<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number: 0-16310
AMERICAN EDUCATIONAL PRODUCTS, INC.
----------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Colorado 84-1012129
- ---------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification number)
5350 Manhattan Circle, Suite 210, Boulder, Colorado 80303
- --------------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(303) 543-0123
---------------------------
(Issuer's telephone number)
- -----------------------------------------------------------------------Former
name, former address, and former fiscal year, if changed since last report
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the Registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 31, 1997 the Company had 916,872 shares of its $.05 par value
common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ]
No [ X ]
<PAGE>
<PAGE>
INDEX
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Page
----
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996 2
Consolidated Statements of Operations for the
three months and six months ended June 30, 1997
and June 30, 1996 3
Consolidated Statements of Cash Flows for the
three months and six months ended June 30, 1997
and June 30, 1996 5
Consolidated Statement of Stockholders' Equity from
January 1, 1997 through June 30, 1997 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources 9
Results of Operations 12
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
<PAGE>
<PAGE>
<TABLE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1997
<CAPTION>
June 30, June 30,
1997 1996
(Unaudited)
------------- ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash $ 115,000 $ 107,000
Trade receivables, net of allowance
of $55,000 and $64,000 1,832,000 840,000
Royalty receivable 133,000 144,000
Inventories 2,421,000 2,475,000
Prepaid advertising costs 37,000 -
Other 131,000 82,000
------------ ------------
TOTAL CURRENT ASSETS 4,669,000 3,648,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $3,692,000 and
$3,327,000, respectively 2,454,000 2,681,000
VIDEO LIBRARY, net of accumulated amortiza-
tion of $510,000 and $443,000, respectively 445,000 512,000
INTANGIBLE ASSETS, net 279,000 361,000
OTHER ASSETS 307,000 354,000
------------ ------------
TOTAL ASSETS $ 8,154,000 $ 7,556,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------
CURRENT LIABILITIES
Note payable $ 2,780,000 $ 1,080,000
Current maturities of long term debt - 428,000
Accounts payable 734,000 752,000
Accrued expenses 220,000 221,000
------------ ------------
TOTAL CURRENT LIABILITIES 3,734,000 2,481,000
LONG TERM DEBT, less current maturities - 907,000
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 50,000,000
shares authorized; none issued or outstanding - -
Common stock; $0.05 par value;
100,000,000 shares authorized;
916,298 and 915,449 shares issued
and outstanding, see Note 3 46,000 46,000
Additional paid in capital 6,472,000 6,468,000
Accumulated deficit (2,098,000) (2,346,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,420,000 4,168,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,154,000 $ 7,556,000
============ ============
/TABLE
<PAGE>
<PAGE>
<TABLE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
(UNAUDITED)
<CAPTION>
June 30, June 30,
1997 1996
------------ ------------
<S> <C> <C>
INCOME:
Net sales $ 2,544,000 $ 2,514,000
Cost of goods sold 1,521,000 1,666,000
------------ ------------
Gross profit 1,023,000 848,000
OPERATING EXPENSES:
Advertising and catalog costs 22,000 108,000
Other marketing 223,000 566,000
------------ ------------
Total marketing 245,000 674,000
General and administrative 380,000 400,000
------------ ------------
Total operating expenses 625,000 1,074,000
------------ ------------
OPERATING INCOME (LOSS) 398,000 (226,000)
OTHER INCOME (EXPENSE):
Loss on sale of division - (384,000)
Interest expense (95,000) (120,000)
------------ ------------
Net other income (expense) (95,000) (504,000)
------------ ------------
INCOME BEFORE INCOME TAXES 303,000 (730,000)
Income tax benefit (expense) - -
------------ ------------
NET INCOME (LOSS) $ 303,000 $ (730,000)
============ ============
Net income (loss) per common share and
common share equivalent, see Note 3 $ 0.33 ($ 0.88)
============ ============
Average number of common and common
equivalent shares outstanding,
see Note 3 918,000 834,000
============ ============
</TABLE>
<PAGE>
<PAGE>
<TABLE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
(UNAUDITED)
<CAPTION>
June 30, June 30,
1997 1996
------------ ------------
<S> <C> <C>
INCOME:
Net sales $ 4,165,000 $ 4,562,000
Cost of goods sold 2,632,000 2,862,000
