10KSB 1 dec2001-10k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 -------------------- Commission File Number: 000-25947 STANFIELD EDUCATIONAL ALTERNATIVES, INC. ---------------------------------------------- (Name of Small Business Issuer in its Charter) Formerly Innovative Technology Systems, Inc. FLORIDA 65-0386286 ------------------------------- ------------------- (State or Other Jurisdiction of IRS Employer Incorporation or Organization) Identification No.) 1557 Cesery Boulevard, Jacksonville, FL 32211 --------------------------------------- -------------- (Address of Principal Executive Offices) (Zip Code) 904 743 9094 --------------------------- (Issuer's Telephone Number) Securities registered under Section 12(b) of the Exchange Act: NONE Securities registered under Section 12(g) of the Exchange Act: Common Stock, no par value Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer is a developmental stage company, and as such has yet to generate substantial revenues. As of December 31, 2001, the issuer had 117,955 shares of Common Stock outstanding. Documents incorporated by reference: NONE PART I This Annual Report on Form 10-KSB contains forward-looking statements that are not statements of historical fact. Forward-looking statements by their nature involve substantial risks and uncertainties, and actual results may differ materially from such statements. These forward-looking statements are based on the Company's expectations and are subject to a number of risks and uncertainties, including but not limited to, those risks associated with economic conditions generally and the economy in those areas where the Company has or expects to have assets and operations; risks relating to changes in interest rates and in the availability, cost and terms of financing; risks related to the performance of financial markets; risks related to changes in domestic and foreign laws, regulations and taxes; risks associated with future profitability; and other factors discussed elsewhere in this report. Item 1. Description of Business Stanfield Educational Alternatives, Inc. (formerly known as Innovative Technology Systems, Inc.("Innovative")) (the "Company") is presently a development stage company. In fiscal year 1999 the company was successful in concluding the purchase of a business through an exchange of capital stock which has resulted in the Company entering into the education business. Prior to the purchase of the educational business by the Company, on November 11, 1999, Larry Stanfield, the majority shareholder of Stanfield Educational Alternatives, Inc. ("Stanfield") (which, as a result of a name swap with Innovative, is now known as Innovative Technology Systems, Inc.), entered into an agreement with John Bylsma, the majority shareholder of Innovative Technologies, Inc. (which, as a result of a name swap, is now known as Stanfield Educational Alternatives, Inc.), to acquire his (Mr. Bylsma's) 4,473,000 control shares of Innovative Technologies Inc. As a result of this transaction, Mr. Stanfield controlled a majority of the shares, as well as a majority of the shares of Stanfield. On December 10, 1999, Innovative Technology Systems, Inc. entered into an agreement with the majority shareholders of Stanfield Educational Alternatives, Inc. to purchase one hundred (100%) percent of the issued and outstanding shares in a tax- free exchange of shares. The share agreement allowed Stanfield Educational Alternatives' shareholders to receive 1 share of Innovative Technology Systems, Inc. common stock in exchange for 2 shares of Stanfield's common stock. A copy of this agreement has previously filed been filed with the Commission on December 16, 1999 on Form 8-K. On December 30, 1999, the Company entered into an agreement with The National Children's Reading Foundation to purchase intellectual properties and certain fixed assets at fair market value. Lawrence W. Stanfield, CEO and President of the Company, is the sole shareholder of The National Children's Reading Foundation. On January 12, 2000, Stanfield Educational Alternatives, Inc. and Innovative Technology Systems, Inc. swapped names, as is reflected in the 8-K filed on December 16, 1999, which resulted in the registrant now being known as "Stanfield Educational Alternatives, Inc." Presently, Innovative is a wholly owned subsidiary of Stanfield. On April 24, 2000 the Company opened its first corporate Ed-vancement center, and had planned to open two additional centers in the fall of 2000. However, as of December 31, 2001 these plans have been abandoned and the Corporate center has been closed. The Company is an educational corporation and franchiser of the Company Ed-vancement Centers, a network that provides a comprehensive range of educational and tutorial services to individuals of all ages. The Company also develops and publishes a variety of specialized educational programs including a computer global Internet educational campus in various languages. The Company develops a variety of educational programs for children of all ages for both video and television production. The Company's principal and proprietary products include the Easy Reader I System (for students in grades 1-3), the Easy Reader II System (for students in grades 4-6) and the Sound Factory System (a phonics program for grades 1-9). In addition, the Company will use a variety of commercially available educational products and services to create full service educational centers that can be utilized by clients from grade school through adulthood. The Company's investment in intellectual properties extends beyond programs, services and textbooks to the proprietary characters that populate them. Young students will enjoy the adventures of Jumping Monkey, Blue Fish, Funny Airplane and a host of other copyrighted and trademarked characters. The K-12 education market, the primary (but by no means exclusive) focus of the Company's efforts, is the largest segment of the education industry with approximately $470 billion spent annually. Despite that size, many analysts recognize it as the most problematic for investors because there are so few investment opportunities in this highly bureaucratic