FORM 10-KSB
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1998
[ ] 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 issuer (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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, 1998
$6,022,121
On March 16, 1999 the aggregate market value of the Common Stock
of the issuer held by non-affiliates based on the last sale
price of the registrant's Common Stock on such date, was
approximately $5,851,423.
Number of shares of the issuer's common stock outstanding as
of December 31, 1998: 13,423,076
Transitional Small Business Disclosure Format
YES NO X
TABLE OF CONTENTS TO FORM 10KSB
- ----------------------------------------------
PART I
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
Item 5 Market for Common Equity and Related Stockholder
Matters
Item 6 Management's Discussion and Analysis or Plan of
Operation
Item 7 Financial Statements
Item 8 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
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
Item 1. Description of Business.
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.
The purchase price for the business was approximately $1,163,000.
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.
The Company's Business.
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The Company's primary business is the development and marketing of
educational software to elementary, middle and secondary schools, adult
literacy centers and vocational, junior and community colleges. The Company
develops software for both Windows and Macintosh operating systems. The
Company's revenues are primarily derived from the sale of its principal
product family, the A+dvanced Learning System, registered (A+LS, registered),
a comprehensive courseware offering developed by the Company. A+LS is currently
shipping in version 2.12 or V2.0. The Company acquired two businesses in 1998,
Projected Learning Programs, Inc. (PLP) and Learning Pathways, Limited (LPL).
These organizations are primarily resellers of other publishers' products and
operate as subsidiaries of the Company. These two subsidiaries now represent
new channels of distribution or access to new markets or market segments for
the Company. PLP, headquartered in Oklahoma City, is a direct mail, catalog
reseller that prints and mails twice a year a total of ten specialty catalogs.
These catalogs are mailed to approximately 220,000 educators located in 23,000
high schools and vocational, junior and community colleges. LPL, the Company's
Derby, UK subsidiary acquired in late 1998, is the exclusive schools and
libraries distributor of the print, multimedia and online versions of World
Book Publishing's World Book Encyclopedia in Great Britain. LPL, in the latter
part of 1998, also began the process of converting the Company's U.S.-based
curriculum content to a product presentation that is suitable for British
educators and schools. LPL should release this revised product family directly
to the UK's school market in the latter half of 1999.
The Company internally develops and licenses, to a limited extent, software
or content from third parties for inclusion in its products for the school
market. The Company utilizes an in-house programming staff for the
development of its software technology and limited, external contract
services to develop these products. The Company is the primary developer of
its curriculum content and employs full-time educational professionals in
this publishing effort. The Company makes extensive use of contract services
to secure the specialized educator skills that are necessary to publish the
wide range of subject matter and grade level content required by the Company's
product offering.
The Company's products are sold by school dealers, catalog companies,
direct telephone sales and mail. Approximately 94% of the Company's 1998
sales were to the domestic U.S. school market. Future sales to international
markets are expected to increase as a percentage of total revenues as a
result of the LPL acquisition in the fourth quarter of 1998. The products are
sold for use in elementary, middle and high schools, libraries, adult learning
centers, correctional institutions, private industry, and to a limited
extent, for home-based schooling.
The increasing use of computers, software and the Internet as educational
and instructional aids in the nation's schools is the major focus of the
Company's marketing strategy. The Company's marketing plan calls for separate
promotional efforts to be directed toward the various segments of the school
market. Currently, the Company utilizes an in-house employee sales force
as well as a national network of school dealers to market its products to
schools. Each independent school dealer generally covers a geographically
limited territory such as a single state. Other marketing efforts are executed
through business partners as well as direct mail and catalog companies, which
market other publishers' products to the school and library markets.
The Company is in a technology-based business and is an active developer of
software applications to facilitate the delivery of its content in a network
environment. A significant percentage of the Company's current revenues are
derived from sales to schools that deliver curriculum content on a local area
network (LAN) within a single school site. The rapid adoption of fiber
optic-based wide-area networks (WAN) and the Internet pose new challenges,
while providing growth opportunities for the Company. Management believes
that it has in place the development programs to allow it to capitalize on
these rapidly developing changes in the structure of the school market and
the school districts that comprise the total marketplace.
Principal Products.
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Educational Software
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 educational software products based upon certain courseware in reading,
English, spelling, social studies, bilingual language development and early
childhood development. Since the acquisition of AECI, the Company has engaged
in extensive development efforts to develop new programming technology as well
as new curriculum content and academic skills assessment tools. As a result
of this effort, the Company now supports all contemporary Macintosh and
Windows operating systems with one of the largest curriculum offerings in the
core subject areas for grade levels 1-12.
Educational software for the elementary, middle and high school markets is
designed for use in classroom instruction and stresses usefulness to the
instructor as well as the student. There is a growing use of both local and
wide-area network technologies in schools and school districts and the Company
provides versions that perform in these environments. The Company's products
for schools and the professional educator versions feature a management function
that records both individual student and class academic performance. This
management function also provides for a wide range of performance reports,
lesson materials, tests and assignments. A hallmark, unique feature of the
Company's products is an authoring capability that allows the educator to add,
modify and expand both graphics and text to the curriculum content provided by
the Company. The Company's software is correlated to most national test and
major state objectives so that educators can develop specific lesson plans to
assist students with a course of study that is directly related to specific
learner objectives, or individual student skill deficiencies. The Company's
computer software products are carefully designed to be utilized without
extensive user experience with computer operations.
In an industry where there are in excess of 300 educational software
publishers, the Company has developed a distinctive niche in form of content
and delivery. This approach features high educational value and extensive
content that is highly correlated to the leading states' desired learning
outcomes, national educational objectives and major adopted textbook series.
The Company has concentrated on a design of its products that offer educational
content substance that is highly specific to grade and age level. These
products allow full educator control of the content delivery rather than one
that is controlled by the software. Various software tools, such as the
Company's products for assessment and testing, and products that allow the
use of the Internet as a source of instruction, provide educators with the
means to effectively utilize the Company's products as a comprehensive
supplemental instructional solution. In addition, the Company's product
design is modular so that each title sold by the Company has an integral
management function. This management function is shared so that new titles
purchased by a customer utilize preexisting A+LS class and student records
that have been previously established. This feature allows schools to add
additional content and titles or updated versions simply and easily.
The majority of the Company's installed base is utilized in a LAN 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 educator control of class and student lesson assignments,
individualized paths of study, skills assessment, authoring, testing,
reporting and the integration of third-party and Internet-based content where
relevant. These capabilities and range of other functions assist the educator
in directing the use, and understanding the effectiveness, of the software
while managing the efficiency of the learning process. Management believes
that fewer than six companies in the educational software industry provide a
comprehensive, fully-managed instructional software solution that is comparable
to the products provided by the Company.
A+dvanced Learning System, registered
A+LS, V2.0, from an educational content perspective, has been designed as a
comprehensive grade level 1-12 core curriculum solution. It is a product
family comprised of 93 subject titles that provide for an interactive
multimedia instructional environment with extensive sound and graphics.
Major subject areas covered are: reading, writing, mathematics, science,
history, geography and language arts. Each ascending grade level of the
product family presents increasingly more complex concepts that provides
overlapping, subject matter reinforcement by grade level. 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 skill assessment tests for all subject
areas and lesson-related activities. This design facilitates the use of the
advanced A+LS class and student management system to pretest, posttest and
to record academic gains, to maintain this data and report on individual
student and class activities. Educators may select a series of specific
lessons across all subject areas to create a curriculum plan for a specific
time period, while specifying independent mastery levels for each lesson for
a class, group or an individual student. They may also insert third party
publishers' materials into a specified course of study for enrichment or
remediation activities. The product design also permits the development of
individualized courses of study for the at-risk or special education student
that might require specific emphasis to correct skill deficiencies.
