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, 1996
[ ] 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.)
or incorporation 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 3,606,668 shares of common stock outstanding at November 14,
1996.
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<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Wasatch Education Systems Corporation
Condensed Balance Sheet
(Unaudited)
<S> <C>
Assets September 30,
1996
--------------
Current assets:
Cash $ 110,815
Accounts receivable, net of allowance for doubtful accounts of $15,000 727,129
Inventories 48,588
Other current assets 31,639
--------------
Total current assets 918,171
Equipment, furniture and fixtures, net of accumulated
depreciation of $607,020 175,836
Courseware development costs, net of accumulated
amortization of $2,386,695 3,819,257
Other assets, net 18,333
==============
Total assets $4,931,597
==============
Liabilities and stockholders' equity
Current liabilities:
Convertible subordinated debentures $1,197,000
Accounts payable 167,608
Accrued employee costs 256,892
Other accrued liabilities 27,735
Deferred revenue 251,887
--------------
Total current liabilities 1,901,122
--------------
Stockholders' equity:
Preferred stock, 20,000,000 shares authorized Series A convertible
redeemable, 4,412,431 shares
outstanding, $4,412,431 involuntary liquidation value 4,628,285
Series B $.375 cumulative convertible redeemable,
91,151 shares outstanding, $158,254
involuntary liquidation value 118,496
Series C 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,
3,606,668 shares outstanding 11,781,511
Accumulated deficit (18,797,817)
--------------
Total stockholders' equity 3,030,475
--------------
Total liabilities and stockholders' equity $ 4,931,597
==============
The accompanying notes are an integral part of this condensed balance sheet.
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<TABLE>
<CAPTION>
Wasatch Education Systems Corporation
Condensed Statements of Income
(Unaudited)
Three Months Ended September 30,
1996 1995
----------------- ---------------
<S> <C> <C>
Revenue:
Courseware license rights $ 399,403 $ 896,901
Services and other 109,455 161,577
----------------- ---------------
508,858 1,058,478
----------------- ---------------
Cost of revenue:
Courseware license rights 297,676 233,743
Services and other 94,265 143,422
----------------- ---------------
391,941 377,165
----------------- ---------------
Gross margin 116,917 681,313
----------------- ---------------
Operating expenses:
General and administrative 290,749 317,273
Sales and marketing 122,837 172,002
Research and development 84,015 60,346
----------------- ---------------
497,601 549,621
----------------- ---------------
(Loss) income from operations (380,684) 131,692
Interest expense 40,731 40,731
----------------- ---------------
(Loss) income before provision for income taxes (421,415) 90,961
Provision for income taxes - 2,080
----------------- ---------------
Net (loss) income (421,415) 88,881
Unpaid and undeclared preferred stock dividends 4,546 4,546
================= ===============
(Loss) income attributable to common stockholders $ (425,961) $ 84,335
================= ===============
Net (loss) income per common share $ (.12) $ 0.01
================= ===============
Weighted average common and common
equivalent shares outstanding 3,595,931 8,009,099
================= ===============
The accompanying notes are an integral part of these condensed statements.
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<CAPTION>
Wasatch Education Systems Corporation
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended September 30,
1996 1995
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (421,415) $ 88,881
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 326,136 282,642
Increase (decrease) in cash from:
Accounts receivable 161,552 659,686
Inventories 18,095 872
Other current assets 5,200 5,000
Accounts payable 41,875 (73,495)
Accrued liabilities (20,381) (203,701)
Deferred revenue 27,646 9,974
---------------- ---------------
Net cash provided by operating activities 138,709 769,859
---------------- ---------------
Cash flows from investing activities:
Purchase of equipment, furniture and fixtures (4,730) (67,830)
Additions to courseware development costs (122,778) (104,323)
---------------- ---------------
Net cash used in investing activities (127,508) (172,153)
---------------- ---------------
Increase in cash 11,201 597,706
Cash at beginning of period 99,614 76,150
---------------- ---------------
Cash at end of period $ 110,815 $ 673,856
================ ===============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 40,731 $ 40,731
================ ===============
Cash paid for income taxes $ 520 $ 13,290
================ ===============
The accompanying notes are an integral part of these condensed statements.
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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, 1996 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, 1996. The results of operations for
the three months ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the remainder of the fiscal year ending June
30, 1997.
The preparation of the 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.
