- --------- ---------
Total revenues............................................. 36,959 41,405 37,337
Cost of revenues............................................... 6,475 6,213 7,668
---------- --------- ---------
Gross profit............................................... 30,484 35,192 29,669
---------- --------- ---------
Operating expenses:
Selling, general and administrative expense.................. 36,988 27,537 19,027
Product development and customer support..................... 8,036 5,307 4,487
---------- --------- ---------
Total operating expenses................................... 45,024 32,844 23,514
---------- --------- ---------
Operating income (loss).................................. (14,540) 2,348 6,155
Interest expense............................................... (1,317) (723) (300)
Interest income and other expense, net......................... (299) (79) 54
---------- --------- ---------
Income (loss) before income taxes........................ (16,156) 1,546 5,909
Provision for income taxes..................................... 4,061 564 2,157
---------- --------- ---------
Net income (loss)........................................ $(20,217) $ 982 $3,752
---------- --------- ---------
---------- --------- ---------
Income (loss) per common and common equivalent share:
Net income (loss)........................................ $ (3.24) $ 0.15 $ 0.60
---------- --------- ---------
---------- --------- ---------
Weighted average common and common equivalent shares
outstanding.............................................. 6,233 6,643 6,280
---------- --------- ---------
---------- --------- ---------
See Notes to Consolidated Financial Statements
40
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK
----------------------------------------------
FOREIGN
CURRENCY TOTAL
TREASURY ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT PAID IN CAPITAL STOCK DEFICIT ADJUSTMENT EQUITY
------- ------- --------------- -------- ----------- ------------ ------------
Balances, November 1, 1994. . . . . . . . 6,073 $ 61 $ 21,291 --- $ (5,177) $(234) $15,941
Net income. . . . . . . . . . . . . . . --- --- --- --- 3,752 --- 3,752
Exercise of stock options and shares
issued under employee stock
purchase plan. . . . . . . . . . . . 27 --- 54 --- --- --- 54
Repurchase of shares. . . . . . . . . . (28) --- --- (183) --- --- (183)
Changes in exchange rates . . . . . . . --- --- --- --- --- (62) (62)
------- ------- --------------- -------- ----------- ------------ ------------
Balances, October 31, 1995. . . . . . . . 6,072 61 21,345 (183) (1,425) (296) 19,502
Net income. . . . . . . . . . . . . . . --- --- --- --- 982 --- 982
Exercise of stock options and shares
issued under employee stock
purchase plan. . . . . . . . . . . . 99 1 289 50 --- --- 340
Repurchase of shares. . . . . . . . . . (4) --- --- (75) --- --- (75)
Changes in exchange rates . . . . . . . --- --- --- --- --- 63 63
------- ------- --------------- -------- ----------- ------------ ------------
Balances, October 31, 1996. . . . . . . . 6,167 62 21,634 (208) (443) (233) 20,812
Net loss. . . . . . . . . . . . . . . . --- --- --- --- (20,217) --- (20,217)
Exercise of options, stock grants and
shares issued under employee stock
purchase plan . . . . . . . . . . . . 260 2 440 --- --- --- 442
Repurchase of shares. . . . . . . . . . (22) --- --- (261) --- --- (261)
Changes in exchange rates . . . . . . . --- --- --- --- --- (29) (29)
------- ------- --------------- -------- ----------- ------------ ------------
Balances, October 31, 1997. . . . . . . . 6,405 $ 64 $ 22,074 $(469) $(20,660) $(262) $ 747
------- ------- --------------- -------- ----------- ------------ ------------
------- ------- --------------- -------- ----------- ------------ ------------
See Notes to Consolidated Financial Statements
41
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED OCTOBER 31,
----------------------------------------
1997 1996 1995
---------- --------- ---------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . $(20,217) $ 982 $3,752
---------- --------- ---------
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 4,061 564 2,157
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 2,644 1,466 807
Provision for doubtful accounts. . . . . . . . . . . . . . . . . . . . 7,252 2,120 300
Disposal of fixed assets . . . . . . . . . . . . . . . . . . . . . . . 2 180 41
Amortization of deferred revenue . . . . . . . . . . . . . . . . . . . --- --- (251)
Changes in assets and liabilities:
Increase in accounts receivable. . . . . . . . . . . . . . . . . . . (1,394) (8,680) (6,153)
