<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File No. 0-24454
WAVE TECHNOLOGIES INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Missouri 43-1481443
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10845 Olive Boulevard, Suite 250, St. Louis, Missouri 63141
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 314/995-5767
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.0.50 par value The Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of Exchange Act of 1934 during the
preceding 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of shares of Common Stock, $.50 par value, held
by non-affiliates, based on the last sale price on July 15, 1999, of $3.25, was
$9,111,343.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [_] Yes [_]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares outstanding of the registrant's Common Stock, $.50 par
value, as of July 15, 1999 was 4,150,954 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
in connection with the Annual Meeting of Shareholders of the registrant to be
held on September 8, 1999, are incorporated by reference into Part III of this
report.
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INDEX
PART I....................................................................... 3
ITEM 1. BUSINESS........................................................ 3
ITEM 2. PROPERTIES...................................................... 6
ITEM 3. LEGAL PROCEEDINGS............................................... 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 7
PART II...................................................................... 7
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS......................................................... 7
ITEM 6. SELECTED FINANCIAL DATA......................................... 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION............................................ 9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................ 15
PART III..................................................................... 15
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............. 15
ITEM 11. EXECUTIVE COMPENSATION.......................................... 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.. 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 16
PART IV...................................................................... 16
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. 16
SIGNATURES................................................................... 18
EXHIBIT INDEX................................................................ 19
FINANCIAL STATEMENTS.........................................................F-1
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PART I
ITEM 1. BUSINESS
General
Wave Technologies International, Inc. ("Wave" or the "Company") designs,
develops and delivers integrated training solutions addressing technical
certification, including computer programming, networking and operating systems
certifications. Wave delivers its certification training by integrating
Internet-based assessment, self-study materials, Internet mentoring and
intervention and live instructor led training ("ILT"), either in-person or over
the Internet. The Company produces and distributes course books, self-study
guides, training videos, CD-ROM and CBT (computer-based training) materials.
For example, Wave's bootcamp style Camp Wave combines self-study material,
assessment, mentoring and drill and practice with live intensive ILT. The
Company's eCamp Wave(TM) provides similar self-study materials, integrated
assessment, mentoring and drill practice but provides the flexibility of remote
web-based ILT. Many of the Company's products are offered in both formats.
A growing factor in the technology training market is the development of
technical certification standards. A number of manufacturers and associations,
including Microsoft, CompTIA and Novell have established certification programs
for their hardware or software products. Wave currently provides certification
training for Microsoft's MCSE and MCSD programs, Novell's CNE, and CompTIA's A+
and Network+ certifications. The certification sponsoring organizations set
certification standards that are satisfied by passage of standardized tests, but
do not dictate the methods that students may use to prepare for the tests.
Typically, students prepare by taking courses or undertaking self-study. In
addition to the knowledge gained in studying for certification tests, students
obtaining certification generally have increased credibility in the industry and
enhanced job possibilities.
Wave has developed both domestic and international distribution channels
for its products. The Company offers instructor-led courses and sells
integrated training programs at its eleven training centers in the United States
and at its two training centers in the United Kingdom. Wave's UK operations
along with international distributors comprise its international division.
Wave's training strategy includes three key elements that it believes
differentiate it from its competitors:
. Wave's training focus is on certification programs. Because
certification requires actual learning it differs from other programs that
might be sold based on ease of deployment or the "edutainment" value of a
live experience, such as a seminar or workshop.
. Wave integrates its self-study media products with its instructor-led
and on-line distance learning services, based upon research that indicates
that adult learning requires significant interaction with instructors and
other students combined with independent study.
. Wave utilizes assessment tools to prescribe training programs
specific to individual needs rather than a standardized offering for an
entire organization's staff. It then provides the training content
materials to create an individualized portfolio of media-based and
instructor-led training. The Company's ability to create modular
<PAGE>
learning units which are then referenced by its assessment tool provides a
unique and enhanced training solution.
Wave, a Missouri corporation, was formed in 1988. The principal offices of
the Company are located at 10845 Olive Boulevard, Suite 250, St. Louis, Missouri
63141, and its telephone number is (314) 995-5767.
Historically, the Company has reported its revenues in three categories,
Publishing, Instructor-Led Training and Custom Solutions.
Publishing
As a component of its certification training solutions, the Company
develops and publishes self-study materials and course materials. As a part of
its publishing business, the Company produces video training materials, software
simulations, computer-based assessment materials, books and on-line electronic
documents (via Intranet or CD-ROM).
Typically, Wave sells its published products as integrated components of a
complete training solution. Wave also distributes its published products as
stand-alone offerings directly to information technology ("IT") professionals
and to independent training companies under training or private label
agreements. Wave increasingly focuses its marketing on large private label and
customization agreements under which the Company licenses its published training
material to large IT companies. The licensee then has the option to provide its
own instruction delivery or to use Wave's integrated delivery methodology. The
licensee may elect to provide its own ILT component or may utilize Wave's Camp
Wave or eCamp Wave delivery as well as other online components of the Wave
solution. Under typical contracts, Wave receives royalty payments for each
published package and classroom participant.
Instructor-Led Training
The Company's instructor-led training consists of the live classroom
training portion of Wave's integrated training solution. The Company currently
offers a core program of standard courses that it has designed for information
systems professionals. In addition to its standard courses, Wave offers several
complete curricula that combine self-study materials with Internet based
tutorials and classroom training. By selectively combining Internet- or
classroom-based ILT with the Company's published multiple media products and
continuous intervention, Wave delivers a complete certification training
solution.
The Company offers a bootcamp style program of a bundled set of services
and products that it markets to individual information systems professionals
under the names Camp Wave and eCamp Wave. For a flat fee, Camp Wave customers
obtain access to a core certification curriculum and attend intensive
instructor-led training. Camp Wave customers receive the same support services
as other Wave customers, including telephone technical support and access to on-
line network bulletin boards and electronic mail messaging systems, as well as
selected Wave published products.
Wave currently conducts its live training operations at its leased training
centers in the following metropolitan areas: St. Louis; Washington, D.C.; Los
Angeles; Dallas; Chicago; San Jose; Atlanta; Boston; Minneapolis; New York City;
and Philadelphia, and in the London area through its United Kingdom subsidiary,
in two locations, Richmond and London's financial district. The Company also
delivers programs in other cities at rented facilities and at facilities of its
third-party "partners."
<PAGE>
Custom Solutions
In the past, the Company developed educational seminars and promotional
programs to assist IT vendors in marketing new technologies. Wave assisted
manufacturers in providing training for their internal staffs as well as
addressing their need to train customers.
At the end of fiscal 1998, the Company made the strategic decision to
increase the Company's focus on its core certification business while
eliminating custom solution assignments which were not central to the Company's
efforts. As a result, custom solutions is a diminished component of the
Company's revenue.
Wave's custom solutions business now is comprised primarily of developing
content and customizing materials for customers, usually beginning with existing
Company products, for license. Wave also provides customized offerings to meet
a customer's needs by tailoring one or more standard courses or by creating an
entirely new course.
Sales and Marketing
The Company markets its services and products through a three-tier sales
strategy: direct-response mailings and telemarketing, a sales force that
develops major accounts and third party distributors. Wave markets its
published products and instructor-led training services through Company catalogs
mailed to information systems professionals and independent training companies
as well as through Internet and trade publication advertising. The Company's
corporate sales force focuses on larger transactions, often structured as
licenses of published products, usually combined with customized development,
assessment, instructor-led training, Web-based training, or other services.
Wave also uses resellers to distribute its published products. The Company has
distribution agreements with ComputerPrep, Inc., Ingram Micro Inc., Merisel
Americas, Inc., and Tech Data Product Management, Inc., and also uses other
distributors to resell its published products to information systems
professionals.
Using trade lists, compilations of prior Wave students and other sources,
the Company has developed databases containing the names, addresses and other
information about information systems professionals. Wave believes that its
emphasis on database marketing gives it greater market coverage and an advantage
over instructor-led training competitors that rely only on referrals from
manufacturers or a direct sales force to generate sales in such a dispersed
market.
Competition
Each area of the Company's business is highly competitive, and there are
few economic barriers to market entry in any of them. The Company not only
faces competition from many other companies offering similar services and
products, but it must also compete with the internal training, marketing and
publishing units of large corporations. Many of Wave's competitors have access
to greater resources and capital than currently available to the Company. The
Company believes, however, that no single company competes with Wave in all of
its lines of business. The Company believes that being involved in all of its
business units gives it certain competitive advantages. For example, unlike
most of its competitors, the Company offers programs that utilize both self-
study and instructor-led training. The insights the Company gains in its
instructor-led training assist it in producing published materials that are
responsive to its customers' needs.
<PAGE>
Regulation
All the jurisdictions in which the Company operates its training centers
regulate and license certain kinds of vocational, trade, technical or other
post-secondary education. The Company believes that employer-funded or
reimbursed information technology training is exempt from such requirements in
many of these states. To the extent that Wave desires to participate in
programs funded by government entities, it will apply for licensing in
jurisdictions in which it operates training centers. If the Company were found
to be in violation of a state's licensing or other regulatory requirements, it
could be subject to civil or criminal sanctions, including monetary penalties.
The Company is also subject to federal, state and local regulations
concerning the environment, occupational safety and health. The Company has not
experienced significant difficulty in complying with such regulations and
compliance has not had a material impact on the Company's business or its
financial results.
