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, 1999
[ ] 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
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(Name of Small Business issuer in its charter)
Colorado
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(State or other jurisdiction of incorporation or organization)
84-0838184
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(I.R.S. Employer Identification No.)
7506 N. Broadway Extension, Suite 505, Oklahoma City, OK 73116
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(Address of principal executive offices )
(405) 840-6031
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(Registrant's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under 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 Exchange Act during
the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
YES X NO
Check 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.
[ X ]
Revenues for the year ended December 31, 1999: $8,564,435
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at
which the common equity was sold, or the average bid and asked price
of such common equity, as of a specified date within the past sixty
days: $6,277,513 based on 5,022,010 shares at $1.25 per share, the
last sale price of the common stock on March 20, 2000. (For purposes
of calculating this amount only, all the directors and executive officers
of the issuer have been treated as affiliates.)
Number of shares of the issuer's common stock outstanding as of March
20, 2000: 14,019,374
Transitional Small Business Disclosure Format YES NO X
TABLE OF CONTENTS TO FORM 10-KSB
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 Stock 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 Control
Persons; Compliance with Section 16(a) of the
Exchange Act
Item 10 Executive Compensation
Item 11 Security Ownership of Certain Beneficial Owners and
Management
Item 12 Certain Relationships and Related Transactions
Item 13 Exhibits and Reports on Form 8-K
THE AMERICAN EDUCATION CORPORATION
FORM 10-KSB
PART I
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Item 1. Description of Business.
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General
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The American Education Corporation, formerly, Plasmedics, Inc., (the
"Company" or "AEC"), was incorporated under the laws of the State of
Colorado on February 23, 1981.
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 2.14 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 1999, substantially completed 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's revised product family was released to the UK school market in
the latter half of 1999. The Company purchased Dolphin, Inc., ("Dolphin")
in December 1999. Dolphin is an established, 11 year-old developer of
educational software for many of the nation's leading textbook and
electronic producers. Dolphin was purchased to provide additional
depth to the Company's development activities and, through its
ongoing industry contacts, to assist the Company in initiating partnering
opportunities in the areas of content development, marketing and
business development.
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 86% of the Company's
1999 sales were to the domestic U.S. school market and approximately
14% to the international 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
Company's 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"), the Internet and new forms of product delivery such as
Application Service Provider ("ASP"), 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 school 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 as well as Citrix application server
software with one of the largest curriculum offerings in the
core subject areas for grade levels 1-12. The Company now publishes
under its various A+ registered brands 139 separate software titles with
approximately another 15 titles in development for release in 2000.
The currently released products all carry 1998 or later copyrights
reflecting the Company's commitment not only to development of
content, but maintaining the currency of its products.
The Company's 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 which
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 which
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 over 70 national tests 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 the form
of content and delivery design. 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 which 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+dvanced Learning System
registered 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 A+dvanced Learning System ("A+LS")
software family and its associated titles is the Company's currently
shipping version of software that comprise the bulk of the Company's
revenues.
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, V2.14, the currently shipping version, 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
139 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 which might require specific
emphasis to correct skill deficiencies. Approximately 8000 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 1998 and into early 1999, the Company completed the release of the
A+LS secondary titles to fully 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. In late 1999, the Company also initiated the
development of additional titles for the General Educational
Development ("GED") test that is scheduled to be released during the
second quarter of 2000.
Throughout 1999, the Company has maintained active development efforts
in updating and expanding both its technology and curriculum offerings
for the A+LS product family. During the year, approximately 30 new
titles, reflecting new offerings in both English and Spanish languages,
were developed for release and the Company's 2000 catalog reflects a
total K-12 offering of 139 titles. This expanded, updated curriculum
offering should provide for additional revenue opportunities with its
existing and future school customers. In addition, during 1999 the
significant portions of the Company's curriculum content was expanded,
updated 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 4000 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, with the option to 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. During 1999, this technology was utilized to
release 11 new titles for primary, middle and secondary grades that
draw upon and integrate selected Internet sites as a key source for
instructional content in language arts, science, mathematics and
social studies. These titles were produced in a publishing
partnership with Teaching Technology, Inc. of Austin, TX.
A+LS/MediaWeaver TM
The Company entered into an agreement in late 1995 to integrate
certain of the Humanities Software, Inc.'s, ("Humanities") popular
MediaWeaver TM 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 incorporate Kids MediaMagic, a new four-title
elementary series in the reading skills area. This new early grade
level product offering was developed and released in the latter part
of 1999.
A+nyWhere Learning System TM
Throughout 1999 the Company has been working on the development of
Important new software technology-based upon Sun Microsystems'
Java2 software. The design approach of this new product family will
maintain the excellent features of the A+dvanced Learning System and
A+SSESS! product families and the means to move current and updated
content to the Java platform. Java2 was selected because of its inherent
suitability for Internet delivery and cross-platform capabilities.
Development work was largely completed in 1999 and the product is currently
in beta testing in schools. The process of transferring the Company's
extensive 139-title content to this new environment began in the
latter part of 1999 and is expected to be completed by late Summer of
2000.
The A+nyWhere Learning System makes use of standardized SQL and ODBC
technology to ensure transferability of student data between the
system and existing customer databases. The powerful class and
student management features of this product provide the means to move
student performance data to most school and district central records.
These features also include the ability to dynamically assess student
capabilities against specific individual state standards, and
prescribe individualized remediation. Importantly, this investment in
new technology provides the Company with the means to deliver its
products in the highly-connected, future market. This capability
should increase and enhance the Company's ability to expand its
delivery alternatives to customers and to secure new marketing and
strategic business relationships.
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 or access to
specialized segments of the market. 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 were 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 relationship provides 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
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The U.S. school market for educational software is growing at
approximately 17%-20% per annum according to industry sources. In the
United States this market growth is being driven by record student
enrollments in primary through secondary schools projected through the
year 2008. The U.S. market is currently comprised of 15,000 school
districts that control 111,000 schools. Many states in the South and
Southwest with high population growth projections are expected to have
expansion of student populations exceeding 20% during the next several
years.
This market is believed to be moving to wider use of technology,
access to the Internet and the increasing use of online services with
K-12 expenditures expected to reach $6.5 billion during the year 2000.
The school market is closing on the mark that 100% of the schools in
the U.S. are connected to the Internet. Access to the Internet is
expected to increase in schools as more connections are effected
throughout school buildings. Importantly, increased home access to
the Internet will open up the potential for distributed learning and
"elearning" with the local school functioning as the hub of a
community-wide network to access educational resources.
