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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, 1998
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.
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(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
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(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
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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.
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The number of shares of the Registrant's common stock, par value $.01 per share,
outstanding as of December 15, 1998 was: 6,446,511 shares.
The aggregate market value of common stock (based on the closing price on
December 15, 1998) held by non-affiliates of the Registrant was approximately
$38,640,000.
Index for exhibits is located on page 50.
This document contains 52 pages.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the Proxy Statement for the Company's Annual Meeting
of Stockholders to be held on April 6, 1999 (the "1999 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 1999 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, 1998
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TABLE OF CONTENTS
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Page
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PART I
Item 1. Business...................................................................4
Item 2. Facilities................................................................14
Item 3. Legal Proceedings.........................................................14
Item 4. Submission of Matters to Vote of Security Holders.........................15
Item 4A. Executive Officers of the Registrant......................................15
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters......18
Item 6. Selected Consolidated Financial Data......................................19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................20
Item 8. Financial Statements and Supplementary Data...............................29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................49
PART III
Item 10. Directors and Executive Officers of the Registrant........................49
Item 11. Executive Compensation....................................................49
Item 12. Security Ownership of Certain Beneficial Owners and Management............49
Item 13. Certain Relationships and Related Transactions............................49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........50
Signatures ..........................................................................52
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TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1998
PART I
- -------------------------------------------------------------------------------
ITEM 1. BUSINESS
OVERVIEW:
TRO Learning, Inc. (the Company) is a leading developer and marketer of
PC-based, interactive, self-paced instructional systems. Offering more than
2,000 hours of comprehensive academic and applied skills courseware designed
for adolescents and adults, the Company's PLATO-Registered Trademark-
Learning Systems are marketed to middle schools and high schools, colleges,
job training programs, correctional institutions, military education
programs, and corporations. The PLATO Learning System is delivered via local
area networks, CD-ROM, the Internet and private Intranets.
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 (UK) Ltd.
COMPANY HISTORY:
The Company was incorporated in 1989 when an investor group acquired the
principal business of the Training and Education Group of Control Data
Corporation. In December 1992, the Company became publicly held and is traded
on the NASDAQ-NMS exchange under the symbol TUTR.
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.
In September 1998, the Company announced the sale of its Aviation Training
business (which marketed PC-based instructional systems to airlines worldwide
for use by commercial airline pilots, maintenance crews, and cabin personnel)
and will focus exclusively on its PLATO-Registered Trademark- brand going
forward.
PRODUCTS AND SERVICES:
The Company's products offer educators and trainers an effective supplement
or alternative to traditional, instructor-led education. PLATO-Registered
Trademark- is a computer-based instructional system designed to enhance the
learning process and help adolescent and adult learners reach their fullest
potential. PLATO provides interactive, individualized instruction in a broad
range of subjects. PLATO courseware has proven effective in a variety of
learning settings, including alternative education programs, graduation
standards prep labs, school-to-work programs, adult basic education, GED
preparation, developmental studies, employment preparation and workplace
training programs.
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Whether used for distance learning, as a supplement to a traditional program, or
as an advanced course offering, PLATO's courseware motivates and engages a wide
range of learners.
The PLATO Learning System is comprised of PLATO courseware, the
PLATO-Registered Trademark- Pathways instructional management software,
multiple courseware delivery systems, and PLATO Professional Services. A
variety of third-party courseware can also be incorporated to meet specific
learning objectives.
PLATO COURSEWARE AND SOFTWARE:
The comprehensive PLATO courseware library includes over 2,000 hours of
mastery-based instruction in the subject areas of reading, writing and language
arts, mathematics, science, social studies, life and job skills, technology and
applied skills for the workplace. The consistent instructional strategy and
design, and modular structure of PLATO courseware provides maximum flexibility
to design customized programs to meet both individual learner needs and specific
program objectives.
PLATO courseware can integrate into an educational program as follows:
- as a complement to classroom learning, addressing individual learner needs
through enrichment and remediation;
- as a supplement to classroom learning, providing additional instruction and
practice; and,
- as a primary resource, allowing the instructor to become a coach,
counselor, and manager.
The Company provides state-of-the-art education and training solutions to its
clients. The Company regularly updates its courseware library and develops
new products to extend and enhance it. In October 1998, the Company announced
that it was in the final stages of converting the 2,000-hour PLATO courseware
library to run as a native 32-bit application under the Windows operating
system. Windows-based PLATO problem-solving courses employ sophisticated
interactive simulations, online coaching, and advanced multimedia and
graphics to create an exciting learning environment that fosters
critical-thinking skills. New courses recently released include Math Problem
Solving, The Employment Partnership, Advanced Reading Strategies, Technology
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Fundamentals, and the PLATO WordBank Editor. Another course, Practical Problem
Solving, is currently in development and is scheduled for release in the fall of
1999.
Math Problem Solving has been selected for inclusion on the Children's
Software Review (CSR) "All Star Software" list with a rating of 4.5 out of 5
stars. CSR's All Star Software List is an ongoing collection of highly
recommended software titles that is updated on a bimonthly basis. In
addition, WordBank Editor has been selected as a top five finalist for the
1999 Codie Award for Best New Education Software Program sponsored by the
Software Publishers Association. Earning the status of a Codie Award finalist
is significant, particularly since PLATO WordBank Editor was selected from a
pool of more than 900 nominations.
The following table summarizes PLATO courseware and software offerings:
PLATO COURSEWARE:
- -----------------
COMMUNICATION SCIENCE/TECHNOLOGY
Reading 1 and 2 Science Fundamentals
Advanced Reading Strategies Chemistry 1 and 2
Reading for Information Physics 1 and 2
Writing Series Technology Fundamentals
Writing in the Workplace
Communication SOCIAL STUDIES
WordBank Editor Social Studies
MATHEMATICS LIFE SKILLS
Math Fundamentals Life and Job Skills
Math Fundamentals (Spanish Edition) Parenting Skills
Math Problem Solving
Data Skills WORKSKILLS/SCHOOL-TO-WORK
Pre-Algebra Quality Fundamentals
Beginning, Intermediate and Advanced Algebra Reading for Information
Beginning and Intermediate Algebra (Spanish Edition) Communication
Geometry and Measurement 1 and 2 Writing in the Workplace
Trigonometry Data Skills
Calculus 1 and 2 The Employment Partnership
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THIRD PARTY COURSEWARE:
- -----------------------
Reading Horizons Business Software Training Series
Mindplay Writing Series Substances Abuse Series
English Discoveries (ESL) Blueprint Reading
Rediscover Science 6-9 and 9-12 Mastering Geometric Dimensioning and Tolerancing
Toward Algebra Ultrakey Keyboarding
PLATO SOFTWARE PRODUCTS:
- ------------------------
PLATO Curriculum Manager PLATO Records Transfer and Consolidation Utility
PLATO Pathways-Registered Trademark- PCD3 Authoring System
Instructional Management PLATO S.T.A.R.
