<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, 1996
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)
5350 Manhattan Circle, Suite 210, Boulder, Colorado 80303
- --------------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(303) 543-0123
---------------------------
(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 4, 1996 the Company had 4,576,551 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
Page
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995 2
Consolidated Statements of Operations for the three months and
nine months ended September 30, 1996 and September 30, 1995 3
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1996 and September 30, 1995 5
Consolidated Statement of Stockholders' Equity from January 1, 1996
through September 30, 1996 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources 10
Results of Operations 13
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
<PAGE>
<TABLE>
AMERICAN EDUCATIONAL PRODUCTS, INC.
-----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
----------------------------------------------
<CAPTION>
September 30, December 31,
1996 1995
(Unaudited)
------------- ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash $ 45,000 $ 146,000
Trade receivables,
net of allowance of $59,000 and $109,000 1,692,000 1,783,000
Royalty receivable 185,000 -
Income tax refunds receivable - 304,000
Inventories 2,470,000 2,358,000
Prepaid advertising costs 111,000 102,000
Other 80,000 126,000
------------- -------------
TOTAL CURRENT ASSETS 4,583,000 4,819,000
PROPERTY AND EQUIPMENT,
net of $3,275,000 and $2,844,000 2,867,000 4,362,000
VIDEO LIBRARY, net of $387,000 and $345,000 566,000 1,407,000
INTANGIBLE ASSETS, net 399,000 511,000
OTHER ASSETS 357,000 141,000
------------- -------------
TOTAL ASSETS $ 8,772,000 $11,240,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Note payable $ 1,400,000 $ 1,081,000
Current maturities of long term debt 470,000 1,412,000
Accounts payable 1,155,000 935,000
Accrued expenses 315,000 613,000
------------- -------------
TOTAL CURRENT LIABILITIES 3,340,000 4,041,000
LONG TERM DEBT, less current maturities 1,002,000 2,360,000
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value;
50,000,000 shares authorized;
none issued or outstanding - -
Common stock; $0.01 par value;
100,000,000 shares authorized;
4,386,551 and 4,150,658 shares
issued and outstanding 44,000 42,000
Additional paid in capital 6,280,000 6,048,000
Retained earnings (accumulated deficit) (1,894,000) (1,251,000)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 4,430,000 4,839,000
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 8,772,000 $11,240,000
============= =============
</TABLE>
<PAGE>
<TABLE>
AMERICAN EDUCATIONAL PRODUCTS, INC.
-----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
for the Three Months ended September 30, 1996 and September 30, 1995
(Unaudited)
<CAPTION>
Sept. 30, Sept. 30,
1996 1995
-------- --------
<S> <C> <C>
INCOME:
Net sales $ 2,631,000 $ 5,176,000
Cost of goods sold 1,638,000 2,962,000
------------- -------------
Gross profit 993,000 2,214,000
OPERATING EXPENSES:
Advertising and catalog costs 95,000 782,000
Other marketing 256,000 626,000
------------- -------------
Total marketing 351,000 1,408,000
General and administrative 342,000 551,000
------------- -------------
Total operating expenses 693,000 1,959,000
------------- -------------
OPERATING INCOME 300,000 255,000
OTHER INCOME (EXPENSE):
Gain on sale of asset 77,000
Other income - 19,000
Interest expense (90,000) (228,000)
------------- -------------
Net other income (expense) (13,000) (209,000)
------------- -------------
INCOME BEFORE INCOME TAXES 287,000 46,000
Income tax benefit (expense) - (17,000)
------------- -------------
NET INCOME $ 287,000 $ 29,000
============= =============
Earnings per common share
and common share equivalent $0.07 $0.01
============= =============
Average number of common and common
equivalent shares outstanding 4,185,000 4,216,000
============= =============
</TABLE>
<PAGE>
<TABLE>
AMERICAN EDUCATIONAL PRODUCTS, INC.
