FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the Transition Period from ________ to ________
Commission File #0-11078
THE AMERICAN EDUCATION CORPORATION
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(Exact name of small business issuer as specified in its charter)
Colorado
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(State or other jurisdiction of incorporation or organization)
84-0838184
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(IRS Employer Identification No.)
7506 North Broadway Extension, Suite 505, Oklahoma City, OK 73116
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(Address of principal executive offices)
(405) 840-6031
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(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.025 per share
Check 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__
Number of shares of the issuer's common stock outstanding as of May
1, 2000: 14,019,374
Transitional Small Business Disclosure Format YES __ NO X
THE AMERICAN EDUCATION CORPORATION
INDEX
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1 Consolidated Balance Sheets 3
March 31, 2000 and December 31, 1999
Consolidated Statements of Income 4
For the Three Months Ended
March 31, 2000 and for the Three
Months Ended March 31, 1999
Consolidated Statements of Cash Flows 5
For the Three Months Ended March 31,
2000 and for the Three Months Ended
March 31, 1999
Notes to Interim Consolidated Financial 6
Statements
Item 2 Management's Discussion and Analysis 8
Of Financial Conditions and Results of
Operations
PART II - OTHER INFORMATION 11
SIGNATURE PAGE 13
PART 1 - FINANCIAL INFORMATION
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31 December 31
2000 1999
Unaudited Audited
ASSETS
Current assets:
Cash and cash equivalents $ 991,057 $ 1,138,711
Accounts receivable, net of
allowance for returns and
uncollectible accounts of
$146,618 and $116,667 2,780,149 2,215,242
Inventory 142,820 152,344
Prepaid expenses and deposits 328,948 358,597
Deferred tax asset 59,262 123,441
--------- ---------
Total current assets 4,302,236 3,988,335
Property and equipment, at cost 913,046 868,483
Less accumulated depreciation
and amortization (347,965) (307,066)
--------- ---------
Net property and equipment 565,081 561,417
Other assets:
Capitalized software costs,
net of accumulated amortization
of $1,746,537 and $1,635,233 2,164,318 1,889,872
Goodwill, net of accumulated
amortization of $170,945 and
$129,628 2,349,534 2,370,483
Deferred tax asset 27,038 13,587
--------- ---------
Total other assets 4,540,890 4,273,942
--------- ---------
Total assets $ 9,408,207 $ 8,823,694
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable trade $ 531,052 $ 399,454
Accrued liabilities 671,503 583,958
Accounts payable - Affiliates 97,827 96,529
Notes payable and current
portion of long-term debt 209,190 213,052
Foreign income taxes payable 160,696 117,677
Income taxes payable 49,124 35,674
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Total current liabilities 1,719,392 1,446,344
Long-term debt 1,498,466 1,519,888
Other 25,800 16,125
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Total liabilities 3,243,658 2,982,357
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Commitments and contingencies - -
Stockholders' Equity
Preferred Stock, $.001 par value;
Authorized - 50,000,000 shares
- issued and outstanding - none - -
Common Stock, $.025 par value
Authorized 30,000,000 shares
- issued and outstanding -
14,019,374 shares 350,485 343,877
Additional paid-in capital 6,577,787 6,424,322
Retained Earnings / (Deficit) (926,862) (926,862)
Year-to-date earnings 163,139 -
--------- ---------
Total stockholders' equity 6,164,549 5,841,337
--------- ---------
Total liabilities and
stockholders' equity $ 9,408,207 $ 8,823,694
--------- ---------
The accompanying notes are an integral part of the financial
statements.
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(unaudited)
2000 1999
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Net Sales $ 2,524,297 $ 1,570,145
Cost of goods sold 724,682 292,464
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Gross profit 1,799,615 1,277,681
Operating expenses:
Sales and marketing 660,658 515,070
Operations 48,211 57,077
General and administrative 705,683 466,786
Amortization of capitalized
software costs 110,594 88,428
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Total operating expenses 1,525,146 1,127,361
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Operating income 274,469 150,320
Other income(expense):
Interest income 8,789 5,104
Interest expense (35,492) (6,693)
Other 88 8,576
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Net income before income taxes 247,854 157,307
Current income taxes 41,732 27,762
Deferred income taxes 42,983 15,320
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Net income $ 163,139 $ 114,225
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Basic 13,911,754 13,488,520
Earnings per share $ 0.012 $ 0.008
Diluted 14,547,982 14,142,247
Earnings per share $ 0.011 $ 0.008
The accompanying notes are an integral part of the financial
statements.