System for Windows-Registered Trademark- PLATO on the Internet
PLATO Remote Administration
PLATO courseware is objective-based and can be aligned to help learners meet
specific program, local, state and provincial learning objectives and tests.
PLATO courseware can also be aligned to national standardized tests and
curriculum standards including:
- ABLE (Adult Basic Literacy Exam)
- ACT (American College Test)
- CAT (California Achievement Test)
- CAAT (Canadian Adult Achievement Test)
- CASAS (Comprehensive Adult Student Assessment System)
- GED (General Education Development) Exam
- NCTM (National Council of Teachers of Mathematics) Standards
- SAT (Scholastic Aptitude Test)
- SCAN'S (Secretary's Commission on Achieving Necessary Skills) Competencies
- Standard Achievement Tests
- TABE (Test of Adult Basic Education)
- ACT Work Keys-TM-
INSTRUCTIONAL MANAGEMENT SOFTWARE:
Instructional management is at the core of any learning environment.
PLATO-Registered Trademark- Pathways is an easy to use Windows-based software
program that seamlessly integrates assessment, instruction and management -
giving instructors a versatile educational tool. This instructional
management system diagnoses strengths and weaknesses and adaptively
prescribes individualized learner menus - ensuring targeted, personalized
instruction keyed to program goals. It can incorporate offline, online, and
Web-based resources to enrich the learning experience. It also tracks learner
progress
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and offers an extensive array of reports which provide administrators,
teachers, learners, and parents with highly meaningful information that
documents accountability and performance.
PLATO-Registered Trademark- Pathways is compatible with Windows-Registered
Trademark- 95, Windows-Registered Trademark- 98, and NT-Registered
Trademark-Workstation, and can manage both Windows And MS-DOS-Registered
Trademark- applications. Pathways is also compatible with Apple-Registered
Trademark- iMac and G3 workstations running Virtual PC Windows emulation
software.
DELIVERY SYSTEMS:
The PLATO Learning System is configured to use PC's running MS-DOS-Registered
Trademark- or Windows or Apple-Registered Trademark- iMac or G3 with Windows
emulation software. With PLATO's multiple delivery systems, learning is no
longer confined to a lab or classroom.
- Desktop Launch - with the desktop launch, individual PLATO courses can
be delivered directly on a PC without a management system. Individual
student sign-on, bookmarking and recordkeeping are available.
- Local Area Networks (LAN) - with a LAN configuration, all courseware,
management software, student records, and files are centralized and can
be accessed by any learner, at any learning station, using a PLATO
sign-on and private password. The Company offers LAN configurations
utilizing either Microsoft Windows NT or Novell-Registered Trademark-
NetWare.
- CD-ROM Stand Alone - CD-ROM delivery allows a single PC workstation to
deliver PLATO and complementary courseware using PLATO-Registered
Trademark- Pathways.
- Internet/Distance Learning - remote learners with Internet or
Intranet access can study PLATO lessons, test for mastery, and
progress through lesson sequences just as if they were onsite in the
lab or classroom -using PLATO-Registered Trademark- on the Internet.
Records and courseware are kept on an Internet Server and are
accessed by learners on demand, from any location, using a private
PLATO identifier and password. To enhance speed and reliability,
modules are downloaded to the local PC at the time they are
selected, so a continuous connection is not required. Learners can
monitor their progress via menus and a learner progress report. To
create a community of learners, PLATO on the Internet also features
a suite of Web-based tools that facilitate discussion groups and
links to education Web sites that complement and enrich instruction.
8
PROFESSIONAL SERVICES:
PLATO Professional Services was created to ensure that clients receive the
necessary support services for the success of their PLATO programs and ongoing
personal development.
- Training Services - Customized education and training solutions
include implementation planning, professional development workshops,
and ongoing training, evaluation and support - provided by the
Company's experienced Education Consultants.
- Technical Support - On-site installation and specialized technical
consulting provided by PLATO Field Engineers and Technicians.
- Software Support - Available via the Company's toll-free number,
Internet e-mail or the PLATO Support Web Page, clients can access a
staff of PLATO specialists and software analysts, to answer questions
or solve problems with their PLATO system. PLATO clients also receive
updates and enhancements to PLATO-Registered Trademark- Pathways
management system and to PLATO courseware.
SALES AND MARKETING:
The Company's sales and marketing efforts are designed to increase market
penetration and reinforce the Company's reputation for product quality, customer
satisfaction, and service. 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 uses a direct sales force in North America and the
United Kingdom. The Company has established exclusive distribution agreements
with distributors experienced in education product distribution in the following
countries: Singapore, Malaysia, Puerto Rico, the United Arab Emirates, and South
Africa.
As of October 31, 1998, fifty-nine account managers are responsible for sales of
PLATO Learning Systems and for maintaining active relationships with both
current and potential clients. Forty-nine education consultants are responsible
for implementing PLATO Learning Systems and providing customized training
solutions for clients.
The Company reaches potential clients and reinforces its market image by
attending and making presentations at national, regional and state educational
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 Learning System. In
addition,
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the Company maintains comprehensive web sites on the Internet's World Wide Web
(www.tro.com and www.plato.com) with 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 Colleges, the National Alliance of Business,
the National Association of Black School Administrators, the American
Association of School Administrators, the League of Innovation, 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.
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 effective multimedia-based,
computer-aided methods of training and education due to, among other reasons,
their flexibility, cost-efficiency, and demonstrated effectiveness.
The Company competes primarily on the basis of the depth and recognized quality
of its courseware and its ability to deliver a flexible, timely, cost-effective,
and customized solution to a client's education and training needs. 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 divisions within
Pearson PLC and McGraw-Hill McMillan. While these companies are focused
primarily on the elementary school market, they compete to some degree with the
Company in the secondary and post-secondary and young adult market. Although
these companies are significantly larger than the Company, PLATO courseware
offers a comprehensive curriculum developed specifically for adult and young
adult learners. In the post-secondary education and training markets there are
many regional and specialized competitors.
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
The Company's product development group develops, enhances, and maintains the
PLATO courseware, instructional management software, and delivery system
platforms. This group
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employs a rigorous multi-phased product development methodology and process
management system. Based on both classical instructional design concepts and
models, as well as systems development management techniques, the Company's
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 Company's rigorous instructional design and development
methodology assures the instructional effectiveness and content integrity of the
resulting product. These procedures ensure that the most appropriate and highest
quality production values are achieved in the development of all software
graphics, audio, video, and text. Moreover, the Company's innovative product
architectures and advanced group-based rapid prototyping technologies shorten
time-to-market and development costs.
Central to the courseware development process are four proprietary software
tools: PLATO-Registered Trademark- PATHWAYS - the PLATO instructional
management system designed for system control, tracking and reporting of
student performance, and administration; MICRO PLATO AUTHORING SYSTEM (MPAS) -
software used in the enhancement and maintenance of existing PLATO
courseware; PLATO CURRICULUM DESIGN, DEVELOPMENT AND DELIVERY (PCD3) SYSTEM -
a proprietary, flexible courseware development tool; and WIN PLATO - a
proprietary courseware authoring framework for writing Windows courseware.