Trademarks and Intellectual Property
The Company's federally registered trademarks, registered with the United
States Patent and Trademark office include the "Wave" name and design and "Camp
Wave." The Company is in the process of registering other marks. The Company's
material intellectual property consists of copyrighted published products, in
multiple media. The Company regards its course development process and its
course titles as proprietary and relies on a combination of statutory and common
law copyright, trademark and trade secret laws, customer licensing agreements,
nondisclosure agreements and other methods to protect its proprietary rights.
Notwithstanding these protections, a third party or parties could copy or
otherwise obtain and use the Company's course materials in an unauthorized
manner or use these materials to develop course titles which are substantially
similar to those of the Company. In addition, Wave operates in countries that
do not provide protection of proprietary rights to the same extent as the United
States.
Employees
As of June 30, 1999, the Company had 199 employees, including 184 full-time
employees. There were 35 trainers and support personnel, four (4) employees
engaged in providing custom solutions, 42 in full-time development and
production of published products, 92 in sales and marketing and 26 in general
and administrative services. None of the Company's employees are represented by
unions. The Company considers its employee relations to be satisfactory.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in St. Louis, Missouri.
The leased property consists of 28,041 square feet and contains the Company's
executive offices, four classrooms and production facilities for courseware and
other published products and advertising materials. The Company's lease expires
on March 31, 2004, with a five-year renewal option. The monthly base rent is
$45,567 through March 31, 2002, and $46,735 for the remainder of the lease term.
The Company also leases 6,360 square feet of warehouse space at an annual
rent of $44,520. The Company uses this space for its mailing and distribution
operations, equipment maintenance, and for storage.
<PAGE>
The following table sets forth the date the Company first leased space in a
market and certain information about each of the Company's current leased
training centers (other than St. Louis) at which the Company has classrooms:
<TABLE>
<CAPTION>
Date Square Current Annual Lease
Location of First Lease Feet Base Rental Term Ends
-------- -------------- ---- ----------- ---------
<S> <C> <C> <C> <C>
Reston, Virginia August 1989 8,182 $209,151 June 2003
Dallas June 1990 5,659 104,691 May 2002
San Jose, California March 1993 7,915 279,818 December 2000
Chicago August 1993 7,082 92,346 July 2000
Atlanta June 1994 7,124 106,860 June 2001
London, United Kingdom August 1994 4,300 181,620 January 2000
London, United Kingdom September 1997 8,500 166,805 December 2001
Los Angeles October 1994 6,999 142,392 September 1999
Philadelphia October 1994 9,152 167,024 May 2009
Boston November 1994 5,439 67,117 January 2000
Minneapolis January 1995 7,462 123,278 March 2001
New York City March 1995 6,000 148,090 July 2005
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material lawsuits. The Company
periodically is subject to claims arising in the ordinary course of its business
which the Company believes will not have, either individually or in the
aggregate, a material adverse effect on the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "WAVT." The following table sets forth the high and low reported sales
prices for the Common Stock as quoted on the Nasdaq National Market for the
periods indicated.
<PAGE>
Quarter Ended High Low
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July 31, 1997 $ 8.75 $ 5.625
October 31, 1997 $ 10.25 $ 7.25
January 31, 1998 $ 8.375 $ 6.50
April 30, 1998 $ 7.75 $ 6.50
July 31, 1998 $6.6875 $ 3.75
October 31, 1998 $ 4.625 $2.59375
January 31, 1999 $ 5.125 $ 3.125
April 30, 1999 $ 5.625 $ 3.625
As of July 15, 1999, the Company had approximately 240 shareholders of
record. Based on the number of annual reports requested by brokers, the Company
estimates that it has approximately 1,700 beneficial owners of its Common Stock.
On July 15, 1999, the last reported sale price of the Common Stock on the Nasdaq
National Market was $3.25 per share.
The Company has not declared or paid any cash dividends on the Common
Stock. The Company currently anticipates that it will retain any earnings to
finance its growth and does not intend to pay cash dividends on its Common Stock
in the foreseeable future. The payment and rate of future cash dividends on the
Common Stock, if any, will be subject to review by the Company's Board of
Directors in light of the Company's financial condition, results of operations
and capital requirements, as well as other factors the Board of Directors deems
relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company is
qualified by reference to and should be read in conjunction with the
consolidated financial statements and notes thereto and other financial data
included elsewhere in this Annual Report on Form 10-K. The consolidated
statement of operations and comprehensive income (loss) data set forth below for
each of the three years in the period ended April 30, 1999 and the consolidated
balance sheet data as of April 30, 1998 and 1999, are derived from the Company's
consolidated financial statements for those years which have been audited by
Deloitte & Touche LLP, independent public accountants, whose report thereon is
included elsewhere herein. The statement of operations and comprehensive income
(loss) data for each of the two years in the period ended April 30, 1996 and the
balance sheet data at April 30, 1995, 1996 and 1997 are derived from audited
financial statements of the Company not included herein. These historical
results are not necessarily indicative of the results to be expected in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation."
<PAGE>
Consolidated Statement of Operations and Comprehensive Income (Loss) Data:
<TABLE>
<CAPTION>
Fiscal Year Ended April 30
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1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(Dollars in thousands except share data)
Revenues $ 18,018 $ 24,369 $ 30,826 $ 36,144 $ 37,021
Gross Profit $ 8,497 $ 11,668 $ 15,522 $ 16,330 $ 16,977
Income (Loss) from Operations $ (1,174) $ (647) $ 1,331 $ 426 $ 188
Net Income (Loss) $ (1,154) $ (724) $ 1,528 $ 113 $ 37
Basic Net Income (Loss) per Share ($0.37) ($0.19) $ 0.39 $ 0.03 $ 0.01
Basic Weighted Average
Shares Outstanding 3,126,398 3,791,562 3,928,141 4,012,087 4,150,954
Diluted Net Income (Loss) per Share ($0.37) ($0.19) $ 0.39 $ 0.03 $ 0.01
Diluted Weighted Average
Shares Outstanding 3,126,398* 3,791,562* 3,968,739 4,065,826 4,173,448
</TABLE>
*All stock options are excluded from diluted weighted average shares outstanding
as their effect is anti-dilutive.
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
April 30
----------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In thousands)
Total Assets $ 12,096 $ 13,658 $ 16,496 $18,296 $ 21,789
Total Current Liabilities $ 5,896 $ 6,841 $ 8,355 $ 8,993 $ 12,708
Long-Term Liabilities
Debt 209 488 242 41 --
Accrued Rent Liability 390 345 298 347 224
---------- --------- --------- -------- ---------
Total Non-current Liabilities $ 599 $ 833 $ 540 $ 388 $ 224
---------- --------- --------- -------- ---------
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
(Dollars in thousands, except share data)
Results of Operations - Fiscal 1999 Compared to Fiscal 1998
Revenues. Total revenues for fiscal 1999 increased $877, or 2%, to $37,021
from $36,144 in fiscal 1998. While custom solutions revenues declined
dramatically as Wave terminated many of its custom solutions services, revenues
from the core business more than offset that decline. International revenues
increased $3,608 in fiscal 1999 compared to the prior year, while domestic
revenues
<PAGE>
decreased $2,731 over the same period, largely as the result of the decrease in
custom solutions revenues, related to Wave's termination of its participation in
the GTE University program.
Publishing revenues in fiscal 1999 increased $1,968, or 11%, to $19,889
from $17,921 in the prior year, and increased as a percentage of total revenues
to 54% from 50%. Domestic sales of published products decreased by approximately
$775 in fiscal 1999 compared to 1998, as the Company sold fewer stand-alone
published products. Wave partially offset that decrease with increased sales of
integrated training solutions which include some published products. The
decrease in domestic publishing revenues was more than offset by a $2,743
increase in publishing revenues in the United Kingdom, including approximately
$800 in sales of boot camps and approximately $900 in sales of a Year 2000
product not offered by Wave in fiscal 2000.
Fiscal 1999 instructor-led training ("ILT") revenues increased $4,158, or
36%, to $15,697 from $11,539 in fiscal 1998, and increased as a percentage of
total revenues to 42% from 32%. Wave's two London training centers accounted for
$859 of the growth in ILT revenues. The most significant factor in the increased
ILT revenues related to $3,429 of revenues for the "Camp Wave" programs begun in
fiscal 1999. Revenues from the Club Wave and corporate Club Wave programs
remained relatively stable at $3,211 in 1999, compared to $3,341 in fiscal 1998.
ILT revenues also included $760 of revenues related to the QA Training
acquisition, completed in January of 1998, a $493 increase over fiscal 1998.
Revenues from some of Wave's historical course offerings declined as the
Company's focus continued to shift to certification-based ILT courses.
Custom solutions revenues in fiscal 1999 decreased dramatically by $5,249
or 79%, to $1,435 from $6,684 in fiscal 1998, as the Company no longer
participated in the GTE University program in fiscal 1999, in light of the lack
of consistent linkage to Wave's core business.
Costs and Expenses. Total costs and expenses in fiscal 1999 increased
$1,115, or 3%, to $36,833 from $35,718 in fiscal 1998, but remained stable as a
percentage of revenues.
