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, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission File #0-11078
THE AMERICAN EDUCATION CORPORATION
(Exact name of small business issuer as specified in its
charter)
Colorado
(State or other jurisdiction of incorporation or
organization)
84-0838184
(IRS Employer Identification number)
7506 North Broadway Extension, Suite 505, Oklahoma City, OK
73116
(Address of principal executive offices)
(405) 840-6031
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.025 per share
Indicate by check mark whether the issuer (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO__
Number of shares of the registrant's common stock
outstanding as of March 31, 1999: 13,569,076
Transitional Small Business Disclosure Format
YES __ NO X
THE AMERICAN EDUCATION CORPORATION
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1 Balance Sheets 3
March 31, 1999 and December 31, 1998
Statements of Income 4
For the Three Months Ended
March 31, 1999 and for the Three
Months Ended March 31, 1998
Statements of Cash Flows 5
For the Three Months Ended March 31,
1999 and for the Three Months Ended
March 31, 1998
Notes to Interim Financial Statements 6
Item 2 Management's Discussion and Analysis 8
Of Financial Conditions and Results of
Operations
PART II - OTHER INFORMATION 11
SIGNATURE PAGE 13
PART I - FINANCIAL INFORMATION
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED BALANCE SHEETS
31-Mar-99 31-Dec-98
Unaudited Audited
ASSETS
Current assets:
Cash and cash equivalents $ 703,989 $ 720,838
Accounts receivable, net of
allowance for returns and
uncollectible accounts of
$95,239 and $98,515 1,478,088 1,396,021
Inventories 92,437 96,248
Prepaid expenses and deposits 389,146 324,647
--------- ---------
Total current assets 2,663,660 2,537,754
Property and equipment, at cost 466,370 438,931
Less accumulated depreciation
and amortization (214,180) (195,538)
--------- ---------
Net property and equipment 252,190 243,393
Other assets:
Capitalized software costs,
net of accumulated amortization
of $1,329,725 and $1,239,719 1,273,728 1,181,754
Goodwill, net of accumulated
amortization of $51,306 and
$33,638 1,009,190 1,009,651
Deferred income taxes 842,778 857,550
Other assets 21,036 -
--------- ---------
Total other assets 3,146,732 3,048,955
--------- ---------
Total Assets $ 6,062,582 $ 5,830,102
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable trade $ 375,545 $ 325,840
Accrued liabilities 358,403 451,018
Accounts payable - Affiliates 92,604 174,199
Notes payable and current
portion of long term debt 232,445 124,686
Foreign income taxes payable 49,888 23,126
Deferred income taxes 40,627 40,627
--------- ---------
Total current liabilities 1,149,512 1,139,496
Long-term debt 72,652 85,742
--------- ---------
Total liabilities 1,222,164 1,225,238
--------- ---------
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 -
13,569,076 shares 339,227 335,577
Additional paid-in capital 6,268,942 6,151,263
Retained Earnings / (Deficit) (1,881,976) (1,881,976)
Year to date earnings 114,225 -
--------- ---------
Total stockholders' equity 4,840,418 4,604,864
--------- ---------
Total liabilities and stockholders'
equity $ 6,062,582 $ 5,830,102
--------- ---------
The accompanying notes are an integral part of the financial
statements.