-----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
for the Nine Months ended September 30, 1996 and September 30, 1995
(Unaudited)
<CAPTION>
Sept. 30, Sept. 30,
1996 1995
-------- --------
<S> <C> <C>
INCOME:
Net sales $ 7,193,000 $15,563,000
Cost of goods sold 4,501,000 8,771,000
------------- -------------
Gross profit 2,692,000 6,792,000
OPERATING EXPENSES:
Advertising and catalog costs 227,000 2,048,000
Other marketing 1,356,000 2,002,000
------------- -------------
Total marketing 1,583,000 4,050,000
General and administrative 1,099,000 2,148,000
------------- -------------
Total operating expenses 2,682,000 6,198,000
------------- -------------
OPERATING INCOME 10,000 594,000
OTHER INCOME (EXPENSE):
Loss on sale of division (384,000) -
Gain on sale of assets 77,000 -
Other income - 68,000
Interest expense (346,000) (679,000)
------------- -------------
Net other income (expense) (653,000) (611,000)
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (643,000) (17,000)
Income tax benefit (expense) - 6,000
------------- -------------
NET INCOME (LOSS) $ (643,000) $ (11,000)
============= =============
Earnings (loss) per common share
and common share equivalent ($0.15) ($0.00)
============= =============
Average number of common and common
equivalent shares outstanding 4,171,000 4,166,000
============= =============
</TABLE>
<PAGE>
<TABLE>
AMERICAN EDUCATIONAL PRODUCTS, INC.
-----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
for the Nine Months ended September 30, 1996 and September 30, 1995
(Unaudited)
<CAPTION>
Sept. 30, Sept. 30,
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (643,000) $ (11,000)
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation 548,000 566,000
Amortization 329,000 581,000
Bad debt expense 8,000 28,000
Change in deferred income taxes - 39,000
Loss on sale of division 384,000 -
Gain on sale of asset (77,000) -
Changes in operating assets and liabilities:
Decrease (increase) in operating assets:
Accounts receivable (195,000) (707,000)
Income tax refunds receivable 304,000 -
Inventories (308,000) 826,000
Prepaid advertising costs (109,000) 412,000
Other 72,000 (243,000)
Increase (decrease) in operating liabilities:
Accounts payable 220,000 (624,000)
Accrued expenses (534,000) (27,000)
------------- -------------
Net cash provided (used) by
operating activities (1,000) 840,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 1,989,000 -
Purchase of property and equipment (206,000) (169,000)
Cost incurred for video production (137,000) (234,000)
------------- -------------
Net cash provided (used)
by investing activities 1,646,000 (403,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and
long term debt 1,208,000 1,209,000
Payments on notes payable and
long term debt (3,188,000) (1,616,000)
Net proceeds from the sale of stock 234,000 112,000
------------- -------------
Net cash provided (used)
by financing activities (1,746,000) (295,000)
------------- -------------
NET INCREASE (DECREASE) IN CASH (101,000) 142,000
Cash, at beginning of period 146,000 220,000
------------- -------------
Cash, at end of period $ 45,000 $ 362,000
============= =============
</TABLE>
<PAGE>
<TABLE>
AMERICAN EDUCATIONAL PRODUCTS, INC.
-----------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
January 1, 1996 through September 30, 1996
(Unaudited)
<CAPTION>
COMMON STOCK Additional Retained
------------
Number Paid Earnings
of Common in (Accumulated
Shares Stock Capital Deficit) Total
-------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Balance as of
Jan. 1, 1996 4,150,658 $42,000 $6,048,000$(1,251,000) $4,839,000
Sale of common
stock 200,000 2,000 198,000 200,000
Sale of common
stock under the
employee stock
purchase plan 25,116 - 28,000 - 28,000
Exercise of options 10,777 - 6,000 - 6,000
Net loss - - - (643,000) (643,000)
-------------------- ---------------------- ------------
Balance as of
Sept. 30, 1996 4,386,551 $44,000 $6,280,000 $(1,894,000) $4,430,000
========== ======== ========= =========== ==========
</TABLE>
<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 as of December 31, 1995
and September 30, 1996, and the results of operations for the three months
and nine months ended September 30, 1996 and 1995. 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, 1995.
Note 2 -- Notes Payable and Long Term Debt
- ------------------------------------------
The Company has a $1,500,000 revolving line of credit pursuant to a loan
agreement which expires April 30, 1997. Borrowing under this line of
credit bears interest at the prime rate plus 2% (totaling 10.25% as of
September 30, 1996). Interest is payable monthly. The principal balance
was $1,400,000 at September 30, 1996. The amounts available to be
borrowed under the agreement are derived from a borrowing base as defined
in the agreement relating to allowable inventory and accounts receivable.
