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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-16310
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AMERICAN EDUCATIONAL PRODUCTS, INC.
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(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-1012129
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification number)
5350 MANHATTAN CIRCLE, SUITE 210, BOULDER, COLORADO 80303
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 543-0123
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B (Section229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ ]
The Registrant's revenues for the year ended December 31, 1995 were $20,333,000.
As of March 15, 1996, the aggregate market value of the Common Stock of the
Registrant based upon the closing prices of the Common Stock as quoted by NASDAQ
(symbol "AMEP") held by non-affiliates of the Registrant was approximately
$5,206,540. As of March 15, 1996, there were 4,165,232 shares of the Common
Stock of the Registrant outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant hereby incorporates herein by reference the following documents:
PART III
Item 9. Directors and Executive Officers of the Registrant.
Item 10. Executive Compensation.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Item 12. Certain Relationships and Related Transactions.
The foregoing are incorporated by reference from the Registrant's
definitive Proxy Statement relating to its annual meeting of stockholders,
which will be filed in an amendment within 120 days of December 31, 1995.
ITEM 13. EXHIBITS
1. Incorporated by reference in the Registrant's Post Effective Amendment
No. 5 to Registration Statement on Form S-18 filed with the Securities and
Exchange Commission and declared effective on July 1, 1987.
2. Incorporated by reference from the Registrant's Registration Statement
on Form S-8 filed with the Securities and Exchange Commission, and declared
effective on August 4, 1992.
3. Incorporated by reference from the Registrant's Current Report on Form
8-K dated March 11, 1994 and filed with the Commission on March 24, 1994.
4. Incorporated by reference from the Registrant's Current Report on Form
8-K dated December 20, 1995 and filed with the Commission on January 4,
1996.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
American Educational Products, Inc. ("AMEP" or the "Company") was organized in
1986 with the primary purpose of merging with or acquiring one or more
businesses. Its first acquisition was of an educational products manufacturer,
Scott Resources Inc. ("Scott"), shortly after the Company completed an initial
public offering of its securities in 1986. Since that first acquisition, the
Company has focused its efforts on the education industry. AMEP is a leading
developer of hands-on educational materials and multi-media products for
students, teachers, and parents. The Company has a broad base of proprietary
products which are primarily used to educate students from pre-school through
high school (the "K - 12" market).
The Company's mission is to manufacture and distribute products which help
teachers increase their effectiveness in the classroom, facilitate students'
learning through the joy of inquiry and discovery, and encourage parental
participation in their children's education. The Company's manipulative
products allow teachers to use the hands-on approach to education, consistent
with a major industry trend away from exclusive reliance on textbooks.
Since 1986, the Company has expanded its operations to include a direct mail
distribution company, a second manufacturing facility producing science products
and maps, and a facility engaged in video production and distribution. Prior to
1995, sales growth had been achieved by expanding distribution of existing
products,
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developing and acquiring new products, and acquiring other educational product
companies. In 1995, sales decreased 4% from the prior year.
The Company adopted a long term growth strategy to develop its product lines and
strengthen its market position via acquisition. During 1995 and 1994, the
Company experienced significant net losses that have eliminated the Company's
access to additional capital to make acquisitions in the near future. For the
short-term, AMEP is focusing its efforts on the core competencies of developing
and manufacturing manipulative products. It will use the cash flow from these
activities to reduce debt. The Company also continually assesses
underperforming assets with a view toward disposition.
If the Company is successful in returning to profitability and regaining an
acceptable debt to equity ratio, the Company may be able to pursue an
acquisition strategy. At that time, the Company may seek acquisition
opportunities in the educational and related products market, particularly for
math and science products. It believes that the appropriate long-term strategy
is to be involved in the consolidation of a fragmented industry.
In 1988, the Company formed Summit Learning, Inc., ("Summit") as a direct mail
marketer of educational products. Summit grew rapidly and became the largest
division of AMEP. By 1995, Summit had grown so large that it was no longer
possible for AMEP to provide adequate working capital. In December, 1995, the
assets of Summit were sold. Summit represented about 50% of AMEP consolidated
sales.
To add to its existing line of science products, the Company acquired Hubbard
Scientific Inc. ("Hubbard") in August, 1991. This leveraged asset acquisition
was completed through a two-tiered, asset-based financing in which the Company
increased its senior secured revolving credit facility by $700,000, borrowed
$3,000,000 under a senior subordinated term note bearing interest at the rate of
23% per annum, and issued $500,000 in redeemable preferred stock to the seller.
The Company prepaid and retired the term note, redeemed the preferred stock, and
reduced the revolving line of credit in September, 1992, with the proceeds of
its secondary public offering.
In September, 1992, the Company completed a secondary public offering of common
stock, realizing net proceeds of approximately $4,763,000. Most of the proceeds
were used to retire the debt and redeemable preferred stock incurred in
connection with its acquisition of Hubbard.
Effective December 31, 1992, the Company acquired certain assets of Redco
Science, Inc. ("Redco"). During 1993, the manufacturing operations of Redco
were assimilated into the Hubbard facility in Chippewa Falls, Wisconsin.
Proceeds from the secondary public offering provided funds for the acquisition.
On March 11, 1994, the Company completed the acquisition of certain assets of
Churchill Films, Inc., a producer and distributor of educational videotapes,
videodiscs, and films. In connection with the acquisition, the Company formed a
multi-media subsidiary, AEP Media Corporation, which assimilated the assets and
does business as Churchill Media ("Churchill"). Churchill sells more than 200
original educational titles covering a wide range of subjects, including earth
and life sciences, health, history, language arts, early childhood, and teen
lifestyle choices. Churchill also distributes a large number of titles
developed by other educational film producers. The acquisition was financed
primarily through bank debt.
In August, 1994, the Company acquired a raised relief map line previously owned
by Kistler, Inc. d.b.a. Kistler Graphics of Denver, Colorado. The product line
includes 27 maps which complement the Company's existing line of raised relief
maps. The acquisition was financed by bank debt.
Following the sale of Summit, the Company is functionally organized into two
operating divisions: Manufacturing and Media. The Manufacturing Division
includes Scott and Hubbard and the Media Division is Churchill. Through its
operating divisions, the Company develops, manufactures, and distributes
educational products to parents, teachers, principals, public and private
schools, and school districts throughout the United States and in some selected
international locations. Each division has a general manager overseeing its
operations and sales/marketing functions. Some administrative functions, such
as information systems, accounting, payroll, and insurance have been
consolidated into a corporate activity which serves all divisions.
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INDUSTRY
According to Lehman Brothers, the education industry is now a $619 billion
market in the United States. Furthermore, experts forecast that the education
industry in the late 1990s will replace health care as the industry of focus.
America's educational system has been the target of increased attention over the
last fifteen years. Continued poor student achievement, despite reform efforts
and increased funding, has kept education in the national spotlight since the
1983 release of the National Commission on Excellence in Education of its widely
acclaimed report, "A Nation at Risk." Fueled by media attention, the public has
become increasingly aware of the need for improving the effectiveness of the
education system.
The education industry is undergoing significant change and controversy. Some
proposals represent a dramatic new way of thinking about an historic part of
civilized culture. The debates to be undertaken now will help determine what
students and parents expect from schools; what schools provide for instruction;
and how teachers enhance their competency in the subject to be taught.
It can be stated unequivocally that parents, school boards, and legislators have
never been so adamant about the need for performance goals, measures, and
progress standards for our public and private schools. For example, relative to
expectations, teachers have never been under so much pressure to improve
teaching of math and science at the elementary and middle schools levels. Also,
it can reasonably be said that students, in terms of cognitive and emotional
development, are at their most difficult stage in the latter part of these
years.
Supplemental instructional materials are needed by schools for several critical
reasons. First, teachers with language arts training may not be prepared
adequately to teach math and science in elementary and middle-schools. Second,
youth at the elementary and middle-school levels learn best developmentally by
active use of material they can manipulate physically. A recent report of the
Association of American Publishers ranked hands-on tools, such as those marketed
by AMEP, as the "most effective (out of ten) in terms of student learning." The
same study ranked videos as highly effective (or second out of ten). Textbooks
were ranked fifth out of ten.
The segment targeted by AMEP is the supplemental instructional market, which
consists of textbooks, hands-on manipulative products, and software.
Educational analysts estimate that this segment is $5.2 billion, of which hands-
on products accounted for $1.3 billion and electronic products accounted for
$1.5 billion. Most of the remaining spending is for traditional textbooks.
AMEP markets hands-on, manipulative products which help students master basic
math skills such as counting, addition, subtraction, multiplication, division,
fractions, decimals, and geometry. Prior to the sale of Summit, math products
represented about 47% of total AMEP sales. Science products, which cover the
basic areas of earth science, life science, and physical science, made up about
38% of sales. Videos made up most of the remaining 15%. With Summit now
divested, math products are expected to represent about 15% of sales, science
products about 55%, and videos most of the remaining 30% of sales.
AMEP faces some significant challenges in its industry. The industry is
volatile, with major publishers merging, software and electronics firms growing
fast and creating partnerships, and hands-on, manipulative-producing firms
growing steadily but at a slower rate. Many of the smaller companies providing
hands-on products are being consolidated. The larger publishing firms are using
their market dominance in their strategies to diversify their product offerings.
The trend toward school system decentralization is shifting more decisions to
the school building level rather that at the school district, region, or state.
Teachers are choosing the curricular materials they need to effectively convey
educational concepts while placing the student at the center of the program.
The industry is rethinking its sales and marketing strategies. As a result, the
industry faces evolving challenges to reaching individual teachers with high
quality, cost effective teaching aids.