THE AMERICAN EDUCATION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(unaudited)
2000 1999
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Cash flows from operating activities:
Net income $ 163,139 $ 114,225
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Deferred income taxes 50,728 15,319
Depreciation and amortization 193,520 124,620
Reserve for bad debts and returns 29,951 (7,587)
Stock issued for compensation 11,500 18,980
Other 3,245 (7,653)
Changes in assets and liabilities:
Accounts receivable (594,858) (75,026)
Inventories 9,524 3,812
Prepaid expenses and other 29,649 (64,499)
Other assets - (21,036)
Accounts payable and accrued
liabilities 219,143 (42,910)
Accounts payable - Affiliate 1,298 (81,595)
Income taxes payable 56,469 26,762
----------- ----------
Net cash provide by operating
activities 173,308 3,412
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Cash flow from investing activities:
Capitalization of organizational
costs and goodwill (14,528) (17,218)
Purchase of capitalized software
costs (385,750) (181,635)
Purchase of property and
equipment (44,563) (26,076)
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Net cash used in investing
activities (444,841) (224,929)
Cash flows from financing activities:
Proceeds received from issuance
of debt - 158,475
Principal payments on notes (25,284) (63,807)
Issuance of common stock 149,163 110,000
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Net cash provided by
financing activities 123,879 204,668
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Net increase (decrease) in cash (147,654) (16,849)
Cash at beginning of the period 1,138,711 720,838
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Cash at end of the period $ 991,057 $ 703,989
----------- ----------
The accompanying notes are an integral part of the financial
statements.
THE AMERICAN EDUCATION CORPORATION
Part I - NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2000 AND 1999
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NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------------------------
1. Nature of Business:
The American Education Corporation's ("the Company") business is the
development and marketing of educational software to elementary,
middle and secondary schools, adult literacy centers and vocational,
junior and community colleges. In addition, the Company has three
subsidiaries, Projected Learning Programs, Inc. ("PLP") , Learning
Pathways, Ltd. ("LPL") and Dolphin, Inc. ("Dolphin"). PLP is a
direct mail catalog reseller of primarily other publishers' products
to high schools and colleges. LPL is the exclusive schools and
libraries distributor of the print, multimedia and online versions
of the World Book Encyclopedia in Great Britain. Dolphin is a
developer of educational software for many of the nation's leading
textbook and electronic publishers.
2. Basis of Presentation:
The summary of significant accounting policies of the Company is
presented to assist in understanding the Company's financial
statements. These accounting policies conform to generally accepted
accounting principles and have been consistently applied in
the preparation of the financial statements.
The Company's consolidated financial statements include the Company
and its wholly-owned subsidiaries. All material intercompany
transactions have been eliminated.
The interim consolidated financial statements at March 31, 2000, and
for the three month periods ended March 31, 2000 and 1999 are
unaudited, but include all adjustments that the Company considers
necessary for a fair presentation. The December 31, 1999 balance
sheet was derived from the Company's audited financial statements.
The accompanying unaudited financial statements are for the interim
periods and do not include all disclosures normally provided
in annual financial statements. They should be read in conjunction
with the Company's audited financial statements included in
the Company's Form 10-KSB for the year ended December 31, 1999. The
accompanying unaudited interim financial statements for the three
month period ending March 31, 2000 are not necessarily indicative of
the results that can be expected for the entire year.
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
3. Revenue Recognition:
The Company recognizes revenue in accordance with the American
Institute of Certified Public Accountant's Statement of Position 97-2
on software revenue recognition.
4. Capitalized Software Costs:
Capitalized software costs consist of licenses for the rights to
produce and market computer software, salaries and other direct
costs incurred in the production of computer software. Costs
incurred in conjunction with product development are charged to
research and development expense until technological feasibility is
established. Thereafter, all software development costs are
capitalized and amortized on a straight-line basis over the
product's estimated economic life of between three and five years.
5. Goodwill:
Goodwill relates to the acquisitions in 1998 of PLP and LPL, and in
1999 for Dolphin, and is amortized over a period of fifteen (15) years.
6. Inventories:
Inventories are stated at the lower of cost (first-in, first-out),
or market, and consist primarily of educational software materials,
packing materials and World Book Encyclopedia print and multimedia
products.