Costs of services, products and development decreased slightly as a percent
of total revenues in fiscal 1999, to 54%, from 55% in fiscal 1998, but increased
on an aggregate basis, by $230, or 1%, to $20,044 from $19,814 in fiscal 1998.
Direct out-of-pocket costs of services related to custom solutions such as
third-party development charges and travel-related expenses, decreased by
$2,080, or 62%, as the result of Wave's decision to discontinue offering most
services in that line of business. Other cost savings related to termination of
Wave's participation in the GTE University program, such as payroll and benefits
are reflected in other expense categories. Total payroll and other employee
benefits also decreased $257, or 3%, from $7,522 in fiscal 1998, to $7,265.
Employee travel-related expense also decreased, by $230, or 34%, compared to
fiscal 1998. Miscellaneous costs of services, products and development also
declined, by $216, or 38%, compared to fiscal 1998, as the result of focused
cost-control efforts.
These decreases were offset by increased expenses in several areas.
Material costs increased by $964, including a $701 increase in costs for
international published products and other international materials, largely to
support increased international revenues and for certain lower-margin products
sold through international distributors. Rental expense increased by $341, or
21%, primarily for the increased classroom space at the Company's corporate
headquarters in St. Louis, as well as for rent increases from lease renewals at
other centers. Rental expense for outside facilities and for equipment also
increased, by $337, or 104%, for third-party facilities and for hardware and
software to support the increase in ILT revenues. Amortization of development
costs increased $323, or 20%, compared to fiscal 1998. Expenses also increased
as the Company amortized $235 less in internal development costs in fiscal 1999
compared to the prior year. Wave also incurred a $282 increase in amortization
expense for domestic licenses, reflecting a full year of license fee
amortization from the QA Training materials license, as well as new licenses of
other materials. Royalty fees increased significantly, by $294, or 100%,
compared to fiscal 1998, for costs of licensed materials for a Year 2000 product
sold internationally. Costs for
<PAGE>
student food and beverage increased by $45, or 23%, for items related to a full
year of operations for the second London training center. The Company also had
smaller dollar increases in several other cost of services line items in fiscal
1999.
Sales and marketing expenses in fiscal 1999 increased $1,565, or 17%, to
$10,678 from $9,113 in fiscal 1998 and represented 29% of total revenues in
fiscal 1999, compared to 25% in the prior fiscal year. Of the increase, $469, or
9%, related to increased payroll costs as the Company paid additional
commissions on increased revenues in commissionable core business. Direct mail
expenses in fiscal 1999 increased by $464 or 21%, from fiscal 1998, and
increased slightly as a percentage of revenues to 7% from 6% in fiscal 1998 to
generate the increased ILT and published products business reflected both in
increased revenues and increased deferred revenues. The Company anticipates
continued higher direct mail expenses in fiscal 2000. Print advertising and
promotional expenses in fiscal 1999 increased $481 or 48%, for international
advertising, which the Company's U.K. operation utilizes rather than direct mail
to generate sales. International sales and marketing depreciation increased $59
and rent allocated to international sales and marketing increased $67.
General and administrative expenses decreased $680, or 10%, to $6,111, from
$6,791 in fiscal 1998, and decreased as a percentage of revenues to 17% from
19%, as Wave continued to focus on cost controls. Depreciation in fiscal 1999
decreased $516, or 32%, from fiscal 1998, as the result of the Company's shift
to leasing equipment rather than purchasing. Payroll-related expenses for
administrative personnel in fiscal 1999 decreased $120, or 5%, from fiscal 1998.
Employee travel expenses also decreased, by $31, or 15%, compared to fiscal
1998. Miscellaneous expenses decreased significantly, by $182, or 68%, from the
prior fiscal year. Telephone expense also decreased $53, or 11%, compared to the
prior year. These decreases were partially offset by an increase in real estate
and equipment rental expenses, of $133, or 34%, primarily as the result of new
hardware licenses and increased rent and expanded space in Wave's St. Louis
facility. Investor relations expense also increased $66, or 72% for a new
investor relations firm. Bad debt expense increased $76, or 316%, in fiscal
1999.
Income from Operations. Income from operations in fiscal 1999 was $188,
compared to $426, in fiscal 1998.
Income Tax Expense. Income tax expense was $63 in fiscal 1999, compared to
$214 in fiscal 1998.
Net Income. Wave's net income for fiscal 1999 was $37, or $0.01 per share,
compared to $113, or $0.03 per share, in fiscal 1998.
Results of Operations - Fiscal 1998 Compared to Fiscal 1997
Revenues. Total revenues for fiscal 1998 increased $5,318, or 17%, to
$36,144 from $30,826 in fiscal 1997.
Publishing revenues in fiscal 1998 increased $2,360, or 15%, to $17,921 from
$15,561 in the prior year, and remained stable as a percentage of total revenues
at 50%. The dollar increase included an initial $1,000 fee from a licensing
agreement with IBM, and approximately $400 in ongoing revenues as IBM resold
Wave's MCSE training program. The remainder of the increase resulted primarily
from two large license agreements for published products. Domestic direct sales
of published products decreased by almost $2,000 in fiscal 1998 compared to
1997, as the Company spent a smaller percentage of its sales and marketing
budget on direct mail. That decrease was more than offset by increases in
direct sales in the United Kingdom and domestic and international corporate
licenses.
<PAGE>
Fiscal 1998 ILT revenues increased $1,539, or 15%, to $11,539 from $10,000
in fiscal 1997. Revenues related to the acquisition of QA contributed $267 of
the increase. Wave's two London training centers accounted for $522, or 34%, of
the growth in ILT revenues. ILT revenues from the Club Wave and corporate Club
Wave programs increased 19%, to $3,341, compared to $2,801 for fiscal 1997,
primarily from corporate Club Wave as the Company's field sales force increased
sales of corporate programs.
Custom solutions revenues in fiscal 1998 increased $1,419, or 27%, to
$6,684 from $5,265 in fiscal 1997. Revenues from GTE and the GTE University
program increased by $1,910 to $3,956, in fiscal 1998. A significant portion of
this increase, however, was offset by increased costs for delivery of the
program. In light of the lack of consistent linkage to Wave's core competencies,
the Company stopped participating in the GTE University program in fiscal 1999.
Costs and Expenses. Total costs and expenses in fiscal 1998 increased
$6,223, or 21%, to $35,718 from $29,495 in fiscal 1997. Total costs and expenses
represented 99% of total revenues for the fiscal year, compared to 96% of total
revenues in fiscal 1997.
Costs of services, products and development represented 55% of total
revenues in fiscal 1998, compared to 50% in fiscal 1997, increasing 29%, to
$19,814 from $15,304 in fiscal 1997. Total payroll and other employee benefits
increased $999, or 15%, from $6,523 in fiscal 1997, to $7,522. Production costs
for publishing rose $367, or 15%, in fiscal 1998, to $2,810 from $2,443 in
fiscal 1997. Amortization of development costs for Wave's expanded product
portfolio increased $357 compared to fiscal 1997. Royalty fees increased
significantly, by $265, compared to fiscal 1997, primarily for costs of licensed
materials for a one-time contract with an international corporate customer.
Outside equipment expenses also increased significantly, by $236, or 273%, in
fiscal 1998, primarily for payments on equipment leases used to finance updated
hardware and software for Wave's training centers. Costs for student food and
beverage increased by $111, or over 100%, in connection with the opening of the
new London training center and increased attendance at Wave's domestic centers.
Freight costs associated with the shipping of published materials and study kits
rose slightly, by $58, in fiscal 1998.
Sales and marketing expenses in fiscal 1998 increased $1,091, or 14%, to
$9,113 from $8,022 in fiscal 1997 and represented 25% of total revenues in
fiscal 1998, compared to 26% in the prior fiscal year. Most of the dollar
increase, $818, or 18%, related to increased payroll costs for the continued
expansion of Wave's outside sales force and for additional commissions on
increased revenues. Direct mail expenses in fiscal 1998 increased only slightly,
by $12, from fiscal 1997, but were $516 below fiscal 1996 levels, and decreased
slightly as a percentage of total sales and marketing expense to 25% from 26% in
fiscal 1997 and 43% in fiscal 1996. Other advertising, promotional and trade
show expenses in fiscal 1998 increased $185, or 22%, for expanded Web and trade
journal advertisements.
General and administrative expenses increased $622, or 10%, to $6,791, from
$6,169 in fiscal 1997, and decreased slightly as a percentage of revenues from
20% to 19%. Employment-related expenses for administrative personnel in fiscal
1998 increased $153, or 7%, from fiscal 1997. Depreciation in fiscal 1998
increased $303, or 25%, from fiscal 1997, reflecting a full year's depreciation
of the new equipment and personal property acquired during fiscal 1997 for the
new London center and upgraded computer equipment for corporate headquarters and
the centers. The Company also amortized $67 of goodwill in fiscal 1998
associated with the asset acquisitions from ETI, Inc. and QA. Expenses for
outside professional services, primarily in the employment consulting area, rose
$111, or 27%, in fiscal 1998.
<PAGE>
Income from Operations. Income from operations in fiscal 1998 was $426, or
1% of revenues, compared to $1,331, or 4% of revenues, in fiscal 1997.
Income Tax (Credit) Expense. Income tax expense was $214 in fiscal 1998,
compared to a credit of $250 in fiscal 1997. The increase in income tax expense
reflected the continued profitability of the Company, and the reversal of the
tax valuation allowance in fiscal 1997.