Approximately 6000 schools, centers of adult literacy and correctional
institutions have adopted appropriate title and subject area components of
this product family since its introduction in mid-1995.
In early 1998, the Company released a major content extension of the A+LS
elementary and middle school curriculum to extend the Company's range of
software publications through grade level 12. One A+SSESS! title was also
developed to support the assessment and testing requirements for this
comprehensive high school level product offering. These secondary grade
level products were well received by the marketplace and were important
factors in the continuing expansion of the Company's 1998 revenues, not
only in the sales of product related revenues, but the more complete product
offering allowed the Company to secure more district-wide adoptions.
Throughout 1998, the Company has maintained active development efforts in
updating and expanding both its technology and curriculum offerings for the
A+LS product family. The Company initiated in early 1998 what it views as a
major redesign of its earlier versions of its software technology (V1.0,
V2.0) with a new Java-based offering planned for introduction in late 1999.
This new technology will support the Internet delivery of the Company's
curriculum and should provide for additional revenue opportunities with its
existing and future school customers. Throughout the 1998 year, portions of
the current curriculum content were expanded and realigned to meet new academic
standards or to provide for necessary updates to important subject areas such
as reading, the sciences and social studies.
A+SSESS! TM
A+SSESS! is a product family of primary, intermediate, advanced, and high
school skill and testing modules, which is comprised of 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 skill levels and optimal placement in all A+LS subject areas. A
pretest process is utilized for this purpose. After skill levels are
determined, A+SSESS! automatically recommends and prepares lesson plans for
each student. A posttest 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 since its
introduction approximately 2000 schools have purchased the product.
A+Net TM
The Company released the A+Net product in May of 1998 as a tool to provide
educators the means to effectively utilize the Internet as an instructional
medium while providing for student accountability. A+Net was specifically
designed to utilize the Internet's rich and varied content as the source for
study material and to allow the educator to author test and essay questions
to measure student knowledge gains as a result of access to Internet-based
educational content. A+Net has an identical management function that is
fully compatible with the Company's A+dvanced Learning System's management
system for its comprehensive reading, writing, mathematics, science, social
studies and language arts software offering for grades 1-12. A+Net 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.
Educators can then author test questions and critical thinking skill problems
while offline for subsequent use in an instructional setting. A+Net's
sophisticated class and student manager functions will randomize test
questions and provide detailed student activity and grade reports.
A+LS/MediaWeaver TM
The Company entered into an agreement in late 1995 to integrate certain of
the Humanities Software, Inc's. 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 and process writing.
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. These programs complement A+LS's basic skills content and
provide a whole language reading and writing dimension to this product
family. Since the initial release of this product offering, the Company and
Humanities expanded the number of novel and skill bundles, bringing the total
titles to 18 during the first quarter of fiscal 1998. In addition, in late
1998, agreement was reached with Humanities to release in 1999, Kids
MediaMagic, a new four-title elementary series in the reading skills area.
New A+ TM
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 multimedia 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 V2.0. 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 that is complementary
to the publications of the Company. Many of these companies do not have the
software management technology or distribution resources of the Company. These
relationships are sought by the Company to supplement and complement the
content of existing and planned A+LS subject matter. The Company has reached
agreements with Teaching Technologies, Inc. (TTI) and World Book Publishing
(WB) to enter into both content and cooperative marketing programs which should
be launched in mid-1999. TTI is publishing its Year In The Internet, an
11-title series, in the Company's A+Net software application to provide for
Internet-based instructional content in language arts, social studies, science
and mathematics. WB is providing a special version of its industry-leading
multimedia World Book Encyclopedia to which the Company will correlate selected
A+LS titles and lesson material. This will provide the Company's customers
with what is believed to be an industry first, a completely integrated
curriculum and reference resource for instruction. Management also believes
continued expansion of these types of relationships enhances the value of the
Company's products to educators and strengthens the business relationships with
its distributors and other business partners.
The Market For Educational Software Products.
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The Company addresses four major market segments for its products; the school
(U.S. and International), adult literacy and home markets. To date, the
Company has not been active with programs to penetrate the home market with
the A+LS product family. In 1998, the Company's school software products were
specially configured for use by the home educator in a separate version modified
for this application.
The U.S. School Market
The U.S. 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 market it must expand its authorized school
dealer sales base. Although significant progress was made in 1998 in the school
dealer recruiting program, a major objective is to continue to expand the
Company's school 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 by the fourth quarter of 1998 and believes
that it now covers most important national markets.
The International School Market
With its acquisition of LPL, the Company has entered the school market in the
UK. This market is approximately 20% the size of the U.S. market and believed
to be growing at an annual rate exceeding 20%. In 1998 the government initiated
Phase 1 of The National Grid for Learning (NGfL) program to invest substantially
in computer hardware infrastructure, Internet access, educator training and
instructional software technologies for the UK's schools. Management believes
that this market will experience higher rates of growth in funding for
educational technology, at the individual school level, than the U.S. The NGfL
funding is scheduled to continue through two additional phases and management
believes that this positive growth trend will continue into the year 2002. In
addition, many former British commonwealth nations utilize the UK's
instructional regimen and management believes that additional international
opportunities will emerge as a result of the Company's programs and presence in
the UK marketplace.
The Adult Literacy/Lifelong Learning Market
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 of the market. In 1998, the Company established additional
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
adults for 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 expansion efforts in this area.
The Home Market
The Company is not currently active in this market segment, which offers future
opportunities for growth and additional financial returns on the Company's
investment into content development. Management believes that there is an
opportunity to move into this segment of the market with its current products.
The home education is growing at rates exceeding 15% per year, according to
industry sources. Many families are choosing to educate their children at home
versus the traditional school education channels or to be actively involved
in providing additional academic emphasis through home supervised study.
Management believes that the Company's products are designed in a manner to
appeal to the home educator who is seriously involved in the educational
process of their children. In addition, the Company has invested heavily in
the correlation of its products to most national and state instructional
objectives. These correlations should provide additional value-added support
to the use of its products by the home educator. The Company has completed
the work on a home version of the complete A+LS family in 1998. This version
will be available for release in 1999.
In competing for the home market, the Company will face stiff competition in
the traditional retail outlets. The Company does not have the financial
resources to effectively compete in the traditional retail market channels.
The Company must, therefore, market its products through partners,
unconventional or emerging channels. This includes developing partnerships
with organizations who deal directly with the marketing of products to the
home and/or emerging Internet e-commerce opportunities.
Trade Names, Service Marks and Logo Types.
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The AECI 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 AECI's software products have also
been registered. These trade names, service marks and logo types were included
in the assets that were purchased by the Company from AECI.
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 its A+ registered
mark for use as A+SSESS! and A+Net in the fourth quarter of 1997 and continued
filing activities on these marks during 1998. In addition, during 1998 the
Company also executed additional filings in the United Kingdom anticipating
the use of its various A+ brands in that country. The use of the Company's
distinctive A+ logo are viewed as integral, distinctive brand 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 most of its software internally. Large
production runs on CD-ROM are contracted with outside duplicators to manage
production costs. The Company develops, with outside packaging developers,
materials and packaging concepts, and internally authors necessary product
manuals. The Company leases high speed duplication equipment that is suitable
for small, or initial production of catalogs and manuals. The Company secures
product packaging from external sources and performs quality control, final
assembly, inventory and distribution on most orders received. Large production
runs of manuals and literature are contracted to outside printers. The Company
has no dependence on any individual supplier.
Research and Development.
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At December 31, 1998, the Company employed thirteen full-time development and
support personnel in its product development efforts. These individuals are
responsible for the new development of new versions of the Company's software
technology and the support of current versions of its software offerings.
