FORM 10-KSB
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES 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 N. Broadway Extension, Suite 505, Oklahoma City, OK 73116
(Address of principal executive offices)
(405) 840-6031
(Registrant's telephone number, including area code)
Not Applicable
(Former Name, former address and former fiscal year, if changed
since last report)
Securities registered pursuant to Section 12(b) of the
Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the
Exchange 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 [ ]
Indicate by check mark if there is no disclosure of delinquent
filers in response to Item 405 of Regulation S-B contained in
this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. YES [ ] NO [X]
Revenues for the year ended December 31, 1997 $3,670,654
On February 6, 1998 the aggregate market value of the Common
Stock of the registrant held by non-affiliates based on the last
sale price of the registrant's Common Stock on such date, was
approximately $3,337,576.
Number of shares of the registrant's common stock outstanding as
of December 31, 1997: 12,183,579
Transitional Small Business Disclosure Format YES [ ] NO [X]
TABLE OF CONTENTS TO FORM 10KSB
PART I
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Item 1 Description of Business
Item 2 Description of Property
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
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Item 5 Market for Common Equity and Related Stockholder
Matters
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7 Financial Statements
Item 8 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
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Item 9 Directors, Executive Officers, Promoters, and Controls
Persons, Compliance with Section 16(a) of the Exchange Act
Item 10 Executive Compensation
Item 11 Security Ownership of Certain Beneficial Owners and
Management
Item 12 Certain Relationships and Related Transactions
Item 13 Exhibits and Reports on Form 8-K
THE AMERICAN EDUCATION CORPORATION FORM 10-KSB
PART I
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Item 1. Description of Business.
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General.
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The American Education Corporation, formerly, PLASMEDICS, INC.,
(the "Company" or "AEC"), was incorporated under the laws of the
State of Colorado on February 23, 1981. Initial business
activities, associated with the research and development of
medical devices and medical technology, commenced from inception
through 1984. In 1984, the Company acquired all the issued and
outstanding stock of Medquest through the issuance of 9,490,000
shares of the Company's common stock. In 1985, in an agreement
with an affiliate, Medac, Inc., the Company received 67,000,000
shares of Medac common stock, $10,000 in license fees and future
royalties, for the assignment of certain technology rights. In
November 1986, Medquest transferred to Medac, Inc. for $10,000,
the rights to certain technology, computer equipment, and
57,000,000 of its 67,000,000 Medac shares. Thereafter, the
Company was essentially inactive until 1989. In 1989, the
Company sold its remaining 10,000,000 shares of Medac common
stock for $290,000. From 1989 until 1990, the Company initiated
a plan to seek an acquisition, or merger with another company.
In December 1990, the Company entered into an agreement to
purchase substantially all of the assets of American Educational
Computer, Inc. from its parent, UNICO, Inc. (UNICO). The
following major developments relating to the asset purchase are
listed in chronological order:
Purchase of Assets of American Educational Computer, Inc.
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On January 8, 1991, the Company completed the purchase of
substantially all of the operating assets of American
Educational Computer, Inc. ("AECI"), an Oklahoma City-based
company. The sale was consummated pursuant to an asset purchase
agreement between the Company and AECI dated December 31, 1990.
Assets involved in the purchase included AECI trade names,
trademarks, retail product sales rights, non-exclusive
school and library sales rights, specific accounts receivable,
specific inventory, and specific furniture and equipment.
As a component of the transaction, the Company also acquired the
publishing and distributing assets and licenses of Concord Video,
a publisher of special interest video tapes. The acquisition was
for a total purchase price of $990,000 consisting of $190,000 in
cash, paid on the effective date, and $800,000 in notes payable.
The notes payable were subsequently structured into $600,000 in
Convertible Preferred Stock and $200,000 in notes payable with
quarterly payments of principal and interest commencing in
September 1991. The Company also assumed accounts payable
and accrued liabilities of AECI, totaling approximately $173,000.
In August 1991, at a meeting of the Company's shareholders, the
purchase of the assets of American Educational Computer, Inc. was
ratified, a new class of Preferred Stock was authorized and the
shareholders approved the change of the Company's name from
Plasmedics, Inc. to The American Education Corporation.
A plan to discontinue the operations of the Company's Concord
Video division was formally adopted by the board of directors in
November 1992. The plan called for the Company to secure a buyer
for the video division's assets in a timely manner or to
liquidate the assets of the division and effectively abandon the
video operations. The Company was unable to attract a buyer for
the video division, therefore, the Company discontinued video
operations and liquidated remaining video assets during fiscal
1993.
The Company's Business.
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The Company's business is to license or internally develop and
market educational personal computer software and CD-ROM titles.
Except as specified to the contrary, all references to the
Company's current business include the activities associated with
the development and marketing of educational computer software
and CD-ROM based products.
The Company internally develops, and also licenses from third
parties, educational computer software. The Company utilizes both
in-house technical programmers and independent computer
programming companies to develop these products. The products are
sold through retail outlets, distributors, catalog companies,
independent dealers, and direct mail. Sales are made to domestic
and international markets. The products are sold for use in
elementary and high schools, libraries, adult learning centers,
private industry, and for use at home for self-directed
learning and home-based schooling.
The use of personal computers and software as educational and
instructional aids is the major focus of the Company's marketing
strategy, as the use of the personal computer and CD-ROM devices
has been adopted by many of the Nation's schools as they have
become more affordable. The Company's marketing plan calls for
separate marketing efforts to be directed toward the home and
institutional markets. Currently, the Company utilizes a small
employee sales force as well as independent dealers ("school-
dealers") to market its products to schools, industry and
libraries. Each school-dealer generally covers a geographically
limited territory. Other marketing efforts are through business
partners such as National School Services, Inc., as well as
direct mail and catalog companies, which market third-party
products to the school and library markets.
Principal Products.
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Computer Software
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The Company acquired (through its acquisition of AECI) ownership
of software titles and a series of exclusive and non-exclusive
licenses to develop and market personal computer software
products based upon certain courseware in reading, English,
spelling, social studies, bilingual language development and
early childhood development.
Educational software for the elementary and high school markets
is designed for use in classroom instruction and stresses
usefulness to the instructor as well as the student. In
addition, there is a growing use of computer network technology
in schools. The Company's products for schools and the
professional educator versions feature management functions,
which track both individual student and class performance. This
management module also prints reports, lesson materials, tests
and assignments. Further, a hallmark of the Company's products
is an authoring capability which allows the user to add, modify
and expand both graphics and text to the curriculum content
provided by the Company. The Company's software, that is
designed for home use, is also closely related to classroom work,
and is correlated to major national test objectives so that
parents can select software to assist students in a specific
subject and grade level. The Company's computer software
products, particularly those designed for the home market, are
designed to be used without extensive experience with computer
operations.
In an industry where there are in excess of 300 educational
software publishers, the Company has developed a distinctive
niche form of content and delivery. This approach features high
educational value and extensive content that is fully correlated
to the leading states' desired learning outcomes, national
educational objectives and major textbook series. The Company
has concentrated on the design of products that offer educational
significance and substance that is correlated to grade and age
level, with teacher control of content delivery rather than
products which are dependent upon high entertainment value to
maintain student interest.
The majority of the Company's school products are designed for
use in a networked environment. To monitor and facilitate
student performance in this environment, a class of software
referred to as a managed solution, has evolved. This solution is
typically defined as an Integrated Learning System ("ILS"). This
approach provides software controlled class and student lesson
assignments, individualized paths of study, skills assessment,
authoring, time management, integration of third party software
where relevant, and a range of other functions which assist the
educator in directing and understanding the effectiveness of the
software and the learning process. Management believes that
fewer than 10 companies, industry-wide, provide a fully managed
ILS solution or this class of sophisticated educational software
product.
A+dvanced Learning System, registered
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A+LS, from a content perspective, has been designed as a grade
level 1-12 basic skills curriculum solution. It is comprised of
78 subject titles in a multi-media environment with extensive
sound and graphics. Subject areas covered are: reading,
writing, mathematics, science, history, geography and language
arts. Each ascending grade level of the product presents
increasingly more complex concepts, but provides overlapping,
grade level to level subject matter reinforcement. As a body of
published work, it is one of the most extensive in the industry
for the primary, middle and secondary grade levels. A+LS's
content is divided into subject titles, each containing a number
of lessons; each lesson containing a number of activities such as
study, practice, test and essay. These activities are further
supported by lesson related activities. This design facilitates
the use of the advanced A+LS class and student management system.
Educators may select specific lessons to create a curriculum plan
for a specific time period, specifying independent mastery levels
for each lesson. They may also insert third party publishers'
materials into a supported course of study for enrichment or
remediation. The design also permits the development of
individualized courses of study for the at risk or special
education student which might require remediation or specific
emphasis to correct skill deficiencies. Approximately 3000
schools and centers of adult literacy have purchased this product
since its introduction in mid-1995.