The Company's technical support group provides a full range of support services
to ensure client satisfaction. 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 consult and coordinate with the client, account manager, and
installation team regarding site preparation and system installation. They also
confirm full client acceptance and monitor client satisfaction and support
requirements.
In fiscal 1997, the Company began offering a new service and support program to
new, as well as renewal, clients. As part of this program, the Company started
charging for support services including training, installation and technical
support for the PLATO products.
The Company integrates its products by purchasing component parts from a network
of external suppliers under a just-in-time inventory system. The integration and
distribution function has the responsibility to integrate computer systems and
ship software and courseware to clients. The Company does not use raw materials
and maintains minimal inventory.
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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 off-the-shelf software and
hardware products from Novell, Microsoft, and other vendors.
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 trademark. 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 on all PLATO 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 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.
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BACKLOG:
The Company's backlog consists of orders for the delivery of goods and services
in future periods. The backlog for PLATO Education was $6.8 million and $8.5
million, respectively, at October 31, 1998 and 1997. From time to time, the
Company may have longer-term contracts in its backlog for the delivery of PLATO
Learning Systems. At October 31, 1998, approximately $0.6 million of such orders
(included in the foregoing backlog figure) are expected to be delivered
subsequent to fiscal 1999.
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 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, 1998, the Company employed 304 people on a full-time basis,
including 170 in sales and marketing, 75 in product development and operations,
35 in support services, and 24 in finance and administration.
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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 maintains sales offices in Dallas, Houston, San Antonio
and Texarkana, Texas; Skippack, Pennsylvania; Huntington Beach, California; Ft.
Lauderdale, Florida; Westport, Connecticut; Lenexa, Kansas; Chicago, Illinois;
Nashville, Tennessee; and Cary, North Carolina. The Company's Canadian
subsidiary leases 525 square feet for its principal offices in Vancouver and
maintains sales offices in Don Mills, Ontario; Winnipeg, Manitoba; and Moncton,
New Brunswick. The United Kingdom subsidiary maintains an office in Berkshire,
England.
The leases for the Company's offices in Edina and Bloomington, Minnesota expire
March 31, 2000 and March 31, 2001, respectively and the lease for the executive
offices in Hoffman Estates, Illinois expires August 31, 2000. See Note 7 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. On May 19, 1998, the United
States District Court for the Northern District of Illinois dismissed the
complaint with prejudice.
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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, 1998.
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
John Murray Executive Vice President and Chief Financial 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, PLATO Support Services and Distribution
Mary Jo Murphy Vice President, Corporate Controller and Chief Accounting Officer
Frank Preese Vice President, Product Development
Steven R. Schuster Vice President and Treasurer
John C. Super Vice President, Marketing
Patricia A. Hlavacek Corporate Secretary
Executive officers are appointed by, and serve at the discretion of, the Board
of Directors.
William R. Roach, age 58, 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.
John Murray, age 43, joined the Company in 1989 as Managing Director of the
United Kingdom subsidiary. In October 1998 he was promoted to his current
position, Executive Vice President and Chief Financial Officer. From October
1997 until October 1998 he served as Senior Vice President, Operations. From
April 1996 to October 1997 he held the position of Vice President,
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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.
G. Thomas Ahern, age 40, 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 51, 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 52, has served in his present capacity, Vice President,
PLATO Support Services and Distribution since 1997. From the Company's founding
in 1989 until 1997, he served as Vice President, Systems Development, Client
Support and Operations. 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 42, 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.
Frank Preese, age 51, joined the Company in 1994 as Director of Curriculum
Development. He has served in his present capacity as Vice President, Product
Development since November 1997. From 1996 through 1997 he served as Assistant
Vice President, Curriculum Development and during 1995 as Senior Director of
Curriculum Development. Prior to joining the Company, Mr. Preese served as Vice
President of Computer Services with Golle & Holmes Corporation, a training
consultancy to Fortune 500 companies.
Steven R. Schuster, age 38, joined the Company in December 1996 as Vice
President and Assistant Treasurer. In October 1998, he was promoted to Vice
President and 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.
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John C. Super, age 51, joined the Company in 1990 as a Workplace Account
Manager. He has served in his present capacity as Vice President, 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 the Company, Mr. Super served in sales and management capacities with
Wicat Systems and Computer Curriculum Corporation.
Patricia A. Hlavacek, age 52, joined the Company in September 1989 as
Administrative Assistant to the Corporate Counsel. From 1993 to the present, she
has served in various capacities including Assistant Secretary, Stock Option
Plan Administrator, and performed the duties of Compliance Officer in matters
involving the Securities and Exchange Commission. In October 1998, she was
appointed as Corporate Secretary. Prior to joining the Company, Ms.
Hlavacek was employed with ALI.
17
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, 1998 and 1997:
FISCAL 1998
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
---------------- -------------- -------------- --------------
High $ 7.50 $ 11.38 $ 10.31 $ 9.50
Low 4.88 6.75 8.00 6.63
FISCAL 1997
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
---------------- -------------- -------------- --------------
High $ 21.88 $ 11.50 $ 12.13 $ 11.00
Low 10.00 7.06 7.00 7.25
HOLDERS:
There were approximately 3,400 stockholders of record as of December 15, 1998
(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.
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
1998 1997 1996 1995 1994
-------------- -------------- ------------- --------------- ---------------
INCOME STATEMENT DATA:
Revenues by product line:
PLATO Education.................. $ 39,385 $ 33,265 $ 36,980 $ 30,613 $ 22,591
Aviation Training................ 3,893 3,694 4,425 6,724 5,774
-------------- -------------- ------------- --------------- ---------------
Total revenues .................. 43,278 36,959 41,405 37,337 28,365
Gross profit......................... 38,269 30,484 35,192 29,669 22,587
Selling, general and administrative
expense.......................... 25,408 36,988 27,537 19,027 15,494
Product development and customer
support.......................... 7,341 8,036 5,307 4,487 7,515
Operating income (loss).............. 5,520 (14,540) 2,348 6,155 (1,222)
Interest expense..................... 2,217 1,480 856 300 344
Provision (credit) for income taxes.. --- 4,061 564 2,157 (533)
Income (loss) from continuing
operations....................... 3,068 (20,217) 982 3,752 (889)
Income (loss) from discontinued
operations....................... --- --- --- --- (1,250)
PER SHARE OF COMMON STOCK (diluted):
Income (loss) from continuing
operations....................... 0.47 (3.24) 0.15 0.60 (0.15)
Loss from discontinued operations.... --- --- --- --- (0.21)
Net income (loss).................... 0.47 (3.24) 0.15 0.60 0.55
BALANCE SHEET DATA:
Total assets......................... 27,407 29,088 42,327 33,660 26,931
Total liabilities.................... 23,738 28,341 21,515 14,158 10,990
Stockholders' equity................. 3,669 747 20,812 19,502 15,941
19
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. Offering more than 2,000 hours
of comprehensive academic and applied skills courseware designed for
adolescents and adults, the Company's PLATO-Registered Trademark- Learning
Systems are marketed to middle schools and high schools, colleges, job
training programs, correctional institutions, military education programs and
corporations. The PLATO Learning System is delivered via networks, CD-ROM,
the Internet and private Intranets.