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Sales of computer related products are growing rapidly, and there is increasing
public pressure to improve computer literacy. According to a McKinsey study in
1995, schools lack much of the infrastructure necessary for expanded computer
training. For example, schools often lack wiring for modems and many are using
outdated computer hardware. Thus a large portion of future school budgets may
be devoted to purchases of hardware, software, and peripheral products. AMEP
has limited product offerings in this area.
The success of the Company relies upon government funding of educational
programs. Most of the funding is provided by state and local governments,
although about 7% of the funds come from the federal government. The Company
believes that governmental units will continue to increase funding of education
to meet an increasing school population. However, there can be no assurance
that such funding will continue to increase.
MANUFACTURING DIVISION: SCOTT AND HUBBARD
Scott is a manufacturer of mathematics and earth science products that are used
by elementary, middle, and high school students and teachers.
Most of the math products are manipulatives; that is, products that illustrate a
particular mathematical concept by providing a concrete or physical object as
the focus of instruction. Twelve major math product lines produced by Scott
include:
FRACTION BARS-Registered Trademark- program is a comprehensive series of
manipulatives used to introduce and teach fraction concepts.
DECIMAL SQUARES-Registered Trademark- program teaches decimals and
percents through the use of a complete series of objectives,
manipulatives, activities, and tests.
CHIP TRADING-Registered Trademark- activities program uses manipulatives
to teach the basic skills of addition, subtraction, multiplication, and
division.
SCOTT GEOBOARDS are wooden or plastic tiles with pin arrays used to
teach basic geometric concepts.
PATTERN BLOCKS and COLOR CUBES are painted wooden or plastic blocks of
various shapes, used to teach shapes, counting, and sorting to younger
students. They are used to teach angles, fractions, areas, and volumes
to older students.
COLOR TILES are plastic, square tiles used to model basic operations
with whole numbers for primary age learners, and to develop patterns and
relationships for problem solving skills for intermediate and middle
school learners.
FRACTION INTERACTION-TM- video series includes three videos for teaching
fractions. The videos are developed for middle school learners.
VideoLabs, a package that combines a video and Scott manipulatives for
student activities, and Teacher Packs are also available.
CLEVER CATCH-TM- is a series of beach balls with math and phonics
skills.
MATH CHASE-TM- is a set of three games to reinforce and extend math
skills at multiple levels.
ALGEBITS-TM- is a set of manipulatives for teaching pre-algebra concepts
to middle school learners. Instruction guides are also developed by
Scott.
STRETCH & SHAPE-TM- is a package with Geoboards and activities for an
introduction to geometry concepts.
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SUPER TRIANGLES-TM- activities program uses manipulatives to teach whole
number concepts and operations.
Other math products developed by Scott include mathematics games, software,
reproducible resource books, and teaching aids such as overhead materials.
In 1995, Scott added 21 new items to its line of supplemental mathematics
products; including an initial title of a video series and a videolab, middle
school products, teacher's guides, and games. Additionally, the packaging for
eight products was redesigned to meet the requirements of the retail market.
Scott also manufactures approximately 150 different earth science products that
are sold to distributors or directly to schools throughout this country and
internationally. The products include rock and mineral collections, fossil
specimens, and geological oddities. Over 100 different minerals and 150 rock
types are sold in bulk quantities or as individual specimens to customers. In
1995, four new earth science products were introduced.
In 1994, Scott developed six Earth Science VideoLabs, a package that combines a
video with lab materials designed so students can duplicate experiments
illustrated in the video. In 1995, two VideoLabs and three new earth science
video titles were added to its proprietary line, making a total of 28 earth
science video titles. Six of these titles were repackaged as an environmental
series. Three titles were also introduced as videodiscs extending the product
line medium.
Hubbard produces a comprehensive line of high quality earth science, life
science, and physical science materials that are specifically designed for
classroom use. These products include three-dimensional models of animal and
human anatomy, a wide variety of astronomy and earth experiments, and the Jewel
line of PlantMobiles, animal cages, and fresh and salt water aquariums.
Additionally, the Company is the largest U.S. producer of high quality raised
relief maps that are marketed to consumers through a number of sales channels,
including map dealers, specialty stores, independent sales representatives, and
direct mail. In 1994, the Company acquired the complete raised relief map line
previously produced by Kistler Graphics of Denver, Colorado. As a result of
this acquisition, Hubbard believes that it sells approximately 90% of the raised
relief maps sold in the United States. Hubbard produces approximately 250
different maps. Four new maps were developed in 1995. Aggregate raised relief
map sales were less than 5% of consolidated revenues.
During 1995, Hubbard introduced 14 new science products. It also updated or
revised 12 existing products. A new line of products was introduced, NATURE
FINDER-TM-, which includes a series of hand-held identification tools for
learning nature classification skills. This product line is applicable in both
institutional and retail markets.
Product development efforts for Scott and Hubbard were consolidated in 1995.
Seventy-two total products were developed, including 51 new products and 21
product revisions or repackaged products. The process for improving development
has focused on reducing the time from initiation to completion of new products
in order to meet critical market windows for introduction. Also included in the
process are formal field testing and development of prototypes for pre-sale
opportunities. In 1995, sales of products developed or revised during the last
three years comprised 8% of consolidated revenues.
Several products manufactured by the Manufacturing Division are under exclusive
agreement with national organizations and governmental agencies. All such
agreements are subject to periodic renewal. In the aggregate, sales of products
manufactured under these agreements are less than 5% of consolidated revenue.
The Manufacturing Division experienced raw material cost increases of
approximately 3% during 1995. This cost increase was not entirely passed onto
the customers, thus affecting margins adversely.
The raw materials and components used by the Manufacturing Division are
purchased from a large number of suppliers. There are a few major vendors that
the Division relies on to supply materials and services. If a disruption in
supply occurred, alternate vendors could be found; however, delays in production
could result. The Division has not experienced any significant supply problems
during the last three years.
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International marketing is a rapidly growing sales channel of the Manufacturing
Division. Such sales are made principally through international educational
dealers and are directed by an international sales manager. International sales
comprised less than 5% of consolidated revenues.
Retail marketing was expanded in 1995, after initial introduction of new
products at the Toy Manufacturers of America (TMA) trade show. This effort has
received a favorable initial response from the marketplace, although it is too
early to quantify the ultimate impact. The consumer market is both larger and
more competitive than the educational market and is dominated by established
firms with much greater resources than AMEP. Sales of the Company's product in
the retail market are represented by companies like Recreational Equipment, Inc.
(REI) and the Nature Company. Retail sales represented 5% of consolidated
revenues. Sixty-five products, plus rock specimens and maps, were developed or
repackaged in 1995 for introduction at the 1996 TMA trade show.
The educational industry is inherently seasonal in nature. There are wide
variations in sales from month to month and, as a result, accounts receivables,
inventories, and accounts payable also vary widely. The summer months are the
most active as educational institutions restock their supplemental materials for
the next school year. Sales terms are typically net 30 days and orders are
normally filled within 14 days.
As of December 31, 1995, the Manufacturing Division had a backlog of orders of
$367,000, compared to a backlog of $60,000 at December 31, 1994, and $232,000 at
December 31, 1993. Historically, the order backlog at year-end has not been a
good indicator of future sales.
MEDIA DIVISION: CHURCHILL
Churchill, acquired by the Company in March 1994, has been a producer of
educational films, videos and videodiscs since 1960. Churchill sells primarily
to the K-12, public library, college/university, public health, and hospital
markets. Churchill's library of proprietary titles accounted for 50% of its
1995 sales, while titles it has acquired from a wide variety of outside
producers accounted for 31% of its 1995 sales. Churchill additionally serves as
the principal distributor for the 250 title Weston Woods line, which accounted
for 10% of 1995 Churchill sales. The distribution agreement with Weston Woods
expires August, 1996. Scott/Hubbard product accounted for the remaining 9% of
1995 Churchill sales.
The traditional market for Churchill's products has been regional media and
county media centers. As funding has begun to shift away from these centers to
districts and individual school sites, Churchill has implemented several new
programs to follow the flow of funding. These programs include increased
telemarketing and direct mail efforts, along with new volume and duplication
pricing programs.
To expand its existing markets, Churchill has added three commissioned sales
representatives in order to cover foreign television, foreign institutional
sales, and domestic government agencies respectively. In addition, licensing of
stock footage to television producers and CD ROM developers has been
implemented.
During 1995, Churchill capitalized on the restructuring of many of its
competitors by adding 30 acquired titles from other producers to its extensive
video library for exclusive distribution, as well as adding 50 acquired titles
from other producers for non-exclusive distribution. Additionally, Churchill
has produced three new video titles, two new videodisc titles, and completed
four revisions of existing titles in 1995. Finally, a new catalog of 50
acquired CD ROM products was distributed in the fourth quarter of 1995 in an
effort to capture media dollars being diverted to new technology sales.
As of December 31, 1995, Churchill Media had a backlog of $5,000, compared to a
backlog of $14,000 at December 31, 1994. The Company does not believe that year
end backlog is a reliable indicator of future sales.
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MARKETS AND MARKETING
The U.S. Department of Education, Office of Educational Research and
Improvement, publishes an annual report titled PROJECTIONS OF EDUCATION
STATISTICS. The report compiles actual historical information and projects
certain items for the next ten years. The most recent information indicates
that there are 49 million public and private school students and 2.8 million
educators. More importantly, the number of new students forecast for grades
kindergarten through twelve is predicted to increase to 54 million over the next
ten years. The number of teachers is expected to reach 3.3 million by the year
2004. These numbers represent a 10% and 18% increase, respectively.
The Manufacturing Division reaches its target market primarily through the use
of 300 distributors who publish and circulate educational product catalogs
displaying AMEP products, among others. Relationship marketing with
distributors was initiated in 1995 to increase support for dealers in the sales
of products manufactured by AMEP. It also sells through direct mail catalogs
and independent sales representatives. Scott and Hubbard maintain separate
brand-name identifications. The Manufacturing Division has a sales and
marketing staff of approximately eight persons working to assist the dealers and
distributors.