and inefficient (less than $0.50 of every public school dollar is spent in the classroom) sector. Management believes increased accountability and parental involvement will create significant demand for the kind of supplemental tutoring for kids that the Company was created to deliver. The Company, even though it is in development stage, is based upon the two and half decades of research and development of its founder, Lawrence W. Stanfield, and has patterned its business model after the successful franchisers such as those listed in the following paragraph entitled "Competition." Unlike those companies, which only deliver commercially available courseware, the Company utilizes a unique, "proprietary" learning system that is child friendly and populated with copyrighted animated characters and an innovative Internet based diagnostic tool. It is the Company's intent to compete at the franchise level with superior products, innovative technology and an initial tight marketing focus on learning disabilities. The Company also enjoys a proprietary product that is readily adaptable to Internet delivery and is thus potentially scalable to mass audience. At the corporate level, the Company believes it can compete successfully in the sale of franchises due to the enormous demand. 2 The Company's focus in 2000 was to develop and utilize the Company's proprietary products by opening corporate Ed-vancement Centers and the sale of franchised Ed-vancement Centers. The classic "big investments opprotunity" is a company that has a solution to a problem. The more significant the problem, the larger the investment potential and this is an enormous problem as of today. The United States currently spends $740 billion per year on education, more than we spend on national defense, yet: * 43% of our forth grades cannot pass a basic reading test; * Nearly half of all high school graduates have not mastered eventh grade arithmetic; * Approximately 50% of all students entering the California State University system are not ready for college level English and math; and * 42 million adults in this nation are functionally illiterate. In the U.S. knowledge-based economy, there no bigger problem than the need for a better-educated populace, yet surprisingly, there are few vehicles for investors to participate in this potential. Against this backdrop is a new work culture of a lifetime of learning, representing a huge secular trend of workers pursuing what are in landscape with lots of vendors and no dominant players, which in turn creates opportunities for branding, consolidation and economies of scale. The Company was formed to commercially provide an alternative learning environment utilizing pioneering work in th field of educating children and adults, especially those with learning disabilities, by Lawrence W. Stanfield, MS. Using proprietary courseware and an innovative Internet based diagnostic system called "SID," the Company had developed a uniform tutoring model that can be used anywhere in the world. More importantly, it is a model that has raised the reading comprehension of seventy-five percent of students by two grade levels in thirty-six hours of instruction and it is a model that can be adapted to emerging distance learning technologies such as the Internet. The Company is in the business of providing educational services using a combination of proprietary and commercially available materials to offer the widest possible range of tutorial services. The Company has also begun to develop a program which it will license the Stanfield Reading Program for use to students of subscribing private schools. This will include a yearly licensing fee and the purchase of all training materials from the corporation. Market Environment ------------------ The Company plans to utilize a national and local marketing/advertising public relations firm. The Company has registered a domain name and has plans to launch a website to be accessed at www.helpingkids.com. ------------------- Based on the Company's research the competition appears to be a fragmented landscape from "mom and pop" consultants to a handful of nationally known educational service companies. The Company's major competitors appear to be: Huntington Learning Centers, Kaplan, Kumon USA and Sylvan Learning Systems. Government Regulation --------------------- The sales of franchises are regulated by various state authorities as well as the Federal Trade Commission (the "FTC"). The FTC requires that franchisors make extensive disclosure to prospective franchisees but does not require registration. A number of states require registration and prior approval of the franchise-offering document. In addition, several states have "franchise relationship laws" or "business opportunity laws" that limit the ability of a franchisor to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. While the Company believes its franchising operations will not be materially adversely affected by such existing regulation, the Company cannot predict the effect of any future legislation or regulation. Trademarks and Copyrights ------------------------- The Company has applied for federal trademark registration for the following items: * Stanfield Educational Alternatives, Inc. * Stanfield Ed-vancement Centers * Company logo with name * Stanfield Interactive Database * SID 3 * Easy Reader System I * Easy Reader System II * Sound Factory System * Jumping Monkey * Blue Fish * Funny Airplane * Bookworm In addition, the Company has applied for copyright protection for all 71 of its characters that are utilized throughout the proprietary, educational materials. Employees --------- As of December 31, 2001, the Company had one (1) employee. This employee is considered full-time and is not represented by a union. The Company believes its relationship with its employee to be good. Environmental Laws ------------------ The Company is in compliance with all environmental laws. Future compliance with environmental laws is not expected to have a material adverse effect on the business. Item 2. Properties The Company was in default of its previous lease agreement and in fact was evicted from its previous