In September 1998, the Company announced the sale of its Aviation Training
business (which marketed PC-based instructional systems to airlines worldwide
for use by commercial airline pilots, maintenance crews and cabin personnel) and
will focus exclusively on its PLATO brand going forward.
FISCAL 1998 COMPARED TO FISCAL 1997:
REVENUES:
Total revenues of $43,278,000 for 1998 increased by $6,319,000 or 17% as
compared to $36,959,000 for 1997. The following table highlights revenues
by product line (in 000's):
PLATO EDUCATION AVIATION TRAINING TOTAL
----------------------- ---------------------- -----------------------
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ---------- ----------- -----------
Courseware and professional services...... $ 35,694 $ 28,083 $ 3,840 $ 3,390 $ 39,534 $ 31,473
Hardware, third party courseware and other 3,691 5,182 53 304 3,744 5,486
----------- ---------- ----------- ---------- ---------- -----------
Total revenues....................... $ 39,385 $ 33,265 $ 3,893 $ 3,694 $ 43,278 $ 36,959
=========== ========== =========== ========== ========== ===========
As summarized in the above table, PLATO Education courseware and professional
services revenue of $35,694,000 for 1998 increased by $7,611,000 or 27% as
compared to 1997. The growth was achieved primarily by expanding the Company's
current markets for PLATO products.
Aviation Training revenues of $3,893,000 increased by $199,000 or 5% from the
prior year. In September 1998, the Company announced the sale of its Aviation
Training business and will focus exclusively on its PLATO brand going forward.
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
20
expenditures and promotional programs. The Company historically has experienced
higher levels of revenues in its fourth fiscal quarter.
GROSS PROFIT:
Gross profit for 1998 increased by $7,785,000 or 26% to $38,269,000 as compared
to $30,484,000 for 1997. This increase was due to the increase in PLATO
Education courseware and professional services revenue as well as a higher mix
of PLATO courseware revenues. The Company's gross margin was 88% for 1998 as
compared to 82% for 1997.
PLATO Education gross margin for 1998 was 89% compared to 83% for 1997. Aviation
Training gross margin was 81% for both 1998 and 1997.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE:
Selling, general, and administrative expense for 1998 decreased by $11,580,000
or 31% to $25,408,000 as compared to $36,988,000 for 1997. This decrease was
principally due to the reduction in PLATO Education selling expenses of
$4,468,000, resulting primarily from the restructuring of operations initiated
in late fiscal 1997, and the decrease in the provision for doubtful accounts of
$6,438,000.
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
Product development and customer support expense for 1998 decreased by $695,000
or 9% to $7,341,000 as compared to $8,036,000 for 1997. PLATO Education product
development expense decreased $323,000, due primarily to reduced spending and
increased capitalization of costs, slightly offset by increased amortization, as
compared to 1997.
OPERATING INCOME (LOSS):
Operating income for 1998 was $5,520,000 as compared to an operating loss of
$(14,540,000) for 1997. This improvement in operating results is due principally
to the increase in courseware and professional services revenue and the positive
impact of the restructuring of operations initiated in late fiscal 1997.
21
INTEREST EXPENSE:
Interest expense was $2,217,000 for 1998 as compared to $1,480,000 for 1997.
This increase was due to increased borrowings, resulting in additional expense
of $414,000, as well as one-time settlements of interest totaling $323,000 with
vendors for past due amounts.
PROVISION FOR INCOME TAXES:
In line with the Company's decision to fully reserve its deferred tax asset at
the end of 1997, no income taxes have been recorded in 1998.
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 and professional services...... $ 28,083 $ 31,252 $ 3,390 $ 4,183 $ 31,473 $ 35,435
Hardware, third party courseware and other 5,182 5,728 304 242 5,486 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 and professional
services revenue of $28,083,000 for 1997 decreased by $3,169,000 or 10% as
compared to 1996. The majority of this decrease occurred in the fourth quarter
of 1997 as compared to 1996.
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.
22
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
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.
23
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 $1,480,000 for 1997 as compared to $856,000 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.
LIQUIDITY AND CAPITAL RESOURCES:
As of October 31, 1998, the Company's principal sources of liquidity included
cash and cash equivalents of $466,000, net accounts receivable of $16,427,000
and its line of credit. The Company has total installment receivables of
$11,071,000 at October 31, 1998, of which $10,496,000 are due within one year
and are included in net accounts receivable.
Net cash provided by the Company's operating activities was $1,988,000 in 1998
as compared to net cash used in operating activities of $5,873,000 in 1997 and
$4,243,000 in 1996. 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 resources available under its revolving loan
agreement to provide borrowings up to a maximum of $18,000,000 through February
28, 1999 (see Note 3 of Notes to Consolidated Financial Statements). At October
31, 1998, borrowings of $6,880,000 were outstanding at a weighted average
interest rate of 9.5%. The agreement provides for financial covenants requiring
a minimum level of operating profit. The Company was in compliance with all
financial covenants for the period ended October 31, 1998.
24
The Company's net cash provided by investing activities was $632,000 in 1998,
which included proceeds of $1,414,000 from the disposal of the Aviation Training
division offset by capital expenditures. Net cash used in investing activities
was $762,000 in 1997 and $1,020,000 in 1996, principally for capital
expenditures. The Company's capital expenditures totaled $782,000, $762,000 and
$1,033,000 in 1998, 1997 and 1996, respectively. At October 31, 1998, the
Company had no material commitments for capital expenditures.
The Company's net cash used in financing activities was $2,379,000 in 1998,
principally for repayments of debt. Net cash provided by financing activities
was $6,723,000 in 1997, principally from long term debt issued, and $5,449,000
in 1996, 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 $33 million which begin to expire in 2004.
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.
On January 13, 1999, the Company announced the completion of a $5 million
private placement of convertible preferred stock. The preferred stock is
convertible into shares of the Company's common stock, at the option of the
holder, up to two years from the issue date. Conversion is mandatory for
securities still outstanding two years from the issue date. The conversion price
is based on the average market price of the Company's common stock prior to
conversion, as defined, and is adjusted over time to provide an 8% annual return
to the holders. The conversion price is also subject to ceiling and floor
limitations, which may be adjusted based on the Company's financial performance.
Concurrent with this issuance, the Company issued 125,000 warrants to purchase
the Company's common stock at $9.51 per share. These warrants expire five years
from
25
the issue date. The net proceeds received from the convertible preferred stock
issuance were approximately $4.6 million and were used to pay down existing
borrowings.
In order to maintain adequate cash reserves and credit facilities to meet its
anticipated working capital, capital expenditure, and business investment
requirements, the Company is currently reviewing several new proposals to
replace its existing revolving loan agreement. Completion of this transaction,
which will offer a longer-term banking relationship with more advantageous terms
and conditions, is expected early in the second quarter of 1999.
