<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
6550 Gunpark Drive, Suite 200, Boulder, Colorado 80301
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(303) 527-3230
--------------------------
(Issuer's telephone number)
5350 Manhattan Circle, Suite 210, Boulder, Colorado 80303(303) 543-0123
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Former name, former address, and former fiscal year, if changed since
last report
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No []
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the Registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes [] No []
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 7, 1997 the Company had 935,872 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 September 30, 1997
and December 31, 1996 2
Consolidated Statements of Operations for the three
months ended September 30, 1997 and September 30, 1996 3
Consolidated Statements of Operations for the nine
months ended September 30, 1997 and September 30, 1996 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and September 30, 1996 5
Consolidated Statement of Stockholders' Equity from
January 1, 1997 through September 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
Impact of Recently Issued Accounting Standards 12
Results of Operations 13
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5 OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
<PAGE>
<PAGE>
<TABLE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<CAPTION>
September 30, December 31,
1997 1996
Unaudited)
------------- ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash $ 212,000 $ 107,000
Trade receivables, net of allowance of
$39,000 and $64,000 1,619,000 840,000
Royalty receivable 165,000 144,000
Inventories 2,436,000 2,475,000
Prepaid advertising costs 58,000 -
Other 108,000 82,000
------------ ------------
TOTAL CURRENT ASSETS 4,598,000 3,648,000
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $3,852,000
and $3,327,000, respectively 2,366,000 2,681,000
VIDEO LIBRARY, net of accumulated
amortization of $543,000 and
$443,000, respectively 412,000 512,000
INTANGIBLE ASSETS, net 238,000 361,000
OTHER ASSETS 248,000 354,000
------------ ------------
TOTAL ASSETS $ 7,862,000 $7,556,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Note payable $ 2,296,000 $1,080,000
Current maturities of long term debt - 428,000
Accounts payable 557,000 752,000
Accrued expenses 227,000 221,000
------------ ------------
TOTAL CURRENT LIABILITIES 3,080,000 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;
917,872 and 915,400 shares issued
and outstanding, see Note 3 46,000 46,000
Additional paid in capital 6,477,000 6,468,000
Accumulated deficit (1,741,000) (2,346,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,782,000 4,168,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,862,000 $7,556,000
============ ============
</TABLE>
<PAGE>
<PAGE>
<TABLE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
(Unaudited)
<CAPTION>
September, September,
1997 1996
------------- ------------
<S> <C> <C>
INCOME:
Net sales $ 2,592,000 $2,631,000
Cost of goods sold 1,577,000 1,638,000
------------ ------------
Gross profit 1,015,000 993,000
OPERATING EXPENSES:
Advertising and catalog costs 19,000 95,000
Other marketing 221,000 256,000
------------ ------------
Total marketing 240,000 351,000
General and administrative 327,000 342,000
------------ ------------
Total operating expenses 567,000 693,000
------------ ------------
OPERATING INCOME (LOSS) 448,000 300,000
OTHER INCOME (EXPENSE):
Gain (loss) on sale of asset - 77,000
Interest expense (91,000) (90,000)
------------ ------------
Net other income (expense) (91,000) (13,000)
INCOME BEFORE INCOME TAXES 357,000 287,000
Income tax benefit (expense) - -
------------ ------------
NET INCOME (LOSS) $ 357,000 $ 287,000
============ ============
Net income per common share
and common share equivalent,
see Note 3 $ 0.36 $ 0.34
============ ============
Average number of common and common
equivalent shares outstanding,
see Note 3 996,000 837,000
============ ============
</TABLE>
<PAGE>
<PAGE>
<TABLE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
(Unaudited)
<CAPTION>
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
INCOME:
Net sales $ 6,757,000 $7,193,000
Cost of goods sold 4,208,000 4,501,000
------------ ------------
Gross profit 2,549,000 2,692,000
OPERATING EXPENSES:
Advertising and catalog costs 52,000 227,000
Other marketing 628,000 1,356,000
------------ ------------
Total marketing 680,000 1,583,000
General and administrative 1,016,000 1,099,000
------------ ------------
Total operating expenses 1,696,000 2,682,000
------------ ------------
OPERATING INCOME 853,000 10,000
OTHER INCOME (EXPENSE):
Loss on sale of division - (384,000)
Gain on sale of asset - 77,000
