FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the Transition Period from ________ to ________
Commission File #0-11078
THE AMERICAN EDUCATION CORPORATION
(Exact name of small business issuer as specified in its charter)
Colorado
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(State or other jurisdiction of incorporation or organization)
84-0838184
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(IRS Employer Identification No.)
7506 North Broadway Extension, Suite 505, Oklahoma City, OK 73116
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(Address of principal executive offices)
(405) 840-6031
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(Issuer's telephone number)
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
Check whether the issuer (1) has 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__
Number of shares of the issuer's common stock outstanding as of November 1,
2003: 14,367,461
Transitional Small Business Disclosure Format YES NO X
THE AMERICAN EDUCATION CORPORATION
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Balance Sheets
September 30, 2003 and December 31, 2002 3
Consolidated Statements of Income
For the Three Months Ended September 30, 2003 4
and for the Three Months Ended September 30, 2002
For the Nine Months Ended September 30, 2003
and for the Nine Months Ended September 30, 2002 5
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2003 6
and for the Nine Months Ended September 30, 2002
Notes to Interim Consolidated Financial
Statements 7
Item 2 Management's Discussion and Analysis
Of Financial Conditions and Results of
Operations 9
PART II - OTHER INFORMATION 13
SIGNATURE PAGE 15
PART I - FINANCIAL INFORMATION
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ITEM 1 - Consolidated Balance Sheets
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30 December 31
2003 2002
------------ -----------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 146,206 $ 74,405
Accounts receivable, net of allowance
for returns and uncollectible accounts
of $225,000 and $102,309 2,855,161 2,001,019
Inventory 46,589 36,444
Prepaid expenses and deposits 163,028 62,758
Deferred tax asset 54,620 54,620
Note receivable from officer 300,000 300,000
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Total current assets 3,565,604 2,529,246
Property and equipment, at cost 1,265,753 1,237,222
Less accumulated depreciation and
amortization (1,021,208) (900,213)
----------- ----------
Net property and equipment 244,545 337,009
Other assets:
Capitalized software costs, net of
accumulated amortization of
$5,267,563 and $4,195,444 4,543,363 4,610,365
Goodwill, net of accumulated
amortization of $369,097 and $369,097 1,840,446 1,840,446
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Total other assets 6,383,809 6,450,811
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Total assets $10,193,958 $9,317,066
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable trade $ 343,492 $ 569,066
Accrued liabilities 1,058,681 1,084,655
Accounts payable - Affiliate -- 60,000
Deferred revenue 682,517 238,080
Notes payable and current portion
of long-term debt 774,943 1,148,701
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Total current liabilities 2,859,633 3,100,502
Other long-term accrued liabilities 220,245 171,555
Deferred income tax liability - Long-term 595,972 206,952
Long-term debt 307,562 26,549
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Total liabilities 3,983,412 3,505,558
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Commitments and contingencies - -
Stockholders' Equity:
Preferred Stock, $.001 par value;
Authorized - 50,000,000 shares-issued
and outstanding-none - -
Common Stock, $.025 par value
Authorized 30,000,000 shares
Issued and outstanding - 14,367,461
shares 359,186 357,874
Additional paid in capital 6,644,600 6,649,240
Treasury stock, at cost, 34,000 shares (19,125) (19,125)
Retained deficit (1,176,481) (1,176,481)
Year-to-date earnings 402,366 -
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Total stockholders' equity 6,210,546 5,811,508
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Total liabilities and stockholders'
equity $10,193,958 $9,317,066
=========== ==========
The accompanying notes are an integral part of the financial statements.
