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: December 31, 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 100
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 3,579,229 shares of common stock outstanding at February 9,
1996.
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Wasatch Education Systems Corporation
Condensed Balance Sheet
(Unaudited)
Assets December 31,1995
<S> <C>
Current assets:
Cash $ 142,697
Accounts receivable, net of allowance for
doubtful accounts of $19,200 782,424
Inventories 78,812
Other current assets 48,028
----------
Total current assets 1,051,961
Equipment, furniture and fixtures, net of accumulated
depreciation of $588,521 280,750
Courseware development costs, net of accumulated
amortization of $1,587,407 4,188,719
Other assets, net 38,333
----------
Total assets $5,559,763
==========
Liabilities and stockholders' equity
Current liabilities:
Convertible subordinated debentures $1,197,000
Accounts payable 128,361
Accrued employee costs 249,777
Other accrued liabilities 82,058
Deferred revenue 323,114
----------
Total current liabilities 1,980,310
----------
Stockholders' equity:
Preferred stock, 20,000,000 shares authorized:
Series A convertible redeemable, 4,429,870
shares outstanding, $4,429,870 involuntary
liquidation value 4,655,724
Series B $.375 cumulative convertible redeemable,
91,151 shares 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, 3,579,229 shares issued and
outstanding 11,754,072
Accumulated deficit (18,248,839)
-----------
Total stockholders' equity 3,579,453
-----------
Total liabilities and stockholders' equity $ 5,559,763
===========
The accompanying notes are an integral part of this condensed balance sheet.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Wasatch Education Systems Corporation
Condensed Statements of Operations
(Unaudited)
Three Months Ended December 31,
1995 1994
<S> <C> <C>
Revenue:
Courseware license rights $ 205,888 $ 892,057
Services and other 181,384 279,974
---------- ----------
387,272 1,172,031
---------- ----------
Cost of revenue:
Courseware license rights 260,418 191,308
Services and other 138,273 294,675
---------- ----------
398,691 485,983
---------- ----------
Gross margin (11,419) 686,048
---------- ----------
Operating expenses:
General and administrative 335,568 220,684
Sales and marketing 214,981 119,053
Research and development 74,330 82,380
---------- ----------
624,879 422,117
---------- ----------
Income (loss) from operations (636,298) 263,931
Interest expense, net of interest income 40,190 243,048
---------- ----------
Net income (loss) (676,488) 20,883
Unpaid and undeclared preferred stock
dividends 4,546 4,546
---------- ----------
Net income attributable to common
stockholders $ (681,034) $ 16,337
========== ==========
Net income (loss) per common share $ (0.19) $ 0.00
========== ==========
Weighted average common and common
equivalent shares outstanding 3,571,512 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 Operations
(Unaudited)
Six Months Ended December 31,
1995 1994
<S> <C> <C>
Revenue:
Courseware license rights $1,102,789 $1,961,129
Services and other 342,917 586,291
---------- ----------
1,445,706 2,547,420
---------- ----------
Cost of revenue:
Courseware license rights 493,152 414,491
Services and other 319,838 544,330
---------- ----------
812,990 958,821
---------- ----------
Gross margin 632,716 1,588,599
---------- ----------
Operating expenses:
General and administrative 617,740 576,985
Sales and marketing 386,983 249,899
Research and development 134,675 181,526
---------- ----------
1,139,398 1,008,410
---------- ----------
Income (loss) from operations (506,682) 580,189
Interest expense, net of interest income 80,922 477,038
---------- ----------
Net income (loss) (587,604) 103,151
Unpaid and undeclared preferred stock
dividends 9,092 9,092
---------- ----------
Net income attributable to common
stockholders $ (596,696) $ 94,059
========== ==========
Net income (loss) per common share $ (0.17) $ 0.01
========== ==========
Weighted average common and common
equivalent shares outstanding 3,570,370 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)
Six Months Ended December 31,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (587,604) $ 103,151
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 570,465 467,445
Increase (decrease) in cash from:
Accounts and contract receivable 885,760 (11,413)
Inventories (3,625) 1,253
Other current assets 149 61,782
Accounts payable (187,651) (147,474)
Accrued interest payable to related parties - 383,635
Accrued liabilities (221,979) (231,707)
Deferred revenue (44,119) 40,171
---------- ----------
Net cash provided by operating activities 411,396 666,843
---------- ----------
Cash flows from investing activities:
Purchase of equipment, furniture and fixtures (81,680) (850)
Additions to courseware development costs (263,169) (735,372)
---------- ----------
Net cash used in investing activities (344,849) (736,222)
---------- ----------
Increase (decrease) in cash 66,547 (69,379)
Cash at beginning of period 76,150 206,043
---------- ----------
Cash at end of period $ 142,697 $ 136,664
========== ==========
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 80,922 $ 81,019
========== ==========
Cash paid for income taxes $ 13,290 $ 3,091
========== ==========
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 December 31, 1995 and for the periods
presented 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 and six months ended December 31, 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 December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Deferred
June 30, (Expense) December 31,
1995 Benefit 1995
<S> <C> <C> <C>
Tax net operating loss $4,372,000 $ 204,000 $4,576,000
Revenue deferred for
financial reporting 140,000 (17,000) 123,000
Reserves and accrued
liabilities 41,000 30,000 71,000
---------- --------- ----------
Total deferred tax assets 4,553,000 217,000 4,770,000
Valuation allowance (4,553,000) (217,000) (4,770,000)
---------- --------- ----------
Deferred tax assets $ - $ - $ -
========== ========= ==========
</TABLE>
(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 income from a one-time licensing fee of
$550,000 upon execution of the agreement which is non-refundable. Additionally,
TRO has guaranteed a minimum royalty revenue to the Company of $800,000 for
the period beginning November 1, 1996 through June 30, 1997. The Company
has no future obligations with respect to service, support or product.