Interest expense (248,000) (346,000)
Net other income (expense) (248,000) (653,000)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 605,000 (643,000)
Income tax benefit (expense) - -
------------ ------------
NET INCOME (LOSS) $ 605,000 $ (643,000)
------------ ------------
Net income (loss) per common share
and common share equivalent,
see Note 3 $ 0.64 ($ 0.77)
------------ ------------
Average number of common and common
equivalent shares outstanding,
see Note 3 943,000 834,000
------------ ------------
</TABLE>
<PAGE>
<PAGE>
<TABLE>
AMERICAN EDUCATIONAL PRODUCTS, INC.AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
(Unaudited)
<CAPTION>
September, September,
1997 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 605,000 $ (643,000)
Adjustments to reconcile net income
(loss)to cash provided by operating
activities:
Depreciation 525,000 548,000
Amortization 223,000 329,000
Bad debt expense 8,000 8,000
Loss on sale of division - 384,000
Gain on sale of asset - (77,000)
Changes in operating assets and
liabilities:
Decrease (increase) in operating assets:
Accounts receivable (787,000) (195,000)
Income tax refunds receivable - 304,000
Inventories 39,000 (308,000)
Prepaid advertising costs (58,000) (109,000)
Other 59,000 72,000
Increase (decrease) in operating
liabilities:
Accounts payable (195,000) 220,000
Accrued expenses 6,000 (534,000)
------------ ------------
Net cash provided (used) by operating
activities 425,000 (1,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets - 1,989,000
Purchase of property and equipment (210,000) (206,000)
Cost incurred for video production - (137,000)
------------ ------------
Net cash provided (used) by investing
activities (210,000) 1,646,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long
term debt 2,800,000 1,208,000
Payments on notes payable and long
term debt (2,919,000) (3,188,000)
Net proceeds from the sale of stock 9,000 234,000
------------ ------------
Net cash provided (used) by financing
activities (110,000) (1,746,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH 105,000 (101,000)
Cash, at beginning of period 107,000 146,000
------------ ------------
Cash, at end of period $ 212,000 $ 45,000
============ ============
</TABLE>
<PAGE>
<PAGE>
<TABLE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
January 1, 1997 through September 30, 1997
(Unaudited)
<CAPTION>
COMMON STOCK
---------------------- Additional
Number Paid
of Common in (Accumulated
Shares Stock Capital Deficit) Total
-------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Adjusted balance as of
January 1, 1997 (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 1,423 - 6,000 - 6,000
Exercise of options 1,000 - 3,000 - 3,000
Net income - - - 605,000 605,000
------- -------- ---------- ------------ ----------
Balance as of
September 30, 1997 917,872 $ 46,000 $6,477,000 $(1,741,000) $4,782,000
======= ======== ========== ============ ==========
</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 September 30, 1997, and the
results of operations for the three months and the nine months ended September
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 1997, the Company obtained 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 September 30, 1997). Interest is payable monthly. The LOC requires
minimum monthly principal payments of $20,000. The principal balance was
$2,296,000 at September 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 -- REVERSE STOCK SPLIT 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 nine months of 1997, the Company issued 55,400 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>
<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 30,900 24,500 55,400 4.09
Options exercised (1,000) 0 (1,000) 3.00
Options terminated (55,300) (48,500) (103,800) 6.64
Options amended 50,900 48,500 99,400 4.50
-------- -------- --------- -----
Balance, September 30, 1997 78,700 73,000 151,700 $4.35
====== ====== =======
</TABLE>
As of September 30, 1997, the Company has outstanding warrants to purchase
78,000 shares of the Company's Common Stock at an exercise price of $4.50 and
an expiration date in 1998.
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. The
Company has filed 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>
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 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 -- SEPTEMBER 30, 1997 COMPARED TO
DECEMBER 31, 1996
- -----------------------------------------------------------------
During the first nine months of 1997, the Company continued its recovery from
the liquidity shortfall experienced in 1996 and 1995. Profitable operations
during the first nine months provided positive cash flow that allowed the
Company to fund its working capital needs and reduce its debt.
