SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 8 K/A
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
December 24, 1999
- -----------------
(Date of earliest event reported)
The American Education Corporation
- ----------------------------------
(Exact name of registrant as specified in its charter)
Colorado
- --------
(State or other jurisdiction of incorporation)
0-11078
- -------
Commission File Number
84-0838184
- ----------
IRS Employer Identification No.
7506 North Broadway Extension, Suite 505, Oklahoma City, Oklahoma
- -----------------------------------------------------------------
(Address of principal executive office)
73116
- -----
(Zip Code)
(405) 840-6031
- --------------
Registrant's telephone number, including area code
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
- -----------------------------------------------------------------
(a) Financial Statements of Business Acquired.
- ----------------------------------------------
The following financial statements of Dolphin, Inc. are filed herewith:
Independent Auditor's Report
Balance Sheets at December 31, 1998 and (unaudited) at
September 30, 1999
Statements of Income for the year ended December 31, 1998
and (unaudited) for the nine months ended September 30, 1999
Statements of Stockholders' Equity for the year ended
December 31, 1998 and (unaudited) for the nine months ended
September 30, 1999
Statements of Cash Flows for the year ended December 31, 1998
and (unaudited) for the nine months ended September 30, 1999
Notes to Consolidated Financial Statements
(b) Unaudited Pro Forma Financial Information.
- ----------------------------------------------
The following unaudited pro forma condensed consolidated financial
information is filed herewith:
Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of September 30, 1999
Unaudited Pro Forma Condensed Consolidated Statement of
Income for the nine months ended September 30, 1999
Unaudited Pro Forma Condensed Consolidated Statement of
Income for the year ended December 31, 1998
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements
(c) Exhibits.
- -------------
Exhibit 2.1 ( the Stock Purchase Agreement ) was filed in accordance
with the provisions of Item 601 of Regulation S-B with the Form 8-K
filed on January 10, 2000.
23.1 Consent of Independent Public Accounts
Independent Auditor's Report
To the Board of Directors
Dolphin, Inc.
Gibbsboro, NJ
We have audited the accompanying balance sheet of Dolphin,
Inc. as of December 31, 1998, and the related statements of income,
stockholder's equity, and cash flows for the year then ended.
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 Dolphin,
Inc. at December 31, 1998 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted
accounting principles.
Haddonfield, New Jersey
December 3, 1999
DOLPHIN, INC.
Balance Sheet
December 31, 1998
Assets
Current assets
Cash $ 12,734
Accounts receivable (Note 2) 667,125
Prepaid expenses (Note 3) 11,194
Total current assets 691,053
Property and equipment (Note 1)
Equipment 260,805
Computers and furniture 150,659
Improvements 30,350
441,814
Less: accumulated depreciation 296,566
Net property and equipment 145,248
Non-current assets
Security deposit - Rent (Note 7) 1,584
Total assets $ 837,885
The accompanying notes are an integral part of these financial
statements
DOLPHIN, INC.
Balance Sheet
December 31, 1998
Liabilities and Stockholder's Equity
Current liabilities
Accounts payable $ 43,278
Accrued expenses (Note 4) 92,556
Deferred federal income taxes payable (Note 14) 132,068
Deferred state income taxes payable (Note 14) 38,417
Deferred revenue (Note 5) 117,130
Reserve for warranties (Note 6) 10,000
Total current liabilities 433,449
Total liabilities 433,449
Stockholder's equity
Common stock, no par value; 18,000 shares
authorized, 100 shares issued and
outstanding 1,000
Additional paid-in capital 11,587
Retained earnings - unappropriated 391,849
Total stockholder's equity 404,436
Total liabilities and
stockholder's equity $ 837,885
The accompanying notes are an integral part of these financial
statements
DOLPHIN, INC.
Statement of Income
For the Year Ended December 31, 1998
Income
Revenue $ 2,278,315
Development Costs
Consultants 91,429
Salaries 1,186,862
Payroll taxes 81,840
Rent (Note 7) 76,944
Depreciation (Note 1) 60,700
Total development costs 1,497,775
Gross Profit 780,540
General and administrative expenses
Administrative salaries 166,617
Payroll taxes 11,691
Rent (Note 7) 19,236
Office supplies/expense 23,543
Travel & entertainment 47,613
Operating expense 981
Telephone 21,243
Insurance 91,485
Automobile 1,405
Professional fees (Note 11) 30,884
Repairs and maintenance 1,350
Postage and delivery 4,656
Conference 110
Dues and subscriptions 3,306
Gifts 8,649
Taxes - other 4,097
Outside services 8,513
Lease expense - auto (Note 8) 9,467
Equipment rental (Note 9) 3,320
Bank charges 220
Advertising 5,042
Continuing education 9,105
Contribution to 401K plan (Note 1) 10,350
Software 7,515
Total general & administrative expenses 490,398
Income from operations 290,142
The accompanying notes are an integral part of these financial
statements
DOLPHIN, INC.