(Increase) decrease in inventories . . . . . . . . . . . . . . . . . 107 (52) 141
(Increase) decrease in prepaid expenses and other current
and noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . 1,794 1,255 (1,746)
Increase in product development costs. . . . . . . . . . . . . . . . (2,251) (3,356) (2,851)
Increase in accounts payable. . . . . . . . . . . . . . . . . . . . 884 341 144
Increase (decrease) in accrued liabilities, accrued employee
salaries and benefits and other liabilities. . . . . . . . . . . . 406 742 (522)
Increase (decrease) in deferred revenue. . . . . . . . . . . . . . . 1,035 215 (601)
---------- --------- ---------
Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . . 14,540 (5,205) (8,534)
---------- --------- ---------
Net cash used in operating activities. . . . . . . . . . . . . . . (5,677) (4,223) (4,782)
---------- --------- ---------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . (762) (1,033) (668)
Proceeds from disposal of fixed assets . . . . . . . . . . . . . . . . --- 13 ---
Decrease in marketable securities. . . . . . . . . . . . . . . . . . . --- --- 2,225
---------- --------- ---------
Net cash provided by (used in) investing activities . . . . . . . . (762) (1,020) 1,557
---------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . 6,050 --- ---
Net proceeds from short term borrowings. . . . . . . . . . . . . . . . 296 5,164 3,448
Net proceeds from the issuance of common stock . . . . . . . . . . . . 442 290 54
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . (261) (25) (183)
---------- --------- ---------
Net cash provided by financing activities. . . . . . . . . . . . . . 6,527 5,429 3,319
---------- --------- ---------
Effect of foreign currency on cash . . . . . . . . . . . . . . . . . . . (26) 58 (63)
---------- --------- ---------
Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . 62 244 31
Cash and cash equivalents at beginning of period . . . . . . . . . . . . 475 231 200
---------- --------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . $537 $475 $231
---------- --------- ---------
---------- --------- ---------
Cash paid for interest expense . . . . . . . . . . . . . . . . . . . . . $1,234 $829 $293
---------- --------- ---------
---------- --------- ---------
See Notes to Consolidated Financial Statements
42
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
markets such systems primarily to educational institutions and private industry.
The Company's fiscal year is from November 1 to October 31. Unless otherwise
stated, references to the years 1997, 1996 and 1995 relate to the fiscal years
ended October 31, 1997, 1996 and 1995, respectively.
PRINCIPLE OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of TRO
Learning, Inc. and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. Credit risk is minimized
as a result of the large number of the Company's customers. The Company
performs evaluations of its customers' credit worthiness and generally requires
no collateral from its customers. Although many of the Company's educational
customers are dependent upon various government funding sources, and are subject
to non-appropriation of funds, the Company does not believe there is a
significant concentration of risk associated with any specific governmental
program or funding source. Reserves have been established for numerous sales
contracts for which payments were not received in 1997 due to non-appropriation
of funds. As of October 31, 1997, the Company had no significant concentrations
of credit risk.
43
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
CASH EQUIVALENTS:
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Such investments are
carried at cost, which approximates fair value.
INVENTORIES:
Inventories, which consist principally of goods purchased for resale, are
stated at the lower of cost (first in, first out) or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements are stated at cost, less accumulated
depreciation. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets. Upon retirement or disposition, cost and
related accumulated depreciation are removed from the accounts, and any gain or
loss is included in the results of operations. Maintenance and repairs are
expensed as incurred.
OTHER ASSETS:
Other assets include principally intangible assets and installment receivables
with terms greater than one year.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of the Company's debt is estimated to approximate the carrying
value of these liabilities based upon borrowing rates currently available to the
Company for borrowings with similar terms.