offices. Currently, the Company shares office space with its President, but does not pay rent at that location. Item 3. Legal Proceedings Due to the financial difficulties, the Company defaulted on a number of debt and lease obligations. The Company was evicted from its premises and several judgements totaling approximately $300,000 were issued against the Company. The Company is currently trying to resolve these obligations through settlements. However, there is no assurance that the Company will be able to settle in terms agreeable to the Company and if it does not do so, this will have a material adverse affect on the ability of the Company to operate properly in the future. Item 4. Submission of Matters to a Vote of Security Holders On January 22, 2001 , by the holders of a majority of the outstanding Common Stock of the Company and the Board of Directors, the Company affected the following actions: a) A reverse stock split of its Common Stock took place in February 2001. The Company's Information Statement on Schedule 14C was filed with the Securities and Exchange Commission on February 5, 2001. b) The Articles of Incorporation were amended to authorize 15,000,000 shares of Preferred Stock. The preferences of the Preferred Stock were set out by the Board. The issuance of Preferred Stock was authorized in three different series as follows: (i) The Board of Directors designed 2,000,000 shares of Preferred Stock to be authorized and issued in a private placement offering as "Series 2001 Convertible Preferred Stock." In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the corporation, the holders of shares of the Series 2001 Convertible Preferred Stock then outstanding shall be entitled to be paid, out of the assets of the corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any payment shall be made in respect of the corporation's Common Stock. The shares of Series 2001 Convertible Preferred Stock shall have no voting rights with regard to the election of directors or as to other matters except those affecting the class. Each snare of Series 2001 Convertible Preferred Stock may, at the option of the holder, be converted into fully paid and non-assessable shares of Common Stock of the corporation at any time after twelve (12) months after the issuance of such shares. (ii) The Board of Directors designed 5,593,000 shares of Preferred Stock to be authorized and issued in exchange for a like number of Common Shares, to various shareholders in consideration for the waiver of certain contractual conditions between the Company and such shareholders, as well as other contractual agreements between various of the shareholders, as "Series 2001A Convertible Preferred Stock." Each share of Series 2001 A Preferred Convertible Stock entitles the holder thereof to one vote, either in person or by proxy, at meetings of shareholders, and such vote shall be equal 4 to the voting rights of the Common Stock and shall be counted with the Common Stock toward the election of directors or such other action as the class of Common Stock shall be entitled. The holders are not permitted to vote their shares cumulatively. In the event that the Company shall at any time combine the outstanding Common Stock into a smaller number of shares, such action shall have no effect upon the conversion ratio or the Series 2001 A Convertible Preferred Stock, which shall always be on a one share for one share basis. Each share of Series 2001A Convertible Preferred Stock may, at the option of the holder, be converted into fully paid and non-assessable shares of Common Stock of the corporation, on a one for one basis, at any time after February 1, 2002. (iii) The Board issued 5,643,175 shares of Series 2001B Convertible Preferred Stock, which carries the following preferences: The shares of Series 2001B Convertible Preferred Stock shall have no voting rights with regard to the election of directors or as to other matters except those affecting the class. In the event that the corporation shall at any time combine the outstanding Common Stock into a smaller number of shares, such action shall have no effect upon the conversion ratio of the Series 2001B Convertible Preferred Stock, which shall always be on a one share for one share basis. Each share of Series 2001B Convertible Preferred Stock may, at the option of the holder, be converted into fully paid and non-assessable shares of common stock of the corporation, on a one for one basis, at any time after twelve months from the date of execution of the agreement between the Company and Coral Ridge, Inc. PART II ------- Item 5. Market for Common Equity and Related Stockholder Matters The Company is listed on the Over-the-Counter Electronic Pink Sheets interdealer trading system. The Company's trading symbol is SEAI. No dividends were declared on the Company's Common Stock during the year ended December 31, 2001, and the Company does not anticipate paying dividends in the future. The high and low closing inter-dealer sales prices for each quarter of the last fiscal year are as follows:
2001 --------------------- High Low 1st Qtr 7.50 1.3125 2nd Qtr 1.38 0.10 3rd qtr 0.90 0.07 4th qtr 0.10 0.07
As of December 31, 2001, the number of shareholders of record was 386. Item 8. Management's Discussion and Analysis or Plan of Operations FORWARD LOOKING STATEMENTS -------------------------- All statements contained herein that are not historical facts, including but not limited to, statements regarding the anticipated impact of future capital requirements and future development plans are based on current expectations. These statements are forward looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: amount of revenues earned by the Company's tutorial and teacher training operations; the availability of sufficient capital to finance the Company's business plan on terms satisfactory to the Company; general business and economic conditions; and other risk factors described in the Company's reports filed from time to time with the Commission. The Company wishes to caution readers not to place undue reliance on any such forward looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, 5 as such, speak only as