Statement of Income (Continued)
For the Year Ended December 31, 1998
Income from operations $ 290,142
Other income (expenses)
Interest income 4,285
Bad debt expense (Note 11) (120,663)
Professional fees (Note 15) (3,835)
Total other income (expenses) (120,213)
Income before income tax expense (benefit) (Note 1) 169,929
Deferred income taxes - federal (Note 14) 57,636
- state (Note 14) 15,294
Total income taxes 72,930
Net income $ 96,999
The accompanying notes are an integral part of these financial
statements
DOLPHIN, INC.
Statement of Stockholder's Equity
For the Year Ended December 31, 1998
Retained Earnings
Additional
Paid-In Common Appro- Unappro-
Capital Stock priated priated Total
Balance,
January 1, 1998 $ 11,587 $ 1,000 $ -0- $ 294,850 $307,437
Net income for
the period -0- -0- -0- 96,999 96,999
Balance,
December 31,
1998 $ 11,587 $ 1,000 $ -0- $ 391,849 $404,436
The accompanying notes are an integral part of these financial
statements
DOLPHIN, INC.
Statement of Cash Flows
For the Year Ended December 31, 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 96,999
Adjustments to Reconcile Net Income to Net
Cash Used by Operating Activities:
Depreciation $ 60,700
(Increase) Decrease in:
Accounts receivable (103,320)
Prepayments (4,707)
Increase in:
Accounts payable 23,470
Deferred income taxes payable
- federal 57,636
Deferred income taxes payable
- state 15,294
Accrued expenses (24,460)
Deferred revenue 102,527
Due to Byron Preiss (320,937)
Total adjustments (193,797)
NET CASH USED BY OPERATING ACTIVITIES (96,798)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (35,965)
NET CASH USED BY INVESTING ACTIVITIES (35,965)
NET DECREASE IN CASH (132,763)
CASH AT JANUARY 1, 1998 145,497
CASH AT DECEMBER 31, 1998 $ 12,734
SUPPLEMENTAL INFORMATION:
Income taxes, paid $ -0-
Interest -0-
The accompanying notes are an integral part of these financial
statements
DOLPHIN, INC.
Notes To Financial Statements
December 31, 1998
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Nature of Operations
- --------------------
The Company was incorporated in the State of New Jersey on
February 5, 1990. Dolphin, Inc. is a service company which
develops computer software in the educational and marketing
areas.
Method of Accounting
- --------------------
The Company prepares its financial statements on the accrual
basis of accounting. The accompanying financial statements
have been prepared on that basis, in which revenue and gains
are recognized when earned and expenses and losses when
incurred.
Recognition of Revenue
- ----------------------
The Company's method of recognizing revenue is the
accrual method. In most instances, customer billings are
prepared when the work completed reaches a certain level
which is designated as a "milestone". As a general
rule, about 10% of the most recent customer billing on a
contract is an advance billing. This advance portion of
billings is reflected as a liability, and is designated
in the financial statements as deferred revenue.
In those instances where customer billings do not
reflect "milestones", the proper adjustments are made to
properly match revenues and expenses.
All costs and expenses, incurred in connection with the
development of products, are charged to operations.
The Company records a reserve for warranties equal to
approximately 1% of the contract amount.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation is
provided on the straight-line method over the estimated lives
of the respective assets.
Income Taxes
- ------------
The Company accounts for its income taxes using Statement of
Financial Accounting Standards (SFAS) 109, Accounting for
Income Taxes which 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. Under this method,
deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax bases
of assets and liabilities, using enacted tax rates in effect
for the year in which the differences are expected to reverse.
401K Plan
- ---------
The Company established a savings plan under section 401K of
the Internal Revenue Code. This savings plan allows eligible
employees to contribute up to 15 percent of their compensation
on a pretax basis. The Company matches 25 percent of the
first six percent of the employees contribution. As of
December 31, 1998, the matching contribution was $10,350.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
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.