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(unaudited)
2003 2002
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Sales $ 2,290,305 $ 2,377,816
Cost of goods sold 336,706 685,492
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Gross profit 1,953,599 1,692,324
Operating expenses:
Selling and marketing 606,222 631,264
Operations 98,302 102,212
General and administrative 582,007 629,833
Amortization of capitalized software
costs 371,084 287,685
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Total operating expenses 1,657,615 1,650,994
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Operating income 295,984 41,330
Other income (expense):
Interest income -- 1,072
Interest expense (17,682) (21,189)
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Net income before income taxes 278,302 21,213
Current income taxes -- 24,575
Deferred income taxes 160,155 (21,852)
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Net Income $ 118,147 $ 18,490
=========== ===========
Basic 14,367,461 14,314,961
Earnings per share $ 0.008 $ 0.001
Diluted 15,329,630 14,314,961
Earnings per share $ 0.008 $ 0.001
The accompanying notes are an integral part of the financial statements.
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(unaudited)
2003 2002
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Sales $ 6,638,259 $ 7,038,154
Cost of goods sold 1,000,960 1,866,731
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Gross profit 5,637,299 5,171,423
Operating expenses:
Selling and marketing 1,594,872 2,058,922
Operations 294,361 282,346
General and administrative 1,835,927 1,964,325
Amortization of capitalized software costs 1,069,057 781,140
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Total operating expenses 4,794,217 5,086,733
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Operating income 843,082 84,690
Other income (expense):
Interest income 181 5,128
Interest expense (51,876) (73,354)
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Net income before income taxes 791,387 16,464
Current income taxes -- (21,349)
Deferred income taxes 389,021 37,479
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Net Income $ 402,366 $ 334
=========== ===========
Basic 14,356,499 14,303,285
Earnings per share $ 0.028 $ --
Diluted 15,318,668 14,303,285
Earnings per share $ 0.026 $ --
The accompanying notes are an integral part of the financial statements.
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(unaudited)
2003 2002
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Cash flows from operating activities:
Net income $ 402,366 $ 334
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,193,114 930,963
Reserve for bad debts 122,691 15,854
Services rendered for common stock 3,675 8,500
Deferred compensation 48,690 48,690
Other (7,003) 13,180
Changes in assets and liabilities:
Accounts receivable (976,833) (399,955)
Inventories (10,145) 43,656
Prepaid expenses and other (100,270) 60,455
Accounts payable and accrued liabilities (251,548) 415,403
Accounts payable - Affiliate (60,000) 60,000
Deferred revenue 444,437 157,526
Income taxes payable -- (58,250)
Deferred income taxes 389,020 37,508
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Net cash provided by operating activities 1,198,194 1,333,864
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Cash flow from investing activities:
Software development costs capitalized (1,005,117) (1,147,646)
Purchase of property and equipment (28,531) (38,265)
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Net cash used in investing activities (1,033,648) (1,185,911)
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Cash flows from financing activities:
Proceeds received from issuance of debt 300,000 --
Principal payments on notes payable (392,745) (715,569)
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Net cash used in financing activities (92,745) (715,569)
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Net increase (decrease) in cash 71,801 (567,616)
Cash at beginning of the period 74,405 612,052
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Cash at end of the period $ 146,206 $ 44,436
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The accompanying notes are an integral part of the financial statements.
THE AMERICAN EDUCATION CORPORATION
Part I
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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1. Nature of Business:
------------------
The American Education Corporation's ("the Company") business is the
development and marketing of educational software to elementary, middle
and secondary schools, adult literacy centers and vocational, junior and
community colleges. In addition, the Company has two active
subsidiaries, Learning Pathways, Ltd. ("LPL"), Derby, UK, and Dolphin,
Inc. ("Dolphin"), Gibbsboro, NJ. LPL modifies the Company's U.S.
curriculum offering to conform to the UK's educational system and markets
these products directly to UK and other international markets. Dolphin is
a developer of educational software for many of the nation's leading
textbook and electronic publishers.
2. Basis of Presentation:
---------------------
The summary of significant accounting policies of 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.
The Company's consolidated financial statements include the Company and
its wholly-owned subsidiaries. All material intercompany transactions
have been eliminated.
The interim consolidated financial statements at September 30, 2003, and
for the three and nine-month periods ended September 30, 2003 and 2002
are unaudited, but include all adjustments that the Company considers
necessary for a fair presentation. The December 31, 2002 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. They 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, 2002. The accompanying unaudited
interim financial statements for the three and nine-month periods ending
September 30, 2003 are not necessarily indicative of the results that 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, 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.