of the date made. Results of Operations --------------------- Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 ---------------------------------------------------------------------- Net Sales for the year ended December 31, 2001 were $9,004 as compared to $36,740 for the year ended December 31, 2000, or a decrease in sales of approximately 75%. This decrease in net sales was due to the Company's facilities closing and ceasing functional operations. Cost of sales in the year 2001 were $0 as opposed to $264 for the year ended December 31, 2000. Operating expenses for 2001 were $574,636 as compared to $2,444,055 for 2000. This decrease (approximately 77%) was due to the Company basically ceasing its operations. Other expenses for the year ended December 31, 2001 were $340,719 as compared to only $14,720 for the year ended December 31, 2000. This increase is due primarily to the impairment of the Company's assets and provisions for loss on non-cancelable leases. The Company's net loss for the year ended December 31, 2001 was $906,351 as compared to $2,422,299 for the year ended December 31, 2000, or a decrease of approximately 63%. This decrease in net loss was primarily due to the decrease in operating expenses as referenced above. As a result of the foregoing, for the year ended December 31, 2001, the Company had a loss per share of $7.68 as compared to a loss per share of $22.48 for the year ended December 31, 2000, on both a basic and fully diluted basis. No conversion has been assumed as such conversion would have an antidilutive effect on diluted loss per common share amounts. Once again, the Company attributes the decrease in loss per share to the decrease in the Company's operating expenses. Liquidity and Capital Resources ------------------------------- On December 31, 2001, the Company had a working capital deficit of approximately $1,086,353. Since its inception, the Company has continued to sustain losses. The Company's operations since inception, have been funded by the sale of common and preferred stock. These funds have been used for working capital and capital expenditures and other corporate purchases. The Company has had losses of $3,562,618 since inception. During the year ended December 31, 2001, the Company experienced a closing of its sole operating center and a reduction in working capital. The Company is seeking financing through equity financing. There can be no assurance that the Company will be able to obtain funding terms acceptable to the Company. These factors indicate that the Company may not be able to continue, as a going concern. Recent Accounting Pronouncements -------------------------------- SFAS No. 141, "Business Combinations", establishes financial accounting and reporting standards for business combinations and supercedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Pre-acquisition Contingencies of Purchased Enterprises". All business combinations in the scope of SFAS No. 141 are to be accounted for using the purchase method of accounting. Adoption of SFAS No. 141 is not expected to have a material effect on the Company, inasmuch as the Company has historically not participated in any business combinations. SFAS No. 142, "Goodwill and Other Intangible Assets", establishes financial accounting and reporting standards for acquired goodwill and other intangible assets and supercedes APB Opinion No. 17, "Intangible Assets". SFAS No. 142 establishes standards as to how intangible assets that are acquired (but not acquired in a business combination) should be accounted for in financial statements upon their acquisition. In addition, SFAS No.142 establishes standards how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Adoption of SFAS No. 142 is not expected to have a material effect on the Company, inasmuch as the Company has historically not had a material amount of intangible assets and no goodwill recorded in the financial statements. 6 Item 7. Financial Statements STANFIELD EDUCATIONAL ALTERNATIVES, INC. (A Development Stage Company) Table of Contents Independent Auditors' Report..................................... F-1 Financial Statements: Balance Sheets................................................ F-2 Statements of Operations...................................... F-3 Statements of Stockholders' Equity............................ F-4 Statements of Cash Flows...................................... F-5 Notes to Financial Statements.................................... F-6 F-1 Independent Auditors' Report ---------------------------- To the Stockholders and Board of Directors of Stanfield Educational Alternatives, Inc.: We have audited the accompanying balance sheets of Stanfield Educational Alternatives, Inc. (a development stage company) (the "Company") as of December 31, 2001 and 2000, and the related statements of operations, stockholders' equity, and cash flows for the years then ended and for the period March 23, 1999 (inception) to December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stanfield Educational Alternatives, Inc. as of December 31, 2001 and 2000 and the results of its operations and cash flows for the years then ended, and for the period March 23, 1999 (inception) to December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1 and 10 to the financial statements, the Company's net loss during the development period and the need to obtain substantial additional funding to meet its obligations and complete its development raises substantial doubt about the entity's ability to continue as a going concern. Management's plans and intentions with regard to these matters are discussed in Note 10. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /S/ TEDDER, JAMES, WORDEN, & ASSOCIATES, P.A. April 17, 2002 Orlando, Florida F-2 STANFIELD EDUCATIONAL ALTERNATIVES, INC. (A Development Stage Company) Balance Sheets December 31, 2001 and 2000
