FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES 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 N. Broadway Extension, Suite 505, Oklahoma City. OK 73116
(Address of principal executive offices)
(405) 840-6031
(Registrant's telephone number, including area code)
Not Applicable
(Former Name, former address and former fiscal year, if
changed since last report)
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 5.025 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 S-B
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 l0-KSB or any amendment to this Form 10-KSB.
YES [ ] NO [X]
Revenues for the year ended December 31, 1995: $1,288,867
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 November 22, 1996: 12,170,828
Transitional Small Business Disclosure Format
YES [ ] NO [X]
THE AMERICAN EDUCATION CORPORATION
FORM 1O-KSB
PART I
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Item 1. Description of Business.
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General.
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The American Education Corporation, formerly PLASMEDICS,
INC. (the "Company" or "AEC"), was incorporated under the
laws of the State of Colorado on February 23, 1981. Initial
business activities, associated with the research and
development of medical devices and medical technology,
commenced from inception through 1984. In 1984, the Company
acquired all of the issued and outstanding stock of
Medquest, Inc. in exchange for 9,490,000 shares of the
Company's common stock. In 1985, in an agreement with an
affiliate, Medac, Inc., the Company received 67,000,000
shares of Medac, Inc. common stock, $10,000 in license fees
and future royalties, for the assignment of certain
technology rights. In November 1986, Medquest, Inc.
transferred to Medac, Inc. for $10,000, the rights to
certain technology, computer equipment, and 57,000,000 of
its 67,000,000 Medac, Inc. shares. Thereafter, the Company
was essentially inactive until 1989. In 1989, the Company
sold its remaining 10,000,000 shares of Medac, Inc. common
stock for $290,000. From 1989 until 1990, the Company
initiated a plan to seek an acquisition, or merger with
another company. In December 1990, the Company entered into
an agreement to purchase substantially all of the assets of
American Educational Computer, Inc. from its parent, UNICO,
Inc. (UNICO). The following major developments relating to
the asset purchase are listed in chronological order:
Purchase of Assets of American Educational Computer Inc.
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On January 8, 1991, the Company completed the purchase of
substantially all of the operating assets of American
Educational Computer, Inc. ("AECI"), an Oklahoma City-based
company. The sale was consummated pursuant to an asset
purchase agreement between the Company and AECI dated
December 31, 1990.
Assets involved in the purchase included AECI's trade names,
trademarks, retail product sales rights, non-exclusive
school and library sales rights, specific accounts
receivable, specific inventory, and specific furniture and
equipment. As a component of the transaction, the Company
also acquired the publishing and distributing assets and
licenses of Concord Video, a publisher of special interest
video tapes. The acquisition was for a total purchase price
of $990,000 consisting of $190,000 in cash, paid on the
effective date, and $800,000 in notes payable. The notes
payable were subsequently structured into $600,000 of
Convertible Preferred Stock and $200,000 in notes payable
with quarterly installments of principal and interest
commencing in September 1991. The Company also assumed
accounts payable and accrued liabilities of AECI, totaling
approximately $173,000.
In August 1991, at a meeting of the Company's shareholders,
the purchase of the assets of AECI was ratified, a new class
of Preferred Stock was authorized and the shareholders
approved the change of the Company's name from Plasmedics,
Inc. to The American Education Corporation.
A plan to discontinue the operations of the Company's
Concord Video division was formally adopted by the board of
directors in November 1992. The plan called for the Company
to secure a buyer for the video division's assets in a
timely manner or to liquidate the assets of the division and
effectively abandon the video operations. The Company was
unable to attract a buyer for the video division, therefore,
the Company discontinued video operations and liquidated the
remaining video division's assets during fiscal 1993.
The Company's Business.
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The Company's business is to license or internally develop
and market educational microcomputer software and CD-ROM
titles. Except as specified to the contrary, all references
to the Company's current business include the activities
associated with the development and marketing of educational
computer software and CD-ROM based products.
The Company internally develops, and also licenses from
third parties, educational computer software. The Company
utilizes both in-house technical programmers and independent
computer programming companies to develop these products.
The products are sold through retail outlets, distributors,
catalog companies, independent dealers, and direct mail.
Sales are made to domestic and international markets. The
products are sold for use in elementary and high schools,
libraries, adult learning centers, private industry, for
personal improvement and home-based schooling.
The increasing use of microcomputers and software as
educational and instructional aids is the major focus of the
Company's marketing strategy, as the use of the personal
computer and CD-ROM devices has been adopted by many School
and District Board's of Education and as they have become
more affordable. The Company's marketing plan calls for
separate marketing efforts to be directed toward the home
and institutional markets. Currently, the Company utilizes
a small employee sales force as well as independent dealers
("school-dealers") to market its products to schools,
industry and libraries. Each school-dealer generally covers
a geographically-limited territory. Other marketing efforts
are through business partners such as Educational Resources,
Davidson & Associates, Learning Services and direct mail and
catalog companies which market third-party products to the
school and library markets.
For the home market, the Company maintains a separate sales
force of independent representative firms that market
products to the home school market.
Principal Products.
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Computer Software
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The Company acquired (through its acquisition of AECI) a
series of exclusive and non-exclusive licenses to develop
and market microcomputer software products based upon
certain courseware in reading, English, spelling, social
studies, bilingual language development and early childhood
development.
Educational software for the elementary and high school
markets is designed for use in classroom instruction and
stresses usefulness to the instructor as well as the
student. In addition, there is a growing use of computer
network technology in schools. The Company's products for
schools and the professional educator feature management
modules which track both individual student and class
performance. This management module also prints reports,
tests and assignments. Further, a hallmark of the Company's
products is an authoring capability which allows the user to
add, modify and expand both graphics and text to the
curriculum content provided by the Company. The Company's
software, that is designed for home use, is also closely
related to classroom work so that parents can select
software to assist students in a specific subject and grade
level. The Company's computer software products,
particularly those designed for the home market, are
designed to be used without extensive experience with
computer operations.
In an industry where there are in excess of 300 educational
software publishers, the Company has developed a distinctive
niche form of content and delivery. This approach features
high educational value and extensive content that is fully
correlated to the leading states' desired learning outcomes,
national educational objectives and major textbook series.
The Company has concentrated on the design of products that
offer educational significance and substance that is
correlated to grade and age level, with teacher control of
content delivery rather than products which are dependent
upon high entertainment value to maintain student interest.
The majority of the Company's school products are designed
for a networked environment. To monitor and facilitate
student performance in this environment, a class of software
referred to as a managed solution has evolved. This solution
is typically defined as an Integrated Learning System
("ILS"). This approach provides software controlled class
and student lesson assignments, individualized paths of
study, skills assessment, authoring, time management,
integration of third party software where relevant, and a
range of other functions which assist the educator in
directing and understanding the effectiveness of the
software and the learning process. Management believes that
fewer than 10 companies, industry-wide, provide a managed
solution or this type of sophisticated educational software
product.