In early 1996, the Company began the process of developing a
major content extension of the A+LS elementary and middle school
curriculum through grade level 12. This development process was
largely completed for core mathematics, science, and social
studies titles during the 1997 fiscal year. One A+SSESS! title
will also be developed to support the assessment and testing
requirements for the high school level product offering.
Management believes that the addition of these new products to
the A+LS product family positions the Company with one of the
largest bodies of integrated curriculum content in the industry.
A+SSESS!TM
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A+SSESS is a product family of primary, intermediate, advanced,
and high school modules, which comprise four individual software
titles. A+SSESS has been designed as a companion to A+LS's
extensive curriculum content, as a tool to assist educators in
determining student beginning skill levels in all A+LS subject
areas. A pretest process is utilized for this purpose. After
beginning skill levels are determined, A+SSESS automatically
recommends and prepares lesson plans for each student. A post-
test process is utilized to facilitate measurement of student
academic gains. This product family, designed to complement the
curriculum design of A+LS was introduced in mid-1996 and
approximately 1000 schools have purchased the product since its
introduction.
A+NetTM
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The Company began working on this product in the fourth quarter
of 1997 and released product for beta test activities in January
1998. A+Net is designed to be fully compatible with the
Company's A+dvanced Learning System family of 78 reading,
writing, mathematics, science, social studies and language arts
software titles for grades 1-12. It allows educators to capture
selected Internet site content in A+Net's specially designed
Study the Lesson browser and save this material to a hard drive.
Instructors can then author test questions, critical thinking
skill problems and educational content while offline. A+Net's
sophisticated class and student manager functions will
randomize test questions and produce class instructional software
lessons with detailed student activity and grade reports. All
Internet and teacher-authored content, tests and essay exercises
may also be printed for traditional pen/paper class or homework
assignments.
A+LS/MediaWeaverTM
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The Company entered into an agreement in late 1995 to integrate
certain of the Humanities Software, Inc. popular MediaWeaver
programs into the A+LS delivery format and class and student
management system. The MediaWeaver software series is well known
by educators for its excellent presentation of material and
exercises relating to classical literature. The MediaWeaver
series did not possess any of the management features required by
today's networked schools until its incorporation into the A+LS
management system. Three novel bundles (including nine titles)
and three skill bundles (including nine titles) for elementary,
middle and high school and one MediaWeaver authoring title are
now fully integrated into the A+LS class and student manager.
These programs complement A+LS's basic skills content and provide
a whole language reading and writing dimension to this product
family.
In December 1997, the Company and Humanities agreed to expand the
number of novel and skill bundles, bringing the total novel
titles to 18 and the total skill titles to 18 during the first
quarter of fiscal 1998. In addition, six reading comprehension
titles will also be completed by the end of the first quarter of
1998.
New A+TM
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Introduced in 1994, New A+ is the predecessor product family to
A+LS. It is comprised of 14 subject titles in the areas of
language arts, social studies and science, and is available in
network, lab pack, school stand-alone, site license, and home
versions for Windows, Macintosh and DOS platforms. New A+ has a
management system, which records student grades and activities
and allows full authoring. It does not provide the multi-media
functions, managed lesson sequences or third party program
capabilities that have been incorporated in A+LS. New A+, which
is installed in approximately 1,500 schools nationwide, remains a
viable alternative for schools with older hardware that will not
support the operating requirements of A+LS. Macintosh, Windows,
Windows NT and DOS are fully supported.
Third Party Publishing and Marketing Affiliations.
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The Company is actively pursuing and is being pursued by third
party publishing and marketing companies which have curriculum
content which is complementary to the publications of the
Company. Many of these companies do not have the software
management technology, or the distribution resources of the
Company. These relationships are being sought to supplement and
complement the content of existing and planned A+LS subject
matter as third party programs, which may be launched in a
planned lesson sequence. Management believes this process
postures A+LS as an open architecture, full classroom management
solution. Management also believes this continued expansion of
these types of relationships enhances the value of the Company's
products and strengthens marketing relationships with its
distributors and other business partners.
The Market For Educational Software Products.
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The Company addresses three major market segments for its
products; the school, adult literacy and home markets. The
Company's products except for those especially configured for use
by the professional educator, generally have application in
either market.
School Market
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The school market for educational software is growing at
approximately 17%-20% per annum according to industry sources.
In order for the Company to take advantage of this fast growing
industry it must expand its authorized dealer sales base.
Although significant progress was made in 1997 in the dealer
recruiting program, a major objective is to continue to expand
the Company's dealer base of organizations calling on and selling
into the public school market. The Company achieved agreement or
otherwise secured effective representation in several important,
previously uncovered, geographical areas of the country in the
fourth quarter of 1997. It hired a full time regional manager
for the New England and Middle Atlantic regions, secured
additional representation and coverage in Texas, the Northwest,
and Upper Midwest.
Adult Literacy Market
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The Company believes it has designed its curriculum content
delivery so that it is both appealing and engaging to children
and not offensive to adult learners. As a result, the Company is
receiving significant interest from this segment. In 1997, the
Company established a number of installations in state and
municipal centers of literacy and the juvenile and adult
corrections market segments. Preliminary information from these
installations is that the Company's products are highly effective
in preparing adult high school equivalency tests and other
recognized measurements of literacy. These markets are growing
in excess of 20% per annum according to industry sources. In
some cases, these market segments are served by specialized
distribution and the Company is seeking to secure additional
dealers to support its efforts in this area.
Home Market
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Home education is growing at rates exceeding 20% per year,
according to industry sources. Many families are choosing to
educate their children at home versus through the traditional
education channels. Many of the Company's products are designed
to appeal to the home educator who is seriously involved in
education. The Company's products are marketed as educational
products versus the more widely recognized "edutainment"
products. The Company has completed the work on a home version of
the complete A+LS family in the fourth quarter of 1997. This
version will be available for release in 1998.
In competing for the home market, the Company faces stiff
competition in the traditional retail outlets. AEC does not have
the financial resources to effectively compete in the traditional
retail market. The Company must, therefore, market its products
through unconventional channels. This includes developing and
expanding a distributor base which deals directly with the public
and emerging Internet opportunities.
Trade Names, Service Marks and Logo Types.
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The American Educational Computer, Inc. service mark for the A+
products was registered with the United States Patent Office on
Principal Register, register number 675,666 on July 31, 1987. On
April 15, 1989, the A+ trademark for use with educational
software, was registered with the United States Patent Office.
The Company was notified on November 16, 1995 that the use of the
A+ symbol for educational software was a registered trademark and
is incontestable for this use. Other various trademarks and
logos associated with American Educational Computer, Inc.'s
software products have also been registered. These trade names,
service marks and logo types were included in the assets which
were purchased by the Company from American Educational Computer,
Inc.
On June 16, 1995, the Company filed for the separate and expanded
use of its A+ registered mark as A+dvanced Learning System with
its logo design to describe and identify this extensive family of
educational software products released in the latter part of
fiscal 1995. This mark was registered with the United States
Patent Office on Principal Register, register number 2,038,275,
on February 18, 1996.
The Company filed for additional separate and expanded use of
it's A+ registered mark for use as A+SSESS and A+Net in the
fourth quarter of 1997. These programs and their identity are
viewed as integral elements to the Company's A+dvanced Learning
System product family.
Production and Manufacturing.
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The Company purchases unformatted 3 1/2" software diskettes and
CD-ROM blanks from various sources. The Company owns commercial
quality, high speed software duplication equipment and duplicates
all software internally. The Company develops, with outside
packaging developers, materials and packaging concepts, and
internally authors necessary product manuals. The Company
secures product packaging from external sources and performs
quality control, final assembly, inventory and distribution on
most orders received. The Company has no dependence on any
individual supplier.
Research and Development Costs.
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Initially, the Company relied upon external, independent software
developers for its technology and as the source of software
titles. In June 1991, the Company hired its first, qualified
technical programmer, and in January 1992, retained an
experienced, doctorate level educational specialist on a project
basis. In May 1992, this individual was hired by the Company on
a full-time basis. By the year ended December 31, 1993, the
Company employed a total of three technical programmers and one
technical support person on a full time basis. At December 31,
1997, the Company employs thirteen full time technical
development and support personnel.
The Company makes extensive use of professional educators as
consultants in the design of its curriculum-based products.
These individuals provide the technical and curriculum support on
the development and enhancement of Company products, support
existing customers on technical issues, and engage in limited
programming and content development of new products. Management
believes that it will continue to rely upon external sources for
a portion of its new product requirements. However, the growing
sophistication and complexity of the design of products and the
rapid changes occurring in the marketplace, will require
continued expansion of in-house curriculum and graphics
development resources.