7. Property and Equipment:
Property and equipment is stated at cost. Depreciation is provided
on the straight-line basis over the estimated useful life of the
assets, which is five years.
8. Statements of Cash Flows:
In the 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. The carrying values of the Company's assets
and liabilities approximate fair value due to their short-term
nature.
9. Income Taxes:
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have
been included in the financial statements or tax returns, determined
by using the enacted tax rates in effect for the year in which the
differences are expected to reverse.
10. Computation of Earnings Per Share:
The Company has adopted Statement of Financial Accounting Standards
No. 128 "Earnings Per Share" (SFAS 128). SFAS 128 requires
presentation of basic and diluted earnings per share. Basic
earnings per share are calculated based only upon the weighted
average number of common shares outstanding during the period.
Diluted earnings per share are calculated based upon the weighted
average number of common and, where dilutive, potential common
shares outstanding during the period, utilizing the treasury stock
method. Potential common shares include options to purchase common
stock.
11. Stockholders' Equity:
During the quarter ended March 31, 2000, the Board of Directors
approved the issuance of 23,000 shares of common stock to
major distributors in recognition of contributions made to the
Company. In addition, options to purchase 241,305 shares of
common stock at $.50 to $.75 were exercised.
At March 31, 2000, paid-in capital includes $4,130 of foreign
currency translation adjustments.
12. Commitments and Contingencies:
The Company amortizes capitalized software costs over the product's
estimated useful life. Due to inherent technological changes in the
software development industry, the period over which such
capitalized software cost is being amortized may have to be
accelerated.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This report contains forward-looking statements. These forward-
looking statements can generally be identified as such because the
context of the statement will include words such as the Company
"believes," "plans," "intends," "anticipates," "expects" or words of
similar import. Similarly, statements that describe the Company's
future plans, objectives, estimates or goals are also forward-
looking statements. Such statements address future events and
conditions concerning capital expenditures, earnings, litigation,
liquidity, capital resources and accounting matters. Actual results
in each case could differ materially from those currently
anticipated in such statements by reason of factors such as economic
conditions, including changes in customer demands; future
legislative, regulatory and competitive developments in markets in
which the Company operates; and other circumstances affecting
anticipated revenues and costs.
Liquidity and Capital Resources
As of March 31, 2000 the Company's principal sources of liquidity
included cash and cash equivalents of $991,057, net accounts
receivable of $2,780,149 and inventory of $142,820. The Company's
net cash provided by operating activities during the first quarter
increased from $3,412 in 1999 to $173,308 in 2000. Net cash used in
investing activities for the same period increased by 98% from
$224,929 in 1999 to $444,841 in 2000, and was comprised primarily of
investment in capitalized software development costs. The majority
of the cash for the Dolphin acquisition in late 1999 was borrowed
under a portion of the Company's lines of credit, and is recorded as
long-term debt as of March 31, 2000.
At March 31, 2000, the Company had working capital of $2,582,844
compared to $2,541,991 at December 31, 1999. The Company
believes that cash flows from operations will be adequate to finance
its normal financing and investing activities for the remainder of
2000.
Additional working capital beyond that available within the Company
is available, if required, to expand operations. Management has and
will consider options available in providing such funding, including
debt financing and capital enhancement. At March 31, 2000, the
Company had available bank credit lines for working capital totaling
$1,000,000, subject to borrowing base limitations, which were
unused.
Impact of The Year 2000
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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 - THREE MONTHS ENDED MARCH 31, 2000
AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1999
- ---------------------------------------------------------
Net sales for the three months ended March 31, 2000, totaled
$2,524,297 compared to $1,570,145 for the same period in 1999. This
represents an increase of 60.8% over the comparable 1999 quarter.
This increase is attributable to sales increases in the Company's
core profit-generating units of the business, American Education and
Learning Pathways, and the inclusion of the results of Dolphin,
Inc. that was acquired in late 1999.