YEAR 2000:
Many existing computer systems use only the last two digits to identify a year.
Consequently, as the year 2000 approaches, many systems do not yet recognize the
difference between the years 1900 and 2000. This, as well as other date-related
processing issues, may cause systems to fail or malfunction. As a result, the
Year 2000 (Y2K) issue may affect the Company's products and normal business
activities.
The Company began addressing the Y2K issue in early 1998 and has assembled a Y2K
evaluation team that is endorsed by, and includes members of, senior management.
A budget has been prepared for Y2K costs and progress reports are presented to
senior management on a regular basis. The Y2K evaluation team has developed and
implemented a comprehensive Y2K readiness plan for the Company's products and
operations. The objectives of the Y2K evaluation team are as follows:
- Develop a Y2K compliance standard for the Company's PLATO courseware
and software products and determine compliance with that standard;
- Advise on compliance of third party courseware, operating system, and
hardware products based on representations by vendors of these
products;
- Determine compliance for the Company's internal systems (including
information technology (IT) systems, such as financial and order entry
systems, and non-IT systems, such as telephones and other office
equipment);
- Determine the Y2K readiness of key business partners that the Company
relies on for normal business operations.
26
The Company has developed a compliance standard based on common testing
methodology. Existing PLATO courseware and software products are currently being
reviewed to determine compliance with that standard. The most current compliance
and remediation information is maintained on the Company's Internet web site.
PLATO products currently under development are being designed to be Y2K
compliant.
The Company also sells various third party courseware, operating system, and
hardware products. Y2K compliance information has been received from key vendors
of third party courseware products and this information is maintained on the
Company's Internet web site. Web links to key vendors of third party operating
system and hardware products are also provided.
The Company has been taking, and will continue to take, actions necessary to
resolve Y2K issues with its internal IT and non-IT systems, including planned
replacements and upgrades. Major computers, applications, and related equipment
have been reviewed and are either compliant or software upgrades have been
ordered and will be installed in 1999. The Company's accounting and data
processing system was not Y2K compliant and was recently upgraded to a version
that the vendor has indicated is Y2K compliant.
The Company relies on key business partners for its normal business operations
and has contacted them regarding Y2K readiness. While the Company is confident
these partners are preparing for the year 2000, it has no control over their
preparations and there is no assurance that they will be successful in
addressing all Y2K issues.
While the Company's Y2K costs incurred to date have not been material,
additional costs will be incurred as Y2K readiness is completed in mid-1999.
Based on information currently available, management expects these additional
costs to be immaterial as well.
While the Company is dedicating existing internal resources toward attaining Y2K
readiness, there is no assurance that it will be successful in addressing all
Y2K issues. If the Company does not achieve Y2K readiness, there could be
significant adverse effects on its results of operations, liquidity, and
financial condition. For example:
- If the Company's PLATO products are not Y2K compliant, it could suffer
increased costs, lost sales or other negative consequences resulting
from customer dissatisfaction, including litigation.
27
- If the Company's internal systems are not Y2K compliant, financial and
customer information, orders and product shipments could be delayed and
customer support could be interrupted.
- If the Company's customers do not achieve Y2K readiness, sales and
cash receipts may be delayed.
- If the Company's key business partners and other third parties do not
achieve Y2K readiness, its ability to receive supplies, ship products,
process cash receipts, and conduct other ongoing business activities
may be affected.
Based on the progress the Company has made to date in addressing Y2K issues,
management does not expect significant risks with its Y2K compliance at this
time. As the Company's plan is to address its major Y2K issues prior to being
affected by them, it has not developed comprehensive Y2K-related contingency
plans. If progress deviates from plan or significant risks are identified, the
Company will consider contingency plans as deemed necessary.
This Y2K discussion is based on the Company's best estimates using the
information that is currently available, and is subject to change. Actual
results may differ materially from these estimates.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
(a) (1) Consolidated Financial Statements:
Report of Independent Accountants.......................................30
Consolidated Balance Sheets as of October 31, 1998 and 1997.............31
Consolidated Statements of Income for the years ended
October 31, 1998, 1997 and 1996.........................................32
Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1998, 1997 and 1996.........................................33
Consolidated Statements of Cash Flows for the years ended
October 31, 1998, 1997 and 1996.........................................34
Notes to Consolidated Financial Statements..............................35
(2) Consolidated Financial Statement Schedule for the years ended
October 31, 1998, 1997 and 1996:
Report of Independent Accountants on Consolidated Financial
Statement Schedule......................................................47
Schedule II. Valuation and Qualifying Accounts and Reserves............48
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.
29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
TRO Learning, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of TRO
Learning, Inc. and its subsidiaries at October 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended October 31, 1998, in conformity with generally accepted
accounting principles. 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 of
these statements in accordance with generally accepted auditing standards
which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
December 3, 1998
30
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OCTOBER 31,
---------------------------
1998 1997
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 466 $ 537
Accounts receivable, less allowances of $920 and $7,020, respectively............ 16,427 18,305
Inventories...................................................................... 648 990
Prepaid expenses and other current assets........................................ 1,121 688
----------- ------------
Total current assets......................................................... 18,662 20,520
Equipment and leasehold improvements, less accumulated depreciation
of $3,204 and $4,092, respectively............................................... 1,073 1,271
Product development costs, less accumulated amortization of $4,768 and $2,562,
respectively..................................................................... 6,380 5,989
Other assets........................................................................ 1,292 1,308
----------- ------------
$ 27,407 $ 29,088
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 2,895 $ 3,472
Accrued employee salaries and benefits........................................... 2,647 3,199
Accrued liabilities.............................................................. 2,130 4,072
Revolving loan................................................................... 9,321 11,908
Deferred revenue................................................................. 3,290 1,949
----------- ------------
Total current liabilities.................................................... 20,283 24,600
Long term debt...................................................................... 3,050 3,050
Deferred revenue, less current portion.............................................. 405 519
Other liabilities................................................................... --- 172
Stockholders' equity:
Common stock, $.01 par value, 25,000 shares authorized;
6,535 shares issued and 6,415 shares outstanding in 1998;
6,450 shares issued and 6,405 shares outstanding in 1997....................... 64 64
Paid in capital.................................................................. 22,956 22,074
Treasury stock at cost, 120 and 45 shares, respectively.......................... (1,176) (469)
Accumulated deficit.............................................................. (17,592) (20,660)
Foreign currency translation adjustment.......................................... (583) (262)
----------- ------------
Total stockholders' equity................................................... 3,669 747
----------- ------------
$ 27,407 $ 29,088
=========== ============
See Notes to Consolidated Financial Statements