At December 31, 1997, the Company employed four full-time
educational professionals in support of this effort. These
individuals plan, manage and coordinate the efforts of up to
twenty independent teaching consultants and graphic designers.
Costs incurred with product development are charged to research
and development expense until technological feasibility of a
product is established. Thereafter, all software development
costs are capitalized and amortized on a straight-line basis over
the product's estimated economic life. The Company capitalized
costs of $564,166 in software research and development costs in
1997.
Distribution
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In marketing its products the Company utilizes independent
distributors, catalog houses, and its in house sales staff in
areas not served by distributors.
Backlog.
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The Company's software products are normally shipped within ten
days of receipt of the order. The Company believes that a level
of backlog at any particular date may not be a meaningful
indicator of future performance, unless technical difficulties
delay the fulfillment of orders related to the launching of new
products.
Seasonality.
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Decisions by schools and individual consumers to purchase
educational software have most frequently been made at the
beginning, or near the end of school periods. The months of
January and December generally represent the lowest new order
booking months for the Company and the school market industry
segment. This seasonality cycle directly can affect the
Company's total revenues and earnings levels in both the first
and fourth quarterly reporting periods.
Significant Customer
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The Company sells its products almost exclusively to schools through
various distributors of educational materials. In 1997, the Company
had one customer that accounted for more than 10% of total revenues;
National School Services, $506,009 or 13.8%. No individual customer
accounted for more than 10% of sales in 1996.
Competition.
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The educational software industry is highly competitive and
subject to rapid change. There are a large number of companies
developing educational software products. Many of these
companies are better known and have substantially greater
financial, marketing and technical resources than the Company.
Such participants are textbook publishing companies, personal
computer hardware manufacturers and microcomputer software
developers which compete directly with the Company.
The primary competitive factors applicable to the educational
software industry are product features (such as subject areas,
graphics and color), price, ease of use, educational content,
product reliability, sales support and customer service.
Employees.
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During the fiscal year ended December 31, 1997, the Company had
twenty-eight (28) full-time employees. The Company believes that
its relationship with employees is satisfactory.
Item 2. Description of Properties.
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The Company rents office space under a lease agreement; dated
March 1, 1996 through February 1999; at the base rate of $5,247 a
month. On November 6, 1997 the Company subleased additional office
space for an initial base rental of $2,581 a month to $3,073 over
the term of the lease. The leases expire February 28, 1999. Total
office rent expense for the years ended December 31, 1997 and 1996
was $68,426 and $56,241, respectively.
Item 3. Legal Proceedings.
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In 1996, the Company became a party to an action in the United
States District Court of the District of Columbia entitled
Securities and Exchange Commission, Plaintiff v. 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 with the Securities and Exchange Commission,
among other things, certain annual and quarterly reports. The
Company entered into a Consent and Undertaking pursuant to which
the Court issued a Final Judgment of Permanent Injunction requiring
the Company to (i) file all of 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 or the assessment of fines against the Company or an action
to suspend trading of the Company's stock.
During July 1997, the Company filed a trademark infringement
action against Jostens Learning Corporation for unauthorized use
of the Company's registered trademark. It is the belief of the
Company that Jostens' unauthorized use of its registered
trademark is damaging to the Company and is causing significant
confusion for the Company's customers. The Company has
historically and successfully defended its trademark position
when it became aware of illegal and unauthorized use.
In addition, the Company is the subject of various legal
proceedings in the normal course of business. However,
management knows of no pending or threatened litigation involving
the Company, other than the Action, that is considered material
to the ongoing operations and viability of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
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No matters were submitted to a vote of the security holders during
the fourth quarter ending December 31, 1997.
PART II
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Item 5. Market for Common Stock and Related Stockholder Matters.
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As of December 31, 1997, there were approximately 2,500 record
holders of the Company's common stock. Since its initial public
offering in 1982, the Company's securities have been traded in the
over-the-counter market. There have been no market makers for
the Company's common stock for the past two years. The following
is a summary of closing bid and ask prices for each of the 1997
quarters. No information is available for the 1996 quarters due to
very limited trading activity during that period.
BID ASK
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Quarter Ending March 31, 1997 1/2 3/4
Quarter Ending June 30, 1997 23/32 15/16
Quarter Ending September 30, 1997 1 1 1/8
Quarter Ending December 31, 1997 3/4 1 1/32
The quotations reflect inter-dealer prices, without retail mark-
up, mark-down, or commission and may not represent actual
transactions.
Dividends.
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The Company has never declared a cash dividend on the Common Stock
and does not anticipate declaring any dividends on the Common Stock
in the foreseeable future. The Company intends, at this point, to
retain any future earnings to support the Company's growth. Any
payment of cash dividends in the future will be dependent upon the
amount of funds legally available and is contingent upon the Company's
earnings, financial condition, capital requirements, and other factors
which the Board of Directors deem relevant.
Item 6. Management's Discussion and Analysis or Plan of
Operation.
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Certain matters discussed herein (including the documents
incorporated herein by reference) are 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 by reason of factors
such as future economic conditions, including changes in customer
demands; future legislative, regulatory and competitive developments
in markets in which the Company operates; and other circumstances
affecting anticipated revenues and costs.
Liquidity and Capital Resources.
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The Company, after assuming operational control of AEC, has
invested significantly in personnel additions, 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 and expand the Company's product
offerings. To finance the business, management has utilized
long-term, subordinated debt from private investment sources,
secured bank revolving credit lines, and lease financing sources.
Management anticipates that the Company will be able to meet the
preponderance of its financial needs from internally generated
funds in 1998. However, additional financing may be required to
accelerate the Company's growth and to take advantage of
strategic growth opportunities through acquisitions that may
exist in the electronic media for education industry. In
addition, management is focused on the need to gain software
industry standard valuations on the business and recognition of
its potential for future profitable growth. In order to gain
this recognition, the Company may undertake additional financing
to strengthen its financial position and to provide management
with the flexibility offered by this strength to deal with value
enhancement options that may be presented in the future.
As of December 31, 1997 the Company's principal sources of
liquidity included cash and cash equivalents of $283,636, net
accounts receivable of $623,287 and inventory of $8,168. The
Company's net cash provided by operating activities increased by
314% from $178,962 in 1996 to $741,305 in 1997. Net cash used in
investing activities increased by 103% from $320,012 in 1996 to
$649,748 in 1997 and was comprised primarily of investment in
capitalized software development costs.
The amount of inventory needed to support expanding sales is
minimal since the Company has a "just in time" inventory plan
that can create the appropriate media (diskettes and CD-ROM's) on
an almost as needed basis. The amount of physical space required
for inventory storage has declined as the Company has shifted to
the CD-ROM delivery system. Management anticipates that the
working capital requirements to support continued expansion will
be funded from continuing operations.
Effective June 30, 1996, the Company exchanged 2,651,274 shares
of common stock for $731,989 of principal and $222,509 of accrued
interest related to convertible notes. At December 31, 1997,
$58,000 of convertible notes, including $8,000 of accrued
interest, with a conversion price per share of $.136, remain
outstanding.
At December 31, 1997, the Company had working capital of $347,560
compared to a deficit of ($203,497) at December 31, 1996. Certain
of the Company's accounts payable, approximately $52,000, date
back to between 1991 and 1993. These accounts are disputed and no
payments have been made. Management anticipates that these
accounts, if paid at all, will be settled for significantly less
than their face value.
Additionally, at December 31, 1997, the Company had recorded as
current liabilities approximately $125,739 of customers' credit
balances. These deposits will be recognized as revenue in the
first half of 1998 as product is shipped, thereby reducing these
balances.
The Company believes that it will enjoy, as demonstrated in
fiscal 1997, increasingly larger dollar size and accelerating
numbers of school district-wide adoption of its products. This
trend is a direct result of the expansion of the A+LS product
line into secondary titles and the expansion of the A+SSESS
products that allow the Company to participate in district-wide
marketing efforts.
With the Company's enhanced gross margins and expense control,
demonstrated during fiscal 1997, and product line expansion of
its product and curriculum base, management believes that the
Company will enjoy similar expansion of its revenues in the
fiscal 1998-period to that experienced in the 1997 over 1996
fiscal periods.
Management believes that it can undertake this expansion with
most of the Company's working capital requirements secured from
its operating cash flows. If successful, the Company should
continue to enhance the liquidity of the business and the overall
strength of the Company's balance sheet and financial position.
Additional working capital beyond that available within the
Company has been and may be required to expand operations.
Management has and will consider options available in providing
such funding, including debt financing and capital enhancement.
