<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ 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, 1996
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
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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 of (I.R.S. Employer
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: 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 (Section 229.405 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, 1996, were
$8,501,000.
As of March 21, 1997, 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 $3,000,000. As of March 21, 1997, there were 4,580,794 shares of
the Common Stock of the Registrant outstanding.<PAGE>
<PAGE>
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, 1996.
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.
5. Incorporated by reference from the Registrant's Current Report on
Form 8-K dated June 17, 1996, and filed with the Commission on July
3, 1996.
FORWARD-LOOKING STATEMENTS
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In addition to historical information, this Annual Report contains "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995, and are thus prospective. The forward-looking statements
contained herein are subject to certain risks and uncertainties that could
cause actual results to differ materially from those reflected in the forward-
looking statements. Factors that might cause such a difference include, but
are not limited to, competitive pressures, changing economic conditions,
factors discussed in the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations", and other factors, some of
which will be outside the control of management. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect
events or circumstances that arise after the date hereof. Readers should refer
to and carefully review the information described in future documents the
Company files with the Securities and Exchange Commission. <PAGE>
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
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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 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.
In 1986, the Company adopted a long term growth strategy to develop its product
lines and strengthen its market position via acquisition. During 1996, 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 plans
to use the positive cash flow from these activities, if any, to reduce debt.
If the Company is successful in returning to profitability and regaining an
acceptable debt to equity ratio, of which there can be no assurance, 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. At the time of the sale, 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 did business as Churchill Media ("Churchill"). The acquisition was
financed primarily through bank debt. Churchill's performance was not
satisfactory and in June, 1996, the assets of Churchill were sold.
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.
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.
INDUSTRY
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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's
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 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." 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 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 by acquiring these smaller companies.
The trend toward school system decentralization is shifting more decisions to
the school building level rather than to 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.
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
does not currently manufacture technology related products.
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.
SCOTT AND HUBBARD
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The Scott product line includes 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 manufactured under
the Scott name include:
FRACTION BARS (registered) program is a comprehensive series of
manipulatives used to introduce and teach fraction concepts.
DECIMAL SQUARES (registered) program teaches decimals and percents through
the use of a complete series of objectives, manipulatives, activities, and
tests.
CHIP TRADING (registered) 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 (trademark) 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 (trademark) is a series of beach balls illustrating math and
phonics skills.
MATH CHASE (trademark) is a set of three games to reinforce and extend
math skills at multiple levels.
ALGEBITS (trademark) is a set of manipulatives for teaching pre-algebra
concepts to middle school learners. Instruction guides are also developed
by Scott.
STRETCH & SHAPE (trademark) is a package with Geoboards and activities for
an introduction to geometry concepts.
TERRIFIC TRIANGLES (trademark) activities program uses manipulatives to
teach whole number concepts and operations.
Other math products developed by Scott include mathematics games, reproducible
resource books, and teaching aids such as overhead materials.
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, mineral, and fossil collections,
charts, classroom activity sets, and videolabs. In addition, Scott has produced
25 earth science videotape and videodisc titles. Over 250 different varieties
of rocks, minerals, and fossils are sold in bulk quantities or as individual
specimens to customers.
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 science experiments and
models, 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. Hubbard produces approximately 250 different
maps. Aggregate raised relief map sales approximated 10% of consolidated
sales.
During 1996, the Company completed development efforts on 38 products initiated
during 1995. These products included additional titles in the Environmental
Series, additional Clever Catch (trademark) balls, a solar system simulator,
and an energy model.
The Company developed twelve new products in 1996. Those products included
nine supplemental products for Fraction Interaction (trademark) and an
additional Clever Catch (trademark). The Nature Finder (trademark) Series was
completed with two additional titles. Nature Finder (trademark) is a series of
six hand-held identification tools for learning nature classification skills
The product development process includes formal field testing and development
of prototypes for pre-sale opportunities to ensure quality of new products and
to meet critical market window introductions. In 1996, sales of products
developed or revised during the last three years comprised 19% of consolidated
revenues.
The Company experienced raw material cost increases of approximately 1% during
1996. This cost increase did not have a significant impact on operations or
profitability.
The raw materials and components used by the Company are purchased from a large
number of suppliers. There are a few major vendors that the Company relies on
to supply materials and services. If a disruption in supply occurred,
alternate vendors could be found; however, delays in production could result.
As discussed more fully in the section titled "Management Discussion and
Analysis of Financial Condition and Results of Operations" the Company's
inability to pay all vendors on a timely basis has resulted in certain vendors
requiring payment in advance. Such requirements make it more difficult to meet
production schedules and may cause production delays.
International marketing is a growing sales channel of the Company. Such sales
are made principally through international educational dealers and are directed
by an international sales manager. International sales comprised approximately
12% of consolidated revenues.
The Company continued its efforts in retail marketing during 1996. 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 World
of Science and the Nature Company. Retail sales represented 12% of
consolidated revenues.
The educational industry is inherently seasonal in nature. There are wide
variations in sales from month to month and, as a result, accounts receivable,
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, 1996, the Company had a backlog of orders of $161,000,
compared to a backlog of $367,000 at December 31, 1995, and $60,000 at December
31, 1994. Historically, the order backlog at year-end has not been a good
indicator of future sales.
MARKETS AND MARKETING
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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 50 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 Company 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. The Company also sells through direct mail catalogs and
independent sales representatives. Scott and Hubbard maintain separate brand-
name identifications.
The Company's marketing efforts also include attending trade shows and
teacher's conferences such as the National Council of Teachers of Mathematics,
and the National Science Teachers' Association. Marketing efforts for maps
includes attendance at the International Map Dealers Association, Outdoor
Retailer Association, and Museum Store 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
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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 that its competitive advantages
include the ability to provide custom orders and to provide specialized
products designed to satisfy basic teaching needs. There are no guarantees
that the Company's products will continue to receive a favorable reception from
classroom educators.
During the last three years, there has been increasing competition from foreign
manufacturers of educational products. These products are often priced less
than the Company's products. While the Company can provide its customers with
better delivery schedules and more comprehensive teacher manuals, foreign
competition may have future adverse consequences to the Company.
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 three years. Specifically, sales of technology related
products are growing at a faster rate than sales of manipulatives and videos.
The Company does not manufacture technology related products and has no such
products currently under development. 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.
PRODUCT DEVELOPMENT
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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 created
externally. Some products are developed by independent contractors under a
development agreement with the Company. Some products are developed by
teachers or other interested educators and submitted to the Company for
evaluation. 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 royalty on
product sales over the life of the copyright.