------------ ------------
Gross profit 1,533,000 1,700,000
OPERATING EXPENSES:
Advertising and catalog costs 32,000 132,000
Other marketing 408,000 1,099,000
------------ ------------
Total marketing 440,000 1,231,000
General and administrative 688,000 759,000
------------ ------------
Total operating expenses 1,128,000 1,990,000
------------ ------------
OPERATING INCOME (LOSS) 405,000 (290,000)
OTHER INCOME (EXPENSE):
Loss on sale of division - (384,000)
Interest expense (157,000) (257,000)
------------ ------------
Net other income (expense) (157,000) (641,000)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 248,000 (931,000)
Income tax benefit (expense) - -
------------ ------------
NET INCOME (LOSS) $ 248,000 $ (931,000)
============ ============
Net income (loss) per common share and
common share equivalent, see Note 3 $ 0.27 ($ 1.12)
============ ============
Average number of common and common
equivalent shares outstanding,
see Note 3 917,000 833,000
======== ========
/TABLE
<PAGE>
<PAGE>
<TABLE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
(Unaudited)
<CAPTION>
June 30, June 30,
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 248,000 $ (931,000)
Adjustments to reconcile net income
(loss) to cash provided by
operating activities:
Depreciation 365,000 361,000
Amortization 150,000 241,000
Bad debt expense 5,000 6,000
Loss on sale of division - 384,000
Changes in operating assets and
liabilities:
Decrease (increase) in operating assets:
Accounts receivable (997,000) 64,000
Income tax refunds receivable - 304,000
Inventories 54,000 (158,000)
Prepaid advertising costs (37,000) (209,000)
Other 8,000 35,000
Increase (decrease) in operating
liabilities:
Accounts payable (18,000) 202,000
Accrued expenses (1,000) (417,000)
------------- -------------
Net cash provided (used) by operating
activities (223,000) (118,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets - 1,000,000
Purchase of property and equipment (138,000) (107,000)
Cost incurred for video production - (136,000)
Other - 31,000
------------- -------------
Net cash provided (used) by investing
activities (138,000) 788,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long
term debt 1,275,000 974,000
Payments on notes payable and long-term
debt (910,000) (1,733,000)
Net proceeds from the sale of stock 4,000 28,000
------------- -------------
Net cash provided (used) by financing
activities 369,000 (731,000)
------------- -------------
NET INCREASE (DECREASE) IN CASH 8,000 (61,000)
Cash, at beginning of period 107,000 146,000
------------- -------------
Cash, at end of period $ 115,000 $ 85,000
============ ============
</TABLE>
<PAGE>
<PAGE>
<TABLE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
JANUARY 1, 1997 THROUGH JUNE 30, 1997
(UNAUDITED)
<CAPTION>
COMMON STOCK
------------------------- Additional
Number Paid
of Common in (Accumulated
Shares Stock Capital Deficit) Total
-------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance as of
January 1, 1997,
as adjusted, see Note 3 915,449 $ 46,000 $ 6,468,000 $ (2,346,000) $ 4,168,000
Sale of common stock
under the employee stock
purchase plan 849 - 4,000 - 4,000
Net income - - - 248,000 248,000
------- ---------- ------------ ------------ -----------
Balance as of
June 30, 1997 916,298 $ 46,000 $ 6,472,000 $ (2,098,000) $ 4,420,000
======= ========= =========== ============= ===========
</TABLE>
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 -- Presentation
- ----------------------
In the opinion of the Company, these unaudited consolidated financial
statements contain all adjustments (consisting of normal accruals) necessary
to present fairly the financial position as of June 30, 1997, and the results
of operations for the three months and the six months ended June 30, 1997 and
1996. These statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996.
Note 2 -- Notes Payable and Long Term Debt
- ------------------------------------------
During the second quarter, the Company negotiated a $2,800,000 revolving line
of credit (LOC) pursuant to a loan agreement which expires April 30, 2000.
Borrowing under this line of credit bears interest at a floating rate plus 3%
(totaling 11.5% as of June 30, 1997). Interest is payable monthly. The LOC
requires minimum monthly principal payments of $20,000. The principal balance
was $2,780,000 at June 30, 1997. Certain 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. Other
amounts available to be borrowed under the agreement are derived from a
borrowing base related to all other assets. The LOC is collateralized by
substantially all of the Company's assets.