Market growth is also expected to effect significant changes in the
use and increased adoption of technology to cope with teacher and
physical facilities shortages in an attempt to gain increasing
efficiency and to secure more accountability for academic performance
at the individual school and district level. To meet the future
challenges, schools are expected to embrace the increased use of a
range technologies including the areas of database management,
elearning through the Internet and its capabilities, and reliance on
outside-hosted software from ASP's.
The International School Market
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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
1999, the British government continued implementation of Phase 1 of
The National Grid for Learning ("NGfL") and launched Phase II of this
program on April 1, 1999, to invest substantially in computer hardware
infrastructure, Internet access, educator training and instructional
software technologies for the UK's schools. The NGfL funding is
scheduled to continue through one additional phase and management
believes that this positive growth trend will continue into the year
2002. This market should experience higher rates of growth in
funding for educational technology, at the individual school level,
than the U.S. and this was reinforced by additional new technology
funding initiatives for the UK school market during 1999. Many former
British commonwealth nations utilize the UK's instructional regimen
and Company management believes that additional international
opportunities will emerge as a result of the Company's programs and
presence in the UK marketplace. This belief was reinforced by the
Company entering into a development partnership with Edu-Sol of Jordan
in late 1999 to provide under license the Company's software
technology and English language content for translation into Arabic
for the Middle East's school market.
The Adult Literacy/Lifelong Learning Market
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The Company believes it has designed its curriculum content delivery
so that it is both appealing and engaging to children and not
offensive to adult learners. As a result, the Company is receiving
significant interest from this segment of the market. In 1999, 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. The Company also embarked on the development of
curriculum content and assessment tools to build a course of study
specifically addressing the General Educational Development test
requirements. The adult literacy and related market segments are
believed to be 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
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The Company has not been active in marketing its products to this
market segment, which offers future opportunities for growth and
additional financial returns on the Company's investment into
educational content. In 1999, the Company initiated programs to begin
marketing these products through a new Internet and web facility for
home educators, greatgrades.com. Management believes that there is
an opportunity to move into this segment of the market with its current
products and collateral support and training materials that will be of
value to home educators. 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 1999. This version will be available
for release in 2000.
In competing for a share of the home market, the Company will adopt an
ecommerce model and release it through its new greatgrades.com
Internet site. This site, under development since late 1999, should
be active at the end of the first quarter 2000. A wide range of
promotional strategies will be implemented to promote this site which
will provide a wide range of value-added support and unique services
to parents interested in home education of their children.
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, in 1999 the Company acted to file necessary documents in the
U.K. to ensure protection and preservation of it's A+ brand in that
country. The Company filed for additional separate and expanded use
of it's A+ registered mark for use as A+nyWhere Learning System in May
1999. The use of the Company's distinctive A+ logo is viewed as an
integral, distinctive brand element to the Company's product families
and important to corporate recognition.
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, 1999, the Company employed thirteen full-time
development and support personnel in its product development efforts.
These individuals are responsible for the 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
personnel resources.
At December 31, 1999, the Company employed five 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 $1,103,633 in
software research and development costs in 1999.
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. During 1999, the Company hired and trained an
internal direct telephone sales staff to provide support to its
dealers and to improve its access to school customers in rural
areas not easily reached by its dealers. This internal direct
sales team was comprised of eleven individuals at December
31, 1999.
Internet Marketing and ecommerce
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The Company views the Internet as an important new channel for future
sales growth and means to develop new customer service and support
programs. During 1999 the Company invested substantial resources in
improving and expanding its Internet marketing and ecommerce
capabilities. In early 1999, the Company entered into a contract to
upgrade Projected Learning's web site, www.p-l-p.com, and to prepare
the division's catalog resale for ecommerce with an outside web page
design and development firm. In August 1999, the Company expanded its
contract with this outside development firm to update functionally and
graphically its www.amered.com web site. In addition, this firm was
given the assignment to develop a new Internet presence for the home
market www.greatgrades.com with full ecommerce capabilities. The new
amered.com and greatgrades.com sites are expected to be active in
April 2000. In addition to these sites, the Company's subsidiaries,
Learning Pathways and Dolphin, maintain active web sites
www.learnpath.com and www.dolphinsoft.com, respectively. At the end
of 1999, the Company has active or under development five Internet
site facilities.
Backlog
- -------
The Company's software products are normally shipped within five 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
- -----------
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 Customers
- ---------------------
The Company sells its A+LS product family almost exclusively to
schools through various school dealers of educational materials. No
individual customer accounted for more than 10% of total revenues in
1998 or 1999.
Competition
- -----------
The educational software industry is highly competitive and subject to
rapid change. In 1999, an increasing number of new publicly financed
and privately funded organizations were identified that are
potentially competitive to the Company's current business and future
plans for electronically delivered content. 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 and
publisher of educational material.
The Internet and the delivery of curriculum by electronic means may
have the capacity to alter the competitive environment and the current
means to content access for both the school and home customer. The
Company, in the judgment of management, has the necessary programs
underway or planned to develop the technology to remain competitive in
the future marketplace environment. Business development programs to
identify future partners and the means to exploit the Company's
investment in both technology and content are an ongoing process with
a number of companies that have a focus on the Internet, the education
marketplace and are seeking content partners.
Employees
- ---------
As of December 31, 1999, the Company had seventy-one (71) full-time
employees in its domestic operations and sixteen (16) full time
employees in its UK subsidiary. The Company believes that its
relationship with employees is satisfactory. In 1999, the Company
established a human resources department that is headed by an
experienced professional.
Item 2. Description of Property.
- ---------------------------------
The Company leases approximately 17,600 sq. ft. of contiguous office
and light warehouse space in Oklahoma City, Oklahoma, under an
agreement renewed February 23, 1999 for thirty-six months at $8,416 a
month. A portion of this space is leased under a sub-lease agreement
for $3,073 a month through February 2000 and thereafter under the
terms of the principal lease for twenty-four months at $4,171 a month.
Dolphin, Inc., a wholly owned subsidiary, leases 6,750 sq. ft. of
office space in Gibbsboro, New Jersey, under a lease agreement
expiring May 31, 2000. The monthly lease expense is $7,950.
Learning Pathways, Limited, a wholly-owned subsidiary, leases
approximately 3,500 sq. ft. of office space in Derby, United Kingdom.
