<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number: 0-16310
AMERICAN EDUCATIONAL PRODUCTS, INC.
-----------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
COLORADO 84-1012129
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification number)
3101 IRIS AVENUE, SUITE 215, BOULDER, COLORADO 80301
(Address of principal executive offices) (Zip Code)
(303) 443-0020
(Issuer's telephone number)
-----------------------------------------------------
Former name, former address, and former fiscal year,
if changed since last report
Check whether the Issuer (1) 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 Issuer was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the Registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 10, 1995 the Company had 4,150,658 shares of its $.01 par
value common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheet as of September 30, 1995 and 2
December 31, 1994
Consolidated Statement of Operations for the three and 3
nine months ended September 30, 1995 and
September 30, 1994
Consolidated Statement of Cash Flows for the three and 5
nine months ended September 30, 1995 and
September 30, 1994
Consolidated Statement of Stockholders' Equity from 7
January 1, 1995 through September 30, 1995
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources 9
Results of Operations 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 2. Changes in Securities 13
ITEM 3. Defaults upon Senior Securities 13
ITEM 4. Submission of Matters to a vote of security holders 13
ITEM 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
ASSETS (Unaudited)
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 362,000 $ 220,000
Trade receivables, net of allowance of $123,000 and $202,000 2,902,000 2,223,000
Income tax refunds receivable 304,000 317,000
Inventories 3,736,000 4,562,000
Prepaid catalog cost 677,000 1,089,000
Other 423,000 139,000
----------- -----------
TOTAL CURRENT ASSETS 8,404,000 8,550,000
PROPERTY AND EQUIPMENT, net of $2,551,000 and $1,985,000 4,735,000 5,132,000
VIDEO LIBRARY, net of $690,000 and $402,000 2,569,000 2,623,000
INTANGIBLE ASSETS, net 2,549,000 2,842,000
OTHER ASSETS 156,000 184,000
----------- -----------
TOTAL ASSETS $18,413,000 $19,331,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 3,963,000 $ 3,337,000
Current maturities of long term debt 1,086,000 1,433,000
Accounts payable 1,634,000 2,258,000
Accrued expenses 383,000 410,000
----------- -----------
TOTAL CURRENT LIABILITIES 7,066,000 7,438,000
LONG TERM DEBT, less current maturities 3,017,000 3,703,000
DEFERRED INCOME TAXES 558,000 519,000
STOCKHOLDERS' EQUITY
Preferred Stock; $.01 par value; 50,000,000 shares authorized;
none issued or outstanding - -
Common Stock; $.01 par value; 100,000,000 shares authorized;
4,150,618 and 4,072,097 shares issued and outstanding 42,000 41,000
Additional paid in capital 6,016,000 5,905,000
Retained earnings 1,714,000 1,725,000
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 7,772,000 7,671,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,413,000 $19,331,000
=========== ===========
</TABLE>
2
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1994
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1995 1994
------------- -------------
<S> <C> <C>
INCOME:
Net sales $5,176,000 $6,521,000
Cost of goods sold 2,962,000 3,429,000
---------- ----------
Gross profit 2,214,000 3,092,000
OPERATING EXPENSES:
Catalog costs 782,000 926,000
Other marketing 626,000 554,000
---------- ----------
Total marketing 1,408,000 1,480,000
General and administrative 551,000 1,082,000
---------- ----------
Total Operating Expenses 1,959,000 2,562,000
---------- ----------
OPERATING INCOME 255,000 530,000
OTHER INCOME (EXPENSE):
Other income 19,000 16,000
Interest expense (228,000) (220,000)
---------- ----------
Net other income (expense) (209,000) (204,000)
---------- ----------
INCOME BEFORE INCOME TAXES 46,000 326,000
Income tax (expense) (17,000) (121,000)
---------- ----------
NET INCOME $29,000 $205,000
---------- ----------
Earnings per common and common share equivalent $0.01 $0.05
========== ==========
Average number of common and common
equivalent shares outstanding 4,216,000 4,134,000
========== ==========
</TABLE>
3
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1994
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1995 1994
------------- -------------
<S> <C> <C>
INCOME:
Net sales $15,563,000 $16,231,000
Cost of goods sold 8,771,000 8,494,000
----------- -----------
Gross profit 6,792,000 7,737,000
OPERATING EXPENSES:
Catalog costs 2,048,000 2,377,000
Other marketing 2,002,000 1,488,000
----------- -----------
Total marketing 4,050,000 3,865,000
General and administrative 2,148,000 2,754,000
----------- -----------
Total Operating Expenses 6,198,000 6,619,000
----------- -----------
OPERATING INCOME 594,000 1,118,000
OTHER INCOME (EXPENSE):
Other income 68,000 47,000