In addition, the loan agreement contains covenants which restrict the
payment of dividends and requires, among other things, that the Company
achieve certain operating income levels. As of September 30, 1996, the
Company was in compliance with the requirements.
The Company's primary bank lender has also extended credit under various
term loan agreements. The line of credit and the term loans are
collateralized by substantially all of the Company's assets.
During 1996, the Company and the bank revised these loan agreements with
regard to rates, payment schedules, and maturity dates. The revised terms
are reflected in the following long term debt schedule:
<PAGE>
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1996 1995
-------- --------
<S> <C> <C>
Note Payable, principal due in monthly install-
ments of $27,800 and interest payable monthly
at prime plus 3%. Remaining balance due
January 31, 1998.
Collateralized by business assets. $ 951,000 $2,473,000
Note Payable, due in monthly installments of
$3,850, including interest at 8.1%. Remaining
balance due January 31, 1998.
Collateralized by land and buildings. 399,000 994,000
Note Payable, due in 20 quarterly installments
of $25,000. 25,000 71,000
Capital lease obligations, due in monthly install-
ments with varying maturities through December 31,
1997. 81,000 198,000
Other 16,000 36,000
----------- -----------
Total 1,472,000 3,772,000
Less current maturities (470,000) (1,412,000)
----------- -----------
Long term debt $1,002,000 $2,360,000
=========== ===========
</TABLE>
Note 3 -- Stockholders' equity
- ------------------------------
During the third quarter, the Company issued 200,000 equity units
consisting of one common stock share plus a warrant to purchase one
additional share of common stock. Total proceeds of $200,000 were
received. Subsequent to September 30, 1996, additional units were issued.
The common stock issued has not been registered under the Securities Act.
The Company believes that the shares will be registered at a future date.
The Company has adopted an Incentive Stock Option Plan (ISOP) under which
the Company's Board of Directors is authorized to issue options for the
purchase of the Company's common stock to key employees. The options are
generally granted for a five year period with the exercise price based
upon the market price of the Company's freely traded common stock on the
date of grant.
The Company has issued other non-qualified stock options to Directors.
The Company will seek stockholder approval of these grants at the next
annual meeting. The Directors have agreed not to exercise any non-
qualified options until stockholder approval is received.
During the first nine months of 1996, the Company issued 186,500 incentive
stock options to key employees. The options were priced at fair market
value on the date of the grant. Also during 1996, the Company issued
107,000 non-qualified stock options to its directors. The options were
priced at fair market value on the date of the grant.
The following is a summary of the number of shares under option:
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
INCENTIVE NON-
STOCK QUALIFIED
OPTION STOCK PRICE RANGE
PLAN OPTIONS TOTAL LOW HIGH
-------- --------- ------- --- ----
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1996 623,000 130,500 753,500 $ 0.45 $ 4.88
Options granted 186,500 107,000 293,500 $ 1.25 $ 1.69
Options exercised (10,777) - (10,777) $ 0.45 $ 0.60
Options terminated(472,223) - (472,223) $ 1.06 $ 4.88
--------- ------- --------- ------ ------
Balance, Sept. 30,
1996 326,500 237,500 564,000 $ 0.60 $ 2.25
======== ======== ========
</TABLE>
The Company has outstanding warrants to purchase 420,000 shares of the
Company's common stock at exercise prices ranging from $1.00 to $4.50 per
share. At September 30, 1996, 220,000 warrants were exercisable. Those
warrants have expiration dates in 1996 (100,000 warrants) and 1997
(120,000 warrants). A total of 200,000 warrants were issued during the
third quarter with an exercise price of $1.00. These warrants are
exercisable for a period of twenty-four months commencing the earlier of
one year from date of issue or the effective date of any registration
statement under the Securities Act.
Note 4 -- Divestitures
- ----------------------
Effective June 17, 1996, the Company sold substantially all of the assets
of Churchill to an unaffiliated company. Total cash proceeds of the sale
were $1,000,000. In addition, the Company will receive future royalties
on Churchill titles sold by the purchaser during the next four years.
Royalties are calculated at 10% of sales and are subject to an aggregate
ceiling of $750,000. Future royalties to be received have been assigned
to the bank as payments under the long term debt. The Company utilized
the proceeds to pay trade creditors and reduce the outstanding balance on
the long term debt. The Company recognized a loss of $384,000 on the
sale. Revenue of $905,000 and operating losses of $215,000 were
attributable to Churchill during the six month period ending June 30,
1996.