Monthly lease expense approximates $1,536. The lease renews each month
for a period of ninety days.
Total corporate cost of lease facilities was $175,990 for 1999 for the
Company's Oklahoma, New Jersey and Derby, UK facilities. Cost of leased
facilities for 1998 was $99,041.
Item 3. Legal Proceedings.
- ---------------------------
The Company may be the subject of various legal proceedings that could
arise during 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, 1999.
PART II
- -------
Item 5. Market for Common Equity and Related Stockholder Matters.
- ------------------------------------------------------------------
As of December 31, 1999, there were approximately 3,400 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. The following is a summary of the high and low bid
price for each of the 1999 and 1998 quarters.
1999 1998
---- ----
HIGH LOW HIGH LOW
--------------- ------------------
Quarter Ending March 31 $9.75 $ .9063 $1.4375 $ .75
Quarter Ending June 30 $1.9375 $1.125 $1.50 $ .9375
Quarter Ending September 30 $1.875 $1.125 $1.375 $ .9375
Quarter Ending December 31 $2.00 $ .9375 $1.1875 $ .75
The above information was obtained from the National Association of
Security Dealers. 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.
Issuance of Securities
- ----------------------
In October, 1999, the Company issued warrants to purchase 200,000
shares of common stock exercisable at $1 7/8 per share in connection
with the Company's engagement of M.H. Meyerson & Co., Inc., as an
investment banker. The warrants are exercisable any time until
September 30, 2004.
In November, 1999, 5,000 shares of common stock were issued as a
result of exercise of options by a former employee of the Company.
In December, 1999, the Company issued 35,148 shares of common stock
as a portion of the purchase price of the acquisition of Dolphin, Inc.
The Company relied upon the exemptions from registration provided by
Sections 4(2) or 4(6) of the Securities Act as the offerings and sales
did not involve public offerings or were made to accredited investors.
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 as a result 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 and to
position the Company for long-term growth. 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
and existing bank lines of credit in 2000. 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, 1999 the Company's principal sources of liquidity
included cash and cash equivalents of $1,138,711, net accounts
receivable of $2,215,242 and inventory of $152,344. The Company's net
cash provided by operating activities increased by 41% from $1,316,544
in 1998 to $1,861,043 in 1999. Net cash used in investing activities
increased by 200% from $1,007,668 in 1998, to $3,019,274 in 1999, and
was comprised primarily of investment in capitalized software
development costs and the cash portion of the purchase price of the
acquisition of Dolphin, Inc. The majority of the cash for the Dolphin
acquisition was borrowed under a portion of the Company's lines of
credit, and is recorded as long-term debt. At December 31, 1999, the
Company had working capital of $2,541,991 compared to $1,398,258 at
December 31, 1998.
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 (CD-ROM's) on an almost as needed
basis. For those items which 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 Companys customers. Management
anticipates that the working capital requirements to support continued
expansion will be funded from continuing operations or 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 and
1999, management believes that the Company can continue to grow at a
rate similar to that experienced in 1999 as compared to 1998.
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, 1999, the
Company had available short-term bank credit lines totaling
$1,000,000, subject to borrowing base limitations, which were unused.
Year 2000
- ---------
The Company's Year 2000 compliance program consisted of review and
assessment of the Company's information technology systems, software
systems it produces for sale, and potential risk if suppliers of
products or services could not resolve their own Year 2000 issues. It
was determined that no major remediation efforts would be necessary.
As of the date of this report, the Company has not experienced any
significant impact on operations from Year 2000 issues, nor have there
been any significant disturbances or interruptions in the Company's
ability to transact business with customers, suppliers or
service providers.
Results of Operations
- ---------------------
Fiscal Year Ended December 31, 1999 Compared to Fiscal Year Ended
December 31, 1998
- -----------------------------------------------------------------
The following is a discussion of the results of operations for the
fiscal year ended December 31, 1999, as compared to the fiscal period
ended December 31, 1998.
Net revenues for the twelve months ended December 31, 1999, totaled
$8,564,435 compared to net revenues of $6,022,121 for the year ended
1998. This represents an increase of 42% in net revenues over the
prior fiscal year. The increase in net revenues reflects the
continued acceptance by educational institutions of the Company's
A+dvanced Learning System family of educational software products.
Increased sales by the Company's Learning Pathways U.K. division and
the acquisition of Dolphin, Inc in the fourth quarter of 1999 were
also significant contributing factors to the increase in revenues.
Cost of goods sold as a percentage of net revenues for the year ended
December 31, 1999 increased to 15.5% from 11.8% in 1998. This change
is attributed to the increase of lower gross margin products sold by
Learning Pathways, Limited as a percentage of consolidated revenues,
and the inclusion of the results of Dolphin, which also has lower
gross margins than the Company's primary business. 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. The Company's
principal product family, A+LS, provided gross profit margins
averaging 94% in 1999. Consolidated Company gross margins are
expected to trend down slightly in the future as lower gross margins
on LPL sales of World Book products and Dolphin's sales of software
become a higher percentage of total corporate revenues.
Total operating expenses recorded for the year ended December 31, 1999,
were $5,656,094, or 66% of net revenues, compared to $3,592,543, or
60%, for the previous fiscal year. The increase in operating expenses
as a percentage of net revenues is primarily due to management's
decision to invest in personnel and infrastructure early in 1999 to
position the Company for continued long-term profitable growth. As a
component of total operating expenses, selling and marketing costs
increased from $1,802,841 in fiscal 1998 to $2,799,405 in fiscal 1999.
The increase in 1999 selling expenses is a direct result of increased
selling efforts required to support the higher sales levels attained.
Operations expense decreased to $181,164, or 2.1% of net revenues in
fiscal 1999, compared to $244,557, or 4.0% of net revenues in fiscal
1998. This decrease in operations expense as a percentage of revenues
is primarily due to volume related efficiencies where much of the
operating cost is fixed, but is set at a level which can support
higher revenues. General and administrative expenses increased to
$2,282,401 in 1999 compared to $1,306,156 in 1998, increasing from 21.6%
of revenues in 1998 to 26.6% in 1999. 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
LPL and Dolphin into the consolidated results.
Costs incurred in conjunction with product development are charged to
research and development expense until technological feasibility is
established. During fiscal 1999, the Company capitalized $1,103,633 of
product development costs, and net of accumulated amortization had
capitalized software costs of $1,889,872 at December 31, 1999.