Note 2 - Accounts Receivable
- ----------------------------
The accounts receivable at December 31, 1998 consists of:
Billed $ 209,925
Unbilled 457,200
667,125
Less: Allowance for doubtful accounts
receivable -0-
$ 667,125
Note 3 - Prepayments
- --------------------
The prepayments at December 31, 1998 are summarized below:
Insurance $ 2,789
Rent 8,405
$ 11,194
Note 4 - Accrued Expenses
- -------------------------
The details at December 31, 1998 of the accrued expenses are summarized
below:
Payroll taxes $ 299
Salaries 71,527
Vacation pay 20,730
$ 92,556
Note 5 - Deferred Revenue
- -------------------------
The Company's policy is to bill customers when the work
completed reaches milestones specified in the contract. The
milestones reflect completed work as indicated in the contract
schedule. Generally, a liability of 10% of the most recent
customer billings on work in process contracts is reflected as
deferred revenue. In certain instances, the deferred revenue
may be greater or less than the 10% noted above. The liability
at December 31, 1998 is $117,130.
Note 6 - Reserve for Warranties
- -------------------------------
The Company records a reserve for warranties equal to
approximately 1% of the contract amount. The warranty period
for completed work is six months. The reserve balance at
December 31, 1998 is $10,000.
Note 7 - Rent Expense
- ---------------------
The Company leases its office facilities, located in Gibbsboro,
New Jersey, from Brandywine Realty Trust. The security deposit
in the amount of $1,584 is being held by the landlord. This
deposit will be refunded upon termination of the lease. On
January 13, 1997, the Company agreed to an amendment of its
current lease. The square feet increased from 5,014 to 6,584.
Minimum rents due under the lease are as follows:
January 1, 1999 to June 30, 1999 $ 42,025
June 30, 1999 - May 31, 2000 95,400
Note 8 - Lease Expense - Auto
- -----------------------------
The Company leases a 1997 Lexus Series LS400 from Lexus
Financial Services. The lease commenced on May 26, 1997, and
extends for a four year period with monthly payments of $789.
Note 9 - Equipment Rental
- -------------------------
The Company leases a Canon NP6230 copier from Canon Financial
Services. The lease commenced on October 10, 1997, and extends
for a three year period with monthly payments of $277.
Note 10 - Stock Purchase Agreement with Byron Preiss Multimedia
- ---------------------------------------------------------------
On March 21, 1997, Mr. Andrew Gardner (Sole Shareholder)
entered into a stock purchase agreement ("Purchase Agreement")
with Byron Preiss Multimedia Company, Inc. ("BPMC"), providing
for the sale of Dolphin, Inc. Under the terms of the purchase
agreement, BPMC purchased all the outstanding capital stock of
Dolphin, Inc., which consisted of 100 shares of common stock,
without par value. On March 21, 1997, the transaction was
completed and Mr. Gardner received $500,000 in cash, a
convertible note in the principal amount of $1,750,000 and
395,947 shares of unregistered BPMC common stock. BPMC
defaulted on its note to Mr. Gardner and, pursuant to a stock
pledge agreement securing BPMC's note to Mr. Gardner,
effective June 14, 1999, the ownership of Dolphin, Inc.
reverted back to Mr. Gardner.
Note 11 - Bad Debt Expense
- --------------------------
This expense in the amount of $120,663 is an extraordinary
expense and not a part of the Company's normal operations.
This amount was an intercompany receivable which was
subsequently deemed to be uncollectible.
Note 12 - Credit Line
- ---------------------
The Company maintains a $200,000 line of credit secured by
personal guarantee of Andrew and Tracy Gardner. The amount
outstanding under the line of credit at December 31, 1998 was
- -0-. The rate of interest on the credit line is prime plus
1%.
Note 13 - Risk Concentrations
- -----------------------------
The Company maintains its cash in bank accounts which, at
times may exceed federally insured limits. The Company has
not experienced any loss on such amounts. As of December 31,
1998, the company's uninsured cash balances totalled $-0-.
The Company grants credit, generally without collateral to its
customers which are located primarily in the eastern United
States. Management believes that its contract acceptance,
billing, and collection policies are adequate to minimize
potential credit risk.