31
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED OCTOBER 31,
---------------------------------------------
1998 1997 1996
------------ ------------- ------------
Revenues by product line:
PLATO Education................................................. $ 39,385 $ 33,265 $ 36,980
Aviation Training............................................... 3,893 3,694 4,425
------------ ------------- ------------
Total revenues............................................... 43,278 36,959 41,405
Cost of revenues.................................................. 5,009 6,475 6,213
------------ ------------- ------------
Gross profit................................................. 38,269 30,484 35,192
------------ ------------- ------------
Operating expenses:
Selling, general and administrative expense..................... 25,408 36,988 27,537
Product development and customer support........................ 7,341 8,036 5,307
------------ ------------- ------------
Total operating expenses..................................... 32,749 45,024 32,844
------------ ------------- ------------
Operating income (loss).................................... 5,520 (14,540) 2,348
Interest expense.................................................. 2,217 1,480 856
Interest income and other expense, net............................ 235 136 (54)
------------ ------------- ------------
Income (loss) before income taxes.......................... 3,068 (16,156) 1,546
Provision for income taxes........................................ --- 4,061 564
------------ ------------- ------------
Net income (loss).......................................... $ 3,068 $ (20,217) $ 982
============ ============= ============
Earnings per share:
Basic........................................................ $ 0.48 $ (3.24) $ 0.16
============ ============= ============
Diluted...................................................... 0.47 $ (3.24) $ 0.15
============ ============= ============
Weighted average common shares outstanding:
Basic........................................................ 6,409 6,233 6,120
============ ============= ============
Diluted...................................................... 6,504 6,233 6,643
============ ============= ============
See Notes to Consolidated Financial Statements
32
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK
--------------------------------------------
FOREIGN
CURRENCY TOTAL
PAID IN TREASURY ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK DEFICIT ADJUSTMENT EQUITY
--------- --------- ---------- --------- ------------ ------------ --------------
Balances, November 1, 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 ............ 259 2 440 -- -- -- 442
Repurchase of shares ....... (21) -- -- (261) -- -- (261)
Changes in exchange rates .. -- -- -- -- -- (29) (29)
--------- --------- ---------- --------- ------------ ------------ --------------
Balances, October 31, 1997 ...... 6,405 64 22,074 (469) (20,660) (262) 747
Net income ................. -- -- -- -- 3,068 -- 3,068
Exercise of stock options
and shares issued under
employee stock purchase
plan...................... 85 1 882 -- -- -- 883
Repurchase of shares ....... (75) (1) -- (707) -- -- (708)
Changes in exchange rates .. -- -- -- -- -- (321) (321)
--------- --------- ---------- --------- ------------ ------------ --------------
Balances, October 31, 1998 ...... 6,415 $64 $22,956 $(1,176) $(17,592) $(583) $ 3,669
========= ========= ========== ========= ============ ============ ==============
See Notes to Consolidated Financial Statements
33
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED OCTOBER 31,
------------------------------------------
1998 1997 1996
----------- ---------- ------------
Cash flows from operating activities:
Net income (loss).................................................. $ 3,068 $ (20,217) $ 982
----------- ---------- ------------
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Deferred income taxes........................................... --- 4,061 564
Depreciation and amortization................................... 2,928 2,644 1,466
Provision for doubtful accounts................................. 814 7,252 2,120
Loss on disposal of Aviation Training division.................. 266 --- ---
Loss on disposal of fixed assets ............................... 2 2 180
Changes in assets and liabilities:
Increase in accounts receivable............................... (1,488) (1,394) (8,680)
(Increase) decrease in inventories............................ 239 107 (52)
(Increase) decrease in prepaid expenses and other current
and noncurrent assets....................................... (479) 1,794 1,255
Increase in product development costs......................... (2,597) (2,251) (3,356)
Increase (decrease) in accounts payable....................... (415) 884 341
Increase (decrease) in accrued liabilities, accrued employee
Salaries and benefits and other liabilities................. (1,828) 210 722
Increase in deferred revenue.................................. 1,478 1,035 215
----------- ---------- ------------
Total adjustments........................................... (1,080) 14,344 (5,225)
----------- ---------- ------------
Net cash provided by (used in) operating activities......... 1,988 (5,873) (4,243)
----------- ---------- ------------
Cash flows from investing activities:
Capital expenditures............................................ (782) (762) (1,033)
Proceeds from disposal of Aviation Training division............ 1,414 --- ---
Proceeds from disposal of fixed assets.......................... --- --- 13
----------- ---------- ------------
Net cash provided by (used in) investing activities.......... 632 (762) (1,020)
----------- ---------- ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt........................ --- 6,050 ---
Net proceeds from (repayments of) short term borrowings......... (2,028) 296 5,164
Repayment of long term debt..................................... (559) --- ---
Net proceeds from the issuance of common stock.................. 208 377 285
----------- ---------- ------------
Net cash provided by (used in) financing activities........... (2,379) 6,723 5,449
----------- ---------- ------------
Effect of foreign currency on cash................................. (312) (26) 58
----------- ---------- ------------
Net increase (decrease) in cash and cash equivalents............... (71) 62 244
Cash and cash equivalents at beginning of year..................... 537 475 231
----------- ---------- ------------
Cash and cash equivalents at end of year........................... $ 466 $ 537 $ 475
=========== ========== ============
Cash paid for interest expense..................................... $ 2,191 $ 1,379 $ 854
=========== ========== ============
See Notes to Consolidated Financial Statements
34
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. Offering
more than 2,000 hours of comprehensive academic and applied skills courseware
designed for adolescents and adults. The Company's PLATO Learning Systems are
marketed to middle and high schools, colleges, job training programs,
correctional institutions, military education programs, and corporations. The
PLATO Learning System is delivered via networks, CD-ROM, the Internet, and
private intranets.
The Company's fiscal year is from November 1 to October 31. Unless otherwise
stated, references to the years 1998, 1997 and 1996 relate to the fiscal years
ended October 31, 1998, 1997 and 1996, respectively.
PRINCIPLES 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. As of October 31, 1998, the Company had no
significant concentrations of credit risk.
35
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, 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.
36
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 using the liability method,
which 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, and income tax carryforwards,
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 the realization of such benefits
is unlikely.
EARNINGS PER SHARE:
The Company has adopted Statement of Financial Accounting Standards 128 (SFAS
128), "Earnings Per Share", as required, effective November 1, 1997. SFAS 128
requires presentation of basic and diluted earnings per share, including a
restatement of all prior periods presented. Basic earnings per share is
calculated based only upon the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated based
upon the weighted average number of common and, where dilutive, potential common
shares outstanding during the period. Potential common shares include options,
warrants and convertible securities.
37
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.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified in the consolidated financial
statements to conform to the current year presentation.
NEW ACCOUNTING STANDARDS:
In June 1997, the Financial Accounting Standards Board (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 in 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 in 1999.
The American Institute of Certified Public Accountants has issued Statement of
Position (SOP) 97-2 "Software Revenue Recognition". SOP 97-2 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. The Company will adopt SOP 97-2 in 1999.