Net Income. Wave's net income for fiscal 1998 was $113 or $0.03 per share,
compared to $1,528, or $0.39 per share, in fiscal 1997.
Liquidity and Capital Resources
The Company's EBITDA in each of the past three years ranged between $4,300
and $4,500. EBITDA is net income (loss) before income taxes, interest expense,
depreciation expense and amortization expense. Although EBITDA is a financial
performance measure commonly used in the financial community, it is not a
measure of performance under accounting principles generally accepted in the
United States. The presentation of EBITDA in management's discussion and
analysis of liquidity is intended to supplement the readers' understanding of
Wave's operating performance and not to replace net income, cash flows,
financial position and comprehensive income determined in accordance with
accounting principles generally accepted in the United States.
The Company had net cash from operating activities of $606 in fiscal 1999,
while the Company had net cash from operating activities of $3,899 in fiscal
1998. The Company's cash and cash equivalents decreased by $797, to $701 at
April 30, 1999, from $1,498 at April 30, 1998. Accounts receivable increased
significantly, by 60% from $7,262 at April 30, 1998, to $11,642 at April 30,
1999, as the result of Camp Wave sales and large corporate sales at quarter end.
Prepaid expenses increased 26%, to $855 at April 30, 1999, from $680 at April
30, 1998, largely for future services provided by the Company's suppliers.
Prepaid direct mail increased $205 from the end of fiscal 1998, as a result of
the increased focus on direct mail marketing described above.
As of April 30, 1999, the Company had total deferred revenue of $6,145,
reflecting sales not yet recognized as revenue, compared to total deferred
revenue at April 30, 1998, of $3,947.
The Company used $639 of cash in fiscal 1999 for capital expenditures,
primarily for computer equipment and related software, compared to $1,212 in
fiscal 1998. The Company invested $2,012 in the development of courseware
materials in fiscal 1999 as compared to $2,072 in fiscal 1998. The Company's
current commitments for operating lease obligations of $2,402 in fiscal 2000
consist primarily of the leases for the Company's headquarters and training
centers. See Note 6 of Notes to Consolidated Financial Statements.
In January, 1999, Wave increased its credit line by $1,000 to $3,500. At
fiscal year-end, Wave had $1,960 available on its line of credit. See Note 5 of
Notes to Consolidated Financial Statements. The Company believes that cash
generated from operations, together with existing cash balances, and its
available credit line, should be sufficient to satisfy the Company's cash
requirements for the next several months.
Year 2000
The Company continues its analysis of its systems and its work with its
software vendors to determine the impact of Year 2000 issues on its operations.
Based upon discussions with
<PAGE>
its vendors, management believes that Year 2000-compliant upgrades are available
for all of its programs at minimal costs, aggregating approximately $200 for
materials, installation and testing, including $60 of estimated internal labor
costs. Wave currently anticipates being Year 2000 compliant by the end of its
second quarter in fiscal 2000. Although the Company's vendors have indicated
that Year 2000-compliant upgrades are available, in the event that such upgrades
are not compatible with existing hardware or software, or are not fully
compliant, Wave believes that it can complete all internal functions manually,
including order entry, class registration and scheduling, accounting and
financial reporting. This would involve additional employee time and effort, and
might delay completion of certain internal reports, and would be estimated to
cost an additional $25 to $50 for short-term employee overtime and temporary
labor costs. If broad interruption of telephone, banking, air travel or similar
services or utilities were to occur, however, this would have a material adverse
effect on the Company's operations, as it would interfere with customers'
abilities to place and pay for orders, and the Company's ability to ship
publishing materials to its customers, and to fulfill customers' training
requirements. The most likely risk for Wave as the result of Year 2000 issues is
the potential delay by companies in sending their technology employees to
training programs. This could result in a significant decline in revenues for
the last calendar quarter of 1999 and the first calendar quarter of 2000, as
information technology professionals stay "on call" to deal with their
employers' potential Year 2000 problems.
Forward-Looking Statements
Certain forward-looking statements are included in this Form 10-K. They use
such words as "may," "will," "expect," "anticipate," "believe," "plan," and
other similar terminology. These statements reflect management's current
expectations and involve a number of risks and uncertainties. Actual results
could differ materially due to changes in the market acceptance of Wave's
integrated approach, market delays related to anticipated or new releases of
Windows 2000, delays by Microsoft or other vendors in implementing certification
guidelines for their new products, the speed and effectiveness of new direct
mail initiatives, global and local business and economic conditions, legislation
and governmental regulations, competition, the Company's ability to effectively
maintain and update its product portfolio, shifts in technology, political or
economic instability in local markets, weather-related issues significantly
affecting attendance at training centers, and currency and exchange rates. As
Wave has focussed its core business and Camp Wave boot camps on training for
Microsoft's MCSE, the Company's dependence on continued demand for the MCSE
certification has increased significantly. In addition, as an increasing
proportion of Wave's revenues are attributable to large licensing agreements,
significant quarterly fluctuations in revenues and earnings may occur. Wave's
fiscal 2000 results also will be adversely affected if companies reduce training
for their IT staffs to keep these employees on site to address potential Year
2000 problems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(In thousands)
The Company has minimal exposure to market risks as it relates to effects
of changes in interest rates and foreign currency exchange rates. Wave does not
hold or issue derivative financial instruments.
Foreign Currency Exchange Risk
Substantially all of the Company's international revenues and expenses are
denominated in local currencies, and translated into U.S. dollars at exchange
rates determined on a weighted monthly basis. Foreign currency translation
impacts primarily revenues and operating expenses as a result of
<PAGE>
exchange rate fluctuations for the British pound. Wave does not currently
utilize foreign currency hedging contracts.
Assuming the same level of activity in foreign currencies, if the U.S.
dollar uniformly increased in strength by 10% relative to the currencies in
which the Company's sales are denominated, income before taxes would decrease by
$144 for the fiscal year ending April 30, 2000. In addition to the direct
effects of changes in exchange rates, which are a changed dollar value of the
resulting sales, changes in exchange rates may also affect the volume of sales
as competitors' products become more or less attractive. The Company's
sensitivity analysis of the effects of changes in foreign currency exchange
rates does not factor in potential changes in sales levels.
Interest Rate Risk
The Company principally invests its available cash balances in overnight
repurchase agreements with its primary banking institution. These investments
are classified as cash and cash equivalents in the Company's financial
statements. The fair value of these instruments would not be significantly
impacted by either a 100 basis point increase or decrease in interest rates due
primarily to the short-term nature of the investments. The Company's credit
facility is directly impacted by changing interest rates in the Commercial Prime
Rate of its lender ("Key Borrowing Rate"). Assuming the Company maintained a
$1,000 outstanding loan balance, and an instantaneous increase or decrease of
one percentage point in its Key Borrowing Rate. The Company's after-tax earnings
would change by $6 over a twelve-month period.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Wave Technologies
International, Inc. and subsidiaries are included at the end of Part III of this
Annual Report on Form 10-K:
Consolidated Balance Sheets as of April 30, 1998 and 1999
Consolidated Statements of Operations and Comprehensive Income (Loss) -
in the Three Years in the Period Ended April 30, 1999
Consolidated Statements of Common Shareholders' Equity in the Three
Years in the Period Ended April 30, 1999
Consolidated Statements of Cash Flows in the Three Years in the Period
Ended April 30, 1999
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction E(3) to Form 10-K, the information required
by this Item is set forth in the section entitled "Election of Directors" in the
definitive proxy statement involving the election of directors in connection
with the Annual Meeting of Shareholders of the registrant to be held
<PAGE>
on September 8, 1999 (the "Proxy Statement"), which section is incorporated
herein by reference. The Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after April 30, 1999, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended.
The information required with respect to Section 16(a) of the Securities
Exchange Act of 1934 is included under the caption "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Proxy Statement, which
section is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction E(3) to Form 10-K, the information required
by this Item is set forth in the section entitled "Election of Directors" in the
Proxy Statement, which section is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction E(3) to Form 10-K, the information required
by this Item is set forth in the section entitled "Voting Rights" and "Security
Ownership of Management" in the Proxy Statement, which sections are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction E(3) to Form 10-K, the information required
by this Item is set forth in the section entitled "Election of Directors" in the
Proxy Statement, which section is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Reference is made to the Index to Consolidated Financial Statements and the
Consolidated Financial Statements following such index.
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Fiscal Year Ended April 30
----------------------------
1997 1998 1999
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Allowance for Doubtful Accounts
Beginning balance 474 446 397
Charged to cost and expenses 78 24 100
Deductions from reserves (106) (73) (102)
----------------------------
Ending balance 446 397 395
============================
Fiscal Year Ended April 30
----------------------------
1997 1998 1999
---- ---- ----
(Dollars in Thousands)
Inventory Reserve
Beginning balance 55 80 180
Charged to cost and expenses 95 125 131
Deductions from reserves (70) (25) (131)
----------------------------
Ending balance 80 180 180
============================
</TABLE>
All other schedules have been omitted because the required information in
such schedules is not present in amounts sufficient to require submission of the
schedule or because the required information is included in the consolidated
financial statements or is not required.
(b) Reports on Form 8-K - The registrant did not file any reports on Form 8-K
during the fiscal quarter ended April 30, 1999.