Pending shareholder approval, the Company has entered into an agreement with
Wasatch Interactive Learning Corporation ("WILC") to sell the Company's
Education Market net assets (see Note 4). If this sale is consummated, the
operations of the Company will change substantially in fiscal year 1997.
(2) INCOME TAXES
The Company accounts for income taxes using the parameters of Statement of
Financial Accounting Standards ("SFAS") No. 109. SFAS No. 109 requires the use
of the liability method for financial reporting purposes. The Company provides a
valuation allowance against all deferred income tax assets, due to uncertainty
as to their ultimate realizability.
The components of the Company's deferred income tax assets as of September 30,
1996 and June 30, 1996 are as follows:
September 30, June 30,
1996 1996
------------ ----------
Tax net operating losses $5,473,000 $5,324,000
Deferred software costs 272,000 363,000
Revenue deferred for
financial reporting 96,000 85,000
Reserves and accrued
liabilities 19,000 24,000
------------ -----------
Total deferred income tax assets 5,860,250 5,796,000
Valuation allowance (5,860,250) (5,796,000)
------------ -----------
Net deferred income tax assets $ - $ -
============ ===========
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(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. TRO is obligated to pay the Company royalties
based on sales of the Company's products. 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 during the first quarter of
fiscal year 1996 from a one-time licensing fee of $550,000 upon execution of the
agreement which is non-refundable. Additionally, TRO has guaranteed minimum
royalty revenue to the Company of $800,000 for the period beginning November 1,
1996 through June 30, 1997, should the sale of the Company's products not meet
specified levels as set forth within the agreement. If the conditions are met
requiring the minimum royalty payments, cash payments would be due the Company
on July 15, 1997. The Company has no future obligations with respect to service,
support or product relative to this license agreement.
(4) SIGNIFICANT EVENT
Effective July 1, 1996, pending shareholder approval, the Company entered
into an Acquisition agreement with Wasatch Interactive Learning Corporation
("WILC"). The Company, pending shareholder approval, has agreed to sell to WILC
the Education Market net assets of the Company relating to or arising out of the
Company's business of developing, marketing and licensing proprietary and third
- -party educational software and related products and services in the Education
Market. The Company, pending shareholder approval, also has granted an
exclusive, worldwide license to WILC to market the Company's products and
develop derivative products in the Education Market. The Company will receive
cash of $1,500,000 and future royalties. In addition, the Company will retain
all capitalized courseware costs, convertible subordinated debentures and tax
net operating loss carryforwards. The sale is also dependent on WILC obtaining
the required funding to complete the transaction.
<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 September 30, 1996 and 1995.
Revenue for the three months ended September 30, 1996 of $509,000 decreased
$550,000 or 52 percent, compared to the three months ended September 30, 1995.
Courseware license rights revenue decreased by $497,000 or 55 percent to
$399,000 for the three months ended September 30, 1996, from $897,000 for the
three months ended September 30, 1995. This decrease is due to the recognition
of a one-time licensing fee of $550,000 during the first quarter of the 1996
fiscal year (see Note 3 to the financial statements), however, excluding this
transaction, the Company experienced a 15 percent increase in new courseware
sales during the three months ended September 30, 1996 compared to the three
months ended September 30, 1995. Services and other revenues decreased $52,000
or 32 percent to $109,000 for the three months ended September 30, 1996 from
$162,000 for the three months ended September 30, 1995. Customer support renewal
revenues decreased $43,000 to $66,000 at September 30, 1996 from $109,000 at
September 30, 1995. The decrease is primarily the result of delays in receiving
annual contracts from customers, the most notable of which was the Chicago area
schools when the new contract period began in September. Other service related
revenues decreased $9,000.
Gross margins decreased by $564,000 or 83 percent to $117,000 for the three
months ended September 30, 1996 from $681,000 for the three months ended
September 30, 1995. This decrease is primarily the result of lower overall
sales.
Operating expenses decreased by 9 percent or $52,000 to $498,000 for the
three months ended September 30, 1996 from $550,000 for the three months ended
September 30, 1995. This decrease is primarily the result of the Company's
ongoing effort to maintain lower overall operating costs. Additionally,
commissions earned in the first quarter are lower due to the decreased sales
levels.
Operating income decreased by $512,000 to a loss of $381,000 for the three
months ended September 30, 1996 compared to income of $132,000 for the three
months ended September 30, 1995.
Interest expense remained consistent with the prior fiscal year period
based on the $1,197,000 of convertible subordinated debentures outstanding.