Note 14 - Income taxes
- ----------------------
The deferred tax assets recognized for taxable temporary differences
were as follows:
Accounts payable $ 31,780
Accrued expenses 92,556
Deferred revenue 117,130
Reserve for warranties 10,000
$ 251,466
At December 31, 1998 the deferred tax liabilities recognized for
deductible temporary differences were as follows:
Accounts receivable $ 209,925
Unbilled accounts receivable 457,200
Prepaid expenses 11,194
$ 678,319
Income tax expense consists of the following components:
Current income tax expense $ 83,700
Less: tax benefit of net operating
loss carry forward (83,700)
Deferred income tax expense 72,930
$ 72,930
Note 15 - Professional fees
- ---------------------------
The fees in the amount of $3,835 are extraordinary expenses
and are not a part of the Company's normal operations. These
fees occurred as a result of Byron Preiss Multimedia Company
defaulting on its obligation to pay Mr. Gardner for purchasing
the Dolphin, Inc. stock. This amount was directly related to
the dissolution of the Byron Preiss merger.
DOLPHIN, INC.
At SEPTEMBER 30, 1999
To the Board of Directors
Dolphin, Inc.
Gibbsboro, NJ
We have compiled the accompanying balance sheet of Dolphin,
Inc. as of September 30, 1999, and the related statements of
income, stockholder's equity, and cash flows for the nine months
then ended in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of
Certified Public Accountants.
A compilation is limited to presenting in the form of
financial statements information that is the representation of
management. We have not audited or reviewed the accompanying
financial statements and, accordingly, do not express an opinion or
any other form of assurance on them.
Haddonfield, New Jersey
November 5, 1999
DOLPHIN, INC.
Balance Sheet
September 30, 1999
Assets
Current assets
Cash $ 106,241
Accounts receivable (Note 2) 494,555
Prepaid expenses (Note 3) 12,370
Total current assets 613,166
Property and equipment (Note 1)
Equipment 271,099
Computers and furniture 172,749
Improvements 32,750
476,598
Less: accumulated depreciation 336,571
Net property and equipment 140,027
Non-current assets
Security deposit - Rent (Note 7) 1,584
Total assets $ 754,777
See accompanying notes and accountant's report
DOLPHIN, INC.
Balance Sheet
September 30, 1999
Liabilities and Stockholder's Equity
Current liabilities
Accounts payable $ 13,412
Accrued expenses (Note 4) 134,775
Current federal income taxes payable 29,231
Current state income taxes payable 11,660
Deferred federal income taxes payable (Note 14) 99,951
Deferred state income taxes payable (Note 14) 25,918
Deferred revenue (Note 5) 35,596
Reserve for warranties (Note 6) 5,400
Total current liabilities 355,943
Total liabilities 355,943
Stockholder's equity
Common stock, no par value; 18,000 shares
authorized, 100 shares issued and
outstanding 1,000
Additional paid-in capital 11,587
Retained earnings - unappropriated 386,247
Total stockholder's equity 398,834
Total liabilities and
stockholder's equity $ 754,777
See accompanying notes and accountant's report
DOLPHIN, INC.
Statement of Income
For the Nine Months Ended September 30, 1999
Income
Revenue $ 1,557,290
Development Costs
Consultants 115,259
Salaries 798,621
Payroll taxes 66,429
Rent (Note 7) 59,859
Depreciation (Note 1) 40,005
Total development costs 1,080,173
Gross Profit 477,117
General and administrative expenses
Administrative salaries 158,559
Payroll taxes 13,189
Rent (Note 7) 14,965
Office supplies/expense 25,126
Travel & entertainment 39,088
Operating expense 3,431
Telephone 13,550
Insurance 71,555
Automobile 2,094
Professional fees (Note 11) 8,918
Repairs and maintenance 1,305
Postage and delivery 4,873
Conference 1,114
Dues and subscriptions 625
Gifts 407
Taxes - other 40
Outside services 7,089
Lease expense - auto (Note 8) 7,100
Interest 4,061
Equipment rental (Note 9) 2,767
Bank charges 240
Advertising 7,137
Continuing education 9,592
Contribution to 401K plan (Note 1) 10,873
Software 8,409
Total general & administrative expenses 416,107
Income from operations 61,010
See accompanying notes and accountant's report
DOLPHIN, INC.
