FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission File #0-11078
THE AMERICAN EDUCATION CORPORATION
(Exact name of registrant as specified in its charter)
Colorado
- --------
(State or other jurisdiction of incorporation, or organization)
84-0838184
- ----------
(IRS Employer Identification number)
7506 North Broadway Extension, Suite 505, Oklahoma City, OK 73116
(Address of principal executive offices)
(405) 840-6031
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.025 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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.
YES / / NO /X/
Indicate by check mark if there is no disclosure of delinquent filers
in response to Item 405 of Regulation SB contained in this form, and no
disclosure will 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-KSB or any amendment to this Form 10-KSB.
YES / / NO /X/
There is presently no market maker for shares of the Registrant's common
stock. Therefore, the Registrant is unable to determine the market value
(if any) of the voting stock held by non affiliates of the Registrant.
Number of shares of the registrant's common stock outstanding as of
December 1, 1996: 12,457,345
Transitional Small Business Disclosure Format YES / / NO /X/
THE AMERICAN EDUCATION CORPORATION
INDEX
Page No.
PART 1 - FINANCIAL INFORMATION
Item 1 Balance Sheets 3
March 31, 1996 and December 31, 1995
Statements of Operations 4
For the Quarter Ended March 31, 1996
and for the Quarter Ended March 31, 1995
Statements of Cash Flow 5
For the Three Months Ended March 31, 1996
and the Three Months Ended March 31, 1995
Notes to Interim Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial 8
Conditions and Results of Operations
PART II - OTHER INFORMATION 10
SIGNATURE PAGE 11
PART 1 - FINANCIAL INFORMATION
THE AMERICAN EDUCATION CORPORATION
BALANCE SHEETS
<TABLE>
March 31 December 31
1996 1995
-------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 102,222 $ 56,882
Accounts receivable, net of allowance for
uncollectible accounts of $28,822 108,189 130,352
Inventories, net of impairment reserve of
$10,000 18,452 19,986
Prepaid expenses and deposits 6,033 7,147
---------- ----------
Total current assets 234,896 214,367
Property and equipment, at cost 143,254 135,115
Less accumulated depreciation and amortization (106,120) (99,641)
---------- ----------
Net property and equipment 37,134 35,474
Other assets:
Capitalized software costs, net of accumulated
amortization of $804,828 and $745,989 315,882 312,364
Goodwill, net of accumulated amortization
of $165,883 and $154,264 80,967 92,536
---------- ----------
Total other assets 396,849 404,900
---------- ----------
Total Assets $ 668,879 $ 654,741
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $1,021,783 $1,063,384
Current maturities of notes payable
and long term debt 771,754 726,989
----------- -----------
Total current liabilities 1,793,537 1,790,373
Long-term debt 62,503 65,000
----------- -----------
Total liabilities 1,856,040 1,855,373
Commitments and contingencies - -
Stockholders' Deficit
Preferred Stock, $.001 par value; Authorized -
50,000,000 shares;
issued and outstanding - none - -
Common Stock, $.025 par value; Authorized -
15,000,000 shares;
issued and outstanding -
9,094,542 and 8,570,865 shares. 227,244 214,272
Additional paid-in capital 4,157,821 4,083,616
Retained deficit (5,572,226) (5,498,520)
----------- -----------
Total stockholders' deficit (1,187,161) (1,200,632)
----------- -----------
Total liabilities and stockholders' equity $ 668,879 $ 654,741
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
THE AMERICAN EDUCATION CORPORATION
STATEMENTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1996 AND 1995
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Net Sales $ 315,239 $ 166,217
Cost of goods sold 56,628 40,185
----------- -----------
Gross profit 258,611 126,032
Operating expenses:
Sales and marketing 84,719 52,253
General and administrative 165,226 179,239
Amortization of capitalized software costs 58,840 53,009
----------- ----------
Total operating expenses 308,785 284,501
Operating loss (50,174) (158,469)
----------- -----------
Other income (expense):
Miscellaneous income 55 -
Interest expense (16,464) (27,896)
Factoring costs (7,121) (5,096)
----------- -----------
Net loss $ (73,704) $ (191,461)
=========== ===========
Weighted average common shares outstanding 8,660,593 8,397,218
=========== ===========
Loss per share $(0.008) $(0.023)
</TABLE>
The accompanying notes are an integral part of the financial statements.
