<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
--- ---
Commission File No. 0-17190
WASATCH EDUCATION SYSTEMS CORPORATION
- ----------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
UTAH 87-0458433
- ------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2000 Alameda de las Pulgas, Suite 250, San Mateo, CA 94403
- ----------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(415) 571-8063
- ----------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
5250 South 300 West, Salt Lake City, Utah 84107
- ----------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
Check whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 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. Yes X No
--- ---
The Company had 3,606,251 shares of common stock, no par value, at May
9, 1997.
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
--------------------
WASATCH EDUCATION SYSTEMS CORPORATION
BALANCE SHEET (UNAUDITED)
- -------------------------
<TABLE>
<CAPTION>
March 31,
1997
-------------
<S> <C>
ASSETS
Current assets:
Cash $ 1,420,917
----------
Total Current Assets 1,420,917
Courseware development costs, net of
accumulated amortization of $3,011,022 3,362,277
----------
$ 4,783,194
Total assets ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Convertible subordinated debentures $ 1,197,000
Other accrued liabilities 17,072
----------
Total current liabilities 1,214,072
----------
Stockholders' equity:
Preferred stock, 20,000,000 shares authorized-
Series A convertible redeemable, 4,402,428
shares outstanding, $4,402,428 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, 3,606,251 shares outstanding 11,781,511
Treasury stock, at cost, 470 shares at
March 31, 1997 (62)
Accumulated deficit (18,259,108)
----------
Total stockholders' equity 3,569,122
----------
Total liabilities and stockholders' equity $ 4,783,194
==========
</TABLE>
The accompanying notes to condensed financial statements are an integral
part of these condensed financial statements.
<PAGE>
WASATCH EDUCATION SYSTEMS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION> Three Months Ended March 31, Nine Months Ended March 31,
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Courseware license rights $ 94,178 770,728 631,750 1,873,516
Services and other 53,087 281,276 301,153 624,194
--------- --------- ---------- ---------
147,265 1,052,004 932,903 2,497,710
--------- --------- ---------- ---------
Cost of revenue:
Courseware license rights 364,523 278,338 969,760 771,132
Services and other 29,737 142,743 303,693 462,939
--------- --------- ---------- ---------
394,260 421,081 1,273,453 1,234,071
--------- --------- ---------- ---------
Gross (deficit) margin (246,995) 630,923 (340,550) 1,263,639
--------- --------- ---------- ---------
Operating expenses:
General and administrative 26,032 405,847 424,526 1,023,588
Sales and marketing 59,829 176,070 285,136 563,054
Research and development 53,251 93,442 215,396 228,116
--------- --------- ---------- ---------
139,112 675,359 925,058 1,814,758
--------- --------- ---------- ---------
Loss from operations (386,107) (44,436) (1,265,608) (551,119)
Other income and expenses:
Litigation settlement -- 70,000 -- 70,000
Interest expense, net of interest
income (30,743) (40,288) (112,204) (121,209)
Unusual item-gain on sale 1,495,107 -- 1,495,107 --
--------- --------- ---------- ---------
1,464,364 29,712 1,382,903 (51,209)
--------- --------- ---------- ---------
Net income (loss) 1,078,257 (14,724) 117,295 (602,328)
Unpaid and undeclared preferred
stock dividends 16,544 4,546 25,636 13,638
--------- --------- ---------- ---------
Net income (loss) attributable to
common stockholders $1,061,713 (19,720) 91,659 (615,966)
========= ========= ========== =========
Net income (loss) per common share
and common equivalent shares: $ 0.14 (0.01) 0.01 (0.17)
========= ========= ========== =========
Weighted average common and common
equivalent shares outstanding 8,009,068 3,579,229 8,024,120 3,573,323
========= ========= ========== =========
The accompanying notes to condensed financial statements are an integral part of these
condensed statements.
</TABLE>
<PAGE>
WASATCH EDUCATION SYSTEMS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended March 31,
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 117,295 (602,328)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Depreciation and amortization 996,140 873,973
Gain on sale of certain net assets (1,495,107) --
Changes in assets and liabilities, net
of effects from sale of certain
net assets:
Accounts and contract receivable 587,943 703,889
Inventories 1,718 (6,950)
Other current assets 13,533 12,884
Accounts payable 38,137 (114,935)
Other accrued liabilities (106,051) (199,274)
Deferred revenue 19,020 (80,032)
----------- --------
Net cash provided by operating
activities 172,628 587,227
----------- --------
Cash flows from investing activities:
Purchase of equipment, furniture and
fixtures (4,730) (84,976)
Additions to courseware development costs (290,124) (409,920)
Proceeds from sale of certain net assets,
net of cash provided of $56,409 1,443,591 --
----------- --------
Net cash provided by (used in)
investing activities 1,148,737 (494,896)
----------- --------
Cash flows from financing activities:
Purchase of treasury stock (62) --
----------- --------
Net cash used in financing
activities (62) --
----------- --------
Increase in cash 1,321,303 92,331
Cash at beginning of period 99,614 76,150
----------- --------
Cash at end of period $ 1,420,917 168,481
=========== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 115,320 121,715
=========== ========
Cash paid for income taxes $ 600 13,856
=========== ========
Supplemental disclosure of non-cash
investing and financing activities:
Conversion of Series A preferred stock
into common stock $ 27,439 10,000
=========== ========
</TABLE>
The accompanying notes to condensed financial statements are an integral
part of these condensed statements.