The Company had used a variety of short and long term financing
until early 1997. Since that time the Company has not required
any financing to fund its expansion. In addition, the Company
undertook, in late 1997, a significant expansion of its office
facilities, which was funded from cash provided by continuing
operations. Although working capital financing was not necessary
in 1997, future conditions may warrant this consideration.
Impact of the Year 2000
- -----------------------
Many computer systems will need reprogramming to deal with
problems associated with the coming year 2000 issues (Y2K). The
problems are associated with computer systems using two digits
for the year portion of the date. When the year 2000 comes, many
systems will not know if it is the year 1900 or the year 2000.
Management has evaluated the potential impact of the coming year
2000 and believes that there is no material effect on either the
Company's internal computer systems or the Company's software
that is marketed to the public.
Results of Operations
- ---------------------
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended
December 31, 1996.
- -----------------------------------------------------------------
The following is a discussion of the results of operations for
the fiscal year ended December 31, 1997, as compared to the
fiscal period ended December 31, 1996.
Net software revenues for the twelve months ended December 31,
1997, totaled $3,670,654 compared to net software revenues of
$2,393,934 for the year ended 1996. This represents an increase
of 53% in 1997. The increase in sales is primarily attributed to
the acceptance of the A+dvanced Learning System family of
products, the release of new subject titles associated with this
product upon the conclusion of lengthy development activity
initiated in 1995 and enhanced relationships with major
educational publishers and distributors.
In addition, the Company entered into an agreement with National
School Services, Inc. (NSS) to work with that organization to
translate its A+dvanced Learning System mathematics titles for
grade levels 1-8 into Spanish and to license the new Spanish
version for NSS's exclusive distribution in certain Spanish-
speaking markets. This task was completed in the third quarter
of 1997. The Company will have the rights to sell the Spanish
version in the United States and other world markets. The formal
agreement with National School Services was signed March 12,
1997.
Cost of goods sold for the year ended December 31, 1997,
decreased by approximately 26%, even though sales increased by
approximately 53%. This decrease in direct costs reflects the
efficiency in which software products are now produced on CD-ROM.
The use of this medium also positively effects the cost of
packaging, handling and freight associated with products that are
marketed primarily into 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. Actual
component costs, direct labor costs, as well as the physical
space associated with the assembly of software products have been
reduced sharply. Excluding the costs of allocated overhead, the
Company's principal products provide gross profit margins ranging
from 75% to 95%.
Total operating expenses recorded for the year ended December 31,
1997, were $2,514,394 compared to $1,879,505 for the previous
year. This represents an increase of approximately 34%. As a
component of total operating expenses, selling and marketing
costs increased by approximately 112%, from $712,230 in fiscal
1996 to $1,510,084 in 1997. The increase in 1997 selling
expenses is a direct result of increased selling efforts required
to support higher sales objectives. General and administrative
expenses increased by 5% during 1997, from $816,583 to $859,473.
This increase is related to expanded technical support staff
added as a result of the expanding customer base and higher
legal, accounting and professional costs related to expansion of
third party relationships and return to full compliance in the
Company's SEC reporting obligations.
Costs incurred in conjunction with product development are
charged to research and development expense until technological
feasibility is established. The comparability of these amounts
reflects the expansion of the Company's developmental activities.
Capitalized software costs at January 1, 1997 were $1,201,069
with additional costs capitalized totaling $564,166 during 1997.
The Company maintained ongoing emphasis on development of new and
enhanced products. During 1997, the Company substantially
completed the curriculum development progress on 17 new high
school titles and one companion A+SSESS! module and achieved
release of these products during the fourth quarter. In
addition, the Company initiated development on A+Net, and
substantially completed work on the A+LS Home version. The
Company commenced planning and initial development efforts on
revised, updated and expanded curriculum offerings, and Version
3.0 of the A+dvanced Learning System product family.
Interest expense decreased by approximately 86% during 1997, from
$50,194 in fiscal 1996 to $6,919 for 1997. This decrease
reflects the reduction of interest bearing debt, as well as the
improving financial condition of the Company during 1997.
Net income for the current year improved by approximately 1947%
during 1997 compared to the prior year. This improvement from
net income of $122,681 in 1996 to net income of $2,511,552 in
1997 reflects the higher sales levels noted above, as well as the
improving gross margins related to concentration of sales in more
profitable markets and cost control of general and administrative
expenses. In addition, the Company benefited from a one-time,
non-recurring change in the valuation allowance relating to net
operating loss carryforwards in the net amount of $1,506,032
which is recorded as an asset on the balance sheet as well as
recognized on the statement of operations. Management believes
that with these ongoing development efforts with increased selling
efforts through expanded third party and independent dealers; the
Company is now positioned to continue to expand sales results
from the home and school education markets.
In 1997, the Company's past financial constraints and need to
access external capital sources began to abate as a result of
significant improvements in revenues, and cash flows from
operations. As sales and cash availability from operations
improved during the 1997 fiscal period, management has reduced
corporate debt levels and will continue this practice during
fiscal 1998. The Company's cash position at the end of fiscal
1997 improved by $90,289 or 47% over the cash position at the end
of the 1996 fiscal period. Current liabilities at the end of 1997
declined 28% over the current liabilities at the end of 1996, and
total liabilities declined 21% over the same period. Stockholders'
equity as a percent of total assets improved from 15% to 79%
during the 1997 fiscal period.
Company management believes that significant opportunities exist
in the school, adult literacy and home markets for future Company
growth. 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 1997. 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 Company has taken the Internet into consideration in its
Version 3.0 planning and design as a potential new channel of
distribution for both products and services. During 1997, the
Company continued strategic planning for the development of
programming technology and curriculum content development to take
advantage of this still developing and emerging channel.
Management believes that the Internet will become an important
future factor in the Company's delivery of new products and
services.
The negotiations relative to the acquisition of Projected
Learning Programs Inc., (PLP), started in late fiscal 1997.
This acquisition was closed March 26, 1998, but is to be
effective January 1, 1998. This event, subsequent to the
close of the Company's fiscal year, is expected to contribute to
the Company's growth, profitability and financial position in the
1998 fiscal year. PLP is viewed by the management of the Company
as a strategic acquisition to gain access to the vocational
school and Junior and Community college post-secondary market
segments, which are not fully penetrated by the Company's
distributors. Projected Learning had $29,390 in cash, net
accounts receivable of $89,903, and inventory of $23,981 at
December 31, 1997. Net sales for 1997 were $898,223.
Item 7. Financial Statements.
- ---------------------------------
Financial Statements and Financial Statement Schedules - See
Index to Financial Statements and Schedules immediately following
the signature page of this report.
Item 8. Accountants
- -----------------------
Steakley, Gilbert & Bozalis, P.C. has audited the Company's financial
statements for the years ending December 31, 1994, 1995, 1996 and 1997.
There are no disputes with the previous or current independent
accountants regarding matters of accounting or reporting.
PART III
- --------
Item 9. Directors, Executive Officers, Promoters and Control
Persons.
- --------------------------------------------------------------
The directors and executive officers of the Company are set forth
below. All directors hold office until the next annual meeting
of stockholders, or until their death, resignation, retirement,
removal, disqualification, or until their successors have been
elected and qualified. Vacancies in the existing board are filled
by a majority vote of the remaining directors. Officers serve at
the will of the board of directors.
Name Age Position Director Since
- -----------------------------------------------------------------
Jeffrey E. Butler 56 President, Director, 1989
Chief Executive Officer,
Chief Financial Officer
Thomas Shively 44 Executive Vice President and
Chief Operating Officer
R. Mark Youngs 50 Vice President - Finance
Jeff Butler, Jr. 33 Vice President Sales and
Marketing
Monty C. McCurry 52 Director 1989
Newton W. Fink 58 Director 1991
Stephen E. Prust 52 Director 1992
Business Experience.
- --------------------
JEFFREY E. BUTLER was named a director of the Company in August
1989 and was elected Chief Executive Officer and President on
March 31, 1990. Since 1985, Mr. Butler has been a management
consultant to businesses in the biotechnology, computer science,
software, educational and entertainment video industries. Mr.
Butler also served as a director to Video Professor Industries,
Inc., a public corporation, from February 1, 1989 to October 31,
1990, when he resigned this directorship. Prior to establishing
his personal services business, Mr. Butler was, from 1980 to
1985, the Chief Executive Officer and President of Infomed
Corporation, an Englewood, Colorado-based provider of computer
diagnostic equipment and data management services to hospitals,
leading corporations and physicians. Prior to 1985, Mr. Butler
was employed by Sandoz, Ltd., Corning, Inc. and the Becton
Dickinson Corporation in middle and senior management positions.
