FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission File #0-11078
THE AMERICAN EDUCATION CORPORATION
(Exact name of registrant as specified in its charter)
Colorado
(State or other jurisdiction of incorporation, or
organization)
84-0838184
(IRS Employer Identification number)
7506 North Broadway Extension, Suite 505
Oklahoma City, OK 73116
(Address of principal executive offices)
(405) 840-6031
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.025 per share
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
YES X NO __
Number of shares of the registrant's common stock
outstanding as of March 31, 1997: 12,170,828
Transitional Small Business Disclosure Format
YES __ NO X
THE AMERICAN EDUCATION CORPORATION
INDEX
Page No.
PART 1 - FINANCIAL INFORMATION
Item 1 Balance Sheets 3
March 31, 1997 and December 31, 1996
Statements of Operations 4
For the Quarter Ended March 31, 1997
and for the Quarter Ended March 31, 1996
Statements of Cash Flows 5
For the Three Months Ended March 31, 1997
and for the Three Months Ended
March 31, 1996
Notes to Interim Financial Statements 6
Item 2 Management's Discussion and Analysis of 8
Financial Conditions and Results of
Operations
PART II - OTHER INFORMATION 11
SIGNATURE PAGE 12
PART 1 - FINANCIAL INFORMATION
THE AMERICAN EDUCATION CORPORATION
BALANCE SHEETS
ASSETS
Current assets:
Cash $ 55,179
Accounts receivable, net of allowance for
uncollectible accounts of $109,177 690,594
Inventories, net of impairment reserve of $9,645 17,625
Prepaid expenses and deposits 13,466
---------
Total current assets 776,864
Property and equipment, at cost 181,383
Less accumulated depreciation and amortization (133,631)
----------
Net property and equipment 47,752
Other assets:
Capitalized software costs, net of accumulated
amortization of $898,903 394,209
Goodwill, net of accumulated amortization
of $212,105 34,695
----------
Total other assets 428,904
-----------
Total Assets $1,253,520
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable trade $ 326,950
Accrued liabilities 332,793
Accounts payable - Affiliate 18,000
Customer Deposits 147,744
===========
Total current liabilities 825,487
Long-term debt 54,250
-----------
Total liabilities 879,737
-----------
Commitments and contingencies -
Stockholders' Equity
Preferred Stock, $.001 par value
Authorized - 50,000,000 shares;
issued and outstanding - none;
liquidation preference - $.02 per share -
Common Stock
Authorized - 15,000,000 shares;
issued and outstanding - 12,170,829 shares 304,271
Additional paid-in capital 5,232,630
Retained earnings (deficit) (5,375,839)
Current year earnings 212,721
------------
Total stockholders' equity 373,783
------------
Total liabilities and stockholders' equity $ 1,253,520
============
The accompanying notes are an integral part of the financial statements.
THE AMERICAN EDUCATION CORPORATION
STATEMENTS OF OPERATIONS
THREE MONTH PERIOD ENDING MARCH 31, 1997 AND 1996
(UNAUDITED)
03/31/97 03/31/96
Net Sales $ 772,741 $ 315,239
Cost of goods sold 87,591 56,628
----------- ----------
Gross profit 685,150 258,611
Operating expenses:
Selling and marketing 174,094 84,719
General and administrative 280,331 165,226
Amortization of capitalized
software costs 19,870 58,840
----------- ---------
Total operating expenses 474,295 308,785
Operating Income 210,855 (50,174)
Other income/(Expense):
Interest and Dividend Income 524 55
Miscellaneous income 3,036 (16,464)
Interest expense (1,693) (7,121)
------------ -----------
Net earnings (loss) before taxes $ 212,722 $ (73,704)
Deferred income taxes 76,580
Valuation allowance - change at (76,580)
beginning of last year ------------ -----------
Net earnings (loss) $ 212,722 $ (73,704)
============ ===========
Weighted average common shares outstanding 10,428,466 8,660,593
Earning (loss) per share $ 0.017 $ (0.009)
Weighted average common shares 13,833,730
outstanding - assuming dilution
Earnings (loss) per share - $ 0.015
assuming dilution
The accoumpanying notes are in integral part of the financial statements.
THE AMERICAN EDUCATION CORPORATION
STATEMENTS OF CASH FLOWS
THREE MONTH ENDED MARCH 31, 1997 AND 1996
31-Mar-97 31-Mar-96
Cash flows from operating activities:
Net Income $ 212,721 $ (73,704)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 39,232 76,887
Reserve for bad debts (3,010) -
Changes in assets and liabilities:
Accounts receivable (279,406) 22,163
Inventories (1,716) 1,534
Prepaid expenses and deposits 18,976 1,114
Accounts payable and accrued liabilities 20,101 (34,426)
Customer deposits (46,736) -
----------- ----------
Net cash used in operating activities (39,838) (6,432)
Cash flow from investing activities:
Purchase of capitalized software costs (92,044) (62,357)
Purchase of property and equipment (6,286) (8,139)
----------- ----------
Net cash used in investing activities (98,330) (70,496)
Cash flows from financing activities:
Proceeds received from issuance of debt - 42,268
Issuance of common stock for cash - 80,000
----------- ----------
Net cash provided by financing activities - 122,268
Net increase (decrease) in cash (138,168) 45,340
Cash at beginning of the period 193,347 56,882
----------- ----------
Cash at end of the period $ 55,179 $ 102,222
=========== ==========
Supplemental Cash Flow Disclosure:
Interest paid $ - $ 5,600
=========== ==========
The accompanying notes are an integral part of the financial statements.
