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, 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.)
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 Securities 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, no par value outstanding at
January 30, 1997.
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<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Wasatch Education Systems Corporation
Condensed Balance Sheet
(Unaudited)
Assets December 31,
1996
----------------
<S> <C>
Current assets:
Cash $ 193,772
Accounts receivable, net of allowance for doubtful accounts of $15,000 376,965
Inventories 61,791
Other current assets 26,639
----------------
Total current assets 659,167
Equipment, furniture and fixtures, net of accumulated
depreciation of $641,309 141,547
Courseware development costs, net of accumulated
amortization of $2,691,952 3,629,813
Other assets, net 18,333
================
Total assets $4,448,860
================
Liabilities and stockholders' equity
Current liabilities:
Convertible subordinated debentures $1,197,000
Accounts payable 277,710
Accrued employee costs 199,255
Other accrued liabilities 19,486
Deferred revenue 264,482
----------------
Total current liabilities 1,957,933
----------------
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 (19,337,365)
----------------
Total stockholders' equity 2,490,927
----------------
Total liabilities and stockholders' equity $ 4,448,860
================
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 Operations
(Unaudited)
Three Months Ended December 31,
1996 1995
----------------- ----------------
<S> <C> <C>
Revenue:
Courseware license rights $ 138,168 $ 205,888
Services and other 138,611 181,384
----------------- ----------------
276,779 387,272
----------------- ----------------
Cost of revenue:
Courseware license rights 307,561 260,418
Services and other 144,783 138,273
----------------- ----------------
452,344 398,691
----------------- ----------------
Gross margin (deficit) (175,565) (11,419)
----------------- ----------------
Operating expenses:
General and administrative 142,653 335,568
Sales and marketing 102,470 214,981
Research and development 78,129 74,330
----------------- ----------------
323,252 624,879
----------------- ----------------
Loss from operations (498,817) (636,298)
Interest expense 40,731 40,190
----------------- ----------------
Net loss (539,548) (676,488)
Unpaid and undeclared preferred stock dividends 4,546 4,546
================= ================
Loss attributable to common stockholders $ (544,094) $ (681,034)
================= ================
Net loss per common share $ (.15) $ (.19)
================= ================
Weighted average common and common
equivalent shares outstanding 3,606,668 3,571,512
================= ================
The accompanying notes are an integral part of these condensed statements.
</TABLE>
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<TABLE>
<CAPTION>
Wasatch Education Systems Corporation
Condensed Statements of Operations
(Unaudited)
Six Months Ended December 31,
1996 1995
----------------- ----------------
<S> <C> <C>
Revenue:
Courseware license rights $ 537,572 $ 1,102,789
Services and other 248,066 342,917
----------------- ----------------
785,638 1,445,706
----------------- ----------------
Cost of revenue:
Courseware license rights 605,237 493,152
Services and other 273,956 319,838
----------------- ----------------
879,193 812,990
----------------- ----------------
Gross margin (deficit) (93,555) 632,716
----------------- ----------------
Operating expenses:
General and administrative 398,494 617,740
Sales and marketing 225,308 386,983
Research and development 162,144 134,675
----------------- ----------------
785,946 1,139,398
----------------- ----------------
Loss from operations (879,501) (506,682)
Interest expense, net of interest income 81,461 80,922
----------------- ----------------
Net loss (960,962) (587,604)
Unpaid and undeclared preferred stock dividends 9,092 9,092
================= ================
Net income attributable to common stockholders $ (970,054) $ (596,696)
================= ================
Net loss per common share $ (.27) $ (.17)
================= ================
Weighted average common and common
equivalent shares outstanding 3,601,300 3,570,370
================= ================
The accompanying notes are an integral part of these condensed statements.
