FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission File #0-11078
THE AMERICAN EDUCATION CORPORATION
(Exact name of registrant as specified in its charter)
Colorado
(State or other jurisdiction of incorporation, or organization)
84-0838184
(IRS Employer Identification number)
7506 North Broadway Extension, Suite 505, Oklahoma City, OK 73116
(Address of principal executive offices)
(405) 840-6031
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.025 per share
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Number of shares of the registrant's common stock outstanding as
of Sept. 30, 1998: 12,913,046
Transitional Small Business Disclosure Format
YES NO X
THE AMERICAN EDUCATION CORPORATION
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1 Balance Sheets 3
September 30, 1998 and December 31, 1997
Statements of Income
For the Three Months Ended September 30, 1998 4
and for the Three Months Ended
September 30, 1997
For the Nine Months Ended September 30, 1998 5
and for the Nine Months Ended
September 30, 1997
Statements of Cash Flows 6
For the Nine Months Ended September 30, 1998
and for the Nine Months Ended
September 30, 1997
Notes to Interim Financial Statements 7
Item 2 Management's Discussion and Analysis of 9
Financial Conditions and Results of Operations
PART II - OTHER INFORMATION 13
SIGNATURE PAGE 15
Part 1 - FINANCIAL INFORMATION
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS 30-Sep-98 31-Dec-97
Unaudited Audited
Current assets:
Cash $ 787,449 $ 283,636
Accounts receivable, net of allowance
for uncollectible accounts of $67,159
and $32,805 1,385,392 $ 623,287
Inventories 60,820 8,168
Prepaid expenses and deposits 243,556 32,593
Deferred income taxes 15,748 13,122
---------- ---------
Total current assets 2,492,965 960,806
Property and equipment, at cost 386,720 314,998
Less accumulated depreciation and
amortization (182,009) (150,938)
----------- ---------
Net property and equipment 204,711 164,060
Other assets:
Capitalized software costs, net of
accumulated amortization of $1,167,702
and $1,000,730 1,035,723 764,505
Organizational costs 33,793
Goodwill, net of accumulated amortization
of $264,863 and $246,800 222,772 0
Deferred income taxes 874,639 1,506,032
---------- ----------
Total other assets 2,166,927 2,270,537
---------- ----------
Total Assets $ 4,864,603 $3,395,403
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable trade $ 202,261 $ 132,156
Accrued liabilities 324,726 319,818
Accounts Payable - Affiliate 90,006 18,000
Customer Deposits 117,703 125,739
Current portion of capital lease
Obligation 13,412 8,021
Income taxes payable 5,154 9,512
----------- ----------
Total current liabilities 753,262 613,246
Long-term debt 26,243 58,000
Capital lease obligation 81,800 46,761
---------- ----------
Total liabilities 861,305 718,007
Commitments and contingencies
Stockholders' Equity
Preferred Stock, $.001 par value;
Authorized-50,000,000 shares-issued and
Outstanding-none 0 0
Common stock, $.025 par value
Authorized 30,000,000 shares-issued and
outstanding-12,913,046 shares 322,826 304,590
Additional paid-in capital 5,503,536 5,237,093
Retained Earnings/(Deficit) (2,864,287) (2,864,287)
Year-to-date earnings 1,041,223 -
---------- ----------
Total stockholders' equity 4,003,298 2,677,396
---------- ----------
Total liabilities and stockholders'
equity $4,864,603 $3,395,403
=========== ===========
The accompanying notes are an integral part of the financial
statements.
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
Net Sales $ 1,529,188 $1,081,084
Cost of goods sold 176,776 17,680
------------ -------------
Gross profit 1,352,412 1,063,404
Operating expenses:
Sales and marketing 428,771 510,714
Operations 98,272 -
General and administrative 283,213 283,281
Amortization of capitalized
software costs 44,496 24,858
------------ ------------
Total operating expenses 854,752 818,853
------------ ------------
Operating Income 497,660 244,551
Other income/(expense)
Interest and Dividend Income 4,515 625
Miscellaneous income 58,625 1,101
Interest Expense (7,807) (1,443)
Other (41,209) (19,444)
------------- ------------
Net income before taxes 511,784 225,390
Current income taxes 9,978
Deferred income taxes 249,538 81,140
Valuation allowance - change at
beginning of year - (81,140)
------------- ------------
Net income $ 252,268 $ 225,390
============= ============
Basic 12,323,579 12,127,393
Earnings per share $ 0.020 $ 0.019
Diluted 13,370,007 13,694,155
Earnings per share $ 0.019 $ 0.016
The accompanying notes are an integral part of the financial
statements.