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
- ---------------------------------------------------
1. PRESENTATION OF INTERIM FINANCIAL STATEMENTS
--------------------------------------------
The accompanying unaudited condensed financial statements have been
prepared by Wasatch Education Systems Corporation ("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 notes 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 March 31, 1997, and for the
periods presented herein. These unaudited condensed 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
and nine months ended March 31, 1997, 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.
Effective February 7, 1997, the Company sold its Education Market net
assets (see Note 3) to Wasatch Interactive Learning Corporation
("WILC"). As a result, the operations of the Company have changed
significantly since that date.
In February, 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS 128). The statement specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS)
for financial statements issued for all periods ending after December
15, 1997. SFAS 128 simplifies the standards for computing EPS
previously found in APB Opinion No. 15 and replaces the presentation of
Primary EPS and Fully Diluted EPS with a presentation of Basic EPS and
Diluted EPS. The Company will adopt SFAS 128 in its fiscal quarter
ended December 31, 1997. The following represents the Company's
earnings per share as computed under the rules of SFAS 128:
<TABLE>
<CAPTION>
For the Three Months Ended
-------------------------------
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Basic EPS $0.30 (0.01)
Diluted EPS 0.14 (0.01)
</TABLE>
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 Company did not record any tax liability related to the gain of
$1,495,107 at March 31, 1997, as the Company has net operating loss
carryforwards in excess of the gain.
3. SALE OF THE COMPANY'S EDUCATION MARKET NET ASSETS
-------------------------------------------------
Effective February 7, 1997, the Company and WILC, a company formed by
the former management team of the Company, entered into an Asset
Purchase and Software License Agreement ("Acquisition Agreement"). The
Acquisition Agreement provided for the assumption by WILC of certain
liabilities of the Company and payment by WILC to the Company of
$1,500,000 in cash in consideration for the Asset Sale and License,
resulting in a gain of $1,495,107. As a result of the Asset Sale and
License, the Company transferred or licensed to WILC tangible and
intangible assets and proprietary rights to allow WILC to pursue the
market for the Company's products relating to schools and educational
institutions ("Education Market") and retained proprietary assets and
rights to pursue the market for the Company's products relating to home
use and other areas outside the Education Market ("Home Market"). The
Education Market is defined as preschool; K-12; juvenile and adult basic
education; post secondary; correctional and corporate facilities; and
programs both public and private. The Company also retained the
obligation of the convertible subordinated debentures and ownership of
the tax net operating loss carryforwards. The Company intends to pursue
the Home and Internet Markets.
In connection with the Asset Sale and License, the Company and WILC
entered into an Education Market License ("License Agreement") which set
forth the details of the grant of the technology licenses to WILC by the
Company discussed in the Acquisition Agreement and the royalties to be
paid during a five-year period by WILC to the Company, which will vary
between 2.5% and 10% of net revenues. The License Agreement provides
for a one-year exclusivity period for WILC with respect to the licensed
technology within the Education Market, with the right of WILC to extend
the exclusivity period for four additional years upon payment of
$500,000 in annual minimum royalties to the Company. The Company will
have exclusive rights in the Home and Internet Markets during the
period, in which WILC makes payments of royalties to the Company.