The Media Division reaches its market through a combination of sales
representatives, catalog mailings, and outbound telemarketing.
The Company's marketing efforts also include attending trade shows and teacher's
conferences such as Toy Manufacturers of America, the National Council of
Teachers of Mathematics, the National Science Teachers' Association, the
Educational Dealers and Equipment Supplies Association, the National School
Supply and Equipment Association, and World Didac. Marketing efforts for maps
includes attendance at the International Map Dealers Association, Outdoor
Retailer Association, and American Bookseller Association. Attendance at these
exhibitions increases the Company's visibility in the market and affords it the
opportunity to meet end users and evaluate the competition.
COMPETITION
Generally, the Company faces competition from many businesses ranging in size
from sole proprietorships to large corporations. The products manufactured by
these competitors range from textbooks to manipulatives and models. Many of
these entities publish catalogs in addition to listing their products in dealer
catalogs. Some of the competitors are larger and have greater financial
resources than AMEP. The Company believes it meets and exceeds competitive
demands by aggressively promoting its products, providing customized product
orders, developing new products, and offering products at prices intended to be
lower than the industry norm.
Churchill faces competition on two levels: within the universe of companies
selling educational technology product, and within the smaller universe of
companies selling videos and related products to educational institutions and
health agencies.
Educational media, including videos and videodiscs, are considered in the
educational market to be "educational technology." Therefore, distributors of
videos and related products are in direct competition for the education dollar
with distributors of computer software, CD-ROM's, computer networking services,
and other educational technology products. Churchill believes that educational
videos will retain a major share of the market for some time to come because of
the large installed base of videocassette recorders in schools, because teachers
are familiar with the technology, because videos can be shown to groups of
students rather than to just one or two at a time, and because the video image
remains a superior teaching tool.
Within the universe of distributors of similar education media, Churchill faces
competition from both producers and distributors that have traditionally
marketed similar products to the same market as Churchill; some of these
companies, such as Encyclopedia Britannica or Coronet, have considerably larger
libraries and are substantially bigger than Churchill. Still other competitors,
like National Geographic or Disney, enjoy the advantage of the nationally
recognized brand name. Churchill also faces competition from building level
resellers, such as
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Cambridge Educational, which sell products from many distributors at very
competitive prices. A final category of competitor includes textbook
publishers, who are financing production of videos and vidediscs specifically to
correlate with their textbook titles. Nonetheless, Churchill has a proven
record of competence at distributing curriculum and health education materials.
The Company feels that it can capitalize on this record to successfully move the
Churchill product line into new markets.
Scott directly competes with products such as Attribute Blocks, Cuisinaire Rods,
and Base 10 Blocks in math products. In science products, Scott's principal
direct competitors in the market are Ward's Natural Science Establishment and
Geo-Science, although some hobby outlets and science supply houses have begun to
enter this market.
Hubbard encounters a significant amount of direct competition for many of its
classroom products. Some of the product lines are similar in quality and price
to items manufactured by others. Two product lines, Jewel and raised relief
maps, enjoy a somewhat unique market niche. The Jewel product line of high
quality aquariums, cages, and botany apparatus is designed to meet extreme
requirements of scientific experimentation and demonstration. The Company is
not aware of any competitors producing comparable quality items for the school
market. However, these products are priced significantly higher than lower
quality alternatives. Similarly, Hubbard produces raised relief maps which
provide a unique cartographic perspective. However, raised relief maps are
significantly more expensive than flat maps of the same cartographic image.
The Company believes that the educational marketplace has become more
competitive in the last two years. Specifically, sales of computer related
products are growing at a faster rate than sales of manipulatives and videos.
Only a small portion of the Company's sales consist of computer related
products. Additionally, the Company's losses during the last two years have
significantly reduced its financial resources. Many of the Company's
competitors are larger, have greater financial resources, and spend more money
on product development.
The Company believes that it can remain competitive by focusing on development
and manufacture of proprietary products. In certain market niches, e.g., raised
relief maps, earth science collections, Jewel aquariums, and health science
videos, the Company enjoys an excellent reputation. It also believes that its
intellectual property gives it certain competitive advantages. Nevertheless,
there are no assurances that the Company can increase sales or market share in
the future.
PRODUCT DEVELOPMENT
To maintain and improve its position in the market, the Company has made a
commitment to develop new products. A key component to product development is
regular revisions of existing products to keep them up-to-date with changing
educational standards.
In addition to internal product development, many new products are initially
created externally, either under contract with the Company or independently by
teachers and others in the education field. The Company regularly receives
prototypes from these external sources. If the Company desires to refine and
manufacture these products, it will typically obtain the rights to the product
and pay the author a 5% to 25% royalty on product sales generally over the life
of the copyright.
INTELLECTUAL PROPERTY
Copyrights, trademarks, and trade secrets are the principal protection sources
for the Company's products. The Company holds numerous copyrights covering its
published materials, including teachers' guides, manuals, game boards, videos,
and software. Each manipulative and model is accompanied by these published
materials. Approximately one-half of these copyrights are derived directly from
original works created by employees of the Company or by independent contractors
hired under agreement for a specific project. The remaining copyrights are held
by the Company through licensing arrangements with the authors.
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The Company has several exclusive manufacturing agreements with national
organizations and governmental agencies that are subject to periodic renewal.
In the aggregate, sales of products manufactured under these agreements are less
than 5% of consolidated sales.
The Company owns federally registered Trademarks for the following product
names: Fraction Bars-Registered Trademark-, Decimal Squares-Registered
Trademark-, and Chip Trading-Registered Trademark-. The following products were
submitted for federally registered Trademarks during 1995: AlgeBits-TM-, Clever
Catch-TM-, Fraction Interaction-TM-, Math Chase-TM-, Nature Finder-TM-, Stretch
& Shape-TM-, and Super Triangles-TM-. The Company claims common law Trademark
protection in all of its proprietary marks and is extremely diligent in its
efforts to develop and protect new marks.
All of the copyrights, licenses, and trademarks are considered by the Company to
be valuable property rights. The protection afforded by these intellectual
property rights and the law of trade secrets are believed by the Company to be
adequate protection for its products. However, notwithstanding the Company's
intellectual property rights, it is possible for a competitor to develop near
imitations of the Company's products, implementing modifications, without
violating those rights.
PERSONNEL
Scott employs 16 people on a permanent, full-time basis, headed by the general
manager of the Manufacturing Division. There are seven persons in manufacturing
positions, three persons in factory clerical or supervisory positions, four
persons in product development, and the two remaining persons are in general
administrative positions. Additional individuals are hired on a temporary
and/or part-time basis during the high-production summer months when large
numbers of orders are usually processed.
Hubbard employs 40 people on a permanent, full-time basis, headed by the general
manager of the Manufacturing Division. There are 17 persons in manufacturing
positions, seven persons performing factory supervisory, purchasing, or clerical
duties; 14 persons in sales, marketing, and customer service; and the two
remaining persons are in general administrative positions. Like Scott, Hubbard
hires additional individuals during peak production months
Churchill employs 22 people on a permanent, full-time basis headed by its own
general manager. There are 15 sales, marketing and customer service positions;
three product development positions, two warehouse positions, and two general
administrative positions.
AMEP, the parent company, employs 12 people on a permanent, full-time basis, as
well as 2 corporate officers. The other employees perform corporate functions
related to accounting, computer systems, and corporate management.
The Company is not part of any collective bargaining agreement. The Company
believes its employee relations are excellent.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases space in Boulder, Colorado, to use as corporate headquarters.
This property consists of 1,300 square feet and is currently leased at $1,400
per month, expiring September 1998.
Churchill leases approximately 9,200 square feet in Van Nuys, California, to use
as an office and warehouse space. Rent is $5,400 per month, and the lease
expires in 1999.
Hubbard's principal manufacturing facility is located in Chippewa Falls,
Wisconsin, and is comprised of approximately 37,000 square feet. The Hubbard
manufacturing facility is leased at $8,000 per month. The lease is subject to
annual renewal.
10
`
<PAGE>
In 1992, AMEP purchased 3.5 acres together with 8,000 square feet of
improvements in Fort Collins, Colorado. In January 1993, the Company completed
construction of a 10,500 square foot facility on this property. The five
buildings on the property contain approximately 14,200 square feet of
manufacturing and warehouse space and 4,300 square feet of office space.
In September, 1993, the Company purchased a 30,000 square foot warehouse
facility located next to an interstate highway in Fort Collins, Colorado.
Approximately one-half of the building is leased to the purchaser of Summit, and
the other half is leased to others.
The Company believes that all its facilities are adequate for their intended
purpose and does not plan any significant investment in additional facilities
during the next year.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company, nor any of its divisions or subsidiaries, is currently a
party to any material pending litigation or other legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its security holders during
the fourth quarter of its fiscal year ending December 31, 1995.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on the Nasdaq National Market tier of the
Nasdaq Stock MarketSM under the symbol AMEP.
HIGH LOW
---- ---
1994
First Quarter 5.13 3.19
Second Quarter 5.00 3.25
Third Quarter 3.63 2.00
Fourth Quarter 3.13 1.81
1995
First Quarter 2.13 1.69
Second Quarter 2.25 1.50
Third Quarter 2.31 1.75
Fourth Quarter 2.31 1.50
1996
First Quarter (through March 15) 1.88 1.13
As of March 15, 1996, there were approximately 367 shareholders of record and
approximately 2,000 beneficial shareholders.