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
Net Sales $ 4,637,744 $ 3,091,157
Cost of goods sold 512,540 245,092
------------ ------------
Gross profit 4,125,204 2,846,065
Operating expenses:
Sales and marketing 1,180,373 858,847
Operations 264,900 -
General and administrative 796,366 960,356
Amortization of capitalized
software costs 121,023 65,593
------------ -----------
Total operating expenses 2,362,662 1,884,796
------------ -----------
Operating income 1,762,542 961,269
Other income (expense)
Interest and Dividend Income 8,841 1,213
Miscellaneous income 62,370 7,511
Interest Expense (14,837) (4,386)
Other (125,397) (19,444)
------------- -----------
Net income before taxes 1,693,519 946,163
Current income taxes 18,238
Deferred income taxes 634,058 340,619
Valuation allowance - change at
beginning of year - (340,619)
------------- ------------
Net income $ 1,041,223 $ 946,163
============= ============
Basic 12,323,579 12,127,393
Earnings per share $ 0.084 $ 0.078
Diluted 13,370,007 13,694,155
Earnings per share $ 0.078 $ 0.069
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, 1998 AND 1997
(UNAUDITED)
1998 1997
Cash flows from operating activities:
Net income $ 1,041,223 $ 946,163
Adjustments to reconcile net income
To net cash provided by (used in)
Operating activities:
Depreciation and amortization 216,106 118,435
Reserve for bad debts 19,554 (40,553)
Stock issued for compensation 20,250 -
Stock issued in lieu of interest
Payment 3,750 -
Other 42,886 -
Changes in assets and liabilities:
Accounts receivable (698,045) (463,465)
Inventories (28,670) 3,275
Prepaid expenses and other (199,170) 12,244
Deferred tax asset 628,767 -
Accounts payable and accrued
liabilities (3,708) (35,111)
Accounts payable - Affiliate 72,006 -
Customer Deposits (35,677) (63,733)
------------ -------------
Net cash provided by operating
activities 1,079,272 477,255
------------ -------------
Cash flow from investing activities:
Acquisition of net assets of
Subsidiary (70,275) -
Capitalization of organizational
Costs and goodwill (33,793) -
Purchase of capitalized software
costs (438,191) (263,552)
Purchase of property and equipment (22,905) (26,668)
------------ ------------
Net cash used in investing
activities (565,164) (290,220)
Cash flows from financing activities:
Payments on notes and leases (37,975) -
Issuance of common stock 27,680 -
------------ ------------
Net cash provided by financing
activities (10,295) -
Net increase in cash 503,813 187,035
Cash at beginning of the period 283,636 193,347
------------ -----------
Cash at end of the period $ 787,449 $ 380,382
============ ===========
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, 1998 AND 1997
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Nature of Business:
The American Education Corporation (the Company) and its
subsidiary's business is the development of educational computer
software, and its distribution to school districts nationally.
2. Basis of Presentation:
The summary of significant accounting policies of The American
Education Corporation (the Company) is presented to assist in
understanding the Company's financial statements. These accounting
policies conform to generally accepted accounting principles and
have been consistently applied in the preparation of the financial
statements.
The Company's consolidated financial statements include the
results from its wholly owned subsidiary, Projected Learning
Programs, Inc. All material intercompany transactions have
been eliminated.
The interim consolidated financial statements at September 30,
1998, and for the three and nine month periods ended September 30,
1998, and 1997 are unaudited, but include all adjustments which
the Company considers necessary for a fair presentation. The
December 31, 1997, 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, 1997. The accompanying unaudited interim financial
statements for the three and nine month periods ending September
30, 1998, 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 is amortized over a period
of 10 years.
6. Inventories:
Inventories are stated at the lower of cost (first-in, first-out),
or market.