A+dvanced Learning System TM
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A+LS, from a content perspective, has been designed as a
grade level 1-9 basic skills curriculum solution. It is
comprised of 43 subject titles in a multi-media environment
with extensive sound and graphics. Subject areas covered
are: reading, writing, mathematics, science, history,
geography and language arts. Each ascending level of the
product presents increasingly more complex concepts, but
provides overlapping, level to level subject matter
reinforcement. As a body of published work, it is one of the
most extensive in the industry for the targeted grade
levels. A+LS's content is divided into subjects and lessons
with each lesson containing a number of activities such as
study, practice, test and essay. This content is further
supported by lesson related exercises. This design
facilitates the use of the advanced A+LS class and student
management system. Educators may select specific lessons to
create a curriculum plan for a specific time period,
specifying independent mastery levels for each lesson. They
may also insert third party publishers' materials into a
supported course of study for enrichment or remediation. The
design also permits the development of individualized
courses of study for the at risk or special education
student which might require remediation or special emphasis
to correct or detect skill deficiencies.
A+SSESS TM
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A+SSESS is a product family of primary, intermediate and
advanced modules which comprise three individual software
titles. A+SSESS has been designed as a companion to A+LS's
extensive curriculum content, as a tool to assist educators
in determining student beginning skill levels in all A+LS
subject areas. A pretest process is utilized for this
purpose. After beginning skill levels are determined,
A+SSESS automatically recommends and prepares lesson plans
for each student. A post-test process is utilized to
facilitate measurement of student academic gains.
New A+ TM
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Introduced in 1994, New A+ is the predecessor product family
to A+LS. It is comprised of 14 subject titles in the areas
of language arts, social studies and science, and is
available in network, lab pack, school stand alone, site
license, and home versions for Windows, Macintosh and DOS
platforms. New A+ has a management system which records
student grades and activities and allows full authoring. It
does not provide the multi-media functions, managed lesson
sequences or third party program capabilities that have been
incorporated in A+LS. New A+, which is installed in
approximately 1,500 schools nationwide, remains a viable
alternative for schools with older hardware that will not
support the operating requirements of A+LS. Macintosh,
Windows, Windows NT and DOS are hilly supported.
Basic Learning Skills Courseware
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Introduced in 1992, Basic Learning Skills Courseware is a
DOS product family that includes hilly networkable
curriculum for grade levels 1-9. Subject areas include
language skills, reading and mathematics (the Language
Skills Development Program, Reading Skills Development
Program and Mathematics Skills Development Program). These
programs are hilly supported by sound capabilities. Included
in the design of these products is a rudimentary management
system keyed to each product. These products, portions of
which are in use in over 700 schools, remain viable for
schools with non-current hardware technology.
Third Party Publishing and Marketing Affiliations
- -------------------------------------------------
The Company is actively pursuing and is being pursued by
third party publishing and marketing companies which operate
in the product niches of the Company. These relationships
are being sought to supplement and complement the content of
existing and planned A+LS subject matter. Management
believes this process postures the Company as an open
architecture, full classroom management solution.
Management also believes this process enhances the value of
the Company's products and strengthens marketing
relationships with distributors
The Market For Educational Software Products.
- ---------------------------------------------
The Company addresses two major market segments for its
products: the school and home markets. The Company's
products, except for those especially configured for use by
the professional educator, generally have application in
either market. During 1995, one customer, United Marketing
Associates, represented 10.7% of total Company revenues.
During 1994, one customer, Educational Resources,
represented 10.3% of total Company revenues.
School Market
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The school market for educational software is growing at
approximately 20%-25% per year according to industry
sources. In order for the Company to take advantage of this
fast growing industry it must expand its authorized dealer
sales base. A major objective is to continue to expand the
Company's dealer base of organizations calling on and
selling into the public school market. The Company lacks
representation in many significant areas of the country. A
key emphasis will be to ensure that this expansion program
will provide coverage in these areas.
Home Market
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Home education is growing at rates exceeding 25% per year,
according to industry sources. Many families are choosing
to educate their children at home versus through the
traditional education channels. Many of the Company's
products are designed to appeal to the home educator who is
seriously involved in education. The Company's products are
marketed as educational products versus the more widely
recognized "edutainment" products.
In competing for the home market, the Company faces stiff
competition in the traditional retail outlets. AEC does not
have the financial resources to effectively compete in the
traditional retail market. The Company must, therefore,
market its products through unconventional channels. This
includes developing and expanding a distributor base which
deals directly with the public.
Trade Names. Service Marks and Logo Types.
- ------------------------------------------
The service mark for the A + products was registered with
the United States Patent Office on Principal Register,
register number 675,666 on July 31, 1987. On April 15, 1989,
the A+ trademark for use with educational software, was
registered with the United States Patent Office. The Company
was notified on November 16,1995 that the use of the A+
symbol for educational software was a registered trademark
of the Company and is incontestable for this use. Other
various trademarks and logos acquired from AECI and
associated with the software products acquired from AECI
have also been registered.
On June 16, 1995, the Company filed for the separate and
expanded use of its A+ registered mark as A+dvanced Learning
System with its logo design to describe and identify the
extensive family of educational software products released
in 1995. Formal notification of acceptance of this
registered mark has not been received at this writing.
Production and Manufacturing.
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The Company purchases unformatted 5 1/4" and 3 1/2" software
diskettes and CD ROM blanks from various sources. The
Company owns commercial quality, high speed software
duplication equipment and duplicates all software
internally. The Company develops, with outside packaging
developers, materials and packaging concepts, and internally
authors necessary product manuals. The Company secures
product packaging from external sources and performs quality
control, final assembly, inventory and distribution on most
orders received. The Company has no dependence on any
individual supplier.
Research and Development Costs.
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Initially, the Company relied upon external, independent
software developers for its technology and as the source of
software titles. In June 1991, the Company hired its first,
qualified technical programmer, and in January 1992,
retained an experienced, doctorate level educational
specialist on a project basis. In May 1992, this individual
was hired by the Company on a full-time basis. By the year
ended December 31, 1993, the Company employed a total of
three technical programmers and one technical support person
on a hill time basis. At December 31, 1995, the Company
employs eight hill time technical development and support
personnel.
The Company makes use of professional educators as
consultants in the design of its curriculum-based products.
These individuals provide the technical support on the
development and enhancement of Company products, support
existing customers on technical issues, and engage in
limited programming and content development of new products.
Management believes that it will continue to rely upon
external sources for a portion of its new product
requirements. However, the growing sophistication and
complexity of the design of products and the rapid changes
occurring in the marketplace will require continued
expansion of in-house technical support and product
development resources. At December 31, 1995, the Company
employed one hill time curriculum manager for this effort.
Costs incurred with product development are charged to
research and development expense until technological
feasibility of a product is established. Thereafter, all
software development costs are capitalized and amortized on
a straight line basis over the product's estimated economic
life. The Company capitalized costs of $166,523 in software
research and development costs in 1995.
Backlog.
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The Company's computer software products are normally
shipped within ten days of receipt of the order. The Company
believes that a level of backlog at any particular date may
not be a meaningful indicator of future performance, unless
technical difficulties delay the fulfillment of orders
related to the launching of new products.