3. Revenue Recognition:
-------------------
The Company recognizes revenue in accordance with the American Institute
of Certified Public Accountant's Statement of Position 97-2, 98-9 and
modifications thereto on software revenue recognition. Revenue for
software design services at Dolphin is recognized on the percentage-of-
completion method.
4. Capitalized Software Costs:
--------------------------
Capitalized software costs consist of licenses for the rights to produce
and market computer software, salaries and other direct costs incurred in
the production of computer software. Costs incurred in conjunction with
product development are charged to research and development expense until
technological feasibility is established. Thereafter, all software
development costs are capitalized and amortized on a straight-line basis
over the product's estimated economic life of between three and five
years.
5. Goodwill:
--------
Goodwill relates to the acquisitions in 1998 of LPL and in 1999 of
Dolphin. Through 2001, goodwill was amortized with a fifteen-year life.
Beginning January 1, 2002, goodwill is no longer amortized. Impairment
evaluations are made annually and any necessary expense recognized.
6. Inventories:
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Inventories are stated at the lower of cost (first-in, first-out), or
market, and consist of packaging and educational software materials.
7. Property and Equipment:
----------------------
Property and equipment is stated at cost. Depreciation is provided on
the straight-line basis over the estimated useful life of the assets,
which is five years.
8. Statements of Cash Flows:
------------------------
In the Consolidated 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
carrying values of the Company's assets and liabilities approximate fair
value due to their short-term nature.
9. Income Taxes:
------------
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
SFAS 109 requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in
the financial statements or tax returns, determined by using the enacted
tax rates in effect for the year in which the differences are expected to
reverse.
10. Computation of Earnings Per Share:
---------------------------------
The Company has adopted Statement of Financial Accounting Standards No.
128 "Earnings Per Share" ("SFAS 128"). SFAS 128 requires presentation of
basic and diluted earnings per share. Basic earnings per share are
calculated based only upon the weighted average number of common shares
outstanding during the period. Diluted earnings per share are calculated
based upon the weighted average number of common and, where dilutive,
potential common shares outstanding during the period, utilizing the
treasury stock method. Potential common shares include options to
purchase common stock and convertible subordinated debt.
11. Stockholders' Equity:
--------------------
During the quarter ended September 30, 2003 the Board of Directors
approved the issuance of stock options to the outside directors and
employees. On July 31, 2003 each outside director received 12,666
qualified options and 30,000 non-qualified options to purchase the
Company's stock for $.30 per share. Also on July 31, 2003 company
employees were awarded qualified options to purchase 1,184,500 shares
of the Company's stock and non-qualified options to purchase 205,000
shares of the Company's stock for $.30 per share. The employee options
vest over a two year period and expire in 2006. On August 29, 2003,
employees were awarded non-qualified options to purchase 191,500 shares
of the Company's common stock for $.47 per share. These options expire
in 2006.
At September 30, 2003, paid-in capital includes $31,810 of foreign
currency translation adjustments.
12. 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.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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This report contains forward-looking statements. 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 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.
Liquidity and Capital Resources
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As of September 30, 2003 the Company's principal sources of liquidity
included cash and cash equivalents of $146,206, net accounts receivable
of $2,855,161 and inventory of $46,589. The Company's net cash provided
by operating activities during the nine months ended September 30 was
$1,198,194 in 2003 compared to $1,333,864 in 2002. Net cash used in
investing activities for the same period decreased by 12.8% from
$1,185,911 in 2002 to $1,033,648 in 2003, and was comprised primarily
of investment in capitalized software development costs. During the nine
months ended September 30, 2003, debt due to financial institutions was
reduced by $392,745, or 33.4%, reflecting bank indebtness of $782,505 at
September 30, 2003. In April 2003, the Company borrowed $300,000 from
major shareholder affiliates, which is subordinated to the debt owed the
Company's senior lender. The debt is convertible into the Company's
common stock at $.6037 per share. The proceeds from the subordinated debt
were used to reduce accounts payable and accrued liabilities.