DIVIDENDS
The Company has paid no cash dividend on its common stock during the last two
fiscal years, and the Company's Board of Directors has determined that no cash
dividend on common stock will be paid for 1995. Future dividend
11
<PAGE>
policy is subject to the discretion of the Board of Directors and is dependent
on a number of factors, including future earnings, capital requirements, and the
financial condition of the Company. Currently, certain of the Company's loan
agreements contain covenants which restrict the payment of dividends.
12
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The following discussion addresses the financial condition and results of
operations 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").
Effective March 1, 1994, AMEP acquired certain assets of Churchill Films, Inc.
The total cost of this acquisition approximated $4,625,000 and was recorded
using the purchase method of accounting. Churchill and its results of
operations have been consolidated with the Company commencing March 1, 1994.
Accordingly, the 1994 consolidated financial statements include Churchill
operations for ten months, and the 1995 consolidated financial statements
include Churchill operations for twelve months.
In December, 1995, AMEP sold substantially all of the assets of Summit for total
proceeds of $3,982,000. The gain on the sale was $1,092,000.
Comparisons among 1995, 1994, and 1993 are affected by the acquisition and the
divestiture.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements, including the explanatory notes, beginning on
page F-1 in this annual report.
LIQUIDITY AND CAPITAL RESOURCES - DECEMBER 31, 1995 COMPARED TO DECEMBER 31,
1994
During 1995, the Company experienced a lack of liquidity and capital resources.
The liquidity shortfall was primarily caused by the operating losses in 1995 and
1994 and by the payments required under various loan agreements. The Company
was unable to make timely payments to its trade creditors and also delayed
certain payments to its primary lender.
The Company continued its efforts to reduce expenditures and conserve cash.
Those efforts included a reduction in catalog mailing programs, reduced raw
material purchases, reduced spending on new product development, consolidation
of facilities, and reduction of work force. In addition, the Company's vendors
provided extended payment terms and increased credit limits.
During 1995 and 1994, the Company was not in compliance with certain loan
covenants. The bank chose to forbear from action with respect to the
noncompliance. Furthermore, the bank extended additional credit so that the
Company could continue its operations in 1995. However, the bank significantly
increased the interest rates and fees charged to the Company.
In December, 1995, AMEP sold the assets of Summit. Sale proceeds were used to
pay trade accounts payable and to reduce the balance on the line of credit. The
sale of Summit improved the Company's liquidity position but did not provide
sufficient capital resources for the Company to fund its operations in 1996.
Subsequent to December 31, 1995, the Company negotiated new loan agreements with
its primary lender. The agreements provide for a working capital line of credit
(LOC) with maximum borrowings up to $1,500,000 and an expiration date of
September 30, 1996. The LOC bears interest at the prime rate (8.25% as of March
18, 1996) plus 2%. Borrowings under the LOC as of March 18, 1996 were
$1,311,000. The agreements also provide the Company with two term loans. One
term loan bears interest at the prime rate plus 3%, payable monthly. It
requires monthly principal payments of $60,000 plus additional principal
payments aggregating $400,000 during June, July, August, and September. The
other term loan bears interest at 8.1% and is payable in monthly installments of
$10,000, including interest. Substantially all of the Company's assets have
been pledged as collateral under the various loan agreements.
13
<PAGE>
The combined effect of the sale of Summit, the cost reduction measures, and the
establishment of bank credit are expected to enable the Company to satisfy its
working capital requirements during 1996.
Management believes that the Company will return to profitability during 1996
and that the LOC and operating cash flow will be sufficient to fund operations
and service the debt. Should the Company fail to do so, it might be required to
sell additional assets. Alternatively, the bank could foreclose on some or all
of the assets pledged as collateral. Such events could have a material adverse
impact on the Company.
The Company experienced a 30% working capital decrease in the year ended
December 31, 1995. While current assets of $4,819,000 decreased $3,731,000 from
December 31, 1994, current liabilities decreased by $3,397,000 from $7,438,000
to $4,041,000. As a result, working capital decreased from $1,112,000 to
$778,000, and the current ratio increased from 1.15 to 1.19. The sale of Summit
accounted for $3,009,000 of the current asset decrease. Proceeds of the sale
accounted for $3,393,000 of the current liability decrease. Thus, the sale of
Summit improved working capital by $384,000. Accelerated maturities on long-
term debt and other operations reduced working capital.
As more fully discussed in Results of Operations, the Company recorded a 1995
impairment provision of $3,297,000 to reduce the carrying value of assets
acquired in 1994 and 1992.
Total assets decreased 42% from $19,331,000 at December 31, 1994, to $11,240,000
at December 31, 1995. During the same period, total liabilities decreased 45%
from $11,660,000 to $6,401,000. The sale of Summit accounted for $3,062,000 of
the total asset decrease and $3,838,000 of the total liability decrease. In
addition, $3,297,000 of the total asset decrease is attributable to asset
impairment provisions. The remainder of the total asset decrease is largely due
to normal depreciation and amortization of assets.
Stockholders' equity decreased from $7,671,000 at December 31, 1994, to
$4,839,000 at December 31, 1995, a decrease of $2,832,000 or 37%. The decrease
was caused by the 1995 net loss of $2,976,000, offset by the issuance of stock
under the employee stock purchase plan and various stock option transactions.
Accounts receivable decreased from $2,223,000 at December 31, 1994, to
$1,783,000 at December 31, 1995, a decrease of $440,000 or 20%. The sale of
Summit reduced accounts receivable by $827,000. Thus, there was an increase of
$387,000 in accounts receivable for the remaining Divisions. This is due in
large part to special sales promotions that occurred during late 1995.
Income tax refunds receivable decreased from $317,000 in 1994 to $304,000 in
1995. The refunds arose from application of net operating losses incurred in
1995 and 1994 to taxes paid in prior years. Refunds of approximately $110,000
were received in 1995, and the remaining $304,000 was received early in 1996.
Net operating loss carryforwards are available to offset future taxable income,
if any. Due to the uncertainty of forecasting future profitability, the Company
has not recognized the benefit of these loss carryforwards in the 1995 financial
statements. The potential future benefits are subject to periodic review and
can be recorded as a reduction of income tax expense at such time as their
utilization is probable.
Inventories decreased from $4,562,000 at December 31, 1994, to $2,358,000 at
December 31, 1995, a decrease of $2,204,000 or 48%. The sale of Summit
accounted for $1,355,000 of this decrease. In the other divisions, inventories
were reduced by $849,000 from 1994 to 1995 by an inventory reduction program
which (a) reduced 1995 inventory purchases by $1,900,000 compared to 1994; (b)
more closely matched inventory purchases to actual sales demand; and (c)
identified $170,000 of excess or obsolete inventory to be disposed. The
inventory reduction plan will continue during 1996 and will include the
additional program of purchasing more frequently using smaller purchase order
quantities.
Prepaid advertising costs decreased from $1,089,000 at December 31, 1994, to
$102,000 at December 31, 1995, a decrease of $987,000 or 91%. The sale of
Summit accounted for $907,000 of this decrease. The balance of the decrease was
due to normal amortization of catalogs mailed in 1994. Prepaid advertising
costs at the end of 1995
14
<PAGE>
represented preliminary spending on the 1996 spring catalog program. The
Company plans to spend $254,000 on that program.
Net property and equipment decreased from $5,132,000 at December 31, 1994, to
$4,362,000 at December 31, 1995, a decrease of $770,000 or 15%. The sale of
Summit accounted for $166,000 of this decrease. Major components of the change
are depreciation expense of $894,000 and asset impairment provisions of
$150,000, offset by asset additions of $424,000.
Video and film library costs decreased from $2,623,000 at December 31, 1994, to
$1,407,000 at December 31, 1995, a decrease of $1,216,000 or 42%. The sale of
Summit had no impact on this decrease. There were $300,000 of additions,
$384,000 of amortization expense, and an impairment provision of $1,133,000.
Intangible and other assets decreased from $3,026,000 at December 31, 1994, to
$652,000 at December 31, 1995, a decrease of $2,374,000 or 79%. The sale of
Summit had no impact on this decrease. The Churchill impairment reduced these
assets by $1,894,000, and normal amortization reduced these assets by $424,000.
Accounts payable and accrued expenses decreased from $2,668,000 at December 31,
1994, to $1,548,000 at December 31, 1995, a decrease of $1,120,000 or 42%.
Proceeds from the sale of Summit accounted for a decrease of $1,357,000. Thus,
there was an increase of $273,000 in accounts payable and accrued expenses for
the remaining divisions during 1995. The Company did not make all payments to
trade creditors in a timely fashion during 1995. This trend is expected to
continue until the Company returns to profitability.
At December 31, 1995, the Company had borrowings under its working capital line
of credit facility in the amount of $1,081,000, down $2,256,000 from $3,337,000
at December 31, 1994. The Company was able to reduce its borrowings with
proceeds from the sale of Summit.
Long term debt, including current maturities, decreased $1,364,000. During
1995, the Company reduced its long term debt by making total payments of
$1,441,000. Additions to long term debt during 1995 were comprised of $77,000
of equipment financing leases.
Management continually assesses the Company's need for capital resources. From
time to time, the Company may evaluate and pursue additional sources of capital.
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 -- 1995 COMPARED TO 1994 AND 1993
As previously discussed, the comparisons of operating results for 1995 to 1994
and 1993 are affected by the sale of Summit in 1995 and the purchase of
Churchill in 1994.
The Company's disappointing performance continued in 1995. Major events in 1995
and 1994 significantly increased the Company's expenses. During 1995, sales of
certain video and science products were significantly below expectations. At
the end of 1995, the Company reviewed the recoverability of the assets it had
acquired from Churchill Films, Inc. and Redco Science. The evaluation indicated
that the Company was unlikely to fully recover the cost of those assets and that
the estimated fair value of those assets was less than the amount recorded in
the financial statements. Accordingly, AMEP recorded an impairment provision to
reduce the assets' carrying value by $3,297,000.