Liquidity and Capital Resources:
At September 30, 1996, the Company had liquid assets (cash and net accounts
receivable) of $838,000, a decrease of 15 percent or $150,000 from June 30, 1996
when liquid assets were $988,000. Cash increased $11,000 primarily as a result
of efforts to collect outstanding accounts receivable. Accounts receivable
decreased $162,000 or 18 percent to $727,000 at September 30, 1996 from $889,000
at June 30, 1996, primarily due to the lower overall sales level and to a lessor
extent due to increased collection efforts.
Current assets decreased by $174,000 or 16 percent to $918,000 at September
30, 1996 from $1,092,000 at June 30, 1996. This decrease was primarily the
result of the $162,000 decrease in accounts receivable.
<PAGE>
Long-term assets during the three month period ended September 30, 1996
decreased $199,000 to $4,013,000 from $4,212,000 at June 30, 1996. Of this,
$168,000 was a decrease in courseware development costs. This decrease was
primarily the result of regular amortization and a lessor amount of courseware
development costs capitalized during the period. Equipment, Furniture and
FixtureFixed assets decreased by $31,000 for the three month period ended
September 30, 1996 as a result of regular depreciation.
Current liabilities of the Company increased by $49,000 to $1,901,000 at
September 30, 1996 from $1,852, 000 at June 30, 1996. This increase is primarily
the result of a $28,000 increase in deferred revenue due to the Company
receiving cash payments on a larger percentage of its annual support contracts
during the first three months of the fiscal year as compared to the prior
quarter.
The Company's working capital decreased by $223,000 from a deficit of
$760,000 at June 30, 1996 to a deficit of $983,000 at September 30, 1996. This
decrease is primarily the result of a lower accounts receivable balance due to
lower overall sales, and an increase in deferred revenue discussed above.
Stockholders' equity decreased by $421,000 to $3,030,000 at September 30,
1996, from $3,451,000 at June 30, 1996. This decrease is the result of a
$421,000 net loss.
In the opinion of management, debt and equity capital resources must 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 entering
into an agreement (subject to shareholder approval) to sell the Company's
Education market net assets to WILC for $1,500,000 in cash (see below) and new
sources of investment funding. The Company has in place an accounts receivable
financing arrangement which allows the Company to borrow 70 percent against its
qualified accounts receivable at a rate of 3 1/2 percent of the face value of
such receivables. The Company has $1,197,000 of convertible subordinated
debentures that are due on January 31, 1997. Funds from operations may not be
adaquate to repay these debentures. Should the Company not have available the
funds to repay these debentures then the Company will pursue an extension to the
due date. The Company has no assurance that required capital will be available,
or available on terms viable to the Company.
Effective July 1, 1996, the Company entered into an Acquisition agreement
with WILC. The Company, pending shareholder approval, has agreed to sell to WILC
the Education Market assets of the Company relating to or arising out of the
Company's business of developing, marketing and licensing proprietary and
third-party educational software and related products and services in the
education market. The Company, pending shareholder approval, also has granted an
exclusive, worldwide license to WILC to market the Company's products and
develop derivative products in the Education Market. If the transaction is
consummated, the Company will receive cash of $1,500,000 and future royalties.
The Company will retain all capitalized courseware costs, convertible
subordinated debentures and tax net operating loss carryforwards.
<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.
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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 14, 1996
Barbara Morris, President & CEO Date
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance sheet and Income statement dated September 30, 1996 on Forn 10-QSB, and
is qualified in its entirety by reference to such Form 10-QSB dated September
30, 1996.
</LEGEND>
<CIK> 0000837987
<NAME> Wasatch Education Systems Corporation
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 110,815
<SECURITIES> 0
<RECEIVABLES> 742,129
<ALLOWANCES> 15,000
<INVENTORY> 48,588
<CURRENT-ASSETS> 918,171
<PP&E> 782,856
<DEPRECIATION> 607,020
<TOTAL-ASSETS> 4,931,597
<CURRENT-LIABILITIES> 1,901,122
<BONDS> 0
0
10,046,781
<COMMON> 11,781,511
<OTHER-SE> (18,797,817)
<TOTAL-LIABILITY-AND-EQUITY> 4,931,597
<SALES> 508,858
<TOTAL-REVENUES> 508,858
<CGS> 391,941
<TOTAL-COSTS> 391,941
<OTHER-EXPENSES> 84,015
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,731
<INCOME-PRETAX> (421,415)
<INCOME-TAX> 0
<INCOME-CONTINUING> (421,415)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (421,415)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