At September 30, 2003, the Company had working capital of $705,971
compared to $(571,256) at December 31, 2002. The Company and its lender
recently agreed to extend the maturity of its bank lines of credit until
March, 2004. Therefore, all bank debt under its lines of credit is
classified as current. The Company is continuing to discuss future
borrowing arrangements with its current lender and several other
financing sources.
With the expansion of the Company's product lines, the addition of new
products and improved coverage of certain markets combined with
indicators signaling regional increases in school spending, management
believes that the Company is returning to a pattern of growth similar to
that demonstrated in prior years. Management believes that it can
undertake this expansion with most of the Company's working capital
requirements secured from its operating cash flows. If successful, the
Company should be able to continue to enhance the liquidity of the
business and the overall strength of the Company's balance sheet and
financial position.
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 to secure such funding, including debt
financing and equity capital through the sale of its common stock.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2003
AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2002
- -------------------------------------------------------------
Net sales for the three months ended September 30, 2003 totaled
$2,290,305 compared to $2,377,816 for the same period in 2002. This
represents a decrease of 3.7% over the comparable 2002 quarter and
is attributable to a combination of a substantial increase in orders at
AEC, offset by planned sales decreases at the LPL and Dolphin
subsidiaries. A decline in the subsidiaries' revenues is a result of
downsizing operations and a refocusing of these business units to achieve
a return to profitable operations. AEC's revenue increase over the same
quarter in 2002 is a result of sales increases in geographic areas where
state, federal or local district funds have become available after over a
year of spending delays or deferment as a result of general economic
conditions. Recent market research data for the type of products
offered by the Company are indicating that this trend should continue.
During 2002, it became evident at both LPL and Dolphin that their cost
structures were too high based upon the revenue generated and immediate
prospects for increase in revenues, resulting in losses at both
subsidiaries. At LPL a decision was made to reduce the staff from 24
employees to 7 employees in the last half of 2002. Due to severance and
benefit rules in the UK, the effects of this reduction, along with the
corresponding reduction in benefits and other associated administrative
costs, did not fully impact LPL until after the beginning of 2003. At
Dolphin, changes in subsidiary management were implemented in the third
quarter of 2002 and personnel levels were reduced from 23 to 13
employees. Total cost savings realized from these completed actions
approximated $377,400 during the third quarter of 2003 and $934,400 for
the nine months ended September 30, 2003.
Cost of goods sold as a percentage of sales revenue for the three months
ending September 30, 2003 decreased to 14.7% from 28.8% of net revenues
for the same period in 2002. This major improvement is attributed to a
reduction in cost of goods sold at LPL as a result of lower sales and
discontinuance of the resale of low margin computer hardware and other
products. The decrease at Dolphin is primarily due to the reduction in
personnel costs noted above and a smaller contribution of Dolphin-related
revenues to consolidated corporate net revenues. The Company's principal
product families, A+nyWhere Learning System, registered trademark, and
A+dvanced Learning System, registered trademark, ("A+LS"), provided gross
profit margins of 97% in the third quarter of 2003. Cost of goods sold
represents the actual cost to produce the software products and includes
certain allocated overhead costs.
Total operating expenses, which include selling and marketing, general
and administrative, operations, and amortization of product development
costs, was $1,657,615 for the three months ended September 30, 2003,
compared to $1,650,994 for the same 2002 quarter. As a percentage of
sales revenue, operating expenses increased from 69.4% in 2002 to 72.4%
in 2003. This increase in operating expenses as a percentage of revenues
is primarily due to decreases in general and administrative expense
resulting from fewer employees offset by an increase in amortization of
product development costs. During the second and third quarters of 2003,
the Company made substantial progress in development efforts on revised,
updated and expanded curriculum offerings for its A+nyWhere Learning
System product family as well as a continued investment into A+dvancer,
trademark, the Company's post-secondary testing and online curriculum
offering that was released late in the second quarter of 2003.