During 1999, the Company completed a major content extension of the
A+LS elementary and middle school curriculum. In addition, the
Company 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 $30,605 in 1999 compared to $24,986 in 1998. This
1999 increase results from interest incurred on the Company's
acquisition debt and the use of debt to finance certain capital assets.
Net income decreased by 2.8% to $955,114 from $982,311 in 1998. This
decrease is a result of the higher net revenues noted above offset by
the increase in operating costs that management elected to incur to
invest in marketing, programming and support staff . 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 1999 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.
During 1999, the Company continued the improvement in revenues and
cash flow from operations that began several years ago. The Company's
cash position at the end of fiscal 1999 improved by $417,873 or 60%
over the cash position at the end of the 1998 fiscal period. Working
capital increased 82% from $1,398,258 at the end of 1998 to $2,541,991
at December 31,1999.
Company management believes that significant future opportunities
exist in the school, adult literacy, home markets to be accessed by
traditional distribution and its growing capability in electronic
delivery for future Company growth. Management believes, as a result
of 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 1999. 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 planning
and believes it represents a potential new, future channel of
distribution for both products and services. During 1999, the Company
not only invested substantially in Internet-related technology, but
continued strategic planning for the necessary technologies and
curriculum content to take advantage of the Internet, which is viewed
as a developing and emerging channel. Management believes that the
Internet, and application server software such as software developed
by Citrix, Inc., that facilitate the hosting of its products by
ASPs will become an important future factor in the Company's growth and
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 1999. 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 58 President, Director, 1989
Chief Executive Officer
Thomas A. Shively 46 Executive Vice President and
Chief Operating Officer
Neil R. Johnson 49 Vice President and
Chief Financial Officer
Monty C. McCurry 54 Director 1989
Newton W. Fink 63 Director 1991
Stephen E. Prust 55 Director 1992
Geoffrey Glossop 51 Director 1998
Business Experience
- -------------------
JEFFREY E. BUTLER became a director of the Company in August 1989 and
was elected Chief Executive Officer and President in March, 1990. From
1985 to 1990, Mr. Butler was a management consultant to businesses in
the biotechnology, computer science, software, educational and
entertainment video industries. Mr. Butler served as a director of
Video Professor Industries, Inc., a publicly held corporation, from
February 1, 1989 to October 31, 1990. Prior to establishing his
management consulting business, Mr. Butler was the Chief Executive
Officer and President of Infomed Corporation, which provided computer
diagnostic equipment and management services to hospitals,
corporations and physicians. Prior to 1985, Mr. Butler was employed
by Sandoz, Ltd., Corning, Inc. and 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.
MONTY C. McCURRY was elected to the Board of Directors in April 1989.
Since 1985, Mr. McCurry has been the President of Executive Resource
Management, an executive search firm headquartered in Aurora,
Colorado. From 1969 to 1985, Mr. McCurry was employed by Paul M.
Riggins and Associates, an executive search firm where he was
associate general manager.
NEWTON W. FINK, Ed.D. was elected to the Board of Directors in January
1991. Since September, 1998 Dr. Fink has been the Superintendent of
Schools in Manteno, IL. From 1994 to 1998 he was Superintendent of the
VIT Schools in Table Grove, IL. Prior to 1994, Dr. Fink was the
President of Computer Instructional Services, Inc., a privately-held
corporation providing computer educational services to individuals,
schools, corporations and institutions. Additionally, he has been
employed as a teacher and an elementary/middle school principal
earlier in his career. Dr. Fink has also published and lectured
extensively on the use of computers in education.
STEPHEN E. PRUST was elected to the Board of Directors in April 1992.
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, Mr. Prust was the President of AVID Home Entertainment, a
division of LIVE Entertainment, Inc. 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 1981.
GEOFFREY GLOSSOP was appointed to the Board of Directors in 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 B.S. 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, 1999, 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
executive officers.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
------------------------------ --------------------
Other
Name and Principal Annual Stock Stock
Position Year Salary Bonus Compensation(1) Options Awards
- -------------------------------------------------------------------------------
Jeffrey E. Butler, 1999 $100,357 $7,347 -- 40,000 $17,600(2)
President and Chief 1998 89,355 4,158 -- 60,000 5,000(2)
Executive Officer 1997 83,878 0 -- 0 0
Thomas A. Shively, 1999 $ 91,204 $7,510 -- 55,000 $12,960(2)
Executive Vice 1998 83,460 3,922 -- 70,000 5,000(2)
President 1997 78,952 0 $10,637(3) 0 0
Neil R. Johnson, 1999 $ 84,432 $1,157 -- 25,000 $ 3,650(2)
Vice President and 1998 26,791 0 -- 75,000 0
Chief Financial
Officer (4)
(1) The executive officers did not receive any prerequisites or other
benefits, the aggregate amount of which exceeded the lesser of
$50,000 or 10% of their compensation. The Company reimbursed Mr.
Butler $11,551 for relocation expenses in 1997.
(2) In April, 1999, Mr. Butler was awarded 35,200 shares of Common
Stock and Mr. Shively was awarded 25,919 shares of Common Stock for
services rendered. In March, 1999, Mr. Johnson was awarded 5,000 shares
of the Company''s Common Stock as a stock bonus. In January, 1998,
Mr. Butler and Mr. Shively each received 10,000 shares of Common Stock
as bonus compensation for their performance in 1997.
(3) These amounts were paid to Mr. Shively for services rendered prior
to 1996.
(4) Mr. Johnson became an employee of the Company in August, 1998.
Employment Agreements
- ---------------------
In December, 1998, the Company entered into an employment agreement
with Jeffrey E. Butler providing for a base salary and benefits as
determined by the Board of Directors, 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 A. Shively, and Neil R. Johnson also have employment
agreements with the Company. These agreements also provide for
severance payments and repurchase of a portion of their beneficial
stock ownership in the event of a change in control.
Stock Incentive Plans
- ---------------------
The shareholders approved an Incentive Stock Option Plan for
employees, including officers, during 1998, and approved an amendment
to the plan in 1999 to increase the number of shares available. The
total common shares issuable under this plan is 1,050,000 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. Since its inception 1,048,000 options have been
granted, 27,000 have expired, and 29,165 options have been exercised.
At December 31, 1999, there were 991,835 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, 349,119 have
expired and 70,200 have been exercised. At December 31, 1999, there
were 1,162,376 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 1999
- ---------------------------
The following table sets forth the information concerning the stock
options granted during the last fiscal year to the executives named in
the Summary Compensation Table:
Percentage of Total
Options Granted Options Granted to Exercise Price Expiration
Name (shares) Employees in 1999 (Per Share) Date
- ------------------------------------------------------------------------------
Jeffrey E.