Although the LOC has a scheduled maturity date of April 30, 2000, the loan
documents contain a demand provision under which repayment of the entire
outstanding balance can be demanded at any time. As a result, the entire
balance has been classified as a current liability.
Note 3 -- Stockholders' equity and retroactive adjustment
- ---------------------------------------------------------
On April 4, 1997, the Company's shareholders approved a one-for-five (1-for-5)
reverse split of its $0.01 par value common stock. The reverse split became
effective on April 22, 1997. As of that date, the par value of the Company's
common stock was increased to $0.05 per share and the number of common shares
outstanding was reduced from 4,580,794 to 916,298.
The reverse split has been shown in the accompanying financial statements as a
retroactive adjustment giving effect to the split for all periods presented.
Note 4 -- Stockholders' Equity, Options and Warrants
- ----------------------------------------------------
During the first six months of 1997, the Company issued 52,700 options to
purchase common stock to its key employees and directors. The options have an
exercise price equal to 100% of the market value of the common stock at the
date of the grant. Also during 1997, the Board of Directors approved
amendments to 99,400 outstanding options and 78,000 outstanding warrants under
which the exercise price was adjusted to reflect 100% of the market value of
the common stock at the date of amendment. The following is a summary of the
number of shares under option:
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
-------------------------------------
Incentive Non-Qualified Weighted
Stock Stock Average
Option Option Exercise
Plan Plan Total Price
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 53,200 48,500 101,700 $7.90
Options granted 28,200 24,500 52,700 3.88
Options exercised 0 0 0 --
Options terminated (52,200) (48,500) (100,700) 6.64
Options amended 50,900 48,500 99,400 4.50
-------- -------- --------- -----
Balance, June 30, 1997 80,100 73,000 153,100 $4.29
====== ====== =======
</TABLE>
As of June 30, 1997, the Company has outstanding warrants to purchase 102,000
shares of the Company's Common Stock at exercise prices ranging from $4.50 to
$22.00 per share. The warrants will expire as follows: 24,000 in 1997 and
78,000 in 1999.
During its meeting on June 2, 1997, the Board of Directors approved a warrant
dividend to existing shareholders. The warrant dividend consists of one
warrant for each share of common stock owned by shareholders of record on
June 5, 1997. Each warrant entitles its holder for a period of three years to
purchase one additional share of the Company's common stock at an exercise
price of $10.00 per share. No voting rights have been attached to the
warrant. The Company retains the right to redeem the warrants upon 30 days
notice for a redemption price of $0.01 per warrant in the event that public
trading of the Company's common stock equals or exceeds 110% of the then
current exercise price of the warrant for twenty consecutive days. During the
third quarter of 1997, the Company intends to file a registration statement
with the Securities and Exchange Commission under the Securities Act of 1933
regarding the warrant dividend. The warrants will be issued immediately after
the effective date of the registration statement.
<PAGE>
<PAGE>
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly 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, those 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 the Company. 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 in future documents the
Company files with the Securities and Exchange Commission.
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion addresses the financial condition and results of
operation for American Educational Products, Inc. and Subsidiaries ("AMEP" or
the "Company"). 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 its wholly-
owned subsidiary, 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. Accordingly, the operating results of
Churchill were consolidated with the Company only through June 17, 1996.
Comparisons between 1997 and 1996 are affected by this divestiture.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included in this quarterly
report.
LIQUIDITY AND CAPITAL RESOURCES -- JUNE 30, 1997 COMPARED TO DECEMBER 31, 1996
- ------------------------------------------------------------------------------
During 1997, the Company continued to improve its liquidity and financial
condition. Profitable operations during the first six months provided
positive cash flow that reduced the liquidity shortfall experienced by the
Company in previous quarters. Net income plus depreciation and amortization
provided cash flow of $663,000 during the first six months of the year.
In addition, the Company reached an agreement with Republic Acceptance
Corporation on an arrangement that provides total financing up to $2,800,000,
an increase of $300,000 from its previous financing arrangement with Colorado
National Bank. As of June 30, 1997, the Company had borrowed substantially
all amounts available to be borrowed under its new financing arrangement and
had repaid all amounts due Colorado National Bank.