In 1997, 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. In conjunction therewith, the Company repaid all amounts due Colorado
National Bank.
As a result of the positive cash flow and additional financing, the Company
was able to make timely payments to all of its trade creditors. As of and
subsequent to September 30, 1997, the Company is not experiencing any
operational difficulties related to its previous liquidity shortfall.
In April, 1997, shareholders approved a one for five reverse stock split of
the Company's $.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 certain
proposed rule changes by the NASDAQ Stock Market.
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 $.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 submitted a registration statement to 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 Company reported a 30% working capital increase during the first nine
months of 1997. Current assets of $4,598,000 increased by $950,000 from
December 31, 1996 and current liabilities increased by $599,000 from
$2,481,000 to $3,080,000. As a result, working capital increased from
$1,167,000 to $1,518,000. The current ratio (calculated as total current
assets divided by total current liabilities) was 1.5 at both September 30,
1997 and December 31, 1996.
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. Accordingly, all long-term debt was reclassified. That
reclassification reduced both the amount reported as working capital and the
current ratio.
Total assets increased by $306,000 from $7,556,000 at December 31, 1996, to
$7,862,000 at September 30, 1997, an increase of 4%. During the same period,
total liabilities decreased by $308,000 from $3,388,000 to $3,080,000, a
decrease of 9%. Stockholders' equity increased $614,000, or 15%, from
$4,168,000 to $4,782,000, primarily as a result of the net income for the
period.
Accounts receivable increased from $840,000 at December 31, 1996, to
$1,619,000 at September 30, 1997, an increase of $779,000 or 93%. This
increase is consistent with seasonal sales patterns under which third quarter
sales exceed fourth quarter sales.
The royalty receivable of $165,000 as of September 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 $2,436,000 at
September 30, 1997, a decrease of $39,000 or 2%. The Company worked
diligently during the first nine 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.
The Company anticipated a greater reduction in inventory during the third
quarter. Unfortunately, the work stoppage at United Parcel Service (UPS) had
a negative impact on the Company and on its distributors that rely on UPS as
their primary shipping service. Coincident with the work stoppage, the
Company experienced a decrease in the incoming order rate. The Company did
not experience a compensating increase at the conclusion of the work stoppage.
As a result of the reduced incoming order rate, the Company's order backlog
was reduced during the third quarter. Since the Company is entering the
fourth quarter with a lower than normal backlog, the negative impact from the
UPS strike may reduce shipments in the fourth quarter.
Prepaid advertising costs increased from zero at December 31, 1996, to $58,000
at September 30, 1997. This increase is due to investment in the 1997 catalog
program offset by partial amortization of this program.
Net property and equipment decreased from $2,681,000 at December 31, 1996, to
$2,366,000 at September 30, 1997, a decrease of $315,000 or 12%. The decrease
represents depreciation of $525,000 offset by net additions of $210,000.
Video and film library costs decreased from $512,000 at December 31, 1996, to
$412,000 at September 30, 1997, a decrease of $100,000 or 20%. The decrease
consists entirely of regular monthly amortization.
Intangible assets decreased from $361,000 at December 31, 1996, to $238,000 at
September 30, 1997, a decrease of $123,000 or 34%. The decrease results from
regular monthly amortization of the assets.
Other assets decreased from $354,000 at December 31, 1996, to $248,000 at
September 30, 1997. Other assets includes estimated royalties to be received
in future years from the purchaser of Churchill in the amount of $223,000.
Accounts payable and accrued expenses decreased by $189,000 from $973,000 at
December 31, 1996, to $784,000 at September 30, 1997. The Company was not
able to make all payments to trade creditors in a timely fashion during 1996.
The Company's improved liquidity position in 1997 allowed it to resume timely
payments to creditors.
During the second quarter of 1997, the Company borrowed substantially all of
the funds available to it under the terms of its $2,800,000 LOC arrangement.
During the third quarter, cash flow from operations was sufficient to reduce
total bank borrowings to $2,296,000. For the nine month period ending
September 30, 1997, total borrowings decreased $119,000. Borrowings by the
Company fluctuate with the seasonality of its business. Management
anticipates further borrowing reductions during the fourth quarter.