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.
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:
The Company has adopted Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (SFAS 128) as required,
effective November 1, 1997. SFAS 128 requires presentation of
basic and diluted earnings per share, including a restatement of
all prior periods presented. 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, warrants and convertible securities.
The weighted average number of basic and diluted common shares
outstanding is as follows:
September 30, 1998 September 30, 1997
Basic 12,323,579 12,127,393
Diluted 13,370,007 13,694,155
11. Stockholders' Equity:
On March 11, 1996 the Company granted options to employees,
officers, and directors, to purchase 1,301,195 shares of common
stock at $.50 per share. The options expire March 11, 1999.
Additional options were issued on January 23, 1998 to 24 employees
in the amount of 230,500 options. These options expire on January
23, 2001 or, like the previously issued options, ninety days
after termination of employment. A total of 55,000 options have
been exercised and 113,000 options have expired due to termination
of employment.
During the first quarter of 1998, the Board of Directors approved
the issuance of a total of 40,500 shares of common stock as an
annual bonus for contributions made to the Company in 1997. The
recipients of 10,000 shares each as a bonus award are: Jeffrey E.
Butler, President; Thomas Shively, Executive Vice President; and
Jeffrey E. Butler, Jr., Vice President of Marketing. In addition,
Patrick Timmons, Director of Programming was awarded 7,500 shares
and each of the outside directors Newton Fink, Monty McCurry
and Stephen Prust were each awarded 1,000 shares of common stock.
During the second and third quarters of 1998, 130,000 additional
stock options were issued to eight new employees. These options
have been ratified by the Board of Directors to be included under
the employee plan approved at the Annual Meeting of Shareholders
held May 29, 1998. A total of 200 of these options have been
exercised.
At December 31, 1997, $50,000 of convertible notes with a
conversion price per share of $0.1346 were outstanding. On
September 30, 1998, these notes, along with $11,750 of accrued
interest due on the notes were converted into 458,767 shares of
the Company's common stock.
2. COMMITMENTS AND CONTINGENCIES
The Company amortizes capitalized software costs over the
product's estimated useful life. Due to inherent technological
changes in the software development industry, the period over
which such capitalized software cost is being amortized may have
to be accelerated.
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 $1,739,703 at September 30,
1998, an improvement of $1,392,143 from $347,560 at December 31,
1997. This significant improvement is associated with higher
levels of sales and collection of sales proceeds.
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.
During the second quarter the Company closed a revolving line of
credit facility establishing a $500,000 line of credit with UMB
Oklahoma Bank. The interest rate on borrowed funds is the national
prime rate. The line of credit is subject to a borrowing base and
at September 30, 1998 was unused.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998
AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997
Net sales for the three months ended September 30, 1998, totaled
$1,529,188 compared to $1,081,084 for the same period in 1997.
This represents an increase of approximately 41% over the 1997
quarter. The increase in sales for the third quarter of 1998
over the comparable quarter in 1997 is attributable to the
availability and customer acceptance of additional secondary grade
level titles released in the latter part of fiscal 1997 and the
first half of 1998 and expanded channels of distribution. The
Company now has effective, trained distribution in 48 states that
contributed to quarterly sales performance.
Cost of goods sold as a percentage of sales revenue for the three
months ending September 30, 1998, increased to 11.6% from 1.7% in
the three-month period ending June 1997. However, the 1997 period
included a one-time adjustment in the cost of goods calculation.
Even though the 1998 results include the lower gross margin
software sold by Projected Learning Programs, the relatively
high overall gross margins reflect the efficiency in which
software products are now produced on CD-ROM. The use of this
medium also positively affects the cost of packaging, handling and
freight associated with products that are marketed primarily to
the school market, as opposed to traditional retail outlets. Cost
of goods sold represents the actual cost to produce the software
products, including certain allocated overhead costs, a
portion of which is fixed. Excluding the costs of allocated
overhead, product costs provide gross profit margins ranging from
75 to 95 percent on the Company's principal products.