As a result of the positive cash flow and additional financing, the Company
improved its ability to maintain acceptable credit relations with its vendors
and suppliers. Nevertheless, the Company was unable to make timely payments
to some of its trade creditors during this period. Some creditors have
responded by granting the Company extended credit terms. Other creditors have
placed the Company on "credit hold" and refuse to ship to the Company without
an advance payment. Although those actions make it more difficult to conduct
business, the Company believes it will substantially resolve those situations
over the next several months and that such actions will not have a material
adverse effect on the Company.
In April, 1997, shareholders approved a one for five reverse stock split of
the Company's $0.01 par value common stock. The reverse split was effective
on April 22, 1997. As a result, the number of outstanding shares was reduced
from 4,577,000 to 916,000. The Company took the action because of a proposed
rule change by the NASDAQ Stock Market that would eliminate NASDAQ trading of
stocks priced below $1.00. Prior to the reverse split, AMEP stock had been
priced at less than $1.00. Since the reverse split, AMEP stock has traded at
prices ranging from $2.63 to $7.25.
During its meeting on June 2, 1997, the Board of Directors approved a warrant
dividend to existing shareholders. The warrant dividend consists of one
warrant for each share of common stock owned by shareholders of record on June
5, 1997. Each warrant entitles its holder for a period of three years to
purchase one additional share of the Company's common stock at an exercise
price of $10.00 per share. No voting rights have been attached to the
warrant. The Company retains the right to redeem the warrants upon 30 days
notice for a redemption price of $0.01 per warrant in the event that public
trading of the Company's common stock equals or exceeds 110% of the then
current exercise price of the warrant for twenty consecutive days. During the
third quarter of 1997, the Company intends to file a registration statement
with the Securities and Exchange Commission under the Securities Act of 1933
regarding the warrant dividend. The warrants will be issued immediately after
the effective date of the registration statement.
The Board believes that the June stock price did not fully reflect the
improvement in the Company's financial condition. The warrant dividend is a
method to assist the shareholders in realizing full value for their holdings.
The financial actions noted above improved the Company's liquidity and capital
resources. Its financial condition is not as precarious as noted in previous
quarters. Nevertheless, there are no guarantees that the Company can continue
to improve its finances. There are numerous factors, some of which are
outside the control of management, that could have an adverse effect on the
Company. Those factors include, but are not limited to, a deterioration in
the overall health of the nation's economy, a change in school spending
patterns, and competitive pressures. While the Company believes that the
capital resources available to it are sufficient for its operations, a
deterioration in its financial health could result in a need for additional
capital. Management continually assesses the Company's need for capital
resources. From time to time, the Company may evaluate and pursue additional
sources of capital.
The Company reported a 20% working capital decrease during the first six
months of 1997. To a great extent, this decrease reflects the
reclassification of all long-term debt from non-current to current
liabilities. Current assets of $4,669,000 increased by $1,021,000 from
December 31, 1996 and current liabilities increased by $1,253,000 from
$2,481,000 to $3,734,000. As a result, working capital decreased from
$1,167,000 to $935,000 and the current ratio fell from 1.5 to 1.3. In
comparison, working capital at June 30, 1996, was $697,000 and the current
ratio was 1.2.
All long-term debt was classified as a current liability in conjunction with
the new borrowing arrangement. Although the new borrowing arrangement has a
final maturity date of April 30, 2000, it also contains a "demand" provision
under which the lender has the right to demand repayment at any time. Even
though the Company does not expect to repay the entire debt within the next
twelve months, it is required to classify all "demand" debt as a current
liability. The amount of debt reclassified as current was $873,000. That
reclassification reduced working capital by $873,000 and reduced the current
ratio from 1.6 to 1.3.
Total assets increased by $598,000 from $7,556,000 at December 31, 1996, to
$8,154,000 at June 30, 1997, an increase of 8%. During the same period, total
liabilities increased by $346,000 from $3,388,000 to $3,734,000, an increase
of 10%. Stockholders' equity increased $252,000, or 6%, from $4,168,000 to
$4,420,000, primarily as a result of the net income for the period.
Accounts receivable increased from $840,000 at December 31, 1996, to
$1,832,000 at June 30, 1997, an increase of $992,000 or 118%. This increase
is consistent with seasonal sales patterns under which second quarter sales
exceed fourth quarter sales.
The royalty receivable of $133,000 as of June 30, 1997 results from the sale
of Churchill and represents royalties expected to be received during the next
twelve months.