REVENUE RECOGNITION:
Revenue from the sale of education and training courseware licenses, computer
hardware and related support services, principally maintenance, is recognized
when the courseware, hardware, and related services are delivered. Upon
delivery, future service costs, if any, are accrued. Future service costs
represent the Company's problem resolution and support "hotline" service for
a one year period. Deferred revenue represents the portion of billings made
or payments received in advance of services being performed or products being
delivered.
44
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
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 technical feasibility of new courseware products
to be sold, leased, or otherwise marketed are expensed as incurred. Once
technical feasibility has been established, costs incurred in the development
of new generation courseware products are capitalized.
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.
INCOME TAXES:
The Company accounts for income taxes as required under the provisions of
Statement of Financial Accounting Standards 109, "Accounting for Income Taxes"
(SFAS 109). SFAS 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. In addition, the amount of any future tax benefits are reduced by a
valuation allowance to the extent such benefits are not expected to be realized.
COMPUTATION OF INCOME (LOSS) PER SHARE:
Income (loss) per share is based upon the weighted average number of shares of
common stock outstanding and, where dilutive, common equivalent shares from
stock options and warrants (using the treasury stock method) and other
potentially dilutive securities. Fully diluted income (loss) per share is not
presented since the results are equivalent to primary income (loss) per share.
FOREIGN CURRENCY TRANSLATION:
Results of operations for foreign entities are translated using the average
exchange rates during the period. Assets and liabilities are translated using
the exchange rate in effect at the balance sheet date. Resulting translation
adjustments are recorded as a separate component of stockholders' equity.
45
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
NEW ACCOUNTING STANDARDS:
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 128, "Earnings Per Share" (SFAS
128), which requires the dual presentation of basic and diluted earnings per
share. Under SFAS 128, the dilutive effect of stock options is excluded for
calculating basic earnings per share. The Company will be required to adopt
SFAS 128 beginning in the interim period ending January 31, 1998, and all prior
periods are required to be restated. There will be no impact on reported
earnings per share for 1997 because the Company incurred a loss for the period.
The impact is expected to result in an increase to reported earnings per share
of $0.01 for 1996.
In June 1997, the FASB issued Statement of Financial Accounting Standards 130,
"Reporting Comprehensive Income" (SFAS 130). Under SFAS 130, companies are
required to report comprehensive income as a measure of overall performance.
Comprehensive income includes all changes in equity during a reporting period,
except those resulting from investments by owners and distributions to owners.
The Company will adopt SFAS 130 for the fiscal year ending October 31, 1999.
In June 1997, the FASB issued Statement of Financial Accounting Standards 131,
"Disclosure About Segments of an Enterprise and Related Information" (SFAS 131).
SFAS 131 redefines how operating segments are determined and requires expanded
quantitative and qualitative disclosures relating to an entity's operating
segments. The Company will adopt SFAS 131 for the fiscal year ending October
31, 1999.
The American Institute of Certified Public Accountants has issued Statement
of Position 97-2 "Software Revenue Recognition". SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997
and provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. The Company does not expect the
application of the SOP to have a material impact on the Company's financial
condition or results of operations.
2. ACCOUNTS RECEIVABLE:
Accounts receivable include net installment receivables of $6,264,000 and
$13,023,000 at October 31, 1997 and 1996, respectively. Installment receivables
with terms greater than one year were $565,000 and $1,909,000 at October 31,
1997 and 1996, respectively, and are included in other assets on the
consolidated balance sheets.
The provision for doubtful accounts, included in selling, general and
administrative expenses on the consolidated statements of income, was
$7,252,000, $2,120,000 and $300,000 for 1997, 1996 and 1995, respectively.
During 1996 and 1995, the Company sold certain installment receivables, on a
non-recourse basis, to financial institutions. Approximately $735,000 and
$1,081,000 of receivables were sold at their discounted present value of
approximately $599,000 and $981,000 in 1996 and 1995, respectively, at an
effective rate of 8.6% and 9.3%, respectively. The difference between the gross
receivable amount and the proceeds has been recorded as interest expense in the
consolidated statements of income.