Cost of goods sold as a percentage of sales revenue for the three
months ending March 31, 2000 increased to 28.7% from 18.6% for the
same period in 1999. 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, Inc. ("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 Projected Learning Programs ("PLP") or Learning
Pathways, Ltd. ("LPL") the cost to acquire software from other
publishers, and includes certain allocated overhead costs. The
Company's principal product family, A+dvanced Learning System registered
(A+LS), provided gross profit margins of 93% in the first quarter of
2000. 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, which include selling and marketing,
general and administrative, operations, and amortization of product
development costs, were $1,525,146 for the three months ended March
31, 2000, compared to $1,127,361 for the same 1999 quarter. As
a percentage of sales revenue, operating expenses decreased from
71.7% in 1999 to 60.4% in 2000. This decrease in operating
expenses as a percentage of revenues is primarily due to volume-
related efficiencies where a higher sales volume can be supported by
the personnel and infrastructure put in place during 1999. As a
component of total operating expenses, selling and marketing costs
increased by 28.2%, from $515,070 for the three months ended March
31, 1999, to $660,658 for the current period. As a percentage of
net revenues, however, these costs decreased from 32.8% to 26.2%.
The increase in 2000 selling expenses is a direct result of
increased selling efforts required to support the higher sales
levels attained.
General and administrative expenses, including operations, increased
from $523,863 to $753,894, but as a percentage of net revenues
decreased from 33.3% to 29.9% for the quarter. The dollar increase
is primarily attributable to the inclusion of the administrative
costs of Dolphin in the consolidated corporate results in the
quarter ended March 31, 2000 and planned increases in support staff
added over the prior year to handle the increased net revenues that
management believes will occur during the balance of the 2000 fiscal
year.
Interest expense for the quarter ended March 31, increased from
$6,693 in 1999 to $35,492 in 2000 reflecting the cost of the debt
incurred in late 1999 for the acquisition of Dolphin. Net income for
the three months ended March 31, 2000, was $163,139 compared to
$114,225 for the same period in 1999, an increase of 42.8%.
Company management believes that significant future growth
opportunities exist in the school, adult literacy and home or self-
directed education markets on a worldwide basis. These markets may
be accessed by not only the Company's traditional distribution-based
methods of selling and marketing, but also by new, rapidly emerging
electronic learning delivery of content business models, or
elearning. The Company's ongoing investment in content, academic
assessment tools, programming technology, and server infrastructure
provide a broad platform to secure new business partners and address
the many opportunities that are believed to be emerging in the
educational technology industry on a global basis. The Company's
investment into the United Kingdom through its acquisition of
Learning Pathways, Ltd. in 1998 underscores management's conviction
that the Company is engaged in a global marketplace. In this global
market, the Company's English-language content, suitable for both
the U.S. and the UK's instructional systems, will meet the
instructional requirement for many countries where English is a
primary instructional requirement. The Company's investment into
technology and the elearning business model should provide for
expanded growth opportunities on a worldwide basis.
The Company's future competitive position has been enhanced as a
result of its investment in personnel, facilities, additional
content and infrastructure as well as its entry into international
markets. The most significant of these investments has been the
sustained spending on the Company's new Java2-based A+nyWhere
Learning System registered. In its planning of the future,
management believes that the Internet will become a principal method
for the future delivery of its products to its customers. These
investments combine to form a stronger overall corporate foundation
that, combined with what management believes to be favorable world
market conditions, provide a basis for sustained growth.
THE AMERICAN EDUCATION CORPORATION
PART II - OTHER INFORMATION
- ----------------------------------
Item 1. Legal Proceedings
Management knows of no pending or threatened litigation involving
the Company that is considered material to the on-going operations
and viability of the Company.
Item 2. Changes in Securities
During the quarter ended March 31, 2000, the Board of Directors
approved the issuance of 23,000 shares of common stock to
major distributors in recognition of contributions made to the
Company. In addition, options to purchase 241,305 shares of
common stock at $.50 to $.75 were exercised.
Item 3. Default Upon Senior Securities
Omitted from this report as inapplicable.
Item 4. Submission of Matters to Vote of Securities Holders
None.
Item 5. Other Information
Omitted from this report as inapplicable.
Item 6. Exhibits and Reports on Form 8-K
The following exhibits have been filed as a part of this report:
Exhibit No. Description of Exhibits
- ----------- -----------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of The
American Education Corporation (incorporated by
reference to the exhibit in the Current Report on Form
8-K filed with the Securities and Exchange Commission
on June 25, 1998)
3.2 Bylaws of The American Education Corporation
(incorporated by reference to the Company's
registration statement 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 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)
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 the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
The American Education Corporation
May 12, 2000 By: Jeffrey E. Butler
__________________________________
Jeffrey E. Butler,
Chief Executive Officer
Chairman of the Board
Treasurer
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
- - FORM
10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL
STATEMENTS.
</LEGEND>
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<SALES> 2,524,297
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<CGS> 724,682
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