In July, 1996, the Company sold the land and buildings previously utilized
to house Summit. When the Company sold the assets of Summit in December,
1995, it retained ownership of the real estate and leased a portion of it
to the purchaser of Summit. The sale of the real estate provided
approximately $1,000,000 in net proceeds that were used to pay trade
creditors and reduce bank debt. A gain on the sale of approximately
$77,000 is reflected in the third quarter financial statements.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion addresses the financial condition and results of
operation for American Educational Products, Inc. and Subsidiaries ("AMEP"
or the "Company"). The four subsidiaries are AEP Media Corporation,
d.b.a. Churchill Media ("Churchill"), Hubbard Scientific, Inc.
("Hubbard"), Scott Resources, Inc. ("Scott") and Summit Learning, Inc.
("Summit"). As of and subsequent to September 30, 1996, only Hubbard and
Scott were operating subsidiaries of AMEP.
In December 1995, AMEP sold substantially all of the assets of Summit for
total proceeds of $3,982,000.
In June 1996, AMEP sold substantially all of the assets of Churchill for a
cash payment of $1,000,000 plus royalties on Churchill titles sold during
the next four years. Future royalties are calculated at ten percent of
sales and are subject to an aggregate ceiling of $750,000.
Comparisons between 1996 and 1995 are affected by these divestitures.
LIQUIDITY AND CAPITAL RESOURCES -- SEPTEMBER 30, 1996, COMPARED TO
- ------------------------------------------------------------------
DECEMBER 31, 1995
- -----------------
The Company experienced a lack of liquidity and capital resources during
the first three quarters of 1996. The liquidity shortfall was primarily
caused by operating losses, raw material purchases, investment in the
spring catalog mailing program, and payments required under various loan
agreements. The Company was unable to make timely payments to its trade
creditors during this period.
The Company continued its efforts to reduce expenditures and conserve
cash. Those efforts resulted in decreased operating expenses that helped
the Company achieve profitable operations in the third quarter. In
addition, during the third quarter of 1996, the Company pursued three
significant actions to improve its liquidity. Those actions were the sale
of certain real estate, negotiation of revised terms on the long term bank
debt, and approval of a private equity placement. These actions are
expected to reduce the severity of the liquidity shortfall experienced by
the Company.
The Company sold the land and buildings it had purchased in 1993 to house
Summit. When the Company sold the assets of Summit in December, 1995, it
retained ownership of the real estate. Since December, 1995, a portion of
the property had been leased to the purchaser of Summit. The sale of the
real estate provided approximately $1,000,000 in net proceeds that were
used to pay trade creditors and reduce bank debt. A gain on the sale of
approximately $77,000 is reflected in the third quarter financial
statements.
Also during the third quarter, the Board of Directors approved the
issuance of up to 500,000 equity units. These units will not be
immediately registered under the Securities Act and, accordingly, may only
be sold to "accredited investors", as defined under the Securities Act.
The Company expects to register all the shares in the future.
<PAGE>
The units were priced at the prevailing market price of $1.00 per share
and consisted of one common stock share plus a warrant to purchase one
additional share of common stock at a price of $1.00 per share. The
warrants are exercisable for a period of twenty-four months commencing the
earlier of one year from date of issue or the effective date of any
registration statement under the Securities Act. Proceeds from the equity
offering will be used to reduce bank debt and provide additional working
capital.
As of September 30, 1996, The Company had received proceeds of $200,000
from the sale of 200,000 units. Subsequent to September 30, 1996, 190,000
additional units were sold. The Board of Directors has determined to sell
no additional units at this time.
Finally, during the third quarter, the Company revised its various credit
arrangements with Colorado National Bank. The balance borrowed under the
term loan was reduced to $950,000 and monthly principal payments were
reduced to $27,800. The final maturity date on the term debt was extended
to January 31, 1998. The balance borrowed under the mortgage loan was
reduced to $400,000 and monthly principal payments were reduced to
approximately $1,000. The final maturity date was extended to January 31,
1998. The Company estimates that its total monthly principal payments for
all debt will average $39,000 and that its monthly interest payments will
average $25,000 over the next twelve months.