46
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
3. DEBT:
The components of debt at October 31 are as follows (in thousands):
1997 1996
------ ------
Current:
Revolving loan........................... $ 8,908 $8,612
15% term loan............................ 3,000 ---
------- ------
Total current debt..................... $11,908 $8,612
------- ------
------- ------
Long term:
10% subordinated convertible debentures.. $ 3,050 $ ---
------- ------
------- ------
The weighted average interest rate of borrowings outstanding under the revolving
loan was 10% and 8.9% at October 31,1997 and 1996, respectively.
In March 1997, the Company expanded its revolving loan agreement to provide for
a maximum $18 million line of credit. The agreement has a commitment through
August 2, 1998 with an option to extend for an additional two years.
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 primarily of certain accounts receivable and inventory, and bear
interest at the prime rate plus 1.5% or the LIBOR rate plus 3.25%, as determined
by the Company. A commitment fee is payable based on the unused portion of the
line of credit. The agreement provides for restrictions on dividends,
investments, additional indebtedness, and the sale of assets, as defined, and
for financial covenants requiring a minimum level of operating profit and a
minimum liabilities to equity ratio. The Company did not comply with the
financial covenants for the period ended October 31, 1997. On December 8, 1997,
the loan agreement was amended to waive compliance with certain covenants for
the period ended October 31, 1997, to reset such covenants, to provide
additional borrowings up to a maximum of $3,500,000 from time to time during
certain periods of the term of the loan agreement and to extend the commitment
through August 31, 1998. Additionally, the amendment terminated the Company's
option to incur LIBOR-based interest loans and the option to automatically
extend the commitment for an additional two years.
In addition, the expanded revolving loan agreement makes available a $3 million
term loan, at an annual interest rate of 15%, during the remaining term of the
agreement. The funds were borrowed in May 1997 and used to reduce the balance
of the outstanding revolving loan.
Also, in March 1997, the Company issued $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.
47
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
3. DEBT, CONTINUED
Scheduled maturities of long term debt are as follows (in thousands):
2001....................... $ 763
2002....................... 763
Thereafter................. 1,524
--------
$ 3,050
--------
--------
4. INCOME TAXES:
The components of income (loss) before provision for income taxes are as follows
(in thousands):
1997 1996 1995
--------- ------- -------
United States . . . . . . . . . $(13,432) $2,066 $6,646
Foreign . . . . . . . . . . . . (2,724) (520) (737)
--------- ------- -------
$(16,156) $1,546 $5,909
--------- ------- -------
--------- ------- -------
The components of the provision for income taxes are as follows (in thousands):
1997 1996 1995
--------- ------- -------
Federal . . . . . . . . . . . . $ 3,397 $ 703 $ 2,260
Foreign . . . . . . . . . . . . 408 (178) (269)
State and local . . . . . . . . 256 39 166
--------- ------- -------
$ 4,061 $ 564 $ 2,157
--------- ------- -------
--------- ------- -------
The provision for income taxes differs from the amount computed by applying the
U.S. federal statutory income tax rate to income (loss) before income taxes.