THE AMERICAN EDUCATION CORPORATION
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
March 31 March 31
1996 1995
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (73,704) $ (191,461)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 76,887 70,928
Reserve for bad debts - (5,000)
Changes in assets and liabilities:
Accounts receivable 22,163 (12,000)
Inventories 1,534 -
Prepaid expenses and other 1,114 400
Accounts payable and accrued liabilities (34,426) 62,000
---------- ----------
Net cash used in operating activities (6,432) (75,133)
Cash flow from investing activities:
Purchase of capitalized software costs (62,357) (41,000)
Purchase of property and equipment (8,139) -
---------- ----------
Net cash used in investing activities (70,496) (41,000)
Cash flows from financing activities:
Proceeds received from issuance of debt 42,268 115,000
Issuance of common stock for cash 80,000 -
---------- ----------
Net cash provided by financing activities 122,268 115,000
---------- ----------
Net increase (decrease) in cash 45,340 (1,133)
Cash at beginning of the period 56,882 2,746
---------- ----------
Cash at end of the period $ 102,222 $ 1,613
========== ==========
Supplemental Cash Flow Disclosures:
Interest paid $ 5,600 $7,536
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
THE AMERICAN EDUCATION CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 1996 AND 1995
1. BASIS OF PRESENTATION
The interim financial statements at March 31, 1996, and
for the three month periods ended March 31, 1996, and
1995 are unaudited, but include all adjustments which
the Company considers necessary for a fair
presentation. The December 31, 1995, balance sheet was
derived from the Company's audited financial
statements.
The accompanying unaudited financial statements are for
the interim periods and do not include all disclosures
normally provided in annual financial statements and
should be read in conjunction with the Company's
audited financial statements included in the Company's
Form 10-KSB for the year ended December 31, 1995. The
accompanying unaudited interim financial statements for
the three month period ended March 31, 1996, are not
necessarily indicative of the results which can be
expected for the entire year.
The accompanying financial statements have been
prepared on a going-concern basis which contemplates
the realization of assets and the satisfaction of
liabilities in the normal course of business. The
Company has incurred continuous losses and has not
generated sufficient working capital to support its
operations. The Company's continued existence is
dependent on its ability to generate positive cash flow
from its operations and/or raise additional financing
or capital. In June 1996, $721,989 of current notes
payable as of December 31, 1995, were converted to
common stock and additional capital was raised through
the sale of stock for cash.
The preparation of the financial statements in
conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and
the reported revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
2. EXERCISE OF OPTIONS TO PURCHASE COMMON STOCK
As of December 31, 1995, options for 100,000 shares of
common stock at $.20 per share remained outstanding.
These options were exercised in July 1996. Outstanding
warrants to purchase 286,517 shares of common stock at
$.50 per share were outstanding at December 31, 1995.
These warrants were exercised in September 1996.
3. COMMITMENTS AND CONTINGENCIES
The Company amortizes capitalized software costs over
the product's estimated useful life. Due to inherent
technological changes in the software development
industry, the period over which such capitalized
software cost is being amortized may have to be
accelerated.
In October 1996, the Company became a party to
litigation in United States District Court for the
District of Columbia entitled Securities and Exchange
Commission, Plaintiff v. The American Education
Corporation, Defendant (the "Action"). In the Action,
the Company admitted that, in violation of certain
provisions of the Securities and Exchange Act of 1934,
as amended (the "Exchange Act"), it failed to file,
among other things, certain annual and quarterly
reports. The Company voluntarily entered into a
Consent and Undertaking pursuant to which the Court
will issue a Final Judgment of Permanent Injunction
requiring the Company to (i) file all its delinquent
Exchange Act reports and (ii) in the future, timely
file all of its Exchange Act reports. The failure to
file any required report could result in a contempt
citation, the assessment of fines against the Company,
or an action by the Securities and Exchange Commission
to deregister the Company's common stock.
The Company has various vendor claims pending on
delinquent trade payables. The Company uses the
services of a professional firm to work out settlements
with these creditors. As a result, these payables may
be settled for less than their recorded amounts.
4. CORPORATE RESTRUCTURING
The Company issued 160,000 shares of common stock for
cash at $.50 per share in March 1996. In March 1996,
the Company also issued 363,677 shares of common stock
valued at $.02 per share in exchange for services
provided by officers and directors of the Company.
Notes payable and accrued interest totaling $976,710 at
June 30, 1996, were converted to 2,666,274 shares of
common stock at rates between $.20 and $.75 per share.
Stock options to purchase 100,000 shares of common
stock at $.20 per share were exercised for cash in July
1996. Warrants for 286,517 shares of common stock at
$.50 per share were exercised in September 1996. In
October 1996, trade debt of $11,747 was converted to
23,495 shares of common stock at a price of $.50 per
share.
Summary of 1996 Equity Transactions
<TABLE>
No. Shares Debt
Type of Transaction Issued Cash Conversion
- ------------------- ---------- ---- ----------
<S> <C> <C> <C>
Options and warrants exercised 546,517 $ 243,258 $ -
Accrued compensation 363,377 - 7,298
Convertible notes and
accrued interest payable 2,651,274 - 965,460
Notes payable converted 15,000 - 11,250
Accounts payable converted 23,495 - 11,747
---------- --------- ----------
3,599,963 $ 243,258 $ 995,755
========== ========= ==========
</TABLE>
5. INCOME TAXES
The Company accounts for income taxes in accordance
with the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"), which requires an asset and
liability approach to accounting for income taxes.