Consistent with prior years, borrowings are expected to increase during the
first quarter of 1998.
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.
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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
- ----------------------------------------------
Statement of Financial Accounting Standards 128, "Earnings per Share" and
Statement of Financial Accounting Standards 129, "Disclosure of Information
About an Entity's Capital Structure". Statement 128 provides a different
method of calculating earnings per share than is currently used in accordance
with Accounting Principles Board Opinion 15, "Earnings per Share". Statement
128 provides for the calculation of "basic" and "diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share. Statement 129
establishes standards for disclosing information about an entity's capital
structure. Statements 128 and 129 are effective for financial statements
issued for periods ending after December 15, 1997. Their implementation is
not expected to have a material effect on the consolidated financial
statements.
Statement of Financial Accounting Standards 130, "Reporting Comprehensive
Income" and Statement of Financial Accounting Standards 131, "Disclosures
About Segments of an Enterprise and Related Information". Statement 130
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, Statement 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that displays with the same prominence as other financial
statements. Statement 131 supersedes Statement of Financial Accounting
Standards 14, "Financial Reporting for Segments of a Business Enterprise".
Statement 131 establishes standards on the way that public companies report
financial information about operating segments in annual financial statements
and requires reporting of selected information about operating segments in
interim financial statements issued to the public. It also establishes
standards for disclosures regarding products and services, geographic areas
and major customers. Statement 131 defines operating segments as components
of a company about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
Statements 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997, and require comparative information for
earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
the standards may have on the future financial statement disclosures. Results
of operations and financial position, however, will be unaffected by
implementation of these standards.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1996
- --------------------------------------------------------------------------
The Company's revenues were $2,592,000 in the third quarter of 1997, a
decrease of $39,000 or 2% from the same period 1996 revenues of $2,631,000.
The Company anticipated a slightly higher sales level during the 1997 third
quarter. Unfortunately, the work stoppage at United Parcel Service (UPS) had
a negative impact on the Company and on its distributors that rely on UPS as
their primary shipping service. Coincident with the work stoppage, the
Company experienced a decrease in the incoming order rate. The Company did
not experience a compensating increase at the conclusion of the work stoppage.
As a result of the reduced incoming order rate, the Company's order backlog
was reduced during the third quarter. Since the Company is entering the fourth
quarter with a lower than normal backlog, the negative impact from the UPS
strike may reduce shipments in the fourth quarter.
The cost of goods sold for the quarter ended September 30, 1997, was
$1,577,000, an decrease of $61,000 or 4% from the same period 1996 amount of
$1,638,000.
Consolidated gross profits for the third quarter of 1997 were $1,015,000, an
increase of $22,000 or 2% from the same period 1996 gross profits of $993,000.
As a percentage of sales for Hubbard and Scott, the third quarter gross margin
increased from 38% in 1996 to 39% in 1997.
The advertising component of marketing costs for the third quarter of 1997 was
$19,000, a decrease of $76,000 or 80% from the same period 1996 cost of
$95,000. Advertising costs as a percent of Hubbard and Scott sales were 1% in
the third quarter of 1997 and 4% in the third 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 third quarter of 1997 were $221,000, a decrease
of $35,000 or 14% from the same period 1996 cost of $256,000. Other marketing
costs as a percent of Hubbard and Scott sales were 9% in the third quarter of
1997 and 10% in the third 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 $327,000, a decrease of $15,000 or 4%
from the third quarter 1996 G & A expense of $342,000. G & A costs as a
percent of Hubbard and Scott sales were 13% in the third quarter of 1997 and
13% in the third quarter of 1996.
Total operating costs decreased 18% from $693,000 in the third quarter of 1996
to $567,000 in the third quarter of 1997. Operating costs as a percentage of
Hubbard and Scott sales approximated 22% in the third quarter of 1997 and 26%
during the same period in 1996.
Interest expense increased from $90,000 in the third quarter of 1996 to
$91,000 in the third quarter of 1997, an increase of $1,000 or 1%.