2001 2000 ----------- ----------- Assets ------ Current assets: Cash $ - - Accounts receivable (net of allowance for doubtful accounts of $0 and $12,728 in 2001 and 2000, respectively) - 5,105 ----------- ----------- Total current assets - 5,105 Property and equipment, net 34,921 218,412 Intangible assets, net 239,393 319,263 Other assets - 46,632 ----------- ----------- Total assets $ 274,314 589,412 =========== =========== Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 211,687 131,492 Bank overdraft - 11,166 Accrued expenses 279,619 158,646 Due to related parties 368,581 41,330 Notes payable 226,466 201,466 Total current liabilities 1,086,353 544,100 Stockholders' equity: Series 2001 convertible preferred stock 49,000 - Series 2001 A convertible preferred stock - - Series 2001 B convertible preferred stock - - Common stock 2,701,579 2,701,579 Accumulated deficit (3,562,618) (2,656,267) ----------- ----------- Total stockholders' equity (812,039) 45,312 ----------- ----------- Total liabilities and stockholders' equity $ 274,314 589,412 =========== ===========
See accompanying notes to the financial statements. F-3 STANFIELD EDUCATIONAL ALTERNATIVES, INC. (A Development Stage Company) Statements of Operations
Cumulative for the period from March 23, Year ended Year Ended 1999 (inception) December 31, December 31, through 2001 2000 Dec. 31, 2001 ------------ ------------ --------------- Net sales $ 9,004 36,740 45,744 Cost of sales - 264 264 ------------ ------------ --------------- Net revenue 9,004 36,476 45,480 Operating expenses 574,636 2,444,055 3,251,055 Other expenses: Interest expense 24,770 14,720 41,094 Impairment of assets 90,949 - 90,949 Provision for loss on non- cancelable leases 225,000 - 225,000 ------------ ------------ --------------- Total expense 915,355 2,458,775 3,608,098 ------------ ------------ --------------- Net loss $ (906,351) (2,422,299) (3,562,618) ============ ============ =============== Loss per common share: Basic and diluted $ (7.68) (22.48) ============ ============ Weighed average common shares outstanding: Basic and diluted 117,955 107,772 ============ ============
See accompanying notes to the financial statements. F-4 STANFIELD EDUCATIONAL ALTERNATIVES, INC. (A Development Stage Company) Statements of Stockholders' Equity For the years ended December 31, 2001 and 2000 and the period from May 23, 1999 (Inception) to December 31, 2001
Additional Preferred Stock Common stock Paid in Accumulated Shares Amount Shares Amount Capital deficit Total ----------- ------------ ----------- ----------- ------------ ----------- ----------- Balance March 23, 1999 (inception) - $ - - - - - - Issuance of stock - - 1,510,000 1,510 241,524 - 243,034 Shares issued to reflect re-capitalization of reverse acquisition - - 5,345,000 241,524 (241,524) - - Net loss - - - - - (233,968) (233,968) ----------- ------------ ----------- ----------- ------------ ----------- ----------- Balances at December 31, 1999 - - 6,855,000 243,034 - (233,968) 9,066 Issuance of common stock - - 405,140 403,140 - - 403,140 Issuance of common stock for services - - 2,069,250 2,055,405 - - 2,055,405 Net loss - - - - - (2,422,299) (2,422,299) ----------- ------------ ----------- ----------- ------------ ----------- ----------- Balances at December 31, 2000 - - 9,329,390 2,701,579 - (2,656,267) 45,312 Reverse stock split - - (9,211,435) - - - - Issuance of Series 2001 convertible preferred stock 25,500 49,000 - - - - 49,000 Issuance of Series 2001 A convertible preferred stock 5,603,000 - - - - - - Issuance of Series 2001 B convertible preferred stock 5,643,175 - - - - - - Net loss - - - - - (906,351) (906,351) ----------- ------------ ----------- ----------- ------------ ----------- ----------- Balances at December 31, 2001 11,271,675 $ 49,000 117,955 2,701,579 - (3,562,618) (812,039) =========== ============ =========== =========== ============ =========== ===========
See accompanying notes to the financial statements. F-5 STANFIELD EDUCATIONAL ALTERNATIVES, INC. (A Development Stage Company) Statements of Cash Flows
Cumulative for the period from March 23, Year ended Year Ended 1999 (inception) December 31, December 31, through 2001 2000 Dec. 31, 2001 ------------ ------------ --------------- Cash flows from operating activities: Net loss $ (906,351) $ (2,422,299) $ (3,562,618) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 107,406 135,035 243,537 Loss on impairment of asset 90,949 - 90,949 Provision for loss on non-cancelable leases 225,000 - 225,000 Common stock issued for services - 2,055,405 2,055,405 Due to related parties for services 350,000 - 350,000 Cash provided by changes in: Accounts receivable 5,105 (5,105) - Prepaid expenses - 1,673 - Other assets 46,632 (46,632) - Accounts payable 80,195 106,834 211,687 Bank overdraft (11,166) 11,166 - Accrued expenses (39,021) 132,418 119,625 ------------ ------------ --------------- Net cash used by operating activities (51,251) (31,505) (266,415) Cash flows used by investing activities: Acquisitions of property and equipment - (191,154) (274,453) ------------ ------------ --------------- Cash flows from financing activities: Due to related parties (22,749) (402,270) (380,772) Proceeds from the issuance of preferred stock 49,000 - 49,000 Proceeds from the issuance of capital stock - 403,140 646,174 Proceeds from the issuance of notes payable 25,000 190,426 226,466 ------------ ------------ --------------- Net cash provided by financing activities 51,251 191,296 540,868 ------------ ------------ --------------- Net decrease in cash and cash equivalents - (31,363) - Cash and cash equivalents - beginning of period - 31,363 - ------------ ------------ --------------- Cash and cash equivalents - end of period $ - - - ============ ============ =============== Supplemental disclosure of cash flow information: Cash paid for interest $ - 14,720 15,310 ============ ============ =============== Non-cash activity: Purchase of other assets from related parties $ - - 399,353 ============ ============ =============== Reduction of capital lease obligation upon abandonment of assets $ 65,006 - 65,006 ============ ============ ===============