Under SFAS 109, deferred tax assets or liabilities are
computed on the difference between the financial
statement and income tax bases of assets and
liabilities ("temporary differences") using the enacted
marginal tax rate. Deferred income tax expenses or
benefits are based on the changes in the deferred tax
asset or liability from period to period.
Management has determined that the Company most likely
will not be able to realize all the tax benefits from
available net operating loss carryforwards and has,
therefore, provided a valuation allowance of an equal
amount for the quarter ended March 31, 1996.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
LIQUIDITY AND CAPITAL RESOURCES
The Company has invested significantly in personnel
additions, the development of new products, and the
acquisition and licensing of new products, to improve
the ability of the organization and its published
products to meet the needs of the marketplace. These
changes were required to update the Company's product
offerings. To finance the business, management has
utilized long-term, subordinated debt from private
investment sources, secured bank revolving credit
lines, and accounts receivable financing sources.
Management anticipates that additional financing will
be required to continue to develop and position the
Company for the significant growth opportunities that
exist in the electronic media for education industry.
The Company views accounts receivable, inventory, and
cash as its principle measures of liquidity. To
supplement its anticipated short-term working capital
requirements, the Company entered into various
convertible loan agreements beginning in January 1991,
with private investors. These loans were convertible
into common stock of the Company at conversion prices
ranging from $.136 to $.50 per common share. Loans of
this nature were the only viable sources of borrowing
for the Company during this period.
At December 31, 1995, the Company had $791,989 of
unpaid principal outstanding on convertible notes,
including $33,201 owed to a vendor. Effective June 30,
1996, the Company exchanged 2,651,274 shares of common
stock for $731,989 of principal and $233,471 of accrued
interest related to these convertible notes. At
November 22, 1996, $50,000 of convertible notes, with a
conversion price per share of $.136, remained
outstanding.
The Company's working capital was a deficit $1,558,641
at March 31, 1996, an improvement of $17,367 from
December 31, 1995. This 1% improvement is associated
with improving sales and collection of sales proceeds
during the period.
Additional working capital beyond that available within
the Company has been and may be required to expand
operations. Management has and will consider options
available in providing such funding, including debt
financing and capital enhancement.
RESULTS OF OPERATIONS - QUARTER ENDED MARCH 31, 1996
AS COMPARED TO THE QUARTER ENDED MARCH 31, 1995
Net software revenues for the three months ended March
31, 1996, totaled $315,239 compared to net software
revenues of $166,217 for the same period in 1995. This
represents an increase of approximately 90% in 1996.
The dramatic increase in sales is primarily attributed
to the acceptance of the A+dvanced Learning System
family of products, following a lengthy period of
development and technical improvement.
Cost of goods sold for the three months ended March 31,
1996, increased by approximately 41%, even though sales
increased by 90%. This disproportionately low increase
in direct costs reflects the efficiency in which
software products are now produced on CD-ROM. The use
of this medium also positively affects the cost of
packaging, handling and freight associated with
products that are marketed primarily into the school
market, as opposed to traditional retail outlets. Cost
of goods sold represents the actual cost to produce the
software products, including certain allocated overhead
costs, a portion of which is fixed. Actual component
costs as well as the direct labor costs associated with
the assembly of software products is now very low.
Excluding the costs of allocated overhead, product
costs provide gross profit margins ranging from 75 to
95 percent on the Company's principal products. As
sales volumes increase, overall gross profit margins
are expected to increase, as total allocable overhead
costs remain relatively fixed.
Total operating expenses recorded for the three months
ended March 31, 1996, were $308,785, compared to
$284,501 for the previous year. This represents an
increase of approximately 9%. Selling and marketing
costs increased by approximately 62%, from $52,253 for
the three months ended March 31, 1995 to $84,719 for
the current period. The increase in 1996 is related
to expanded sales and marketing efforts and higher
commission costs related to the higher sales levels
achieved. General and administrative expenses
decreased by approximately 8% during 1996, from
$179,239 to $165,226. This decrease is related to
lower legal and professional fees incurred during the
first three months of 1996 compared to the prior year.
Due to restricted cash flows from operations, the
Company entered into a factoring arrangement whereby it
would assign from time to time, the payment of specific
invoices to the factoring entity. The cost of
factoring is disclosed as a separate line item within
the Statement of Operations. Such costs increased by
approximately 40% during the first three months of 1996
compared to the prior year, from $5,096 to $7,121,
reflecting the need for such financing during the
initial portion of the year.