The bank renewed its commitment to provide a working capital line of
credit with borrowings up to $1,500,000 for the period through April 30,
1997. The Company's agreements with its bank contain certain restrictive
covenants, such as a restriction on the payment of dividends, and certain
performance covenants, such as the requirements that the Company maintain
minimum financial ratios and achieve certain operating income levels. As
of September 30, 1996, the Company was in compliance with all
requirements.
The sale of Churchill in June 1996, provided additional liquidity to the
Company. Proceeds from the Churchill sale in the amount of $400,000 were
used to pay Churchill creditors and the remaining proceeds were used to
reduce bank debt. In addition, future royalties to be received were
assigned to the bank as payments under the long term debt.
During the first nine months of 1996, management devoted considerable time
and effort to reducing the Company's borrowings and improving its
financial condition. It is believed that funds available to the Company
are sufficient to allow its continued operation. However, it is still
unable to make all payments on a timely basis. Should the Company fail to
achieve consistently profitable operations, it will need to sell
additional assets or obtain additional financing. There are no guarantees
that it can accomplish those objectives.
The Company experienced an 60% working capital increase during the first
three quarters of 1996. While current assets of $4,583,000 decreased
$236,000 from December 31, 1995, current liabilities decreased by
$701,000, from $4,041,000 to $3,340,000. As a result, working capital
increased from $778,000 to $1,243,000. The current ratio improved from
1.2 to 1.4. These changes were primarily caused by the sale of Churchill,
the sale of real estate, and the revisions to long term debt previously
discussed.
<PAGE>
Total assets decreased 22% from $11,240,000 at December 31, 1995, to
$8,772,000 at September 30, 1996, primarily because of the Churchill and
real estate sale. During the same period, total liabilities decreased
from $6,401,000 to $4,343,000, a decrease of 32%. All of the cash
proceeds received from the asset sales were used to reduce indebtedness to
various creditors. Stockholders' equity decreased $410,000, or 9%, from
$4,839,000 to $4,429,000, because the net loss for the period was
partially offset by new equity investments.
Accounts receivable decreased from $1,783,000 at December 31, 1995, to
$1,691,000 at September 30, 1996, a decrease of $92,000 or 5%. The
Churchill sale reduced accounts receivable by $309,000 while the other
divisions increased receivables in a manner that is consistent with
seasonal sales patterns.
The royalty receivable results from the sale of Churchill and represents
royalties expected to be received during the next twelve months.
All refunds receivable from income taxing authorities were received during
1996.
Inventories increased from $2,358,000 at the end of 1995 to $2,470,000 at
September 30, 1996, an increase of $112,000 or 5%. Churchill's sale
reduced inventory by $232,000. The other divisions increased inventories
because inventory purchases exceeded inventory sales. This increase
represents an unfavorable trend as the Company historically reduced
inventories during the third quarter. The inventory increase has
contributed to the Company's liquidity problems. During the fourth
quarter, it is expected that inventories will be reduced by decreasing
purchases of raw material.
Prepaid advertising costs increased from $102,000 at December 31, 1995, to
$111,000 at September 30, 1996, an increase of $9,000 or 9%. This
increase is due to investment in the spring 1996 catalog program offset by
partial amortization of this program and by the sale of Churchill.
Churchill's sale reduced prepaid advertising by $75,000.
Net property and equipment decreased from $4,362,000 at December 31, 1995,
to $2,867,000 at September 30, 1996, a decrease of $1,495,000 or 34%.
Churchill's sale reduced property and equipment by $243,000. Real estate
with a net book value of $912,000 was sold. The remaining decrease
represents depreciation of $548,000 offset by net additions of $208,000.
Video and film library costs decreased from $1,407,000 at December 31,
1995, to $566,000 at September 30, 1996, a decrease of $841,000 or 60%.
Churchill's sale accounted for $772,000 of the decrease. The remaining
decrease consists of amortization of $206,000 offset by additional
investment in video products of $137,000.
Intangible assets decreased from $511,000 at December 31, 1995, to
$399,000 at September 30, 1996, a decrease of $112,000 or 22%. The
decrease results from regular monthly amortization of the assets.
Other assets increased from $141,000 at December 31, 1995, to $357,000 at
September 30, 1996. Other assets includes estimated royalties to be
received in future years from the purchaser of Churchill in the amount of
$318,000.