(c) Exhibits required to be filed by Item 601 of Regulation S-K are listed in
the Exhibit Index attached hereto, which is incorporated by reference. Set forth
below is a list of management contracts and compensatory plans and arrangements
required to be filed as exhibits by Item 14(a)(3):
Service Agreement dated June 1, 1994, by and between the Company and John
A. Kirkham (filed as Exhibit 10.2 to Registrant's Registration Statement on
Form SB-2 (file No. 33-80556).
<PAGE>
Employment Agreement dated June 25, 1997 between the Company and J. Michael
Bowles (filed as Exhibit 10.1 to Registrant's Annual Report on Form 10-KSB
for the fiscal year ended April 30, 1997).
Amended and Restated 1993 Stock Option Plan (filed as Exhibit 10.3 to
Registrant's Registration Statement on Form SB-2 (File No. 33-80556)).
1995 Stock Option Plan (filed as Exhibit 4.3 to Registrant's Registration
Statement on Form S-8 (File No. 33-98462)).
Wave Technologies International, Inc. Outside Directors Stock Option Plan
(filed as Exhibit 10.4 to Registrant's annual report on Form 10-KSB for the
fiscal year ended April 30, 1997).
Wave Technologies International, Inc. 1997 Stock Option Plan (filed as
Exhibit 10.18 to Registrant's quarterly report on Form 10-QSB for the
quarter ended October 31, 1997).
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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.
WAVE TECHNOLOGIES INTERNATIONAL, INC.
Dated: July 28, 1999 By: /s/ Kenneth W. Kousky
-------------------------
Kenneth W. Kousky, President
Pursuant to requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Kenneth W. Kousky President, Chairman of July 28, 1999
- -------------------------- the Board, and Chief
Kenneth W. Kousky Executive Officer
(principal executive
officer)
/s/ J. Michael Bowles Chief Financial Officer July 28, 1999
- -------------------------- (principal financial
J. Michael Bowles and principal
accounting officer)
/s/ Maxine K. Clark Director July 28, 1999
- --------------------------
Maxine K. Clark
/s/ Raymond J. Kalinowski Director July 28, 1999
- --------------------------
Raymond J. Kalinowski
/s/ David W. Kemper Director July 28, 1999
- --------------------------
David Kemper
/s/ Robert E. Lefton Director July 28, 1999
- --------------------------
Robert E. Lefton
/s/ Walter N. Torous Director July 28, 1999
- --------------------------
Walter N. Torous
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page No.
<S> <C> <C>
3.1 Articles of Incorporation, as amended and restated
(filed as Exhibit 3.1 to Registrant's Registration
Statement on Form SB-2 (File No. 33-80556) and
incorporated herein by reference)
3.2 Restated Bylaws, as amended (filed as Exhibit 3.2 to
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended April 30, 1997, and incorporated herein by
reference)
4.1 Specimen Stock Certificate (filed as Exhibit 4.1 to
Registrant's Registration Statement on Form SB-2 (File
No. 33-80556) and incorporated herein by reference)
10.1 Employment Agreement dated June 25, 1997, between the
Company and J. Michael Bowles (filed as Exhibit 10.1 to
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended April 30, 1997, and incorporated herein by
reference)
10.2 Service Agreement dated June 1, 1994, by and between the
Company and John A. Kirkham (filed as Exhibit 10.2 to
Registrant's Registration Statement on Form SB-2 (file
No. 33-80556) and incorporated herein by reference)
10.3 Amended and Restated 1993 Stock Option Plan (filed
as Exhibit 10.3 to Registrant's Registration Statement
on Form SB-2 (File No. 33-80556) and incorporated herein
by reference)
10.4 Wave Technologies International, Inc. Outside Directors
Stock Option Plan (filed as Exhibit 10.4 to Registrant's
annual report on Form 10-KSB for the fiscal year ended
April 30, 1995, and incorporated herein by reference)
10.5 Distribution Agreement between the Company and Ingram Micro,
Inc., dated April 19, 1996 (filed as exhibit 10.8 to
Registrant's annual report on Form 10-KSB for the fiscal
year ended April 30, 1995, and incorporated herein by
reference)
10.6 Promissory Note dated as of January 1, 1999 (filed as
Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 1999 and
incorporated herein by reference)
10.7 General Loan and Security Agreement between Commerce
Bank, National Association, and the Company, dated as of
August 31, 1995 (filed as Exhibit 10.15 to Registrant's
Quarterly Report on Form 10-QSB for the quarter ended
October 31, 1995, and incorporated
</TABLE>
19
<PAGE>
herein by reference)
10.8 First Amendment to General Loan and Security Agreement,
dated as of January 5, 1996, between the Company and
Commerce Bank, National Association (filed as Exhibit
10.13 to Registrant's Quarterly Report on Form 10-QSB
for the quarter ended January 31, 1996, and incorporated
herein by reference)
10.9 $600,000 Note dated January 5, 1996, to Commerce Bank,
National Association (filed as Exhibit 10.14 to
Registrant's Quarterly Report on Form 10-QSB for the
quarter ended January 31, 1996 and incorporated herein by
reference)
10.10 Second Amendment to General Loan and Security Agreement
between the Company and Commerce Bank, National
Association, dated as of September 1, 1996 (filed as
Exhibit 10.13 to Registrant's Quarterly Report on Form
10-QSB for the quarter ended October 31, 1996, and
incorporated herein by reference)
10.11 Wave Technologies International, Inc. 1995 Stock Option
Plan (filed as Exhibit 4.3 to Registrant's Registration
Statement on Form S-8 (File No. 33-98462) and
incorporated herein by reference)
Courseware License Agreement effective as of July 31,
1997, between the Company and International Business
Machines Corporation (filed as Exhibit 10.17 to
Registrant's Quarterly Report on Form 10-QSB for the
quarter ended October 31, 1997 and incorporated herein
reference)
10.13 Wave Technologies International, Inc. 1997 Stock Option
Plan (filed as Exhibit 10.18 to Registrant's Quarterly
Report on Form 10-QSB for the quarter ended October 31,
1997 and incorporated herein by reference)
10.14 Asset Purchase and License Agreement by and among QA
Training, Inc., QA Training, Ltd. and Wave Technologies
International, Inc. dated as of January 22, 1998 (filed
as Exhibit 10.19 to Registrant's Quarterly Report on Form
10-QSB for the quarter ended January 31, 1998, and
incorporated herein by reference)
10.15 Wave Distribution Agreement between Wave Technologies
International, Inc. and QA Training, Ltd., dated as of
January 22, 1998. (filed as Exhibit 10.20 to
Registrant's Quarterl Report on Form 10-QSB ended
January 31, 1998, and incorporated herein
by reference)
10.16 Third Amendment to General Loan and Security Agreement
dated as of August 8, 1998, between
20
<PAGE>
Registrant and Commerce Bank, National Association
(filed as Exhibit 10.17 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended July 31,
1998, and incorporated herein by reference)
11.1 Statement Regarding Computation of Per Share Earnings
(Loss)--Included in Notes to Consolidated Financial
Statements
21.1 List of Subsidiaries
23.1 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Wave Technologies International, Inc.:
We have audited the accompanying consolidated balance sheets of Wave
Technologies International, Inc. and Subsidiaries (the "Company") as of April
30, 1999 and 1998, and the related consolidated statements of operations and
comprehensive income (loss), common shareholders' equity and cash flows for each
of the three years in the period ended April 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Wave Technologies International,
Inc. and Subsidiaries at April 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
April 30, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
June 4, 1999
F-1
<PAGE>
WAVE TECHNOLOGIES INTERNATIONAL, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Shares and Per Share Amounts)
- ------------------------------------------------------------------------------------------------------------------------
April 30,
-----------------------------
ASSETS 1998 1999
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,498 $ 701
Accounts receivable - less allowance for doubtful accounts of
$397 and $395, respectively 7,262 11,642
Inventory 905 845
Prepaid expenses 680 855
------- -------
Total current assets 10,345 14,043
PROPERTY AND EQUIPMENT (Note 3) 3,366 2,331
PREPAID DIRECT MAIL COSTS 408 613
DEFERRED COURSEWARE DEVELOPMENT COSTS 2,124 2,239
OTHER ASSETS (Note 4) 2,053 2,563
------- -------
TOTAL $18,296 $21,789
======= =======
</TABLE>
(Continued)
F-2
<PAGE>
WAVE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Shares and Per Share Amounts)
- --------------------------------------------------------------------------------
April 30,
-----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1999
CURRENT LIABILITIES:
Accounts payable $ 2,480 $ 2,369
Accrued expenses 2,347 2,686
Deferred revenue 3,947 6,145
Current portions of long-term debt and capital
lease obligations:
Notes payable (Note 5) 163 -
Capital lease obligations (Note 6) 56 38
Bank line of credit (Note 5) - 1,470
------- -------
Total current liabilities 8,993 12,708
------- -------
CAPITAL LEASE OBLIGATIONS (Note 6) 41 -
ACCRUED RENT LIABILITY (Note 6) 347 224
COMMON SHAREHOLDERS' EQUITY:
Common stock, $.50 par value, authorized,
20,000,000 shares;
issued, 4,158,311 shares in 1998 and 1999 2,079 2,079
Treasury stock, at cost (7,357 shares in 1998
and 1999) (15) (15)
Additional paid-in capital 8,083 8,083
Accumulated deficit (1,355) (1,318)
Cumulative translation adjustment 123 28
------- -------
Total common shareholders' equity 8,915 8,857
------- -------
TOTAL $18,296 $21,789
======= =======
See notes to consolidated financial statements. (Concluded)
F-3
<PAGE>
WAVE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands, Except Shares and Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended April 30,
--------------------------------------
1997 1998 1999
<S> <C> <C> <C>
REVENUES (Notes 11 and 12):
Publishing $ 15,561 $ 17,921 $ 19,889
Instructor-led training 10,000 11,539 15,697
Custom solutions 5,265 6,684 1,435
---------- ---------- ----------
Total revenues 30,826 36,144 37,021
COSTS AND EXPENSES:
Cost of services, products and development 15,304 19,814 20,044
Sales and marketing 8,022 9,113 10,678
General and administrative 6,169 6,791 6,111
---------- ---------- ----------
Total costs and expenses 29,495 35,718 36,833
---------- ---------- ----------
INCOME FROM OPERATIONS 1,331 426 188
OTHER EXPENSE - Net 53 99 88
---------- ---------- ----------
NET INCOME BEFORE INCOME TAXES 1,278 327 100
INCOME TAX (CREDIT) EXPENSE (Note 7) (250) 214 63
---------- ---------- ----------
NET INCOME 1,528 113 37
OTHER COMPREHENSIVE INCOME (LOSS) -
Foreign currency translation adjustments 57 44 (95)
---------- ---------- ----------
COMPREHENSIVE INCOME (LOSS) $ 1,585 $ 157 $ (58)
========== ========== ==========
BASIC NET INCOME PER SHARE (Note 10) $ 0.39 $ 0.03 $ 0.01
========== ========== ==========
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING (Note 10) 3,928,141 4,012,087 4,150,954
========== ========== ==========
DILUTED NET INCOME PER SHARE (Note 10) $ 0.39 $ 0.03 $ 0.01
========== ========== ==========
DILUTED COMMON SHARES (NOTE 10) 3,968,739 4,065,826 4,173,448
========== ========== ==========
</TABLE>
See Notes to consolidated financial statements.