During 1994, the Company adopted a new accounting policy for catalog costs. The
new policy conforms with an accounting standard issued by the American Institute
of Certified Public Accountants in 1993. Adopting the new policy resulted in a
charge to 1994 operations of $2,067,000.
These two events affect the comparisons of 1995 to 1994 and 1993.
15
<PAGE>
The Company reported a net loss of $2,976,000 for 1995, compared to a net loss
of $1,858,000 for 1994, and net income of $1,285,000 in 1993. Loss per share
was $0.72 for 1995, a $0.26 decrease from the 1994 loss of $0.46. The 1995 loss
per share was a $1.03 decrease from the 1993 income per share of $0.31.
Management took several actions to improve future performance. The Distribution
Division was sold in December, 1995. The Distribution Division was capital
intensive and required working capital funds for inventory and catalog mailings.
It is estimated that proceeds from the sale will reduce 1996 interest expense by
$350,000. Cost reduction programs have reduced general and administrative
spending by $225,000 per quarter, primarily as a result of eliminating positions
and consolidating facilities. A study of the evolving educational video market
indicates that it is no longer cost effective to utilize Company resources in
the creation of new videos. The Company now obtains new videos that have been
produced by others. Finally, development of new manipulative products has been
consolidated into one functional area to provide a steady flow of new products.
It is believed that these efforts are appropriate to return the Company to
profitability. There are, of course, no assurances of future success.
For the first time in its history, the Company reported a sales decrease. The
sales decline had a negative impact on gross profits and on cash flow. In
addition, the decline had a further negative effect by indicating that the value
of certain assets had been impaired. The Company recorded an expense of
$3,297,000 to recognize the diminution in value of assets acquired from
Churchill Films and Redco Science.
The impairment provision recorded in 1995 reduced the carrying value of
Churchill's intangible assets to zero. The amortization expense associated with
those accounts was $232,000 in 1995. There will be no further amortization
expense associated with these assets. The carrying value of the video library
was also reduced, and future amortization expense will be reduced. However, the
reduction is expected to occur in 1997 and later years. Amortization of the
video library in 1996 is expected to approximate the $240,000 expense recorded
in 1995.
The Company's revenues in 1995 were $20,333,000, a decrease of $768,000 or 4%
from the prior year revenues of $21,101,000 and an increase of $3,658,000 or 22%
over 1993. Sales declined because both the Distribution Division and the Media
Division reduced selling prices. Management at both Divisions believed that
price reductions would significantly increase demand and that increased unit
volume would more than offset the lower selling price. Neither division
realized the anticipated increases in unit volume. The Distribution division
has since been sold, and Churchill has revised its pricing policy on new titles
and products. Summit's revenues for 1995 were $10,215,000.
The cost of goods sold for the year ended December 31, 1995, was $11,985,000, an
increase of 2% over the prior period figure of $11,732,000 and 36% more than
1993. The increase can be attributed to slightly higher volume at Summit and
higher costs associated with underutilized capacity and certain raw material
cost increases at the Manufacturing Division. Although the Company was able to
reduce spending on variable factory overhead during 1995, production volumes
were less than capacity and did not fully absorb the fixed expenses of
depreciation, amortization, and occupancy. Summit's costs of goods sold for
1995 were $5,789,000.
Consolidated gross profits for 1995 were $8,348,000 a decrease of 1,021,000 or
11% from the prior period gross profit of $9,369,000 and $494,000 or 6% over
1993. As a percentage of sales, the gross margin decreased from 44% in 1994 and
47% in 1993 to 41% in 1995. The decrease in margin primarily reflects
discounting of selling prices.
During fiscal 1995, the Company spent approximately $611,000 to develop,
acquire, or revise additional products. Spending in 1995 was $371,000 less than
1994 development spending of $982,000. Nevertheless, new product introductions
in 1995 were greater than new product introductions in 1994. At Churchill, the
focus of new products was shifted from creation of new titles to the acquisition
of distribution rights for titles created by other producers. At the
Manufacturing Division, tasks previously performed by consultants were shifted
to Company employees. As a result, 161 new products were developed, acquired,
or revised during 1995 compared to 59 products for 1994.
16
<PAGE>
The advertising component of marketing costs decreased $400,000 or 12% from 1994
and increased $903,000 over 1993. The 1995 decrease is the direct result of
cutbacks in the development and distribution of catalogs. Summit's advertising
costs for 1995 were $2,612,000.
Other marketing costs increased by $620,000 or 28% over 1994 and $1,570,000 or
125% over 1993. As a percentage of sales these costs were 14% in 1995, 10% in
1994, and 8% in 1993. Churchill accounted for $564,000 or 91% of the increase
over 1994 and $1,198,000 or 76% of the increase over 1993. The increases were
caused by expanded marketing programs at Churchill and by additional personnel
in retail marketing. Summit's other marketing costs for 1995 were $576,000.
General and administrative expenses were $3,210,000, a decrease of $802,000 or
20% from the 1994 general and administrative expense of $4,012,000 and an
increase of $745,000 or 30% over 1993. As a percentage of sales, general and
administrative expense was 16% in 1995, 19% in 1994, and 15% in 1993. The
decrease from 1994 to 1995 was the result of cost reduction measures discussed
previously. Churchill accounted for $571,000 or 77% of the increase over 1993.
Summit's general and administrative expense for 1995 was $950,000.
Interest expense increased from $661,000 in 1994 to $874,000 in 1995, an
increase of $213,000 or 32%. The increased interest expense resulted from
higher interest rates, higher debt levels caused by the acquisition of Churchill
and Kistler in 1994, and increased borrowings under the working capital line of
credit.
Included in 1995 is a gain on sale of assets in the amount of $1,092,000. The
gain resulted from the sale of Summit. There were no such gains in prior years.
The Company's operating losses have allowed it to eliminate its deferred tax
liability. The total benefit recognized in 1995 was $620,000, a $335,000
decrease from the benefit recognized in 1994. Recognition of future benefits is
dependent upon the Company's return to profitability. The Company was able to
carry back its taxable losses to prior years and has received refunds of federal
income taxes paid in 1993, 1992, and 1991.
Inflation did not have any material effect on the Company's operations for 1994
and 1993. During 1995, Summit experienced cost increases for paper and postage
used in its catalog business. These increases adversely affected profitability.
The sale of Summit reduces the Company's exposure to increased costs of paper
and postage. At the Manufacturing Division, cost increases for plastic and
formed metal parts had a negative impact on 1995 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. While the Company does not expect inflation to have
a material impact on 1996 operations, there are no guarantees that future cost
increases would not have an adverse impact.
The Company historically has experienced significant seasonality in its sales
primarily due to the purchasing cycle of educational institutions. Following
the sale of Summit, it is expected that the first and fourth fiscal quarters
will each generate approximately 20% of annual sales and the second and third
fiscal quarters will each generate approximately 30% of annual sales.
Other than the forgoing, management knows of no trends, demands, or
uncertainties that are reasonably likely to have a material impact on the
Company's results of operations.
17
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are filed as part of this report beginning on
page F-1:
1. Independent Auditor's Report
2. Consolidated Balance Sheets as of December 31, 1995 and December 31,
1994
3. Consolidated Statement of Operations for the Years ended December 31,
1995, 1994, and 1993
4. Consolidated Statement of Stockholders' Equity for the years from
January 1, 1993 through December 31, 1995
5. Consolidated Statements of Cash Flow for the years ended December 31,
1995, 1994, and 1993
6. Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were neither changes in accountants nor disagreements of the type required
to be reported under this Item between the Company and its independent
accountants, Hein + Associates LLP, during the fiscal years ended
December 31, 1995 or December 31, 1994.
PART III
Part III, Items 9, 10, 11, and 12, are incorporated herein by reference from the
Registrant's definitive proxy statement relating to its Annual Meeting of
Shareholders which will be filed in an amendment within 120 days of December 31,
1995.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS EXHIBIT NO TITLE
* 3.1 Articles of Incorporation
* 3.2 Articles of Amendment to Articles of
Incorporation
* 3.2(b) Articles of Amendment to Articles of
Incorporation dated April 21, 1987
* 3.2(c) Articles of Amendment to Articles of
Incorporation dated February 19, 1990
* 3.3 By-Laws
** 4.1 American Educational Products, Inc. 1987
Incentive Stock Option Plan, together
with Option Agreement
** 4.2 American Educational Products, Inc. 1990
Incentive Stock Option Plan, together
with Option Agreement
** 4.3 American Educational Products, Inc. 1990
Employee Stock Purchase Plan, together
with Subscription Agreement
18
<PAGE>
*** 10.1 Colorado National Bank Revolving Loan
Agreement
*** 10.2 Asset Purchase Agreement dated March 1,
1994, with Churchill Films, Inc.
**** 10.3 Asset Purchase Agreement dated December
20, 1995, with Steck-Vaughn Publishing
Corporation relating to the
sale of Summit Learning, Inc. assets.
----------------------
* Incorporated by reference from the Registrant's
Post-Effective Amendment No. 5 to Registration Statement on
Form S-18 filed with the Securities and Exchange
Commission and which was declared effective on
July 1, 1987.
** Incorporated by reference from the Registrant's
Registration Statement on Form S-8 filed with the
Securities and Exchange Commission which was declared
effective on August 4, 1992.
*** Incorporated by reference from the Registrant's Current
Report on Form 8-K dated March 11, 1994 and filed with the
Commission on March 24, 1994.
**** Incorporated by reference from the Registrant's Current
Report on Form 8-K dated December 20, 1995 and filed with
the Commission on January 4, 1996.