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED March 31, 1999 AND 1998
(unaudited)
1999 1998
------------- ------------
Net Sales $ 1,570,145 $ 1,170,220
Cost of goods sold 292,464 121,454
------------- ------------
Gross profit 1,277,681 1,048,766
Operating expenses:
Sales and marketing 515,070 373,504
Operations 57,077 52,733
General and administrative 466,786 197,345
Amortization of capitalized
software costs 88,428 59,624
------------- ------------
Total operating expenses 1,127,361 683,206
------------- ------------
Operating income 150,320 365,560
Other income/(expense):
Interest Income 5,104 2,386
Interest Expense (6,693) (4,228)
Other 8,576 80
------------- ------------
Net income before taxes 157,307 363,798
Current income taxes 27,762 7,000
Deferred income taxes 15,320 145,684
------------- -----------
Net income $ 114,225 $ 211,114
------------- -----------
Basic 13,488,520 12,206,985
Earnings per share $ 0.008 $ 0.017
Diluted 14,142,247 13,361,931
Earnings per share $ 0.008 $ 0.016
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, 1999 AND 1998
(unaudited)
1999 1998
----------- -----------
Cash flows from operating activities:
Net income $ 114,225 $ 211,114
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 124,620 63,228
Reserve for bad debts and returns (7,587) (6,366)
Stock issued for compensation 18,980 20,249
Other (7,653) -
Changes in assets and liabilities:
Accounts receivable (75,026) (183,019)
Inventories 3,812 (16,233)
Prepaid expenses and other (64,499) (206,562)
Deferred tax asset 15,319 145,684
Other assets (21,036) -
Accounts payable and accrued
liabilities (6,778) 90,608
Accounts payable - Affiliate (81,595) 68,824
Income taxes payable 26,762 6,998
Customer deposits (36,132) (14,905)
----------- ----------
Net cash provide by operating
activities 3,412 179,620
----------- ----------
Cash flow from investing activities:
Acquisition of net assets of
subsidiary - (70,275)
Capitalization of organizational
costs and goodwill (17,218) (31,564)
Purchase of capitalized software
costs (181,635) (137,331)
Purchase of property and
equipment (26,076) (12,646)
----------- ----------
Net cash used in investing
activities (224,929) (251,816)
Cash flows from financing activities:
Proceeds received from issuance
of debt 158,475 -
Principal payments on notes (63,807) (3,829)
Issuance of common stock 110,000 -
----------- ----------
Net cash provided by
financing activities 204,668 (3,829)
----------- ----------
Net increase (decrease) in cash (16,849) (76,025)
Cash at beginning of the period 720,838 283,636
----------- ----------
Cash at end of the period $ 703,989 $ 207,611
----------- ----------
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, 1999 AND 1998
--------------------------------------------------
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 subsidiaries. Projected Learning Programs, Inc.
is a direct mail catalog reseller of primarily other publishers'
products to high schools and colleges. Learning Pathways, Ltd. is
the exclusive schools and libraries distributor of the print
multimedia and online versions of the World Book Encyclopedia in
Great Britain.
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 consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
The interim consolidated financial statements at March 31, 1999,
and for the three month periods ended March 31, 1999, and 1998
are unaudited, but include all adjustments which the Company
considers necessary for a fair presentation. Certain immaterial
amounts in the March 31, 1998 financial statements have been
reclassified to conform to the 1999 presentation. The December
31, 1998 balance sheet was derived from the Company's audited
financial statements.
The accompanying unaudited financial statements are for the
interim periods and do not include all disclosures normally
provided in annual financial statements and should be read in
conjunction with the Company's audited financial statements
included in the Company's Form 10-KSB for the year ended December
31, 1998. The accompanying unaudited interim financial
statements for the three month period ending March 31, 1999, are
not necessarily indicative of the results which can be expected
for the entire year.
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets, 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
91-1 on software revenue recognition.
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 acquisition by the Company in 1998 of
Projected Learning Programs, Inc. and Learning Pathways, Ltd.
and is amortized over a period of 15 years.
6. Inventories:
Inventories are stated at the lower of cost (first-in, first-
out), or market and consist primarily of packing and educational
software materials and World Book Encyclopedia print and
multimedia products.
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 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 Income Per Share:
Basic earnings per share is 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.
11. Stockholders' Equity:
In February 1999, 100,000 shares of common stock were sold for a
total of $100,000.
During the first quarter of 1999, 20,000 options to purchase
common stock at $.50 per share were exercised, and the Board of
Directors approved the issuance of a total of 26,000 shares of
common stock to key employees as a bonus for contributions made to
the Company.
At March 31, 1999, paid-in-capital includes $6,903 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.
The Company has employment agreements with its officers that
include salary terms and severance benefits.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
-----------------------------------------------
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
The Company views accounts receivable, inventory, and cash as its
principal measures of liquidity. To supplement its anticipated
short-term working capital requirements, the Company has, in the
past, entered into various convertible loan agreements beginning
in January 1991, with private investors. Several of these loans
were convertible into common stock of the Company at conversion
prices ranging from $0.1346 to $0.50 per common share. These
loans were converted into common stock of the Company in June of
1996 and September of 1998.