THOMAS A. SHIVELY joined the Company as Executive Vice President
in September 1991. From 1990 to 1991, Mr. Shively was Vice
President and General Manager of AVID Home Entertainment, a
division of LIVE Inc., with headquarters in Denver, CO. From
1989 to 1990, he was Vice President and General Manager of the
Richie Resource Group with headquarters in Minneapolis, MN. From
1978 to 1988, he was employed by Gelco Corporation, Minneapolis,
MN, a $2 billion NYSE firm that was purchased by General Electric
Corporation in 1988. During the first five years of his career
with Gelco, he was Director of Corporate Planning and from 1983,
he served as a staff Vice President and as a Vice President of
various Gelco operating divisions. Upon graduation from the
Wharton School of Finance and Commerce in 1976, Mr. Shively began
his business career with the 3M Corporation, Minneapolis, MN.
R. MARK YOUNGS has been employed by AEC since April 1997. Prior
to joining the Company, he was the Chief Financial Officer for
Golf USA, Inc., an Oklahoma based retail franchiser of golf
apparel and equipment from 1994 to 1996. Prior to this position
he was an independent financial consultant, Director of Franchise
Finance for Pennzoil-Jiffy Lube and Vice President of Finance for
B-Tech, Inc. Mr. Youngs is a graduate of Brigham Young University
and holds an MBA from the University of Oregon.
JEFFREY E. BUTLER, JR. has been employed by the Company since
March 1994. In July 1997 he was promoted from Director of School
Sales to Vice President and an officer of the Company. Prior to
joining the Company he was a senior product manager with Birtcher
Medical Systems, Inc. From 1989 to 1991 he was employed as a
sales representative and a district sales manager with C. R.
Bard, Inc. From 1985 to 1990 he was employed by the Ortho
Diagnostics Division of Johnson and Johnson as a sales
representative. Mr. Butler graduated with a BA in Molecular
and Cellular Biology, 1985 from the University of Colorado.
MONTY C. MCCURRY was named a director of the Company and was
elected Secretary and Treasurer in April, 1989. Upon the
acquisition of assets from AECI, Mr. McCurry relinquished the
position of Secretary and Treasurer to the Company's full-time
Chief Financial Officer. Since 1985, Mr. McCurry has been
President and owner of Executive Resource Management, an
executive search firm with headquarters in Aurora, Colorado.
From 1969 to 1985, he was associate general manager of Paul M.
Riggins and Associates, a Denver, Colorado-based executive
search firm.
NEWTON W. FINK, EdD, was named a director of the Company on
January 8, 1991. Since 1984, Dr. Fink has been President of
Computer Instructional Services, Inc., a privately held
corporation providing computer educational services to
individuals, schools, corporations and institutions. Prior to
founding Computer Instructional Services, Inc., Dr. Fink was the
Superintendent of Schools in Fort Lupton, Colorado and Hillside,
Illinois.
STEPHEN E. PRUST has been a director of the Company since April
1992. As a director, he has worked to develop special retail
marketing strategies for the Company's software products. From
1990 to 1992, he was the President of AVID Home Entertainment, a
division of Live Entertainment, Inc., a major NYSE video
production company. From 1981 to 1990, Mr. Prust was a
consultant to companies in the entertainment industry. In 1975,
Mr. Prust founded Dominion Music, Inc., a joint venture with K-
Tel Records, Inc. He served as President of Dominion Music until
his personal interests in the venture were acquired by K-Tel in
1981.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, executive officers and holders of
more than 10% of the Common Stock to file with the Securities and
Exchange Commission initial reports of ownership and reports of
changes in ownership of the Common Stock. Based solely upon a review
of Forms 3, 4 and 5 furnished to the Company with respect to the year
ended December 31, 1997, to the best of the Company's knowledge, the
Company's directors, executive officers and holders of more than 10%
of its Common Stock timely filed the reports required by Section 16(a).
Item 10. Executive Compensation.
- -----------------------------------
Cash Compensation.
- ------------------
The following table shows the cash compensation of the Company's
Chief Executive Officer, as well as all executive officers and
employees paid in excess of $100,000, and all compensation paid
to the Company's other officers and directors, as a group, who
served during any portion of the preceding year, who earned less
than $100,000.
Name of Individual or Number in Group Cash Compensation (1)
- ------------------------------------- ---------------------
Jeffrey E. Butler (1, 2, 3) 1997 $ 83,878
1996 $ 60,570
1995 $ 94,349
Directors and executive 1997 $299,335
officer(s) as a group 1996 $204,540
(4 persons) (1, 3) 1995 $242,550
(1) Exclusive of personal benefits and other forms of non-cash
compensation, the aggregate value of which did not exceed the
lesser of $25,000, or 10% of the cash compensation shown for each
officer, or for all officers and directors as a group.
(2) The Company has employment agreements with Jeffrey E.
Butler, Thomas Shively, and Jeffrey E. Butler, Jr. which
guarantee their salary at a minimum of the annual amount
authorized by the Board of Directors, plus incentive bonus that
is based upon profitability and, in the case of Mr. Shively, on
attainment of sales and profit plan. Mr. Butler, Mr. Shively,
and Mr. Butler Jr. have severance provisions in their respective
understandings that their compensation will continue in force for
six months for Mr. Butler and four months for Messrs. Shively and
Butler, Jr., respectively, should they be terminated by the
Company for any reason, other than a willful act of fraud, or the
failure to spend the necessary time in the execution of their
respective duties.
(3) Excludes $11,551 for 1997, in payments made to Mr. Butler
for reimbursement of out of pocket relocation expenses.
In 1991 the Company initially entered into a consulting agreement
with Mr. Butler for $65,000 per year and 2.5% of net pre-tax
income. Due to the uncertain financial future of the company, Mr.
Butler did not receive his full compensation as established by
the Board of Directors for the years 1991 - 1996. At June 30,
1996 the deferred compensation amounted to $63,881.
Of the $94,349 Mr. Butler received in 1995, $39,177 represented
reimbursements for, among other things, Mr. Butler's travel and
for the travel of company employees and related affiliates.
At June 30, 1996 Mr. Butler converted all historically accrued
and unpaid compensation in the amount of $63,881 into 127,762
shares of common stock (at $0.50 per share) as part of the major
restructuring of the Company's debt and convertible debt. As of
July 1, 1997 Mr. Butler's salary was increased to $84,040 per year.
As of July 1, 1997 Mr. Butler voluntarily terminated his profit
sharing plan to provide adequate and reasonable bonuses for all
the employees of the Company. The new Company wide profit sharing
plan consists of 5% of the Company's pre-tax net income and is
distributed to all qualified employees.
Before the adoption of the Company wide profit sharing plan in
July 1997, Mr. Butler accrued $18,019 in unpaid profit sharing
from the first six months of the year that remains due and
payable to him from the Company.
In March 1996, a Non-Qualified Stock Option Plan was approved by
the Board of Directors. Non-qualified stock options to purchase
a total of 1,301,195 shares of restricted common stock at a price
of $.50 per share were granted to 20 employees and key associates
during 1996. Of this total, 1,203,195 remain outstanding at
December 31, 1997.
None of the options granted in 1996 have been exercised.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
- ----------------------------------------------------------------
The following table sets forth ownership of the common stock of
each director and officer, all officers and directors as a group,
and each person known or believed by the Company to have
beneficially owned five percent or more of the Company's
outstanding common stock as of March 5, 1998. Unless otherwise
indicated, the beneficial owner has sole voting and investment
power over the common stock listed below:
Shares Beneficially Owned
Title of Class
Name/Address of Beneficial Owner Number Percent
- ----------------------------------------------------------------------------
Jeffrey E. Butler (1) Common 981,904 7.8%
4217 Old Farm Road
Oklahoma City, OK 73120
Thomas A. Shively (2) Common 449,664 3.6%
14431-C North Penn
Oklahoma City, OK 73134
R. Mark Youngs (3) Common 75,000 0.6%
7112 Summit Drive
Oklahoma City, OK 73162
Jeffrey E. Butler, Jr. (4) Common 253,919 2.1%
12901 North McArthur
Oklahoma City, OK 73142
Monty C. McCurry (5) Common 108,400 0.9%
2134 S. Eagle Ct.
Aurora, CO 80014
Newton W. Fink (6) Common 76,400 0.6%
921 Broadway
Ft. Lupton, CO 80621
Stephen E. Prust (7) Common 435,768 3.5%
9025 East Kenyon Avenue
Denver, CO 80237
John D. Garber (8) Common 6,379,108 50.8%
7530 Navigator Circle
Carlsbad, CA 92009
Robert Schoolfield Common 1,536,517 12.6%
5 Pleasant Cove
Austin , TX 78746
Frederick G. Weiss, Jr. Common 662,897 5.4%
RR 2 Box 280
Careyville, FL 32427
Officers and Directors
as a Group (7 persons) Common 2,381,055 18.1%
(1) (2) (3) (4) (5) (6) (7)
(1) The amount and percentage figures include the possible
exercise of 352,000 common stock options, with an exercise price
of $.50 per share.