</TABLE>
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<TABLE>
<CAPTION>
Wasatch Education Systems Corporation
Condensed Statements of Cash Flows
(Unaudited)
Six Months Ended December 31,
1996 1995
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (960,962) $ (587,604)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 665,682 570,465
Increase (decrease) in cash from:
Accounts receivable 511,717 885,760
Inventories 4,891 (3,625)
Other current assets 10,200 149
Accounts payable 151,977 (187,651)
Accrued liabilities (86,267) (221,979)
Deferred revenue 40,240 (44,119)
---------------- --------------
Net cash provided by operating activities 337,478 411,396
---------------- --------------
Cash flows from investing activities:
Purchase of equipment, furniture and fixtures (4,730) (81,680)
Additions to courseware development costs (238,590) (263,169)
---------------- --------------
Net cash used in investing activities (243,320) (344,849)
---------------- --------------
Increase in cash 94,158 66,547
Cash at beginning of period 99,614 76,150
---------------- --------------
Cash at end of period $ 193,772 $ 142,697
================ ==============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 40,732 $ 80,922
================ ==============
Cash paid for income taxes $ 600 $ 13,290
================ ==============
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, 1996 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 six months ended December 31, 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 stockholder 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). This sale is expected to close on or
about February 7, 1997. If this sale is consummated, the operations of the
Company will change substantially during the remainder of 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 December 31,
1996 and June 30, 1996 are as follows:
December 31, June 30,
1996 1996
----------- -----------
Tax net operating losses $5,683,000 $5,324,000
Deferred courseware
development costs 181,500 363,000
Revenue deferred for
financial reporting 101,000 85,000
Reserves and accrued
liabilities 10,000 24,000
Total deferred income tax assets 5,975,500 5,796,000
----------- -----------
Valuation allowance (5,975,500) (5,796,000)
----------- -----------
Net deferred income tax assets $ - $ -
=========== ===========
<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. TRO is obligated to pay to 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 its sales of the Company's products not meet specified levels as
set forth within the agreement. If the sales conditions are not met, the minimum
royalty 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) POTENTIAL SALE OF THE COMPANY'S EDUCATION MARKET NET ASSETS
Effective July 1, 1996, pending stockholder approval that will be sought on
February 7, 1997, the Company entered into an Acquisition agreement with Wasatch
Interactive Learning Corporation ("WILC"). The Company, pending stockholder
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 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, pending stockholder approval, also has granted an exclusive, worldwide
license to WILC to market the Company's products and develop derivative products
in the Education Market. Should the sales be consummated the Company will
receive cash of $1,500,000 and future royalties. The Company will retain
ownership of the capitalized courseware costs, convertible subordinated
debentures, tax net operating loss carryforwards and intellectual property as
well as ownership rights to the products and additionally the rights to market
the products in the "Home and Retail Market", which it intends to pursue. The
Company expects to recognize a gain on the sale, an amount which is
indeterminable at this time. 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 December 31, 1996 and 1995.
Revenue for the three months ended December 31, 1996 of $277,000 decreased
$110,000 or 29 percent, compared to the three months ended December 31, 1995.
Courseware license rights revenue decreased by $68,000 or 33 percent to $138,000
for the three months ended December 31, 1996, from $206,000 for the three months
ended December 31, 1995. This decrease is primarily due to lower than
anticipated revenues generated from the Company's dealer organizations, due in
part from the Company adding and deleting certain dealer organizations over the
past year in an effort to find those dealer organizations which the Company
feels will enhance its overall sales strategy. Services and other revenues
decreased $43,000 or 24 percent to $139,000 for the three months ended December
31, 1996 from $181,000 for the three months ended December 31, 1995. Customer
support renewal revenues decreased $36,000 or 28 percent to $93,000 at December
31, 1996 from $129,000 at December 31, 1995. 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 the new contract period began in
September.
Gross margins decreased by $165,000 or 1,437 percent to a deficit of $176,000
for the three months ended December 31, 1996 from a deficit of $11,000 for the
three months ended December 31, 1995. This decrease is primarily the result of
lower overall sales.
Operating expenses decreased by $302,000 or 48 percent to $323,000 for the three
months ended December 31, 1996 from $625,000 for the three months ended December
31, 1995. This decrease is primarily the result of the Company's ongoing effort
to maintain lower overall operating costs proportional to sales levels.
Additionally, commissions earned in this quarter are lower due to the decreased
sales levels.
Loss from operations decreased by $137,000 or 22 percent to a loss of $499,000
for the three months ended December 31, 1996 compared to a loss of $636,000 for
the three months ended December 31, 1995.
Interest expense of $41,000 remained consistent with the prior fiscal year
period based on the $1,197,000 of convertible subordinated debentures
outstanding.
The following are explanations of significant period to period changes for the
six months ended December 31, 1996 and 1995.
Revenue for the six months ended December 31, 1996 of $786,000 decreased
$660,000 or 46 percent, compared to the six months ended December 31, 1995.
Revenue from courseware license rights decreased by $565,000 or 51 percent to
$538,000 for the six months ended December 31, 1996, from $1,103,000 for the six
months ended December 31, 1995.
<PAGE>
This decrease is primarily due to the recognition of a one-time licensing fee of
$550,000 during the first quarter of fiscal year 1996 (see Note 3 to the
condensed financial statements). Excluding this one-time transaction, the
Company experienced only a 3 percent decrease in new courseware sales during the
six months ended December 31, 1996. Services and other revenues decreased
$95,000 or 28 percent to $248,000 for the six months ended December 31, 1996
from $343,000 for the six months ended December 31, 1995. Of this decrease,
$9,000 is the result of lower text and consumable sales which resulted from the
lower courseware sales. Customer support renewal revenues decreased $79,000 or
33 percent to $159,000 at December 31, 1996 from $238,000 at December 31, 1995.
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 $726,000 or 115 percent to a loss of $94,000 for the
six months ended December 31, 1996 from $633,000 for the six months ended
December 31, 1995. This decrease is primarily the result of lower overall sales.