INTELLECTUAL PROPERTY
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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, and
videos. 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.
The Company owns federally registered Trademarks for the following product
names: Fraction Bars (registered), Decimal Squares (registered), Chip Trading
(registered), Plant Mobiles (registered), Oceanic (registered), Jewel
(registered), Earth Science VideoLab (registered), Life Science Videolab
(registered), and Exploractivity (registered). In addition, the Company has
applied, or plans to apply, for federally registered Trademarks regarding:
Anamod (trademark), Math in Brief (trademark), AlgeBits (trademark), Clever
Catch (trademark), Fraction Interaction (trademark), Math Chase (trademark),
Finders (trademark), Stretch & Shape (trademark), and Checks and Balances
(trademark). 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
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The Company employs 61 persons in full-time permanent positions. Personnel are
located in Boulder, Colorado; Fort Collins, Colorado; and Chippewa Falls,
Wisconsin. There are 19 persons employed in direct manufacturing positions;
14 persons employed in factory supervisory, clerical, purchasing, and product
development positions; 5 persons employed in shipping and receiving positions;
10 persons employed in sales, marketing and customer service positions; and 13
persons employed in general and administrative positions.
The Company is not part of any collective bargaining agreement. There have
been no work stoppages and the Company believes its employee relations are
good.
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.
Approximately 9,200 square feet of office and warehouse space is leased in Van
Nuys, California. The space was previously occupied by Churchill. Rent is
$5,400 per month, and the lease expires in 1999. Subsequent to December 31,
1996, the Company signed a sublease with an unaffiliated third party to occupy
the space through the remaining term of the lease. Sublease rental income will
approximate $5,000 per month.
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 $8,150 per month. The lease is subject to
annual renewal.
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.
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 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, 1996.<PAGE>
<PAGE>
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 SmallCap Market under the
symbol AMEP.
<TABLE>
<CAPTION>
HIGH LOW
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<S> <C> <C>
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 1.88 1.13
Second Quarter 1.63 1.13
Third Quarter 1.44 0.75
Fourth Quarter 1.31 0.78
1997
First Quarter
(through April 3) 1.06 0.59
</TABLE>
The bid price of the Company's common stock as of April 3, 1997, was $0.59 per
share. The prices presented are bid prices which represent prices between
broker-dealers and do not include retail markups and markdowns or any
commissions to the broker-dealer. The prices do not reflect prices in actual
transactions.
As of March 21, 1997, there were approximately 300 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 1996. Future dividend 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion addresses the financial condition and results of
operations for American Educational Products, Inc. and its Subsidiaries ("AMEP"
or the "Company"). AMEP currently has two operating subsidiaries: Hubbard
Scientific, Inc. ("Hubbard"), and Scott Resources, Inc. ("Scott"). As
discussed below, the Company recently sold the operating assets of two
subsidiaries: Summit Learning, Inc. ("Summit") and AEP Media Corporation,
d.b.a. Churchill Media ("Churchill").
Effective June 17, 1996, AMEP sold the assets of Churchill for a cash payment
of $1,000,000 plus future royalties. AMEP purchased Churchill in 1994.
Accordingly, the operating results of Churchill were consolidated with the
Company commencing March 1, 1994, and ending on June 17, 1996. Thus, the
consolidated results of operations for the last three years include Churchill
results for six months in 1996, twelve months in 1995, and ten months in 1994.
In December, 1995, AMEP sold substantially all of the assets of Summit for
total proceeds of $3,982,000. The consolidated results of operations exclude
Summit for all of 1996. Twelve months of Summit results are included for both
1995 and 1994.
Comparisons among 1996, 1995, and 1994 are affected by the foregoing
acquisition and divestitures.
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, 1996 COMPARED TO DECEMBER 31,
- ----------------------------------------------------------------------------
1995
- ----
The Company experienced net losses in 1996, 1995, and 1994. The net losses
reduced the Company's liquidity and capital resources. During this period,
cash provided from operations was not sufficient to fund the Company's cash
requirements.
Accordingly, the Company undertook a major restructuring and sale of assets.
In 1995, the Company sold substantially all of the assets of Summit to an
unaffiliated company. 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 $10,215,000 and
operating income of $288,000 were attributable to Summit's operations during
the year ended December 31, 1995.
Effective June 17, 1996, the Company sold substantially all of the assets of
Churchill to an unaffiliated company. Total cash proceeds of the sale were
$1,000,000. In addition, the Company has the right to receive future royalties
on Churchill titles sold by the purchaser during the next four years.
Royalties are calculated at 10% of sales and are subject to an aggregate
ceiling of $750,000. Future royalties to be received have been assigned to the
bank as payments under the long term debt. The Company utilized the cash
proceeds to pay trade creditors and reduce the outstanding balance on the long
term debt. The Company recognized a loss of $384,000 on the sale. Revenue of
$905,000 and operating losses of $215,000 were attributable to Churchill during
the six month period ending June 30, 1996.
In July, 1996, the Company sold the land and buildings previously occupied by
Summit. When the Company sold the assets of Summit in December, 1995, it
retained ownership of the real estate and leased a portion of it to the
purchaser of Summit. The sale of the real estate provided approximately
$1,000,000 in net proceeds that were used to pay trade creditors and reduce
bank debt. A gain on the sale of approximately $77,000 is reflected in the
financial statements.
During the last three years, the Company was not in compliance with certain
covenants included in its agreements with its primary lender. The bank chose
to forbear from action with respect to the noncompliance and restructured its
debt agreements with the Company. Payment terms on the debt were revised to
reflect the reduced balances and to better match payments to available cash
flow. As of December 31, 1996, the bank agreements provide for a working
capital line of credit (LOC) with maximum borrowings up to $1,500,000 and an
expiration date of April 30, 1997. The LOC bears interest at the prime rate
(8.5% as of March 18, 1997) plus 2%. 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 $27,800 plus
additional quarterly principal payments equal to the royalty payment received
from the purchaser of Churchill. The other term loan bears interest at 8.1%
and is payable in monthly installments of $4,000, including interest. Both
term loans have a maturity date of January 31, 1998. The aggregate outstanding
balance on both term notes was reduced from $3,467,000 to $1,254,000 during
1996. Substantially all of the Company's assets have been pledged as
collateral under the various loan agreements.
The Company anticipates negotiating revised terms and conditions for all of its
bank debt during 1997. The existing LOC matures on April 30, 1997. The two
term loans mature on January 31, 1998. Thus, effective January 31, 1997, all
of the bank debt will be classified as a current liability in the Company's
financial statements. The Company does not have funds available to pay these
loans when they mature. Early in 1997, the Company began negotiations to renew
these borrowings and extend their maturity dates. However, it is likely that
any new borrowings or renewals of existing borrowings will contain "demand"
provisions such that the lender can demand payment of the loans at any time.