Seasonality.
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Sales of textbook products to schools are subject to a
certain degree of seasonality as major purchases are usually
made in July and August prior to the start of the school
year. The sale of educational software products does not
indicate this same pattern. Decisions by schools and
individual consumers to purchase educational software have
most frequently been made at the beginning, or near the end
of school periods. For home computer software products, the
Company experiences marginally higher sales levels during
the first and fourth quarters of the year. Summer months
have shown the lowest level of sales for computer software
products. The Company anticipates that seasonal trends will
become more distinct as the educational software market
continues to mature.
Competition.
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The educational software industry is highly competitive and
subject to rapid change. There are a large number of
companies developing educational software products. Many of
these companies are better known and have substantially
greater financial, marketing and technical resources than
the Company. Such participants are textbook publishing
companies, microcomputer hardware manufacturers and
microcomputer software developers which compete directly
with the Company.
The primary competitive factors applicable to the
educational software industry are product features (such as
subject areas, graphics and color), price, ease of use,
educational content, product reliability, sales support and
customer service.
Employees.
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During the fiscal year ended December 31, 1995, the Company
had twenty-three (23) hill-time employees. The Company
believes that its relationship with employees is
satisfactory.
Subsequent Events.
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In an effort to appropriately capitalize the Company and to
provide sufficient working capital to develop and market
high quality products, management has sought appropriate
investment from qualified private investors. From January
1, 1996 through November 22, 1996, the following significant
subsequent events have occurred:
In March 1996, a private investor purchased 160,000 shares
of restricted common stock at price per share of $.50.
In June 1996, five third party debt holders converted
$965,460 of short term debt and accrued interest related
thereto, into 2,651,274 shares of common stock at an average
price per share of approximately $.34.
In June 1996, a supplier of the Company exchanged $11,250 of
amounts owed to it by the Company for 15,000 shares of
restricted common stock at a price per share of $.75.
In July 1996, a private investor exercised 100,000 warrants
to purchase 100,000 shares of restricted common stock, at an
exercise price of $.20 per share.
In September 1996, a private investor exercised 286,517
warrants to purchase 286,517 shares of restricted common
stock at an exercise price of $.50 per share.
In October 1996, a supplier of the Company exchanged $11,747
of amounts owed to it by the Company for 23,495 shares of
restricted common stock at a price per share of $.50.
The pro forma effect of these transactions is as follows:
<TABLE>
<S> <C>
Debt eliminated $988,457
Capital from purchase of stock $243,258
Common stock shares issued 3,236,286
</TABLE>
As a result of these transactions, borrowings from third
parties or banks have been reduced to approximately $67,000
as of November 22, 1996.
Item 2. Description of Properties.
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The Company is located at 7506 North Broadway, Suite 505,
Oklahoma City, Oklahoma, 73116. This space houses,
within approximately 8,750 square feet, the Company's
corporate offices and warehouse facility. At December 31,
1995, the Company was in default on this lease and was,
therefore, occupying the space on a month to month basis.
Effective March 31, 1996, the default was corrected and the
space was leased for a monthly fee of approximately
$5,247, exclusive of utilities and other services. The term
of the lease expires February 28, 1999.
Item 3. Legal Proceedings.
- --------------------------
In October 1996, the Company became a party to litigation in
the 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 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 of 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.
In addition, the Company is the subject of various legal
proceedings in the normal course of business. However,
management knows of no pending or threatened litigation
involving the Company, other than the Action, that is
considered material to the on-going operations and viability
of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
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No matters were submitted to a vote of the security holders in 1995.
PART II
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Item 5. Market for Common Stock and Related Stockholder Matters.
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As of September 22, 1996, there were approximately 2,500
record holders of the Company's common stock. Since its
initial public offering in 1982, the Company's securities
have been traded in the over-the-counter market. There have
been no formal market makers for the Company's common stock
for the past two years. Due to the absence of a formal
market for the stock, the Company is unable to state the
range of high and low bid information for the common stock
for those years.
Dividends.
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The Company has never declared a cash dividend. The Company
intends, at this point, to retain any future earnings to
support the Company's growth. Any payment of cash dividends
in the future will be dependent upon the amount of hinds
legally available and is contingent upon the Company's
earnings, financial condition, capital requirements, and
other factors which the Board of Directors deem relevant.
Item 6. Management's Discussion and Analysis or Plan of Operation.
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Liquidity and Capital Resources.
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The Company, after assuming operational control of AECI, 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 additional long-term, subordinated
debt from private investment sources, secured bark 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.
Additional working capital beyond that available within the
Company have been and may be required to expand operations.
Management has and will consider options available in
providing such finding, including debt financing and capital
enhancement.
Results of Operations.
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Fiscal Year Ended December 31. 1995 Compared to
Fiscal Year Ended December 31, 1994.
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The following is a discussion of the results of operations
for the fiscal year ended December 31, 1995, as compared to
the fiscal period ended December 31, 1994.
Net software revenues for the twelve months ended December
31, 1995, totaled $1,288,867 compared to net software
revenues of $672,228 for the year ended 1994. This
represents an increase of nearly 92% in 1995. 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.
The Company is presently involved in discussions with
several companies regarding the marketing and distribution
of its products into the home market.
Cost of goods sold for the year ended December 31, 1995,
increased by approximately 9%, even though sales increased
by 92%. 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
effects 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 year ended
December 31, 1995, were $1,320,153, compared to $1,158,248
for the previous year. This represents an increase of
approximately 14%. Selling and marketing costs increased by
approximately 22%, from $256,924 in fiscal 1994 to $312,355
in 1995. The increase in 1995 is related to expanded sales
and marketing efforts and higher commission costs related to
the higher sales levels achieved.
General and administrative expenses increased by
approximately 7% during 1995, from $745,147 to $795,615.
This nominal increase is related to expanded technical
support staff added as a result of the expanding customer
base and higher legal and professional costs related to
expansion of third party relationships and resolution of
disputes with prior period suppliers.
Costs incurred in conjunction with product development are
charged to research and development expense until
technological feasibility is established. In 1995
amortization of such costs was approximately equal to the
amount of such charges capitalized for the year. The
comparability of these amounts reflects the maturing nature
of the Company's developmental activities. Amortization of
capitalized software costs increased by approximately 36%
during 1995, from $156,177 in 1994 to $212,183 in 1995. This
increase reflects the Company's emphasis on development of
new and enhanced products during the past two years.
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 decreased by approximately 42% during 1995, reflecting
the reduced need for such financing during the latter
portion of the year.
Interest expense increased by approximately 58% during 1995,
from $67,177 in 1994 to $106,261 for 1995. This increase
reflects the higher levels of interest bearing debt and the
reduced dependence on factoring during the year.
The net loss in 1995 improved by approximately 45% as
compared to the prior year. This reduction of net loss from
$856,593 in 1994 to $473,476 in 1995 reflects the higher
sales levels noted above, as well as the improving gross
margins related to concentration of sales in more profitable
markets. Also during 1995, final technical difficulties
associated with network versions of the Company's products
were resolved. Management believes that with these 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.