4. CONVERTIBLE SUBORDINATED DEBENTURES
-----------------------------------
At March 31, 1997, convertible subordinated debentures totaling
$1,197,000 were outstanding and interest payments were current. The
current interest rate is 13.5% per annum and interest is payable each
March, June, September, and December. The debentures matured on January
31, 1997. In order to retain a substantial portion of the cash proceeds
from the sale to fund the pursuit of the Home and Internet Markets,
management submitted a restructuring proposal in March of 1997 to the
debenture holders for approval. The proposed restructure terms include
the extension of the maturity date to March 31, 2000, and a partial
principal payment upon the approval. In addition, the proposal provides
that the interest rate be reduced to 10% per annum commencing March 1,
1997; the remaining principal and interest are amortized in twelve equal
quarterly payments. The Company retains the option to prepay the
remaining principal and interest balance in full at any time before the
maturity date without incurring any prepayment penalty. A 66 2/3
percent majority vote of the debenture holders was received on May 2,
1997.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
Effective February 7, 1997, the Company entered into an agreement to
sell the Company's Education Market net assets to WILC for $1,500,000 in
cash and future royalties. See Note 3 to the condensed financial
statements. The Company retained all capitalized courseware costs,
convertible subordinated debentures and tax net operating loss
carryforwards. Since all of the Company's revenues were from the
Education Market, there will be no such revenues for the Company after
the sale (except royalty revenues from WILC); expenses will be similarly
reduced.
In the opinion of management, capital resources must be increased for
the Company to pursue the Home Market in the next twelve months. The
Company has no assurance that required capital will be available, or
available on terms viable to the Company.
Results of Operations:
- ----------------------
The following are significant period to period changes for the three
months ended March 31, 1997 and 1996. Variances are primarily due to
the net asset sale to WILC.
Revenue for the three months ended March 31, 1997, of $147,000 decreased
$905,000 or 86 percent, compared to the three months ended March 31,
1996. Courseware license rights revenue decreased by $677,000 or 88
percent to $94,000 for the three months ended March 31, 1997, from
$771,000 for the three months ended March 31, 1996. Services and other
revenues decreased $228,000 or 81 percent to $53,000 for the three
months ended March 31, 1997, from $281,000 for the three months ended
March 31, 1996. Customer support renewal revenues decreased $126,000 or
78 percent to $35,000 at March 31, 1997, from $161,000 at March 31,
1996.
Gross margins decreased by $878,000 or 139 percent to a gross deficit of
$247,000 for the three months ended March 31, 1997, from a gross margin
of $631,000 for the three months ended March 31, 1996.
Operating expenses decreased by 79 percent or $536,000 to $139,000 for
the three months ended March 31, 1997, from $675,000 for the three
months ended March 31, 1996.
Loss from operations increased by $342,000 or 777 percent to a loss of
$386,000 for the three months ended March 31, 1997, compared to a loss
of $44,000 for the three months ended March 31, 1996.
Interest expense of $31,000 remained consistent with the prior fiscal
year period based on the $1,197,000 of convertible subordinated
debentures outstanding.
The Company recognized an unusual gain of $1,495,000 arising from the
sale of certain net assets to WILC effective February 7, 1997.
The following are explanations of significant period to period changes
for the nine months ended March 31, 1997 and 1996.
Revenue for the nine months ended March 31, 1997, of $933,000 decreased
$1,565,000 or 63 percent, compared to the nine months ended March 31,
1996. Revenue from courseware license rights decreased by $1,242,000 or
66 percent to $632,000 for the nine months ended March 31, 1997, from
$1,874,000 for the nine months ended March 31, 1996. This decrease was
substantially due to lower courseware sales due to the sale of the
Education Market to WILC and the recognition of a one-time licensing fee
of $550,000 during the first quarter of fiscal year 1996.
Services and other revenues decreased $323,000 or 52 percent to $301,000
for the nine months ended March 31, 1997, from $624,000 for the nine
months ended March 31, 1996. Customer support renewal revenues decreased
$204,000 or 51 percent to $194,000 at March 31, 1997, from $398,000 at
March 31, 1996. This decrease was primarily the result of delays in
receiving annual contracts from customers.
Gross margins decreased by $1,604,000 or 127 percent to a gross deficit
of $341,000 for the nine months ended March 31, 1997, from a gross
margin of $1,264,000 for the nine months ended March 31, 1996. This
decrease was primarily the result of lower overall sales.
Operating expenses decreased by $890,000 or 49 percent to $925,000 for
the nine months ended March 31, 1997, from $1,815,000 for the nine
months ended March 31, 1996. General and administrative expenses
decreased $599,000 or 59 percent to $425,000 at March 31, 1997, from
$1,024,000 at March 31, 1996, as a result of ongoing efforts to maintain
lower operating costs. Sales and marketing expenses decreased $278,000
or 49 percent to $285,000 for the nine months ended March 31, 1997, from
$563,000 at March 31, 1996. This decrease was primarily the result of
lower commissions due to lower overall sales. Research and development
expenses decreased $13,000 or 6 percent to $215,000 for the nine months
ended March 31, 1997, from $228,000 at March 31, 1996.
Loss from operations increased by $714,000 or 130 percent to a loss of
$1,266,000 for the nine months ended March 31, 1997, compared to a loss
of $551,000 for the nine months ended March 31, 1996.