See accompanying notes to the financial statements. F-6 STANFIELD EDUCATIONAL ALTERNATIVES, INC. (A Development Stage Company) Notes to Financial Statements (1) Summary of Significant Business and Accounting Policies (a) Organization In December 1999, Innovative Technology Systems, Inc. ("Innovative") authorized and entered into an agreement affecting a tax-free exchange in a reorganization pursuant to IRS Code 368(a)(1)(A). Pursuant to the agreement, Innovative exchanged one share of its previously authorized but unissued shares of no par common stock in exchange for two shares of Stanfield Educational Alternatives, Inc.'s (the "Company") common stock. In accordance with the agreement, Innovative acquired all of the issued and outstanding shares of the Company in exchange for shares of Innovative. For accounting purposes, the acquisition has been treated as an acquisition of Innovative Technology Systems, Inc. by the Company and as a re-capitalization ("Reverse Acquisition") of the Company. The financial statements are those of the Company. Pro forma information is not presented, since the combination is a re- capitalization rather than a business combination. During 2000, Innovative Technology Systems, Inc. changed its name to Stanfield Educational Alternatives, Inc. ("Stanfield") and simultaneously the former Stanfield Educational Alternatives, Inc. changed its name to Innovative Technology Systems, Inc. The Company is an educational corporation and franchiser of the Stanfield Ed-vancement Centers, a system that provides a comprehensive range of educational and tutorial services to individuals of all ages. The Company has developed a variety of specialized educational programs, including a computer global Internet educational campus in various languages. The Company has developed a variety of educational programs for children of all ages for both video and television production. The Company is in its development stage and needs substantial additional capital to complete its development and to reach an operating stage. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, and therefore, will recover the reported amount of its assets and satisfy its liabilities on a timely basis in the normal course of its operations. See Note 9 to the financial statements for a discussion of commitments and contingencies and Note 10 to the financial statements for a discussion of management's plans and intentions. (b) Property and Equipment Property and equipment are stated at cost. Depreciation for financial statement purposes is computed using the straight- line method over the estimated useful lives of the individual assets, which range from 3 to 5 years. The Company has reviewed its long-lived assets and intangibles for impairment and has recorded an adjustment to the carrying value of long-lived assets. (c) Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. (d) 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 F-7 STANFIELD EDUCATIONAL ALTERNATIVES, INC. (A Development Stage Company) Notes to Financial Statements (1) Summary of Significant Business and Accounting Policies, Continued (d) Use of Estimates (Contd.) assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (f) Revenue Recognition The Company records revenue as earned when goods or services are provided. (g) Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (h) Loss Per Share Basic loss per common share amounts are based on the weighted average shares outstanding of 117,955 and 107,772 for the years ended December 31, 2001 and 2000, respectively. Diluted loss per common share amounts reflect the potential dilution that could occur if convertible preferred shares are converted into common stock. No conversion is assumed if such conversion would have an antidilutive effect on diluted loss per common share amounts. The weighted average shares outstanding for the year ended December 31, 2000 have been adjusted for the one-for-eighty stock split in 2001. (i) Reclassifications Certain reclassifications have been made in the 2000 financial statements to conform to the 2001 presentation. (2) Leases Operating --------- During 2000 the Company entered into a lease for office and storage space under a non-cancelable operating lease with an original lease term of five years. Lease payments totaled $6,840 per month and increased on a yearly basis. During 2001, the lease was amended to reflect the Company's relocation to a smaller suite within the building. The Company has defaulted on this lease obligation. The lessor has expressed an intention to enforce the terms of the lease, and in December 2001, the Circuit Court of Duval County entered a Final Summary Judgement against the President, individually, for $33,892 for unpaid rent and against the Company for $223,733 for non-cancelable future obligations under the lease. As a result, the Company has included all non-cancelable obligations under this lease in current liabilities and has recorded a provision for loss on these leases of $225,000 at December 31, 2001. Total lease payments made during the year ended December 31, 2001 were $12,247. Capital ------- During the current year, the Company defaulted on a number of leases classified as capital leases. Certain of the assets under these leases have been abandoned or returned to the lessor; others have been maintained by the Company because the lessor has elected to enforce the terms of the lease. For those leases for which assets were abandoned or returned to F-8 STANFIELD EDUCATIONAL ALTERNATIVES, INC. (A Development Stage Company) Notes to Financial Statements (2) Leases, Continued the lessor, the Company has reduced its capital lease obligations by $65,006. For those leases for which assets have been retained, the Company has included the remaining obligations under the leases of $29,849 in accrued expenses. (3) Property and Equipment At December 31, 2001 and 2000, property and equipment consists of the following:
2001 2000 ------------ ------------ Computer software $ 41,201 44,107 Furniture and equipment 20,000 230,346 ------------ ------------ 61,201 274,453 ------------ ------------ Less accumulated depreciation (26,280) (56,041) ------------ ------------ Property and equipment, net $ 34,921 218,412 ------------ ------------