Item 7. Financial Statements.
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Financial Statements and Financial Statement Schedules - See
Index to Financial Statements and Schedules immediately
following the signature page of this report.
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.
- -----------------------------------------------------
In March 1994, the Company experienced a disagreement with
its then current independent auditing firm regarding the
cost and timeliness of the audit for fiscal year 1993. The
proposed cost involved an overrun of more than 150% from the
originally estimated amount. Due to the deficient working
capital position of the Company at that time, the dispute
was not resolved until November 1996. As a result, the
independent audits for the years 1993, 1994 and 1995 were
significantly delayed in completion. The Company was not
able to maintain reporting compliance with the Securities
and Exchange Commission throughout this period. As a result
of the recently improving condition of the Company,
management was able to resolve the differences with the
independent auditing firm and, on October 31, 1996, the
Company voluntarily agreed to a formal Consent and
Undertaking to resolve the reporting deficiency with the
Securities and Exchange Commission. Prior to resolution of
the dispute with the independent auditing firm which was
responsible for the audit of fiscal 1993, the Company
engaged the services of a local independent auditing
firm to begin the auditing processes for fiscal years 1994
and 1995. Upon completion and delivery of the independent
audit report for 1993, the prior independent auditing firm
of Lehman Butterwick withdrew from future auditing work for
the Company and the firm of Steakley & Gilbert was hired as
the Company's independent auditors and accountants. There
were and are no disputes with independent auditors regarding
matters of accounting or reporting. There are no remaining
disputes regarding fees or services as of November 22, 1996.
PART III
- --------
Item 9. Directors. Executive Officers. Promoters and
Control Persons.
- ----------------------------------------------------
The directors and executive officers of the Company are set
forth below. All directors hold office until the next annual
meeting of stockholders, or until their death, resignation,
retirement, removal, disqualification, or until their
successors have been elected and qualified. Vacancies in the
existing board are filled by a majority vote of the
remaining directors. Officers serve at the will of the board
of directors.
<TABLE>
Name Age Position
- ------------------------------------------------------------
<S> <C> <C>
Jeffrey E. Butler 54 President, Director,
Chief Executive Officer
and Chief Financial Officer
Thomas Shively 44 Executive Vice President
and Chief Operating Officer
Monty C. McCurry 51 Director
Newton W. Fink 58 Director
Stephen E. Prust 51 Director
</TABLE>
Business Experience.
- --------------------
JEFFREY E. BUTLER was named a director of the Company in
August 1989 and was elected Chief Executive Officer and
President on March 31, 1990. Since 1985, Mr. Butler has been
a management consultant to businesses in the biotechnology;
computer science; software; educational and entertainment
video industries. Mr. Butler also served as a director to
Video Professor Industries, Inc., a public corporation, from
February 1, 1989 to October 31, 1990, when he resigned this
directorship. Prior to establishing his personal services
business, Mr. Butler was, from 1980 to 1985, the Chief
Executive Officer and President of Informed Corporation, an
Englewood, Colorado-based provider of computer diagnostic
equipment and data management services to hospitals, corporations
and physicians. Prior to 1985, Mr. Butler was employed by
Sandoz, Ltd., Corning, Inc. and the Becton Dickinson Corporation
in middle and senior management positions.
THOMAS A. SHIVELY joined the Company as Executive Vice
President in September 1991. From 1990 to 1991, Mr. Shively
was Vice President and General Manager of AVID Home
Entertainment, Inc., a division of LIVE Inc., with
headquarters in Denver, CO. From 1989 to 1990, he was Vice
President and General Manager of the Richie Resource Group
with headquarters in Minneapolis, MN. From 1978 to 1988, he
was employed by Gelco Corporation, Minneapolis, MN, a $2
billion NYSE firm that was purchased by General Electric
Corporation in 1988. During the first five years of his
career with Gelco, he was Director of Corporate Planning and
from 1983, he served as a staff Vice President and as a Vice
President of various Gelco operating divisions. Upon
graduation from the Wharton School of Finance and Commerce
in 1976, Mr. Shively began his business career with the 3M
Corporation, Minneapolis, MN.
MONTY C. MCCURRY was named a director of the Company and was
elected Secretary and Treasurer in April, 1989. Upon the
acquisition of assets from AECI, Mr. McCurry relinquished
the position of Secretary and Treasurer to the Company's
hill-time Chief Financial Officer. Since 1985, Mr. McCurry
has been President and owner of Executive Resource
Management, an executive search firm with headquarters in
Aurora, Colorado. From 1969 to 1985, he was associate
general manager of Paul M. Riggins and Associates, a Denver,
Colorado-based executive search firm.
NEWTON W. FINK, EdD, was named a director of the Company on
January 8, 1991. Since 1984, Dr. Fink has been President of
Computer Instructional Services, Inc., a privately-held
corporation providing computer educational services to
individuals, schools, corporations and institutions. Prior
to founding Computer Instructional Services, Inc., Dr. Fink
was the Superintendent of Schools in Fort Lupton, Colorado
and Hillside, Illinois.
STEPHEN E. PRUST has been a director of the Company since
April 1992. As a director, he has worked to develop special
retail marketing strategies for the Company's software
products. From 1990 to 1992, he was the President of AVID
home video, Inc., a division of Live Entertainment, Inc., a
major NYSE video production company. From 1981 to 1990, Mr.
Prust was a consultant to companies in the entertainment
industry. In 1975, Mr. Prust founded Dominion Music, Inc., a
joint-venture with K-Tel Records, Inc. He served as
President of Dominion Music until his personal interests in
the venture were acquired by K-Tel in 1981.
Item 10. Executive Compensation.
- --------------------------------
Cash Compensation.
- ------------------
The following table shows the cash compensation of the
Company's Chief Executive Officer, as well as all executive
officers and employees paid in excess of $100,000 for the
fiscal years, and all compensation paid to the Company's
other officers and directors, as a group, who served during
any portion of the preceding year, who earned less than
$100,000. During these periods, no other executive officer
of the Company received total salary and/or bonus
compensation in excess of $100,000. The Company did not
grant any restricted stock awards, stock options or stock
appreciation rights, or make any long term incentive plan
payments to Mr. Butler during the fiscal years indicated.
<TABLE>
Name of Individual or Number in Group Cash
Compensation (1)
- ------------------------------------- ------
<S> <C>
Jeffrey E. Butler (1, 2, 3) 1995 $ 94,349
1994 $ 88,083
Directors and executive officer(s) as a group
(7 persons) (1, 3) 1995 $242,550
1994 $292,360
</TABLE>
(1) Exclusive of personal benefits and other forms of non-
cash compensation, the aggregate value of which did not
exceed the lessor of $25,000, or 10% of the cash
compensation shown for each officer, or for all officers and
directors as a group.
(2) The Company has employment agreements with Jeffrey E.