<PAGE>
Accounts payable and accrued expenses decreased by $78,000 from December
31, 1995, to September 30, 1996. The Company used approximately $400,000
received from the sale of Churchill to reduce accounts payable and accrued
expenses. The reduction was offset by increases in amounts due other
vendors and creditors. The Company has not been able to make all payments
to trade creditors in a timely fashion during the first nine months of
1996. The Company's ability to pay its trade creditors may improve during
the fourth quarter if it successfully sells additional equity units and if
it sufficiently reduces raw material purchases, as previously discussed.
There are no guarantees that the Company will achieve these goals.
At September 30, 1996, the Company had borrowings under its working
capital line of credit facility in the amount of $1,400,000, up $319,000
from $1,081,000 at December 31, 1995.
Long term debt, including current maturities, decreased $2,299,000 as a
result of monthly long-term debt payments and additional payments
resulting from the asset sales.
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 short-term liquidity or capital resources.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED
- ------------------------------------------------------------------------
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1995
- ---------------------------------------------
As previously discussed, the comparison of operating results for the third
quarter of 1996 to the third quarter of 1995 is affected by the sale of
Summit in 1995 and by the sale of Churchill in 1996.
The Company's revenues were $2,631,000 in the third quarter of 1996, a
decrease of $2,545,000 or 49% from the same period 1995 revenues of
$5,176,000. Summit and Churchill's impact on revenues during this period
in 1995 was $2,845,000. After adjusting for Summit and Churchill, sales
at Hubbard and Scott were $2,631,000 for the quarter, an increase of
$300,000 from 1995 third quarter sales of $2,331,000.
The cost of goods sold for the quarter ended September 30, 1996, was
$1,638,000, a decrease of $1,324,000 or 45% from the same period 1995
figure of $2,962,000. Summit and Churchill's impact on cost of goods sold
during this period in 1995 was $1,493,000.
Consolidated gross profits for the third quarter of 1996 were $993,000, a
decrease of $1,221,000 or 55% from the same period 1995 gross profits of
$2,214,000. Summit and Churchill's impact on consolidated gross profits
during this period in 1995 was $1,353,000. After adjusting for Summit and
Churchill, gross profits at Hubbard and Scott were $993,000 for the 1996
quarter, an increase of $132,000 from 1995 third quarter gross profits of
$861,000. As a percentage of sales for Hubbard and Scott, the third
quarter gross margin increased from 37% in 1995 to 38% in 1996. The
Company continues its efforts to improve gross margins by increasing
certain selling prices and by better utilization of production capacity.
The advertising component of marketing costs for the third quarter of 1996
was $95,000, a decrease of $687,000 or 88% from the same period 1995 cost
of $782,000. Summit and Churchill's advertising costs for the third
quarter of 1995 were $767,000. After adjusting for Summit and Churchill,
advertising costs as percent of sales at Hubbard and Scott were 4% of
sales in the third three months of 1996 and 1% of sales in the third three
months of 1995. Hubbard and Scott produce direct mail catalogs featuring
their manufactured products.
<PAGE>
Other marketing costs for the third quarter of 1996 were $256,000, a
decrease of $370,000 or 59% from the same period 1995 cost of $626,000.
Summit and Churchill's other marketing costs for the third quarter of 1995
were $377,000. After adjusting for Summit and Churchill, other marketing
costs as a percentage of sales at Hubbard and Scott were 10% in the third
three months of 1996, and 11% in the third three months of 1995.
General and administrative expenses were $342,000, a decrease of $209,000
or 38% from the third quarter of 1995 G & A expense of $551,000. Summit
and Churchill's G & A expense for the third quarter of 1995 was $167,000.
After adjusting for Summit and Churchill, G & A costs as a percent of
Hubbard and Scott sales were 13% in the third quarter of 1996 and 16% in
the third quarter of 1995. The reduction reflects decreased
administrative staff levels, decreased office space, and decreased
telephone expense.
Total operating costs decreased 38% from $1,959,000 in the third three
months of 1995 to $693,000 in the third three months of 1996. Summit and
Churchill's total operating costs during this period in 1995 was
$1,311,000. After adjusting for Summit and Churchill, operating costs as
a percentage of Hubbard and Scott sales approximated 26% in 1996 and 28%
in 1995.