REPORTS ON FORM 8-K
The Registrant filed no Current Reports on Form 8-K during
the Fourth Quarter ended December 31, 1995. On January 4,
1996, the Registrant filed a Current Report on Form 8-K
dated December 20, 1995, related to sale of Summit. That
report included:
Item 2 Disposition of Assets
Item 7(b) Pro Forma Financial Information
19
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT F-2
CONSOLIDATED BALANCE SHEETS - December 31, 1995 and 1994 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS - For the Years Ended
December 31, 1995, 1994, and 1993 F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - From
January 1, 1993 through December 31, 1995 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years Ended
December 31, 1995, 1994, and 1993 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
American Educational Products, Inc.
Boulder, Colorado
We have audited the accompanying consolidated balance sheets of American
Educational Products, Inc. and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Educational
Products, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 3, American Educational Products, Inc. changed its
accounting for direct catalog costs in the year ended December 31, 1994.
HEIN + ASSOCIATES LLP
Denver, Colorado
March 22, 1996
F-2
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
Cash $ 146,000 $ 220,000
Trade receivables, net of allowance of
$109,000 and $202,000 1,783,000 2,223,000
Income tax refunds receivable 304,000 317,000
Inventories 2,358,000 4,562,000
Prepaid advertising costs 102,000 1,089,000
Other 126,000 139,000
----------- -----------
TOTAL CURRENT ASSETS 4,819,000 8,550,000
PROPERTY AND EQUIPMENT, net 4,362,000 5,132,000
VIDEO LIBRARY, net 1,407,000 2,623,000
INTANGIBLE ASSETS, net 511,000 2,842,000
OTHER ASSETS 141,000 184,000
----------- -----------
TOTAL ASSETS $11,240,000 $19,331,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Note payable $ 1,081,000 $ 3,337,000
Current maturities of long term debt 1,412,000 1,433,000
Accounts payable 935,000 2,258,000
Accrued expenses 613,000 410,000
----------- -----------
TOTAL CURRENT LIABILITIES 4,041,000 7,438,000
LONG TERM DEBT, less current maturities 2,360,000 3,703,000
DEFERRED INCOME TAXES - 519,000
COMMITMENTS (Note 6)
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;
4,150,618 and 4,072,097 shares
issued and outstanding 42,000 41,000
Additional paid in capital 6,048,000 5,905,000
Retained earnings (accumulated deficit) (1,251,000) 1,725,000
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 4,839,000 7,671,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,240,000 $19,331,000
----------- -----------
----------- -----------
</TABLE>
See accompanying note to consolidated financial statements
F-3
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
INCOME:
Net sales $ 20,333,000 $ 21,101,000 $ 16,675,000
Cost of goods sold 11,985,000 11,732,000 8,821,000
------------ ------------ ------------
Gross profit 8,348,000 9,369,000 7,854,000
OPERATING EXPENSES:
Catalog costs due to adoption of SOP 93-7 (Note 3) - 2,067,000 -
Advertising and catalog costs 2,915,000 3,315,000 2,012,000
Other marketing 2,824,000 2,204,000 1,254,000
------------ ------------ ------------
Total marketing 5,739,000 7,586,000 3,266,000
General and administrative 3,210,000 4,012,000 2,465,000
Impairment of assets (Note 2) 3,297,000 - -
------------ ------------ ------------
Total operating expenses 12,246,000 11,598,000 5,731,000
------------ ------------ ------------
OPERATING INCOME (LOSS) (3,898,000) (2,229,000) 2,123,000
OTHER INCOME (EXPENSE):
Gain on sale of assets 1,092,000 - -
Other income 84,000 77,000 44,000
Interest expense (874,000) (661,000) (202,000)
------------ ------------ ------------
Net other income (expense) 302,000 (584,000) (158,000)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (3,596,000) (2,813,000) 1,965,000
Income tax benefit (expense) 620,000 955,000 (680,000)
------------ ------------ ------------
NET INCOME (LOSS) $ (2,976,000) $ (1,858,000) $ 1,285,000
------------ ------------ ------------
------------ ------------ ------------
Earnings (loss) per common share
and common share equivalent ($0.72) ($0.46) $0.31
----- ----- ----
----- ----- ----
Average number of common and common
equivalent shares outstanding 4,122,000 4,060,000 4,195,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying note to consolidated financial statements
F-4
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
JANUARY 1, 1993 THROUGH DECEMBER 31, 1995
<TABLE>
<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 January 1, 1993 3,893,879 $ 39,000 $ 5,495,000 $ 2,298,000 $ 7,832,000
Sale of common stock under the
employee stock purchase plan 37,378 - 128,000 - 128,000
Exercise of options 82,000 1,000 116,000 - 117,000
Net income - - - 1,285,000 1,285,000
---------- --------- ----------- ------------ -----------
Balance as of December 31, 1993 4,013,257 40,000 5,739,000 3,583,000 9,362,000
Sale of common stock under the
employee stock purchase plan 33,840 1,000 110,000 - 111,000
Exercise of options and warrants 25,000 - 56,000 - 56,000
Net loss - - - (1,858,000) (1,858,000)
---------- --------- ----------- ------------ -----------
Balance as of December 31, 1994 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
Grant of non-qualified stock options - - 32,000 - 32,000
at less than fair market value
Net loss - - - (2,976,000) (2,976,000)
---------- --------- ----------- ------------ -----------
Balance as of December 31, 1995 4,150,658 $ 42,000 $ 6,048,000 $ (1,251,000) $ 4,839,000
---------- --------- ----------- ------------ -----------
---------- --------- ----------- ------------ -----------
</TABLE>
See accompanying note to consolidated financial statements
F-5
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,976,000) $ (1,858,000) $ 1,285,000
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 1,705,000 1,702,000 763,000
Impairment of assets 3,297,000 - -
Stock based compensation expense 32,000 - -
Bad debt expense 14,000 74,000 40,000
Change in deferred income taxes (519,000) (751,000) 324,000
Gain on sale of assets (1,092,000) - -
Changes in operating assets and liabilities:
Decrease (increase) in operating assets:
Accounts receivable (32,000) 247,000 (892,000)
Income tax refunds receivable 13,000 (317,000) -
Inventories 885,000 (1,051,000) (674,000)
Prepaid advertising costs 459,000 327,000 (424,000)
Other (27,000) 77,000 (6,000)
Increase (decrease) in operating liabilities:
Accounts payable (1,614,000) 1,838,000 (85,000)
Accrued expenses 76,000 113,000 106,000
Income taxes payable - (197,000) 180,000
------------ ------------ ------------
Net cash provided by operating activities 221,000 204,000 617,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 3,982,000 - -
Purchase of property and equipment (424,000) (433,000) (1,500,000)
Cost incurred for video production (300,000) (521,000) (226,000)
Cost incurred for intangible assets - - (206,000)
Cash paid for acquisitions - (1,010,000) -
Sale of marketable securities - - 152,000
------------ ------------ ------------
Net cash provided (used) by investing activities 3,258,000 (1,964,000) (1,780,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long term debt 1,209,000 5,130,000 4,591,000
Payments on notes payable and long term debt (4,874,000) (3,534,000) (3,567,000)
Net proceeds from the sale of stock 112,000 132,000 245,000
------------ ------------ ------------
Net cash provided (used) by financing activities (3,553,000) 1,728,000 1,269,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (74,000) (32,000) 106,000
Cash, at beginning of period 220,000 252,000 146,000
------------ ------------ ------------
Cash, at end of period $ 146,000 $ 220,000 $ 252,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying note to consolidated financial statements
F-6
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS - American Educational Products, Inc., (AMEP) was
organized as a Colorado Corporation in 1986. AMEP has four operating
subsidiaries: Hubbard Scientific, Inc. (Hubbard), Scott Resources, Inc.
(Scott), Summit Learning, Inc. (Summit), and AEP Media Corporation d.b.a.
Churchill Media (Churchill). Collectively, these entities are referred to
as the Company. During December 1995, AMEP sold substantially all the
assets of Summit.
The Company sells a wide variety of educational products through multiple
sales channels. The Company's products include those developed and
produced by the Company, as well as products manufactured by other
companies. The Company's customers include educational institutions,
wholesalers, individual educators, and consumers, primarily in the United
States.
A summary of the Company's significant accounting policies follows:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION - Sales are recorded at time of shipment, and an
allowance is provided for returns.
INVENTORIES - Inventories are valued at the lower of cost or market on
substantially a first-in, first-out (FIFO) basis and consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Raw materials $ 1,162,000 $ 1,288,000
Work in process 262,000 309,000
Finished goods 934,000 2,965,000
------------ ------------
Total $ 2,358,000 $ 4,562,000
------------ ------------
------------ ------------
</TABLE>
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is computed by the straight-line method over estimated useful
lives ranging generally from 3 to 30 years. Depreciation expense was
$894,000, $853,000, and $549,000 for the years ended December 31, 1995,
1994, and 1993, respectively.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Reproduction masters $ 2,971,000 $ 2,727,000
Plant machinery and equipment 1,696,000 1,564,000
Office furniture and equipment 350,000 503,000
Land and buildings 734,000 1,687,000
Rental property 984,000 -
Computer hardware and software 427,000 578,000
Vehicles and other 44,000 58,000
------------ ------------
7,206,000 7,117,000
Less accumulated depreciation (2,844,000) (1,985,000)
------------ ------------
$ 4,362,000 $ 5,132,000
------------ ------------
------------ ------------
</TABLE>
F-7
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maintenance and repairs are charged to expenses when incurred. Property
replacements and betterments that extend the life of assets, including
reproduction masters for significant, non-routine product updates, are
capitalized and subsequently depreciated.