These "demand" provisions would require the Company to classify the debt as a
current liability. Therefore, it is considered likely that financial
statements prepared for various periods during 1997 will classify all debt as a
current liability.
During 1996, the Company sold 390,000 equity units for total proceeds of
$390,000. The proceeds were used to reduce bank debt and to provide additional
working capital. The equity units consisted of one share of the Company's
common stock plus a warrant to purchase one additional share of common stock at
a price of $1.00 per share. The units were not registered under the Securities
Act and, accordingly, were only sold to "accredited investors", as defined
under the Securities Act. The Company expects to register the units at a
future date. The warrants are exercisable for a period of twenty-four months
commencing the earlier of one year from date of issue or the effective date of
any registration statement under the Securities Act.
While the Company has improved its liquidity and financial position, the
improved position was not sufficient to allow the Company to pay all of its
creditors on a timely basis. Some creditors have responded by granting the
Company extended payment terms. Other creditors have placed the Company on
"credit hold" and refuse to ship to the Company without an advance payment.
Those actions make it more difficult for the Company to conduct business.
Management believes that the restructured Company will generate positive cash
flow in 1997. However, there is no guarantee that it will do so. Should the
Company fail to achieve consistently profitable operations in 1997, it will
need to find alternate sources of capital. Alternatively, it may sell
additional assets or take other actions to further reduce its cash
requirements. Such actions could have an adverse effect on the Company and its
stockholders.
The Company experienced a 50% working capital increase in the year ended
December 31, 1996. While current assets of $3,648,000 decreased $1,171,000
from December 31, 1995, current liabilities decreased by $1,560,000 from
$4,041,000 to $2,481,000. As a result, working capital increased from $778,000
to $1,167,000, and the current ratio increased from 1.19 to 1.47. Working
capital improved because of the asset sales, the equity offering, and the
renegotiation of debt payment terms.
Total assets decreased 33% from $11,240,000 at December 31, 1995, to $7,556,000
at December 31, 1996. During the same period, total liabilities decreased 47%
from $6,401,000 to $3,388,000. Assets decreased primarily because of the asset
sales and normal depreciation and amortization. Liabilities decreased because
proceeds from the asset sales and equity offering were used to reduce accounts
payable and debt.
Stockholders' equity decreased from $4,839,000 at December 31, 1995, to
$4,168,000 at December 31, 1996, a decrease of $671,000 or 14%. The decrease
was caused by the 1996 net loss of $1,095,000, offset by the issuance of
$390,000 of equity units, the issuance of stock under the employee stock
purchase plan, and various stock option transactions.
Accounts receivable decreased from $1,783,000 at December 31, 1995, to $840,000
at December 31, 1996, a decrease of $943,000 or 53%. The sale of Churchill
reduced accounts receivable by $309,000. In addition, the December 31, 1995
balance included $315,000 related to the sale of Summit Learning in the form of
holdbacks pending final audit by the buyer of Summit. Those receivables were
received during 1996. The remaining decrease is attributable to the 1996
decision to eliminate special fourth quarter sales promotions that have
typically increased December sales.
Income tax refunds receivable of $304,000 as of December 31, 1995, were
received during 1996. 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.
Inventories increased from $2,358,000 at December 31, 1995, to $2,475,000 at
December 31, 1996, an increase of $117,000 or 5%. The sale of Churchill
reduced inventories by $222,000. Thus, inventories at Scott and Hubbard
increased by $339,000 from 1995 to 1996. Much of this increase can be
attributed to fourth quarter production in anticipation of first quarter
revenues. In addition, a substantial number of new products under development
were added to the product line during 1996 and the ending inventory balance
includes ramped up production of those items.
Prepaid advertising costs of $102,000 at December 31, 1995, decreased to zero
as of December 31, 1996. As of December 31, 1995, the Company had incurred
some preliminary costs on the 1996 catalog program. For the 1997 catalog
program, all costs were incurred subsequent to December 31, 1996.
Net property and equipment decreased from $4,362,000 at December 31, 1995, to
$2,681,000 at December 31, 1996, a decrease of $1,681,000 or 39%. The sale of
assets and other disposals reduced the balance by $1,181,000. In addition, the
Company recorded depreciation expense of $780,000. Capital expenditures of
$280,000 during the year were comprised primarily of reproduction masters and
production tooling.
Video and film library costs decreased from $1,407,000 at December 31, 1995, to
$512,000 at December 31, 1996, a decrease of $895,000 or 64%. The sale of
Churchill accounted for $771,000 of this decrease. There were $138,000 of
video additions and $262,000 of amortization expense.
Intangible and other assets increased from $652,000 at December 31, 1995, to
$715,000 at December 31, 1996, an increase of $63,000 or 10%. Normal
amortization reduced these assets by $150,000. The sale of Churchill reduced
other assets by $75,000. These reductions were offset by addition of the
royalty receivable resulting from the sale of Churchill.
Accounts payable and accrued expenses decreased from $1,548,000 at December 31,
1995, to $973,000 at December 31, 1996, a decrease of $575,000 or 37%. The
Company was able to reduce accounts payable and accrued expenses by utilizing
some of the proceeds received from the asset sales and the equity offering.
However, cash flow from operations was not sufficient to make all payments to
trade creditors in a timely fashion. This trend is expected to continue until
the Company returns to profitability.
Borrowings under the Company's working capital line of credit did not vary
significantly from 1995 to 1996.
The Company achieved its goal of reducing long term debt. Long term debt,
including current maturities, decreased $2,437,000 during 1996. The source of
funds used to reduce long term debt was primarily from asset sales and from the
equity offering.
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 -- 1996 COMPARED TO 1995 AND 1994-
- --------------------------------------------------------
As previously discussed, the comparisons of operating results for 1996 to 1995
and 1994 are affected by the divestitures and acquisitions made by the Company.
The Company's performance improved in 1996, relative to its performance in 1995
and 1994. The net loss for 1996 was reduced from the losses incurred in prior
years. The restructuring undertaken by the Company reduced the size of the
Company and returned it to its core business. Restructuring of continuing
operations has included major efforts to consolidate marketing and customer
service into Fort Collins, consolidate certain manufacturing processes to
Chippewa Falls, and reduce headcount across all functions. In addition, the
Company reviewed all expenditures for potential savings and implemented
significant cost reduction measures.