Butler and Thomas Shively which guarantee their salary at a
minimum of the annual amount authorized by the Board of
Directors, plus incentive bonus that is based upon
profitability and, in the case of Mr. Shively, on attainment
of sales and profit plan. Mr. Butler and Mr. Shively have
severance provisions in their respective agreements that
their compensation will continue in force for six months and
four months, respectively, should they be terminated by the
Company for any reason, other than a willful act of fraud,
or the failure to spend the necessary time in the execution
of their respective duties
(3) Includes $39,177 for 1995 and $41,107 for 1994, in
payments made to Mr. Butler for reimbursement of out of
pocket expenses incurred on behalf of the Company.
An incentive stock plan (the "Plan") in which 40,000 shares
of the Company's common stock was reserved for issuance to
key employees of the Company lapsed in July 1992, and was
not renewed by the Board of Directors. The Plan was replaced
by an unqualified common stock option plan which was
approved by the Company's Board of Directors in December
1992. The 1992 unqualified plan involved fourteen key
management and advisory personnel of the Company. Under the
terms of the 1992 plan, which expired in December 1995, a
total of 1,045,000 common shares of the common stock were
reserved for issuance under the terms of the plan, with
exercise prices ranging from $.20 per common share to $.50
per common share. In March 1996, a Non-Qualified Stock
Option Plan was approved by the Board of Directors. Non-
qualified stock options to purchase a total of 1,289,195
shares of restricted common stock at a price of $.50 per
share were granted to 14 employees in March 1996.
There were no exercises of stock options by employees during
1995 and no options were deemed In-the Money during this
period.
Item 11. Security Ownership of Certain Beneficial Owners
and Management.
- ---------------------------------------------------------
The following table sets forth ownership of the common stock
of each director and officer, all officers and directors as
a group, and each person known or believed by the Company to
have beneficially owned five percent or more of the
Company's outstanding common stock as of November 22, 1996.
Unless otherwise indicated, the beneficial owner has sole
voting and investment power over the common stock listed
below:
<TABLE>
Shares Beneficially Owned
-------------------------
Title of Class
--------------
Name/Address of Beneficial Owner Number Percent
- -------------------------------- ------ -------
<S> <C> <C> <C>
Jeffrey E. Butler (1)
7952 5. South Emerson CT.
Englewood, CO 80112 Common 981,904 7.8%
Thomas A. Shively (2)
13331 Plaza Terrace
Oklahoma City, OK 731 Common 451,161 3.6%
Monty C. McCurry (3)
2134 S. Eagle CT.
Aurora, CO 80014 Common 108,400 .9%
Newton W. Fink (4)
921 Broadway
Ft. Lupton, CO 80621 Common 76,400 .6%
Stephen E. Prust (5)
9025 East Kenyon Avenue
Denver, CO 80237 Common 459,616 3.7%
John D. Garber (6)
7530 Navigator Circle
Carlsbad, CA 92009 Common 6,454,507 51.5%
Robert Schoolfield (7)
S Pleasant Cove
Austin , TX 78746 Common 1,536,517 12.7%
Officers and Directors as a Group
(6 persons) Common 2,077,481 15.9%
(1) (2) (3) (4) (5)
</TABLE>
(1) The amount and percentage figures include the possible
exercise of 352,000 common stock options, with an exercise
price of $.50 per share.
(2) The amount and percentage figures include the possible
exercise of 259,195 common stock options, with an exercise
price of $.50 per share.
(3) The amount and percentage figures include the possible
exercise of 70,000 common stock options, with an exercise
price of $.50 per share.
(4) The amount and percentage figures include the possible
exercise of 70,000 common stock options, with an exercise
price of $.50 per share.
(5) The amount and percentage figures include the possible
exercise of 120,000 common stock options, with an exercise
price of $.50 per share.
(6) The amount and percentage figures include the possible
conversion of 371,471 common shares for convertible debt
loaned to the Company pursuant to the loan agreement between
Mr. Garber and the Company. The Company borrowed hinds and
created indebtedness in 1991 of $50,000 which may be
converted at the option of Mr. Garber into shares of the
Company's Common Stock at an exchange rate of $0.1346 per
share.
(7) The amount and percentage figures include the exercise
of 286,517 common stock warrants to purchase an equal number
of common shares at a price of $.50 per share, exercised in
September 1996.
Item 12. Certain Relationships and Related Transactions With
Management and Others.
- ------------------------------------------------------------
No business relationship between the Company and any
business or professional entity, for which a director of the
Company has served during the last fiscal year or currently
serves as an executive officer or has owned a 10% record or
beneficial interest, has existed since the beginning of the
Company's last fiscal year or currently exists and which
represented or will represent payments for property or
services in excess of 5% of the Company's gross revenues for
its last hill fiscal year or of the other entity's
consolidated gross revenues for its last hill fiscal year.
In addition, the Company did not owe, at the end of its
fiscal period, to any business or professional entity, for
which a director of the Company has served during the last
fiscal year or currently serves as an executive officer or
has owned during the last fiscal year or currently owns a
10% record or beneficial interest, an aggregate amount in
excess of 5% of the Company's total assets at the end of its
last fiscal period. No director of the Company has served
during the last fiscal year or currently serves as a partner
or executive officer of any investment banking firm that
performed services for the Company during the last fiscal
year or that the Company proposes to have perform services
during the current year. The Company knows of no other
relationship between a director of the Company and the
Company that are not substantially similar in nature and
scope to that which is described above.
In April 1992, Stephen Prust, a director of the Company,
loaned to the Company $66,667 in exchange for a convertible
note payable. The note contained a provision to convert to
common stock of the Company at the rate of $.50 per share.
Interest on the note accrued at an annual rate of twelve
percent and was payable quarterly with the principal due
December 1994. This note plus accrued interest of $39,967
was converted to 213,268 shares of restricted common stock
as of June 30, 1996.
In March 1995, the Company entered into an agreement with
John Garber, a shareholder, to engage in the financing of
the Company's accounts receivable. This financing was
performed through a company owned by Mr. Garber, AmED
Financing Company, which was incorporated under the laws of
the state of Oklahoma on March 17, 1995. Under the terms of
this agreement, AmED Financing Company made advances to the
Company during 1995 and the initial portion of 1996. Unpaid
advances under this financing arrangement were convertible
into common stock of the Company, at the option of the
holder, at a conversion price of $.50 per share. All
tangible assets of the Company were pledged as security for
advances under the terms of this agreement. Effective June
30, 1996, Mr. Garber converted unpaid advances made to the
Company by AmED Financing Company, in the amount of $290,000
plus accrued interest of $34,481 related thereto, into
648,962 shares of restricted common stock at a conversion
price of $.50 per share. See footnote 8, to financial
statements.
PART IV
- -------
Item 13. Exhibit, Financial Statement Schedules. and Reports
on Form 8-K.
- ------------------------------------------------------------
(a) The following documents are filed as part of this
report:
Financial Statements and Financial Statement Schedules - See
Index to Financial Statements and Schedules immediately
following signature page of this report.
Exhibits: The following exhibits are filed with this Form
lO-KSB and are identified by the numbers indicated. See
index to exhibits immediately following the financial
statements and schedules of this report.