Inventories decreased from $2,475,000 at the end of 1996 to $2,421,000 at June
30, 1997, a decrease of $54,000 or 2%. The Company worked diligently during
the first six months of 1997 to reduce its inventory balances without
compromising its ability to meet inventory requirements for the second and
third quarters of the year. Stricter purchasing controls were implemented to
reduce raw material intake. These controls have resulted in more frequent
purchases of smaller quantities, sometimes at higher per unit costs, compared
to previous purchases. The Company continues to evaluate the optimum balance
between purchase quantities and per unit costs.
Prepaid advertising costs increased from zero at December 31, 1996, to $37,000
at June 30, 1997. This increase is due to investment in the spring 1997
catalog program offset by partial amortization of this program.
Net property and equipment decreased from $2,681,000 at December 31, 1996, to
$2,454,000 at June 30, 1997, a decrease of $227,000 or 9%. The decrease
represents depreciation of $365,000 offset by net additions of $138,000.
Video and film library costs decreased from $512,000 at December 31, 1996, to
$445,000 at June 30, 1997, a decrease of $67,000 or 13%. The decrease
consists entirely of regular monthly amortization.
Intangible assets decreased from $361,000 at December 31, 1996, to $279,000 at
June 30, 1997, a decrease of $82,000 or 23%. The decrease results from
regular monthly amortization of the assets.
Other assets decreased from $354,000 at December 31, 1996, to $307,000 at June
30, 1997. Other assets includes estimated royalties to be received in future
years from the purchaser of Churchill in the amount of $279,000.
Accounts payable and accrued expenses decreased by $19,000 from $973,000 at
December 31, 1996, to $954,000 at June 30, 1997. The Company has not been
able to make all payments to trade creditors in a timely fashion during the
first six months of 1997, though its ability to do so improved toward the end
of the second quarter. Although the Company believes that its ability to pay
trade creditors on a timely basis will continue to improve during the
remainder of 1997, there are no guarantees that this trend will continue.
At June 30, 1997, the Company had increased its borrowings under its working
capital line of credit facility by $1,700,000 to reflect the increased needs
and borrowing capacity generated by second quarter sales and to reflect its
new borrowing arrangement.
Long-term debt, excluding current maturities, decreased $907,000 as a result
of both normal long-term debt payments during 1997 and reclassification of all
debt to current liabilities as a result of the new borrowing agreement.
As a whole, total borrowings increased $365,000 during the first six months of
1997. As of and subsequent to June 30, 1997, the Company had borrowed
substantially all funds available to it under the various borrowing
agreements.
Other than the foregoing, management knows of no trends, demands, or
uncertainties that are reasonably likely to have a material impact on the
Company's short-term liquidity or capital resources.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED JUNE 30, 1997, COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1996
- --------------------------------------------------------------------------
As previously discussed, the comparison of operating results for the second
quarter of 1997 to the second quarter of 1996 is affected by the sale of
Churchill in 1996.
The Company's revenues were $2,544,000 in the second quarter of 1997, an
increase of $30,000 or 1% from the same period 1996 revenues of $2,514,000.
Churchill's impact on revenues during this period in 1996 was $364,000. After
adjusting for Churchill, sales at Hubbard and Scott increased by $394,000 or
18% from second quarter 1996 sales of $2,150,000.
The cost of goods sold for the quarter ended June 30, 1997, was $1,521,000, a
decrease of $145,000 or 9% from the same period 1996 amount of $1,666,000.
Churchill's impact on cost of goods sold during this period in 1996 was
$188,000. After adjusting for Churchill, cost of goods sold at Hubbard and
Scott increased by $43,000 or 3% from second quarter 1996 cost of goods sold
of $1,478,000.
Consolidated gross profits for the second quarter of 1997 were $1,023,000, an
increase of $175,000 or 21% from the same period 1996 gross profits of
$848,000. Churchill's impact on consolidated gross profits during this period
in 1996 was $176,000. After adjusting for Churchill, gross profits at Hubbard
and Scott increased by $351,000 from second quarter 1996 gross profits of
$672,000. As a percentage of sales for Hubbard and Scott, the second quarter
gross margin increased from 31% in 1996 to 40% in 1997.
Actual gross margin percent is sensitive to actual production levels and can
vary significantly between periods. The Company incurs certain operating
expenses, such as depreciation, occupancy, and indirect personnel costs each
period. When production levels are low, such costs are not applied to
inventory and the result is an unfavorable cost variance in cost of sales.