Interest expense (679,000) (466,000)
----------- -----------
Net other income (expense) (611,000) (419,000)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (17,000) 699,000
Income tax (expense) 6,000 (259,000)
----------- -----------
NET INCOME (LOSS) $(11,000) $440,000
=========== ===========
Earnings (loss) per common and common share equivalent $0.00 $0.11
=========== ===========
Average number of common and common
equivalent shares outstanding 4,166,000 4,166,000
=========== ===========
</TABLE>
4
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
for the Three Months ended September 30, 1995 and September 30, 1994
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1995 1994
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,000 $ 205,000
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 393,000 290,000
Change in allowance for doubtful accounts (34,000) 87,000
Change in deferred income taxes 20,000 25,000
Decrease (increase) in operating assets:
Accounts receivable 192,000 (431,000)
Inventories 632,000 833,000
Prepaid catalog costs 464,000 (690,000)
Other (169,000) (22,000)
Increase (decrease) in operating liabilities:
Accounts payable (652,000) (432,000)
Accrued expenses (40,000) (16,000)
Income taxes payable - 6,000
--------- ---------
Net cash provided (used) by operating activities 835,000 (145,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (32,000) (298,000)
Cost incurred for video production (68,000) (292,000)
--------- ---------
Net cash provided (used) by investing activities (100,000) (590,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long term debt - 888,000
Payments of notes payable and long term debt (887,000) (198,000)
Net proceeds from the sale of stock 28,000 49,000
--------- ---------
Net cash provided (used) by financing activities (859,000) 739,000
--------- ---------
NET INCREASE (DECREASE) IN CASH (124,000) 4,000
Cash, at beginning of period 486,000 173,000
--------- ---------
Cash, at end of period $ 362,000 $ 177,000
========= =========
</TABLE>
5
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
for the Nine Months ended September 30, 1995 and September 30, 1994
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1995 1994
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (11,000) $ 440,000
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 1,147,000 797,000
Change in allowance for doubtful accounts (79,000) 40,000
Change in deferred income taxes 39,000 25,000
Decrease (increase) in operating assets:
Accounts receivable (600,000) (1,227,000)
Inventories 826,000 (1,478,000)
Prepaid catalog costs 412,000 (994,000)
Other (243,000) (98,000)
Increase (decrease) in operating liabilities:
Accounts payable (624,000) 902,000
Accrued expenses (27,000) 85,000
Income taxes payable - (6,000)
----------- -----------
Net cash provided (used) by operating activities 840,000 (1,514,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (169,000) (596,000)
Cost incurred for video production (234,000) (468,000)
Cash paid for acquisitions - (498,000)
Sale of marketable securities - 50,000
----------- -----------
Net cash provided (used) by investing activities (403,000) (1,512,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long term debt 1,209,000 3,366,000
Payments of notes payable and long term debt (1,616,000) (494,000)
Net proceeds from the sale of stock 112,000 132,000
----------- -----------
Net cash provided (used) by financing activities (295,000) 3,004,000
----------- -----------
NET INCREASE (DECREASE) IN CASH 142,000 (22,000)
Cash, at beginning of period 220,000 199,000
----------- -----------
Cash, at end of period $ 362,000 $ 177,000
=========== ===========
</TABLE>
6
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
January 1, 1995 through September 30, 1995
(Unaudited)
<TABLE>
Caption>
Additional
Number Paid
of Common in Retained
Shares Stock Capital Earnings Total
--------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance as of January 1, 1995 4,072,097 $41,000 $5,905,000 $1,725,000 $7,671,000
Sale of common stock under the
employee stock purchase plan 53,061 1,000 85,000 - 86,000
Exercise of Options 25,500 - 26,000 - 26,000
Net loss - - - (11,000) (11,000)
--------- ------- ---------- ---------- ----------
Balance as of September 30, 1995 4,150,658 $42,000 $6,016,000 $1,714,000 $7,772,000
========= ======= ========== ========== ==========
</TABLE>
7
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- PRESENTATION
In the opinion of the Company, these unaudited consolidated financial
statements contain all adjustments (consisting of normal accruals)
necessary to present fairly the financial position of the Company as of
September 30, 1995 and the results of operations for the three and nine
months ended September 30, 1995 and 1994. These statements should be
read in conjunction with the audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1994.