The Company's default on certain capital lease obligations and other events and circumstances in the current year have indicated that the book value of certain long-lived assets may not be recoverable. Management has estimated the impairment to these assets and reduced the asset balances to their estimated net realizable value. The loss on impairment of assets at December 31, 2001 consists of the following: Write off of book value of long-lived assets $ 155,955 Less: reduction of associated capital lease obligations (65,006) ---------- Impairment of assets $ 90,949 Depreciation expense for the years ended December 31, 2001 and 2000 was $27,536 and $55,165, respectively. (4) Intangible Assets At December 31, 2001 and 2000, intangible assets consist of the following:
2001 2000 --------- --------- Writer's consent $ 245 245 Literary properties 15,000 15,000 Intellectual properties 384,108 384,108 --------- --------- 399,353 399,353 Less accumulated amortization (159,960) (80,090) --------- --------- Total other assets $ 239,393 319,263 ========= =========
F-9 STANFIELD EDUCATIONAL ALTERNATIVES, INC. (A Development Stage Company) Notes to Financial Statements (4) Intangible Assets, Continued These assets were purchased from the National Children's Reading Foundation on December 30, 1999. The National Children's Reading Foundation is a not-for-profit company whose shares are held by Lawrence Stanfield, who is a substantial shareholder of Stanfield Educational Alternatives, Inc. These assets are being amortized utilizing the straight-line method over a five-year life. Management reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the opinion of management, no such impairment has occurred. Amortization expense for the years ended December 31, 2001 and 2000 was $79,870 each year. (5) Notes Payable Notes payable at December 31, 2001 and 2000 consist of note agreements with various individuals bearing interest at rates varying from 10% to 12%. Because these notes are in default, the total outstanding balances of $226,466 at December 31, 2001 and $201,466 at December 31, 2000 have been classified as current liabilities. (6) Capitalization (a) Common Stock The Company has authorized the issuance of 50,000,000 shares of common stock, having no par value. In accordance with the agreement and plan of share exchange, the Company acquired all issued and outstanding shares of common stock of the former Stanfield in exchange for shares of the Company. For accounting purposes, the transaction was treated as a recapitalization ("Reverse Acquisition"). On January 19, 2001, the majority shareholders and the Board of Directors approved an eighty-for-one split of the Company's common stock to holders of record on February 21, 2001. (b) Preferred Stock On January 19, 2001, the majority shareholders and the board of directors approved the creation of a class of 15,000,000 shares of preferred stock and the Board authorized the following issuances after the filing of the Articles of Amendment to the Articles of Incorporation: F-10 STANFIELD EDUCATIONAL ALTERNATIVES, INC. (A Development Stage Company) Notes to Financial Statements (6) Capitalization, Continued (b) Preferred Stock, Continued (i) The Board of Directors has designated three different series of preferred stock to be issued to three different groups. Namely, 2,000,000 shares of Series 2001 Convertible Preferred Stock, 5,593,000 shares of Series 2001A Convertible Preferred Stock and 5,643,175 shares of Series 2001B Convertible Preferred Stock. Series 2001 Convertible Preferred Stock was approved to be issued in a private offering as follows: (i) Holders of Series 2001 Convertible Preferred Stock shall receive preference in the event of liquidation, dissolution or winding up of the corporation. Specifically, in the event of liquidation, dissolution or winding up holders of Series 2001 Preferred Stock shall be paid Five Dollars ($5.00) per share for each Preferred Share, plus all declared and unpaid dividends. (ii) Shares of Series 2001 Convertible Preferred Stock shall have no voting rights. (iii) Each share of Series 2001 Convertible Preferred Stock may, at the option of the holder, be converted into common stock of the corporation at any time after twelve months after the issuance of such shares. The conversion ratio per share of the Series 2001 Convertible Preferred Stock shall be either $5.00 per share or 30% below the trading price of the common stock as priced the prior trading day to conversion. This conversion ratio is subject to change in the event of subdivision of common stock or issuance of a stock dividend. At December 31, 2001, 25,500 of these shares were issued and outstanding. Series 2001A Convertible Preferred Stock was approved to be issued by the Board of Directors to various shareholders in exchange for a like number of common shares, as follows: (i) Each share of 2001A Convertible Preferred Stock entitles the holder thereof to one vote, either in person or by proxy, at meetings of shareholders, and such vote shall be equal to the voting rights of the common stock and shall be counted with the common stock toward election of directors or such other action as the class of common stock shall be entitled. F-11 STANFIELD EDUCATIONAL ALTERNATIVES, INC. (A Development Stage Company) Notes to Financial Statements (6) Capitalization, Continued (b) Preferred Stock, Continued (ii) Each share of Series 2001A Convertible Preferred Stock may, at the option of the holder, be converted into shares of common stock on a one for one basis at any time after February 1, 2002. At December 31, 2001, 5,603,000 of these shares were issued and outstanding. Series 2001B Convertible Preferred Stock was approved to be issued by the Board of Directors pursuant to agreements for consulting and investment banking services, to Coral Ridge, Inc. Series 2001B Convertible Preferred Stock carries the following preferences: (i) Shares of Series 2001B Convertible Preferred Stock shall have no voting rights. However, the Company may not (1) alter or change any of the powers, preferences, privileges or rights of Series 2001B Convertible Preferred Stock; (2) create a new class or series of shares having preferences; or (3) amend the provisions of this paragraph without first obtaining the approval by vote or written consent of at least a majority of the outstanding Series 2001B Convertible Preferred Stock, voting separately as a class. (ii) Each