Consolidated Company gross margins are expected to trend down
slightly as lower gross margins on PLP catalog sales 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 $854,752 for
the three months ended September 30, 1998, compared to $818,853
for the previous year. This represents an increase of
approximately 4% but only represents 56% of sales compared to 76%
of sales for the comparable 1997 period. This decrease in
operating expenses as a percentage of revenues is
primarily due to volume related efficiencies where much of the
operating cost is fixed, but is set at a level which can support
higher revenues currently and in the future.
Selling and marketing costs decreased by approximately 16%, from
$510,714 for the three months ended September 30, 1997, to
$428,771 for the current period. The decrease in 1998 is
related to reduced promotional costs necessary to achieve the
current sales levels, due to increased acceptance of the
Company's products in the marketplace and a wider distribution
system already in place.
General and administrative and operations expenses increased by
approximately 35% during the 1998 quarter, from $283,281 to
$381,485. This increase is primarily attributable to the
increases in personnel over the prior year, which represent an
important investment in the future growth of the business.
Pre-tax income increased by 127% to $511,784 from $225,390 for the
comparable 1997 quarter.This improvement reflects the higher
revenues which are being achieved without a comparable
increase in operating costs, primarily due to volume related
efficiencies. Because the 1998 net income amount includes a full
provision for corporate income taxes, whereas the 1997 results do
not, management believes that pre-tax earnings comparisons are a
more meaningful measure of the progress of the Company than
comparisons of net income.
Net income for the three months ended September 30, 1998, improved
by approximately 12% as compared to the prior year from $225,390
in 1997 to $252,268 in 1998. Net income for 1998 was impacted by a
one-time adjustment resulting from a change in the estimated
annual effective income tax rate which was recorded during the
quarter.
Average earnings per diluted share were $0.019 for the quarter
ending September 30, 1998 compared to $0.016 for the same period
in 1997. The average number of diluted shares outstanding
decreased from 13,694,155 to 13,370,007 during the same period as
a result of expiration of previously issued stock options.
Shareholders' equity as a percent of total assets improved to 82%
from 79% at December 31, 1997. The Company's current ratio has
improved from 1.57 at December 31, 1997 to 3.31 at September 30,
1998.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998
AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Net sales for the nine months ended September 30, 1998, totaled
$4,637,744 compared to $3,091,157 for the comparable 1997 period.
This represents an increase of approximately 50%. This
significant increase in the 1998 total Company revenues highlights
the increasing acceptance of the Company's products by
schools as the Company is now installed in over 5500 U.S. and
Puerto Rican schools. Significantly, the Company penetrated new
areas of the country with its expanded distribution force, but
also enjoyed a strong re-order trend from existing customers.
Several districts expanded the scope of curriculum
published by the Company, or ordered additional software for
deployment in other schools within their districts.
Cost of goods sold for the nine months ended September 30, 1998,
was $512,540 or 11% of net sales, compared to $245,092 or 8% for
the same period in 1997. The increase is primarily attributable
to the inclusion this year of the results of Projected Learning
Systems, which sells a higher cost product in relation to sales
than the base business. The relatively low cost of sales compared
to net sales, however, reflects the efficiency in which software
products are now produced on CD-ROM. The use of this medium also
reduces the cost of packaging, handling, and freight associated
with products that are marketed primarily to the school market,
as opposed to traditional retail outlets. Cost of goods sold
represents the actual cost to produce the software products,
including certain allocated overhead costs, a portion of which
is fixed. Excluding the costs of allocated overhead, product
costs provide gross profit margins ranging from 75 to 95 percent
on the Company's principal products. As sales volumes increase,
consolidated Company gross margins are expected to trend down
slightly as lower gross margins on PLP catalog sales 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 $2,362,662 for the nine months
ended September 30, 1998, compared to $1,884,796 for the previous
year. This represents an increase of approximately 25%. During
the nine-month period, revenue per employee increased
by 7% compared to the prior year, demonstrating greater operating
efficiencies. In prior periods, the Company had to maintain a
fixed support staff of technical and business professionals to
provide for critical expansion functions as both an investment in
its ability to service a rapidly growing customer base and its
public company status. Management believes that the operating
expense category has now stabilized in its cost structure
relationship to revenues and that higher revenue and business
activities can be attained with modest incremental additions to
operating costs. Accordingly, it is believed that with stringent
control and planning, management has a high leverage category of
expenditures to concentrate on to secure continuing efficiencies
from the business in future periods. Total operating expenses for
the nine-month period were also impacted by the ongoing
development costs associated with the planned expansion
and updating of the curriculum of the product line and continued
investment into the Company software technology.
