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 March 31, 2004
[ ] 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)
Nevada 73-1621446
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7506 North Broadway Extension, Suite 505, Oklahoma City, OK 73116
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(Address of principal executive offices)
(405) 840-6031
---------------------------
(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 May 1,
2004: 14,133,461
Transitional Small Business Disclosure Format YES__ NO X
THE AMERICAN EDUCATION CORPORATION
INDEX
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1 Consolidated Balance Sheets
March 31, 2004 and December 31, 2003 3
Consolidated Statements of Income
For the Three Months Ended March 31, 2004
and for the Three Months Ended March 31, 2003 4
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2004
and for the Three Months Ended March 31, 2003 5
Notes to Interim Consolidated Financial
Statements 6
Item 2 Management's Discussion and Analysis
Of Financial Condition and Results of
Operations 9
Item 3 Controls and Procedures 12
PART II - OTHER INFORMATION 13
SIGNATURE PAGES 15
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED BALANCE SHEETS
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31 December 31
2004 2003
------------ -----------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 44,166 $ 216,676
Accounts receivable, net of allowance
for returns and uncollectible accounts
of $225,000 and $225,000 2,993,947 2,790,327
Inventory 15,597 16,451
Prepaid expenses and deposits 137,329 174,482
Deferred tax asset 95,323 95,323
------------ -----------
Total current assets 3,286,362 3,293,259
Property and equipment, at cost 1,256,537 1,287,338
Less accumulated depreciation and
amortization (1,056,274) (1,064,640)
------------ -----------
Net property and equipment 200,263 222,698
Other assets:
Capitalized software costs, net of
accumulated amortization of
$6,018,754 and $5,641,359 4,417,415 4,454,143
Goodwill, net of accumulated
amortization of $369,097 and
$369,097 1,840,446 1,840,446
------------ -----------
Total other assets 6,257,861 6,294,589
------------ -----------
Total assets $ 9,744,486 $ 9,810,546
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable trade $ 505,060 $ 374,822
Accrued liabilities 1,036,926 1,213,566
Deferred revenue 506,195 609,700
Notes payable and current
portion of long-term debt 511,387 312,188
------------ -----------
Total current liabilities 2,559,568 2,510,276
Other long-term accrued liabilities 282,975 236,475
Deferred income tax liability - Long-term 656,013 613,763
Long-term debt 484,949 738,745
------------ -----------
Total liabilities 3,983,505 4,099,259
------------ -----------
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 - 14,133,461 shares 359,186 359,186
Additional paid in capital 6,702,819 6,674,130
Treasury stock, at cost, 234,000 shares (319,125) (319,125)
Retained deficit (1,002,904) (1,002,904)
Year-to-date earnings 21,005 -
------------ -----------
Total stockholders' equity 5,760,981 5,711,287
------------ -----------
Total liabilities and
stockholders' equity $ 9,744,486 $ 9,810,546
============ ===========
The accompanying notes are an integral part of the financial statements.
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(unaudited)
2004 2003
----------- -----------
Sales $2,613,537 $1,897,319
Cost of goods sold 342,875 287,157
----------- -----------
Gross profit 2,270,662 1,610,162
Operating expenses:
Selling and marketing 1,151,915 542,986
Operations 108,958 77,596
General and administrative 534,480 643,267
Amortization of capitalized software costs 372,146 340,375
----------- -----------
Total operating expenses 2,167,499 1,604,224
----------- -----------
Operating income 103,163 5,938
Other income (expense):
Interest expense (15,281) (11,013)
----------- -----------
Net income (loss) before income taxes 87,882 (5,075)
Deferred income tax (benefit) expense 66,877 (19,287)
----------- -----------
Net Income $ 21,005 $ 14,212
=========== ===========
Basic 14,133,461 14,314,961
Earnings per share $ 0.001 $ 0.001
Diluted 15,427,021 14,314,961
Earnings per share $ 0.001 $ 0.001
The accompanying notes are an integral part of the financial statements.