VIDEO LIBRARY - The company capitalizes costs incurred relating to the
development of educational video products. These costs are amortized over
the estimated future unit sales of the video products on an individual film
forecast computation method. Estimated future unit sales of each video
represent a significant estimate and are reviewed quarterly by the Company.
Amortization expense was $384,000, $294,000 and $34,000 for the year ended
December 31, 1995, 1994, and 1993 respectively. During the fourth quarter
of 1995, the Company recorded an impairment allowance of $1,133,000 for the
Churchill video library. The impairment was recorded by reducing the cost
of the library to its estimated fair value.
As of December 31, 1995 and 1994, video library consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Acquired video library $ 142,000 $ 1,715,000
Production costs - completed videos 1,505,000 1,242,000
Production costs - videos in process 105,000 68,000
------------ ------------
Total video library 1,752,000 3,025,000
Accumulated amortization (345,000) (402,000)
------------ ------------
$ 1,407,000 $ 2,623,000
------------ ------------
------------ ------------
</TABLE>
INTANGIBLES - As of December 31, 1995 and 1994, intangible assets consist
of:
<TABLE>
<CAPTION>
1995
--------------------------------------------------
AMORTI-
COST ZATION NET
----------- ----------- -----------
<S> <C> <C> <C>
Copyrights $ 650,000 $ (346,000) $ 304,000
Covenants 653,000 (446,000) 207,000
----------- ----------- -----------
$ 1,303,000 $ (792,000) $ 511,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
1994
--------------------------------------------------
AMORTI-
COST ZATION NET
----------- ----------- -----------
<S> <C> <C> <C>
Copyrights $ 650,000 $ (303,000) $ 347,000
Covenants 1,293,000 (416,000) 877,000
Goodwill 1,704,000 (86,000) 1,618,000
----------- ----------- -----------
$ 3,647,000 $ (805,000) $ 2,842,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
In the various acquisitions made by the Company, an allocation has been
made to copyrights for proprietary products acquired. These costs are
being amortized over the remaining lives of the related copyrights,
generally eight to thirty years.
The Company has covenants not to compete from the former owners of its
acquired subsidiaries. The amounts allocated to the covenants are being
amortized over the five to seven year lives of the covenants.
F-8
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the fourth quarter of 1995, the Company recorded an impairment
allowance of $405,000 for the Churchill covenant. The impairment has been
recorded by reducing the cost and the accumulated amortization of the
Churchill covenant to zero.
A portion of the Churchill purchase price was allocated to goodwill (see
Note 4). This cost was being amortized over 15 years. During the fourth
quarter of 1995, the Company recorded an impairment allowance of $1,489,000
for goodwill by reducing the cost and accumulated amortization to zero.
PREPAID ADVERTISING COSTS - Substantially all of the Company's advertising
is through the mailing of catalogs. The printing and mailing costs of
catalogs are recorded as a current prepaid cost. In 1994 and 1995, these
costs were amortized to expense based upon individual cost pools using
actual and estimated future revenues for each catalog. In 1993 and prior
years, the Company's amortization calculation aggregated annual revenues
from all catalog mailings rather than identifying revenues by each separate
catalog.
All other advertising costs are expensed when the advertising first takes
place.
LONG-LIVED ASSETS - Management periodically assesses recoverability of all
long-lived assets, including intangibles. The assessment for impairment is
performed whenever events or changes in circumstance indicate that the
carrying value of an asset may not be recoverable. The assessment compares
the carrying value of the assets to the estimated future cash flows of the
assets, exclusive of interest. If an impairment is indicated, a provision
is made to reduce the asset's carrying value to its estimated fair value.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK - The
carrying value of the Company's trade receivables and trade payables are
considered to approximate fair value due to their short maturities. The
fair value of the Company's notes payable and long term debt, including
current portions, are considered to approximate fair value because 75% of
the obligations have floating interest rates. The rates on the fixed rate
debt do not vary significantly from current market rates.
The Company has a concentration of credit risk along educational lines.
Management believes that the allowance for doubtful accounts is sufficient
to cover the related credit risk.
STOCK-BASED COMPENSATION - In October 1995, the Financial Standards
Accounting Board issued a new statement titled "Accounting for Stock-Based
Compensation" (SFAS 123). The new statement is effective for fiscal years
beginning after December 15, 1995. SFAS 123 encourages, but does not
require, companies to recognize compensation expense for grants of stock,
stock options, and other equity instruments to employees based on fair
value. Companies that do not adopt the fair value accounting rules must
disclose the impact of adopting the new method in notes to the financial
statements. Transactions in equity instruments with non-employees for
goods and services must be accounted for on the fair value method. The
Company currently does not intend to adopt the fair value accounting
prescribed by SFAS 123, and will be subject only to the disclosure
requirements prescribed by SFAS 123. However, the Company intends to
continue its analysis of SFAS 123 and may elect to adopt its provisions in
the future.
INCOME TAXES - The Company accounts for income taxes under the liability
method of SFAS No. 109. Deferred income taxes reflect the effect of
temporary differences between the tax basis of assets and liabilities and
the carrying value of those assets and liabilities for financial reporting
purposes. Deferred income taxes also reflect the value of net operating
losses and an offsetting valuation allowance. Tax effects are computed
using the tax rates and laws enacted as of the balance sheet date.
F-9
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS (LOSS) PER SHARE - Earnings (loss) per share are based on the
weighted average number of shares outstanding, including common stock
equivalents outstanding during the periods, unless anti-dilutive.
USE OF ESTIMATES - The preparation of the Company's consolidated financial
statements in conformity with generally acceptable accounting principles
requires the Company's management to make estimates and assumptions that
affect the amounts reported in these financial statements and accompanying
notes. Actual results could differ from those estimates.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1995 1994 1993
------- --------- -------
<S> <C> <C> <C>
Cash payments for:
Interest 875,000 617,000 206,000
------- --------- -------
------- --------- -------
Income taxes - 240,000 152,000
------- --------- -------
------- --------- -------
Non-cash investing and financing activities:
Issuance of debt for assets of acquisitions - 4,203,000 -
------- --------- -------
------- --------- -------
Acquisition of equipment for debt 77,000 189,000 200,000
------- --------- -------
------- --------- -------
</TABLE>
2. IMPAIRMENT OF LONG-LIVED ASSETS AND ACQUIRED INVENTORY:
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-
Lived Assets" (SFAS 121). The Company adopted SFAS 121 during the fourth
quarter of 1995.
As a result of operating losses, it was determined that certain assets
acquired from Churchill Films, Inc., in 1994 and from Redco Science, Inc.,
in 1992 had suffered an impairment (See Note 4).
In accordance with the provisions of SFAS 121, the future cash flows of the
long-lived assets used by Churchill were estimated. The future cash flows
consist of future sales less costs of completing those sales and were not
adjusted for a discount factor or interest charges. The future cash flows
so estimated were less than the carrying value of the video library and
intangible assets, including goodwill. An additional calculation was made
to estimate the fair value of the assets. Fair value was estimated as the
present value of the future cash flows using an appropriate discount rate.
Carrying value exceeded estimated fair value by $3,027,000 and,
accordingly, an impairment provision in that amount has been included in
the 1995 results of operations.
In connection with Redco, it was determined that sales of certain products
had decreased to an unprofitable level. It is probable that manufacture of
those products will be discontinued and that the inventory and equipment
associated with those products will be scrapped or otherwise disposed and
the proceeds of disposition will approximate the costs of disposition. The
carrying value of those assets was reduced to zero by including $270,000 in
the 1995 provision for asset impairment. The provision of $270,000 was
recorded by increasing accumulated depreciation of reproduction masters and
plant equipment by $150,000 and by establishing an inventory reserve of
$120,000.
F-10
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CATALOG COST ADJUSTMENT:
The Company capitalizes the cost of catalogs that are mailed directly to
potential customers. Prior to 1994, the Company amortized the costs based
on the aggregate annual sales curve for all catalogs. In the fourth
quarter of 1994, the Company adopted Statement of Position 93-7, Reporting
on Advertising Costs (SOP 93-7). In accordance with SOP 93-7, the
capitalized costs of catalogs are now being amortized based on individual
cost pools using actual and estimated future revenues for each catalog.
Included in the twelve months ending December 31, 1994, is a charge of
$2,067,000 ($1,364,000 or $0.34 per share after related tax benefit)
representing the effect of the acceleration in amortization of catalogs
pursuant to SOP 93-7. None of the adjustment represented a writedown to
net realizable value.
4. ACQUISITIONS AND DIVESTITURES:
Effective December 31, 1992, the Company purchased certain of the assets of
Redco for approximately $790,000.
Effective March 1, 1994, the Company purchased certain assets of Churchill
Films, Inc. The total capitalized cost of the acquisition was
approximately $4,625,000. To finance this acquisition, the Company
incurred additional term debt of $3,300,000. In addition, the Company's
line of credit was increased by $2,000,000, a portion of which was used to
complete the transaction. Debt to former owners was issued totaling
$568,000. Assets acquired included goodwill of $1,704,000 and video
library valued at $1,715,000. The acquisition was recorded using the
purchase method of accounting, and operations of Churchill were included
with the Company's operations commencing March 1, 1994.
During 1995, an analysis of the assets purchased from Churchill and Redco
resulted in a combined impairment adjustment of $3,297,000 (see Note 2).
Effective December 1, 1995, the Company sold substantially all of the
assets of Summit to an unaffiliated company. The sale comprised the assets
used by Summit in connection with its catalog distribution business. Total
proceeds of the sale were $3,982,000. The Company utilized the proceeds to
pay all of Summit's outstanding accounts payable and to reduce the
outstanding balance on the Company's line of credit. The Company
recognized a gain of $1,092,000 on the sale. Revenue of $10,216,000 and
operating income of $288,000 were attributable to Summit's operations
during the year ended December 31, 1995.