During the period prior to 1993, the Company demonstrated that it could
profitably operate its core business and the restructuring steps taken were
designed to return the Company to that mode. The Company hopes that these
efforts will result in future profitable operations. Should the Company fail
to achieve profitability, additional cost reduction and restructuring actions
may be implemented.
During the prior years of 1995 and 1994, several major events 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 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.
All of these events affect comparisons between 1996, 1995, and 1994.
The Company reported a net loss of $1,095,000 for 1996, compared to a net loss
of $2,976,000 for 1995, and a net loss of $1,858,000 in 1994. On a loss per
share basis, the 1996 loss was $0.26 per share, the 1995 loss was $0.72 per
share, and the 1994 loss was $0.46 per share.
The Company's revenues in 1996 were $8,501,000, a decrease of $11,832,000 or
58% from the prior year revenues of $20,333,000 and a decrease of $12,600,000
or 60% below 1994. Sales declined because of the sales of Summit and
Churchill. Summit's revenues for 1995 were $10,215,000. Churchill's revenues
for 1996 and 1995 were $905,000 and $2,418,000 respectively.
The cost of goods sold for the year ended December 31, 1996, was $5,586,000, a
decrease of 53% from the prior period figure of $11,985,000 and 52% less than
1994. Cost of goods sold declined because of the sales of Summit and
Churchill. Summit's costs of goods sold for 1995 were $5,789,000. Churchill's
cost of goods sold for 1996 and 1995 were $447,000 and $1,119,000 respectively.
Consolidated gross profits for 1996 were $2,915,000, a decrease of $5,433,000
or 65% from the prior period gross profit of $8,348,000, and $6,454,000 or 69%
below 1994. As a percentage of sales, the gross margin decreased from 41% in
1995 and 44% in 1994 to 34% in 1996. Summit's gross profits for 1995 were
$4,426,000 with a gross margin of 43%. Churchill's gross profits for 1996 and
1995 were $458,000 and $1,299,000 respectively, with a gross margin of 51% in
1996 and 54% in 1995. The decrease in both gross profit and gross margin is
primarily the result of the sale of Summit and Churchill. For continuing
operations, there was an erosion of the gross margin percent as a result of
certain raw material cost increases incurred during 1995 and the impact of a
promotional sales program during the first half of 1996.
During fiscal 1996, the Company spent approximately $401,000 to develop,
acquire, or revise additional products. Spending in 1996 was $210,000 or 34%
less than 1995 development spending of $611,000 and $581,000 or 59% less than
1994 development spending of $982,000. During 1996, the Company's development
efforts concentrated on completing projects begun in earlier periods.
The advertising component of marketing costs decreased $2,588,000 or 89% from
1995 and decreased $2,988,000 or 90% from 1994. The 1996 decrease is the
direct result of the sale of Summit and Churchill. Summit's advertising costs
for 1995 were $2,612,000. Churchill's advertising costs were $58,000 for 1996
and $89,000 for 1995.
Other marketing costs decreased by $1,244,000 or 44% from 1995 and $624,000 or
28% from 1994. As a percentage of sales these costs were 19% in 1996, 14% in
1995, and 10% in 1994. Summit's other marketing costs for 1995 were $576,000.
Churchill's other marketing costs were $476,000 for 1996 and $1,198,000 for
1995.
General and administrative expenses were $1,378,000, a decrease of $1,832,000
or 57% from the 1995 general and administrative expense of $3,210,000 and a
decrease of $2,634,000 or 66% from 1994. As a percentage of sales, general and
administrative expense was 16% in 1996, 16% in 1995, and 19% in 1994. Summit's
general and administrative expense for 1995 was $950,000. Churchill's general
and administrative expense for 1996 and 1995 was $138,000 and $571,000
respectively.
Interest expense decreased from $874,000 in 1995 to $418,000 in 1996, a
decrease of $456,000 or 52%. The decreased interest expense resulted from
reductions to debt made possible primarily through proceeds from the asset
sales.
Included in 1996 is a loss on the sale of assets in the amount of $384,000
resulting from the sale of Churchill and a gain on the sale of assets in the
amount of $77,000 resulting from sale of real estate. Included in 1995 is a
gain on sale of assets in the amount of $1,092,000 resulting from the sale of
Summit. There were no such gains and losses in 1994.
The Company's operating losses have allowed it to recognize tax benefits
related to the offset of taxes accrued or paid in prior years. 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.
During 1995, the Company eliminated its deferred tax liability. As a result,
no tax benefits were recognized in 1996. The total benefit recognized in 1995
was $620,000, a $335,000 decrease from the benefit recognized in 1994.
Net operating loss (NOL) carryforwards approximating $4,100,000 are available
to offset future taxable income, if any. Because ultimate realization of any
benefit from the NOL carryforward is uncertain, the Company has not recognized
the benefit of these loss carryforwards in its 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.
Inflation did not have any material effect on the Company's operations for 1996
and 1994. During 1995, Summit experienced cost increases for paper and postage
used in its catalog business. These increases adversely affected
profitability. The sale of Summit reduced the Company's exposure to increased
costs of paper and postage. Also during 1995, cost increases for plastic and
formed metal parts had a negative impact on margins. While the Company has
been able to partially mitigate the impact of such cost increases it has not
been able to completely offset the cost increases. While the Company does not
expect inflation to have a material impact on 1997 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. Historical
trends indicate 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 foregoing, management knows of no trends, demands, or
uncertainties that are reasonably likely to have a material impact on the
Company's results of operations.
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, 1996, and December 31,
1995
3. Consolidated Statements of Operations for the Years ended December
31, 1996, 1995, and 1994
4. Consolidated Statement of Stockholders' Equity for the period of
January 1, 1994, through December 31, 1996
5. Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995, and 1994
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, 1996, or December 31, 1995.<PAGE>
<PAGE>
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, 1996.
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
*** 10.1 Asset Purchase Agreement dated March 1, 1994, with
Churchill Films, Inc.
**** 10.2 Asset Purchase Agreement dated December 20, 1995, with
Steck-Vaughn Publishing Corporation relating to the sale of
Summit Learning, Inc. assets
***** 10.3 Asset Purchase Agreement dated June 17, 1996, with New SVE,
Inc. relating to the sale of AEP Media Corporation 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.
***** Incorporated by reference from the Registrant's Current Report on Form
8-K dated June 17, 1996, and filed with the Commission on July 3, 1996.