The Company employs a staff of professional educators who are responsible for
the development and support of its curriculum content. The Company also
utilizes part-time educational consultants in the design of its curriculum-based
product offering. These individuals provide the curriculum design support on
the development and enhancement of Company products. These consultants allow
the Company to effectively and efficiently address the specialized grade level
and diverse content needs of its A+LS product family. Management believes
that it will continue to rely upon external sources for a portion of its new
product content. However, the growing sophistication and complexity of the
interactive design of company products will require continued expansion of
in-house curriculum and graphics development resources.
At December 31, 1998, the Company employed four full-time education
professionals in support of this effort. These individuals plan, manage and
coordinate the efforts of up to twenty independent educational consultants
and graphic designers.
Research and Development Costs.
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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 $656,238 in software research and development
costs in 1998.
Distribution and Sales Programs.
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In marketing its products, the Company utilizes approximately 50 independent
school dealers and 7 catalog houses to reach its school-based customers. In
late 1998, the Company began to develop an internal direct telephone sales
staff to provide support to its distributors and to access customers in rural
areas not easily reached by its distributors. This internal direct sales
team was comprised of five individuals at December 31, 1998.
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
release 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 seasonal cycle can directly affect the Company's total
revenues and earnings levels in both the first and fourth quarterly reporting
periods.
Significant Customer.
- ---------------------
The Company sells its A+LS product family almost exclusively to schools
through various school dealers of educational materials. In 1998, no
individual customer accounted for more than 10% of total revenues. In 1997,
one customer, National School Services, accounted for $506,009 or 13.8% of
revenues.
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 and their software divisions
and other larger independent educational software and content developers,
which may 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. Management believes through constant analysis of its
competitors and ongoing surveys that it sponsors at the customer level that
the Company is currently competitive and enjoys a reputation as a quality
organization.
The Internet and the delivery of curriculum by electronic means may have the
capacity to alter the competitive environment and the current means of access
to the school and home customer. The Company, in the judgment of management,
has programs to develop the technology to remain competitive in this future
environment. Programs to identify future partners and the means to exploit
the Company's investment in both technology and content are currently active.
Employees.
- ----------
As of December 31, 1998, the Company had forty-one (41) full-time employees
in its domestic operations and six (6) full time employees in its foreign
subsidiary. The Company believes that its relationship with employees is
satisfactory.
Item 2. Description of Property.
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The Company rents office space under a lease agreement dated March 1, 1999,
which extends through February 2002. The lease covers a total of 17,619
square feet at a base rate of $10,437 a month through February, 2000, and
$10,943 thereafter until the expiration of the lease. Total office rent
expense for the years ended December 31, 1998 and 1997, was $99,041 and
$68,426, respectively.
Item 3. Legal Proceedings.
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On July 8, 1997, the Company filed a complaint in the United States District
Court for the Western District of Oklahoma against Jostens Learning Corporation
("Jostens"). The complaint alleged, among other things, that Jostens had
improperly adopted and used the mark "A+" and "A+dvantage" in connection with
its educational software, and that Jostens' confusingly similar mark has
caused damage to the Company. The complaint requested, among other things,
monetary damages, and injunctive relief. On June 24, 1998 the Company and
Jostens reached a mediated settlement, without proceeding to trial, that was
favorable to the Company.
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 that is considered material to the ongoing operations
and viability of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
No matters were submitted to a vote of the security holders during the fourth
quarter ending December 31, 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
- ------- --------------------------------------------------------
As of December 31, 1998, 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 1998 and
1997 quarters.
1998 1997
---- ----
BID ASK BID ASK
--------------- -------------
Quarter Ending March 31 1 1 1/16 1/2 3/4
Quarter Ending June 30 1 1/4 1 1/2 23/32 15/16
Quarter Ending September 30 7/8 1 1/32 1 1 1/8
Quarter Ending December 31 1 3/32 1 1/4 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.
- ----------
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.
Sales of Common Stock
- ---------------------
In February, 1998, the Company issued 175,000 shares of common stock as a
portion of the purchase price of the acquisition of Projected Learning Programs,
Inc.
In November, 1998, the Company issued 510,030 shares of common stock as a
portion of the purchase price of the acquisition of Learning Pathways, Ltd.
During the year ended December 1, 1998, 45,200 shares of common stock were
issued as a result of exercise of options by current and former employees of
the Company.
The Company relied upon the exemption from registration provided by Sections
4 (2) or 4 (6) of the Securities Act.
Item 6. Management's Discussion and Analysis or Plan of Operation.
- ------- ----------------------------------------------------------
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.
- --------------------------------
The Company 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 1999. 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, 1998 the Company's principal sources of liquidity included
cash and cash equivalents of $720,838, net accounts receivable of $1,396,021
and inventory of $96,248. The Company's net cash provided by operating
activities increased by 78% from $741,305 in 1997 to $1,316,544 in 1998. Net
cash used in investing activities increased by 55% from $649,748 in 1997, to
$1,007,668 in 1998, and was comprised primarily of investment in capitalized
software development costs and the cash portion of the purchase price of
acquisitions. At December 31, 1998, the Company had working capital of
$1,398,258 compared to $347,560 at December 31, 1997.
The amount of inventory needed to support expanding software 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. For those items that must
be inventoried, such as the World Book products in the United Kingdom or items
offered through catalog sales, management strives to keep such amounts to a
minimum while providing timely service to the Company's customers. Management
anticipates that the working capital requirements to support continued expansion
will be funded from continuing operations or short term lines of credit with
banks.
With the expansion of the Company's product lines and the addition of new
products and markets through its subsidiaries acquired in 1998, management
believes that the Company can continue to grow at a rate similar to that
experienced in 1998 compared to 1997. 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. At December 31, 1998, the Company had available bank
credit lines for working capital totaling $1,350,000 of which $1,284,000 was
unused.
Impact of The Year 2000
- -----------------------
Many existing computer systems use only the last two digits to identify years
in the date field. As a result, those systems may not be able to properly
identify the correct year after the beginning of the year 2000, believing that
"00" is referring to the year 1900. Systems that do not properly recognize the
correct date could generate erroneous information or cause a system to fail.
This potential problem is generally referred to as the "Year 2000 Issue."
The Company is continuing its review and assessment of the potential effect
of the Year 2000 Issue. Thus far, the Company has completed the initial review
of its information technology systems, including both software and hardware,
and determined that they appear to be Year 2000 compliant. Additionally, the
Company had previously planned to upgrade its accounting and reporting systems
independent of Year 2000 considerations and has selected a Year 2000 compliant
system that is anticipated to be installed by June 30, 1999. This installation
date has not been accelerated by Year 2000 concerns.
The Company has tested the educational software systems that it produces for
sale and believes they are Year 2000 compliant.
The Company is currently in the process of contacting critical suppliers of
products and services to determine the extent to which the Company may be at
risk if such parties fail to resolve their own Year 2000 Issues. The Company
will assess and attempt to mitigate any risks that may be perceived by such
possible failures. The effect, if any, on the Company's results of operations
from the failure of third parties to be Year 2000 compliant cannot be reasonably
estimated.
The Company is still evaluating its non-information technology systems such as
telephones, utilities, alarm systems and climate control systems and expects
to complete its evaluation by June 30, 1999. Based on its preliminary
assessment, the Company currently believes that these systems are or will be
Year 2000 compliant. The Company has not yet developed a contingency plan but
will determine if it appears one may be necessary as the current assessment is
refined.
Based on the Company's overall current assessment to date, no matters have been
identified and the Company does not currently believe that the Year 2000 Issue
will have a material adverse effect on the Company's financial position or
results of operations. The Company also believes any costs that may be incurred
relating to the identification or remediation of Year 2000 issues will not be
material. The Company's beliefs and expectations, however, are based on certain
assumptions that may prove to be inaccurate, especially those relating to third
parties over which the Company has no control. Potential sources of risk include
the inability of suppliers of goods or services to be Year 2000 compliant,
which could result in delays in product deliveries or disruption of distribution
channels.