The Company did not sell the real property occupied by Summit. The
purchaser of Summit is leasing the facility from AMEP under a two year
lease with approximate annual rentals of $67,000.
5. NOTES PAYABLE AND LONG TERM DEBT:
The Company has a $1,500,000 revolving line of credit pursuant to a loan
agreement which expires September 30, 1996. Borrowing under this line of
credit bears interest at the prime rate plus 2% (totaling 10.5% as of
December 31, 1995). Interest is payable monthly. The principal balance
was $1,081,000 and $3,337,000 at December 31, 1995 and 1994, respectively.
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.
F-11
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Subsequent to December 31, 1995, the Company renegotiated these loan
agreements with regard to rates and maturity. The revised terms are
reflected in the long term debt schedule following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Note Payable, principal due in monthly installments of $60,000 plus
additional payments of $100,000 during June, July, August, and
September. Remaining balance due December 31, 1997.
Accrued interest is payable monthly at prime plus 3%.
Collateralized by business assets. $ 2,473,000 $ 3,078,000
Note Payable, due in monthly installments of $10,000 including
interest at 8.1%, remaining balance due December 31, 1997,
collateralized by land and buildings. 994,000 1,030,000
Note Payable, original face amount of $500,000, noninterest
bearing, due in 20 quarterly installments of $25,000, less
unamortized discount at 12%. 71,000 156,000
Note Payable to the sellers of Churchill, paid September 11, 1995. - 248,000
Capital lease obligations, due in monthly installments with varying
maturities through December 31, 1997. 198,000 352,000
Other 36,000 272,000
----------- -----------
Total 3,772,000 5,136,000
Less current maturities (1,412,000) (1,433,000)
----------- -----------
Long term debt $ 2,360,000 $ 3,703,000
----------- -----------
----------- -----------
</TABLE>
At December 31, 1995, the future minimum principal payments on long term
debt and capitalized lease obligations were as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 1,412,000
1997 2,360,000
-----------
Total $ 3,772,000
-----------
-----------
</TABLE>
F-12
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS:
The Company leases office space, equipment, and warehouse facilities under
noncancellable operating leases. Total rental expense was $282,000,
$270,000, and $217,000 for the years ended December 31, 1995, 1994, and
1993, respectively. The total minimum rental commitments at December 31,
1995, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 209,000
1997 102,000
1998 99,000
1999 54,000
2000 3,000
------------
Total $ 467,000
------------
------------
</TABLE>
The Company has certain royalty agreements with third parties on various
products. Total royalty expense for the years ended December 31, 1995,
1994, and 1993 were $367,000, $496,000, and $187,000, respectively.
7. STOCKHOLDERS' EQUITY:
The Company has authorized 50,000,000 shares of preferred stock. These
shares may be issued in series with such rights and preferences as may be
determined by the Board of Directors. None of the shares are issued and
outstanding.
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 under terms and at
prices deemed appropriate by the Board of Directors.
F-13
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the number of shares under option:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------
INCENTIVE NON-
STOCK QUALIFIED PRICE RANGE
OPTION STOCK ----------------
PLAN OPTIONS TOTAL LOW HIGH
--------- --------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 292,000 50,000 342,000 $ 0.45 $ 6.25
Options granted 284,000 8,000 292,000 $ 3.44 $ 6.25
Options exercised (32,000) - (32,000) $ 0.45 $ 1.06
Options terminated (109,000) (15,000) (124,000) $ 0.75 $ 6.25
-------- ------- --------
Balance, December 31, 1993 435,000 43,000 478,000 $ 0.45 $ 6.25
Options granted 230,000 12,000 242,000 $ 2.19 $ 4.50
Options exercised - (25,000) (25,000) $ 0.75 $ 1.00
Options terminated (182,000) - (182,000) $ 1.00 $ 6.25
-------- ------- --------
Balance, December 31, 1994 483,000 30,000 513,000 $ 0.45 $ 6.25
Options granted 264,400 100,500 364,900 $ 1.60 $ 2.25
Options exercised (25,500) - (25,500) $ 0.94 $ 1.06
Options terminated (98,900) - (98,900) $ 2.13 $ 6.25
-------- ------- --------
Balance, December 31, 1995 623,000 130,500 753,500 $ 0.45 $ 4.88
-------- ------- --------
-------- ------- --------
</TABLE>
A total of 401,000 of the above options are exercisable, and 92,000 shares
are available for future grants.
During 1995, the Company issued 130,500 non-qualified stock options to its
directors at 85% of fair value at the date of the grant, resulting in 1995
compensation expense of $32,000.
The Company has outstanding warrants to purchase 220,000 shares of the
Company's common stock at exercise prices ranging from $3.25 to $4.50 per
share. All 220,000 warrants are exercisable at December 31, 1995, and
expire in 1996 and 1997. During 1993, a total of 50,000 warrants were
exercised at $1.75 per share.
Substantially all of the Company's permanent full-time employees are
eligible to participate in an employee stock purchase plan (ESPP), except
those owning more than 5% of the Company's common stock or more than
$25,000 in value of the Company's common stock. In 1995, the stockholders
increased the number of shares for the ESPP to 300,000. Under the ESPP,
employees may purchase shares at 85% of the NASDAQ quoted market value on
either the beginning or ending date of the six month enrollment period,
whichever is less. The number of shares purchased under the ESPP for each
of the three years ending December 31 were: 53,061 in 1995; 33,840 in 1994;
and 37,378 in 1993.
F-14
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES:
Deferred tax assets (liabilities) are comprised of the following as of
December 31, 1995:
<TABLE>
<CAPTION>
CURRENT LONG TERM
----------- -----------
<S> <C> <C>
Deferred assets (liabilities):
Prepaid catalogs $ (38,000) $ -
Inventories 178,000 -
Net operating losses - 583,000
Other 32,000 63,000
----------- -----------
Net deferred tax asset 172,000 646,000
Valuation allowance (172,000) (646,000)
----------- -----------
$ - $ -
----------- -----------
----------- -----------
</TABLE>
The Company's net operating loss carryforwards expire in 2009 and 2010.
Due to the uncertain nature of their ultimate realization based upon past
performance and expiration dates, the Company has established a full
valuation allowance against these carryforward benefits and will recognize
the benefits only as reassessment indicates they are realizable. While the
need for this valuation allowance is subject to periodic review, if the
allowance is reduced, the tax benefits of the carryforwards will be
recorded in future operations as a reduction of the Company's income tax
expense.
The composition of income tax expense (benefit) for the years ended
December 31 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
Current $ (101,000) $ (204,000) $ 356,000
Deferred (519,000) (751,000) 324,000
----------- ----------- ----------
Total $ (620,000) $ (955,000) $ 680,000
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
The Company has Federal and state net operating losses of approximately
$1,400,000 and $2,000,000, respectively, available to offset future taxable
income, which expire in 2009 and 2010.
The Company's effective tax rates for 1995, 1994, and 1993 were
approximately 17%, 34% and 35% respectively. This is reconciled to the
statutory U.S. Federal income tax rate as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory rate 34% 34% 34%
State taxes, net of Federal benefit 3% 2% 3%
Permanent differences 2% - -
Valuation allowance (22%) - -
Other - (2%) (2%)
---- ---- ----
Effective tax rate 17% 34% 35%
---- ---- ----
---- ---- ----
</TABLE>
F-15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN EDUCATIONAL PRODUCTS, INC.
Date: March 25, 1996 /s/ Robert A. Scott
-------------------- -------------------------
Robert A. Scott, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Robert A. Scott Chairman of the Board and March 25, 1996
- ------------------------- --------------
Robert A. Scott Director (Chief Executive
Officer)
/s/ Clifford C. Thygesen President and Director March 25, 1996
- ------------------------- --------------
Clifford C. Thygesen
/s/ Frank L. Jennings Vice President March 25, 1996
- ------------------------- --------------
Frank L. Jennings (Chief Financial Officer,
Chief Accounting Officer)
/s/ Michael L. Hobbs Secretary and Director March 25, 1996
- ------------------------- --------------
Michael L. Hobbs
/s/ Wayne R. Kirschling Director March 25, 1996
- ------------------------- --------------
Wayne R. Kirschling
/s/ Dale LaFrenz Director March 25, 1996
- ------------------------- --------------
Dale LaFrenz
/s/ Clifford L. Neuman Director March 25, 1996
- ------------------------- --------------
Clifford L. Neuman
/s/ Paul D. Whittle Director March 25, 1996
- ------------------------- --------------
Paul D. Whittle
<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 F-3 AND F-4 OF THE COMPANY'S FORM 10-KSB FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 146
<SECURITIES> 0
<RECEIVABLES> 1,892
<ALLOWANCES> 109
<INVENTORY> 2,358
<CURRENT-ASSETS> 4,819
<PP&E> 7,206
<DEPRECIATION> 2,844
<TOTAL-ASSETS> 11,240
<CURRENT-LIABILITIES> 4,041
<BONDS> 0
0
0
<COMMON> 42
<OTHER-SE> 4,797
<TOTAL-LIABILITY-AND-EQUITY> 11,240
<SALES> 20,333
<TOTAL-REVENUES> 20,333
<CGS> 11,985
<TOTAL-COSTS> 12,246
<OTHER-EXPENSES> (1,176)<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 874
<INCOME-PRETAX> (3,596)
<INCOME-TAX> (620)
<INCOME-CONTINUING> (2,976)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,976)
<EPS-PRIMARY> (0.72)
<EPS-DILUTED> (0.72)
<FN>
<F1>INCLUDES A GAIN ON SALE OF ASSETS OF $1,092
</FN>
</TABLE>