F-4
<PAGE>
WAVE TECHNOLOGIES INTERNATIONAL, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(Dollars in Thousands, Except Shares and Per Share Amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Total
Additional Cumulative Common
Common Treasury Paid-in Accumulated Translation Shareholders'
Stock Stock Capital Deficit Adjustment Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 30, 1996 $ 1,961 $ (15) $ 7,012 $ (2,996) $ 22 $ 5,984
Net income 1,528 1,528
Options - warrants exercised 6 26 32
Change in cumulative translation adjustment 57 57
------- ------- ------- -------- ------- -------
BALANCE, APRIL 30, 1997 1,967 (15) 7,038 (1,468) 79 7,601
------- ------- ------- -------- ------- -------
Net income 113 113
Options - warrants exercised 37 253 290
Issuance of common stock in connection with
purchase of license (Note 4) 65 686 751
Issuance of common stock in connection with
QA acquisition (Note 13) 10 106 116
Change in cumulative translation adjustment 44 44
------- ------- ------- -------- ------- -------
BALANCE, APRIL 30, 1998 2,079 (15) 8,083 (1,355) 123 8,915
Net income 37 37
Change in cumulative translation adjustment (95) (95)
------- ------- ------- -------- ------- -------
BALANCE, APRIL 30, 1999 $ 2,079 $ (15) $ 8,083 $ (1,318) $ 28 $ 8,857
======= ======= ======= ======== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
WAVE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Except Shares and Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended April 30,
------------------------------------
1997 1998 1999
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,528 $ 113 $ 37
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,138 4,019 4,151
Barter revenue (843) (311) -
Net changes in other assets and liabilities:
Accounts receivable (2,006) (36) (4,475)
Inventory (86) (120) 60
Prepaid expenses and other current assets (274) (203) (175)
Prepaid direct mail costs (91) 150 (205)
Other assets 61 (102) (848)
Deferred tax asset (250) (436) (242)
Accounts payable 520 (10) (111)
Accrued expenses 148 938 339
Accrued rent liability (48) 49 (123)
Deferred revenue 978 (152) 2,198
------- ------- -------
Net cash provided by (used in) operating activities 2,775 3,899 606
------- ------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (815) (1,212) (639)
Capitalized courseware development (1,281) (2,072) (2,012)
Acquisition of QA Training, Inc. - (17) -
------- ------- -------
Net cash used in investing activities (2,096) (3,301) (2,651)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issuance - net 32 290 -
Proceeds from borrowings (repayments) under
line-of-credit - net (228) - 1,470
Repayments of notes payable (233) (264) (163)
Payments of capital lease obligation (49) (74) (59)
------- ------- -------
Net cash (used in) provided by financing activities (478) (48) 1,248
------- ------- -------
</TABLE>
(Continued)
F-6
<PAGE>
WAVE TECHNOLOGIES INTERNATIONAL, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Except Shares and Per Share Amounts)
- -----------------------------------------------------------------------------------------------------------------
Years Ended April 30,
------------------------------------------
1997 1998 1999
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 201 $ 550 $ (797)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 747 948 1,498
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 948 $ 1,498 $ 701
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 69 $ 110 $ 87
========== ========== ==========
Purchase of license through the issuance of common stock
(See Note 4) $ - $ 751 $ -
========== ========== ==========
Acquisition of QA Training, Inc. through the issuance of common
stock (See Note 12) $ - $ 116 $ -
========== ========== ==========
Income tax payments $ - $ 264 $ 498
========== ========== ==========
</TABLE>
See notes to consolidated financial statements. (Concluded)
F-7
<PAGE>
WAVE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF APRIL 30, 1998 AND 1999 AND EACH OF THE THREE YEARS
IN THE PERIOD ENDED APRIL 30, 1999
(Dollars in Thousands, Except Shares and Per Share Amounts)
- -------------------------------------------------------------------------------
1. THE COMPANY
Wave Technologies International, Inc. ("Wave" or the "Company") is engaged in
the business of developing, marketing, and delivering training and
instructional products relating to sophisticated information technologies.
The Company operates eleven training centers in the United States, and two in
the United Kingdom.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition - Revenue is recognized for information technology
training and custom solutions as the services are rendered. Revenue from the
sale of published products is recognized at the time the product is shipped.
Club Wave, Corporate Club Wave and Bootcamps represent programs through which
the Company provides an integrated set of services and products. The portion
of revenue pertaining to products is recognized at the time the product is
shipped. The remaining revenue is deferred and recognized as the services are
provided over the term of the membership. The Company provides allowances for
returns at the time of sale based on management estimates.
Basis of Consolidation - The consolidated financial statements include the
accounts of Wave and its wholly owned subsidiaries. All intercompany accounts
and transactions have been eliminated.
Foreign Currency - Assets and liabilities of the Company's foreign operations
are translated at current exchange rates, while revenue and expenses are
translated at average rates prevailing during the year. Translation
adjustments are reported as a component of shareholders' equity.
Cash and Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less at the date of
purchase to be cash equivalent.
Inventories - Inventories are primarily composed of published materials and
are valued at the lower of cost or market using the First-in, First-out
(FIFO) method of computing cost.
Property and Equipment - Property and equipment is stated at cost, less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over 3 years for computer equipment and software, 7-10
years for furniture and fixtures and the term of the related lease for
leasehold improvements.
Advertising Costs - Direct response advertising consists primarily of direct
mail programs and is capitalized and amortized over its expected period of
future benefits, generally less than 18 months. The Company expenses all
other advertising costs as incurred. Advertising expense for the years ended
April 30, 1997, 1998 and 1999 was $3,082, $3,244 and $3,665, respectively.
Deferred Courseware Development - The Company capitalizes the direct labor
and material costs incurred in connection with the development of courseware.
Such capitalized costs are amortized over the estimated life of the product
offering.
F-8
<PAGE>
Goodwill - Goodwill represents the excess of purchase price over the fair
value of net assets acquired and is amortized using the straight-line method
not to exceed five years. Management periodically reviews the value of its
goodwill to determine if an impairment has occurred or whether changes have
occurred that would require a revision to the remaining useful life. In
making such determination, management evaluates the performance, on an
undiscounted basis of the underlying operations or assets which give rise to
such amount. In the event an impairment is indicated, the asset value is
written down to its discounted cash value, using an appropriate discount
rate. Based on this review, management does not believe that any such
impairment has occurred.
Long-Lived Assets - Impairment of property and intangible assets of the
Company is considered whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. No impairment
losses have been identified by the Company.
Stock-Based Compensation Plans - The Company recognizes and measures
compensation for its stock rights and stock option plans in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. See Note 9 for pro forma
disclosures of net income and earnings per share as if the fair value-based
method prescribed by SFAS No. 123, Accounting for Stock-based Compensation,
had been applied.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported 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.
Fair Value of FinanciaL Instruments - The carrying amount of the Company's
notes payable and long-term debt approximates the fair value based on quoted
market prices for similar issues or current rates offered to the Corporation
for debt with similar maturity schedules. The carrying amount of all other
financial instruments, including cash and cash equivalents, accounts
receivable and accounts payable approximates fair value due to the short-term
nature of these investments.
Reclassifications - Previously reported amounts have been reclassified to
make them consistent with the current presentation.