Reports on Form 8-K
- -------------------
The Registrant filed no Current Reports on Form 8-K during the Fourth Quarter
ended December 31, 1996.<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
PAGE
----
INDEPENDENT AUDITOR'S REPORT F-2
CONSOLIDATED BALANCE SHEETS - December 31, 1996, and 1995 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS - For the Years
Ended December 31, 1996, 1995, and 1994 F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY -
From January 1, 1994, through December 31, 1996 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years
Ended December 31, 1996, 1995, and 1994 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7<PAGE>
<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, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 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, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
HEIN + ASSOCIATES LLP
Denver, Colorado
February 6, 1997<PAGE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
as of December 31, 1996, and 1995
1996 1995
-------- --------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash $ 107,000 $ 146,000
Trade receivables, net of
allowance of $64,000
and $109,000840,000 1,783,000
Income tax refunds receivable - 304,000
Royalty receivable 144,000 -
Inventories2,475,000 2,358,000
Prepaid advertising costs - 102,000
Other 82,000 126,000
------------- -------------
TOTAL CURRENT ASSETS 3,648,000 4,819,000
PROPERTY AND EQUIPMENT, net 2,681,000 4,362,000
VIDEO LIBRARY, net 512,000 1,407,000
INTANGIBLE ASSETS, net 361,000 511,000
OTHER ASSETS 354,000 141,000
------------ ------------
TOTAL ASSETS $ 7,556,000 $ 11,240,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Note payable $ 1,080,000 $ 1,081,000
Current maturities of long term debt 428,000 1,412,000
Accounts payable 752,000 935,000
Accrued expenses 221,000 613,000
------------ ------------
TOTAL CURRENT LIABILITIES 2,481,000 4,041,000
LONG TERM DEBT, less current maturities 907,000 2,360,000
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock; $0.01 par value;
50,000,000 shares authorized;
none issued or outstanding - -
Common stock; $0.01 par value;
100,000,000 shares authorized;
4,576,551 and 4,150,618 shares
issued and outstanding 46,000 42,000
Additional paid in capital 6,468,000 6,048,000
Accumulated deficit (2,346,000) (1,251,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,168,000 4,839,000
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 7,556,000 $ 11,240,000
============ ============
/TABLE
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------
for the Years ended December 31, 1996, 1995, and 1994
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
INCOME:
Net sales $ 8,501,000 $ 20,333,000 $ 21,101,000
Cost of goods sold 5,586,000 11,985,000 11,732,000
------------ ------------ -------------
Gross profit 2,915,000 8,348,000 9,369,000
OPERATING EXPENSES:
Catalog costs due to
adoption of SOP 93-7 - - 2,067,000
Advertising and
catalog costs 327,000 2,915,000 3,315,000
Other marketing 1,580,000 2,824,000 2,204,000
------------ ------------ -------------
Total marketing 1,907,000 5,739,000 7,586,000
General and administrative 1,378,000 3,210,000 4,012,000
Impairment of assets - 3,297,000 -
------------ ------------ -------------
Total operating
expenses 3,285,000 12,246,000 11,598,000
------------ ------------ -------------
OPERATING (LOSS) (370,000) (3,898,000) (2,229,000)
OTHER INCOME (EXPENSE):
Gain (loss) on sale
of assets (307,000) 1,092,000 -
Other income - 84,000 77,000
Interest expense (418,000) (874,000) (661,000)
------------ ------------ -------------
Net other income
(expense) (725,000) 302,000 (584,000)
------------ ------------ -------------
(LOSS) BEFORE INCOME TAXES (1,095,000) (3,596,000) (2,813,000)
Income tax benefit - 620,000 955,000
------------ ------------ -------------
NET (LOSS) $ (1,095,000) $ (2,976,000) $ (1,858,000)
============ ============ ============
Net (Loss) per common share
and common share equivalent ($0.26) ($0.72) ($0.46)
===== ===== =====
Average number of common and common
equivalent shares
outstanding 4,256,000 4,122,000 4,060,000
============ ============ ============
/TABLE
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
January 1, 1994, through December 31, 1996
COMMON STOCK Additional
------------
Number Paid
of Common in
Shares Stock Capital
------ ------- ---------
<S> <C> <C> <C>
Balance as of
January 1, 1994 4,013,257 $40,000 $ 5,739,000
Sale of common stock under the
employee stock purchase plan 33,840 1,000 110,000
Exercise of options and warrants 25,000 - 56,000
Net loss - - -
--------- --------- ------------
Balance as of
December 31, 1994 4,072,097 41,000 5,905,000
Sale of common stock under the
employee stock purchase plan 53,061 1,000 85,000
Exercise of options 25,500 - 26,000
Non-qualified stock options
granted at less that fair
market value - - 32,000
Net loss - - -
--------- --------- ------------
Balance as of
December 31, 1995 4,150,658 42,000 6,048,000
Sale of common stock under the
employee stock purchase plan 25,116 - 28,000
Exercise of options 10,777 - 6,000
Sale of equity units 390,000 4,000 386,000
Net loss - - -
--------- -------- -----------
Balance as of
December 31, 1996 4,576,551 $ 46,000 $ 6,468,000
========= ======== ===========
/TABLE
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
January 1, 1994, through December 31, 1996 (Continued)
Retained
Earnings
(Accumulated
Deficit) Total
------------ -----
<S> <C> <C>
Balance as of
January 1, 1994 $ 3,583,000 $ 9,362,000
Sale of common stock under the
employee stock purchase plan - 111,000
Exercise of options and warrants - 56,000
Net loss (1,858,000) (1,858,000)
---------- ----------
Balance as of
December 31, 1994 1,725,000 7,671,000
Sale of common stock under the
employee stock purchase plan - 86,000
Exercise of options -
Non-qualified stock options
granted at less that fair
market value - 32,000
Net loss (2,976,000) (2,976,000)
---------- ----------
Balance as of
December 31, 1995 (1,251,000) 4,839,000
Sale of common stock
under the employee
stock purchase plan - 28,000
Exercise of options - 6,000
Sale of equity units - 390,000
Net loss (1,095,000) (1,095,000)
---------- ----------
Balance as of
December 31, 1996 $(2,346,000) $ 4,168,000
=========== ============
/TABLE
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the years ended December 31, 1996, 1995, and 1994
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(1,095,000) $(2,976,000) $(1,858,000)
Adjustments to reconcile
net (loss) to cash provided
by operating activities:
Depreciation 780,000 908,000 853,000
Amortization 412,000 797,000 849,000
Impairment of assets - 3,297,000 -
Stock based compensa-
tion expense - 32,000 -
Bad debt expense 11,000 14,000 74,000
Change in deferred
income taxes - (519,000) (751,000)
(Gain) loss on sale
of assets 307,000 (1,092,000) -
Changes in operating assets
and liabilities:
Decrease (increase) in
operating assets:
Accounts receivable 653,000 (32,000) 247,000
Income tax refunds
receivable 304,000 13,000 (317,000)
Inventories (313,000) 885,000 (1,051,000)
Prepaid advertising costs 2,000 459,000 327,000
Other (82,000) (27,000) 77,000
Increase (decrease) in
operating liabilities:
Accounts payable (183,000) (1,614,000) 1,838,000
Accrued expenses (392,000) 76,000 113,000
Income taxes payable - - (197,000)
----------- ---------- ----------
Net cash provided by
operating activities 404,000 221,000 204,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 1,989,000 3,982,000 -
Purchase of property
and equipment (280,000) (424,000) (433,000)
Cost incurred for
video production (138,000) (300,000) (521,000)
Cash paid for acquisitions - - (1,010,000)
------------ ------------ -----------
Net cash provided (used)
by investing activities 1,571,000 3,258,000 (1,964,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable
and long term debt 1,228,000 1,209,000 5,130,000
Payments on notes payable
and long term debt (3,666,000) (4,874,000) (3,534,000)
Net proceeds from the sale
of stock 424,000 112,000 132,000
---------- ---------- ----------
Net cash provided (used)
by financing activities (2,014,000) (3,553,000) 1,728,000
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH (39,000) (74,000) (32,000)
Cash, at beginning of period 146,000 220,000 252,000
---------- ---------- ----------
Cash, at end of period $ 107,000 $ 146,000 $ 220,000
========== ========== ==========
/TABLE
<PAGE>
<PAGE>
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business -
------------------
American Educational Products, Inc. (AMEP or the Company) was organized as
a Colorado corporation in 1986. AMEP currently has two operating
subsidiaries: Hubbard Scientific, Inc. (Hubbard), and Scott Resources,
Inc. (Scott). The Company recently sold two operating subsidiaries.