NOTE 2 -- NOTES PAYABLE AND LONG TERM DEBT
The Company has several borrowing arrangements with its bank. A
revolving line of credit agreement provides working capital up to a
maximum of $4,000,000 and is subject to certain restrictions and a
sufficiency of collateral calculation. This agreement is contained
within a ninety day renewable note. The current agreement has been
renewed through January 15, 1996.
There are several long term borrowing agreements with the bank which are
payable in installments approximating $65,000 per month plus accrued
interest. The bank has renewed these agreements through November 30, 1996.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
SEPTEMBER 30, 1995 COMPARED TO DECEMBER 31, 1994
During the third quarter of 1995, American Educational
Products, Inc. (the "Company") continued to experience a
shortage of liquidity and capital resources. As a result,
the Company continued its efforts to reduce expenditures and
conserve cash. Those efforts consisted of several specific
actions, including reduction in inventory purchases,
selling, marketing, general and administrative staff
reductions, and reduced spending on catalogs. Please see
Results of Operations.
Although the Company's efforts to reduce cash expenditures
had a positive impact, cash flows from operations were lower
than previous historic levels. However, the Company was
able to meet its obligations during the first nine months of
1995 primarily due to the cooperation it received from its
major vendors, who provided extended payment terms and
increased credit limits, and from its bank, which provided a
supplemental working capital line of credit.
As of September 30, 1995, the Company had borrowings under
its working capital line of credit facilities totaling
$3,963,000. Approximately $3,300,000 was collateralized by
accounts receivable and inventory under the borrowing base
provisions of the primary line. The remaining $663,000 was
borrowed under a supplemental line of credit collateralized
by substantially all of the Company's assets. The bank
continues to renew the primary line every 90 days (the next
maturity date is January 15, 1996). Maximum borrowing
available under the facilities is $4,000,000.
In addition to the working capital line of credit,
substantially all of the Company's long term debt is payable
to its primary bank under various note agreements. The
agreements require monthly payments of approximately $65,000
plus accrued interest. The bank has extended the maturity
date of the note agreements to November 30, 1996.
As of and subsequent to September 30, 1995, the Company has
borrowed all the funds available under its various bank loan
agreements. The Company has worked with the bank to
establish acceptable borrowing limits and repayment
schedules and believes that it will be able to reduce its
borrowings in the normal course of business. However, there
can be no guarantees that the Company will achieve its cash
flow and repayment objectives. Should the Company fail to
meet the bank's requirements, the bank has the right to
foreclose on substantially all the Company's assets. Such
an event would have material adverse consequences to the
Company and its stockholders.
To raise additional capital, the Company has undertaken the
registration of 250,000 shares of its $0.01 par value common
stock that are issuable by the Company pursuant to the
exercise of Common Stock warrants held by two (2) investors.
The warrants are exercisable at a purchase price of $2.00
per share. The transaction is expected to close in the
fourth quarter of fiscal 1995. However, there can be no
assurances that the Company will be able to successfully
register the warrants or that the warrantholders will
exercise the warrants in a timely fashion, if at all.
Assuming the successful registration and subsequent exercise
of the warrants, the proceeds from the offering will be used
to reduce borrowings and accounts payable to vendors. The
Company is also evaluating other sources of capital,
including the sale of certain assets.