2. ACCOUNTS RECEIVABLE:
Accounts receivable include net installment receivables of $10,496,000 and
$6,264,000 at October 31, 1998 and 1997, respectively. Installment receivables
with terms greater than one year were $575,000 and $565,000 at October 31, 1998
and 1997, 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
38
the consolidated statements of income, was $814,000, $7,252,000 and $2,120,000
for 1998, 1997 and 1996, respectively.
During 1996, the Company sold certain installment receivables, on a non-recourse
basis, to financial institutions. Approximately $735,000 of receivables were
sold at their discounted present value of approximately $599,000 at an effective
rate of 8.6%. The difference between the gross receivable amount and the
proceeds has been recorded as interest expense in the consolidated statements of
income.
3. DEBT:
The components of debt at October 31 are as follows (in thousands):
1998 1997
---------------- ---------------
Current:
Revolving loan............................... $ 6,880 $ 8,908
15% term loan................................ 2,441 3,000
---------------- ---------------
Total current debt......................... $ 9,321 $ 11,908
================ ===============
Long term:
10% subordinated convertible debentures...... $ 3,050 $ 3,050
================ ===============
The weighted average interest rate of borrowings outstanding under the revolving
loan was 9.5% and 10% at October 31,1998 and 1997, respectively.
The Company's revolving loan agreement, as amended, provides for a maximum $18
million line of credit through February 28, 1999. The agreement also provides
for additional line of credit borrowings up to a maximum $4,500,000 from time to
time during certain periods of the remaining term of the agreement.
Substantially all of the Company's assets are pledged as collateral under the
agreement. Borrowings under the line 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% to 2%, as defined. 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.
In addition, the revolving loan agreement provides for a $3 million term loan at
an annual interest rate of 15%. The term loan is subject to monthly prepayments
of $50,000 and a mandatory prepayment of $1,000,000 on or before November 30,
1998.
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
39
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.
Scheduled maturities of long term debt are as follows (in thousands):
2001...................................... $ 763
2002...................................... 763
2003...................................... 762
Thereafter................................ 762
----------------
$ 3,050
================
4. 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.
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.
Information regarding stock option plans is as follows (in thousands):
1998 1997 1996
----------------- ----------------- -----------------
Options at beginning of year 952 1,016 937
Options granted 305 151 196
Options exercised (100) (148) (96)
Options forfeited (47) (67) (21)
----------------- ----------------- -----------------
Options outstanding at end of year 1,110 952 1,016
================= ================= =================
Options exercisable at end of year 678 646 623
================= ================= =================
Weighted average option prices:
Outstanding at beginning of year $ 8.53 $ 7.77 $ 6.12
Granted 7.48 9.85 13.19
Exercised 7.48 2.68 2.89
Forfeited 11.21 12.88 6.81
Outstanding at end of year 8.22 8.53 7.77
Exercisable at end of year 8.10 7.76 6.25
40
Pursuant to the Company's various stock incentive and stock option plans,
participants may elect to exercise stock options through a noncash transaction.
Upon exercise, the Company immediately repurchases shares, at the current market
price, equal to the participants aggregate exercise price and tax liability. The
acquired shares are recorded as treasury stock at cost. The Company acquired
75,000, 21,000 and 4,000 shares totaling $707,000, $261,000 and $75,000 through
noncash exercise transactions in 1998, 1997 and 1996, respectively.
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.
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 earnings per share would have been changed to
the following pro forma amounts (in thousands, except per share amounts):
AS REPORTED PRO FORMA
----------------- ------------------
Net income (loss):
1998 $ 3,068 $ 1,672
1997 (20,217) (20,816)
1996 982 (40)
Diluted earnings per share:
1998 $ 0.47 $ 0.26
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: 4.7 to 6.7%
Volatility: 69% to 73% Dividend yield: None
41
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.
5. INCOME TAXES:
The components of income (loss) before provision for income taxes are as follows
(in thousands):
1998 1997 1996
---------------- ---------------- ----------------
United States............................. $ 2,335 $ (13,432) $ 2,066
Foreign................................... 733 (2,724) (520)
---------------- ---------------- ----------------
$ 3,068 $ (16,156) $ 1,546
================ ================ ================
The components of the provision for income taxes are as follows (in thousands):
1998 1997 1996
---------------- ---------------- ----------------
Federal................................... $ -- $ 3,397 $ 703
Foreign................................... -- 408 (178)
State and local........................... -- 256 39
---------------- ---------------- ----------------
$ -- $ 4,061 $ 564
================ ================ ================
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):
1998 1997 1996
-------------- ---------------- ----------------
U.S. federal statutory rate at 34%........ $ 1,043 $ (5,493) $ 525
State taxes, net of U.S. federal
Income tax ............................ -- (565) 52
Previously unrecognized benefit from
utilizing tax loss carryforwards....... (1,043) -- --
Other..................................... -- 10,119 (13)
-------------- ---------------- ----------------
$ -- $ 4,061 $ 564
============== ================ ================
42
The components of the deferred tax asset at October 31 are as follows (in
thousands):
1998 1997
------------------------------- -----------------------------
TEMPORARY TEMPORARY
DIFFERENCE TAX EFFECTED DIFFERENCE TAX EFFECTED
-------------- -------------- -------------- -------------
Current:
Revenue recognition.................... $ (3,619) $ (1,339) $ (3,793) $ (1,385)
Accrued liabilities and reserves....... 3,130 1,158 7,701 2,811
-------------- -------------- -------------- -------------
Total current deferred tax asset
(liability)........................ (489) (181) 3,908 1,426
-------------- -------------- -------------- -------------
Long-term:
Net operating loss carryforwards....... 28,497 10,544 26,498 9,673
Product development expense
recognition.......................... -- -- (3,133) (1,144)
Discontinued operations reserve........ -- -- 500 183
Equipment basis difference............. 465 172 812 296
Revenue recognition.................... (494) (183) (517) (189)
Other.................................. 38 14 (345) (126)
-------------- -------------- -------------- -------------
Total long-term deferred tax asset... 28,506 10,547 23,815 8,693
-------------- -------------- -------------- -------------
$ 28,017 $ 10,366 $ 27,723 $ 10,119
============== ==============
Less valuation allowance (10,366) (10,119)
-------------- -------------
$ -- $ --
============== =============
In line with the Company's decision to fully reserve its deferred tax asset at
the end of 1997, no income taxes have been recorded in 1998.
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, 1998, the Company had a federal net operating loss carryforward
of approximately $28 million and a foreign net operating loss carryforward of
approximately $5 million. These net operating loss carryforwards begin to expire
in 2004.