Results of Operations
Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended
December 31, 1997.
- ------------------------------------------------------------------
The following is a discussion of the results of operations for the fiscal year
ended December 31, 1998, as compared to the fiscal period ended December 31,
1997.
Net revenues for the twelve months ended December 31, 1998, totaled $6,022,121
compared to net revenues of $3,670,654 for the year ended 1997. This represents
an increase of 64% in net revenues over the prior fiscal year. The increase
in net revenues is primarily attributed to increased acceptance of the A+dvanced
Learning System family of products, the release of new subject titles associated
with this product during the first half of 1998 and the consolidation of LPL
and PLP into the Company's financial results.
Cost of goods sold as a percentage of net revenues for the year ended December
31, 1998 increased to 11.8% from 7.3% in 1997. This increase is attributed to
a change in the Company's product mix by the addition of lower gross margin
products sold by Projected Learning Programs and Learning Pathways, Limited.
Cost of goods sold represents the actual cost to produce the software products,
or in the case of PLP or LPL the cost to acquire software from other publishers,
and includes certain allocated overhead costs. Excluding the costs of allocated
overhead, the Company's principal product family, A+LS, provided gross profit
margins averaging 95% in 1998. Consolidated Company gross margins are expected
to trend down slightly in the future as lower gross margins on PLP catalog sales
and LPL sales of World Book products become a higher percentage of total
corporate revenues.
Total operating expenses recorded for the year ended December 31, 1998 were
$3,592,543, or 60% of net revenues, compared to $2,514,394, or 68%, for the
previous fiscal year. The decrease in operating expenses as a percentage of
net revenue is primarily due to volume related efficiencies where the operating
costs are fixed or controllable. As a component of total operating expenses,
selling and marketing costs increased from $1,510,084 in fiscal 1997 to
$1,802,841 in fiscal 1998. The increase in 1998 selling expenses is a direct
result of increased selling efforts required to support the higher sales levels
attained. Operations expense increased to $244,557, or 4.0% of net revenues in
fiscal 1998, compared to $95,679, or 2.6% of net revenues in fiscal 1997. This
increase is attributable to increases in curriculum development costs and
expansion of the quality control and technical support departments. General
and administrative expenses increased to $1,264,641 in 1998 compared to
$763,794 in 1997, but remained relatively unchanged as a percent of net revenues
at 21.0%. This increase in costs is related to expanded administrative and
support staff added as a result of the expanding customer base, and the addition
of the administrative costs of PLP and LPL into the consolidated results.
Additionally, one time costs for investment banking fees and professional costs
related to expansion of the business and analysis of various alternatives to
increase the value of the Company were incurred in fiscal 1998.
Costs incurred in conjunction with product development are charged to research
and development expense until technological feasibility is established. During
fiscal 1998, the Company capitalized $656,238 of product development costs, and
net of accumulated amortization had capitalized software costs of $1,181,754
at December 31, 1998. During 1998, the Company completed a major content
extension of the A+LS elementary and middle school curriculum and one companion
A+SSESS! Module. In addition, the Company completed development of A+Net, and
the A+LS Home version. The Company also made substantial progress in
development efforts on revised, updated and expanded curriculum offerings and
a new Java-based Version 3.0 of the A+dvanced Learning System product family.
Interest expense was $24,986 in 1998 compared to $6,919 in 1997. This increase
results from interest on the Company's acquisition debt and the use of debt to
finance certain capital assets.
Pre-tax income increased by 70% to $1,707,955 from $1,001,910 in 1997. This
increase is a result of the higher net revenues noted above in addition to the
decrease in operating costs as a percentage of net revenues. Net income form
1998 was $982,311 compared to a proforma amount of $686,346 in 1997, which
recognizes the after-tax effect of fiscal 1997 earnings on the same basis as
fiscal 1998. The reported 1997 results were impacted by a one time,
non-recurring change in the valuation allowance relating to net operating loss
carryforwards in the net amount of $1,825,206 which was recorded as an asset
on the balance sheet as well as recognized on the statement of income.
Management believes that with the increase in the Company's product offerings,
the addition of new products and markets through its subsidiaries acquired in
1998 and increased selling efforts through expanded third party and school
dealers, the Company is now positioned to continue to expand sales results from
the home and school education markets.
Beginning 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. This favorable trend continued
throughout 1998. The Company's cash position at the end of fiscal 1998 improved
by $437,202 or 154% over the cash position at the end of 1997 fiscal period.
Working capital increased 302% from $347,560 at the end of 1997 to $1,398,258 at
December 31, 1998.
Company management believes that significant future opportunities exist in the
school, adult literacy and home markets for future Company growth. In 1998,
management undertook to position the Company in what it believes is a fast
growing segment of the educational market. The Company is now equipped with
A+LS Macintosh and Windows software program engines that facilitate the low
cost and rapid development of new subject titles. In addition, the Company
has expanded its content and intellectual property base with the internal
development of substantial educational content for its current and future
products. Management believes, as a result of these recent curriculum and
technical developments, that the Company is well positioned to compete in the
major market segments of the educational technology industry. The Company's
competitive position is further enhanced by its growing employee base of
skilled technical and business professionals that has aided the development
of new industry partnerships during 1998. These elements combine to form a
stronger overall corporate foundation that, combined with growing markets and
expanding marketing and distribution strengths, provides a greatly improved
internal and external environment for the Company's future operations.
The Company has taken the Internet into consideration in its Version 3.0
planning and believes it represents a potential new, future channel of
distribution for both products and services. During 1998, the Company
continued strategic planning for the development of programming technology
and curriculum content to take advantage of the Internet, which it views as
a 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.
Item 7. Financial Statements.
- --------------------------------
Financial Statements and Financial Statement Schedules - See Index to
Consolidated Financial Statements and Schedules immediately following the
signature page of this report.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------- ---------------------------------------------------------------
Steakley, Gilbert & Bozalis, P.C. has audited the Company's financial statements
for the years ending December 31, 1994 through 1998. 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; Compliance with Section 16(a) of the Exchange Act.
- ------- -----------------------------------------------------------
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.
Name Age Position Director Since
- -----------------------------------------------------------------
Jeffrey E. Butler 57 President, Director, 1989
Chief Executive Officer
Thomas Shively 45 Executive Vice President and
Chief Operating Officer
Neil R. Johnson 48 Vice President and
Chief Financial Officer
Jeffrey E. Butler,
Jr. 34 Vice President Sales and
Marketing
Monty C. McCurry 53 Director 1989
Newton W. Fink 62 Director 1991
Stephen E. Prust 54 Director 1992
Geoffrey Glossop 50 Director 1998
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, Colorado. From 1989 to 1990, he was Vice President and General
Manager of the Richie Resource Group with headquarters in Minneapolis,
Minnesota. From 1978 to 1988, he was employed by Gelco Corporation,
Minneapolis, Minnesota, 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, Minnesota.
NEIL R. JOHNSON has been employed by the Company since August, 1998. Immediately
prior to being employed by the Company, Mr. Johnson was an independent business
consultant. From 1994 to 1997, Mr. Johnson was Chief Financial Officer and
Treasurer for Unit Parts, Inc., an Oklahoma City based remanufacturer of
automotive parts. From 1985 to 1994, Mr. Johnson was Vice President of
Corporate Finance and Treasurer of Doskocil Companies, Inc., a diversified
food products manufacturer. Prior to those positions, Mr. Johnson spent twelve
years with the public accounting firm of Coopers & Lybrand. Mr. Johnson
graduated from Valparaiso University in 1972 with a BS in Business
Administration. He is a Certified Public Accountant.
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 1990 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 from the University
of Colorado with a BA in Molecular and Cellular Biology in 1985. Mr. Butler is
the son of the President of the Company.