The increase in amortization expense is a result of increases in
capitalized development costs that are associated with these essential
investments in the Company's future and competitive position.
As a component of total operating expenses, selling and marketing costs
decreased by 4.0%, from $631,264 for the three months ended September 30,
2002, to $606,222 for the current period. The decrease in the third
quarter 2003 selling expenses is largely attributable to the reductions
in personnel at LPL. General and administrative expenses, including
operations, decreased from $732,045 to $680,309 or by 7.1%. This decrease
is primarily attributable to the decreases in operating costs at LPL
and Dolphin discussed above.
Interest expense was $17,682 for the three months ended September 30,
2003 compared to $21,189 for the same 2002 quarter reflecting the reduced
amount of debt outstanding during the third quarter of 2003. Net income
was $118,147 for the three months ended September 30, 2003, compared to
$18,490 for the same period in 2002, primarily as a result of the
decreases in costs discussed above.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2003
AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2002
- ------------------------------------------------------------
Net sales for the nine months ended September 30, 2003, totaled
$6,638,259 compared to $7,038,154 for the same period in 2002. This
represents a decrease of 5.7% over the comparable 2002 period. This
decrease is attributable to increases in sales at AEC being offset by
planned decreases in sales at LPL and Dolphin as a result of the
restructuring programs discussed in the third quarter analysis above.
The Company has experienced significant growth in its online content
delivery business since the introduction of its client-server online
version of the A+nyWhere Learning System in early 2002 followed by the
Company's browser-based Version 4.0 in the fall of 2002. For example, the
Company signed 49 schools to online instructional services during the
third quarter, an increase of 31% over the end of the prior quarter.
Generally accepted accounting principles require the revenue to be
deferred and recognized ratably over the period of service, accordingly
this increase will not have a significant affect on the Company's
revenues until 2004. Late in the second quarter of 2003, the Company
released A+dvancer, trademark, an online college diagnostic, prescriptive
admissions test and remedial curriculum offering for reading, writing,
mathematics and algebra that is aligned to the College Board's
ACCUPLACER, registered trademark, Online tests. ACCUPLACER Online tests
are widely recognized as the admissions standard for academically
challenged students by many states and institutions. The Company's new
A+dvancer products provide for expanded testing and the online delivery
of highly focused remedial coursework. The Company believes that this
new product offering will continue to provide additional impetus to the
growth of its online business in future periods.
Cost of goods sold as a percentage of sales revenue for the nine months
ending September 30, 2003 decreased to 15.1% compared to 26.5% for the
same period in 2002. This major improvement is attributed to a reduction
in cost of goods sold at LPL as a result of lower sales and
discontinuance of the resale of low margin computer hardware and other
products. The decrease at Dolphin is primarily due to the reduction in
personnel costs noted above and a smaller contribution of Dolphin-related
revenues to consolidated corporate net revenues. The Company's principal
product families, A+dvanced Learning System and the A+nyWhere Learning
System, provided gross profit margins of 96% in the first nine months of
2003.
Total operating expenses, which include selling and marketing, general
and administrative, operations, and amortization of product development
costs, were $4,794,217 for the nine months ended September 30, 2003,
compared to $5,086,733 for the same 2002 fiscal period. As a percentage
of sales revenue, operating expenses remained relatively unchanged
decreasing from 72.3% in 2002 to 72.2% in 2003, but in actual dollars
decreased 5.8%. This decrease in operating expenses results primarily
from decreases in sales and marketing expense resulting from a reduction
in commissions due on direct sales and the cost reductions at the
Company's subsidiaries offset by the increase in amortization of product
development costs.
General and administrative expenses, including operations, decreased from
$2,246,671 to $2,130,288 or 5.2%. This improvement is primarily
attributable to decreases in administrative costs at the Company's
subsidiaries.