The Company attributes its profitability in the third quarter to the
significant cost reduction measures implemented during the year. Much of
the cost reduction resulted from decreasing the number of employees.
Since January 1, 1996, the number of employees has been reduced by 29.
The sale of Churchill reduced the number of employees by 22. Other
reductions were achieved primarily in accounting, product development, and
marketing.
Interest expense decreased from $228,000 in the third quarter of 1995 to
$90,000 in the third quarter of 1996, a decrease of $138,000 or 60%. The
decreased interest expense is the result of lower debt levels made
possible by proceeds from the 1995 sale of Summit and the 1996 asset
sales.
The Company did not recognize any income tax benefit or expense for the
third quarter of 1996. By the end of 1995, all income tax liabilities had
been offset against operating losses. The Company has net operating loss
carryovers of approximately $2,500,000 available for Federal income tax
purposes. The Company will be able to offset those carryforwards against
future taxable income, if any. It will be able to record a benefit from
those carryforwards when they appear to be realizable.
Net income for the third quarter of 1996 was $287,000, compared with net
income of $29,000 in the same period of 1995. Included in net income for
1996 is the gain on sale of real estate in the amount of $77,000. There
was no such gain in 1995. Earnings per share was $0.07 for the third
quarter of 1996, compared to earnings per share of $0.01 for the third
quarter of 1995.
Inflation has not had any material effect on the Company's operations
during 1996. During 1995, price increases in postage, paper, plastic, and
formed metal parts adversely impacted profitability. The Company attempts
to reduce the impact of cost increases through design changes and improved
factory efficiencies. There is no guarantee that it will be successful in
these attempts.
<PAGE>
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. This
distribution of sales is likely to continue throughout 1996. Historical
patterns indicate that fourth quarter sales will be approximately 33% less
than third quarter sales. As a result, the Company does not expect to
report profitable results for the fourth quarter.
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.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO
- --------------------------------------------------------------------------
THE NINE MONTHS ENDED SEPTEMBER 30, 1995
- ----------------------------------------
As previously discussed, the comparison of operating results for the first
nine months of 1996 to the first nine months of 1995 is affected by the
sale of Summit in 1995 and the sale of Churchill in 1996.
The Company's revenues were $7,193,000 in the first nine months of 1996, a
decrease of $8,370,000, or 54%, from the same period 1995 revenues of
$15,563,000. Summit and Churchill's impact on revenues during this period
in 1995 was $8,730,000. After adjusting for Summit and Churchill,
revenues at Hubbard and Scott were $6,328,000 for the nine months, a
decrease of $505,000 from 1995 nine month sales of $6,833,000. As
discussed below, the decline resulted primarily from price reductions.
The cost of goods sold for the nine months ended September 30, 1996, was
$4,501,000, a decrease of 49% from the prior year figure of $8,771,000.
Summit and Churchill's cost of goods sold for the first nine months of
1995 was $4,641,000. After adjusting for Summit and Churchill, gross
profits at Hubbard and Scott were $2,235,000 for the nine months, a
decrease of $467,000 from 1995 nine months gross profits of $2,702,000.
As a percentage of sales for Hubbard and Scott, the gross margin decreased
from 40% in 1995 to 35% in 1996. The decreased gross margin percent was
caused by sales promotion programs that reduced the average selling price
of certain products and by costs associated with under utilized factory
capacity.
Advertising costs decreased $1,821,000 or 89% from the first three
quarters of 1995. Summit and Churchill's advertising cost for the first
three quarters of 1995 was $1,973,000. After adjusting for Summit and
Churchill, advertising costs as percent of sales at Hubbard and Scott were
3% of sales in the nine months of 1996 and 1% of sales in the nine months
of 1995.
Other marketing costs decreased by $647,000 or 32% from the comparable
period ended September 30, 1995. Summit and Churchill's other marketing
costs for the first nine months of 1995 was $1,258,000. After adjusting
for Summit and Churchill, other marketing costs as a percentage of sales
at Hubbard and Scott were 19% in the nine months of 1996 and 11% in the
nine months of 1995. In 1996, the Company increased its institutional
marketing activities. Specifically, it increased its presence at industry
trade shows and conventions, it increased the number of presentations to
distributors, and it increased the number of marketing personnel compared
to the same period in 1995.
