UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended: September 30, 1995
[ ] 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: 0-17190
WASATCH EDUCATION SYSTEMS CORPORATION
(Exact name of small business issuer as specified in its charter)
UTAH 87-0458433
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5250 South 300 West, Suite 101
Salt Lake City, Utah 84107
(Address of principal executive offices)
(801) 261-1001
(Issuer's telephone number)
No Change
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
X yes no
The Company had 3,574,229 shares of common stock outstanding at November 10,
1995
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<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
<CAPTION>
Wasatch Education Systems Corporation
Condensed Balance Sheet
(Unaudited)
September 30, 1995
<S> <C>
Assets
Current assets:
Cash $ 673,856
Accounts receivable, net of allowance for
doubtful accounts of $15,000 1,008,498
Inventories 74,315
Other current assets 43,176
-----------
Total current assets 1,799,845
Equipment, furniture and fixtures, net of accumulated
depreciation of $546,515 308,907
Courseware development costs, net of accumulated
amortization of $1,341,591 4,275,691
Other assets, net 38,333
-----------
Total assets $ 6,422,776
===========
Liabilities and stockholders' equity
Current liabilities:
Convertible subordinated debentures 1,197,000
Accounts payable 242,517
Accrued employee costs 200,082
Other accrued liabilities 150,031
Deferred revenue 377,208
------------
Total current liabilities 2,166,838
------------
Stockholders' equity
Preferred stock, 20,000,000 shares authorized:
Series A convertible redeemable, 4,439,870
shares outstanding, $4,439,870 involuntary
liquidation value 4,665,724
Series B $.375 cumulative convertible
redeemable, 91,151 shares issued and
outstanding, $158,254 involuntary liquidation
value 118,496
Series C non-convertible redeemable, 5,300,000
shares outstanding $5,300,000 preferred
liquidation value 5,300,000
Common stock, no par value, 200,000,000 shares
authorized; 3,574,229 shares outstanding 11,544,072
Accumulated deficit (17,572,354)
------------
Total stockholders' equity 4,255,938
------------
Total liabilities and stockholders' equity $ 6,422,776
============
The accompanying notes are an integral part of this condensed balance sheet.
</TABLE>
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<TABLE>
<CAPTION>
Wasatch Education Systems Corporation
Condensed Statements of Income
(Unaudited)
Three Months Ended September 30,
1995 1994
<S> <C> <C>
Revenue:
Courseware license rights $ 896,901 $ 1,069,072
Services and other 161,578 306,617
---------- -----------
1,058,478 1,375,389
---------- -----------
Cost of revenue:
Courseware license rights 233,743 223,182
Services and other 143,422 249,656
---------- -----------
377,165 472,838
---------- -----------
Gross margin 681,313 902,551
---------- -----------
Operating expenses:
General and administrative 317,273 356,301
Sales and marketing 172,002 130,846
Research and development 60,346 99,146
---------- -----------
549,621 586,293
---------- -----------
Income (loss) from operations 131,692 316,258
Interest expense, net of interest income 40,731 233,991
---------- -----------
Income before provision for income taxes 90,961 82,267
Provision for income taxes 2,080 -
---------- -----------
Net income 88,881 82,267
Unpaid undeclared preferred stock dividends 4,546 4,546
---------- -----------
Income attributable to common stockholders $ 84,335 $ 77,721
========== ===========
Net income per common share $ 0.01 $ 0.01
========== ===========
Weighted average common and common
equivalent shares outstanding 8,009,099 6,342,433
========== ===========
The accompanying notes are an integral part of these condensed statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Wasatch Education Systems Corporation
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended September 30,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income $ 88,881 $ 82,267
Adjustments to reconcile net income
to net cash
provided by operating activities:
Depreciation and amortization 282,642 234,326
Increase (decrease) in cash from:
Accounts and contract receivable 659,686 87,724
Inventories 872 8,869
Other current assets 5,000 51,430
Accounts payable (73,495) 85,268
Accrued liabilities (203,701) (20,280)
Deferred revenue 9,974 51,154
--------- ----------
Net cash provided by operating
activities 769,859 580,758
--------- ----------
Cash flows from investing activities:
Purchase of equipment, furniture and
fixtures (67,830) -
Additions to courseware development
costs (104,323) (252,061)
--------- ----------
Net cash used in investing
activities (172,153) (252,061)
--------- ----------
Increase in cash 597,706 328,697
Cash at beginning of period 76,150 206,043
--------- ----------
Cash at end of period $ 673,856 $ 534,740
========= ==========
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 40,731 $ 40,561
========= ==========
Cash paid for income taxes $ 13,290 $ 1,686
========= ==========
The accompanying notes are an integral part of these condensed statements.