share of Series 2001B Convertible Preferred Stock may, at the option of the holder, be converted into fully paid and nonassessable shares of common stock of the corporation on a one for one basis at anytime after twelve months from the date of execution of the agreement between the Company and Coral Ridge, Inc. for consulting and investment banking services. (iii) In the event we should at anytime combine the outstanding common stock into a smaller number of shares, such action will have no effect upon the conversion ratio of the Series 2001B Convertible Preferred Stock. At December 31, 2001, 5,643,175 of these shares were issued and oustanding. (7) Income Tax The Company has no provision for taxes as they have a net operating loss of approximately $3,400,000 that expires in varying times through the year 2016. The total deferred tax asset associated with the net operating loss has been reduced by a valuation allowance to $0 at December 31, 2001, and no net deferred asset has been recorded, as the possibility of utilizing the net operating loss is dependent on the Company achieving profitable operations. F-12 STANFIELD EDUCATIONAL ALTERNATIVES, INC. (A Development Stage Company) Notes to Financial Statements (8) Related Party Transactions The president and principal stockholder and certain employees from time to time make advances to the Company. The advances are non- interest bearing and have been made principally for working capital purposes. No advances are outstanding at December 31, 2001. The Company has an outstanding obligation at December 31, 2001 of $18,581, owned by the president and principal stockholder of the Company. At December 31, 2001, the Company owes a significant shareholder $350,000 arising as part of the Reverse Acquisition transaction. (9) Commitments and Contingencies During the current year, the Company defaulted on a number of debt and lease obligations. These obligations are in various stages of negotiation or litigation. An estimate of the Company's liability related to these obligations has been accrued in the financial statements. All such amounts are included in current liabilities. (10) Going Concern Matters 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. As shown in the financial statements, the Company has incurred cumulative losses of $3,562,618 during its development stage and has classified all of its debt as current for the years ended December 31, 2001 and 2000. These factors among others may dictate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company's continuation as a going concern is dependent upon its ability to obtain additional financing and ultimately to attain profitability. Management anticipates, through a combination of additional debt but primarily equity financing, that the Company will successfully complete the remaining research and development of its technology and determine and implement its overall marketing strategy. However, as of December 31, 2001, the success of achieving the objectives discussed above, as well as the ultimate profitability of the Company's operations once the development stage has ended, cannot be determined. F-13 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The Company has no disagreements with the accountants. PART III Item 9. Directors, Executive Officers Promoters and Control Persons Chief Executive Officer - Lawrence W. Stanfield, MS (54) Lawrence W. Stanfield, MS, is the Company's founder and creator of the instructional materials and methodologies that are the heart of the Company. Mr. Stanfield has been a leader in the educational industry for over three decades. Prior to his current position, Mr. Stanfield has been the President of The National Children's Reading Foundation (a not-for-profit tutorial center) for the past six years. Compliance with Section 16(a) of the Exchange Act Item 10. Executive Compensation The following table sets forth the compensation received by officers.
SUMMARY COMPENSATION TABLE -------------------------- Annual Compensation Long Term Compensation ------------------- ------------------------ Awards Payments ----------- ----------- Restricted Securities Name of Individual Other Annual Stock Underlying/ LTIP and Principal Position Year Salary Bonus Compensation Award(s) Options/SARs Payouts ---------------------- ---- -------- ----- ------------ ---------- ------------ ------- ------------------------------------------------------------------------------------------------------------------------- Lawrence W. Stanfield, 2001 $ - - - - - - CEO 2000 50,394 - - - - - (Since 1/15/93) 1999 66,000 - - - - - Persons (1)(2) 1998 - - - - - - 1997 - - - - - - -------------------------------------------------------------------------------------------------------------------------
7 Item 11. Security Ownership of Certain Beneficial Owners and Management Table 1. Security Ownership of Certain Beneficial Owners
(1) (2) (3) (4) Name of Amount and Nature Percent Title of Beneficial of Beneficial of Class Owner Ownership Class -------- ---------- -------------------- ----------- Common Stock Lawrence W. Stanfield 40,156 34% Series 2001 A Lawrence W. Stanfield 4,703,000 73% Preferred Stock
Table 2. Security Ownership of Management
(1) (2) (3) (4) Name of Amount and Nature Percent Title of Beneficial of Beneficial of Class Owner Ownership Class -------- ---------- -------------------- ----------- Common Stock Lawrence W. Stanfield 40,156 34% Series 2001 A Lawrence W. Stanfield 4,703,000 73% Preferred Stock
Item 12. Certain Relations and Related Transactions The President and principal stockholder and certain employees have made advances to the Company. The advances are non-interest bearing and were made principally for working capital purposes. These advances are included in due to related parties in the accompanying balance sheet set forth under Item 7 herein. Item 13. Exhibits and Reports on Form 8-K ITEMS 1 AND 2. INDEX TO AND DESCRIPTION OF EXHIBITS (a) EXHIBIT No. EXHIBIT NAME (b) Reports on Form 8-K 8 SIGNATURES ---------- Stanfield Educational Alternatives, Inc. By:___/s/Lawrence W. Stanfield___________________ Lawrence W. Stanfield, Chief Executive Officer Date: 5-25-02 9