The Company did not recognize any income tax benefit or expense for the third
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 third quarter of 1997 was $357,000, compared with net
income of $287,000 in the same period of 1996. After giving effect to the 1-
for-5 reverse stock split, the earnings per share was $0.36 for the third
quarter of 1997 compared to earnings per share of $0.34 for the third 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 continue to 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 -- NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1996
- -------------------------------------------------------------------------
As previously discussed, the comparison of operating results for the first
nine months of 1997 to the first nine months of 1996 is affected by the sale
of Churchill in 1996.
The Company's revenues were $6,757,000 in the first nine months of 1997, a
decrease of $436,000 or 6% from the same period 1996 revenues of $7,193,000.
Churchill's impact on revenues during this period in 1996 was $866,000. After
adjusting for Churchill, sales at Hubbard and Scott increased by $429,000 or
7% from the same period 1996 sales of $6,328,000.
The cost of goods sold for the nine months ended September 30, 1997, was
$4,208,000, a decrease of $293,000 or 7% from the same period 1996 amount of
$4,501,000. 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 $115,000 or 3% from same period cost of goods
sold of $4,093,000.
Consolidated gross profits for the first nine months of 1997 were $2,549,000,
a decrease of $143,000 or 5% from the same period 1996 gross profits of
$2,692,000. 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 $314,000 or 14% over same period 1996 gross
profits of $2,235,000. As a percentage of sales for Hubbard and Scott, gross
margin increased from 35% in the first nine months of 1996 to 38% in the first
nine 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 nine months of 1997, production levels were slightly higher
than those of the first nine months of 1996, resulting in improved margins.
The advertising component of marketing costs for the first nine months of 1997
was $52,000, a decrease of $175,000 or 77% from the same period 1996 cost of
$227,000. Churchill's advertising costs for the first nine 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 nine months
of 1997 and 3% of sales in the first nine 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 nine months of 1997 were $628,000, a
decrease of $728,000 or 54% from the same period 1996 cost of $1,356,000.
Churchill's other marketing costs for the first nine months of 1996 were
$476,000. After adjusting for Churchill, other marketing costs as a
percentage of sales at Hubbard and Scott were 9% in the first nine months of
1997, and 14% in the first nine 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 $1,016,000, a decrease of $83,000 or
8% from the first nine months of 1996 G & A expense of $1,099,000.
Churchill's G & A expense for the first nine months of 1996 was $139,000. G &
A costs as a percent of Hubbard and Scott sales approximated 15% in both 1997
and 1996.
Total operating costs decreased 37% from $2,682,000 in the first nine months
of 1996 to $1,696,000 in the first nine 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 25% in the first nine months of 1997 and 32% during the same
period of 1996.
Interest expense decreased from $346,000 in the first nine months of 1996 to
$248,000 in the first nine months of 1997, a decrease of $98,000 or 28%. 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 nine months
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 nine months of 1997 was $605,000, compared with a net
loss of ($643,000) 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, earnings per share were $0.64 for
the first nine months of 1997, compared to a loss per share of ($.77) for the
first nine 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 continue to 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
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
Exhibit 27 Financial Data Schedule
Reports on Form 8-K: None
<PAGE>
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities and Exchange Act,
the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN EDUCATIONAL PRODUCTS, INC.
Dated: November 10, 1997 By: /s/ Clifford C Thygesen
-------------------- -----------------------------------
Clifford C. Thygesen, President
Dated: November 10, 1997 By: /s/ Frank L. Jennings
-------------------- ------------------------------------
Frank L. Jennings, Chief Financial Officer
and Vice President of Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 2 THROUGH 4 OF THE COMPANY'S FORM 10-QSB FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 212
<SECURITIES> 0
<RECEIVABLES> 1823
<ALLOWANCES> (39)
<INVENTORY> 2436
<CURRENT-ASSETS> 4598
<PP&E> 6218
<DEPRECIATION> (3852)
<TOTAL-ASSETS> 7862
<CURRENT-LIABILITIES> 3080
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 4736
<TOTAL-LIABILITY-AND-EQUITY> 7862
<SALES> 2592
<TOTAL-REVENUES> 2592
<CGS> 1577
<TOTAL-COSTS> 1577
<OTHER-EXPENSES> 567
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91
<INCOME-PRETAX> 357
<INCOME-TAX> 0
<INCOME-CONTINUING> 357
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 357
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
</TABLE>