<PAGE>
General and administrative expenses were $1,099,000, a decrease of
$1,049,000 or 49% from the first nine months of 1995 G & A expense of
$2,148,000. Summit and Churchill's G & A expense for the nine months of
1995 was $728,000. After adjusting for Summit and Churchill, G & A costs
as a percent of Hubbard and Scott sales were 15% in the nine months of
1996 and 21% in the nine months of 1995. The reduction reflects decreased
administrative staff levels, decreased office space, and decreased
telephone expense. Also reducing G & A expenses in 1996 were proceeds of
$100,000 received in connection with settlement of a lawsuit.
Total operating costs decreased 57% from $6,198,000 in the first nine
months of 1995 to $2,681,000 in 1996. Summit and Churchill's total
operating costs during this period in 1995 was $3,960,000. After
adjusting for Summit and Churchill, operating costs as a percentage of
Hubbard and Scott sales approximated 37% in 1996 and 33% in 1995.
Interest expense decreased from $679,000 in the first nine months of 1995
to $347,000 in the first nine months of 1996, a decrease of $332,000, or
49%. The decreased interest expense is the result of lower debt levels
made possible by proceeds from the 1995 sale of Summit and the 1996 asset
sales.
The Company did not recognize any tax benefit for the nine months of 1996.
By the end of 1995, all income tax liabilities had been offset against
operating losses. The Company has net operating loss carryovers of
approximately $2,500,000 available for Federal income tax purposes. The
Company will be able to offset those carryforwards against future taxable
income, if any. It will be able to record a benefit from those
carryforwards when they appear to be realizable.
The net loss for the first nine months of 1996 was $643,000, compared with
a net loss of $11,000 in the same period of 1995. Included in the 1996
results is a $384,000 loss recognized on the sale of Churchill and a
$77,000 gain recognized on the sale of real estate. Loss per share was
$0.15 for 1996, a $0.15 decrease from 1995's three quarter loss per share
of $0.00.
Inflation has not had any material effect on the Company's operations
during 1996. During 1995, price increases in postage, paper, plastic, and
formed metal parts adversely impacted profitability. The Company attempts
to reduce the impact of cost increases through design changes and improved
factory efficiencies. There is no guarantee that it will be successful in
these attempts.
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. This
distribution of sales is likely to continue throughout 1996. Historical
patterns indicate that fourth quarter sales will be approximately 33% less
that third quarter sales. As a result, the Company does not expect to
report profitable results for the fourth quarter.
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.
<PAGE>
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:
1. On July 2, 1996, the Registrant filed a Current Report on Form
8-K dated June 17, 1996, related to the sale of Churchill. That
report included:
Item 2. Disposition of Assets
Item 7. Financial Statements and Exhibits
(b) Pro Forma Financial Information
2. On August 9, 1996, the Registrant filed a Current Report on Form
8-K dated August 9, 1996, related to its July financial
statements. That report included:
Item 5. Other Events
Item 7. Financial Statements and Exhibits
Balance Sheet as of July 31, 1996 and Statement of
Operations for the month ended July 31, 1996.
<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 13, 1996 By: /s/ Clifford C. Thygesen
------------------- -------------------------
Clifford C. Thygesen,
President
Dated: November 13, 1996 By: /s/ Frank L. Jennings
------------------- -------------------------
Frank L. Jennings, Chief
Financial Officer and
Vice President of Finance
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 45,000
<SECURITIES> 0
<RECEIVABLES> 1,751,000
<ALLOWANCES> (59,000)
<INVENTORY> 2,470,000
<CURRENT-ASSETS> 4,583,000
<PP&E> 6,142,000
<DEPRECIATION> (3,275,000)
<TOTAL-ASSETS> 8,772,000
<CURRENT-LIABILITIES> 3,340,000
<BONDS> 0
0
0
<COMMON> 44,000
<OTHER-SE> 4,386,000
<TOTAL-LIABILITY-AND-EQUITY> 8,772,000
<SALES> 7,193,000
<TOTAL-REVENUES> 7,193,000
<CGS> 4,501,000
<TOTAL-COSTS> 4,501,000
<OTHER-EXPENSES> 2,682,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (346,000)
<INCOME-PRETAX> (643,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (643,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (643,000)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
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