THE AMERICAN EDUCATION CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 1997 AND 1996
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.
1. BASIS OF PRESENTATION
- ------------------------
The interim financial statements at March 31, 1997, and for
the three month periods ended March 31, 1997, and 1996 are
unaudited, but include all adjustments which the Company
considers necessary for a fair presentation. The December
31, 1996, balance sheet was derived from the Company's
audited financial statements.
The accompanying unaudited financial statements are for the
interim periods and do not include all disclosures normally
provided in annual financial statements and should be read
in conjunction with the Company's audited financial
statements included in the Company's Form 10-KSB for the
year ended December 31, 1996. The accompanying unaudited
interim financial statements for the three month period
ended March 31, 1997 is not necessarily indicative of the
results which can be expected for the entire year.
The preparation of the financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
The Company recognizes revenue in accordance with the
American Institute of Certified Public Accountant's
Statement of Position 91-1 on software revenue recognition.
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.
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.
Inventories are stated at the lower of cost (first-in,
first-out), or market.
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.
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 funds or other investments with original
maturities of three months or less.
The Company accounts for income taxes in accordance with
the provisions of SFAS No. 109. The Company has a net
operating loss carryforward. A valuation allowance has been
assessed for the full amount of the related deferred tax
asset.
Shareholder's Equity
- --------------------
In 1996 the Company issued 3,599,963 shares as common stock
in exchange for $243,258 cash and $995,755 of debt
retirement.
During the first quarter of 1996, the Company adopted a new
non-qualified stock option plan. On March 11, 1996 the
company granted options to employees, officers, and
directors, to purchase 1,301,195 shares of common stock at
$.50 per share. The options expire March 11, 1999, or
ninety days after termination of employment. No options
have been exercised and 58,000 have expired due to
termination of employment.
2. COMMITMENTS AND CONTINGENCIES
- --------------------------------
The Company amortizes capitalized software costs over the
product's estimated useful life. Due to inherent
technological changes in the software development industry,
the period over which such capitalized software cost is
being amortized may have to be accelerated.
In October 1996, the Company became a party to litigation
in United States District Court for the District of
Columbia entitled Securities and Exchange Commission,
Plaintiff v. The American Education Corporation, Defendant
(the "Action"). In the Action, the Company admitted that,
in violation of certain provisions of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), it
failed to file, among other things, certain annual and
quarterly reports. The Company voluntarily entered into a
Consent and Undertaking pursuant to which the Court will
issue a Final Judgment of Permanent Injunction requiring
the Company to (i) file all its delinquent Exchange Act
reports and (ii) in the future, timely file all of its
Exchange Act reports. The failure to file any required
report could result in a contempt citation, the assessment
of fines against the Company, or an action by the
Securities and Exchange Commission to deregister
the Company's common stock.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has invested significantly in personnel
additions, the development of new products, and the
acquisition and licensing of new products, to improve the
ability of the organization and its published products to
meet the needs of the marketplace. These changes
were required to update the Company's product offerings.
To finance the business, management has utilized long-term,
subordinated debt from private investment sources,
secured bank revolving credit lines, and accounts
receivable financing sources. Management anticipates
that additional financing will be required to continue
to develop and position the Company for the significant
growth opportunities that exist in the electronic media
for education industry.
The Company has several marketing partnerships that were
entered into in the fiscal 1995 and 1996 periods. Since mid
1995, the Company has been a Compaq/Microsoft Educational
Partner and a Microsoft NT Solutions Partner. These two
relationships provide the Company with significant
advertising and promotional exposure in literature and
various promotions directed to the school market place. On
June 29, 1996, the Company entered into a marketing
agreement with HomeQuest, Inc. to provide a private brand
version of its A+dvanced Learning System? product family
for the home market. HomeQuest is a direct seller of
educational products to the home with approximately 400
marketing consultants. An agreement was entered into
with Davidson & Associates, (a subsidiary of CUC
International [NYSE]) on August 29, 1996, to provide
certain elements of A+dvanced Learning System software
technology and curriculum content to Davidson. In addition
the company entered into verbal agreement with National
School Services, Inc. (NSS) to work with that organization
to convert certain A+dvanced Learning System subject
content areas into Spanish and to license the new Spanish
version in the United States. It is expected that the
formal agreement with National School Products will
be signed during the second quarter of 1997.
The Company views accounts receivable, inventory, and cash
as its principal 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 December 31, 1996,
and March 31, 1997 $50,000 of convertible notes, with a
conversion price per share of $.136, remained outstanding.