During December 1995, AMEP sold substantially all the assets of Summit
Learning, Inc. (Summit). During June 1996, AMEP sold substantially all
the assets of AEP Media Corporation, d.b.a. Churchill Media (Churchill).
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, located 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 [using a standard costing
system that approximates a first-in, first-out (FIFO) basis] or market,
and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995
--------- ----------
<S> <C> <C>
Raw materials $1,095,000 $1,162,000
Work in process 304,000 262,000
Finished goods 1,076,000 934,000
---------- ----------
Total $2,475,000 $2,358,000
</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 $780,000, $894,000, and
$853,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995
--------- ----------
<S> <C> <C>
Reproduction masters $ 3,040,000 $ 2,971,000
Plant machinery
and equipment 1,572,000 1,696,000
Office furniture
and equipment 284,000 350,000
Land and buildings 734,000 734,000
Rental property 0 984,000
Computer hardware
and software 366,000 427,000
Vehicles and other 12,000 44,000
----------- -----------
6,008,000 7,206,000
Less accumulated
depreciation (3,327,000) (2,844,000)
---------- ------------
$ 2,681,000 $ 4,362,000
=========== ===========
</TABLE>
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 $262,000, $384,000 and $294,000 for the years
ended December 31, 1996, 1995, and 1994 respectively. In 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, 1996, and 1995, the video library consists of:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Acquired video library $ 0 $ 142,000
Production costs - completed videos 940,000 1,505,000
Production costs - videos in process 15,000 105,000
----------- -----------
Total video library 955,000 1,752,000
Accumulated amortization (443,000) (345,000)
----------- -----------
$ 512,000 $ 1,407,000
=========== ===========
</TABLE>
Intangibles -
-----------
As of December 31, 1996, and 1995, intangible assets consist of:
<TABLE>
<CAPTION>
1996
--------------------------------------------------
AMORTI-
COST ZATION NET
-------- ---------- --------
<S> <C> <C> <C>
Copyrights $ 650,000 $ (388,000) $ 262,000
Covenants 653,000 (554,000) 99,000
----------- ----------- ----------
$ 1,303,000 $ (942,000) $ 361,000
=========== =========== ==========
</TABLE>
<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>
In the various acquisitions made by the Company, an allocation was made to
copyrights for proprietary products acquired. These costs are amortized
over the estimated remaining lives of the products, or related copyrights,
whichever is shorter. The lives range from 2 years to 6 years.
The Company has a covenant not to compete from the former owners of
Hubbard. The amount allocated to the covenant is being amortized over the
six year life of the covenant, which is less than the estimated useful
life. In 1995, the Company recorded an impairment allowance of $405,000
for the Churchill covenant. The impairment was 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. This
cost was being amortized over 15 years. In 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. These costs are amortized to expense based upon
individual cost pools using actual and estimated future revenues for each
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 80% 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).
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 did not adopt the fair value
accounting prescribed by SFAS 123 for employee grants, but is subject to
the related disclosure requirements.
Income Taxes -
------------
The Company accounts for income taxes under the liability method of SFAS
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.
Net (loss) per Share -
--------------------
Net (loss) per share is based on the weighted average number of shares
outstanding. The outstanding common stock equivalents were not included
in the calculations for 1996, 1995, and 1994, because they were anti-
dilutive.
Use of Estimates -
----------------
The preparation of the Company's consolidated financial statements in
conformity with generally accepted 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,
--------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash payments for:
Interest $ 428,000 $ 875,000 $ 617,000
=========== =========== ===========
Income Taxes $ 0 $ 0 $ 240,000
=========== =========== ===========
Non-cash investing and financing activities:
Bank debt incurred in exchange
for asset acquisitions $ 0 $ 0 $ 4,203,000
=========== =========== ===========
Capital leases incurred
in exchange for
equipment purchases $ 0 $ 77,000 $ 189,000
=========== =========== ===========
</TABLE>
2. LIQUIDITY:
---------
The Company experienced net losses in 1996, 1995, and 1994. The net
losses reduced the Company's liquidity and capital resources. During this
period, cash provided from operations was not sufficient to fund the
Company's cash requirements. In addition, the Company was not in
compliance with certain loan covenants.
Accordingly, the Company took several actions to improve its liquidity.
It restructured its debt with its primary lender and received a waiver for
its inability to comply with certain loan covenants. The Company also (i)
sold the assets of Summit and Churchill; (ii) sold certain real estate;
(iii) issued 390,000 equity units for total proceeds of $390,000; and (iv)
reduced monthly operating expenses throughout the Company.
The steps taken by the Company have improved its liquidity and financial
position. However, the improved position was not sufficient to allow the
Company to pay all of its creditors on a timely basis. The liquidity
shortage makes it more difficult for the Company to conduct business.