As of September 30, 1995, the Company had working capital of
$1,338,000 and a current ratio of 1.19. Compared to
December 31, 1994, these computations indicate a slight
improvement over working capital of $1,112,000 and a current
ratio of 1.15.
9
<PAGE>
Total assets decreased 5% from $19,331,000 at December 31,
1994 to $18,413,000 at September 30, 1995.
Accounts receivable increased $679,000 (31%) from $2,223,000
at December 31, 1994 to $2,902,000 at September 30, 1995.
This increase is consistent with increased sales to
educational institutions and educational dealers during
third quarter of 1995 versus fourth quarter of 1994.
Inventories decreased from $4,562,000 at the end of 1994 to
$3,736,000 at September 30, 1995, a decrease of
$826,000 (18%). The reduction is a result of the Company's
inventory control program begun in the third quarter of
1994. Under this program, inventory purchases have been
reduced by better matching of inventory purchases to sales
demand, by purchasing more frequently, and by purchasing
smaller quantities on each purchase order.
Prepaid catalog costs decreased $412,000, or 38%, to
$677,000. This decrease is due to normal amortization of
prepaid catalog costs during the period of $2,048,000 offset
by spending on new catalogs of $1,636,000. During the same
period in 1994, prepaid catalog costs increased $1,019,000.
The increase for 1994 reflected spending of $3,396,000
offset by amortization of $2,377,000.
Net property and equipment decreased $397,000, primarily as
a result of depreciation expense offset by additions of
$169,000. Video and film library costs decreased $54,000,
which consists of amortization of $288,000 offset by
additional investment in video products of $234,000. Other
intangible assets decreased by $293,000 due to amortization.
During the period from December 31, 1994 to September 30,
1995, total liabilities decreased from $11,660,000 to
$10,641,000, a decrease of $1,019,000 or nearly 9%.
Accounts payable decreased $624,000 (28%) from $2,258,000 at
December 31, 1994 to $1,634,000 at September 30, 1995. The
decrease is consistent with reduced spending on inventory
and catalogs.
Total long term debt (including current maturities) was
$4,103,000 at September 30, 1995. The decrease of
$1,103,000 (20%) from December 31, 1994 reflects normal
monthly payments.
During the nine months, stockholder equity increased
$101,000, or 1%, from $7,671,000 to $7,772,000. The sale of
additional common stock to employees under the employee
stock purchase plan plus the exercise of outstanding options
totaled $112,000. Offsetting the increase was a net loss
for the period of $11,000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1994
The Company's revenues were $5,176,000 in the third three
months of 1995, a decrease of $1,345,000, compared to the
same period 1994 revenues of $6,521,000. It is estimated
that $250,000 of the decrease was caused by decreased
catalog mailings. Also, the Company's 1995 marketing
strategy was to increase unit volume by lowering certain
sales prices at Churchill Media and Summit Learning.
Although unit volume has increased, the increase has not
been sufficient to offset the lower selling prices. In
addition, sales of certain earth science products have
declined because of increased competition. The Company has
begun a program to recapture lost earth science sales.
The cost of goods sold for the quarter ended September 30,
1995 was $2,962,000, a decrease of 14% from the prior year
figure of $3,429,000. Thus, consolidated gross profits for
the third quarter of 1995 were $2,214,000, a decrease of
$878,000, or 28%, from the prior year amount of $3,092,000.
As a percent of sales, the gross margin decreased from 47%
in 1994 to 43% in 1995. The decrease in margin percent was
primarily a result of reductions in selling prices. In
addition, certain raw material cost increases have had a
negative effect on margins.
10
<PAGE>
Catalog costs decreased $144,000 (16%) from the third
quarter of 1994, reflecting the Company's reduced catalog
expenditures.
Other marketing costs increased by $72,000 (13%) over the
quarter ended September 30, 1994. The increase was
primarily the result of additional marketing efforts at
Churchill. As a percentage of sales, these costs were 12%
in 1995 and 9% in 1994.
General and administrative expenses were $551,000, a
decrease of $531,000 (49%) from the third quarter of 1994
G & A expense of $1,082,000. This reflects the ongoing
management effort to reduce overhead expenses. As a percent
of sales, third quarter G & A expenses were 11% in 1995 and
17% in 1994.