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. Since 1992, Mr. Prust has provided business
consulting services, including advice on equity and debt transactions, mergers
and acquisitions to a variety of companies, ranging from entertainment concerns,
Internet start-ups and industry consolidators. 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.
GEOFFREY GLOSSOP has been a director of the Company since December 1998. He is
the President of Learning Pathways, Limited, a company he founded in 1997. From
1994 to 1996, Mr. Glossop was the Research and Development Director for Systems
Integrated Research plc. Prior to 1994 Mr. Glossop was the Managing Director
of Global Learning Systems Ltd. Mr. Glossop graduated from the University of
Newcastle upon Tyne in 1969 with a BS in Electrical Engineering. He was awarded
the M.B.E. for services to the educational technology industry in the Queen's
Birthday Honours in 1982.
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, 1998, 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. No other executive officer was paid in excess of $100,000.
Summary Compensation Table
Annual Compensation Long-Term Compensation
Name and Principal Profit Stock Stock
Position Year Salary($) Sharing ($) Options Awards ($)
- -------------------------------------------------------------------------------
Jeffrey E. Butler,
President and Chief
Executive Officer
(1) (2) (3) 1998 $89,355 $4,158 60,000 $5,000 (2)
1997 83,878 0 0 0
1996 60,570 0 352,000 0
(1) Exclusive of personal benefits and other forms of non-cash compensation,
the aggregate value of which did not exceed the lesser of $50,000, or 10% of
the cash compensation shown above.
(2) In January, 1998 Mr. Butler received 10,000 shares of the Company's common
stock as a bonus for 1997.
(3) Excludes $11,551 for 1997, in payments made to or in behalf of Mr. Butler
for reimbursement of relocation expenses to relocate from Denver to Oklahoma
City.
Employment Agreement
- --------------------
In December, 1998 the Company entered into an employment agreement with Jeffrey
E. Butler providing for a base salary of $95,086 and benefits, including
incentive bonuses based on profitability, that are provided to all employees
of the Company. If Mr. Butler is terminated without cause, his compensation
will continue for one year. In the event of a change in control, Mr. Butler
may require the Company to purchase up to 50% of his beneficial stock ownership.
Messrs. Thomas Shively, Jeffrey E. Butler, Jr., and Neil R. Johnson also have
employment agreements with the Company.
Stock Incentive Plans
- ---------------------
The shareholders approved an Incentive Stock Option Plan for employees,
including officers, during 1998. The total common shares issuable under this
plan is 750,000 shares. The Board of Directors acts as the Compensation
Committee ("Committee"). The Committee of this Plan determines the employees
who will receive options to purchase common shares and the number granted.
Option prices will be the fair market value at date of grant. Options are
exercisable as deemed by the Committee and terminate within ninety days of
employment termination, or as designated by the Committee. In no event shall
an option be exercisable more than ten years from the date it is granted. No
options may be issued under this plan after March 31, 2008. During 1998,
498,000 options had been granted, 5,000 had expired, and no options had been
exercised. At December 31, 1998 there were 493,000 options outstanding under
this Plan.
In March 1996, a Non-Qualified Stock Option Plan was approved by the Board of
Directors. Since its inception non-qualified stock options to purchase a
total of 1,581,695 shares of restricted common stock at prices ranging from
$.50 to $.90 have been issued, 200,500 have expired and 45,200 have been
exercised. At December 31, 1998, there were 1,335,995 options outstanding.
Certain of these options had an original expiration date of March 11, 1999.
In February 1999, these options were extended for an additional three years
and now expire in 2002.
Stock Option Grants In 1998
- ---------------------------
The following table sets forth the information concerning the stock options
granted during the last fiscal year to the executive named in the Summary
Compensation Table.
Percentage of Total
Options Granted Options Granted to Exercise Price Expiration
Name (shares) Employees in 1998 (Per Share) Date
- ------------------------------------------------------------------------------
Jeffrey E.
Butler 60,000 7.7% $.73 November 1, 2001
Option Exercises and Fiscal Year-End Values
- -------------------------------------------
No executive officer exercised options during 1998. The following table sets
forth, for the executive officer named in the Summary Compensation Table above,
the year-end value of unexercised stock options.
Value of Unexercised
Number of Unexercised In-the-Money
Name Options at Year-End Options at Year-End
- --------------------------------------------------------------------------
Jeffrey E. Butler 412,000 $229,280
Directors' Compensation
- -----------------------
In 1998, the Company's non-employee directors each received 1,000 shares of
the Company's common stock, and options to purchase 10,000 shares of the
Company's common stock at $.75 per share. These options expire January 23,
2001. The directors received no compensation, other than the shares and
options, for services in such capacity.
The shareholders approved a Director's Stock Option Plan during 1998. The total
common shares issuable under this Plan is 100,000 shares. Each outside director
initially elected or appointed after March 27, 1998, shall be granted an option
to purchase 5,000 shares of common stock at the fair market value at the date
of the grant. Additionally, each outside director shall automatically be
granted an option to purchase 3,000 shares of common stock as of January 1 of
each succeeding calendar year through termination of the Plan on March 31,
2008. Options granted are exercisable immediately and for a period of three
years after the date of the grant or, if earlier, ninety days after the date
when the participant ceases to be a director of the Company. At December 31,
1998, no options had been issued or were outstanding under this Plan.
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 8, 1999. 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 1,423,375 9.3%
4217 Old Farm Road
Oklahoma City, OK 73120
Thomas A. Shively (2) Common 529,664 3.5%
14431-C North Penn
Oklahoma City, OK 73134
Neil R. Johnson (3) Common 75,000 0.5%
6500 N.W. Grand Blvd.
Oklahoma City, OK 73116
Jeffrey E. Butler, Jr. (4) Common 333,919 2.2%
1813 Talequah
Edmond, OK 73013
Monty C. McCurry (5) Common 122,400 0.8%
2134 S. Eagle Ct.
Aurora, CO 80014
Newton W. Fink (6) Common 90,400 0.6%
1093 Lincoln
Manteno, IL 60950
Stephen E. Prust (7) Common 434,768 2.8%
9025 East Kenyon Avenue
Denver, CO 80237
Geoffrey Glossop (8) Common 510,030 3.3%
Field House
6 Haley Croft
Duffield, Derbyshire, UK
John D. Garber (9) Common 6,038,286 39.6%
7530 Navigator Circle
Carlsbad, CA 92009
Robert Schoolfield (10) Common 1,536,517 10.1%
5 Pleasant Cove
Austin , TX 78746
Officers and Directors
as a Group (8 persons) Common 3,519,556 23.0%
(1) (2) (3) (4) (5) (6) (7) (8)
(1) The amount and percentage figures include the possible exercise of
352,000 common stock options, with an exercise price of $.50 per share, and
60,000 common stock options at $.73 per share. Exclusive of 333,919 shares
of common stock beneficially owned by Mr. Butler's son, Jeffrey E. Butler, Jr.
(2) The amount and percentage figures include the possible exercise of
259,195 common stock options, with an exercise price of $.50 per share, and
70,000 common stock options at $.73 per share.
(3) The amount and percentage figures include the possible exercise of
75,000 common stock options, with an exercise price of $.73 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, and
70,000 common stock options at $.73 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, 10,000
common stock options at $.75 per share, and 3,000 common stock options at
$.73 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, 10,000
common stock options at $.75 per share, and 3,000 common stock options at
$.73 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, 10,000
common stock options at $.75 per share, and 3,000 common stock options at
$.73 per share.
(8) The amount and percentage figures include 510,030 shares of common
stock held in trust for the benefit of the Glossop family.
(9) The amount and percentage figures include 5,527,286 shares of common
stock held by John D. Garber and Clare C. Garber as trustees of the John D.
Garber and Clare C. Garber Trust forwhich Mr. Garber is the beneficiary;
440,000 shares of common stock held by John D. Garber and Clare C. Garber,
as trustees of the John D. Garber and Clare C. Garber defined benefit plan
and 71,000 shares of common stock owned by a company controlled by the Garber
family.