Management believes that the restructured Company will generate positive
cash flow in 1997. However, there is no guarantee that it will do so.
Should the Company fail to achieve consistently profitable operations in
1997, it will need to find alternate sources of capital. Alternatively,
it may sell additional assets or take other actions to further reduce its
cash requirements.
The Company anticipates negotiating revised terms and conditions for all
of its bank debt during 1997. The working capital line of credit matures
on April 30, 1997. The two term loans mature on January 31, 1998. Thus,
effective January 31, 1997, all of the bank debt will be classified as a
current liability in the Company's financial statements. The Company does
not have funds available to pay these loans when they mature. Early in
1997, the Company began negotiations to renew these borrowings and extend
their maturity dates. However, it is likely that any new borrowings or
renewals of existing borrowings will contain "demand" provisions such that
the lender can demand payment of the loans at any time. These "demand"
provisions would require the Company to classify the debt as a current
liability. Therefore, it is considered likely that financial statements
prepared for various periods during 1997 will classify all debt as a
current liability.
3. 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.
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 was
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.
4. DIVESTITURES AND ACQUISITIONS:
-----------------------------
Effective June 17, 1996, the Company sold substantially all of the assets
of Churchill to an unaffiliated company. The sale comprised all the
assets used by Churchill for video production and distribution. Total
cash proceeds of the sale were $1,000,000. In addition, the Company has
the right to receive future royalties on Churchill titles sold by the
purchaser during the next four years. Royalties are calculated at 10% of
sales and are subject to an aggregate ceiling of $750,000. The Company
recorded a $490,000 royalty receivable based upon its estimate of future
sales (using historical sales decline curves) less a discount factor of
11.5% for the time value of money. The Company utilized the proceeds to
pay trade creditors and to reduce the outstanding balance on the Company's
bank debt. The Company recognized a loss of $384,000 on the sale.
Revenue of $905,000 and operating losses of $215,000 were attributable to
Churchill's operations during the six months ended June 30, 1996.
Effective July 31, 1996, the Company sold the land and building occupied
by Summit. When the Company sold the assets of Summit in December, 1995,
it retained ownership of the real estate and leased a portion of it to the
purchaser of Summit. The sale of the real estate provided approximately
$1,000,000 in net proceeds that were used to pay trade creditors and
reduce bank debt. A gain of approximately $77,000 was realized on the
sale.
Effective December 1, 1995, the Company sold substantially all 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.
In 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.
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 April 30, 1997. Borrowing under this line of
credit bears interest at the prime rate plus 2% (totaling 10.5% as of
December 31, 1996). Interest is payable monthly. The principal balance
was $1,080,000 and $1,081,000 at December 31, 1996 and 1995, 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. The Company did not achieve the required minimum operating income
levels for some months of 1996 and the bank agreed to waive the
requirement for those months.
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.
The Company's long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
-------- ----------
<S> <C> <C>
Note Payable, principal due in monthly
installments of $27,800, plus additional
quarterly principal payments equal to
royalties received from the purchaser
of Churchill. Remaining balance due
January 31, 1998. Accrued interest is
payable monthly at prime plus 3% (total
of 11.5% at December 31, 1996). Collater-
alized by business assets. $ 858,000 $ 2,473,000
Note Payable, due in monthly installments
of $4,000, including interest at 8.1%.
Remaining balance due January 31, 1998.
Collateralized by land and buildings. 396,000 994,000
Capital lease obligations, due in monthly
installments with varying maturities
through January 31, 1998. 55,000 198,000
Other 25,000 107,000
----------- -----------
Total 1,334,000 3,772,000
Less current maturities (428,000) (1,412,000)
----------- ----------
Long term debt $ 906,000 $2,360,000
=========== ==========
</TABLE>
At December 31, 1996, the future minimum principal payments on long term
debt and capitalized lease obligations were as follows:
<TABLE>
<S> <C>
1997 $428,000
1998 906,000
-----------
Total $ 1,334,000
===========
</TABLE>
6. COMMITMENTS:
-----------
The Company leases office space, equipment, and warehouse facilities under
noncancellable operating leases. Total rental expense was $184,000,
$282,000, and $270,000 for the years ended December 31, 1996, 1995, and
1994, respectively. Future minimum rental commitments at December 31,
1996, are as follows:
<TABLE>
<S> <C>
1997 $ 205,000
1998 105,000
1999 33,000
2000 3,000
---------
Total $ 346,000
=========
</TABLE>
The Company has certain royalty agreements with third parties on various
products. Total royalty expense for the years ended December 31, 1996,
1995, and 1994 was $207,000, $367,000, and $496,000, 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.
During 1996, the Company sold 390,000 equity units for total proceeds of
$390,000. The proceeds were used to reduce bank debt and to provide
additional working capital. The equity units consist of one share of the
Company's common stock plus a warrant to purchase one additional share of
common stock at a price of $1.00 per share. The units were not registered
under the Securities Act. The Company expects to register the units at a
future date. The warrants are exercisable for a period of twenty-four
months commencing the earlier of one year from date of issue or the
effective date of any registration statement under the Securities Act.
The Company has outstanding warrants to purchase 510,000 shares of the
Company's common stock at exercise prices ranging from $1.00 to $4.40 per
share. At December 31, 1996, 120,000 warrants were exercisable. The
warrants will expire as follows: 120,000 in 1997 and 390,000 in 1999.
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: 25,116 in 1996; 53,061 in
1995; and 33,840 in 1994.
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. At December 31, 1996, the 266,000 options outstanding
under this plan had exercise prices ranging from $0.60 to $2.25,
exercisable as follows:
<TABLE>
<CAPTION>
EXERCISABLE NUMBER WEIGHTED
IN OF AVERAGE
YEAR SHARES EXERCISE PRICE
----------- -------- --------------
<S> <C> <C>
1996 167,500 $1.67
1997 40,000 1.55
1998 40,000 1.55
1999 18,500 1.25
</TABLE>
At December 31, 1996, there were 438,000 shares available for future
grants.
The Company has issued other non-qualified stock options under terms and
at prices deemed appropriate by the Board of Directors. During 1995, the
Company issued 100,500 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. During 1996, the Company issued 112,000 non-qualified
stock options to its directors at 100% of fair value at the date of the
grant. No compensation expense was recorded in connection with the 1996
grants. All 242,500 non-qualified options outstanding at December 31,
1996, were exercisable.