(2) The amount and percentage figures include the possible
exercise of 259,195 common stock options, with an exercise price
of $.50 per share.
(3) The amount and percentage figures include the possible
exercise of 75,000 common stock options, with an exercise price
of $.50 per share.
(4) The amount and percentage figures include the possible
exercise of 120,000 common stock options, with an exercise price
of $.50 per share.
(5) The amount and percentage figures include the possible
exercise of 70,000 common stock options, with an exercise price
of $.50 per share.
(6) The amount and percentage figures include the possible
exercise of 70,000 common stock options, with an exercise price
of $.50 per share.
(7) The amount and percentage figures include the possible
exercise of 120,000 common stock options, with an exercise price
of $.50 per share.
(8) The amount and percentage figures include the possible
conversion of 371,471 common shares for convertible debt loaned
to the Company pursuant to the loan agreement between Mr. Garber
and the Company. The Company borrowed funds and created
indebtedness in 1991 of $50,000, which may be converted at the
option of Mr. Garber into shares of the Company's Common Stock at
an exchange rate of $0.1346 per share.
Item 12. Certain Relationships and Related Transactions With
Management and Others.
- --------------------------------------------------------------
Prior to 1997 the Company paid consulting fees to AMD Corporation.
Jeffrey E. Butler is an officer of, and owns more than 10% of the
equity ownership interest in AMD Corporation.
The Company paid $400.00 to Jeffrey E. Butler in 1997 as reimbursement
of expenses incurred in connection with consulting services rendered
by Mr. Butler to the Company. The Company paid Jeffrey E. Butler
$11,557 in reimbursement of relocation expenses in 1997.
The Company paid $1,733.00 to Executive Resource Management in
1997 for recruiting services rendered by that entity to the Company.
Monty C. McCurry, who is a director of the Company, is an executive
officer of, and owns more than 10% of the equity ownership interest
in Executive Resource Management.
In years prior to 1997, Stephen E. Prust, who is a director
(and a director nominee) of the Company, rendered consulting services
to the Company. Mr. Prust did not receive any remuneration from the
Company in 1997 in any capacity other than as a director.
In March 1995, the Company entered into an agreement with a
corporate affiliate of John D. Garber, who beneficially owns
approximately 50.8% of the Common Stock, to engage in the financing
of the Company's accounts receivable. This financing was performed
through a corporation controlled by Mr. Garber, AmEd Financing Company.
Under the terms of this agreement, AmEd Financing Company made advances
to the Company during 1995 and the initial protion of 1996. Unpaid
advances under this financing arrangement were convertible into
common stock of the Company, at the option of the holder, at a
conversion price of $.50 per share. All tangible assets of the Company
are pledged to AmEd Financing Company as security for advances under
the terms of this agreement. Effective June 30, 1996, AmEd Financing
Company converted unpaid advances made to the Company by AmEd
Financing Company in the amount of $290,000, plus accrued interest
of $34,481, into 648,962 shares of Common Stock. There are currently
no amounts owed by the Company to AmEd Financing Company under the
financing arrangement.
The sole financial arrangement that the Company has with any
shareholder, director, or officer is a loan owing from the
Company to Mr. Garber in the amount of $50,000 plus accrued
interest. This note provides Mr. Garber with a first lien
position on substantially all the Company's assets. Mr. Garber
has the option to convert this note into 371,471 shares of the
Company's common stock at $0.1346 per share. Management
anticipates that this loan will be repaid during fiscal 1998.
PART IV
- -------
Item 13. Exhibit, Financial Statement Schedules, and Reports on
Form 8-K.
- -----------------------------------------------------------------
(a) The following documents have been filed as a part of this
annual report:
Exhibit No. Description of Exhibits
- ----------- -----------------------
3.1* Articles of Incorporation of The American Education
Corporation
3.2* Bylaws of The American Education Corporation
11.1** Statement re: computation of per share earnings
21** Subsidiaries of The American Education Corporation
27.1** Financial Data Schedule (filed only with the SEC)
* 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)
** Filed herewith
(b) Reports on Form 8-K, the Company filed with the SEC a Current
report on Form 8-K announcing the acquisition of Projected Learning
Programs, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 30, 1998 By: /s/Jeffrey E. Butler,
----------------------
Chief Executive Officer
Chief Financial Officer
Chairman of the Board
Treasurer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Name Title Date
/s/Jeffrey E. Butler Chief Executive Officer March 30, 1998
Chief Financial Officer
Chairman of the Board
Treasurer
/s/Monty C. McCurry Director March 30, 1998
/s/Newton W. Fink Director March 30, 1998
/s/Stephen E. Prust Director March 30, 1998
The American Education Corporation
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Item Page No.
- -----------------------------------------------------------------
Independent Auditors' Report F-1
Financial Statements:
Balance Sheet, December 31, 1997 F-2
Statements of Operations for the years ended
December 31, 1997 and 1996 F-3
Statements of Stockholders' Equity for the years
ended December 31, 1997 and 1996 F-4
Statements of Cash Flows for the years ended
December 31, 1997 and 1996 F-5
Notes to the Financial Statements F-7
All schedules are omitted as the required information is included
in the financial statements or notes thereto or is not present in
sufficient amounts.
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To Board of Directors and Stockholders
The American Education Corporation
Oklahoma City, Oklahoma
We have audited the balance sheet of The American Education
Corporation as of December 31, 1997 and the related statements of
operations, changes in stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of The American Education Corporation as of December 31, 1997 and
the results of its operations and cash flows for each of the two
years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Oklahoma City, Oklahoma
March 5, 1998
F-1
THE AMERICAN EDUCATION CORPORATION
BALANCE SHEET
December 31, 1997
ASSETS
Current assets:
Cash $283,636
Accounts receivable, net of allowance for returns and
uncollectible accounts of $32,805 (Note 1) 623,287
Inventory (Note 1) 8,168
Prepaid expenses and deposits 32,593
Deferred income taxes (Note 7) 13,122
---------
Total Current Assets 960,806
Property and equipment, at cost (Note 1) 314,998
Less accumulated depreciation and amortization (150,938)
---------
Net property and equipment 164,060
Other assets:
Capitalized software costs, net of accumulated
amortization of $1,000,730 (Note 1) 764,505
Goodwill, net of accumulated amortization of
$246,800 (Note 1) --
Deferred income taxes (Note 7) 1,506,032
----------
Total other assets 2,270,537
----------
Total Assets $3,395,403
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable trade $132,156
Accrued liabilities (Note 12) 319,818
Accounts payable - Affiliate 18,000
Customer deposits (Note 13) 125,739
Current portion of capital lease obligation (Note 5) 8,021
Income taxes payable (Note 7) 9,512
---------
Total current liabilities 613,246
Long-term debt (Note 4) 58,000
Capital lease obligation (Note 5) 46,761
--------
Total liabilities 718,007
--------
Commitments and contingencies (Notes 5, 6, 8, 11 and 15) --
Stockholders' Equity (Note 3)
Preferred Stock $.001 par value;
Authorized-50,000,000 shares, issued and outstanding-none;
liquidation preference-$.02 per share --
Common Stock, $.025 par value;
Authorized 15,000,000; issued and outstanding-
12,183,579 shares 304,590
Additional paid in capital 5,237,093
Retained deficit (2,864,287)
-----------
Total stockholders' equity 2,677,396
-----------
Total liabilities and stockholders' equity $3,395,403
See accompanying notes and accountants' report.
F-2
THE AMERICAN EDUCATION CORPORATION
STATEMENTS OF OPERATIONS
Years ended December 31, 1997 and 1996
1997 1996
---- ----
Sales (Note 1) $3,670,654 $2,393,934
Cost of goods sold 266,980 360,739
---------- ----------
Gross Profit 3,403,674 2,033,195
---------- ----------
Operating expenses:
Selling and marketing (Note 1) 1,510,084 712,230
General and administrative 859,473 816,583
Provision for bad debts 23,140 83,365
Amortization of capitalized
software costs 121,697 267,327
---------- ----------
Total operating expenses 2,514,394 1,879,505
---------- ----------
Operating income 889,280 153,690
Other income (expense):
Interest and dividend income 4,203 1,995
Miscellaneous income 115,346 31,156
Interest expense (6,919) (50,194)
Factoring costs -- (13,966)
--------- ----------
Net income before income taxes 1,001,910 122,681
Deferred income tax provision 306,052 71,000
Current income tax provision 9,512 --
Valuation allowance - change at
beginning of year (Note 7) (1,825,206) (71,000)
----------- ---------
Net income $2,511,552 $122,681
----------- ---------
Earnings per share: (Note 16)
Basic $.21 $.012
Diluted $.19 $.012
See accompanying notes and accountants' report.