The principal reasons for the differences are as follows (in thousands):
1997 1996 1995
--------- ------- -------
U.S. federal statutory rate at 34% $ (5,493) $ 525 $ 2,009
State taxes, net of U.S. federal
income tax . . . . . . . . . (565) 52 166
Other . . . . . . . . . . . . . 10,119 (13) (18)
--------- ------- -------
$ 4,061 $ 564 $ 2,157
--------- ------- -------
--------- ------- -------
48
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
4. INCOME TAXES, CONTINUED
The components of the deferred tax asset at October 31, are as follows (in
thousands):
1997 1996
-------------------------- --------------------------
TEMPORARY TEMPORARY
DIFFERENCE TAX EFFECTED DIFFERENCE TAX EFFECTED
---------- ------------ ----------- -------------
Current:
Revenue recognition . . . . . . . . . . . . . . $ (3,793) $ (1,385) $(8,285) $ (3,065)
Accrued liabilities and reserves. . . . . . . . 7,701 2,811 3,297 1,220
---------- ------------ ----------- -------------
Total current deferred tax asset
(liability). . . . . . . . . . . . . . . . . 3,908 1,426 (4,988) (1,845)
---------- ------------ ----------- -------------
Long-term:
Net operating loss carryforwards. . . . . . . . 26,498 9,673 18,516 6,851
Product development expense
recognition. . . . . . . . . . . . . . . . . (3,133) (1,144) (2,668) (987)
Discontinued operations reserve . . . . . . . . 500 183 1,000 370
Equipment basis difference. . . . . . . . . . . 812 296 646 239
Revenue recognition . . . . . . . . . . . . . . (517) (189) (1,024) (379)
Other . . . . . . . . . . . . . . . . . . . . . (345) (126) (356) (188)
---------- ------------ ----------- -------------
Total long-term deferred tax asset . . . . . 23,815 8,693 16,114 5,906
---------- ------------ ----------- -------------
$ 27,723 $ 10,119 $11,126 $ 4,061
---------- -----------
---------- -----------
Less valuation allowance (10,119) ---
------------ -------------
$ --- $ 4,061
------------ -------------
------------ -------------
The Company took a non-cash charge of $4,061,000 in 1997 to record a valuation
allowance against the deferred tax asset. Such valuation allowance has been
provided based on the inherent uncertainty of predicting the sufficiency of the
future taxable income necessary to realize the benefit of the net deferred tax
asset in light of the Company's recent loss history and the competitive nature
of the industry in which the Company operates.
At October 31, 1997, the Company had a federal net operating loss carryforward
of $21,639,000 and a foreign net operating loss carryforward of $5,854,000.
These net operating loss carryforwards begin to expire in 2004.
49
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
5. STOCKHOLDERS' EQUITY:
STOCK INCENTIVE AND STOCK OPTION PLANS:
The Company has adopted various stock incentive and stock option plans that
authorize the granting of stock options, stock appreciation rights, and stock
awards to directors, officers and key employees, subject to certain conditions,
including continued employment. Under these plans, 1,953,540 shares are
reserved for granting.
In September 1997, stock awards totaling 101,000 shares of the Company's common
stock were granted to certain key employees for the purchase price of $1.00 per
share. These shares vest over a five-year period and they may not be sold or
transferred.
Stock options are granted with an exercise price equal to the fair market value
of the Company's common stock on the date of grant. All options become
exercisable ratably over three years and expire ten years from the grant date.
Effective for 1997, the Company has adopted the disclosure only provisions of
SFAS 123, "Accounting for Stock-Based Compensation". All stock options are
granted at an exercise price equal to the fair market value on the grant date
and, accordingly, no compensation expense has been recognized in the
accompanying consolidated financial statements. Had compensation expense
been recognized based on the fair value of options granted, consistent with
the provisions of SFAS 123, the Company's net income (loss) and net income
(loss) per share would have been changed to the pro forma amounts as follows
(in thousands, except per share amounts):
AS REPORTED PRO FORMA
------------- -------------
Net income (loss):
1997 $ (20,217) $ (20,816)
1996 982 (40)
Net income (loss) per share:
1997 $ (3.24) $ (3.34)
1996 0.15 (0.01)
The fair value of these options was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
Expected life: 5 years Interest rate: 5.5 to 6.7%
Volatility: 70% to 73% Dividend yield: None
50
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
5. STOCKHOLDERS' EQUITY, CONTINUED
STOCK INCENTIVE AND STOCK OPTION PLANS, Continued
Information regarding stock option plans is as follows (in thousands):
1997 1996 1995
------ ------ ------
Options at beginning of year 1,016 937 713
Options granted 151 196 259
Options exercised (148) (96) (19)
Options forfeited (67) (21) (16)
------ ------ ------
Options outstanding at end of year 952 1,016 937
------ ------ ------
------ ------ ------
Options exercisable at end of year 646 623 562
------ ------ ------
------ ------ ------
Weighted average option prices:
Outstanding at beginning of year $ 7.77 $6.12 $5.70
Granted 9.85 13.19 6.79
Exercised 2.68 2.89 0.77
Forfeited 12.88 6.81 4.92
Outstanding at end of year 8.53 7.77 6.12
Exercisable at end of year 7.76 6.25 5.34
STOCK WARRANTS AND CONVERTIBLE SECURITIES:
In March 1997, the Company issued subordinated debentures which are convertible
into shares of common stock at $9.60 per share (see Note 3). Concurrent with
this issuance, the Company issued approximately 51,000 warrants to purchase
common stock at $9.60 per share. The warrants expire from 2002 to 2007.