(10) The amount and percentage figures include 737,528 shares of common
stock owned by the Schoolfield 1994 Charitable Unitrust for which Mr.
Schoolfield is the trustee; 614,607 shares of common stock owned by Mr.
Schoolfield individually; and 184,382 shares of common stock owned by the
Schoolfield Grandchildren's Trust for which Mr. Schoolfield is the trustee.
Item 12. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
In 1998, the Company paid deferred consulting fees and expense reimbursement
amounts of $25,556 to AMD Corporation for amounts owed to Mr. Butler by the
Company for services rendered and out-of-pocket expenses incurred prior to
1997. Mr. Butler is an officer of, and owns more than 10% of the equity
ownership interest in, AMD Corporation.
In 1997, the Company paid $400 to Jeffrey E. Butler as reimbursement of expenses
incurred in connection with consulting services rendered by Mr. Butler to the
Company. In addition, the Company also paid Mr. Butler $11,551 in reimbursement
of relocation expenses.
The Company paid Executive Resource Management $8,833 in 1998 and $1,733 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 1998 the Company's subsidiary, Learning Pathways, Ltd., paid Editplan
Services, Ltd. a consulting fee of $37,000 to perform management services for
LPL. Mr. Geoffrey Glossop is an executive officer of, and owns more than 10%
of the equity ownership interest in, Editplan Services, Ltd.
Item 13. Exhibits 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 Amended and Restated Articles of Incorporation of The
American Education Corporation (incorporated by
reference to the exhibit in the Current Report on
Form 8-K filed with the Securities and Exchange
Commission on June 25, 1998)
3.2 Bylaws of The American Education Corporation (incorporated
by reference to the Company's registration statement
filed with the Securities and Exchange Commission on
Form S-18 (File No. 2-78660-D))
4.1 Form of Stock Certificate (incorporated by reference to
the Company's registration statement filed with the Securities
and Exchange Commission on Form S-18 (File No. 2-78660-D))
10.1 Promissory Note issued by the Company to Rich Carle
(incorporated by reference to the exhibit contained
in the Company's Quarterly Report on Form 10-QSB for
the fiscal quarter ended June 30, 1998)
10.2 Directors' Stock Option Plan (incorporated by reference
to Exhibit B to the Definitive Proxy Statement filed
with the Securities and Exchange Commission on
April 24, 1998)
10.3 Stock Option Plan for Employees (incorporated by
reference to Exhibit C to the Definitive Proxy
Statement filed with the Securities and Exchange
Commission on April 24, 1998)
10.4 Loan Agreement and Promissory Note between the Company and
UMB Oklahoma Bank (incorporated by reference to the exhibit
contained in the Company's Quarterly Report on Form 10-QSB
for the fiscal quarter ended June 30, 1998)
10.5 Purchase Agreement for the acquisition by the Company of
Learning Pathways, Limited (incorporated by reference to
the exhibit in the Current Report on Form 8-K filed with
the Securities and Exchange Commission on December 15, 1998.
11 Statement re: computation of per share earnings
(filed herewith)
21 Subsidiaries of The American Education Corporation
(filed herewith)
27 Financial Data Schedule (filed herewith; electronic
filing only)
(b) Reports on Form 8-K
(i) Current Report on Form 8-K filed December 15,
1998 regarding the acquisition of Learning
Pathways, Limited.
________________________________________________________
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, 1999 By: /s/Jeffrey E. Butler,
----------------------
Chief Executive 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, 1999
Chairman of the Board
Treasurer
/s/Neil R. Johnson Chief Financial Officer March 30, 1999
/s/Monty C. McCurry Director March 30, 1999
/s/Newton W. Fink Director March 30, 1999
/s/Stephen E. Prust Director March 30, 1999
/s/Geoffrey Glossop Director March 30, 1999
The American Education Corporation
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Item Page No.
- -----------------------------------------------------------------
Independent Auditors' Report F-1
Financial Statements:
Consolidated Balance Sheet, December 31, 1998 F-2
Consolidated Statements of Income for the years
ended December 31, 1998 and 1997 F-3
Consolidated Statements of Changes In Stockholders'
Equity for the years ended December 31, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1998 and 1997 F-5
Notes to Consolidated 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 consolidated balance sheet of The American Education
Corporation as of December 31, 1998 and the related consolidated statements
of income, changes in stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 1998. 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 consolidated financial position of The American
Education Corporation as of December 31, 1998 and the consolidated results of
its operations and cash flows for each of the two years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
STEAKLEY, GILBERT & BOZALIS
Oklahoma City, Oklahoma
March 12, 1999
F-1
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED BALANCE SHEET
December 31, 1998
ASSETS
Current assets:
Cash and cash equivalents $ 720,838
Accounts receivable, net of allowance for returns and
uncollectible accounts of $98,515 (Note 1) 1,396,021
Inventory (Note 1) 96,248
Prepaid expenses and deposits 324,647
---------
Total Current Assets 2,537,754
Property and equipment, at cost (Note 1) 438,931
Less accumulated depreciation and amortization (195,538)
---------
Net property and equipment 243,393
Other assets:
Capitalized software costs, net of accumulated
amortization of $1,239,719 (Note 1) 1,181,754
Goodwill, net of accumulated amortization of
$33,638 (Note 1) 1,009,651
Deferred income taxes (Note 6) 857,550
----------
Total other assets 3,048,955
----------
Total Assets $5,830,102
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable trade $325,840
Accrued liabilities (Note 11) 451,018
Accounts payable - Affiliates (Note 8) 174,199
Notes payable and current portion
of long-term debt (Note 4) 124,686
Foreign income taxes payable 23,126
Deferred income taxes (Note 6) 40,627
---------
Total current liabilities 1,139,496
Long-term debt (Note 4) 85,742
---------
Total liabilities 1,225,238
---------
Commitments and contingencies (Notes 5, 7, 10 and 13) --
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 30,000,000 shares; issued and outstanding-
13,423,076 shares 335,577
Additional paid in capital 6,151,263
Retained deficit (1,881,976)
-----------
Total stockholders' equity 4,604,864
-----------
Total liabilities and stockholders' equity $5,830,102
See accompanying notes and accountants' report.
F-2
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998 and 1997
1998 1997
---- ----
Sales (Note 1) $6,022,121 $3,670,654
Cost of goods sold 712,922 266,980
---------- ----------
Gross Profit 5,309,199 3,403,674
---------- ----------
Operating expenses:
Selling and marketing (Note 1) 1,802,841 1,510,084
Operations 244,557 95,679
General and administrative 1,264,641 763,794
Provision for bad debts 41,515 23,140
Amortization of capitalized
software costs 238,989 121,697
---------- ----------
Total operating expenses 3,592,543 2,514,394
---------- ----------
Operating income 1,716,656 889,280
Other income (expense):
Interest and dividend income 16,285 4,203
Miscellaneous income -- 115,346
Interest expense (24,986) (6,919)
--------- ----------
Net income before income taxes 1,707,955 1,001,910
Deferred income tax provision 712,527 306,052
Current income tax provision 13,117 9,512
Valuation allowance - change at
beginning of year (Note 6) -- (1,825,206)
----------- ---------
Net income $ 982,311 $ 2,511,552
----------- ---------
Earnings per share: (Note 14)
Basic $.08 $.21
Diluted $.07 $.19
See accompanying notes and accountants' report.