Similarly, when production levels are high, such costs are applied to
inventory and the result is a favorable cost variance in cost of sales.
During the second quarter of 1997, production levels were higher than those of
the second quarter of 1996, resulting in improved margins.
The advertising component of marketing costs for the second quarter of 1997
was $22,000, a decrease of $86,000 or 80% from the same period 1996 cost of
$108,000. Churchill's advertising costs for the second quarter of 1996 were
$39,000. After adjusting for Churchill, advertising costs as percent of sales
at Hubbard and Scott were 1% of sales in the second quarter of 1997 and 3% of
sales in the second quarter of 1996. Hubbard and Scott produce direct mail
catalogs featuring their manufactured products. In 1997, the Company chose to
reduce its catalog mailing program as one of its cash conservation measures.
Other marketing costs for the second quarter of 1997 were $223,000, a decrease
of $343,000 or 61% from the same period 1996 cost of $566,000. Churchill's
other marketing costs for the second quarter of 1996 were $225,000. After
adjusting for Churchill, other marketing costs as a percentage of sales at
Hubbard and Scott were 9% in the second quarter of 1997, and 16% in the second
quarter of 1996. This expense reduction results from restructuring the
marketing group whereby the number of marketing personnel and marketing
programs were decreased.
General and administrative expenses were $380,000, a decrease of $20,000 or 5%
from the second quarter 1996 G & A expense of $400,000. Two items effect the
comparability of 1997 to 1996. First, Churchill's G & A expense for the
second quarter of 1996 was $70,000. Secondly, G & A expenses for 1996 were
reduced by $70,000 to reflect favorable settlement of a royalty dispute.
After adjusting for Churchill and the settlement, G & A costs as a percent of
Hubbard and Scott sales were 15% in the second quarter of 1997 and 19% in the
second quarter of 1996.
Total operating costs decreased 42% from $1,074,000 in the second quarter of
1996 to $625,000 in the second quarter of 1997. Churchill's total operating
costs during this period in 1996 were $334,000. After adjusting for
Churchill, operating costs as a percentage of Hubbard and Scott sales
approximated 25% in the second quarter of 1997 and 34% during the same period
in 1996.
Interest expense decreased from $120,000 in the second quarter of 1996 to
$95,000 in the second quarter of 1997, a decrease of $25,000 or 21%. The
decreased interest expense is the result of lower debt levels made possible by
proceeds from the sale of Churchill assets and certain real estate.
The Company did not recognize any income tax expense for the second quarter of
1997. During preceding quarters, all income tax liabilities had been offset
against operating losses. The Company has net operating loss carryovers of
approximately $4,100,000 available for income tax purposes. Subject to
certain restrictions imposed by the Internal Revenue Code, the Company will be
able to offset those carryforwards against future taxable income, if any, and
will be able to record a benefit from those carryforwards when they appear to
be realizable. For 1997, it appears that the carryover will allow the Company
to eliminate substantially all income tax expense that might be incurred.
Net income for the second quarter of 1997 was $303,000, compared with a net
loss of $730,000 in the same period of 1996. The loss in 1996 included
$384,000 related to the loss on the sale of Churchill assets. After giving
effect to the 1-for-5 reverse stock split, the income per share was $0.33 for
the second quarter of 1997, compared to a loss per share of $0.88 for the
second quarter of 1996.
Inflation has not had any material effect on the Company's operations during
1997. The Company attempts to reduce the impact of cost increases through
design changes, improved factory efficiencies, and sales price increases.
There is no guarantee that it will be successful in these attempts.
The Company historically has experienced significant seasonality in its sales
primarily due to the purchasing cycle of educational institutions. Typically,
the first and fourth fiscal quarters each generate approximately 20% of annual
sales, with the second and third fiscal quarters each generating approximately
30% of annual sales. This distribution of sales is likely to continue
throughout 1997.
Other than the foregoing, management knows of no trends, demands, or
uncertainties that are reasonably likely to have a material impact on the
Company's results of operations.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1996
- -----------------------------------------------------------------------------
As previously discussed, the comparison of operating results for the first
half of 1997 to the first half of 1996 is affected by the sale of Churchill in
1996.