Butler 40,000 7.3% $.73 August 1, 2002
Thomas A.
Shively 55,000 10.0% $.73 August 1, 2002
Neil R.
Johnson 25,000 4.5% $.73 August 1, 2002
Option Exercises and Fiscal Year-End Values
- -------------------------------------------
No executive officer exercised options during 1999. The following
table sets forth, for the executive officers 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 416,800 $315,650
Thomas A. Shively 358,276 $262,349
Neil R. Johnson 100,000 $ 58,250
Directors' Compensation
- -----------------------
In 1999, the Company's non-employee directors each received shares of
the Company's common stock and options to purchase shares of the
Company's common stock at $.73 per share. Stephen Prust received
12,000 shares of common stock and options to purchase 10,000 shares of
common stock at $.73 per share. Monty McCurry and Newton Fink each
received 7,000 shares of the Company's common stock and options to
purchase 10,000 shares of common stock at $.73 per share. 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 options 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 in 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, 1999, 30,000 options
had been issued and 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, 2000. Unless otherwise indicated, the beneficial owner has
sole voting and investment power over the common stock listed below:
Shares Beneficially
Owned
--------------------
Name/Address of Beneficial Owner Title of Class Number Percent
- ------------------------------------------------------------------------
Jeffrey E. Butler (1) Common 1,436,575 10.2%
7506 N. Broad Ext.,
Oklahoma City, OK 73116
Thomas A. Shively (2) Common 547,814 3.9%
14431-C North Penn
Oklahoma City, OK 73134
Neil R. Johnson (3) Common 88,250 0.6%
6500 N.W. Grand Blvd.
Oklahoma City, OK 73116
Monty C. McCurry (4) Common 129,400 0.9%
2134 S. Eagle Ct.
Aurora, CO 80014
Newton W. Fink (5) Common 97,400 0.7%
1093 Lincoln
Manteno, IL 60950
Stephen E. Prust (6) Common 451,768 3.3%
9025 East Kenyon Avenue
Denver, CO 80237
Geoffrey Glossop (7) Common 525,540 3.8%
Field House
6 Haley Croft
Duffield, Derbyshire, UK
John D. Garber (8) Common 5,288,286 38.4%
7530 Navigator Circle
Carlsbad, CA 92009
Robert Schoolfield (9) Common 1,536,517 11.2%
5 Pleasant Cove
Austin , TX 78746
The Pennsylvania State Common 750,000 5.3%
University (10)
University Park, PA 16802
Officers and Directors
as a Group (7 persons) Common 3,276,747 22.1%
(1) (2) (3) (4) (5) (6) (7)
(1) The amount and percentage figures include the possible exercise
of 316,800 common stock options, with an exercise price of $.50 per
share, and 73,200 common stock options at $.73 per share, exercisable
within 60 days.
(2) The amount and percentage figures include the possible exercise
of 233,276 common stock options, with an exercise price of $.50 per
share, and 88,150 common stock options at $.73 per share, within 60
days.
(3) The amount and percentage figures include the possible exercise
of 83,250 common stock options, with an exercise price of $.73 per
share, exercisable within 60 days.
(4) The amount and percentage figures include the possible exercise
of 63,000 common stock options, with an exercise price of $.50 per
share, 10,000 common stock options at $.75 per share, and 10,000
common stock options at $.73 per share, exercisable within 60 days.
(5) The amount and percentage figures include the possible exercise
of 63,000 common stock options, with an exercise price of $.50 per
share, 10,000 common stock options at $.75 per share, and 10,000
common stock options at $.73 per share, exercisable within 60 days.
(6) The amount and percentage figures include the possible exercise
of 108,000 common stock options, with an exercise price of $.50 per
share, 10,000 common stock options at $.75 per share, and 10,000
common stock options at $.73 per share, exercisable within 60 days.
(7) The amount and percentage figures include 510,030 shares of
common stock held in trust for the benefit of the Glossop family and
include the possible exercise of 15,510 common stock options with an
exercise price of $.73 per share, exercisable within 60 days.
(8) The amount and percentage figures include 3,177,286 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 for which 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 1,671,000 shares of common stock owned
by a company controlled by the Garber family.
(9) 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.
(10) During 1999, the John D. Garber and Clare C. Garber Trust
donated 750,000 shares of the Company's Common Stock to The
Pennsylvania State University.
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.
The Company paid Executive Resource Management $8,833 in 1998 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.