New Accounting Standards - Effective May 1, 1998, the Company adopted SFAS
130, Reporting Comprehensive Income. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in financial
statements. Comprehensive income includes all non-shareowner changes in
equity and for the Company consists of net income and foreign currency
translation adjustments.
On May 1, 1998, the Company adopted SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. The new rules established revised
standards for public companies relating to the reporting of financial
information about operating segments. The Company's principal consolidated
financial statements were not materially affected by the Company's adoption
of SFAS 131 but did affect the Company's segment information disclosures.
In October 1998 the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes a definition for derivative instruments and requires that all
such items be recognized as assets and liabilities on the balance sheet and
measured at fair value. Changes in the fair value of the derivative
instruments are recognized as a component of either income or comprehensive
income, depending on the designated purpose of the
F-9
<PAGE>
derivative. SFAS No. 133 will be adopted by Wave during the first quarter of
the fiscal year beginning on May 1, 2001 and, based on current circumstances,
management does not believe the effect of adoption will be material.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
April 30,
--------------------
1998 1999
Computer Equipment and software $ 6,758 $ 7,074
Furniture and fixtures 2,658 2,838
Leasehold improvements 1,004 1,086
-------- --------
10,420 10,998
Less - Accumulated depreciation
and amortization (7,054 (8,667)
-------- --------
$ 3,366 $ 2,331
======== ========
Depreciation expense related to this property and equipment was $1,732,
$2,182 and $1,674 for the years ended April 30, 1997, 1998 and 1999,
respectively.
The Company provides technology training to certain customers in exchange for
computer hardware and software. Computer hardware and software of $311 was
acquired in the year ended April 30, 1998 in connection with such nonmonetary
transactions. The Company records such nonmonetary transactions at the lower
of the fair market value of the assets received or the fair market price of
the related training program.
4. OTHER ASSETS
Other assets consist of:
April 30,
-------------------
1998 1999
Goodwill (Note 12) $ 468 $ 320
License 704 1,207
Other 195 108
Deferred tax asset 686 928
------ ------
Total $2,053 $2,563
====== ======
In January 1998, the Company entered into a perpetual license agreement with
QA Training, Ltd. ("QA Ltd.") of the United Kingdom through the issuance of
130,000 shares of common stock, with a fair market value of $751. During
1999, Wave acquired the license rights to additional technology of QA Ltd.
not previously held for $470. These perpetual license agreements give the
Company exclusive rights in the United States and non-exclusive rights
worldwide, excluding the United Kingdom and Ireland, to distribute published
products and provide instructor-led training based on training materials that
are developed by QA Ltd. During 1999, the Company also acquired license
rights from National Education Training Group, Inc. ("Netg") for $375. This
perpetual license provides the Company with access to training course
materials developed by Netg. The licenses are being amortized on a straight-
line basis over the estimated period of benefit, three to four years.
F-10
<PAGE>
Amortization of intangible assets was $167, $235 and $580 in the years ended
April 30, 1997, 1998 and 1999, respectively.
5. DEBT
Debt consists of:
<TABLE>
<CAPTION>
April 30,
----------------
1998 1999
<S> <C> <C>
Note payable to the bank, at 9.25%, payable
in monthly payments of interest and principal
of $19 through January 1999 collateralized by
accounts receivable, equipment, inventory and
other assets of the Company. $ 147 $ -
Note payable to the bank, at 9%, payable in
monthly payments of interest and principal
of $4 through August 1998, collateralized by
equipment of the Company. 16 -
Bank line-of-credit - 1,470
----- ------
163 1,470
Current maturities 163 1,470
----- ------
Total long-term obligations $ - $ -
===== ======
</TABLE>
The Company's operating bank line-of-credit was renewed on September 1, 1998.
In January of 1999, the line, which expires on September 1, 1999, was increased
from $2,500 to $3,500. During the year ended 1999 the Company borrowed and
repaid an aggregate of approximately $12,000 under this agreement. The line
bears interest at the prime rate. The borrowings under the line-of-credit
agreement are collateralized by accounts receivable, equipment, inventory and
other assets of the Company. The line-of-credit agreement includes covenants
which require the maintenance of a certain level of tangible net worth and
precludes the payment of dividends. The Chairman of the Board of the bank is a
member of the Board of Directors of the Company. Interest expense was $69, $109
and $95 in the years ended April 30, 1997, 1998 and 1999, respectively.
F-11
<PAGE>
6. LEASING ARRANGEMENTS
The Company leases equipment under noncancelable capital lease agreements
which expire in fiscal year 2000. The equipment acquired under the leases
has been capitalized and the related obligation is included in long-term debt
and capital lease obligation in the financial statements. The Company leases
facilities and other equipment under various noncancelable operating lease
agreements. The following is a schedule of future minimum lease payments
under the operating leases as of April 30, 1999:
<TABLE>
<CAPTION>
Year Ended Operating
April 30, Leases
<S> <C>
2000 $2,402
2001 1,899
2002 1,229
2003 952
2004 713
Thereafter 200
------
Net minimum lease payments, April 30,1999 $7,395
======
</TABLE>
As of April 30, 1997, 1998 and 1999, the total cost of equipment capitalized
amounted to $269 and the corresponding accumulated depreciation amounted to
approximately $95, $146 and $188 at April 30, 1997, 1998 and 1999,
respectively. Net minimum lease payments under capital leases during the year
ended April 30, 2000 will be $40 and include interest of $2.
Rent expense under operating leases was $1,621, $2,003 and $2,583 for the
years ended April 30, 1997, 1998 and 1999, respectively.
Accrued rent liability consists of rent incentives received for leased
operating facilities and is being amortized on a straight-line basis as an
adjustment to rent expense over the life of the lease. Certain of the
Company's leases include scheduled base rent increases over the term of the
lease. The total amount of such base rent payments is being charged to
expense on a straight-line basis over the term of the lease.
7. INCOME TAXES
The Provision (credit) for income taxes consists of the following:
<TABLE>
<CAPTION>
April 30,
-------------------------
1997 1998 1999
<S> <C> <C> <C>
Current income taxes $ - $ 650 $ 305
Deferred income taxes (250) (436) (242)
----- ----- -----
Provision (credit) for income taxes (250) $ 214 $ 63
===== ===== =====
</TABLE>
Deferred tax assets increased by $250 in 1997 as a result of the deferred tax
benefits associated with the elimination of the Company's valuation
allowance.
F-12
<PAGE>
Deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
April 30,
-------------------
1998 1999
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 108 $ 106
Courseware development costs 172 237
Accruals not currently deductible for tax purposes 152 302
Net operating loss carryforward and alternative minimum tax credits 116 116
Depreciation 141 222
Other 140 165
------ ------
Gross deferred tax assets 829 1,148
Deferred tax liabilities - Prepaid advertising (143) (220)
------ ------
Net deferred tax assets $ 686 $ 928
====== ======
</TABLE>
The following is a reconciliation of the income tax provision (benefit)
computed by applying the U.S. federal statutory rate of 34% to the recorded
income tax provision:
<TABLE>
<CAPTION>
April 30,
----------------------
1998 1999
<S> <C> <C>
Statutory rate 34% 34%
========= =========
Taxes on income at statutory rates $ 113 $ 34
Nondeductible portion of meals and entertainment 60 22
State income taxes (net of federal benefit) 53 3
Other (12) 4
--------- ---------
Total tax expense $ 214 $ 63
========= =========
Effective tax rate 65% 63%
========= =========
</TABLE>
8. EMPLOYEE BENEFIT PLAN
The Company has a salary reduction defined contribution profit sharing plan,
including features designed to qualify the plan under Section 401(k) of the
Internal Revenue Code, which provides retirement benefits to substantially
all of its employees. The Company's contribution to the plan is determined
annually by the Board of Directors. The Company contributed $90, $115 and $93
under this plan in the years ended April 30, 1997, 1998 and 1999,
respectively.
9. STOCK COMPENSATION
Under the Company's 1993, 1995 and 1997 Stock Option Plans, the Company may
grant options for selected officers and employees of the Company and its
subsidiaries for up to 990,000 shares of common stock. Under the plans, the
exercise price of each option equals not less than fair market value of the
Company's stock on the date of grant, and an option's maximum term is 10
years. Options are granted by the Board of Directors, its delegates or the
President of the Company. The majority of
F-13
<PAGE>
options granted vest over three years, in equal installments. If the
optionee's employment is terminated, this option remains exercisable for a
period between 30 and 90 days, unless the employee is terminated "for cause",
then the options terminate immediately.
The Company has elected to continue following the guidance of APB Opinion No.
25, Accounting for Stock Issued to Employees, for measurement and recognition
of stock-based transactions with employees. Under the provisions of APB
Opinion No. 25, no compensation cost has been recognized for the Company's
option plans. Had the determination of compensation cost for these plans
been based on the fair value of the grant dates for awards under these plans,
consistent with the method of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
April 30,
------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Net income (loss):
As reported $ 1,528 $ 113 $ 37
Pro forma 1,417 23 (117)
Earnings (loss) per share:
As reported 0.39 0.03 0.01
Pro forma 0.36 0.01 (0.03)
</TABLE>
The resulting compensation expense may not be representative of compensation
expense to be incurred on a pro forma basis in future years.