<TABLE>
Exhibit
No. Description of Exhibits
- ------- -----------------------
<S> <C>
3 Articles of Incorporation and by-laws. Reference is
made to Exhibit 2(a) and 2(b) respectively, of the
Company's registration statement on Form S-IS
(file No. 2-78660-D) which are incorporated herein by
reference.
4 Registrant's Convertible Subordinated Note offering
dated September 15, 1991, incorporated by reference.
</TABLE>
Reports on Form 8-K. There were no reports filed or required
to be filed on Form 8-K for the fourth quarter ended
December 31, 1995.
SIGNATURES
- ----------
Pursuant to the requirements of Section 13, or IS(d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this report to he signed on its behalf by the
undersigned, thereunto duly authorized.
November 22, 1996
The American Education Corporation
By: /s/ Jeffrey E. Butler
---------------------
Chief Executive Officer
Chairman of the Board Treasurer
Pursuant to the 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.
<TABLE>
Name Title Date
- --------------------- ------------------------------------------------
<S> <C> <C>
/s/ Jeffrey E. Butler Chief Executive Officer November 22, 1996
Chairman of the Board Treasurer
/s/ Monty C. McCurry Director November 22, 1996
/s/ Newton W. Fink Director November 22, 1996
/s/ Stephen E. Prust Director November 22, 1996
</TABLE>
The American Education Corporation
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
Item
Page No.
- -------------------------------------------------------
<S> <C>
Independent Auditors' Report F-1
Financial Statements:
Balance Sheet, December 31, 1995 F-2
Statements of Operations years ended
December 31, 1995 and 1994 F-3
Statements of Stockholders' Deficit years ended
December 31, 1995 and 1994 F-4
Statements of Cash Flows years ended
December 31, 1995 and 1994 F-5
Schedule of Non-Cash Investing and Financing
Activities years ended December 31, 1995 and 1994 F-6
Notes to the Financial Statements F-7
</TABLE>
All schedules are omitted as the required information is
included in the financial statements or notes thereto or is
not present in sufficient amounts.
STEAKLEY & GILBERT, P. C.
CERTIFIED PUBLIC ACCOUNTANTS
15 N ROBINSON. SUITE 701
OKLAHOMA CITY. OKLAHOMA 73102
STEVEN R. STEAKLEY, CPA
GREG P. GILBERT, CPA
STEVANNA H. WOLFARD, CPA
DAVID L BOZALIS, CPA
JANE A. HRESKO, CPA
OFFICE: (405) 235-4400 FAX: (405) 236-2207
INDEPENDENT AUDITORS' REPORT
To Board of Directors and Stockholders
The American Education Corporation
Oklahoma City, Oklahoma
We have audited the balance sheet of The American Education
Corporation as of December 31, 1995 and the related
statements of operations, stockholders' deficit, and cash
flows for each of the two years in the period ended December
31, 1995. 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of The American Education Corporation as of
December 31, 1995 and the results of its operations and cash
flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted
accounting principles.
Oklahoma City, Oklahoma November 18, 1996
THE AMERICAN EDUCATION CORPORATION
BALANCE SHEET
December 31, 1995
ASSETS
- ------
<TABLE>
Current assets:
<S> <C>
Cash $ 56,882
Accounts receivable, net of allowance for
uncollectible accounts of $28,822 (Note 1) 130,352
Inventory, net of impairment reserve of $10,000 (Note 1) 19,986
Prepaid expenses and deposits 7,147
---------
Current Assets 214,367
Property and equipment, at cost (Note 1) 135,115
Less accumulated depreciation and amortization (99,64l)
-----------
Net property and equipment 35,474
Other assets:
Capitalized software costs, net of accumulated
amortization of $745,989 (Note 1) 312,364
Goodwill, net of accumulated amortization of
$154,264 (Note 1) 92.536
----------
Total other assets 404,900
----------
Total Assets $ 654,741
==========
</TABLE>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
Current liabilities:
<S> <C>
Accounts payable and accrued liabilities $1,063,384
Current maturities of notes payable and
long-term debt (Note 4) 726.989
----------
1,790,373
Long-term debt (Note 4) 65,000
----------
Total liabilities 1,855,373
----------
Commitments and contingencies (Notes 5, 6, 10, 11 and 12) --
Stockholders' Deficit (Note 3)
Preferred Stock $.00 1 par value; Authorized-50,000,000
shares, issued and outstanding-none; liquidation preference-
$.02 per share --
Common Stock, $.025 par value;
Authorized 15,000,000; issued and outstanding-
8,570,865 shares 214,272
Additional paid in capital 4,083,616
Retained deficit (5,498,520)
-----------
Total stockholders' deficit (1,200,632)
-----------
Total liabilities and stockholders' deficit $ 654.741
===========
</TABLE>
See accompanying notes and accountants' report.
THE AMERICAN EDUCATION CORPORATION
STATEMENTS OF OPERATIONS
Years ended December 31, 1995 and 1994
<TABLE>
1995 1994
---------- -----------
<S> <C> <C>
Sales $1,238,867 $ 672,228
Cost of goods sold 311,603 286,182
----------- ----------
Gross Profit 977,264 386,046
----------- ----------
Operating expenses:
Selling and marketing 312,355 256,924
General and administrative 795,615 745,147
Amortization of capitalized software costs 212,183 156,177
----------- -----------
Total operating expenses 1,320,153 1,158,248
----------- -----------
Operating loss (342,889) (772,202)
Other income (expense):
Interest income -- 847
Miscellaneous income 7,410 36,831
Interest expense (106,261) (67,177)
Factoring costs (31,736) (54,892)
----------- ----------
Net loss $(473,476) $(856,593)
=========== ==========
Weighted average common shares outstanding 8,403,403 8,088,916
=========== ==========
Net loss per common share ($.056) ($.106)
=========== ==========
</TABLE>
See accompanying notes and accountants' report.
<TABLE>
THE AMERICAN EDUCATION CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
Years ended December 31, 1995 and 1994
<CAPTION>
Additional
Common Stock Preferred Stock paid in Retained
Shares Amount Shares Amount capital deficit
------------------ ----------------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at 6,228,165 $155,704 -- -- $3,330,930 $(4,168,451)
December 31, 1993
Issuance of 1,375,000 34,375 -- -- 515,625 --
common stock for
cash at $.40 per
share
Issuance of 40,000 1,000 -- -- 19,000 --
common stock for
cash at $.50 per
share
Conversion of 754,053 18,852 -- -- 135,578 --
notes payable to
stock at a price
of $.205 per share
Net loss -- -- -- -- -- (856,593)
--------- ------- -------- -------- --------- -----------
Balance at 8,397,218 209,931 -- -- 4,001,133 (5,025,044)
December 31, 1994
Issuance of 173,647 4,341 -- -- 82,483
common stock for
cash at $.50 per
share
Net loss -- -- -- -- -- (473,476)
--------- -------- -------- -------- --------- -----------
Balance at 8,570,865 $214,272 -- -- $4,083,616 $(5,498,520)
December 31, 1995 ========= ======== ======== ======== ========== ============
</TABLE>
See accompanying notes and accountants' report.