Interest expense for the nine months ended September 30, decreased from
$73,354 in 2002 to $51,876 in 2003 reflecting the reduction in debt
levels and interest rates in 2003 compared to the prior year. Net
income increased to $402,366 for the nine months ended September 30,
2003, compared to $334 for the same period in 2002 as a result of the
decreased expenses noted above.
Company management continues to believe that significant future growth
opportunities exist in the school, adult literacy, post secondary and the
home or self-directed education markets on a worldwide basis. These
markets may be accessed by not only the Company's traditional
distribution-based methods of selling and marketing, but also by the
growth and increasing acceptance of electronic learning, or e-learning.
The Company's ongoing investment in content, computer adaptive assessment
tools, programming technology, and server infrastructure should provide a
broad platform to secure new business partners and address the many
opportunities that are believed to be emerging in the educational
technology industry on a global basis. The Company's investment into the
United Kingdom through its acquisition of Learning Pathways, Ltd. in 1998
underscores management's conviction that the Company is engaged in a
global marketplace. In this global market, the Company's English-
language content, which is suitable for both the U.S. and the UK's
instructional systems, will meet the requirements for many countries
where English-language instruction is part of the required coursework.
Management believes that the Company's investment into content,
technology and its online learning business model should provide for
expanded growth opportunities on a worldwide basis in the future.
The Company's future competitive position has been enhanced as a result
of its ongoing investment in personnel, facilities, additional content
and infrastructure as well as its entry into international markets.
The most significant of these investments has been the sustained spending
on the Company's new Java-based A+nyWhere Learning System and A+dvancer,
a post-secondary testing and online curriculum product offering. In its
planning of the future, management believes that the Internet and will
become a principal method for the future online delivery of its product
to its customers. These investments combine to form a stronger overall
corporate foundation that combined with what management believes to be a
new lower cost structure and the development of important new
partnerships provide a favorable, competitive basis for sustained, future
growth and profitability.
ITEM 3 - CONTROLS AND PROCEDURES
- --------------------------------
Within 90 days prior to the filing of this report, the Management of the
Company, including the Chief Executive Officer and the Chief Financial
Officer has evaluated the Company's disclosure controls and procedures.
Based upon this evaluation, management has concluded that the controls
and procedures are designed to ensure that information required to be
disclosed by the issuer in the reports filed or submitted by it under the
Exchange Act are recorded, processed, summarized and reported, within the
time periods specified in the Commission's rules and forms. There have
been no significant changes in internal controls, subsequent to the date
that management, including the Chief Executive Officer and Chief
Financial Officer, completed this evaluation.
THE AMERICAN EDUCATION CORPORATION
PART II - OTHER INFORMATION
- ----------------------------------
Item 1. Legal Proceedings
-----------------
Management knows of no pending or threatened litigation involving the
Company that is considered material to the on-going operations and
viability of the Company.
Item 2. Changes in Securities
---------------------
During the quarter ended September 30, 2003 the Board of Directors
approved the issuance of stock options to the outside directors and
employees. On July 31, 2003 each outside director received 12,666
qualified options and 30,000 non-qualified options to purchase the
Company's stock for $.30 per share. Also on July 31, 2003 company
employees were awarded qualified options to purchase 1,184,500 shares
of the Company's stock and non-qualified options to purchase 205,000
shares of the Company's stock for $.30 per share. The employee options
vest over a two year period and expire in 2006. On August 29, 2003,
company employees were awarded non-qualified options to purchase 191,500
shares of the Company's common stock for $.47 per share. These options
expire in 2006.
Item 3. Default Upon Senior Securities
------------------------------
Omitted from this report as inapplicable.