The Company's revenues were $4,165,000 in the first half of 1997, a decrease
of $397,000 or 9% from the same period 1996 revenues of $4,562,000.
Churchill's impact on revenues during this period in 1996 was $866,000. After
adjusting for Churchill, sales at Hubbard and Scott increased by $469,000 or
13% from the same period 1996 sales of $3,696,000.
The cost of goods sold for the six months ended June 30, 1997, was $2,632,000,
a decrease of $230,000 or 8% from the same period 1996 amount of $2,862,000.
Churchill's impact on cost of goods sold during this period in 1996 was
$407,000. After adjusting for Churchill, cost of goods sold at Hubbard and
Scott increased by $177,000 or 7% from same period cost of goods sold of
$2,455,000.
Consolidated gross profits for the first six months of 1997 were $1,533,000, a
decrease of $167,000 or 10% from the same period 1996 gross profits of
$1,700,000. Churchill's impact on consolidated gross profits during this
period in 1996 was $459,000. After adjusting for Churchill, gross profits at
Hubbard and Scott increased by $292,000 or 24% over same period 1996 gross
profits of $1,241,000. As a percentage of sales for Hubbard and Scott, gross
margin increased from 34% in the first six months of 1996 to 37% in the first
six months of 1997.
Actual gross margin percent is sensitive to actual production levels and can
vary significantly between periods. The Company incurs certain operating
expenses, such as depreciation, occupancy, and indirect personnel costs each
period. When production levels are low, such costs are not applied to
inventory and the result is an unfavorable cost variance in cost of sales.
Similarly, when production levels are high, such costs are applied to
inventory and the result is a favorable cost variance in cost of sales.
During the first half of 1997, production levels were slightly higher than
those of the first half of 1996, resulting in improved margins.
The advertising component of marketing costs for the first six months of 1997
was $32,000, a decrease of $100,000 or 76% from the same period 1996 cost of
$132,000. Churchill's advertising costs for the first six months of 1996 were
$58,000. After adjusting for Churchill, advertising costs as percent of sales
at Hubbard and Scott were less than 1% of sales in the first six months of
1997 and 2% of sales in the first six months of 1996. Hubbard and Scott
produce direct mail catalogs featuring their manufactured products. In 1997,
the Company chose to reduce its catalog mailing program as one of its cash
conservation measures.
Other marketing costs for the first six months of 1997 were $408,000, a
decrease of $691,000 or 63% from the same period 1996 cost of $1,099,000.
Churchill's other marketing costs for the first six months of 1996 were
$476,000. After adjusting for Churchill, other marketing costs as a
percentage of sales at Hubbard and Scott were 10% in the first six months of
1997, and 17% in the first six months of 1996. This expense reduction results
from restructuring the marketing group whereby the number of marketing
personnel and marketing programs were decreased.
General and administrative expenses were $688,000, a decrease of $71,000 or 9%
from the second quarter 1996 G & A expense of $759,000. Churchill's G & A
expense for the first six months of 1996 was $139,000.. During 1996, the
amounts reported as G & A expenses were reduced by $170,000 to reflect
favorable settlement of two disputes. Adjusting 1996 expenses for those
settlements indicates that G & A expense declined by $102,000 from 1996 to
1997. Had the Company not recognized those proceeds in 1996, G & A expenses
would have been $790,000, or 21%, of sales in the first six months of 1996 at
Hubbard and Scott. After adjusting for Churchill and the settlements, G & A
costs as a percent of Hubbard and Scott sales were 17% in the first six months
of 1997 and 21% in the first six months of 1996.
Total operating costs decreased 43% from $1,990,000 in the first six months of
1996 to $1,128,000 in the first six months of 1997. Churchill's total
operating costs during this period in 1996 were $673,000. After adjusting for
Churchill, operating costs as a percentage of Hubbard and Scott sales
approximated 27% in the first six months of 1997 and 36% during the same
period of 1996.
Interest expense decreased from $257,000 in the first six months of 1996 to
$157,000 in the first six months of 1997, a decrease of $100,000 or 39%. The
decreased interest expense is the result of lower debt levels made possible by
proceeds from the sale of Churchill assets and certain real estate.