THE AMERICAN EDUCATION CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995 and 1994
<TABLE>
1995 1994
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net Loss $ (473,476) $ (856,593)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 283,714 224,918
Deferred assets written off -- 42,511
Reserve for bad debts (34,188) 60,531
Gain on debt settlement (7,206) --
Changes in assets and liabilities:
Accounts receivable (21,741) (67,141)
Inventories 21,762 69,216
Prepaid expenses and deposits 1,751 19,986
Accounts payable and accrued liabilities 104,862 91,059
---------- ----------
Net cash used in operating activities (124,522) (415,513)
Cash flows from investing activities:
Purchase of property and equipment (8,311) (17,713)
Purchase of capitalized software costs (166,528) (159,310)
----------- -----------
Net cash used in investing activities (174,839) (177,023)
Cash flows from financing activities:
Proceeds received from issuance of debt 280,000 103,750
Principal payment on debt (13,327) (82,198)
Issuance of common stock for cash 86,824 570,000
----------- -----------
Net cash provided by financing activities 353,497 591,552
Net increase (decrease) in cash 54,136 (984)
Cash at beginning of year 2,746 3,730
----------- -----------
Cash at end of year $ 56,882 $ 2,746
=========== ===========
Interest paid $ 30,146 $ 19,111
=========== ===========
</TABLE>
See accompanying notes and accountants' report.
THE AMERICAN EDUCATION CORPORATION
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Years Ended December 31, 1995 and 1994
During 1994, $3,775 of accrued interest was converted to
note principal; $4,430 of accrued interest and $150,000 of
notes payable were converted to 754,053 shares of common
stock at a price of $.205 per share. (See Note 3).
See accompanying notes and accountants' report.
THE AMERICAN EDUCATION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
1. Summary of significant accounting policies
- ---------------------------------------------
The summary of significant accounting policies of The
American Education Corporation (the Company) is presented to
assist in understanding the Company's financial statements.
These accounting policies conform to generally accepted
accounting principles and have been consistently applied in
the preparation of the financial statements.
History and business activity
- -----------------------------
The American Education Corporation (formerly Plasmedics,
Inc.) was incorporated under the laws of the State of
Colorado on February 23, 1981. Through 1986, the Company's
principal purpose was to manufacture and market medical
devices and medical technology. The Company's activities
from inception through 1984 were directed toward raising
equity capital, acquisition of license and patent rights and
research and development. From 1986 through 1990, the
Company was essentially inactive and seeking acquisition or
merger candidates.
On January 8, 1991, the Company purchased substantially all
of the assets of American Education Computer, Inc., and
assumed specific trade accounts payable and other accrued
liabilities related to that business.
On August 15, 1991, Plasmedics, Inc., changed its name to
The American Education Corporation (AEC). AEC's principal
business is the development of educational computer software
and its distribution to retail outlets and school districts
nationally.
Basis of presentation
- ---------------------
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 has an accumulated
deficit of $5,498,520, and an excess of current liabilities
over current assets of $1,576,006 at December 31, 1995.
Accordingly, 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.
(See Note 11-Subsequent Events).
Accounts receivable factoring
- -----------------------------
During 1995, the Company factored certain of its receivable
with recourse to a related party shareholder. Total
receivable factored for the year was $1,049,680. Of this amount,
$255,743 is due to the factoring company in the form of a
note payable at December 31, 1995. This note was
subsequently converted to common stock in June 1996. Factoring
expense for 1995 and 1994 was $31,736 and $54,892, respectively.
Revenue recognition
- -------------------
The Company recognizes revenue in accordance with the
American Institute of Certified Public Accountant's
Statement of Position 91-1 on software revenue recognition
The Company has recognized revenue and a like amount of
expense on products traded for advertising and promotional
services. Revenue and expense include $77,239 of such non-
monetary transactions for the year ended December 31, 1995
and $-0- for 1994.
Capitalized software costs
- --------------------------
Capitalized software costs consist of licenses for the
rights to produce and market computer software, salaries and
other direct costs incurred in the production of computer
software. Costs incurred in conjunction with product
development are charged to research and development expense
until technological feasibility is established. Thereafter,
all software development costs are capitalized and amortized
on a straight line basis over the product's estimated
economic life of between three and five years. Capitalized
software costs at January 1, 1995 were valued at $891,825
with additional costs capitalized of $166,528 during 1995.
Goodwill
- --------
Goodwill relates to the acquisition of the Company in 1991,
and prior to 1993 was amortized over a period of 40 years.
In 1993, the estimated useful life was revised with the
remaining goodwill amortized over five years. Amortization
expense totaled $46,281 and $46,272 for 1995 and 1994,
respectively.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in,
first-out) or market and consist primarily of materials,
labor and overhead. The components of computer software
inventories at December 31, 1995 are as follows:
<TABLE>
<S> <C>
Raw materials $ 29,986
Less: Impairment reserve (10,000)
----------
Inventory, net of reserves $ 19,986
</TABLE>
Property and equipment
- ----------------------
Property and equipment is stated at cost. Depreciation is
provided on the straight-line basis over the estimated
useful life of the assets, which is five years.
Depreciation expense totaled $25,249 and $22,468 for 1995
and 1994, respectively. The components of property and
equipment at December 31, 1995 are as follows:
<TABLE>
<S> <C>
Computer equipment $ 47,637
Furniture, fixtures and office equipment 83,223
Leasehold improvements 4,255
---------
Total property and equipment $ 135.115
=========
</TABLE>
Statements of cash flows
- ------------------------
In the Statements of Cash Flows, cash and cash equivalents
may include currency on hand, demand deposits with banks or
other financial institutions, treasury bills, commercial
paper, mutual fluids or other investments with original
maturities of three months or less. At December 31, 1995 and
1994 cash and cash equivalents include demand deposits with
banks.
Use of Estimates
- ----------------
The preparation of the financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
2. Exercise of options to purchase common stock
- -----------------------------------------------
During 1995, a shareholder exercised options to purchase
173,647 shares of common stock for cash at $.50 per share.
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 common stock at $.50 per share totaled 286,517
shares at December 31, 1995. These warrants were exercised
in September 1996.
3. Common and Preferred stock
- -----------------------------
During 1994, 1,375,000 shares of common stock were issued
for cash at a price of $.40 per share. An additional 40,000
shares were issued for cash at a price of $.50 per share. A
note payable and accrued interest totaling $154,430 was
converted to 754,053 shares at a price of $.205 per share.