F-3
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1998 and 1997
Additional
Common Stock paid in Retained
Shares Amount capital deficit
----------------- ----------- ---------
Balance at
December 31, 1996 12,170,829 $304,271 $5,232,630 $(5,375,839)
Issuance of common
stock for services 12,750 319 4,463 --
Net Income 2,511,552
---------- -------- ---------- ------------
Balance at
December 31, 1997 12,183,579 304,590 5,237,093 (2,864,287)
Issuance of common
stock upon conversion
of debts 458,767 11,469 50,281 --
Issuance of common
stock for services
rendered 50,500 1,262 23,988 --
Issuance of common
stock for purchase
of subsidiaries 685,030 17,126 820,912 --
Issuance of common
stock for cash 45,200 1,130 21,550 --
Net Income 982,311
Comprehensive Income
adjustment:
Foreign currency
translation adjustment (2,561)
---------- ------- --------- -----------
Balance at
December 31, 1998 13,423,076 335,577 6,151,263 $(1,881,976)
See accompanying notes and accountants' report.
F-4
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
1998 1997
----------- --------
Cash flows from operating activities:
Net Income $ 982,311 $2,511,552
Adjustments to reconcile net income
to net cash provided by operating
activities:
Deferred income taxes 702,230 (1,519,154)
Depreciation and amortization 339,164 194,792
Reserve for bad debts 25,110 23,140
Gain on debt settlement -- (107,629)
Services rendered for common stock 25,250 4,782
Changes in assets and liabilities:
Accounts receivable (585,920) (238,249)
Inventories (43,421) 7,741
Prepaid expenses and deposits (270,752) (151)
Accounts payable and accrued
liabilities 96,902 (76,290)
Customer deposits (29,036) (68,741)
Income taxes payable 1,387 9,512
Accounts payable - Affiliate 73,319 --
Net cash provided by operating -------- --------
activities 1,316,544 741,305
Cash flows from investing activities:
Purchase of subsidiaries (267,045) --
Purchase of property and equipment (115,527) (85,582)
Software development costs
capitalized (625,096) (564,166)
Net cash used in investing --------- ---------
activities (1,007,668) (649,748)
Cash flows from financing
activities:
Proceeds received from issuance of debt 170,724 --
Principal payments on notes payable (65,078) (1,268)
Issuance of common stock for cash 22,680 --
-------- ---------
Net cash provided by (used in)
financing activities 128,326 (1,268)
Net increase in cash 437,202 90,289
Cash at beginning of year 283,636 193,347
--------- ---------
Cash at end of year $720,838 $283,636
--------- ---------
Interest paid in cash $ 16,647 $ 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, 1998 and 1997
The Company acquired office equipment under an installment plan in the amount
of $56,050 during 1997 and $55,496 in 1998. During 1998, convertible debt and
accrued interest of $61,750 was exchanged for 458,767 shares of common stock.
The Company acquired two subsidiaries during 1998 for a combination of cash,
debt and common stock. Projected Learning Programs, Inc. was acquired effective
January 1, 1998 by issuing a $50,000 note payable, 175,000 shares of common
stock valued at $1.00 per share and cash of $100,000.
Learning Pathways, Limited was acquired effective October 1, 1998 for 510,030
shares of common stock valued at $1.30 per share and $165,760 of debt of which
$82,880 was paid prior to December 31, 1998.
See accompanying notes and accountants' report.
F-6
THE AMERICAN EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
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.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
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.
On February 26, 1998, the Company acquired the business of Projected Learning
Programs, Inc. ("PLP") pursuant to the terms of an agreement and Plan of
Merger, among the Company, PLP, and PLP Holdings, Inc. (a subsidiary of the
Company formed to accommodate the merger). The transaction is accounted for
as a purchase. The Company paid the sellers $325,000 for the stock of PLP 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 business of PLP is to produce,
publish and distribute computer software catalogs to various educational
institutions throughout the United States. The operations of PLP were relocated
from California to Oklahoma City in March 1998. The closing date of the
transaction was effective as of January 1, 1998.
On November 25, 1998, effective October 1, 1998, the Company purchased the
business of Learning Pathways, Limited, ("LPL"), an entity organized under
the laws of the United Kingdom, pursuant to an Agreement between the Company
and the stockholders of LPL. The transaction is accounted for as a purchase.
Pursuant to the Agreement, the Company paid the sellers 510,030 shares of the
Company's $.025 par value common stock and cash of $165,760. The Agreement
further provides that if LPL meets or exceeds certain financial goals set
forth in the Agreement, then the Company will pay the sellers additional shares
of the Company's common stock. The business of LPL principally is to distribute
the World Book Encyclopedia print and multimedia product line in the United
Kingdom.
In 1998 net income from foreign operations totaled $45,940. No dividends were
received from the foreign entity.
F-7
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 $775,045 and
$1,051,289 of such non-monetary transactions for 1998 for 1997, respectively.
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, 1998 were
$1,765,235 with additional costs capitalized totaling $625,096 and $31,142
acquired with the purchase of Learning Pathways, Ltd. during 1998. Amortization
expense totaled $238,989 in 1998 and $121,697 in 1997.
Goodwill
Goodwill represents the excess of the cost of purchased companies over the
fair value of their net assets at dates of acquisition.
Accumulated
Goodwill Amortization
Projected Learning Programs -
1998 $ 325,000 $ (21,667)
Learning Pathways, Ltd. -
1998 718,289 (11,971)
---------- -------------
$1,043,289 $ (33,638)
Goodwill is being amortized over fifteen years. Amortization expense
totaled $33,638 and $46,264 for 1998 and 1997, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist primarily of packing and educational software materials and World
Book Encyclopedia print and multimedia products.
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 $44,869 and $26,831 for 1998 and
1997, respectively. The components of property and equipment at December 31,
1998 are as follows:
Furniture, fixtures and office equipment $ 319,006
Office equipment financed under installment notes 111,546
Leasehold improvements 8,379
----------
438,931
Less: accumulated depreciation $ (195,538)
Net property and equipment $ 243,393
F-8
Statements of cash flows
In the Consolidated Statements of Cash Flows, cash and cash equivalents may
include currency on hand, demand deposits with banks or other financial
institutions, treasury bills, commercial paper, mutual funds or other
investments with original maturities of three months or less.
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
The shareholders approved an Incentive Stock Option Plan for employees during
1998. The total shares issuable under this plan is 750,000. The Committee of
this Plan determines the employees who will receive options to purchase common
shares and the number granted. Option prices will be the fair market value at
date of grant. Options are exercisable as deemed by the Committee and terminate
within ninety days of employment termination, or as designated by the Committee.
In no event shall an option be exercisable more than ten years from the date
it is granted. No options may be issued under this plan after March 31, 2008.
The shareholders also approved a Director's Stock Option Plan during 1998. The
total shares issuable under this Plan is 100,000. Each outside director
initially elected or appointed after March 27, 1998, shall be granted an option
to purchase 5,000 shares of common stock at the fair market value at the date
of the grant. Additionally, each outside director shall automatically be granted
an option to purchase 3,000 shares of common stock as of January 1 of each
succeeding calendar year through termination of the Plan on March 31, 2008.
Options granted are exercisable immediately and for a period of three years
after the date of the grant or, if earlier, ninety days after the date when the
participant ceases to be a director of the Company.
The Company's former non-qualified stock option plan originated in 1996 and
certain unexercised options under this plan will be extended beyond the original
expiration date of March 11, 1999, for a period of three years. The following
table summarizes stock option plan activity:
(In Shares)
--------------------------
1998 1998
1996 Plan Director Plan Employee Plan Total
--------- ------------- ------------- ---------
Number of shares
under options
outstanding as of:
December 31, 1997 1,203,195 -- -- 1,203,195
Shares granted 280,500 -- 498,000 778,500
Shares exercised (45,200) -- -- (45,200)
Shares expired (102,500) -- (5,000) (107,500)
---------- ------ -------- ---------
December 31, 1998 1,335,995 -- 493,000 1,828,995
Option price range
per share $.50 - $.90 $ .73
F-9
3. Common and preferred stock
The following is a summary of common stock transactions
during 1998:
Number of Price
Shares Issued Per Share
------------- ---------
Stock issued for services 50,500 $ .50
Stock issued for cash upon
exercise of stock options 45,200 $ .50
Stock issued for acquisition
of Projected Learning
Programs, Inc. 175,000 $ 1.00
Stock issued for acquisition
of Learning Pathways, Ltd. 510,030 $ 1.30
Stock issued upon conversion of
note payable and accrued interest
to shareholders 458,767 $ .13
The Company amended its Articles of Incorporation during 1998, increasing the
authorized number of common shares to 30,000,000 shares with a par value of
$.025 per share.