Total operating costs decreased 24% from $2,562,000 in the
third three months of 1994 to $1,959,000 in 1995. As a
percentage of sales, total operating costs decreased from
39% in 1994 to 38% for the third quarter of 1995. To reduce
its costs, the Company reduced its selling, marketing,
general and administrative staff by 21 positions;
consolidated operations into smaller facilities; and reduced
spending on catalogs. The $603,000 operating expense
decrease in the third quarter of 1995 indicates the impact
of the cost reduction plan. Similarly, fourth quarter 1995
operating expenses are expected to be lower than expenses in
the 1994 fourth quarter.
The operating income for the three months ending September
30, 1995 was $255,000, compared to $530,000 in the same
quarter of the prior year, a decrease of $275,000. The
primary cause of this change was the decreased gross profits
offset by decreased spending on operating expenses.
Interest expense of $228,000 in the third quarter of 1995
was similar to interest expense of $220,000 in 1994.
Pretax income was $46,000 for the quarter ended September
30, 1995, compared to pretax income of $326,000 for the
three months ended September 30, 1994.
The net income for the third three months of 1995 was
$29,000, compared with net income of $205,000 in the same
period of 1994. Income per share was $0.01 for 1995, a
$0.04 decrease from third quarter 1994's earnings per share
of $0.05.
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1994
The Company acquired certain assets of Churchill Films
during the first quarter of 1994. The assets acquired were
used to form a new media division doing business as
Churchill Media ("Churchill"). The results of operations
for the nine months ended September 30, 1994 included only
seven months of operations of Churchill. All comparisons of
1995 with 1994 are affected by this acquisition.
The Company's revenues were $15,563,000 in the first nine
months of 1995, a decrease of $668,000, or 4%, from the same
period 1994 revenues of $16,231,000. Churchill's sales were
$2,029,000 for the nine months of 1995 versus $2,224,000 for
the seven months of 1994. The educational video market
suffered from an adverse industry environment during 1995
and Churchill had difficulty overcoming the difficulties
encountered. In addition, both Churchill and Summit
Learning, Inc. reduced certain sales prices after market
research indicated such reductions would increase sales.
Although some unit sales have increased, the increase has
not been sufficient to offset the reduced selling prices.
The cost of goods sold for the nine months ended September
30, 1995 was $8,771,000, an increase of 3% over the prior
year figure of $8,494,000. Thus, consolidated gross profit
for the first three quarters of 1995 was $6,792,000, a
decrease of $945,000, or 12%, from the prior year gross
profit of $7,737,000. As a percent of sales, the gross
margin decreased from 48% in 1994 to 44% in 1995. The
decrease in margin
11
<PAGE>
percent was primarily a result of the selling price changes
discussed previously. In addition, cost increases at the
manufacturing division have reduced margins. Gross profits at
Churchill were $1,120,000 for the first nine months of 1995
compared to $1,532,000 for the seven months ended September
30, 1994.
Catalog costs decreased $329,000 (14%) from the first three
quarters of 1994, reflecting reduced catalog spending
levels. These costs were 13% of sales in the first nine
months of 1995 and 15% in 1994. In 1995, expenditures for
fall catalogs mailed to educational institutions were
reduced by $1,350,000. It is estimated that the reduced
fall mailing will reduce sales by $1,500,000 during the
third and fourth quarters of 1995. Since the 1995 fall
catalog program was designed to solicit sales from the
most responsive mailing lists, it is believed that the
1995 program will have a higher response rate and
greater profits than the 1994 program. In contrast,
expenditures for the 1995 consumer Christmas catalog
were increased by $225,000 and related sales are
expected to increase approximately $600,000.
Other marketing costs increased by $514,000 (35%) over the
same three quarters ended September 30, 1994. Ninety-nine
percent (99%) of the increase can be attributed to increased
marketing efforts at Churchill Media. As a percentage of
sales, these costs were 13% in 1995 and 9% in 1994.