Interest expense decreased by approximately 41% during
1996, from $27,896 in 1995 to $16,464 for 1996. This
decrease reflects the lower levels of interest bearing
debt and the increased dependence on factoring during
the year.
The net loss for the three months ended March 31, 1996,
improved by approximately 62% as compared to the prior
year. This reduction of net loss from $191,461 in 1995
to $73,704 in 1996, reflects the higher sales levels
noted above, as well as the improving gross margins
related to concentration of sales in more profitable
markets. Management believes that with network
problems resolved and with the expansion of sales and
marketing efforts through third party organizations and
independent dealers, the Company is now positioned to
develop more dependable sales results from the home and
school education markets.
The Company has been constrained by the lack of
adequate capital and proper financing for the past
several years. As sales of the enhanced product line
have improved, management has taken action to reduce
debt and to supplement capital through the private sale
of restricted common stock and conversion of
convertible debt to common stock.
Company management believes that significant, future
opportunities exist in both the school and home
markets. The Company is now equipped with Macintosh,
DOS and Windows program shells that facilitate the
rapid and less expensive development of new subject
titles. Management also believes that the Company is
better positioned to compete in the multimedia field as
a result of its software development tools and
capabilities, growing marketing strengths and its
position within the school and home market places.
Accordingly, this area which is now emerging as a major
market, is under study and the Company is investigating
sources for intellectual property and potential
partnerships with other publishers on which it may base
future publications. Management believes that the
Company can make significant progress within its
existing product development and marketing budgets to
position the Company to identify and plan products for
this business.
THE AMERICAN EDUCATION CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In October 1996, the Company became a party to
litigation in United States District Court for the
District of Columbia entitled Securities and Exchange
Commission, Plaintiff v. The American Education
Corporation, Defendant (the "Action"). In the Action,
the Company admitted that, in violation of certain
provisions of the Securities and Exchange Act of 1934,
as amended (the "Exchange Act"), it failed to file,
among other things, certain annual and quarterly
reports. The Company voluntarily entered into a
Consent and Undertaking pursuant to which the Court
will issue a Final Judgment of Permanent Injunction
requiring the Company to (i) file all its delinquent
Exchange Act reports and (ii) in the future, timely
file all of its Exchange Act reports. The failure to
file any required report could result in a contempt
citation, the assessment of fines against the Company,
or an action by the Securities and Exchange Commission
to deregister the Company's common stock.
Item 2. Changes in Securities
Summary of 1996 Equity Transactions
<TABLE>
No. Shares Debt
Type of Transaction Issued Cash Conversion
- ------------------- ---------- ---- ----------
<S> <C> <C> <C>
Options and warrants exercised 546,517 $ 243,258 $ -
Accrued compensation 363,377 - 7,298
Convertible notes and
accrued interest payable 2,651,274 - 965,460
Notes payable converted 15,000 - 11,250
Accounts payable converted 23,495 - 11,747
--------- --------- ----------
3,599,963 $ 243,258 $ 995,755
========= ========= ==========
</TABLE>
Item 3. Default Upon Senior Securities
------------------------------
Omitted from this report as inapplicable.
Item 4. Submission of Matters to Vote of Securities Holders
---------------------------------------------------
No matters were submitted to a vote of security holders during
the period.
Item 5. Other Information
-----------------
Omitted from this report as inapplicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
Omitted from this report as inapplicable.
B. Reports on Form 8-K
In November, 1996, the Company filed Form 8-K
describing the pertinent factors associated with a
change in the Company's independent auditing firm.
SIGNATURES
Pursuant to the requirements of 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.
The American Education Corporation
December 10, 1996 By: /s/ Jeffrey E. Butler
----------------------
Chief Executive Officer
Chairman of the Board
Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM - FORM
10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 102,222
<SECURITIES> 0
<RECEIVABLES> 137,011
<ALLOWANCES> (28,822)
<INVENTORY> 18,452
<CURRENT-ASSETS> 234,896
<PP&E> 143,254
<DEPRECIATION> (106,120)
<TOTAL-ASSETS> 668,879
<CURRENT-LIABILITIES> 1,793,537
<BONDS> 0
0
0
<COMMON> 227,244
<OTHER-SE> 4,157,821
<TOTAL-LIABILITY-AND-EQUITY> 668,879
<SALES> 315,239
<TOTAL-REVENUES> 315,294
<CGS> 56,628
<TOTAL-COSTS> 308,785
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,585
<INCOME-PRETAX> (73,704)
<INCOME-TAX> 0
<INCOME-CONTINUING> (73,704)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (73,704)
<EPS-PRIMARY> (.008)
<EPS-DILUTED> (.008)
</TABLE>