6. COMMITMENTS:
The Company leases its warehouse, sales and administration facilities. Certain
of these leases contain renewal options, escalation clauses and requirements
that the Company pay taxes, insurance and maintenance costs. Commitments for
future minimum rental payments under noncancelable leases for the next five
years ending October 31, are as follows (in thousands):
1998......................$1,339
1999.........................792
2000.........................244
2001..........................19
2002...........................5
Rent expense was $1,616,000, $1,413,000 and $1,251,000 for 1997, 1996 and 1995,
respectively.
51
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
6. COMMITMENTS, CONTINUED
In December 1996, the Company extended an agreement for rights to distribute
certain products. In consideration for this license, the Company agreed to pay
royalties through April 1999. For each of the two years ended April 30, 1998
and 1999, the guaranteed minimum royalty is $625,000. Revenue from the sale of
these products is recognized when the products are delivered to the customer, at
which time costs are accrued for the earned royalty.
7. INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION:
The Company operates in one industry segment, namely education and training.
Information about the Company's operations in different geographic areas is as
follows (in thousands):
YEAR ENDED OCTOBER 31
---------------------------------
1997 1996 1995
-------- -------- --------
Revenues from unaffiliated customers:
United States. . . . . . . . . . . . . $ 30,779 $33,217 $27,471
Canada . . . . . . . . . . . . . . . . 1,644 2,955 2,871
United Kingdom . . . . . . . . . . . . 4,536 5,233 6,995
-------- -------- --------
$ 36,959 $41,405 $37,337
-------- -------- --------
-------- -------- --------
Operating income (loss):
United States. . . . . . . . . . . . . $(11,856) $3,006 $6,546
Canada . . . . . . . . . . . . . . . . (1,444) (528) (364)
United Kingdom . . . . . . . . . . . . (1,240) (130) (27)
-------- -------- --------
$(14,540) $2,348 $ 6,155
-------- -------- --------
-------- -------- --------
Total assets:
United States. . . . . . . . . . . . $ 23,398 $35,497 $27,392
Canada . . . . . . . . . . . . . . . 1,026 2,322 2,052
United Kingdom . . . . . . . . . . . 4,664 4,508 4,216
-------- -------- --------
$ 29,088 $42,327 $33,660
-------- -------- --------
-------- -------- --------
Revenues from affiliates, while not significant, are recorded at established
intercompany selling prices which are based upon cost plus mark-up.
52
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
8. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
(In thousands, except per share data)
JAN 31 APR 30 JUL 31 OCT 31 TOTAL
------- ------- ------- ------- -------
1997:
- ----
Revenues by product line:
PLATO Education. . . . . . . $4,265 $6,224 $10,674 $12,102 $33,265
Aviation Training. . . . . . 822 1,376 669 827 3,694
------ ------ ------- ------- -------
Total revenues . . . . . . . 5,087 7,600 11,343 12,929 36,959
Gross profit . . . . . . . . . 4,307 6,249 9,582 10,346 30,484
Net loss . . . . . . . . . . . (2,315) (2,281) (1,080) (14,541) (20,217)
Net loss per common
and common equivalent share. (0.37) (0.37) (0.17) (2.31) (3.24)
1996:
- ----
Revenues by product line:
PLATO Education. . . . . . . $4,545 $6,021 $10,917 $15,497 $36,980
Aviation Training. . . . . . 1,864 720 484 1,357 4,425
------ ------ ------- ------- -------
Total revenues . . . . . . . 6,409 6,741 11,401 16,854 41,405
Gross profit . . . . . . . . . 5,195 6,109 9,422 14,466 35,192
Net income (loss). . . . . . . (1,049) (988) 725 2,294 982
Net income (loss) per
common and common
equivalent share . . . . . . (0.17) (0.16) 0.11 0.34 0.15
9. SUBSEQUENT EVENTS:
In November 1997, the Company announced that it had retained BancAmerica
ROBERTSON STEPHENS to advise it regarding strategic alternatives to enhance
shareholder value.