The Company's working capital was $1,514,148 at March 31, 1999,
an improvement of $115,890 from $1,398,258 at December 31, 1998.
Additional working capital beyond that available within the
Company has been and may be required to expand operations.
Management has and will consider options available in providing
such funding, including debt financing and capital enhancement.
At March 31, 1999, the Company had available bank credit lines
for working capital totaling $1,350,000, subject to a borrowing
base, of which approximately $1,175,000 was unused.
Impact of The Year 2000
Many existing computer systems use only the last two digits to
identify years in the date field. As a result, those systems may
not be able to properly identify the correct year after the
beginning of the year 2000, believing that "00" is referring to
the year 1900. Systems that do not properly recognize the correct
date could generate erroneous information or cause a system to
fail. This potential problem is generally referred to as the
"Year 2000 Issue."
The Company is continuing its review and assessment of the
potential effect of the Year 2000 Issue. Thus far, the Company
has completed the initial review of its information technology
systems, including both software and hardware, and determined
that they appear to be Year 2000 compliant. Additionally, the
Company has begun a previously planned upgrade of its accounting
and reporting systems independent of Year 2000 considerations and
has selected a Year 2000 compliant system. It is anticipated that
the installation will be complete by June 30, 1999. This
installation date has not been accelerated by Year 2000 concerns.
The Company has tested the educational software systems that it
produces for sale and believes they are Year 2000 compliant.
The Company is currently in the process of contacting critical
suppliers of products and services to determine the extent to
which the Company may be at risk if such parties fail to resolve
their own Year 2000 Issues. The Company will assess and attempt
to mitigate any risks that may be perceived by such possible
failures. The effect, if any, on the Company's results of
operations from the failure of third parties to be Year 2000
compliant cannot be reasonably estimated.
The Company's bank has run tests to determine whether Year 2000
issues would affect their systems. They believe that their
systems will not be affected in any significant way. The Company
is still evaluating its non-information technology systems. Based
on its preliminary assessment, the Company currently believes
that these systems are or will be Year 2000 compliant. News
reports indicate that providers of utilities such as electricity,
gas and telephone services are taking appropriate steps to
minimize any disruption in services. The Company has not yet
developed a contingency plan but will determine if it appears one
may be necessary as the current assessment is refined.
Based on the Company's overall current assessment to date, no
matters have been identified and the Company does not currently
believe that the Year 2000 Issue will have a material adverse
effect on the Company's financial position or results of
operations. The Company also believes any costs that may be
incurred relating to the identification or remediation of Year
2000 issues will not be material. The Company's beliefs and
expectations, however, are based on certain assumptions that may
prove to be inaccurate, especially those relating to third
parties over which the Company has no control. Potential sources
of risk include the inability of suppliers of goods or services
to be Year 2000 compliant, which could result in delays in
product deliveries or disruption of distribution channels.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1999
AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1998
- ---------------------------------------------------------
Net sales for the three months ended March 31, 1999, totaled
$1,570,145 compared to $1,170,220 for the same period in 1998.
This represents an increase of approximately 34% over the 1998
quarter. The increase in sales for the first quarter of 1999
over the comparable quarter in 1998 is attributable to increases
net sales for the Company, the Company's catalog division and the
inclusion of the results of the Company's United Kingdom subsidiary,
Learning Pathways, Ltd. ("LPL").
Cost of goods sold as a percentage of sales revenue for the three
months ending March 31, 1999, increased to 18.6% from 10.4% in
the three-month period ending March 1998. This increase is
attributable to a change in the Company's product mix by the
addition of lower gross margin products sold by Projected Learning
Programs ("PLP") and LPL. Cost of goods sold represents the
actual cost to produce the software products, including certain
allocated overhead costs, a portion of which is fixed. Consolidated
Company gross margins are expected to trend down slightly as lower
gross margins on PLP catalog sales and LPL World Book resale products
become a higher percentage of total corporate revenues.