F-3
THE AMERICAN EDUCATION CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1997 and 1996
Additional
Common Stock paid in Retained
Shares Amount capital deficit
----------------- ----------- ---------
Balance at
December 31, 1995 8,570,865 $214,272 $4,083,616 $(5,498,520)
Issuance of common
stock for cash at
$.20-$.50 per share 546,517 13,663 229,596 --
Issuance of common
stock upon conversion
of debts at $.20-$.75
per share 2,689,770 67,244 921,213 --
Issuance of common
stock for services
rendered at $.02
per share 363,677 9,092 (1,795) --
Net Income 122,681
Balance at ---------- ------- --------- -----------
December 31, 1996 12,170,829 304,271 5,232,630 $(5,375,839)
Issuance of common
stock for services
at $.375 per share 12,750 319 4,463 --
Net Income 2,511,552
----------- ------- ---------- ----------
Balance at
December 31, 1997 2,183,579 $304,590 $5,237,093 $(2,864,287)
See accompanying notes and accountants' report.
F-4
THE AMERICAN EDUCATION CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 and 1996
1997 1996
----------- --------
Cash flows from operating activities:
Net Income $2,511,552 $122,681
Adjustments to reconcile net income
to net cash provided by operating
activities:
Deferred income taxes (1,519,154) --
Depreciation and amortization 194,792 342,827
Reserve for bad debts 23,140 83,365
Gain on debt settlement (107,629) (31,158)
Services rendered for common stock 4,782 --
Changes in assets and liabilities:
Accounts receivable (238,249) (361,191)
Inventories 7,741 4,077
Prepaid expenses and deposits (151) (25,295)
Accounts payable and accrued
liabilities (76,290) (99,344)
Customer deposits (68,741) 125,000
Income taxes payable 9,512 --
Accounts payable - Affiliate -- 18,000
Net cash provided by operating -------- --------
activities 741,305 178,962
Cash flows from investing activities:
Purchase of property and equipment (85,582) (43,013)
Software development costs
capitalized (564,166) (276,999)
Net cash used in investing --------- ---------
activities (649,748) (320,012)
Cash flows from financing
activities:
Proceeds received from issuance of debt -- 34,256
Principal payment on capital lease
obligation (1,268) --
Issuance of common stock for cash -- 243,259
Net cash provided by (used in) -------- --------
financing activities (1,268) 277,515
Net increase in cash 90,289 136,465
Cash at beginning of year 193,347 56,882
-------- --------
Cash at end of year $283,636 $193,347
-------- --------
Interest paid in cash $1,919 $ --
See accompanying notes and accountants' report.
F-5
THE AMERICAN EDUCATION CORPORATION
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Years Ended December 31, 1997 and 1996
During 1996, $773,245 of principal debt and $222,509 of accrued
interest and accounts payable were converted to 3,053,447 shares
of common stock. The Company acquired office equipment under a
financing lease in the amount of $56,050 during 1997.
See accompanying notes and accountants' report.
F-6
THE AMERICAN EDUCATION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. Summary of significant accounting policies
- ---------------------------------------------
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.
History and business activity
The American Education Corporation (formerly Plasmedics, Inc.)
was incorporated under the laws of the State of Colorado on
February 23, 1981. Through 1986, the Company's principal purpose
was to manufacture and market medical devices and medical
technology. The Company's activities from inception through 1984
were directed toward raising equity capital, acquisition of
license and patent rights and research and development. From
1986 through 1990, the Company was essentially inactive and
seeking acquisition or merger candidates.
On January 8, 1991, the Company purchased substantially all of
the assets of American Education Computer, Inc., and assumed
specific trade accounts payable and other accrued liabilities
related to that business.
On August 15, 1991, Plasmedics, Inc., changed its name to The
American Education Corporation (AEC). AEC's principal business
is the development of educational computer software and its
distribution to retail outlets and school districts nationally.
Accounts receivable factoring
Until June 1996, the Company factored certain of its receivables
with recourse to a related party shareholder. Factoring expense
for 1997 and 1996 was $ -0- and $13,966, respectively.
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. The Company has recognized
revenue and a like amount of expense on products traded for
advertising and promotional services. Sales revenue and selling
and marketing expense include approximately $1,051,289 and
$362,000 of such non-monetary transactions for the years ended
December 31, 1997, and 1996, respectively.
F-7
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 and costs
to defend the Company's trademark. 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. Capitalized software costs at January 1, 1997 were
$1,201,069 with additional costs capitalized totaling $564,166
during 1997. Amortization expense totaled $121,697 in 1997 and
$267,327 in 1996.
Goodwill
Goodwill relates to the acquisition of the Company in 1991, and
prior to 1993 was amortized over a period of 40 years. In 1993,
the estimated useful life was revised with the remaining goodwill
amortized over five years. Amortization expense totaled $46,264
and $46,272 for 1997 and 1996, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out)
or market and consist primarily of raw materials.
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. Depreciation expense
totaled $26,831 and $29,228 for 1997 and 1996, respectively. The
components of property and equipment at December 31, 1997 are as
follows:
Computer equipment $126,680
Furniture, fixtures and office equipment 128,013
Office equipment held under capital lease 56,050
Leasehold improvements 4,255
---------
314,998
Less: accumulated depreciation (149,350)
Less: accumulated depreciation under capital lease (1,588)
---------
Net property and equipment $164,060
F-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.
Use of estimates
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 and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fair value of financial instruments
The carrying values of the Company's assets and liabilities
approximate fair value due to their short-term nature.
2. Options and warrants to purchase common stock
- ----------------------------------------------------
During 1996, a shareholder exercised options to purchase 100,000
shares of common stock for cash at $.20 per share. Warrants to
purchase common stock at $.50 per share for 286,517 shares were
exercised in September 1996.
During the first quarter of 1996, the Company adopted a new non-
qualified stock option plan. 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, or ninety days after termination of
employment. As a result of employment termination, options for
28,000 shares expired in 1996 and 70,000 shares expired in 1997.
No options have been exercised. Subsequent to December 31, 1997,
the Board of Directors granted new options to employees for
195,500 shares of common stock at a price of $.75 per share.
Options outstanding at December 31, 1997 totaled 1,203,195.
3. Common and preferred stock
- -----------------------------
The following is a summary of common stock transactions during
1997:
Number of Price
Shares Issued Per Share
------------- ---------
Stock issued for services 12,750 $.375
F-9
4. Long-term debt
- ------------------
The Company has a note payable to a shareholder in the amount of
$50,000 due June 30, 2000; along with accrued interest at the
rate of 10% per annum. Total accrued interest at December 31,
1997 is $8,000. The note is convertible to common stock at
$.1346 per share and is collateralized by virtually all of the
Company's assets.
December 31, 1997
- -----------------
Note payable $50,000
Interest payable 8,000
-------
58,000
Current portion -0-
-------
Long-term debt $58,000
Aggregate maturities of notes payable are as follows:
December 31,
- ------------
1998 $--
1999 --
2000 58,000
-------
$58,000
Interest incurred on notes payable for the years ended December
31, 1997 and 1996 totaled $5,000 and $46,420, respectively.
5. Capital lease obligation
- ---------------------------
The Company acquired office equipment under a capital lease in
November 1997. Future minimum lease payments are as follows:
1998 $11,870
1999 11,870
2000 11,870
2001 11,870
2002 18,291
-------
65,771
Less interest imputed at 9% (10,989)
--------
54,782
Less current portion (8,021)
--------
Long-term capital lease obligation $46,761
Interest expense incurred under capital lease obligations totaled
$710 during 1997 and $-0- in 1996.
F-10
6. Operating leases
- --------------------
The Company rents office space under a lease agreement; dated
March 1, 1996 through February 1999; at the base rate of $5,247 a
month. On November 6, 1997 the Company subleased additional
office space for an initial base rental of $2,581 a month
increasing to $3,073 over the term of the lease. The leases
expire February 28, 1999. Total office rent expense for the
years ended December 31, 1997 and 1996 was $68,426 and $56,241,
respectively.
Future rental commitments under lease agreements are as follows:
Office Lease
------------
1998 $96,643
1999 16,394
2000 --
2001 --
2002 --
--------
$113,037
7. 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.