Selling and marketing costs increased by approximately 37%, from
$858,847 for the nine months ended September 30, 1997 to
$1,180,373 for the comparable 1998 period. The increase
for this category of expense in the 1998 nine-month period is
attributable to expanded sales, marketing, distributor training
and commission costs related to the higher sales levels and the
release of 14 new titles this year.
General and administrative and operations expenses increased by
approximately 11% during the 1998 nine month period from $960,356
to $1,061,266. As a percentage of sales, general and
administrative expenses (including "operations" in 1998) fell from
31% to 23%. This dollar increase is primarily related to higher
expenses associated with the final development efforts
associated with new title and curriculum content released during
the period. During the period, the Company released eight new,
updated titles, replacing its award winning elementary and
middle school science family originally comprised of four titles
that were released in 1994. Ten new titles under its existing
license with Humanities Software, Inc. were also released to
expand the content offering and grade level range of this well
received product family. Additional content development update
work was initiated on the language arts and social studies
product groups to bring these significant elements of the
Company's product lines to a current level of conformity
with recent national and state standards for release in future
periods. The Company plans to continue this investment into an
aggressive new content title development schedule as well as its
software programming technology. These investments should
position the Company to maintain its growth and penetration of
existing and new markets.
Pre-tax income improved 79% from $946,163 to $1,693,519 in the
nine-month period ending September 30, 1998 compared to the
comparable 1997 period, reflecting the higher revenues
being achieved without a commensurate increase in operating costs.
This is due to volume-related efficiencies and increases in
revenue per employee. Because the 1998 results include a
full provision for corporate income taxes, whereas the 1997
results do not, management believes that pre-tax comparisons are a
more meaningful measure of the progress of the Company than
comparisons of net income.
Net after tax earnings for the nine months ended September 30,
1998, improved by approximately 10% as compared to the prior 1997
period. Net cash provided by operating activities increased from
$477,255 in the 1997 period to $1,079,272 in the comparable 1998
period. This 126% increase reflects the Company's ability to
generate additional cashflow from its ongoing operations.
Average diluted earnings per share were $0.078 for the nine months
ending September 30, 1998 compared to $0.069 for the same period
in 1997 which is an increase of 13%. The average number of
diluted shares outstanding decreased from 13,694,155 to 13,370,007
during the same period. This decrease is primarily attributable
to the retirement of previously issued stock options, which have
expired.
Prior to 1996, the Company had incurred net operating losses since
its inception in 1981. As a result, there was substantial doubt
as to the realization of the $4,900,000 net operating loss
carryforwards at December 31, 1995. The Company has subsequently
utilized approximately $1,200,000 of net operating loss
carryforwards during the years ending December 31, 1997 and
1996 as a result of improvements in operations. Management
believes that the Company will be generating net income in future
years, and therefore, a deferred tax asset resulting from the net
operating loss carryforwards, in the amount of $890,387 is
recorded on the Company's financial statement at September 30,
1998. No valuation allowance has been recorded against the
deferred tax asset.
Company management believes that significant, future opportunities
exist in both the school and home markets for its products. The
Company is now equipped with Macintosh and Windows software
engines that facilitate the rapid and less expensive development
of new subject titles. Management also believes that the Company
is well positioned to compete in the educational software market
as a result of its ongoing investment in software development
tools, experienced and stable professional staff, growing
distribution coverage of key markets and a rapidly expanding
installed base within the school market. Management believes that
the Company can make significant progress within its existing
product development and marketing budgets to allow the Company to
maintain the continued, profitable expansion of the business.
The Company is investigating sources of intellectual property and
potential partnerships with other publishers with whom it may base
future publications, Internet commercial activities, or marketing
alliances. Some of these investigations may lead to possible
Company acquisition opportunities, such as the purchase of the
stock of Learning Pathways, Ltd. Of Derby, England, which
was announced in August of 1998, and which should close in the
fourth quarter of this year. Increasingly, management views
these potential acquisitions of other entities as a possible
avenue for accelerating the growth of the Company.