Total operating expenses, which include selling and marketing,
general and administrative, operations, and amortization of product
development costs, were $1,127,361 for the three months ended March 31,
1999, compared to $683,206 for the previous year. As a percentage of
sales revenue, operating expenses increased from 58.4% in 1998 to
71.8% in 1999.
Selling and marketing costs increased by approximately 38%, from
$373,504 for the three months ended March 31, 1998, to $515,070 for
the current period. As a percentage of net revenues, however, the
amounts are relatively unchanged, increasing from 31.9% to 32.8%.
The higher selling expenses are the result of personnel costs of
new hires in connection with management's planned increase in the
size of both the inside and field sales forces. Management believes
that the Company is required to make these investments to maintain
its rate of growth in future years.
General and administrative and operations expenses increased from
$250,078 to $523,863. This increase is primarily attributable to
the planned increases in administrative and support staff added
over the prior year to prepare the Company to handle the increased
sales that management believes will occur in 1999. The Company
also had higher costs associated with activities to support the
development of Version 3.0 and new curriculum content development.
In addition, the administrative costs of LPL are now included in the
consolidated corporate results in 1999.
Net income for the three months ended March 31, 1999, was $114,225
compared to $211,114 for the same period in 1998. This decrease is
primarily a result of the increase in costs noted above.
Company management believes that significant future opportunities
exist in the school, adult literacy and home markets for future
Company growth. In 1998, management undertook to position the
Company in what it believes is a fast growing segment of the
educational market. The Company is now equipped with A+LS
Macintosh and Windows software program engines that facilitate
the low cost and rapid development of new subject titles. In
addition, the Company has expanded its content and intellectual
property base with the internal development of substantial
educational content for its current and future products.
Management believes, as a result of these recent curriculum and
technical developments, that the Company is well positioned to
compete in the major market segments of the educational
technology industry. The Company's competitive position is
further enhanced by its growing employee base of skilled
technical and business professionals that has aided the
development of new industry partnerships during 1998. These
elements combine to form a stronger overall corporate foundation
that, combined with growing markets and expanding marketing and
distribution strengths, provides a greatly improved internal and
external environment for the Company's future operations.
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
---------------------
In February, 1999 the Company sold 100,000 shares of common stock for
a total of $100,000.
In the quarter ended March 31, 1999, 20,000 shares of common stock
were issued at $.50 per share as a result of exercise of options by
current and former employees of the Company. In addition, the
Company issued 26,000 shares of common stock to key employees as a
bonus for contributions made to the Company.
On January 1, 1999, in accordance with the Directors' Stock Option
Plan, each of the Company's outside directors, Newton Fink, Monty
McCurry and Stephen Prust were granted options to purchase 3,000 shares
of the Company's common stock at $.73 per share. The options expire on
January 1, 2002.
The Company relied upon exemptions from registration provided by,
among others, Sections 4(2) and 4(6) of the Securities Act and
Regulation D of the Rules and Regulations thereof, as these
transactions did not involve public offerings and/or were limited
to accredited investors.
Item 3. Default Upon Senior Securities
Omitted from this report as inapplicable.
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
The 1999 Annual Meeting of Shareholders has been tentatively scheduled
for July 1999. Shareholders will receive timely notice when the
final date is determined.
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents 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 filed
with the Securities and Exchange Commission on Form S-18
(File No. 2-78660-D))
4.1 Form of Stock Certificate (incorporated by reference to
the Company's registration statement filed with the
Securities and Exchange Commission on Form S-18 (File No.
2-78660-D))
10.1 Promissory Note issued by the Company to Rich Carle
for the acquisition of Projected Learning Systems, Inc.,
(incorporated by reference to the exhibit contained in
the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 1998)
10.2 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)
10.3 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)
10.4 Loan Agreement and Promissory Note between the Company
and UMB Oklahoma Bank establishing a line of credit for
working capital (incorporated by reference to the
exhibit contained in the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended June 30, 1998)
10.5 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).
27 Financial Data Schedule (filed herewith; electronic
filing only)
(b) Reports on Form 8-K
Current Report on Form 8-K filed February 11, 1999 regarding the
acquisition of Learning Pathways, Limited.
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
May 14, 1999
By: s/a Jeffrey E. Butler
Chief Executive Officer
Chairman of the Board
Treasurer