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(unaudited)
2004 2003
----------- -----------
Cash flows from operating activities:
Net income $ 21,005 $ 14,212
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 400,896 384,138
Reserve for bad debts -- 5,010
Deferred compensation 46,500 16,230
Other 28,689 (2,494)
Changes in assets and liabilities:
Accounts receivable (203,620) (31,267)
Inventories 854 (8,626)
Prepaid expenses and other 37,153 5,755
Accounts payable and accrued liabilities (46,402) 71,833
Deferred revenue (103,505) 5,967
Deferred income taxes 42,250 (19,287)
----------- -----------
Net cash provided by operating activities 223,820 441,471
----------- -----------
Cash flow from investing activities:
Software development costs capitalized (340,667) (361,828)
Purchase of property and equipment (1,066) (4,606)
----------- -----------
Net cash used in investing activities (341,733) (366,434)
----------- -----------
Cash flows from financing activities:
Principal payments on notes payable (54,597) (86,003)
----------- -----------
Net cash used in financing activities (54,597) (86,003)
----------- -----------
Net (decrease) in cash (172,510) (10,966)
Cash at beginning of the period 216,676 74,405
----------- -----------
Cash at end of the period $ 44,166 $ 63,439
=========== ===========
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 MARCH 31, 2004 AND 2003
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------------------------
1. Description 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 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 March 31, 2004, and for
the three-month periods ended March 31, 2004 and 2003 are unaudited, but
include all adjustments that the Company considers necessary for a fair
presentation. The December 31, 2003 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, 2003. The accompanying unaudited
interim financial statements for the three-month period ending March 31,
2004 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:
-----------
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. Debt:
----
The Company had the following indebtedness under notes and loan
agreements:
Current Long-term Total
--------- --------- --------
Line of credit with bank, matures
November 30, 2005; payments of
$24,000 per month plus interest at
the bank's prime rate plus 2%
(6.00% at March 31, 2004) $288,000 $183,761 $471,761
Line of credit with bank, matures
March 31, 2005; maximum line -
$450,000, interest at the bank's
prime rate plus 2.5% (6.50% at
March 31, 2004) 206,514 -- 206,514
Installment notes payable to bank 16,873 1,188 18,061
Subordinated debt due to shareholder
affiliates, originated April 1, 2003,
matures April 1, 2005; interest at 8%
payable quarterly, principal due at
maturity, convertible into the Company's
common stock at $.6037 per share -- 300,000 300,000
--------- --------- --------
$511,387 $484,949 $996,336
========= ========= ========
9. Stock Options:
-------------
The Company has historically measured compensation from issuing employee
stock options under the accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" which is an intrinsic value
method. Subsequent accounting pronouncements SFAS No. 123 and SFAS No.
148, "Accounting for Stock Based Compensation," establish financial
accounting and reporting standards for stock-based employee compensation
plans. SFAS No. 123 defines a fair value based method of accounting for
an employee stock option. SFAS No. 148 amends SFAS No. 123 to provide
alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. The Company plans to continue to use the intrinsic value
method for stock-based compensation. Accordingly, the compensation cost
for stock options has been measured as the excess, if any, of the quoted
market price of Company stock at the date of the grant over the amount the
employee must pay to acquire the stock. The compensation cost is
recognized over the vesting period of the options. Hence, no compensation
is incurred unless the market value is greater than the option exercise
price.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that Statement. The Company is continuing to utilize the intrinsic value-
based method for accounting for employee stock options or similar equity
instruments; therefore, the Company has not recorded any compensation cost
in the statements of operations for stock-based employee compensation
awards.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma income and earnings per share are as follows for the
quarter ended March 31:
2004 2003
------- -------
Net income - as reported $21,005 $14,212
Stock -based employee compensation
expense - pro forma 5,550 -
------- -------
Net income - pro forma 15,455 14,212
Basic earnings per common share-as reported $.01 $.01
Diluted earnings per common share as reported .01 .01
Basic earnings per common share -
pro forma $.01 $.01
Diluted earnings per common share-
pro forma .01 .01
10. 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.
11. 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.
12. 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.