Statement of Income (Continued)
For the Nine Months Ended September 30, 1999
Income from operations $ 61,010
Other income (expenses)
Interest income 433
Professional fees (Note 11) (70,770)
Total other income (expenses) (70,337)
Income (loss) before income tax expense (benefit) (Note 1) (9,327)
Federal income taxes - current (Note 14) 29,231
State income taxes - current (Note 14) 11,660
Federal income taxes - deferred (Note 14) (32,117)
State income taxes - deferred (Note 14) (12,499)
Total income taxes (3,725)
Net loss $ (5,602)
See accompanying notes and accountant's report
DOLPHIN, INC.
Statement of Stockholder's Equity
For the Nine Months Ended September 30, 1999
Retained Earnings
Additional
Paid-In Common Appro- Unappro-
Capital Stock priated priated Total
Balance,
January 1, 1999 $ 11,587 $ 1,000 $ -0- $ 391,849 $404,436
Net loss
the period -0- -0- -0- (5,602) (5,602)
Balance,
September 30,
1999 $ 11,587 $ 1,000 $ -0- $ 386,247 $398,834
See accompanying notes and accountant's report
DOLPHIN, INC.
Statement of Cash Flows
For the Nine Months Ended September 30, 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,602)
Adjustments to Reconcile Net loss to Net
Cash Used by Operating Activities:
Depreciation $ 40,005
(Increase) Decrease in:
Accounts receivable 172,570
Prepayments (1,176)
Increase (Decrease) in:
Accounts payable (29,866)
Current income taxes payable
- federal 29,231
Current income taxes payable
- state 11,660
Deferred income taxes payable
- federal (32,117)
Deferred income taxes payable
- state (12,499)
Accrued expenses 42,219
Deferred revenue (81,534)
Reserve for warranties (4,600)
Total adjustments 133,893
NET CASH PROVIDED BY OPERATING ACTIVITIES 128,291
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (34,784)
NET CASH USED BY INVESTING ACTIVITIES (34,784)
NET INCREASE IN CASH 93,507
CASH AT JANUARY 1, 1999 12,734
CASH AT SEPTEMBER 30, 1999 $ 106,241
SUPPLEMENTAL INFORMATION:
Income taxes, paid $ -0-
Interest 4,061
See accompanying notes and accountant's report
DOLPHIN, INC.
Notes To Financial Statements
September 30, 1999
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Business Activity
- -----------------
The Company was incorporated in the State of New Jersey on
February 5, 1990. Dolphin, Inc. is a service company which
develops computer software in the educational and marketing
areas.
Method of Accounting
- --------------------
The Company prepares its financial statements on the accrual
basis of accounting. The accompanying financial statements
have been prepared on that basis, in which revenue and gains
are recognized when earned and expenses and losses when
incurred.
Recognition of Revenue
- ----------------------
The Company's method of recognizing revenue is the
accrual method. In most instances, customer billings are
prepared when the work completed reaches a certain level
which is designated as a "milestone". As a general
rule, about 10% of the most recent customer billing on a
contract is an advance billing. This advance portion of
billings is reflected as a liability, and is designated
in the financial statements as deferred revenue.
In those instances where customer billings do not
reflect "milestones", the proper adjustments are made to
properly match revenues and expenses.
All costs and expenses, incurred in connection with the
development of products, are charged to operations.
The Company records a reserve for warranties equal to
approximately 1% of the contract amount.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation is
provided on the straight-line method over the estimated lives
of the respective assets.
Income Taxes
- ------------
Provisions for income taxes are based on taxes payable or
refundable for the current year and deferred taxes on
temporary differences between the amount of taxable income and
pretax financial income and between the taxes bases of assets
and liabilities and their reported amounts in the financial
statements.
401K Plan
- ---------
The Company established a savings plan under section 401K of
the Internal Revenue Code. This savings plan allows eligible
employees to contribute up to 15 percent of their compensation
on a pretax basis. The Company matches 25 percent of the
first six percent of the employees contribution. As of
September 30, 1999, the matching contribution was $10,873.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
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.