The Company did not recognize any income tax expense for the first half of
1997. During preceding quarters, all income tax liabilities had been offset
against operating losses. The Company has net operating loss carryovers of
approximately $4,100,000 available for income tax purposes. Subject to
certain restrictions imposed by the Internal Revenue Code, the Company will be
able to offset those carryforwards against future taxable income, if any, and
will be able to record a benefit from those carryforwards when they appear to
be realizable. For 1997, it appears that the carryover will allow the Company
to eliminate substantially all income tax expense that might be incurred.
Net income for the first six months of 1997 was $248,000, compared with a net
loss of $931,000 in the same period of 1996. The loss in 1996 included
$384,000 related to the loss on the sale of Churchill assets. After giving
effect to the 1-for-5 reverse stock split, the income per share was $0.27 for
the first six months of 1997, compared to a loss per share of $1.12 for the
first six months of 1996.
Inflation has not had any material effect on the Company's operations during
1997. The Company attempts to reduce the impact of cost increases through
design changes, improved factory efficiencies, and sales price increases.
There is no guarantee that it will be successful in these attempts.
The Company historically has experienced significant seasonality in its sales
primarily due to the purchasing cycle of educational institutions. Typically,
the first and fourth fiscal quarters each generate approximately 20% of annual
sales, with the second and third fiscal quarters each generating approximately
30% of annual sales. This distribution of sales is likely to continue
throughout 1997.
Other than the foregoing, management knows of no trends, demands, or
uncertainties that are reasonably likely to have a material impact on the
Company's results of operations.
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No legal proceedings have been filed on behalf of or against the
Company nor have any claims been made.
ITEM 2. CHANGES IN SECURITIES
1. Reverse Stock Split -- See Item 4 below.
2. Warrant Dividend -- During its meeting on June 2, 1997. the Board of
Directors approved a warrant dividend to existing shareholders. The
warrant dividend consists of one warrant for each share of common
stock owned by shareholders of record on June 5, 1997. Each warrant
entitles its holder for a period of three years to purchase one
additional share of the Company's common stock at an exercise price
of $10.00 per share. No voting rights have been attached to the
warrant. The Company retains the right to redeem the warrants upon
30 days notice for a redemption price of $0.01 per warrant in the
event that public trading of the Company's common stock equals or
exceeds 110% of the then current exercise price of the warrant for
twenty consecutive days. During the third quarter of 1997, the
Company intends to file a registration statement with the Securities
and Exchange Commission under the Securities Act of 1933 regarding
the warrant dividend. The warrants will be issued immediately after
the effective date of the registration statement.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 4, 1997, the Company held a Special Meeting of Shareholders
(the "Meeting"), to vote upon the following matter:
The adoption and approval of a reverse split of the issued and
outstanding shares of the Company's Common Stock and issued and
outstanding options, warrants, and other rights convertible into
shares of Common Stock of up to one-for-five (1-for-5) at the future
discretion and subject to the determination of the Board of
Directors (the "Reverse Stock Split"). The results of the vote at
the Meeting were:
For Against Abstain
2,398,439 208,935 169,074
On April 22, 1997, the one-for-five Reverse Stock Split became
effective.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
Exhibit No. 27 - Financial Data Schedule
Reports on Form 8-K: None
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities and Exchange Act,
the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN EDUCATIONAL PRODUCTS, INC.
Dated: August 19, 1997 By: /s/ Clifford C. Thygesen
------------------- --------------------------------
Clifford C. Thygesen, President
Dated: August 19, 1997 By: /s/ Frank L. Jennings
------------------- -------------------------------
Frank L. Jennings, Chief
Financial Officer and Vice
President of Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEULD CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENT OF OEPRATIONS FOUND ON PAGES 3, 4 AND 5
OF THE COMPANY'S FORM 10-QSB FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 115
<SECURITIES> 0
<RECEIVABLES> 2,020
<ALLOWANCES> (55)
<INVENTORY> 2,421
<CURRENT-ASSETS> 4,669
<PP&E> 6,146
<DEPRECIATION> 3,692
<TOTAL-ASSETS> 8,154
<CURRENT-LIABILITIES> 3,734
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 4,374
<TOTAL-LIABILITY-AND-EQUITY> 8,154
<SALES> 2,544
<TOTAL-REVENUES> 2,544
<CGS> 1,521
<TOTAL-COSTS> 1,521
<OTHER-EXPENSES> 625
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95
<INCOME-PRETAX> 303
<INCOME-TAX> 0
<INCOME-CONTINUING> 303
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 303
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