The Company's subsidiary, Learning Pathways, Ltd., paid Editplan
Services, Ltd. consulting fees of $143,290 in 1999 and $37,000 in 1998
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 on
Form S-8 filed with the Securities and Exchange Commission
on October 22, 1999)
4.1 Form of Stock Certificate (incorporated by reference to
the Company's registration statement on Form S-8 filed
with the Securities and Exchange Commission on October
22, 1999)
4.2 Directors' Stock Option Plan (incorporated by reference
to Exhibit B to the Definitive Proxy Statement filed
with the Securities and Exchange Commission on April 24,
1998)
4.3 First Amendment to the Directors' Stock Option Plan
(incorporated by reference to the Company's registration
statement on Form S-8 filed with the Securities and
and Exchange Commission on October 22, 1999)
4.4 Stock Option Plan for Employees (incorporated by
Reference to Exhibit C to the Definitive Proxy Statement
Filed with the Securities and Exchange Commission on
April 24, 1998)
4.5 First Amendment to the Stock Option Plan for Employees
(incorporated by reference to the Company's registration
statement on Form S-8 filed with the Securities and
Exchange Commission on October 22, 1999)
10.1 Purchase Agreement for the acquisition by the Company
of Learning Pathways, Limited (incorporated by
reference to the exhibit in the Current Report on
Form 8-K filed with the Securities and Exchange
Commission on December 15, 1998)
10.2 Stock Purchase Agreement for the acquisition by the
Company of Dolphin, Inc. (incorporated by reference
To the exhibit in the Current Report on Form 8-K filed
with the Securities and Exchange Commission on
January 10, 2000)
11 Statement re: computation of per share earnings
(filed herewith)
21 Subsidiaries of The American Education Corporation
(filed herewith)
23.1 Consent of Steakley, Gilbert and Bozalis
27 Financial Data Schedule (filed herewith; electronic
filing only)
(b) Reports on Form 8-K
(i) Current Report on Form 8-K filed January 10, 2000 regarding the
acquisition of Dolphin, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
The American Education Corporation
March 30, 2000 By: /s/Jeffrey E. Butler
____________________________
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
- ------------------ ----------------------- --------------
Jeffrey E. Butler /s/Jeffrey E. Butler March 30, 2000
Chief Executive Officer
Chairman of the Board
Treasurer
Neil R. Johnson /s/Neil R. Johnson March 30, 2000
Chief Financial Officer
Monty C. McCurry /s/Monty C. McCurry March 30, 2000
Director
Newton W. Fink /s/Newton W. Fink March 30, 2000
Director
Stephen E. Prust /s/Stephen E. Prust March 30, 2000
Director
Geoffrey Glossop /s/Geoffrey Glossop March 30, 2000
Director
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, 1999 F-2
Consolidated Statements of Income for the years
ended December 31, 1999 and 1998 F-3
Consolidated Statements of Changes In Stockholders'
Equity for the years ended December 31, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1999 and 1998 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, 1999 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, 1999. 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, 1999 and the
consolidated results of its operations and cash flows for each of the
two years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
STEAKLEY, GILBERT & BOZALIS
Oklahoma City, Oklahoma
March 7, 2000
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED BALANCE SHEET
December 31, 1999
ASSETS
Current assets:
Cash and cash equivalents $1,138,711
Accounts receivable, net of allowance for returns and
uncollectible accounts of $116,667 (Note 1) 2,215,242
Inventory (Note 1) 152,344
Prepaid expenses and deposits 358,597
Deferred tax asset (Note 6) 123,441
---------
Total current assets 3,988,335
Property and equipment, at cost (Note 1) 868,483
Less accumulated depreciation and amortization (307,066)
---------
Net property and equipment 561,417
Other assets:
Capitalized software costs, net of accumulated
amortization of $1,635,233 (Note 1) 1,889,872
Goodwill, net of accumulated amortization of
$129,628 (Note 1) 2,370,483
Deferred tax asset (Note 6) 13,587
----------
Total other assets 4,273,942
----------
Total assets $8,823,694
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable trade $399,454
Accrued liabilities (Note 11) 583,958
Accounts payable - Affiliates (Note 8) 96,529
Notes payable and current portion
of long-term debt (Note 4) 213,052
Foreign income taxes payable 117,677
Income taxes payable (Note 6) 35,674
---------
Total current liabilities 1,446,344
Long-term debt (Note 4) 1,519,888
Other 16,125
---------
Total liabilities 2,982,357
---------
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-13,755,069 shares 343,877
Additional paid in capital 6,424,322
Retained deficit (926,862)
-----------
Total stockholders' equity 5,841,337
-----------
Total liabilities and stockholders' equity $8,823,694
===========
See accompanying notes and accountants' report.
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999 and 1998
1999 1998
---- ----
Sales (Note 1) $8,564,435 $6,022,121
Cost of goods sold 1,331,523 712,922
---------- ----------
Gross Profit 7,232,912 5,309,199
---------- ----------
Operating expenses:
Selling and marketing (Note 1) 2,799,405 1,802,841
Operations 181,164 244,557
General and administrative 2,282,401 1,306,156
Amortization of capitalized
software costs 393,124 238,989
---------- ----------
Total operating expenses 5,656,094 3,592,543
---------- ----------
Operating income 1,576,818 1,716,656
Other income (expense):
Interest income 29,920 16,285
Interest expense (30,605) (24,986)
--------- ----------
Net income before income taxes 1,576,133 1,707,955
Deferred income tax provision 520,903 712,527
Current income tax provision 100,116 13,117
----------- ---------
Net income $ 955,114 $ 982,311
=========== ===========
Earnings per share: (Note 14)
Basic $.07 $.08
=========== ===========
Diluted $.07 $.07
=========== ===========
See accompanying notes and accountants' report.
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1999 and 1998
Additional
Common Stock paid in Retained
Shares Amount capital deficit
----------------- ----------- ---------
Balance at
December 31, 1997 12,183,579 $304,590 $5,237,093 $(2,864,287)
Issuance of common stock for:
Conversion of debts 458,767 11,469 50,281 --
Services rendered 50,500 1,262 23,988 --
Purchase of
subsidiaries 685,030 17,126 820,912 --
Cash 45,200 1,130 21,550 --
Net Income 982,311
Comprehensive
Income adjustment:
Foreign currency
translation (2,561)
---------- -------- ---------- ------------
Balance at
December 31, 1998 13,423,076 335,577 6,151,263 (1,881,976)
Issuance of common
stock for:
Services rendered 172,680 4,317 106,323 --
Purchase of
subsidiary 35,148 879 47,121 --
Cash 124,165 3,104 112,336 --
Net Income 955,114
Comprehensive Income
adjustment:
Foreign currency
translation -- -- 7,279 --
---------- ------- ---------- -----------
Balance at
December 31, 1999 13,755,069 $343,877 $6,424,322 $ (926,862)
========== ======= ========== ===========
See accompanying notes and accountants' report.
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
1999 1998
----------- --------
Cash flows from operating activities:
Net Income $ 955,114 $ 982,311
Adjustments to reconcile net income
to net cash provided by operating
activities:
Deferred income taxes 499,685 702,230
Depreciation and amortization 603,032 339,164
Reserve for bad debts 18,152 25,110
Services rendered for common stock 110,640 25,250
Deferred compensation 16,125 --
Changes in assets and liabilities:
Accounts receivable (342,820) (585,920)
Inventories (56,096) (43,421)
Prepaid expenses and deposits (19,995) (270,752)
Accounts payable and accrued
liabilities 24,650 67,866
Income taxes payable 130,226 1,387
Accounts payable - Affiliate (77,670) 73,319
---------- ---------
Net cash provided by operating
activities 1,861,043 1,316,544
Cash flows from investing activities:
Purchase of subsidiaries less cash
on hand at date of acquisition (1,687,965) (267,045)
Purchase of property and equipment (227,676) (115,527)
Software development costs
capitalized (1,103,633) (625,096)
---------- ---------
Net cash used in investing
activities (3,019,274) (1,007,668)
Cash flows from financing
activities:
Proceeds received from issuance of debt 1,755,642 170,724
Principal payments on notes payable (294,978) (65,078)
Issuance of common stock for cash 115,440 22,680
---------- ---------
Net cash provided by
financing activities 1,576,104 128,326
Net increase in cash 417,873 437,202
Cash at beginning of year 720,838 283,636
---------- --------
Cash at end of year $1,138,711 $720,838
========== ========
Interest paid in cash $ 27,375 $ 16,647
========== ========
See accompanying notes and accountants' report.