13. Stockholders' Equity:
--------------------
At March 31, 2004, paid-in capital includes $26,410 of foreign currency
translation adjustments.
14. 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 OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------
Overview
- --------
The American Education Corporation is a developer of instructional
content, computer adaptive testing software, and software management
technology specifically designed to manage the delivery of and record
the results of student progress in schools and other institutions. Java-
based technology, the A+nyWhere Learning System, registered, ("A+LS")
Versions 3.0 and 4.0 of educational software products, provides a
research-based, integrated curriculum offering of software for grade
levels 1-12 for Reading, Mathematics, Language Arts, Science, Writing,
History, Government, Economics and Geography. In addition, the Company
provides assessment testing and instructional content for the General
Educational Development (GED) test. All company products are designed to
provide for LAN, WAN and Internet delivery options. The Company has
developed computer adaptive, companion academic skill assessment testing
tools to provide educators with the resources to more effectively use the
Company's curriculum content, which is aligned to important state and
national academic standards. Spanish-language versions are available for
Mathematics and Language Arts for grade levels 1-8. The Company's
curriculum content is aligned to the other third party digital resources
such as the World Book Multimedia Encyclopedia, ETS's e-rater online
essay grading technology and GoKnow's scientifically-based, Internet
accessible curriculum and reference materials, which may be accessed
directly from A+LS lessons.
The A+LS comprehensive family of educational software is now in use in
over 11,000 schools, centers of adult literacy, colleges and universities,
and correctional institutions in the U.S., UK and other international
locations. A+dvancer, trademark, Online Courseware the Company's new
diagnostic, prescriptive test and online developmental curriculum
offering, is aligned to ACCUPLACER OnLine, the leading college admissions
test for students requiring developmental support to enroll in full
credit secondary coursework in mathematics, reading, algebra and writing.
The Company is a technology-based publishing enterprise. To remain
competitive it must constantly invest in the development of programming
technology to maintain currency of its product offering and ensure that
its products maintain compatibility with constantly changing and revised
database and operating system platforms sold to schools by other
developers. The Company must also maintain the currency of its content
and underwrite content revisions and its realignment to new, or updated
state and national educational standards and, more recently, to
investigate and publish information which provides school customers
scientifically-based research on the effectiveness of company products to
remain competitive. This requirement is to allow the Company's products
to comply with certain research-based product effectiveness standards of
"The No Child Left Behind Act of 2001." The necessity to support these
requirements represent a new cost of doing business and introduces
additional complexity into the Company's development processes.
The necessity to accomplish these essential, ongoing corporate functions
requires retention and recruitment of a highly skilled professional
workforce. These investments are an essential, recurring cost of doing
business and impact the Company's operating cost and margin structures.
The Company is subject to risks or uncertainties associated with the
business that it is engaged in. Among these uncertainties are a
dependency on funding for school technology purchases, lengthy sales
cycles, seasonal demand cycles and a dependency on retention of key
personnel. Certain matters discussed herein (including the documents
incorporated herein by reference) may contain forward-looking statements
intended to qualify for the safe harbors from liabilities established by
the Private Securities Litigation Reform Act of 1995. 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 as a result of factors
such as future economic conditions, 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. Accordingly, investors should be alert to the
possibility that factors beyond the control of management may have impact
on the short or long-term operations of the business.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2004
AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2003
- ---------------------------------------------------------
Net sales for the three months ended March 31, 2004 totaled $2,613,537
compared to $1,897,319 for the same period in 2003. This represents an
increase of 38% over the comparable 2003 quarter and is attributable to a
combination of a substantial increase in orders at AEC, somewhat offset by
sales decreases at the LPL subsidiary, which recorded a large international
order in the 2003-year quarterly period. Revenue at the Dolphin subsidiary
for the first quarter was approximately equal to the prior year. AEC's
revenue increase over the same quarter in 2003 is a result of securing
increasingly larger dollar size orders and as a result of billing more
schools directly as a condition of certain contract awards.