For the purpose of this pro forma presentation, the fair value of each option
grant is estimated on the date of grant by using the Black-Scholes option-
pricing model. The following weighted-average assumptions were used for
option grants:
<TABLE>
<CAPTION>
April 30,
------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Expected dividend yield 0.00 % 0.00 % 0.00 %
Expected volatility 68.00 % 68.00 % 80.60 %
Risk-free interest rates 6.87 % 5.75 % 5.21 %
Expected option lives (years) 5.00 5.00 5.00
</TABLE>
F-14
<PAGE>
A summary of the status of the Company's stock option plan for the three-year
period ended April 30, 1999 follows:
<TABLE>
<CAPTION>
Outstanding
-----------------------------
Weighted-
Average
Exercisable Exercise
Shares Shares Price
<S> <C> <C> <C>
Outstanding, April 30, 1996 135,314 353,749 5.52
Granted 74,700 5.30
Exercised (12,466) 2.57
Expired (81,866) 5.48
--------
Outstanding, April 30, 1997 191,866 334,117 5.43
Granted 99,600 6.50
Exercised (74,852) 3.87
Expired (45,424) 6.12
--------
Outstanding, April 30, 1998 186,010 313,441 6.18
Granted 227,100 4.14
Exercised - -
Expired (119,066) 6.49
---------
Outstanding, April 30, 1999 162,434 421,475 4.99
=========
</TABLE>
The weighted-average fair values of options granted during 1997, 1998 and
1999 were $2.80, $4.00 and $2.98, respectively.
The following tables summarize information about stock options outstanding as
of April 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Weighted- Weighted-
Average Average
Remaining Exercise
Range of exercise price Shares Contractual Life Price
<S> <C> <C> <C>
$2.00 - $3.99 169,200 9.74 $3.63
$4.00 - $5.99 121,809 7.78 5.21
$6.00 - $7.50 130,466 7.84 6.56
Options Exercisable Weighted-
Average
Range of Exercise Price Shares Exercise Price
$2.00 - $3.99 1,600 $2.00
$4.00 - $5.99 82,374 5.35
$6.00 - $7.50 78,460 6.56
</TABLE>
As of April 30, 1999, the Company has 374,170 shares available for future
options under the Plans.
F-15
<PAGE>
10. EARNINGS PER SHARE
Effective January 31, 1998, Wave adopted SFAS No. 128, Earnings Per Share.
SFAS No. 128 established standards for computing and presenting earning per
share ("EPS"). The old standard, which required exhibiting primary and
fully diluted EPS calculations, was replaced by basic and diluted EPS
calculations. Basic EPS measures operating performance assuming no dilution
from securities or contracts to issue common stock. Diluted EPS measures
operating performance after considering the dilution that would occur when
securities or contracts to issue common stock are exercised or converted.
Basic EPS calculations were computed using the weighted average number of
common shares outstanding each year (3,928,141 in 1997, 4,012,087 in 1998
and 4,150,954 in 1999). Diluted EPS calculations take into account the
effect of dilutive potential common shares (40,598 in 1997, 53,739 in 1998
and 22,494 in 1999). Dilutive potential common shares consist of
outstanding stock options. As of April 30, 1999, outstanding options to
purchase approximately 250,000 shares of common stock were not included in
the computation of diluted EPS because the exercise prices of these options
were greater than the average market price of the common shares. These
options expire from 2003 through 2009.
11. GEOGRAPHIC SEGMENTS
Upon adoption of SFAS 131, the Company has presented financial information
for its two reportable operating segments: US Operations, International
Operations. The US Operations segment consists of sales, operations and the
Company's research and development. International Operations segment
represents a sales and operations group managed by the Company's wholly
owned subsidiary in the United Kingdom. The International Operations
segment includes the operation of two training centers in London as well as
sales of the Company's products and methodology to distributors outside the
United States and United Kingdom. Some of the international sales are
booked and fulfilled by the Company's parent operations in the United
States.
The Company and its subsidiary operate in one industry segment, the
development, marketing and delivery of training and instructional products
related to sophisticated information technologies. The Company provides its
products and services through instructor-led courses, seminars, multimedia-
published products and over the Internet.
The Company's products are primarily developed in the United States and
sold to customers in the US, the Company's subsidiary in the United Kingdom
and to distributors in other geographic areas. All inter-segment revenues
and costs of revenues associated with transactions between segments are
eliminated in consolidation.
The Company's management does not allocate the resources, assets and
expenses related to courseware development activities, which primarily take
place in the US, to the other segments. The Company's management also does
not attempt to allocate the resources and assets used in the US and the UK
to support the International Distributor activity. The Company does not
review segment results below net income before taxes, therefore, income
taxes is not broken out by segment. The Company does not account for nor
report to management its assets or capital expenditures by segment, thus
asset information is not provided on a segment basis.
F-16
<PAGE>
A summary of the segment financial information reported to the Company's
management is as follows:
<TABLE>
<CAPTION> Year Ended April 30, 1997
--------------------------------------------
US International
Operations Operations Consolidated
<S> <C> <C> <C>
Revenues $ 24,488 $ 6,338 $ 30,826
-------- ------- --------
Cost of services, products and development 13,488 1,816 15,304
Sales and marketing 6,203 1,819 8,022
General and administrative 4,869 1,300 6,169
-------- ------- --------
Total costs and expenses 24,560 4,935 29,495
-------- ------- --------
Income (loss) from operations (72) 1,403 1,331
Other income (expense) (59) 6 (53)
-------- ------- --------
Net income (loss) before income taxes $ (131) $ 1,409 $ 1,278
======== ======= ========
</TABLE>
<TABLE>
<CAPTION> Year Ended April 30, 1998
--------------------------------------------
US International
Operations Operations Consolidated
<S> <C> <C> <C>
Revenues $ 28,130 $ 8,014 $ 36,144
-------- ------- --------
Cost of services, products and development 16,466 3,348 19,814
Sales and marketing 6,863 2,250 9,113
General and administrative 5,135 1,656 6,791
-------- ------- --------
Total costs and expenses 28,464 7,254 35,718
-------- ------- --------
Income (loss) from operations (334) 760 426
Other income (expense) (129) 30 (99)
-------- ------- --------
Net income (loss) before income taxes $ (463) $ 790 $ 327
======== ======= ========
</TABLE>
<TABLE>
<CAPTION> Year Ended April 30, 1999
-------------------------------------------
US International
Operations Operations Consolidated
<S> <C> <C> <C>
Revenues $ 25,340 $ 11,681 $ 37,021
--------- -------- --------
Cost of services, products and development 15,403 4,641 20,044
Sales and marketing 7,748 2,930 10,678
General and administrative 4,603 1,508 6,111
-------- -------- --------
Total costs and expenses 27,754 9,079 36,833
-------- -------- --------
Income (loss) from operations (2,414) 2,602 188
Other income (expense) (103) 15 (88)
-------- -------- --------
Net income (loss) before income taxes $ (2,517) $ 2,617 $ 100
======== ======== ========
</TABLE>
F-17
<PAGE>
The categorization of revenue based upon the geographic location of the
customer would also be categorized the same as provided in the above
information.
Long-lived assets are those assets that can be directly associated with a
particular geographic area. Geographical areas categorize these assets as
follows:
<TABLE>
<CAPTION>
Year Ended April 30, 1998
-----------------------------------
1998 1999
<S> <C> <C>
Long-lived assets:
United States $6,229 $5,994
United Kingdom 935 735
------ ------
Total $7,164 $6,729
====== ======
</TABLE>
In fiscal years 1997, 1998 and 1999 approximately $1,462 (5%), $3,995 (11%)
and $583 (2%) of revenues were from one customer, respectively.
12. ACQUISITION
On January 22, 1998, the Company purchased substantially all of the assets
of QA Training, Inc. ("QA") through the issuance of 20,000 shares of common
stock and cash payments for direct transaction cost of approximately $17.
QA was a wholly owned U.S. subsidiary of QA Ltd. of the United Kingdom that
provided information technology training in the United States. The
acquisition of QA has been accounted for as a purchase transaction in
accordance with the Accounting Principles Board Opinion No. 16. The
purchase price was allocated to tangible and intangible assets acquired
based on estimated fair values at January 22, 1998. The allocation is
summarized as follows:
<TABLE>
<S> <C>
Property $ 56
Goodwill 77
----
$133
====
</TABLE>
The portion allocated to goodwill is being amortized on a straight-line
basis over four years.
* * * * * *
F-18
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Wave Technologies (UK) Limited, incorporated in England, 1993
22
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
Wave Technologies International, Inc. (the "Company") on Form S-8 (Nos. 33-
86342, 33-98462 and 333-46757) of our report dated June 4, 1999, appearing in
the Annual Report on Form 10-K of Wave Technologies International, Inc. for the
year ended April 30, 1999.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of the Company, included in Item
14. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
July 26, 1999
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED APRIL 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> APR-30-1999
<CASH> 701
<SECURITIES> 0
<RECEIVABLES> 12,037
<ALLOWANCES> 395
<INVENTORY> 845
<CURRENT-ASSETS> 14,043
<PP&E> 10,998
<DEPRECIATION> 8,667
<TOTAL-ASSETS> 21,789
<CURRENT-LIABILITIES> 12,708
<BONDS> 0
0
0
<COMMON> 2,079
<OTHER-SE> 6,778
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<INCOME-TAX> 63
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<CHANGES> 0
<NET-INCOME> 37
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