Item 4. Submission of Matters to Vote of Securities Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
Omitted from this report as inapplicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
The following exhibits have been filed as a part of this report:
Exhibit
No. Description of Exhibits
- ------- -----------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of The
American Education Corporation (incorporated by reference
to the exhibit in the Current Report on Form 8-K filed with
the Securities and Exchange Commission on June 25, 1998)
3.2 Bylaws of The American Education Corporation (incorporated
by reference to the Company's registration statement on
Form S-8 filed with the Securities and Exchange Commission
on October 22, 1999)
4.1 Form of Stock Certificate (incorporated by reference to the
Company's registration statement on Form S-8 filed with the
Securities and Exchange Commission on October 22, 1999)
4.2 Directors' Stock Option Plan (incorporated by reference to
Exhibit B to the Definitive Proxy Statement filed with the
Securities and Exchange Commission on April 24, 1998)
4.3 First Amendment to the Directors' Stock Option Plan
(incorporated by reference to the Company's registration
statement on Form S-8 filed with the Securities and
Exchange Commission on October 22, 1999)
4.4 Stock Option Plan for Employees (incorporated by reference
to Exhibit C to the Definitive Proxy Statement filed with
the Securities and Exchange Commission on April 24, 1998)
4.5 First Amendment to the Stock Option Plan for Employees
(incorporated by reference to the Company's registration
statement on Form S-8 filed with the Securities and
Exchange Commission on October 22, 1999)
4.6 Second Amendment to the Stock Option Plan for Employees
(incorporated by reference to Exhibit 4.7 to the Company's
registration statement on Form S-8 filed with the
Securities and Exchange Commission on September 29, 2000)
10.1 Purchase Agreement for the acquisition by the Company of
Learning Pathways, Limited (incorporated by reference to
the exhibit in the Current Report on Form 8-K filed with
the Securities and Exchange Commission on December 15,
1998)
10.2 Stock Purchase Agreement for the acquisition by the Company
of Dolphin, Inc. (incorporated by reference to the exhibit
in the Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 10, 2000)
(b) Reports on Form 8-K
On October 29, 2003, the Company filed a Form 8-K under Item 5, Other
Events, Item 9, Regulation FD Disclosure and Item 12, Results of
Operations and Financial Condition, filing its press release announcing
the company's financial results for the quarter ended September 30, 2003.
On October 21, 2003, the Company filed a Form 8-K under Item 5, Other
Events, filing a press release announcing it had been awarded a statewide
contract for software by New Mexico.
On September 29, 2003, the Company filed a Form 8-K under Item 5, Other
Events, filing a press release announcing the licensing of its
proprietary data base of state academic standards to Educational Testing
Service.
On September 3, 2003, the Company filed a Form 8-K under Item 5, Other
Events, filing a press release announcing that the Company's products had
received national recognition in an annual survey by eSchool News.
On August 21, 2003 the Company filed a Form 8-K under Item 5, Other
Events, filing a press release announcing a Malaysia licensing and
disribution agreement with Pusat Komputer Interaktif Learning Center.
SIGNATURES
- ----------
Pursuant to the requirements 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
November 14, 2003
By: /s/Jeffrey E. Butler
--------------------
Jeffrey E. Butler,
Chief Executive Officer
Chairman of the Board
Treasurer
CERTIFICATIONS
- --------------
I, Jeffrey E. Butler, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of The American
Education Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"), and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2003
The American Education Corporation
By: /s/Jeffrey E. Butler
--------------------
Jeffrey E. Butler,
Chief Executive Officer
I, Neil R. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of The American
Education Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"), and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2003
/s/ Neil R. Johnson
- --------------------
Neil R. Johnson
Title: Chief Financial Officer
Certification of Periodic Financial Report
Pursuant to 18 U.S.C. Section 1350
- ------------------------------------------
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, each of the undersigned officers of The
American Education Corporation (the "Company") certifies that the
Quarterly Report on Form 10-QSB of the Company for the quarter ended
September 30, 2003 (the "Report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that
the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Dated: November 14, 2003
/s/ Jeffrey E. Butler
- ---------------------
Jeffrey E. Butler, Chief Executive Officer
Dated: November 14, 2003
/s/ Neil R. Johnson
- -------------------
Neil R. Johnson, Chief Financial Officer
This certification is made solely for purpose of 18 U.S.C. Section 1350,
subject to the knowledge standard contained therein, and not for any
other purpose.