Cost of goods sold as a percentage of sales revenue for the three months
ending March 31, 2004 decreased to 13% from 15% of net revenues for the
same period in 2003. This improvement is attributed to a larger portion of
consolidated sales contributed by the core AEC operating unit. The
Company's principal product family, A+dvanced Learning System, registered,
provided gross profit margins of 96% in the first quarter of 2004,
consistent with prior quarters. 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,
increased to $2,167,499 for the three months ended March 31, 2004,
compared to $1,604,224 for the same 2003 quarter, an increase of 35.1%.
As a percentage of sales revenue, however, operating expenses decreased
from 84.6% in 2003 to 82.9% in 2004. The increase in total operating
expenses is primarily due to an increase in amortization of product
development costs and increased marketing and selling expenditures. During
the first quarter of 2004, the Company continued to make substantial
progress in development efforts on revised, updated and expanded
curriculum offerings for its A+nyWhere Learning System, registered,
product family as well as continued its investment into A+dvancer,
trademark, the Company's post-secondary testing and online curriculum
offering.
As a component of total operating expenses, selling and marketing costs
increased by 112.1%, from $542,986 for the three months ended March 31,
2003, to $1,151,915 for the current period. The increase in the first
quarter 2004 selling expenses is largely attributable to changes in sales
mix, which resulted in increased sales commissions paid as the Company
billed direct to school customers a higher percentage of orders. In
addition, the Company initiated programs to expand sales coverage in new
sales territories, as well as expanded trade show activities during the
quarter which increased planned quarterly spending. General and
administrative expenses, including operations, decreased 10.7% from $720,863
to $643,438. This decrease is primarily attributable to reductions in
royalty costs, bad debt expense and continued decreases in operating costs
at LPL and other corporate cost control initiatives.
Interest expense was $15,281 for the three months ended March 31, 2004
compared to $11,013 for the same 2003 quarter reflecting higher interest
rates in effect for the Company's debt in 2004. The provision for
income taxes differs from the amount that would normally be expected
because the pre-tax loss at LPL does not qualify for tax benefit under UK
accounting rules. There is net income of $21,005 for the three months
ended March 31, 2004, compared to net income of $14,212 for the same
period in 2003.
Liquidity and Capital Resources
- -------------------------------
The Company has invested significantly in the development of new products
and the acquisition and licensing of new products to improve the ability
of the organization and its published products to meet the needs of the
marketplace. These changes were required to update, expand and keep
current the Company's extensive curriculum product offerings and to
position the Company for long-term growth. To finance the business,
management has utilized secured bank revolving credit lines, bank financed
equipment loans and lease financing sources.
As of March 31, 2004 the Company's principal sources of liquidity included
cash and cash equivalents of $44,166, net accounts receivable of
$2,993,947 and inventory of $15,597. The Company's net cash provided
by operating activities during the first quarter was $223,820 in 2004
compared to $441,471 in 2003. Net cash used in investing activities for
the same period decreased by 6.7% from $366,434 in 2003 to $341,733 in 2004,
and was comprised primarily of investment in capitalized software
development costs. During the quarter ended March 31, 2004 total bank debt
was reduced by $54,597, or by 7.3%.
At March 31, 2004, the Company had working capital of $726,794 compared to
$782,983 at December 31, 2003. The Company's commercial bank recently
extended the maturity of its bank lines of credit until March and November
of 2005. This restructuring of bank indebtedness permitted a portion of the
bank debt under its lines of credit to be classified as long-term debt.
The Company is continuing to discuss future borrowing arrangements with
its current lender and several other financing sources.
It is believed that the Company can continue to achieve favorable
performance in financial results in the foreseeable future. This belief
is as a result of the following factors: expansion of the Company's
product lines; addition of new products; expanded geographical coverage;
and, the return of increases in forecasted spending in fiscal 2004 and
2005 for certain school market segments. Management believes that it can
undertake necessary expansion of marketing and product development
efforts with the Company's working capital requirements secured primarily
from its operating cash flows and available bank credit facilities. If
successful, the Company should be able to continue to enhance the
liquidity of the Corporation and the overall strength of the Company's
balance sheet and financial position.