Note 2 - Accounts Receivable
- ----------------------------
The accounts receivable at September 30, 1999 consists of:
Billed $ 443,905
Unbilled 50,650
494,555
Less: Allowance for doubtful accounts
receivable -0-
$ 494,555
Note 3 - Prepayments
- --------------------
The prepayments at September 30, 1999 are summarized below:
Insurance $ 4,329
Rent 8,041
$ 12,370
Note 4 - Accrued Expenses
- -------------------------
The details at September 30, 1999 of the accrued expenses are
summarized below:
Salaries $ 40,777
Vacation pay 17,942
Bonuses 34,195
Consultants 5,100
Professional fees 27,770
Operating 8,991
$ 134,775
Note 5 - Deferred Revenue
- -------------------------
The Company's policy is to bill customers when the work
completed reaches milestones specified in the contract. The
milestones reflect completed work as indicated in the contract
schedule. Generally, a liability of 10% of the most recent
customer billings on work in process contracts is reflected as
deferred revenue. In certain instances, the deferred revenue
may be greater or less than the 10% noted above. The liability
at September 30, 1999 is $35,696.
Note 6 - Reserve for Warranties
- -------------------------------
The Company records a reserve for warranties equal to
approximately 1% of the contract amount. The warranty period
for completed work is six months. The reserve balance at
September 30, 1999 is $5,400.
Note 7 - Rent Expense
- ---------------------
The Company leases its office facilities, located in Gibbsboro,
New Jersey, from Brandywine Realty Trust. The security deposit
in the amount of $1,584 is being held by the landlord. This
deposit will be refunded upon termination of the lease. On
January 13, 1997, the Company agreed to an amendment of its
current lease. The square feet increased from 5,014 to 6,584.
Minimum rents due under the lease are as follows:
January 1, 1999 to June 30, 1999 $ 42,025
June 30, 1999 - May 31, 2000 95,400
Note 8 - Lease Expense - Auto
- -----------------------------
The Company leases a 1997 Lexus Series LS400 from Lexus
Financial Services. The lease commenced on May 26, 1997, and
extends for a four year period with monthly payments of
$789.
Note 9 - Equipment Rental
- -------------------------
The Company leases a Canon NP6230 copier from Canon Financial
Services. The lease commenced on October 10, 1997, and extends
for a three year period with monthly payments of $277.
Note 10 - Stock Purchase Agreement with Byron Preiss Multimedia
- ---------------------------------------------------------------
On March 21, 1997, Mr. Andrew Gardner (Sole Shareholder)
entered into a stock purchase agreement ("Purchase Agreement")
with Byron Preiss Multimedia Company, Inc. ("BPMC"), providing
for the sale of Dolphin, Inc. Under the terms of the purchase
agreement, BPMC purchased all the outstanding capital stock of
Dolphin, Inc., which consisted of 100 shares of common stock,
without par value. On March 21, 1997, the transaction was
completed and Mr. Gardner received $500,000 in cash, a
convertible note in the principal amount of $1,750,000 and
395,947 shares of unregistered BPMC common stock. BPMC
defaulted on its note to Mr. Gardner and, pursuant to a stock
pledge agreement securing BPMC's note to Mr. Gardner,
effective June 14, 1999, the ownership of Dolphin, Inc.
reverted back to Mr. Gardner.
Note 11 - Professional Fees
- ---------------------------
The fees in the amount of $70,700 are extraordinary expenses
and are not a part of the Company's normal operations. These
fees occurred as a result of Byron Preiss Multimedia Company
defaulting on their obligation to pay Mr. Gardner for
purchasing the Dolphin, Inc. stock.
Note 12 - Credit Line
- ---------------------
The Company maintains a $200,000 line of credit secured by
personal guarantee of Andrew and Tracy Gardner. The amount
outstanding under the line of credit at September 30, 1999 was
- -0-. The rate of interest on the credit line is prime plus
1%.
Note 13 - Risk Concentrations
- -----------------------------
The Company maintains its cash in bank accounts which, at
times may exceed federally insured limits. The Company has
not experienced any loss on such amounts. As of September 30,
1999, the company's uninsured cash balances totalled $-0-.
The Company grants credit, generally without collateral to its
customers which are located primarily in the eastern United
States. Management believes that its contract acceptance,
billing, and collection policies are adequate to minimize
potential credit risk.