Interest expense of $112,000 remained consistent with the prior fiscal
year period based on the $1,197,000 of convertible subordinated
debentures outstanding.
For the nine months ended March 31, 1997, the Company recognized an
unusual gain of $1,495,000 arising from the sale of certain net assets
to WILC effective February 7, 1997.
Liquidity and Capital Resources:
- --------------------------------
At March 31, 1997, the Company had cash of $1,421,000, an increase of
$433,000 or 44 percent from June 30, 1996, when liquid assets (cash and
net accounts receivable) were $988,000. As a result of the sale of
certain net assets to WILC in February of 1997 proceeds from the sale
increased cash by $1,321,000 and decreased accounts receivable by
$889,000.
Long-term assets during the nine month period ended March 31, 1997,
decreased $850,000 or 20 percent to $3,362,000 from $4,212,000 at June
30, 1996. Of this decline, $625,000 was a decrease in courseware
development costs net of accumulated amortization. This decrease was
primarily the result of regular amortization and a lesser amount of
courseware development costs capitalized. Equipment, furniture and
fixtures net of accumulated depreciation decreased by $206,000 for the
nine month period ended March 31, 1997, as a result of the sale of net
assets to WILC.
Current liabilities of the Company decreased by $638,000 or 34 percent
to $1,214,000 at March 31, 1997, from $1,852,000 at June 30, 1996. This
decrease was primarily the result of the sale of net assets to WILC.
The Company's convertible subordinated debentures totaling $1,197,000
matured on January 31, 1997. As described in Note 4 to the condensed
financial statements, a restructuring proposal was approved by a
majority of the debenture holders on May 2, 1997.
The Company's working capital increased by $967,000 from a deficit of
$760,000 at June 30, 1996, to $207,000 at March 31, 1997, as a result of
the sale of net assets to WILC.
Stockholders' equity increased by $117,000 to $3,569,000 at March 31,
1997, from $3,452,000 at June 30, 1996. This increase was primarily
attributable to an unusual gain on the sale of net assets to WILC of
$1,495,000, mostly offset by a $1,266,000 net loss from operations for
the nine months ended March 31, 1997.
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 3. Defaults Upon Senior Securities
-------------------------------
As disclosed in Note 4 to the condensed financial statements,
the Company was in default on its $1,197,000 convertible
subordinated debentures at March 31, 1997. The necessary
approval of restructure terms was received from debenture
holders subsequent to quarter end.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
As disclosed in Note 3 to the condensed financial statements,
the Company held a special meeting of its shareholders on
February 7, 1997.
The shareholders approved the Asset Sale and License and the
other transactions contemplated by the terms and conditions of
the Acquisition Commitment dated July 1, 1996.
Shares Voted For Shares Voted Against Abstentions
---------------- -------------------- -----------
2,738,635 7,077 1,383
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Asset Purchase and Software License Agreement dated as of
February 7, 1997, between Wasatch Education Systems
Corporation and Wasatch Interactive Learning Corporation
and exhibits and schedules thereto (incorporated by reference
to Exhibit 2.02 to Registrant's Form 8-K/A dated February 7, 1997,
and filed April 10, 1997).
(b) A Form 8-K was filed on February 14, 1997, as amended by Form
8-K/A, filed on April 10, 1997, to report the sale of the Company's
Education Market net assets as disclosed in Note 3 to the financial
statements. The following items were included in the Form 8-K:
Item 2: Acquisition and Disposition of Assets.
Item 7: Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired - not
applicable
(b) Pro Forma Financial Information
(c) Exhibits.
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WASATCH EDUCATION SYSTEMS CORPORATION
-------------------------------------
Date: May 14, 1997 By: /s/Debbie A. Wong
--------------------------------
Debbie A. Wong
Vice President and
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet and Income Statement dated March 31, 1997, on Form 10-QSB,
and is qualified in its entirety by reference to such Form 10-QSB dated
March 31, 1997.
</LEGEND>
<CIK> 0000837987
<NAME> Wasatch Education Systems Corporation
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,420,917
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,420,917
<PP&E> 3,362,277
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,783,194
<CURRENT-LIABILITIES> 1,214,072
<BONDS> 0
0
10,046,781
<COMMON> 11,781,511
<OTHER-SE> (18,259,108)
<TOTAL-LIABILITY-AND-EQUITY> 4,783,194
<SALES> 932,903
<TOTAL-REVENUES> 932,903
<CGS> 1,273,453
<TOTAL-COSTS> 1,273,453
<OTHER-EXPENSES> 925,058
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112,204
<INCOME-PRETAX> 117,295
<INCOME-TAX> 0
<INCOME-CONTINUING> 117,295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91,659
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