4. Notes payable
- ----------------
<TABLE>
<S> <C>
Convertible note payable to a shareholder; interest at 12%
per annum due quarterly; principal due July 15, 1995; unpaid
interest and principal balance convertible to $.025 par
value common stock at a rate ranging between $.1346 and $.50
per share; collateralized by virtually all of the assets of
the Company. A portion of this debt and the related accrued
interest were converted to common stock during 1993 and
1994. $105,520 principal plus accrued interest was converted
to common stock on June 30, 1996. The balance of $50,000 is
also convertible to common stock and matures June 30, 1998. $ 155,520
Convertible notes payable to shareholders; interest at 12%
due quarterly; principal due June 30, 1996; unpaid interest
and principal balance convertible to $.025 par value common
stock at rate of $.50 per share; subordinated to all other
notes of the Company, except for those notes created through
the settlement of accounts payable. $100,000 principal plus
accrued interest was converted to common stock on June 30,
1996. 100,000
Convertible notes payable to individuals; interest at 12%
due quarterly; principal due June 30, 1996; convertible to
$.025 par value common stock at a rate of $.50 per share;
subordinated to all other notes of the Company, except for
those notes created through the settlement of accounts
payable. One of these notes with an outstanding balance of
$66,667 is with a shareholder of the Company. $110,000
principal plus accrued interest was converted to common
stock on June 30, 1996. 110,000
Convertible note payable to a shareholder, interest at 10%
per annum due quarterly; principal due by December 15, 1997;
unpaid principal and interest balance convertible to $.025
par value common stock at $.50 per share; collateralized by
virtually all of the assets of the Company. $137,525
principal plus accrued interest was converted to common
stock on June 30, 1996. 137,525
Account payable converted to a note, due July 15, 1995,
eighteen equal principal payments plus accrued interest of
10% per annum are due monthly through maturity, subordinated
to all other notes of the Company. The note was in default
at December 31, 1995 with default interest at 18%. In June
1996, the debt was partially converted to stock and a new
note for $20,000 due in 24 installments beginning July 1,
1996. 33,201
Note payable to factoring company owned by a shareholder,
with 10% interest, due December 31, 1996. Principal plus
interest converted to common stock on June 30, 1996. 255,743
---------
Total notes payable 791,989
Less current portion (726,989)
----------
$ 65,000
==========
</TABLE>
Aggregate maturities of notes payable are as follows:
<TABLE>
December 31,
------------
<S> <C>
1996 $ 726,989
1997 10,000
1998 55,000
1999 --
2000 --
---------
$ 791,989
=========
</TABLE>
Interest incurred on these notes for the years ended
December 31, 1995 and 1994 totaled $106,261 and $67,177,
respectively.
5. Royalty agreements
- ---------------------
Several of the Company's software tides are authored by
independent consultants for which royalty agreements exist.
These agreements call for quarterly payments ranging from 1%
to 5% of net collected sales on those particular titles.
These agreements expire in the years 2000 and 2005. Royalty
expense totaled $10,064 and $45,412 in 1995 and 1994,
respectively.
6. Operating leases
- -------------------
The Company leases office space under a lease which is in
default and is therefore on a month to month basis. Rent
expense totaled $59,235 and $56,357 for the years ended
December 31, 1995 and 1994, respectively. The company was in
arrears on rent payments in the amount of $19,862 at
December 31, 1995. Subsequent to December 31, 1995, the
Company entered into a new lease agreement for the same
office space at a monthly rate of $5,247. The lease term is
March 1, 1996 through February 28, 1999.
7. Income taxes
- ---------------
Effective January 1, 1993, the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109
requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that
have been included in the financial statements or tax
returns, determined by using the enacted tax rates in effect
for the year in which the differences are expected to
reverse.
There was no impact on January 1, 1993 from the adoption of
this standard.
No current or deferred tax provision resulted as there was
both an accounting and a tax loss for each of the periods
presented. There are no significant timing differences
between the reporting of income and expenses on a tax basis
and on an accounting basis.
The Company has available a net operating loss carry forward
of approximately $4,831,000 expiring between the years 1997
and 2010. A valuation allowance for the full amount of the
related deferred tax asset of approximately $966,000 has
been assessed.
8. Related party transactions
- -----------------------------
The Company has various notes payable with shareholders
(Note 4). Accrued interest related to these notes at December 31,
1995 is $152,765. The related interest expense totaled
$97,215 and $47,039 during 1995 and 1994, respectively. The
accrued interest was converted to common stock on June 30,
1996.
During 1995 and 1994, the Company paid fees to a firm owned
by the President in the amount of $94,349 and $88,083,
respectively. These fees include consulting, travel
reimbursement, temporary living expenses and other various
business expenses totaling $39,177 and $41,107 in 1995 and
1994, respectively.
During 1995 and 1994, the Company also paid a director and
shareholder $-0- and $12,600 in consulting fees,
respectively.
9. Significant Customers
- ------------------------
The Company sells its products almost exclusively to schools
through various distributors of educational materials.
During the years ended December 31, 1995 and 1994, ten
percent or more of the Company's revenues were generated
from individual customers as follows:
<TABLE>
December 31,
1995 1994
-------------------------
<S> <C>
United Marketing Associates $137,626 10.7% $ --
Educational Resources $ -- 10.3% $68,969
</TABLE>
10. Commitments and Contingencies
- ---------------------------------
The Company amortizes capitalized software costs over the
products estimated useful life. Due to inherent
technological changes in the software development industry,
the period over which such capitalized software costs
(carried in the accompanying balance sheet net of
amortization at $312,364) is being amortized may have to be
accelerated.
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.
11. Subsequent Events
- ---------------------
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 its common stock valued at
$.02 per share in exchange for accrued wages and fees owed
to the officers and directors of the Company. Notes payable
and accrued interest totaling $976,710 at June 30, 1996 was
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.
Summary of 1996 Equity Transactions
<TABLE>
Type of # Shares
Transaction Issued Cash Debt Conversion
- ----------- --------- --------- ---------------
<S> <C> <C> <C>
Options and warrants exercised 546,517 $ 243,258 $ --
Accrued compensation 363,677 -- 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
========= ========= =========
12. Litigation
- --------------
In October 1996, the Company became a party to litigation in
the United States District Court for the District of
Columbia entitled SECURITIES AND EXCHANGE COMMISSION-
PLAINTIFF V. 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 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 or the assessment of fines against the
Company.
In addition, the Company is the subject of various legal
proceedings in the normal course of business. However,
management knows of no pending or threatened litigation
involving the Company, other than the Action, that is
considered material to the on-going operations and viability
of the Company.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM - FORM
10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 56,882
<SECURITIES> 0
<RECEIVABLES> 159,174
<ALLOWANCES> (28,822)
<INVENTORY> 19,986
<CURRENT-ASSETS> 214,367
<PP&E> 135,115
<DEPRECIATION> (99,641)
<TOTAL-ASSETS> 654,741
<CURRENT-LIABILITIES> 1,790,373
<BONDS> 0
0
0
<COMMON> 214,272
<OTHER-SE> 4,083,616
<TOTAL-LIABILITY-AND-EQUITY> 654,741
<SALES> 1,288,867
<TOTAL-REVENUES> 1,296,277
<CGS> 311,603
<TOTAL-COSTS> 1,320,153
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 137,997
<INCOME-PRETAX> (473,476)
<INCOME-TAX> 0
<INCOME-CONTINUING> (473,476)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (473,476)
<EPS-PRIMARY> (.056)
<EPS-DILUTED> (.056)
</TABLE>