</TABLE>
<PAGE>
Wasatch Education Systems Corporation
Notes to Condensed Financial Statements
(Unaudited)
(1) PRESENTATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been prepared
by the Company in accordance with the rules and regulations of the Securities
and Exchange Commission for Form 10-QSB, and accordingly, do not include all
of the information and footnotes required by generally accepted accounting
principles. In the opinion of management, these financial statements reflect
all adjustments, which consist of normal recurring adjustments, which are
necessary to present fairly the Company's financial position, results of
operations and cash flows as of September 30, 1995 and for the periods herein.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1995. The results of
operations for the three months ended September 30, 1995 are not necessarily
indicative of the results that may be expected for the remainder of the
fiscal year ending June 30, 1996.
(2) INCOME TAXES
Effective July 1, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No. 109
requires the use of the liability method for financial reporting purposes
which differs from the deferred method previously required by generally
accepted accounting principles. The components of and the changes in deferred
tax assets for the period ended September 30, 1995 are as follows:
<TABLE>
<CAPTION>
Deferred
June 30, (Expense) September 30,
1995 Benefit 1995
<S> <C> <C> <C>
Tax net operating loss $ 4,372,000 $ (43,000) $ 4,329,000
Revenue deferred for
financial reporting 140,000 3,000 143,000
Reserves and accrued
liabilities 41,000 - 41,000
Total deferred tax assets 4,553,000 (40,000) 4,513,000
Valuation allowance (4,553,000) 40,000 (4,513,000)
Deferred tax assets $ - $ - $ -
=============================================
</TABLE>
During the three months ended September 30, 1995, the Company utilized
approximately $114,000 of net operating loss carryforwards to offset the
Company's current Federal regular taxable income.
<PAGE>
(3) LICENSE AGREEMENT
Effective September 30, 1995, the Company entered into a licensing agreement
with The Roach Organization, Inc., doing business as TRO Learning ("TRO").
The license agreement grants TRO a world-wide, non-transferable, exclusive
license to distribute certain of the Company's products as part of the
courseware system marketed by TRO. The term of the agreement and the license
is two years and one month commencing September 30, 1995 and ending October
31, 1997. The Company recognized a one time licensing fee of $550,000 upon
execution of the agreement which is non-refundable. The Company has no future
obligations with respect to service, support or product.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations:
The following are explanations of significant period to period changes for the
three months ended September 30, 1995 and 1994.
Revenue for the three months ended September 30, 1995 of $1,058,000 decreased
$317,000 or 23 percent, compared to the three months ended September 30, 1994.
Courseware license rights revenue decreased by $172,000 or 16 percent to
$897,000 for the three months ended September 30, 1995, from $1,069,000 for
the three months ended September 30, 1994. This decrease is due primarily to
the delaying a number of sales prospects into the second quarter of the fiscal
year because oflonger sales cycles in certain school districts with tighter
budgetary constraints. Services and other revenues decreased $145,000 or 47
percent to $162,000 for the three months ended September 30, 1995 from
$307,000 for the three months ended September 30, 1994. Of this, $65,000 is
the result of lower text and consumable sales. Customer support renewal
revenues decreased $80,00 to $109,000 at September 30, 1995 from $189,000 at
September 30, 1994. The decrease is primarily the result of the Company
lowering its annual customer support renewal fee.
Gross margins decreased by $222,000 or 25 percent to $681,000 for the three
months ended September 30, 1995 from $903,000 for the three months ended
September 30, 1994. This decrease is primarily the result of lower overall
sales.