The Company's working capital was a deficit $48,623 at
March 31, 1997, an improvement of $154,623 from a deficit
of $203,479 at December 31, 1996. This significant
improvement is associated with higher levels of sales and
collection of sales proceeds during the period.
Additional working capital beyond that available within the
Company has been and may be required to expand operations.
Management has and will consider options available in
providing such funding, including debt financing and
capital enhancement.
These forward-looking statements can generally be identified
as such because the context of the statement will include words
such as the Company "believes," "plans," "intends," "anticipates,"
"expects," or words of similar import. Similarly, statements that
describe the Company's future plans, objectives, estimates, or goals
are also forward-looking statements. Such statements address
future events and conditions concerning capital expenditures,
earnings, litigation, liquidity, capital resources and
accounting matters. Actual results in each case could differ
materially from those currently anticipated in such statements
by reason of factors such as future economic conditions,
including changes in customer demands; future legislative,
regulatory and competitive developments in markets in which the
Company operates; and other circumstances affecting anticipated
revenues and costs.
RESULTS OF OPERATIONS - QUARTER ENDED MARCH 31, 1997
AS COMPARED TO THE QUARTER ENDED MARCH 31, 1996
- ----------------------------------------------------
Net software revenues for the three months ended March 31,
1997, totaled $772,741 compared to net software revenues of
$315,239 for the same period in 1996. This represents an
increase of approximately 145% in 1997. The dramatic increase in
sales is primarily attributed to the acceptance of the
A+dvanced Learning System family of products, following a
lengthy period of development and technical improvement.
Cost of goods sold for the three months ended March 31,
1997, increased by approximately 55%, even though sales
increased by 145%. 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 three months
ended March 31, 1997, were $474,295, compared to $308,785
for the previous year. This represents an increase of
approximately 54%. Selling and marketing costs increased by
approximately 105%, from $84,719 for the three months ended
March 31, 1996 to $174,094 for the current period. The
increase in 1997 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 70% during 1997, from $165,226
to $280,331. This increase is related to higher levels of
product development and technical support during 1996 as a
result of the larger installed base of products for the
Company.
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. Such costs decreased by approximately
76% during the three months ended March 31, 1997 compared to
the same period in 1996, from $7,121 to $1,693, reflecting
the reduced need for such financing as the cash flow of the
Company has improved.
Net earnings for the three months ended March 31, 1997,
improved by approximately 389% as compared to the prior
year. This improvement from a net loss of ($73,704) in
1996 to net earnings of $212,722 in 1997, reflects the
higher sales levels noted above, as well as the improving
gross margins related to concentration of sales in more
profitable markets. Management believes that with network
problems resolved and with the expansion of sales and
marketing efforts through third party organizations and
independent dealers, the Company is now positioned to
develop more dependable sales results from the home and
school education markets.
The Company has been constrained by the lack of adequate
capital and proper financing for the past several years.
As sales of the advanced 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
educational software market 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 the continued
profitable expansion of the business.
THE AMERICAN EDUCATION CORPORATION
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- -------------------------
In October 1996, the Company became a party to litigation
in United States District Court for the District of
Columbia entitled Securities and Exchange Commission,
Plaintiff v. The American Education Corporation, Defendant
(the "Action"). In the Action, the Company admitted that,
in violation of certain provisions of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), it
failed to file, among other things, certain annual and
quarterly reports. The Company voluntarily entered into a
Consent and Undertaking pursuant to which the Court will
issue a Final Judgment of Permanent Injunction requiring
the Company to (i) file all its delinquent Exchange Act
reports and (ii) in the future, timely file all of its
Exchange Act reports. The failure to file any required
report could result in a contempt citation, the assessment
of fines against the Company, or an action by the
Securities and Exchange Commission to deregister the
Company's common stock. As of March 15, 1997 the Company
was current with all filings with the SEC through
the end of fiscal year December 31, 1996.
Item 2. Changes in Securities
- -----------------------------
Summary of 1996 Equity Transactions
Number of Debt
Type of Transaction Shares Issued Cash Conversion
- ------------------- ------------- ---- ----------
Options & Warrants
Exercised 546,517 $243,258
Accrued Compensation 363,377 $7,298
Convertible Notes and
accrued interest payable 2,651,274 $965,460
Notes Payable Converted 15,000 $11,250
Accounts Payable Converted 23,495 $11,747
--------- -------- --------
3,599,963 $243,258 $995,755
========= ======== ========
Item 3. Default Upon Senior Securities
- --------------------------------------
Omitted from this report as inapplicable.
Item 4. Submission of Matters to Vote of Securities Holders
- -----------------------------------------------------------
No matters were submitted to a vote of security holders
during the period.
Item 5. Other Information
- -------------------------
Omitted from this report as inapplicable.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
A. Exhibits
Omitted from this report as inapplicable.
B. Reports on Form 8-K
In November, 1996, the Company filed Form 8-K
describing the pertinent factors associated
with a change in the Company's independent auditing
firm.
SIGNATURES
Pursuant to the requirements of Section 13, or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
The American Education Corporation
May 14, 1997
By: /s/Jeffrey E. Butler,
Chief Executive Officer
Chairman of the Board
Treasurer