<PAGE>
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 December 31, 1995 and 1994.
Revenue for the three months ended December 31, 1995 of $387,000 decreased
$785,000 or 67 percent, compared to the three months ended December 31, 1994.
Courseware license rights decreased by $686,000 or 77 percent to $206,000 for
the three months ended December 31, 1995, from $892,000 for the three months
ended December 31, 1994. This decrease is primarily attributable to the
reorganization and enlargement of the Company's sales force. The Company has
shifted from a combination of a direct sales force and dealers to exclusively
dealers and built a network comprised of over 30 dealers with approximately
80-90 total representatives marketing the Company's products. During the
first half of fiscal year 1996 the Company focused on putting into place and
training these dealer organizations. Due to the time involved in training the
dealers and the relatively long sales lead times in the industry (6-9 months),
sales levels declined. Additionally, the overall market was very sluggish
during the quarter as schools with Chapter I money available seemed reluctant
to commit the funds. Services and other revenues decreased $99,000 or 35
percent to $181,000 for the three months ended December 31, 1995 from $280,000
for the three months ended December 31, 1994. Of this decrease, $30,000 is the
result of lower text and consumable sales which resulted from the lower
courseware sales. Customer support renewal revenues decreased $74,000 to
$129,000 at December 31, 1995 from $203,000 at December 31, 1994. This
decrease is primarily the result of delays in receiving annual contracts from
customers; the most notable of which was the Chicago area schools where
approval of our annual contract has been delayed.
Gross margins decreased by $697,000 or 102 percent to a deficit of $11,000 for
the three months ended December 31, 1995 from $686,000 for the three months
ended December 31, 1994. This decrease is primarily the result of lower
overall sales.
Operating expenses increased by 48 percent or $203,000 to $625,000 for the
three months ended December 31, 1995 from $422,000 for the three months ended
December 31, 1994. General and administrative expenses increased $115,000 to
$336,000 for the three months ended December 31, 1995 from $221,000 for the
three months ended December 31, 1994. Sales and marketing expenses increased
$96,000 or 81 percent to $215,000 for the three months ended December 31, 1995
from $119,000 at December 31, 1994. This increase is primarily the result of
the increased effort during the first six months of fiscal year 1996 to
establish and train the dealer network.
Operating income decreased by $900,000 to a deficit of $636,000 for the three
months ended December 31, 1995 compared to an operating income of $264,000
for the three months ended December 31, 1994.
Net interest expense decreased by $203,000 to $40,000 for the three months
ended December 31, 1995 from $243,000 for the three months ended December 31,
1994. This decrease is primarily the result of the debt to equity conversion
which was effective 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.
The following are explanations of significant period to period changes for
the six months ended December 31, 1995 and 1994.
Revenue for the six months ended December 31, 1995 of $1,446,000 decreased
$1,102,000 or 43 percent, compared to the six months ended December 31, 1994.
Revenue from courseware license rights decreased by $858,000 or 44 percent to
$1,13,000 for the six months ended December 31, 1995, from $1,961,000 for
the six months ended December 31, 1994.
<PAGE>
This decrease is primarily attributable to the reorganization and enlargement
of the Company's sales force. The Company has shifted from a combination of a
direct sales force and dealers to exclusively dealers and has built a network
comprised of over 30 dealers with approximately 80-90 total representatives
marketing the Company's products. During the first half of fiscal year 1996,
the Company focused on putting into place and training these dealer
organizations. Due to the time involved in training the dealers and the
relatively long sales lead times in the industry (6-9 months), sales levels
declined. Additionally, the overall market was very sluggish during the six
months as schools with Chapter I money available seemed reluctant to commit
the funds. Services and other revenues decreased $243,000 or 42 percent to
$343,000 for the six months ended December 31, 1995 from $586,000 for the six
months ended December 31, 1994. Of this decrease, $95,000 is the result of
lower text and consumable sales which resulted from the lower courseware
sales. Customer support renewal revenues decreased $155,000 to $238,000 at
December 31, 1995 from $393,000 at December 31, 1994. This decrease is
primarily the result of delays in receiving annual contracts from customers;
the most notable of which was the Chicago area schools where approval of our
annual contract has been delayed. This decrease was partially offset by an
increase in other related service revenues.