Additional working capital beyond that available to the Company as a result
of internally generated cash flows has been and may be required to expand
operations. Management has and will consider options available to access
such funding, including expanded debt and new equity financing as dictated
by the needs of the business.
Off-Balance Sheet Arrangements
- ------------------------------
The Company does not have any off-balance sheet arrangements.
Contractual Cash Obligations
- ----------------------------
The following is a summary of the Company's significant contractual cash
obligations for the periods indicated that existed as of March 31, 2004
(amounts in thousands of dollars):
Less than 1 to 3 4 to 5 Over 5
1 year years years years
--------- ------ ------ ------
Long and short term debt $511 $485 $ -- $ --
Operating leases 308 338 146 --
---- ---- ---- ----
Total contractual obligations $819 $823 $146 $ --
==== ==== ==== ====
Critical Accounting Policies
- ----------------------------
Management is responsible for the integrity of the financial information
presented herein. The Company's financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States of America. Where necessary, they reflect estimates based
on management's judgment. Significant accounting policies that are
important to the portrayal of the Company's financial condition and
results, which in some cases require management's judgment, are summarized
in the Notes to Interim Consolidated Financial Statements, which are
included herein.
ITEM 3 - CONTROLS AND PROCEDURES
- --------------------------------
It is the responsibility of the Chief Executive Officer and the Chief
Financial Officer to ensure that the Company maintains disclosure controls
and procedures designed to provide reasonable assurance that material
information, both financial and non-financial, and other information
required under the securities laws to be disclosed is identified and
communicated to senior management on a timely basis. The Company's
disclosure controls and procedures include mandatory communication of
material events, automated accounting processing and reporting, management
review of monthly results and an established system of internal controls.
As of March 31, 2004, management, including the Chief Executive Officer
and Chief Financial Officer, conducted an evaluation of disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14 as of
the end of the period covered by this report. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded the
disclosure controls and procedures currently in place are adequate to
ensure material information and other information requiring disclosure are
identified and communicated in a timely fashion. There have been no
significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the Chief
Executive Officer and Chief Financial Officer completed their 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
---------------------
None.
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 Articles of Incorporation of The American Education Corporation
(incorporated by reference to Annex B to the Definitive Proxy
Statement filed with the Securities and Exchange Commission on
October 12, 2001)
3.2 Bylaws of The American Education Corporation (incorporated by
reference to Annex C to the Definitive Proxy Statement filed
with the Securities and Exchange Commission on October 12, 2001)
4.1 Form of Stock Certificate (incorporated by reference to Form
8-A12G/A filed with the Securities and Exchange Commission on
January 20, 2004)
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)
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On January 5, 2004, the Company filed Form 8-K under Item 5, Other
Events, filing a press release announcing the completion of the
Company's reincorporation to Nevada.
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
/s/ Jeffrey E. Butler
---------------------
Jeffrey E. Butler,
Chief Executive Officer
Chairman of the Board
Treasurer
/s/ Neil R. Johnson
-------------------
Chief Financial Officer
Date: May 14, 2004
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based upon such evaluation;
and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, 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 and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; 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 over financial reporting.
Date: May 14, 2004
/s/ Jeffrey E. Butler
- ----------------------
Signature
Title: Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based upon such evaluation;
and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, 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 and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; 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 over financial reporting.
Date: May 14, 2004
/s/ Neil R. Johnson
- --------------------
Signature
Title: Chief Financial Officer
Exhibit 32.1
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-QSB of The
American Education Corporation (the "Company") for the period ended March
31, 2004 as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Jeffrey E. Butler, Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of the operations
of the Company.
By: /s/ Jeffrey E. Butler
- --------------------------
Jeffrey E. Butler
Chief Executive Officer
May 14, 2004
Exhibit 32.2
CERTIFICATION BY CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-QSB of The
American Education Corporation (the "Company") for the period ended March
31, 2004 as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Neil R. Johnson, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of the operations
of the Company.
By: /s/ Neil R. Johnson
- ------------------------
Neil R. Johnson
Chief Financial Officer
May 14, 2004