Operating expenses decreased by 6 percent or $36,000 to $552,000 for the three
months ended September 30, 1995 from $586,000 for the three months ended
September 30, 1994. This decrease is primarily the result of the Company's
ongoing effort to maintain lower overall operating costs after reducing
headcount during the same period last fiscal year. Additionally, commissions
earned in the first quarter are lower due to the decreased sales levels.
Operating income decreased by $186,000 to $130,000 for the three months ended
September 30, 1995 compared to $316,000 for the three months ended September
30, 1994.
Net interest expense decreased by $193,000 to $41,000 for the three months
ended September 30, 1995 from $234,000 for the three months ended September
30, 1994. This decrease is primarily the result of the debt to equity
conversion which took place on June 30, 1995, wherein, $5,500,000 in related
party debt was exchanged for a combination of 5,300,000 shares of Series C
Redeemable Preferred Stock and 1,666,666 shares of Common Stock.
Liquidity and Capital Resources:
At September 30, 1995, the Company had liquid assets (cash and accounts
receivable) of $1,682,000, a decrease of 2 percent or $42,000 from June 30,
1995 when liquid resources were $1,724,000. Cash increased $598,000 primarily
as a result of efforts to collect outstanding accounts receivable. Accounts
receivable decreased $640,000 or 39 percent to $1,008,000 at September 30,
1995 from $1,648,000 at June 30, 1995, primarily due to the lower overall
sales level.
Current assets decreased by $68,000 or 4 percent to $1,800,000 at September
30, 1995 from $1,868,000 at June 30, 1995. This decrease was the result of a
$598,000 increase in cash, a decrease of $660,000 in accounts contract
receivables.
Long term assets during the period ended September 30, 1995 decreased $110,000
to $4,623,000 from $4,733,000 at June 30, 1995. Of this, $136,000 was a
decrease in courseware development costs. This decrease was primarily the
result of increased amortization and a lower percentage of courseware
development costs capitalized.
<PAGE>
Fixed assets increased by $26,000 for the three month period ended September
30, 1995 as a result of $68,000 of additions offset by depreciation expense.
Current liabilities of the Company increased by $930,000 to $2,167,000 at
September 30, 1995 from $1,237,000 at June 30, 1995. Of this, $1,197,000 is
the change in classification of the convertible subordinated debentures from
long-term to short-term liabilities. Accounts payable decreased $73,000 as a
result of lower overall operating expenses and an effort to pay vendors
within the agreed payment terms. Other accrued liabilities decreased $204,000
primarily as a result of the payment during the quarter of commissions and
tax liabilities that were accrued as of June 30, 1995.
The Company's working capital decreased by $998,000 from $631,000 at June 30,
1995 to a deficit of $367,000 at September 30, 1995. This decrease is
primarily the result of the change in classification of the convertible
subordinated debentures from long term to short term liabilities with an
offsetting decrease in other accrued liabilities as discussed above.
Stockholders' capital increased by $89,000 to $4,256,000 at September 30, 1995
, from $4,167,000 at June 30, 1995. This increase is the result of $89,000
in net income.
In the opinion of management, debt and equity capital resources should be
increased for the Company to pursue its goals in the next twelve months. The
Company is addressing the need for longer term growth capital by pursuing new
sources of investment funding. While management believes that the Company can
continue its current operating strategy without additional funding, cash flows
are difficult to forecast accurately. Therefore, the Company has no assurance
that capital will not be required, nor that it will be available on terms
which are acceptable to the Company. The Company has $1,197,000 of
convertible subordinated debentures that are due on July 31, 1996. Although
current plans indicate that funds from operation will be available to repay
these debentures, it is possible that adequate funds may not be available by
that time.
<PAGE>
PART II - OTHER INFORMATION
The information required by items in Part II is omitted because the items are
not applicable, the answer is negative or substantially the same information
is included elsewhere in this report or has been previously reported by the
registrant.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WASATCH EDUCATION SYSTEMS CORPORATION
/s/Barbara Morris November 10, 1995
Barbara Morris, President & CEO Date.