THE AMERICAN EDUCATION CORPORATION
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Years Ended December 31, 1999 and 1998
The Company acquired office equipment under an installment purchase
plan in the amount of $55,496 during 1998 and financed $61,848 for the
purchase of vehicles during 1999. 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, Ltd. 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.
Effective October 1, 1999, the Company acquired all of the common
stock of Dolphin, Inc. for $1,752,000 cash and 35,148 shares of the
Company's common stock valued at $48,000.
See accompanying notes and accountants' report.
THE AMERICAN EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
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 Educational 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 was 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. The results of operations of PLP are included in the
consolidated statements of income for the two years ended December 31,
1999.
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 was 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 finaancial 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. Results of operations
of LPL are included in the consolidated income statements for the
period October 1, 1998 through December December 31, 1998 and for the
year ended December 31, 1999.
On December 24, 1999, the Company entered into a stock purchase
agreement to acquire 100% of the capital stock of Dolphin, Inc.,
("Dolphin") a New Jersey corporation. The transaction's effective date
was October 1, 1999. The purchase price was $1,800,000 consisting of
cash payments totaling $1,752,000 and 35,148 shares of the Company's
common stock valued at $48,000. The acquisition has been accounted
for as a purchase. Results of Dolphin's operations for the period
October 1, 1999 through December 31, 1999 are included in the 1999
consolidated statement of income. Dolphin provides software design
services for unaffiliated customers.
During 1999 and 1998 net income from foreign operations totaled
$195,423 and $45,940, respectively. No dividends were received from
the foreign entity.
Revenue recognition
- -------------------
The Company recognizes revenue in accordance with the American
Institute of Certified Public Accountant's Statement of Position 97-2
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 $393,835 and $775,045 of such non-monetary
transactions for the years ended December 31, 1999 and 1998,
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, 1999, were
$2,421,473 with $1,103,633 additional costs capitalized during 1999.
Amortization expense totaled $393,124 in 1999 and $238,989 in 1998.
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, Inc. $ 325,000 $ (43,333)
Learning Pathways, Ltd. 760,494 (62,718)
Dolphin, Inc. 1,414,617 (23,577)
---------- -------------
$2,500,111 $ (129,628)
========== =============
Goodwill is being amortized over fifteen years. Amortization expense
totaled $95,990 and $33,638 for 1999 and 1998, respectively.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist 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 $111,528 and
$44,869 for 1999 and 1998, respectively. The components of property
and equipment at December 31, 1999, are as follows:
Furniture, fixtures and office equipment $ 662,556
Office equipment financed under installment notes 111,546
Leasehold improvements 33,283
Vehicles 61,098
----------
868,483
Less: accumulated depreciation (307,066)
----------
Net property and equipment $ 561,417
==========
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 to purchase common stock
- -----------------------------------
The shareholders approved an Incentive Stock Option Plan for employees
during 1998, and approved an amendment to the plan in 1999 to
increase the number of shares available. The total shares issuable
under this plan is 1,050,000. 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 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 were 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, 1998 1,335,995 -- 493,000 1,828,995
Shares granted -- 30,000 550,000 580,000
Shares exercised (25,000) -- (29,165) (54,165)
Shares expired (148,619) -- (22,000) (170,619)
---------- ------ -------- ----------
December 31, 1999 1,162,376 30,000 991,835 2,184,211
========== ====== ======== ==========
Option price range
per share $.50 - $.90 $ .73 $ .73
3. Common and preferred stock
- -----------------------------
The following is a summary of common stock transactions during 1999:
Number of Price
Shares Issued Per Share
------------- ---------
Stock issued for services 172,680 $ .50-$1.28
Stock issued for cash
including exercise of stock options 124,165 $ .50-$1.00
Stock issued for acquisition of
Dolphin, Inc. 35,148 $1.36
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 December 23, 1999,
matures April 30, 2001; initial
line - $1,145,000, reducing by
$12,500 per month; interest at
prime rate payable monthly
(8.5% at December 31, 1999),
remaining principal due at
maturity, secured by accounts
receivable and inventory $122,433 $ 909,969 $1,023,402
Line of credit with bank,
originated December 23, 1999,
matures April 30, 2001; maximum
line - $475,000, interest at
prime rate (8.5% at December
31, 1999) payable monthly,
principal due at maturity,
secured by accounts receivable
and inventory -- 475,000 475,000
Lines of credit with bank,
originated April 30, 1999, to
December 23,1999, matures
April 30, 2000; maximum line -
$1,000,000, interest at prime
rate (8.5% at December 31, 1999),
payable monthly, principal due at
maturity, secured by accounts
receivable and inventory -- -- --
Installment notes payable to bank,
originated June 4, 1999, through
October 26, 1999, matures
December 4, 2002 through April 26,
2003; principal and interest due
in monthly payments of $2,721,
interest at bank's prime rate plus
.25%, (8.75% at December 31, 1999);
secured by equipment 25,172 64,461 89,633
Two installment notes payable to
finance company, originating July
and August 1999, due in monthly
payments of $1,700 including interest
at 0.9% annually, maturing June and
July 2002; secured by vehicles 20,404 33,711 54,115
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 6,808 -- 6,808
Various installment notes payable,
bearing interest at 9% - 9.6%,
maturing between 2001 and 2002.
Monthly payments totaling $2,953;
Secured by equipment 38,235 45,747 83,982
--------- ---------- ----------
$ 213,052 $1,519,888 $1,732,940
========= ========== ==========
Aggregate maturities of notes payable are as follows:
2000 $ 213,052
2001 1,452,829
2002 62,020
2003 5,039
----------
$1,732,940
==========
5. Operating leases
- --------------------
The Company leases office space in Oklahoma City, Oklahoma, under an
agreement renewed February 23, 1999, for thirty-six months at $8,416
a month. Adjacent space is leased under a sub-lease agreement for
$3,073 a month through February 2000 and thereafter under an expansion
space lease for twenty-four months at $4,171 a month.
Dolphin, Inc., a wholly-owned subsidiary, leases office space in
Gibbsboro, New Jersey, under a lease agreement expiring May 31, 2000.