Gross margins decreased by $956,000 or 60 percent to $633,000 for the six
months ended December 31, 1995 from $1,589,000 for the six months ended
December 31, 1994. This decrease is primarily the result of lower overall
sales.
Operating expenses increased by 13 percent or $131,000 to $1,139,000 for the
six months ended December 31, 1995 from $1,008,000 for the six months ended
December 31, 1994. General and administrative expenses increased $41,000 to
$618,000 at December 31, 1995 from $577,000 at December 31, 1994. Sales and
marketing expenses increased $137,000 or 55 percent to $387,000 for the six
months ended December 31, 1995 from $250,000 at December 31, 1994. This
increase is primarily the result of the increased effort during the first six
months of fiscal year 1996 to establish and train the dealer network.
Additionally, $72,000 of this increase came from the Company's catalog
division which did not commence business until January 1995 or the third
quarter of fiscal year 1995.
Operating income decreased by $1,087,000 to a deficit of $507,000 for the six
months ended December 31, 1995 compared to operating income of $580,000 for
the six months ended December 31, 1994.
Net interest expense decreased by $396,000 to $81,000 for the six months ended
December 31, 1995 from $477,000 for the six months ended December 31, 1994.
This decrease is primarily the result of the debt to equity conversion which
was effective 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 December 31, 1995, the Company had liquid resources (cash and accounts
receivable) of $925,000, a decrease of 47 percent or $819,000 from June 30,
1995 when liquid resources were $1,744,000. Cash increased $67,000 primarily
as a result of efforts to collect outstanding accounts receivable. Accounts
and contract receivables decreased $886,000 or 52 percent to $782,000
primarily due to the lower overall sales level.
Current assets decreased by $816,000 or 44 percent to $1,052,000 at December
31, 1995 from $1,868,000 at June 30, 1995. This decrease was primarily the
result of a $865,000 decrease in accounts receivable, with an offsetting
increase in cash of $67,000.
Long-term assets as of December 31, 1995 were $4,508,000 compared to
$4,733,000 at June 30, 1995. This decrease was primarily the result of
increased amortization and a lower percentage of courseware development costs
capitalized.
<PAGE>
Current liabilities of the Company increased by $743,000 to $1,980,000 at
December 31, 1995 from 1,237,000 at June 30, 1995. Of this increase,
$1,197,000 is the change in classification of the convertible subordinated
debentures from long-term to short-term liabilities. Accounts payable
decreased $188,000 as a result of an effort to pay vendors within the agreed
payment terms. Other accrued liabilities decreased $222,000 primarily as a
result of the payment during the six months of commissions and tax liabilities
that were accrued as of June 30, 1995.
The Company's working capital decreased by $1,559,000 from $631,000 at June
30, 1995 to a deficit of $928,000 at December 31, 1995. This decrease is
primarily the result of the change in classification of the convertible
subordinated debentures from long-term to short-term liabilities and accounts
receivable.
Stockholders' equity decreased by $588,000 to $3,579,000 at December 31, 1995,
from $4,167,000 at June 30, 1995. This decrease is the result of a $588,000
net loss for the six month period.
In the opinion of management, debt and equity capital resources should be
increased for the Company to fully 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. Additionally, the Company has secured a
source for its short-term working capital needs through an accounts receivable
financing arrangement. of short term working capital financing for any
operating capital requirements. While management believes that the Company can
continue its current operating strategy without additional funding, cash flows
are difficult to forecast accurately. Therefore, there can be no assurance
that additional 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 operations will be available to repay
these debentures, it is possible that adequate funds may not be available by
that time. Should the Company not have available funds to repay these
debentures then the Company will pursue an extension to the due date.
<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 February 9, 1996
Barbara Morris, President & CEO Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the
Balance sheet and Income statement dated December 31, 1995 on Form 10-QSB,
and is qualified in its entirety by reference to such Form 10-QSB dated
December 31, 1995.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> DEC-31-1995
<CASH> 142,697
<SECURITIES> 0
<RECEIVABLES> 801,633
<ALLOWANCES> 19,209
<INVENTORY> 78,812
<CURRENT-ASSETS> 1,051,961
<PP&E> 869,271
<DEPRECIATION> 588,521
<TOTAL-ASSETS> 5,559,763
<CURRENT-LIABILITIES> 1,980,310
<BONDS> 0
<COMMON> 11,754,072
0
10,074,220
<OTHER-SE> (18,248,839)
<TOTAL-LIABILITY-AND-EQUITY> 5,559,763
<SALES> 1,445,706
<TOTAL-REVENUES> 1,445,706
<CGS> 812,990
<TOTAL-COSTS> 812,990
<OTHER-EXPENSES> 134,675
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,922
<INCOME-PRETAX> (587,604)
<INCOME-TAX> 0
<INCOME-CONTINUING> (587,604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (587,604)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