On December 15, 1997, a securities fraud class action was filed in the United
States District Court for the Northern District of Illinois against the
Company and two of its current and former executive officers. The
purported class action was filed on behalf of all persons who purchased common
stock of the Company during the period December 7, 1995 through June 10,
1997, seeking damages for alleged violations of the federal securities laws.
The complaint in the purported class action alleges that throughout this time
period, defendants knowingly participated in a course of conduct involving
misrepresentation and concealment of adverse material information about the
business and finances of the Company. The complaint alleges that the course
of action followed by the defendants caused the plaintiff and other members
of the purported class to purchase the Company's securities at artificially
inflated prices. The complaint seeks damages suffered as a result of the
actions of the defendants, including costs, expenses and fees incurred in the
litigation.
The Company cannot predict the outcome of this litigation but believes it has
meritorious defenses to these allegations and intends to defend itself
vigorously.
53
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART II
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the information with respect to the Directors of the Registrant which is set
forth in the section entitled "Election of Directors" of the Company's 1998
Proxy Statement, which is incorporated herein by reference. See the information
set forth in the section entitled "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the 1998 Proxy Statement, which is
incorporated herein by reference. The 1998 Proxy Statement will be filed with
the Securities and Exchange Commission within 120 days after the close of the
Company's fiscal year.
For information regarding Executive Officers of the Registrant, see Item 4A of
this Report, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See the information set forth in the sections entitled "Director Compensation",
"Executive Compensation", and "Compensation Committee Interlocks and Insider
Participation" in the 1998 Proxy Statement, which is incorporated herein by
reference. Such incorporation by reference shall not be deemed to specifically
incorporate by reference the information referred to in Item 402(a)(8) of
Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information set forth in the section entitled "Security Ownership of
Certain Beneficial Owners and Management" in the 1998 Proxy Statement, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the information set forth in the section entitled "Certain Relationships and
Transactions" in the 1998 Proxy Statement, which is incorporated herein by
reference.
54
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. Financial Statements - see index on page 37.
2. Financial Statement Schedules - see index on page 37.
(b) Reports on Form 8-K:
None
(c) Exhibits:
The following documents are filed herewith or incorporated herein by
reference and made a part of this Form 10-K.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
3.01 Certificate of Incorporation of the Company (1)
3.02 Bylaws of the Company (1)
4.01 Form of stock certificate of the Company (1)
10.01 Amended and Restated Revolving Loan and Security Agreement
between Sanwa Business Credit Corporation and The Roach
Organization, Inc. and TRO Learning (Canada), Inc. dated
March 5, 1997
10.02 Registration Agreement (1)
10.03 Exchange Agreement (1)
10.04 1993 Outside Director Stock Option Plan+ (4)
10.05 Warrants of the Registrant (1)
10.06 Series B Preferred Stock Purchase Agreement, as amended, and
agreements relating thereto (1)
10.08 Lease for Edina, Minnesota office (5)
10.10 Settlement Agreement with Control Data (1)
10.11 Form of Indemnification Agreement (1)
10.12 Stock Purchase Warrant of TRO (1)
10.13 Certification and Testing Services Agreement between the
Company and Sylvan Learning Systems, Inc. dated August 31,
1993 (2)
10.14 1993 Stock Option Plan + (3)