Note 14 - Income taxes
- ----------------------
The deferred tax assets recognized for deductible temporary differences
were as follows:
Accounts payable $ 13,412
Accrued expenses 134,775
Deferred revenue 35,596
Reserve for warranties 5,400
Other 541
$ 189,724
At September 30, 1999 the deferred tax liabilities for taxable
temporary differences were as follows:
Accounts receivable $ 443,905
Unbilled accounts receivable 50,650
Prepaid expenses 12,370
$ 506,925
Income tax expense consists of the following components:
Current income tax expense $ 40,891
Deferred income tax expense (44,616)
$ (3,725)
PRO FORMA FINANCIAL INFORMATION
- -------------------------------
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma consolidated statement of income
for the year ended December 31, 1998 reflects the historical
accounts of The American Education Corporation ("AEC" or "the
Company") for that period, adjusted giving effect to the
acquisition, by AEC of Dolphin, Inc. as if the event had occurred on
the first day of the period presented. The following unaudited pro
forma consolidated statement of income for the nine months ended
September 30, 1999 reflects the historical accounts of the Company
for that period, adjusted giving effect to the acquisition, as if
the event had occurred on the first day of the period presented. The
following unaudited pro forma consolidated balance sheet as of
September 30, 1999 reflects the historical accounts of the Company
as of that date as adjusted to give pro forma effect to the
acquisition, as if the event had occurred on September 30, 1999.
The unaudited pro forma consolidated financial data and related
notes should be read in conjunction with the financial statements
and financial information pertaining to the Company and Dolphin,
Inc. included elsewhere herein and documents previously filed with
the Securities and Exchange Commission by the Company. The Company
believes that the assumptions used in the following statements
provide a reasonable basis on which to present the unaudited pro
forma financial data. The unaudited pro forma consolidated financial
data are provided for informational purposes only and should not be
construed to be indicative of the Company's financial condition,
results of operations or covenant compliance had the acquisition
transaction described above been consummated on the dates assumed,
and are not intended to project the Company's financial condition on
any future date or its results of operations for any future period.
UNAUDITED PRO FORMA CONSOLIDATED BLANCE SHEETS
AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Historical
-----------------------
The American
Education Dolphin Pro Forma Pro Forma
Corporation Inc. Adjustments Consolidated
------------ -------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash $ 1,143,484 $106,241 $ (252,000)(a)$ 997,725
Accounts receivable 2,132,332 494,555 2,626,887
Inventories 185,308 - 185,308
Prepaid expenses
and deposits 417,319 12,370 429,689
------------ --------- ------------ -----------
3,878,443 613,166 (252,000) 4,239,609
Property and equipment,
at cost 690,299 476,598 1,166,897
Less accumulated
Depreciation and
Amortization (263,528) (336,571) (600,099)
------------ --------- ------------- ----------
Net property and
Equipment 426,771 140,027 566,798
Other assets:
Capitalized software
costs, net of
amortization 1,685,969 - 1,685,969
Goodwill, net of
accumulated
amortization 986,416 - 1,401,166 (a) 2,387,582
Other 21,036 1,584 22,620
Deferred income
Taxes 313,994 - 313,994
------------- ---------- --------------- -----------
Total other assets 3,007,415 1,584 1,401,166 4,410,165
------------- ---------- --------------- -----------
Total Assets $ 7,312,629 $ 754,777 $ 1,149,166 $ 9,216,572
============= ========== =============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
trade $ 365,024 $ 13,412 $ $ 378,436
Accrued liabilities 678,344 134,775 813,119
Accounts Payable -
affiliate 95,216 - 95,216
Foreign income taxes
payable 86,428 - 86,428
Notes payable and
current portion of
long term debt 129,749 - 129,749
Income taxes payable 40,627 166,760 207,387
Other current
liabilities - 40,996 40,996
------------- ---------- --------------- -----------
Total current
liabilities 1,395,388 355,943 - 1,751,331
Long-term debt 137,479 - 1,500,000(a) 1,637,479
Other liabilities 6,450 - 6,450
------------- ---------- --------------- -----------
Total liabilities 1,539,317 355,943 1,500,000 3,395,260
Commitments and contingencies
Stockholders' Equity
Common Stock 342,331 1,000 879 (a) 343,210
(1,000)(b)
Additional paid-in
capital 6,347,971 11,587 47,121 (a) 6,395,092
(11,587)(b)
Retained Earnings/
(Deficit) (1,881,976) 391,849 (391,849)(b) (1,881,976)
Year to date