The following is a reconciliation of the statutory federal income
tax rate to the Company's effective income tax rate:
1997 1996
------------------------
Statutory federal income tax rate 34.0% 34.0%
Allowance for uncollectible accounts (3.3%) --
Software amortization (8.2%) --
Change in valuation allowance (182)% (34)%
Property and equipment depreciation .4% --
Other, net 8.1% --
------ -------
Effective income tax rate (151)% -0-%
F-11
Deferred tax liabilities and assets at December 31, are comprised
of the following:
1997 1996
Deferred tax liabilities: ------ -------
Plant and equipment and related
depreciation $1,785 $--
------ -------
Total deferred tax liabilities $1,785 $--
------ -------
Deferred tax assets:
Receivables allowance $13,122 $--
Net operating loss carryforward 1,474,484 1,825,206
Capitalized software & other
intangible and related
amortization 33,333 --
Valuation allowance -- (1,825,206)
---------- -----------
Total deferred tax assets 1,520,939 --
---------- -----------
Net deferred tax asset $1,519,154 $--
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. 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 $1,825,206, has been
recorded to the Company's financial statement at January 1, 1997.
No valuation allowance has been recorded against the deferred tax
asset.
The Company has available net operating loss carryforwards of
approximately $3,700,000 for regular tax purposes and, $3,800,000
for alternative minimum purposes expiring between the years 2000
and 2011.
8. Royalty agreements
- ---------------------
Several of the Company's software titles are authored by
independent consultants for whom royalty agreements exist. These
agreements call for quarterly payments ranging from 1% to 5% of
net collected sales on those particular titles. These agreements
expire in the years 2000 and 2005. Royalty expense totaled
$38,390 and $29,743 in 1997 and 1996, respectively.
F-12
9. Related party transactions
- ------------------------------
The Company has an outstanding note payable and interest to one
shareholder totaling $58,000 at December 31, 1997. Total related
party interest expense and factoring costs was $5,000 and $51,657
for the years ended December 31, 1997 and 1996, respectively.
The Company paid consulting fees to a company owned by its
President in the amount of $11,551 and $37,663 during 1997 and
1996, respectively. Consulting fees totaling $1,733 and $13,090
were also paid to directors during 1997 and 1996, respectively.
10. Significant customers and concentration of credit risk
- -----------------------------------------------------------
The Company sells its products almost exclusively to schools
through various distributors of educational materials.
In 1997, the Company had one customer that accounted for more
than 10% of total revenues; National School Services, $506,009 or
13.8%. No individual customer accounted for more than 10% of
sales in 1996.
The Company reserves for returns and bad debts in the normal
course of its operations. Management feels the allowance is
sufficient to cover any losses from uncollectible trade
receivables.
11. Commitments and contingencies
- ---------------------------------
The Company amortizes capitalized software costs over the
products' estimated useful life. Due to inherent technological
changes in the software development industry, the period over
which such capitalized software costs are being amortized may
have to be accelerated. Software costs are carried in the
accompanying balance sheet net of amortization.
The Company has various vendor claims pending on delinquent trade
payables. The Company uses the services of a professional firm
to work out settlements with these creditors. As a result, these
payables may be settled for less than their recorded amounts.
12. Accrued liabilities
- -----------------------
Accrued liabilities are comprised of the following at December
31, 1997:
Accrued payroll tax liabilities $ 137,991
Accrued payroll, consulting and commissions 88,969
Accrued royalties 37,049
Accrued audit and shareholder meeting expense 36,750
Accrued profit sharing 19,059
---------
$ 319,818
F-13
13. Customer deposits
- ---------------------
Customer deposits at December 31, 1997 are comprised of various
customers' credit balances in trade accounts receivable.
14. Profit sharing plan
- ------------------------
On July 8, 1997, the Board of Directors adopted a profit sharing
program, to begin July 1, whereby 5% of the Company's pretax
profits are accrued to a profit sharing pool. The amounts paid
to individual employees will be determined based upon performance
and upon annual salary. Ten percent of the pool will be paid
based upon employee performance and 90% of the pool will be
allocated based upon annual salary. The Company's total profit
sharing expense for 1997 was $24,077.
15. Litigation
- ---------------
In October 1996, the Company became a party to litigation in the
United States District Court for the District of Columbia
entitled Securities and Exchange Commission, Plaintiff v.
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 entered into a
Consent and Undertaking pursuant to which the Court issued a
Final Judgement 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
or the assessment of fines against the Company.
During July 1997, the Company filed a trademark infringement
action against Jostens Learning Corporation for unauthorized use
of the Company's registered A+ trademark. It is the belief of
the Company that Jostens' unauthorized use of its registered
trademark is damaging to the Company and is causing significant
confusion for the Company's customers. The Company has
historically and successfully defended its trademark position
when it became aware of illegal and unauthorized use.
In addition, the Company is the subject of various legal
proceedings in the normal course of business. However,
management knows of no pending or threatened litigation involving
the Company, other than the Action, that is considered material
to the on-going operations and viability of the Company.
F-14
16. Earnings per share
- ----------------------
Basic earnings per share are computed by dividing earnings
available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted earnings
per share reflect per share amounts that would have resulted if
dilutive potential common stock had been converted to common
stock.
The weighted average number of basic and diluted common shares
outstanding is as follows:
1997 1996
----------------------------
Basic 12,178,567 10,428,466
Diluted 13,211,071 10,428,466
For the year ended December 31, 1997, net income for the
computation of diluted earnings per share is increased by $5,000
of interest expense assumed not paid on $58,000 of debt assumed
converted to 430,906 shares of common stock. Employee stock
options are also included in the number of diluted common
shares using the treasury stock method. For the year ended
December 31, 1996, net income and the number of common shares
used for the computation of diluted earnings per share is the
same as basic earnings per share, since the market value of the
stock was less than the exercise price of stock options and
the debt conversion rate.
17. Subsequent events
- ---------------------
On February 20, 1998, the Company borrowed approximately $87,000
from its principal shareholder for short-term working capital.
Management anticipates repaying the advance by April 30, 1998.
On February 26, 1998, the Company acquired the business of
Projected Learning Programs, Inc. ("P.L.P.") pursuant to the terms
of an Agreement and Plan of Merger, among the Company, "P.L.P.",
P.L.P. Holdings, Inc. (a subsidiary of the Company formed to
accommodate the merger), and Richard Carle, Jr. and James F.
Cowee (the "Sellers"). The Company paid the Sellers $325,000
for the stock of P.L.P. as follows; 175,000 shares of the
Company's $.025 par value common stock, cash of $100,000 and a
$50,000 promissory note. The note bears interest at 10% per
annum and will be repaid in 24 monthly installments of $2,307
beginning March 26, 1998. The business of P.L.P. is to produce,
publish and distribute computer software catalogs to various
educational institutions throughout the United States. The
operations of P.L.P. will be relocated from California to
Oklahoma City in March 1998 and be operated as a subsidiary of
the Company. The closing date of the transaction will be
effective as of January 1, 1998.
F-15
Exhibit 11.1
- ------------
Statement re: computation of per share earnings
Basic earnings per share are computed by dividing earnings
available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted earnings
per share reflect per share amounts that would have resulted if
dilutive potential common stock had been converted to common
stock.
The weighted average number of basic and diluted common shares
outstanding is as follows:
1997 1996
---------------------------
Basic 12,178,567 10,428,466
Diluted 13,211,071 10,428,466
For the year ended December 31, 1997, net income for the
computation of diluted earnings per share is increased by $5,000
of interest expense assumed not paid on $58,000 of debt assumed
converted to 430,906 shares of common stock. Employee stock
options are also included in the number of diluted common shares
using the treasury stock method. For the year ended December 31,
1996, net income and the number of common shares used for the
computation of diluted earnings per share is the same as basic
earnings per share, since the market value of the stock was less
than the exercise price of stock options and the debt conversion
rate.
Exhibit 21
- ----------
Subsidiaries of The American Education Corporation
Projected Learning Programs, Inc., a Nevada corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from - Form
10-KSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 283,636
<SECURITIES> 0
<RECEIVABLES> 656,092
<ALLOWANCES> (32,805)
<INVENTORY> 8,168
<CURRENT-ASSETS> 960,806
<PP&E> 314,998
<DEPRECIATION> (150,938)
<TOTAL-ASSETS> 3,395,403
<CURRENT-LIABILITIES> 613,246
<BONDS> 0
0
0
<COMMON> 304,590
<OTHER-SE> 2,372,806
<TOTAL-LIABILITY-AND-EQUITY> 3,395,403
<SALES> 3,670,654
<TOTAL-REVENUES> 3,670,654
<CGS> 266,980
<TOTAL-COSTS> 2,514,394
<OTHER-EXPENSES> (119,549)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,919
<INCOME-PRETAX> 1,001,910
<INCOME-TAX> (1,509,642)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,511,552
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.19
</TABLE>