10.15 Severance and Non Competition Agreement with William R.
Roach + (4)
10.16 Severance and Non Competition Agreement with Andrew N.
Peterson+
10.17 First Amendment to Amended and Restated Revolving Loan and
Security Agreement between Sanwa Business Credit Corporation
and The Roach Organization, Inc. and TRO Learning (Canada),
Inc. dated March 18, 1997
10.18 Form of Series 1997 10% Subordinated Convertible Debentures
due March 27, 2004
10.19 Form of Common Stock Warrants dated March 27, 1997
55
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1997
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K,
CONTINUED
10.20 Second Amendment to Amended and Restated Revolving Loan and
Security Agreement between Sanwa Business Credit Corporation
and The Roach Organization, Inc. and TRO Learning (Canada),
Inc. dated December 8, 1997
11.01 Statement re: computation of per share earnings
21.01 Subsidiaries of the Registrant (1)
23.01 Consent of Coopers & Lybrand L.L.P. with respect to
Registration Statements on Form S-8
24.01 Powers of Attorney
27.00 Financial Data Schedule
(1) Incorporated by reference to the corresponding exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-54296).
(2) Incorporated by reference to the corresponding exhibit on the Company's
Annual Report on Form 10-K for the year ended October 31, 1993 (File
Number 0-20842).
(3) Incorporated by reference to Exhibit A to the Company's 1994 Proxy
Statement (File Number 0-20842).
(4) Incorporated by reference to the corresponding exhibit on the Company's
Annual Report on Form 10-K for the year ended October 31, 1994 (File
Number 0-20842).
(5) Incorporated by reference to the corresponding exhibit on the Company's
Annual Report on Form 10-K for the year ended October 31, 1995 (File
Number 0-20842).
(6) Incorporated by reference to the corresponding exhibit on the Company's
Annual Report on Form 10-K for the year ended October 31, 1996 (File
Number 0-20842).
+ Management contract or compensatory plan, contract or arrangement.
56
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
TRO Learning, Inc.
Our report on the consolidated financial statements of TRO Learning, Inc. and
Subsidiaries is included on page 38 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index on page 37 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
January 12, 1998
57
TRO LEARNING, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED OCTOBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
ADDITIONS
----------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) END OF PERIOD
- ---------------------------- ---------- ---------- ---------- ---------- -------------
Deducted in the balance
sheets from the assets to
which they apply:
Allowance for doubtful
accounts:
For the year ended
October 31, 1995 $ 363 $ 300 --- $ (79) (a) $ 584
For the year ended
October 31, 1996 584 2,120 264 (b) (2,458) (a) 510
For the year ended
October 31, 1997 510 7,252 --- (742) (a) 7,020
Allowance for inventory
obsolescence:
For the year ended
October 31, 1995 388 125 --- (22) (a) 491
For the year ended
October 31, 1996 491 150 --- (185) (a) 456
For the year ended
October 31, 1997 456 --- --- (140) (a) 316
(a) Amounts written off, net of recoveries.
(b) Amounts reclassified.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 January 12, 1998.
TRO LEARNING, INC.
By /s/William R. Roach
------------------------
William R. Roach
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on January 12, 1998.
Signature: Title:
/s/ William R. Roach Chairman of the Board, President and Chief
- ------------------------- Executive Officer (principal executive officer)
William R. Roach
/s/ Andrew N. Peterson Senior Vice President, Chief Financial Officer,
- ------------------------- Treasurer and Secretary
Andrew N. Peterson (principal financial officer)
/s/ Mary Jo Murphy Vice President, Corporate Controller and Chief
- ------------------------- Accounting Officer
Mary Jo Murphy (principal accounting officer)
*
- -------------------------
Jack R. Borsting Director
*
- -------------------------
Tony J. Christianson Director
*
- -------------------------
John L. Krakauer Director
*
- -------------------------
Vernon B. Lewis Director
*
- -------------------------
John Patience Director
* By /s/ Mary Jo Murphy
---------------------
Mary Jo Murphy
Attorney-in Fact
59