4. Notes Payable and Long-term debt
The Company had the following indebtedness under notes and loan agreements:
Current Long-term Total
--------- --------- -------
Line of credit with bank,
originated June 9, 1998, matures
April 30, 1999; maximum line -
$500,000, interest at prime rate
payable monthly (7.75% at December
31, 1998), principal due at
maturity, secured by accounts
receivable and inventory $ 30,000 $ -- $ 30,000
Line of credit with bank,
originated December 4, 1998,
matures April 30, 1999; maximum
line - $850,000, interest at
prime rate payable monthly
(7.75% at December 31, 1998),
principal due at maturity,
secured by accounts receivable
and inventory 36,000 -- 36,000
Note payable to affiliate for
acquisition of subsidiary,
dated February 26, 1998,
maturing March 5, 2000,
bearing interest at 10%, payable
in 24 monthly installments.
Original loan $50,000 25,812 4,557 30,369
Various installment notes payable,
bearing interest at 9% - 9.6%,
maturing between 2001 and 2002.
Monthly payments totaling $5,717.
Collateralized by office equipment 32,874 81,185 114,059
-------- -------- --------
$ 124,686 $ 85,742 $ 210,428
The Company anticipates that the bank lines of credit will be renewed upon
their April 30, 1999 maturity.
Aggregate maturities of notes payable are as follows:
1999 $ 124,686
2000 39,995
2001 27,888
2002 17,859
----------
$ 210,428
Interest incurred on notes payable for the years ended December 31, 1998 and
1997 totaled $14,075 and $5,710, respectively.
F-10
5. 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,
which expired February 28, 1999, were extended for three years. The new lease
includes additional space and has an initial base rate of $10,437 per month.
Total office rent expense for the years ended December 31, 1998 and 1997 was
$99,041 and $68,426, respectively.
Future rental commitments under lease agreements are as follows:
Office Lease
------------
1999 $ 121,110
2000 131,313
2001 131,313
2002 21,886
---------
$ 405,622
6. Income taxes
Deferred tax liabilities and assets are recognized 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:
1998 1997
------ ------
Statutory federal income tax rate 34.0% 34.0%
Prepaid advertising cost 9.8% --
Allowance for uncollectible accounts (1.3%) (3.3%)
Software amortization -- (8.2%)
Change in valuation allowance -- (182.0%)
Property and equipment depreciation (5.7%) .4%
Accrued incentives 4.2% --
Other, net 1.0% 8.1%
----- -------
Effective income tax rate 42.0% (151.0%)
F-11
Deferred tax liabilities and assets at December 31, are comprised of the
following:
1998 1997
-------- -------
Deferred tax liabilities:
Plant and equipment and related
depreciation $ 17,366 $ 1,785
Prepaid advertising 67,027 --
-------- ---------
Total deferred tax liabilities $ 84,393 $ 1,785
Deferred tax assets:
Receivables allowance $ 26,400 $ 13,122
Net operating loss carryforward 868,515 1,474,484
Capitalized software & other intangible
and related amortization 6,401 33,333
Valuation allowance -- --
-------- ----------
Total deferred tax assets 901,316 1,520,939
Net deferred tax asset $816,923 $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 $2,752,000 of
net operating loss carryforwards during the years ending December 31, 1996
through December 31, 1998. 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, was recorded on 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 carry forwards of approximately
$2,100,000 for regular tax purposes and for alternative minimum purposes
expiring between the years 2000 and 2012.
7. Royalty agreements
Several of the Company's software titles are authored by independent
consultants for which 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. The
Company entered into distribution agreements for the sale of other software
curriculum and guidebooks during 1998. Royalty expense totaled $145,605 and
$38,390 in 1998 and 1997, respectively.
8. Related party transactions
The Company has an outstanding note payable, totaling $30,369 at December 31,
1998, to a shareholder for part of the acquisition price of a subsidiary. The
Company is also indebted to a shareholder for temporary advances of $91,319
and owes $82,880 to an affiliate for the acquisition of a subsidiary.
The Company paid accrued consulting fees to a company owned by its President
in the amount of $25,556 during 1998 and $11,551 of relocation expenses during
1997. Consulting fees totaling $8,833 and $1,733 were also paid to directors
during 1998 and 1997, respectively.
F-12
9. Significant customers and concentration of credit risk
The Company sells its products almost exclusively to schools through various
distributors of educational materials.
No individual customer accounted for more than 10% of revenues in 1998. In
1997, the Company had one customer that accounted for more than 10% of total
revenues; National School Services, $506,009 or 13.8%.
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.
10. 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 employment agreements with its officers which include salary
terms and severance benefits.
11. Accrued liabilities
Accrued liabilities are comprised of the following at December 31, 1998:
Accrued profit sharing $ 73,251
Accrued payroll and taxes 44,517
Accrued commissions 96,353
Accrued royalties 99,524
Accrued professional costs 30,879
Accrued foreign taxes 17,866
Accrued - other 88,628
--------
$ 451,018
F-13
12. Profit sharing plan
On July 1, 1997, the Board of Directors adopted a profit sharing Program 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 profit sharing expense totaled $95,644 and $24,077 for
1998 and 1997, respectively.
13. Litigation
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 was damaging to the Company and has caused
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 June, 1998 the Company and Jostens reached a
mediated settlement, without proceeding to trial, that was favorable to the
Company.
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 that is considered material to
the on-going operations and viability of the Company.
14. 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:
1998 1997
---------- ----------
Basic 12,626,000 12,178,567
Diluted 13,615,784 13,211,071
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.
This debt, and the accrued interest, were converted to common stock during the
year ended December 31, 1998. Employee stock options are also included in the
number of diluted common shares using the treasury stock method.
15. Subsequent events
In March 1999, the Company paid $82,880 that was due to an Affiliate to
complete the terms of the Learning Pathways, Ltd. acquisition.
F-14
Exhibit 11
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:
1998 1997
---------- ----------
Basic 12,626,000 12,178,567
Diluted 13,615,784 13,211,071
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. This debt, and the accrued interest, were converted to common stock
during the year ended December 31, 1998. Employee stock options are also
included in the number of diluted common shares using the treasury stock method.
Exhibit 21
Subsidiaries of The American Education Corporation
Projected Learning Programs, Inc., a Nevada corporation
Learning Pathways, Limited, a United Kingdom 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> 720,838
<SECURITIES> 0
<RECEIVABLES> 1,494,536
<ALLOWANCES> (98,515)
<INVENTORY> 96,248
<CURRENT-ASSETS> 2,537,754
<PP&E> 438,931
<DEPRECIATION> (195,538)
<TOTAL-ASSETS> 5,830,102
<CURRENT-LIABILITIES> 1,139,496
<BONDS> 0
0
0
<COMMON> 335,577
<OTHER-SE> 4,269,287
<TOTAL-LIABILITY-AND-EQUITY> 5,830,102
<SALES> 6,022,121
<TOTAL-REVENUES> 6,022,121
<CGS> 712,922
<TOTAL-COSTS> 3,592,543
<OTHER-EXPENSES> (16,285)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,986
<INCOME-PRETAX> 1,707,955
<INCOME-TAX> 725,644
<INCOME-CONTINUING> 982,311
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 982,311
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.07
</TABLE>