General and administrative expenses were $2,148,000 a
decrease of $606,000 (22%) from the 1994 expense of
$2,754,000. As a percent of sales, G & A expenses were 14%
in 1995, and 17% in 1994.
Total operating costs decreased 6% from $6,619,000 in the
first nine months of 1994 to $6,198,000 in 1995.
Churchill's operating expenses increased $16,000 during the
period while the other divisions reduced operating expenses.
As a percentage of sales, total operating costs decreased
from 41% in 1994 to 40% in 1995. The reasons for the
operating expense decreases in the nine month period are the
same as those discussed for the three months ending
September 30, 1995.
The operating income for the nine months ending September
30, 1995 was $594,000, compared to an operating income of
$1,118,000 in the same period of the prior year, a decrease
of $524,000, or 47%.
Interest expense increased from $466,000 in the first nine
months of 1994 to $679,000 in the first nine months of 1995,
an increase of $213,000, or 46%. The increased interest
expense resulted from higher interest rates, higher debt
levels caused by the 1994 acquisitions, as well as increased
borrowings under the working capital line of credit.
Pretax loss was $17,000 for the nine months ended September
30, 1995, compared to pretax income of $699,000 for the
first three quarters of 1994.
The effective tax rate for both 1995 and 1994 was 37%,
including the effect of both federal and state income
taxation.
The net loss for the first nine months of 1995 was $11,000,
compared with net income of $440,000 in the same period of
1994. Loss per share was less than $0.01 for 1995, an $0.11
decrease from 1994's earnings per share of $0.11.
For three years prior to 1995, inflation did not have any
material effect on the Company's operations. In 1995, price
increases in postage and paper effected the catalog mailing
program. Also in 1995, increases for plastic and formed
metal parts had a negative impact on margins. While the
Company has been able to partially mitigate the impact of
such cost increases through design changes and improved
factory efficiencies, it has not been able to completely
offset the cost increases and the result has been lower
profitability.
The Company historically has experienced significant
seasonality in its sales primarily due to the purchasing
cycle of educational institutions. Typically, the first and
fourth fiscal quarters each generate approximately 20% of
annual sales, with the second and third fiscal quarters each
generating approximately 30% of annual sales. There was a
shift to additional sales in the fourth quarter of 1993 and
12
<PAGE>
1994 as a result of the Company's efforts to penetrate the
consumer market. This shift is likely to continue in 1995,
so that the first quarter will become the weakest sales
period.
Other than the foregoing, management knows of no trends,
demands, or uncertainties that are reasonably likely to have
a material impact on the Company's results of operations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No legal proceedings have been filed on behalf of or against
the Company nor have any claims been made.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: None.
Reports on Form 8-K: None
13
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities and
Exchange Act, the registrant caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
AMERICAN EDUCATIONAL PRODUCTS, INC.
Dated: NOVEMBER 20, 1995 By: /s/ PAUL D. WHITTLE
--------------------------
Paul D. Whittle, Chief Executive Officer
and President
Dated: NOVEMBER 20, 1995 By: /s/ FRANK L. JENNINGS
--------------------------
Frank L. Jennings, Chief Financial Officer
and Vice President of Finance
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS
FOUND ON PAGES 2 AND 3 OF THE COMPANY'S FORM 10-QSB FOR THE FISCAL QUARTER
ENDED SEPTEMBER 30, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 362
<SECURITIES> 0
<RECEIVABLES> 3,025
<ALLOWANCES> 123
<INVENTORY> 3,736
<CURRENT-ASSETS> 8,404
<PP&E> 7,286
<DEPRECIATION> 2,551
<TOTAL-ASSETS> 18,413
<CURRENT-LIABILITIES> 7,066
<BONDS> 3,017
<COMMON> 42
0
0
<OTHER-SE> 6,016
<TOTAL-LIABILITY-AND-EQUITY> 18,413
<SALES> 15,563
<TOTAL-REVENUES> 15,563
<CGS> 8,771
<TOTAL-COSTS> 8,771
<OTHER-EXPENSES> 6,198
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (679)
<INCOME-PRETAX> (17)
<INCOME-TAX> 6
<INCOME-CONTINUING> (11)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