The following is a summary of the number of shares under option:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------------
INCENTIVE NON- WEIGHTED
STOCK QUALIFIED AVERAGE
OPTION STOCK EXERCISE
PLAN OPTIONS TOTAL PRICE
---------- --------- ------- ---------
<S> <C> <C> <C> <C>
Balance, Jan 1, 1994 435,000 43,000 478,000 $3.13
Options granted 230,000 12,000 242,000 $3.93
Options exercised 0 ( 25,000) ( 25,000) $0.85
Options terminated (182,000) 0 (182,000) $3.86
-------- -------- --------
Balance, Dec 31, 1994 483,000 30,000 513,000 $3.37
Options granted 264,400 100,500 364,900 $2.02
Options exercised ( 25,500) 0 ( 25,500) $1.00
Options terminated ( 98,900) 0 ( 98,900) $4.21
-------- -------- --------
Balance, Dec 31, 1995 623,000 130,500 753,500 $2.10
Options granted 156,500 112,000 268,500 $1.26
Options exercised ( 10,800) 0 ( 10,800) $0.59
Options terminated (502,700) 0 (502,700) $2.03
------- -------- -------
Balance, Dec 31, 1996 266,000 242,500 508,500 $1.58
======= ======= =======
</TABLE>
Except as noted above, for all options granted during the period, the
weighted average market price of the Company's common stock on the grant
date was approximately equal to the weighted average exercise price. The
weighted average remaining contractual life for all options as of December
31, 1996, was approximately 3.5 years. If not previously exercised or
terminated, options outstanding at December 31, 1996, will expire as
follows:
<TABLE>
<CAPTION>
EXERCISABLE NUMBER WEIGHTED
IN OF AVERAGE
YEAR SHARES EXERCISE PRICE
----------- -------- --------------
<S> <C> <C>
1997 21,500 $1.87
1998 26,250 2.25
1999 48,750 2.24
2000 165,500 1.75
2001 246,500 1.24
</TABLE>
Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
Opinion 25 and related interpretations in accounting for its stock options
that are granted to employees and directors. Accordingly, no compensation
cost has been recognized for grants of options where the exercise price is
not less than the fair value of the Company's common stock on the grant
date. Had compensation cost been determined based on the fair value at
the grant dates for awards under those plans consistent with the method of
SFAS 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated in the following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995
-------- --------
<S> <C> <C>
Net loss
As reported $(1,095,000) $(2,976,000)
Pro forma $(1,220,000) $(3,160,000)
Net loss per common share
As reported $(0.26) $(0.72)
Pro forma $(0.29) $(0.74)
</TABLE>
The fair value of each option granted was estimated as of the date of
grant using the Black - Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995
-------- --------
<S> <C> <C>
Estimated fair value/share of
options granted $0.73 $1.28
Expected volatility 64% 70%
Risk free interest rate 6% 6%
Expected dividends $0.00 $0.00
Expected term (in years) 5.0 5.0
</TABLE>
8. INCOME TAXES:
------------
The composition of income tax (benefit) for the years ended December 31
was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current $ 0 $(101,000) $(204,000)
Deferred 0 (519,000) (751,000)
--- --------- ---------
Total $ 0 $(620,000) $(955,000)
=== ========= =========
</TABLE>
The percentage tax benefits recorded for 1996, 1995, and 1994 were
approximately 0%, 17%, and 34%, respectively. The difference between the
recorded percentages and the Federal statutory rate of 34% is primarily
caused by the addition of state taxes (2% - 3%) offset by limitations on
the recognition of net operating loss (NOL) carryforwards.
The Company has the ability to carryforward its net operating losses and
offset them against future taxable income, if any. The NOL carryforwards
approximate $4,100,000 and expire in the years 2009, 2010, and 2011.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
significant components of deferred tax assets and liabilities as of
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets (liabilities):
Current
Prepaid advertising costs $ 0 $ (38,000)
Inventories 87,000 178,000
Installment receivables (172,000) 0
Other 40,000 32,000
Long-term
Property, plant and equipment (554,000) 103,000
Net operating losses 1,706,000 583,000
Other (40,000)
------------ ---------
Net deferred tax asset 1,107,000 818,000
Valuation allowance (1,107,000) (818,000)
----------- ---------
Total $ 0 $ 0
=========== =========
</TABLE>
Based upon past performance and statutory expiration dates, the ultimate
realization of the NOL carryforwards is uncertain. Accordingly, the
Company has established a full valuation allowance against these
carryforward benefits and will recognize the benefits only as reassessment
indicates that they are realizable. The need for this valuation allowance
is subject to periodic review. Should the allowance be reduced in a
future period, the tax benefits of the carryforwards will be recorded at
that time as a reduction of the Company's income tax expense. The
increase of $289,000 in the valuation allowance during 1996 is primarily
due to an increase in the net operating loss carryforward.
9. 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 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.<PAGE>
<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: April 11, 1997 /s/ Clifford C. Thygesen
------------------ -------------------------------
Clifford C. Thygesen, President
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 April 11, 1997
- -------------------- -----------------
Robert A. Scott Director
/s/ Clifford C. Thygesen President and Director April 11, 1997
- ------------------------- -----------------
Clifford C. Thygesen (Chief Operating Officer)
/s/ Frank L. Jennings Vice President April 11, 1997
- ---------------------- -----------------
Frank L. Jennings (Chief Financial Officer,
Chief Accounting Officer)
/s/ Stephen G. Calandrella Director April 11, 1997
- --------------------------- -----------------
Stephen G. Calandrella
/s/ Wayne R. Kirschling Director April 11, 1997
- ------------------------ -----------------
Wayne R. Kirschling
/s/ Dale LaFrenz Secretary and Director April 11, 1997
- ----------------- -----------------
Dale LaFrenz
/s/ Clifford L. Neuman Assistant Secretary and April 11, 1997
- ----------------------- -----------------
Clifford L. Neuman Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES F-3 THROUGH F-4 OF THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 107
<SECURITIES> 0
<RECEIVABLES> 1,048
<ALLOWANCES> 64
<INVENTORY> 2,475
<CURRENT-ASSETS> 3,648
<PP&E> 6,008
<DEPRECIATION> (2,681)
<TOTAL-ASSETS> 7,556
<CURRENT-LIABILITIES> 2,481
<BONDS> 907
0
0
<COMMON> 46
<OTHER-SE> 4,122
<TOTAL-LIABILITY-AND-EQUITY> 7,556
<SALES> 8,501
<TOTAL-REVENUES> 8,501
<CGS> 5,586
<TOTAL-COSTS> 5,586
<OTHER-EXPENSES> 3,285
<LOSS-PROVISION> 11
<INTEREST-EXPENSE> 418
<INCOME-PRETAX> (1,095)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,095)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,095)
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