Monthly rents are $7,950. Dolphin, Inc. also leases an auto for $789 a
month through May 2001.
Learning Pathways, Limited, a wholly-owned subsidiary, leases office
space in the United Kingdom. Monthly rent approximates $1,536. The
lease renews each month for a period of ninety days.
Total rent expense was $175,990 for 1999 and $99,041 for 1998.
Future rental commitments under lease agreements are as follows:
Office Lease
------------
2000 $ 198,061
2001 154,984
2002 25,173
------------
$ 378,218
============
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:
1999 1998
------ -----
Statutory federal income tax rate 34.0% 34.0%
State income taxes 6.0% 6.0%
Amortization of goodwill 2.4% 0.7%
Nondeductible expenses 1.2% 1.0%
Foreign income taxed at different rate (1.3%) --
Other, net (2.9%) 0.8%
------ -----
Effective income tax rate 39.4% 42.5%
====== =====
Deferred tax liabilities and assets at December 31, 1999 are comprised
of the following:
Deferred tax liabilities:
Capitalized software $ 659,339
Change in accounting method for tax purposes -
cash to accrual for purchased subsidiary 100,705
Plant and equipment and related depreciation 35,420
Prepaid advertising 45,713
---------
Total deferred tax liabilities 841,177
---------
Deferred tax assets:
Receivables and inventory valuation allowances 46,482
Net operating loss carryforward 537,425
Change in accounting method for tax purposes-
Capitalized software expensed for tax purposes 347,416
Vacation accrual and deferred compensation 46,882
---------
Total deferred tax assets 978,205
---------
Net deferred tax asset $ 137,028
=========
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 $3,512,000 of net operating loss carryforwards during
the years ending December 31, 1996 through December 31, 1999, and
therefore, a deferred tax asset has been recorded for the tax benefit
of the net operating loss carryforward. No valuation allowance has
been recorded against the deferred tax asset.
The Company has available net operating loss carryforwards of
approximately $1,340,000 for regular tax purposes and for alternative
minimum purposes expiring between the years 2001 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 based upon a percentage of the net sales of the
particular titles. These agreements expire in the years 2000 to 2005.
The Company entered into distribution agreements for the sale of other
software curriculum and integration with the World Book Encyclopedia
during 1999. Royalty expense totaled $182,249 and $145,605 in 1999
and 1998, respectively.
8. Related party transactions
- ------------------------------
The Company has an outstanding note payable with a remaining balance
of $6,808 at December 31, 1999, to a shareholder for part of the
acquisition price of a subsidiary. The Company is also indebted to a
shareholder for temporary advances plus accrued interest totaling
$96,529 at December 31, 1999.
The Company paid accrued consulting fees to a company owned by its
President in the amount of $25,556 during 1998. Consulting fees
totaling $8,833 were also paid to certain directors during 1998.
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 1999
or 1998.
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.
As of December 31, 1999, the Company has $608,000 of funds on deposit
in a financial institution in excess of federally insured limits.
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,
1999:
Accrued profit sharing $ 133,354
Accrued payroll, taxes and benefits 123,301
Accrued commissions and royalties 129,853
Accrued professional costs 38,500
Accrued revenues and warranties 18,400
Accrued - other 140,550
---------
$ 583,958
=========
12. Profit sharing plan
- ------------------------
The Board of Directors has 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 is determined based upon
performance and upon annual salary. The Company's profit sharing
expense totaled $79,183 and $95,644 for 1999 and 1998, respectively.
13. Litigation
- ---------------
The Company may be the subject of various legal proceedings that could
arise during 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:
1999 1998
---------- ----------
Basic 13,645,129 12,626,000
Diluted 14,379,303 13,615,784
Employee stock options are included in the number of diluted common
shares using the treasury stock method.
15. Employee benefit plans
- ---------------------------
The Company adopted a 401(k) Plan effective January 1, 1999. The Plan
allows eligible employees to defer part of their income on a tax-
favored basis into the Plan. The Plan is subject to the provisions of
the Employee Retirement Income Security Act of 1974 (ERISA). The
Company may make contributions to the Plan as a matching percentage or
as a lump sum amount determined annually. During 1999 the Company
made no contributions to the Plan.
16. Foreign assets, liabilities and income
- -------------------------------------------
The consolidated financial statements include the assets, liabilities
and income of its foreign subsidiary Learning Pathways Ltd. (LPL).
The following is a summary of LPL's financial condition at December
31, 1999 and the results of its operations for the year then ended
stated in U.S. currency:
Total assets $ 779,956
Total liabilities $ 381,406
Revenues $1,447,868
Net Income $ 195,423
Foreign income taxes $ 94,860
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:
1999 1998
---------- ----------
Basic 13,645,129 12,626,000
Diluted 14,379,303 13,615,784
Employee stock options are 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., an Oklahoma corporation
Learning Pathways, Limited, a United Kingdom corporation
Dolphin, Inc., a New Jersey corporation
Exhibit 23.1
- ------------
We consent to the incorporation by refrence in the Registration
Statement (Form S-8) filed October 22, 1999, pertaining to
The American Education Corporation Stock Option Plan for Employees
and The American Education Corporation Directors' Stock Option Plans
of our report dated March 7, 2000, with respect to the consolidated
financial statement of The American Education Corporation
included in its Annual Report (Form 10-KSB) for the year
ended December 31, 1999, filed with the Securities and Exchange
Commission.
Steakley, Gilbert & Bozalis, P.C.
March 30, 2000
Oklahoma City, Oklahoma
<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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,138,711
<SECURITIES> 0
<RECEIVABLES> 2,331,909
<ALLOWANCES> (116,667)
<INVENTORY> 152,344
<CURRENT-ASSETS> 3,988,335
<PP&E> 868,483
<DEPRECIATION> (307,066)
<TOTAL-ASSETS> 8,823,694
<CURRENT-LIABILITIES> 1,446,344
<BONDS> 0
0
0
<COMMON> 343,877
<OTHER-SE> 5,497,460
<TOTAL-LIABILITY-AND-EQUITY> 8,823,694
<SALES> 8,564,435
<TOTAL-REVENUES> 8,564,435
<CGS> 1,331,523
<TOTAL-COSTS> 5,656,094
<OTHER-EXPENSES> (29,920)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,605
<INCOME-PRETAX> 1,576,133
<INCOME-TAX> 621,019
<INCOME-CONTINUING> 955,114
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 955,114
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