earnings 964,986 (5,602) 5,602 (b) 964,986
------------- ---------- --------------- -----------
Total stockholders'
equity 5,773,312 398,834 (350,834) 5,821,312
------------- ---------- --------------- -----------
Total liabilities and
stockholders'
equity $ 7,312,629 $ 754,777 $ 1,149,166 $ 9,216,572
============= ========== =============== ===========
</TABLE>
See notes to Unaudited Pro Forma Consolidated Balance Sheet.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED September 30, 1999
(unaudited)
<TABLE>
<CAPTION>
Historical
-----------------------
The American
Education Dolphin Pro Forma Pro Forma
Corporation Inc. Adjustments Consolidated
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net Sales $ 6,491,095 $1,557,290 $ - $ 8,048,385
Cost of goods sold 711,419 1,080,173 - 1,791,592
------------ ---------- ------------ ------------
Gross Profit 5,779,676 477,117 - 6,256,793
Operating Expenses 4,218,465 416,107 69,778 (a) 4,704,350
----------- ---------- ------------ ------------
Operating income 1,561,211 61,010 (69,778) 1,552,443
Other income (expense) (3,442) (70,337) (95,625)(b) (169,404)
------------ --------- ------------ -------------
Net income before
taxes 1,557,769 (9,327) (165,403) 1,383,039
Income taxes 592,783 (3,725) (38,250)(c) 550,808
------------ --------- ------------ -------------
Net income $ 964,986 $ (5,602) $(127,153) $ 832,231
============ ========= ============ =============
Basic 13,624,217 35,148 13,659,365
Earnings per share $ 0.071 $ 0.061
============ ============
Diluted 14,327,615 35,148 14,362,763
Earnings per share $ 0.067 $ 0.058
============ ============
</TABLE>
See notes to Unaudited Pro Forma Consolidated Statements of Income
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Historical
-----------------------
The American
Education Dolphin Pro Forma Pro Forma
Corporation Inc. Adjustments Consolidated
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net Sales $ 6,022,121 $2,278,315 $ - $ 8,300,436
Cost of goods sold 712,922 1,497,775 - 2,210,697
------------ -------- ------------ ------------
Gross Profit 5,309,199 780,540 - 6,089,739
Operating Expenses 3,592,543 490,398 93,038 (a) 4,175,979
------------ -------- ------------ ------------
Operating income 1,716,656 290,142 (93,038) 1,913,760
Other income (expense) (8,701) (120,213) (127,500)(b) (256,414)
------------ --------- ------------ -------------
Net income before
taxes 1,707,955 169,929 (220,538) 1,657,346
Income taxes 725,644 72,930 (51,000)(c) 747,574
------------- --------- ----------- -------------
Net income $ 982,311 $ 96,999 $(169,538) $ 909,772
============ ========= ============ =============
Basic 12,626,000 35,148 12,661,148
Earnings per share $ 0.078 $ 0.072
============ ============
Diluted 13,615,784 35,148 13,650,932
Earnings per share $ 0.072 $ 0.067
============ ============
</TABLE>
See notes to Unaudited Pro Forma Consolidated Statements of Income
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(a) Represents the amortization over an assumed useful life of 15
years, of the goodwill resulting from the acquisition of Dolphin,
Inc.
(b) Represents interest expense on the bank debt at 8.5%.
(c) Represents the tax effect of the interest deduction.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(a) Represents the preliminary allocation of the purchase price of
the Dolphin, Inc. acquisition based on the estimated fair value of
the net assets acquired. The estimated purchase price allocation
consists of the following:
Consideration: Cash $ 1,752,000
Common stock 48,000
-------------
Total $ 1,800,000
Less: Estimated fair
value tangible net
assets acquired $ 398,834
-------------
Excess of purchase
price over fair
value of net tangible
assets acquired $ 1,401,166
-------------
It is assumed that $1,500,000 is borrowed from a financial institution
and the remainder of the cash is from the Company's operating accounts.
Acquisition expenses are assumed to be immaterial to this
transaction.
There are no intercompany transactions to be eliminated in the pro
forma financial statements.
(b) To eliminate the equity acquired.
Exhibit 23.1
- ------------
CONSENT OF INDEPENDENT AUDITORS
As independent public accountants, we hereby consent to the
incorporation by reference of our reports, included in this Form 8-
K/A, into The American Education Corporation previously filed
Form S-8 Registration Statement file No. 333-89583.
James F. Leone & Co.
Haddonfield, New Jersey
March 8, 2000
Signatures
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
The American Education Corporation
Date: March 8, 2000 By: Jeffrey E. Butler
---------------------------
Jeffrey E. Butler, Sr.
Chairman of the Board of
Directors
President and Chief Executive
Officer