Operating expenses decreased by $353,000 or 31 percent to $786,000 for the six
months ended December 31, 1996 from $1,139,000 for the six months ended December
31, 1995. General and administrative expenses decreased $220,000 or 36 percent
to $398,000 at December 31, 1996 from $618,000 at December 31, 1995. Sales and
marketing expenses decreased $162,000 or 42 percent to $225,000 for the six
months ended December 31, 1996 from $387,000 at December 31, 1995. This decrease
is primarily the result of lower commissions due to lower overall sales.
Research and development increased $27,000 or 20 percent to $162,000 for the six
months ended December 31, 1996 from $135,000 at December 31, 1995. This increase
is primarily the result of the Company expensing a larger percentage of
development costs.
Loss from operations increased by $373,000 or 74 percent to a loss of $880,000
for the six months ended December 31, 1996 compared to a loss of $507,000 for
the six months ended December 31, 1995.
Interest expense of $81,000 remained consistent with the prior fiscal year
period based on the $1,197,000 of convertible subordinated debentures
outstanding.
Liquidity and Capital Resources:
At December 31, 1996, the Company had liquid assets (cash and net accounts
receivable) of $571,000, a decrease of $417,000 or 42 percent from June 30, 1996
when liquid assets were $988,000. Cash increased $94,000 primarily as a result
of efforts to collect outstanding accounts receivable. Accounts receivable
decreased $512,000 or 58 percent to $377,000 at December 31, 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 $433,000 or 40 percent to $659,000 at December 31,
1996 from $1,092,000 at June 30, 1996. This decrease was primarily the result of
the $512,000 decrease in accounts receivable and a $15,000 decrease in other
current assets, partially offset by the $94,000 increase in cash.
Long-term assets during the six month period ended December 31, 1996 decreased
$422,000 or 10 percent to $3,790,000 from $4,212,000 at June 30, 1996. Of this,
$357,000 was a decrease in courseware development costs net of accumulated
amortization. This decrease was primarily the result of regular amortization and
a lessor amount of courseware development costs capitalized. Equipment,
furniture and fixtures net of accumulated depreciation decreased by $65,000 for
the six month period ended December 31, 1996 as a result of depreciation
expense.
Current liabilities of the Company increased by $106,000 or 6 percent to
$1,958,000 at December 31, 1996 from $1,852, 000 at June 30, 1996. This increase
is primarily the result of a an increase of $152,000 in accounts payable due to
the Company extending the terms on certain obligations. Other accrued
liabilities decreased by $46,000 primarily as the result of the payment of a
certain state sales tax audit liability.
<PAGE>
The Company's working capital decreased by $539,000 or 71 percent from a deficit
of $760,000 at June 30, 1996 to a deficit of $1,299,000 at December 31, 1996.
This decrease is primarily the result of a lower accounts receivable balance due
to lower overall sales, and an increase in accounts payable discussed above.
Stockholders' equity decreased by $961,000 to $2,491,000 at December 31, 1996,
from $3,452,000 at June 30, 1996. This decrease is the result of a $961,000 net
loss for the six months ended December 31, 1996.
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 pending to shareholder approval to sell the Company's
Education Market Net assets to WILC for $1,500,000 in cash (see below), and
pursuing 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
will not be adequate to repay these debentures, but the Company may be able to
sell certain assets for an amount in excess of any shortfall. Should the Company
not have available the funds to repay these debentures timely, 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 stockholder approval, has agreed to sell 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 stockholder approval, also has granted an
exclusive, worldwide license to WILC to market the Company's products and
develop derivative products in the Education Market. Should the transaction be
consummated the Company will receive cash of $1,500,000 and future royalties.
The Company expects to recognize a gain on the sale, an amount which is
indeterminable at this timeThe 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.
<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 January 30, 1997
Barbara Morris, President & CEO Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet and Income Statement dated December 31, 1996 on Form 10-QSB, and
is qualified in its entirety by reference to such Form 10-QSB dated December 31,
1996.
</LEGEND>
<CIK> 0000837987
<NAME> Wasatch Education Systems Corporation
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 193,772
<SECURITIES> 0
<RECEIVABLES> 391,965
<ALLOWANCES> 15,000
<INVENTORY> 61,791
<CURRENT-ASSETS> 659,167
<PP&E> 782,856
<DEPRECIATION> 641,309
<TOTAL-ASSETS> 4,448,860
<CURRENT-LIABILITIES> 1,957,933
<BONDS> 0
0
10,046,781
<COMMON> 11,781,511
<OTHER-SE> (19,337,365)
<TOTAL-LIABILITY-AND-EQUITY> 4,448,860
<SALES> 785,638
<TOTAL-REVENUES> 785,638
<CGS> 879,501
<TOTAL-COSTS> 879,501
<OTHER-EXPENSES> 162,144
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,461
<INCOME-PRETAX> (960,962)
<INCOME-TAX> 0
<INCOME-CONTINUING> (960,962)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (960,962)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