43
6. EARNINGS PER SHARE
The components of the earnings per share calculation are as follows (in
thousands, except per share data:
1998 1997 1996
------------- ------------- -------------
Numerator:
Net income (loss) for basic earnings per share $ 3,068 $(20,217) $ 982
Effect of convertible debentures -- -- --
----------- -------- --------
Net income (loss) for diluted earnings per share $ 3,068 $(20,217) $ 982
=========== ======== ========
Denominator:
Weighted average common shares for basic earnings
per share 6,409 6,233 6,120
Potential common shares:
Stock options and warrants 95 -- 523
Convertible debentures -- -- --
----------- -------- --------
Weighted average common and potential common
shares outstanding for diluted earnings per share 6,504 6,233 6,643
=========== ======== ========
Basic Earnings Per Share $ 0.48 $ (3.24) $ 0.16
=========== ======== ========
Diluted Earnings Per Share $ 0.47 $ (3.24) $ 0.15
=========== ======== ========
In 1998, the effect of the convertible debentures is antidilutive and the
related number of shares and interest expense are excluded from the calculation.
Since the Company incurred a net loss in 1997, the effect of all potential
common shares is antidilutive and the related amounts are excluded from the
calculation.
7. 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):
1999....................................$1,286
2000.......................................651
2001.......................................125
2002.........................................8
2003........................................--
Rent expense was $1,692,000, $1,616,000 and $1,413,000 for 1998, 1997, and 1996,
respectively.
44
8. 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
----------------------------------------------------
1998 1997 1996
-------------- --------------- ---------------
Revenues from unaffiliated customers:
United States............................. $ 35,401 $ 30,779 $ 33,217
Canada.................................... 1,411 1,644 2,955
United Kingdom............................ 6,466 4,536 5,233
-------------- --------------- ---------------
$ 43,278 $ 36,959 $ 41,405
============== =============== ===============
Operating income (loss):
United States............................. $ 4,755 $ (11,856) $ 3,006
Canada.................................... (51) (1,444) (528)
United Kingdom............................ 816 (1,240) (130)
-------------- --------------- ---------------
$ 5,520 $ (14,540) $ 2,348
============== =============== ===============
Total assets:
United States............................. $ 24,945 $ 23,398 $ 35,497
Canada.................................... 1,055 1,026 2,322
United Kingdom............................ 1,407 4,664 4,508
-------------- --------------- ---------------
$ 27,407 $ 29,088 $ 42,327
============== =============== ===============
Revenues from affiliates, while not significant, are recorded at established
intercompany selling prices which are based upon cost plus mark-up.
45
9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
(In thousands, except per share data)
JAN 31 APR 30 JUL 31 OCT 31 TOTAL
------------- ------------- ------------- ------------- -------------
1998:
- ----
Revenues by product line:
PLATO Education.......... $ 6,043 $ 8,391 $ 10,601 $ 14,350 $ 39,385
Aviation Training........ 1,160 1,222 1,464 47 3,893
------------- ------------- ------------- ------------- -------------
Total revenues........... 7,203 9,613 12,065 14,397 43,278
Gross profit................ 5,613 8,266 10,650 13,740 38,269
Net income (loss)........... (2,901) (516) 1,586 4,899 3,068
Earnings per share:
Basic.................... (0.45) (0.08) 0.25 0.76 0.48
Diluted.................. (0.45) (0.08) 0.23 0.73 0.47
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 income (loss)........... (2,315) (2,281) (1,080) (14,541) (20,217)
Basic and diluted earnings
per share................ (0.37) (0.37) (0.17) (2.31) (3.24)
10. SUBSEQUENT EVENT (UNAUDITED):
On January 13, 1999, the Company announced the completion of a $5 million
private placement of convertible preferred stock. The preferred stock is
convertible into shares of the Company's common stock, at the option of the
holder, up to two years from the issue date. Conversion is mandatory for
securities still outstanding two years from the issue date. The conversion price
is based on the average market price of the Company's common stock prior to
conversion, as defined, and is adjusted over time to provide an 8% annual return
to the holders. The conversion price is also subject to ceiling and floor
limitations, which may be adjusted based on the Company's financial performance.
Concurrent with this issuance, the Company issued 125,000 warrants to purchase
the Company's common stock at $9.51 per share. These warrants expire five years
from the issue date. The net proceeds received from the convertible preferred
stock issuance were approximately $4.6 million and were used to pay down
existing borrowings.
46
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 30 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 29 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.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
December 3, 1998
47
TRO LEARNING, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998
(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 584 2,120 264 (b) (2,458)(a) 510
October 31, 1996
For the year ended 510 7,252 --- (742)(a) 7,020
October 31, 1997
For the year ended 7,020 814 367 (b) (7,281)(a) 920
October 31, 1998
Allowance for inventory
obsolescence:
For the year ended 491 150 --- (185)(a) 456
October 31, 1996
For the year ended 456 --- --- (140)(a) 316
October 31, 1997
For the year ended 316 --- --- (41)(a) 275
October 31, 1998
(a) Amounts written off, net of recoveries.
(b) Amounts reclassified.
48
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 1999
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 1999 Proxy Statement, which is
incorporated herein by reference. The 1999 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 1999 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 1999 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 1999 Proxy Statement, which is incorporated herein by
reference.
49
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 29.
2. Financial Statement Schedules - see index on page 29.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed for the quarter ended October 31,
1998.
(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 Certificate of Designations for Series C Convertible
Preferred Stock
3.03 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 (7)
10.04 1993 Outside Director Stock Option Plan+ (3)
10.08 Lease for Edina, Minnesota office (4)
10.14 1993 Stock Option Plan + (2)
10.15 Severance and Non Competition Agreement with William R.
Roach + (3)
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 (7)
10.18 Form of Series 1997 10% Subordinated Convertible
Debentures due March 27, 2004 (7)
10.19 Form of Common Stock Warrants dated March 27, 1997 (7)
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 (7)
10.21 1997 Stock Incentive Plan + (5)
10.22 1997 Non-Employee Directors Stock Option Plan + (6)
10.23 Preferred Stock Purchase Agreement
10.24 Form of 1999 Warrants
10.25 Registration Rights Agreement
50
10.26 Form of Series C Convertible Preferred Stock
10.27 First Amendment to Subordinated Convertible Debentures
due March 27, 2004
21.01 Subsidiaries of the Registrant (1)
23.01 Consent of PricewaterhouseCoopers LLP 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 Exhibit A to the Company's 1994 Proxy
Statement (File Number 0-20842).
(3) 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).
(4) 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).
(5) Incorporated by reference to Appendix A to the Company's 1997 Proxy
Statement (File Number 0-20842).
(6) Incorporated by reference to Appendix B to the Company's 1997 Proxy
Statement (File Number 0-20842).
(7) Incorporated by reference to the corresponding exhibit on the Company's
Annual Report on Form 10-K for the year ended October 31, 1997 (File
Number 0-20842).
+ Management contract or compensatory plan, contract or arrangement.
51
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 22, 1999.
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 22, 1999.
Signature: Title:
/s/ William R. Roach Chairman of the Board, President and Chief
- --------------------------- Executive Officer (principal executive officer)
William R. Roach
/s/ John Murray Executive Vice President and Chief Financial
- --------------------------- Officer (principal financial officer)
John Murray
/s/ Mary Jo Murphy Vice President, Corporate Controller and Chief
- --------------------------- Accounting Officer (principal accounting officer)
Mary Jo Murphy
*
- ---------------------------
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
52