THE AMERICAN EDUCATION CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In October 1996, the Company became a party to litigation in
United States District Court for the District of Columbia entitled
Securities and Exchange Commission, Plaintiff v. The American
Education Corporation, Defendant (the "Action"). In the Action,
the Company admitted that, in violation of certain provisions of
the Securities and Exchange Act of 1934, as amended (the "Exchange
Act"), it failed to file, among other things, certain annual and
quarterly reports. The Company voluntarily entered into a
Consent and Undertaking pursuant to which the Court has issued a
Final Judgment of Permanent Injunction requiring the Company to
(i) file all its delinquent Exchange Act reports and (ii) in the
future, timely file all of its Exchange Act reports. The failure
to file any required report could result in a contempt citation,
the assessment of fines against the Company, or an action by
the Securities and Exchange Commission to deregister the Company's
common stock. As of September 30, 1998 the Company was current
with all filings with the SEC through the end of the fiscal
year December 31, 1997 and the six months ending June 30, 1998.
The Company filed a complaint on July 8, 1997 in the United States
District Court for the Western District of Oklahoma against
Jostens Learning Corporation ("Jostens"). The complaint alleged,
among other things, that Jostens has improperly adopted and used
the mark "A+" and "A+dvantage" in connection with its educational
software, and that Jostens' confusingly similar mark has caused
damage to the Company. The complaint requested, among other
things, monetary damages, and injunctive relief. On June 24, 1998
the Company and Jostens reached a mediated settlement ,without
proceeding to trial, that was favorable to the Company.
Item 2. Changes in Securities
During the quarter ended September 30, 1998, the Company
granted options to purchase 75,000 shares of the Common Stock at a
price of $0.73 per share. These options were issued in a private
transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4 (2) thereof. Additionally,
options to purchase 55,200 shares of common stock were exercised
at a total purchase price of $27,680. Convertible debt and accrued
interest totaling $61,750 was converted into 458,767 shares of
Common Stock during the quarter.
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
(a) The following exhibits have been filed as a part of this
report:
Exhibit No. Description
Exhibit 3.1* Amended and Restated Articles of
Incorporation of The American Education Corporation
Exhibit 3.2** Bylaws of The American Education
Corporation
Exhibit 4*** Form of Stock Certificate
Exhibit 10.1**** Promissory Note of The American Education
Corporation to Rich Carle
Exhibit 10.2***** Directors' Stock Option Plan
Exhibit 10.3****** Stock Option Plan for Employees
Exhibit 10.4**** Loan Agreement between The American
Education Corporation and UMB Oklahoma Bank
Exhibit 10.5**** Promissory Note between The American
Education Corporation and UMB Oklahoma Bank
Exhibit 27.1******* Financial Data Schedule (filed only
electronically with the SEC)
* Incorporated by reference to the same numbered exhibit in
the Current Report on Form 8-K filed by the Company on June 25,
1998.
** Incorporated by reference to the registration statement on
Form S-18 (File no. 2-78660-D) of the Company.
*** Previously filed with the Securities and Exchange
Commission as an exhibit to the Company's registration statement
on form S-18 (File no. 2-78660-D).
**** Previously filed with the Securities and Exchange
Commission with Form 10-QSB dated August 6, 1998.
***** Incorporated by reference to Exhibit B to the Definitive
Proxy Statement filed on April 24, 1998.
****** Incorporated by reference to Exhibit C to the Definitive
Proxy Statement filed on April 24, 1998.
******* Filed herewith.
B. Reports on Form 8-K
On June 25, 1998 the Company filed a Current Report on Form 8-K
regarding the shareholders' approval of an amendment to the
Company's Articles of Incorporation. Attached, as Exhibit 3.1 to
such Form 8-K was a copy of the Amended and Re-stated Articles of
Incorporation of the Company.
On September 28, 1998 the Company filed a Current Report on Form
8-K regarding the appointment of Neil R. Johnson as Vice President
and Chief Financial Officer.
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 12, 1998
By: /s/Jeffrey E. Butler,
Chief Executive Officer
Chairman of the Board
Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM - FORM
10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
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