<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, 1998
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 Dr., Suite 200, Boulder, Colorado 80301
- ---------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(303) 527-3230
------------------
(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, 1998 the Company had 1,017,023 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, 1998
and December 31, 1997 2
Consolidated Statements of Operations for the three months
and six months ended June 30, 1998 and June 30, 1997 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and June 30, 1997 5
Consolidated Statement of Stockholders' Equity from
January 1, 1998 through June 30, 1998 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 8
Results of Operations 11
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security
Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 158,000 $ 183,000
Trade receivables, net of allowance of
$95,000 and $52,000 1,949,000 1,220,000
Royalty receivable 109,000 119,000
Inventories 3,184,000 2,540,000
Prepaid advertising costs 118,000 38,000
Other 137,000 139,000
------------ ------------
TOTAL CURRENT ASSETS 5,655,000 4,239,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $4,284,000 and $3,985,000,
respectively 2,746,000 2,247,000
VIDEO LIBRARY, net of accumulated amortization
of $642,000 and $580,000, respectively 298,000 359,000
INTANGIBLE ASSETS, net 1,498,000 169,000
OTHER ASSETS 175,000 237,000
------------ ------------
TOTAL ASSETS $10,372,000 $ 7,251,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 2,362,000 $ 1,855,000
Current maturities of long term debt 282,000 -
Accounts payable 580,000 533,000
Accrued expenses 460,000 145,000
TOTAL CURRENT LIABILITIES 3,684,000 2,533,000
LONG TERM DEBT, less current maturities 1,220,000 -
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; 1,005,606 and 922,872
shares issued and outstanding 50,000 46,000
Additional paid in capital 6,919,000 6,504,000
Accumulated deficit (1,501,000) (1,832,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,468,000 4,718,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,372,000 $ 7,251,000
============ ============
</TABLE>
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Three Months ended June 30, 1998 and June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
------------ ------------
<S> <C> <C>
INCOME:
Net sales $ 2,555,000 $ 2,544,000
Cost of goods sold 1,462,000 1,521,000
------------ ------------
Gross profit 1,093,000 1,023,000
OPERATING EXPENSES:
Advertising and catalog costs 53,000 22,000
Other marketing 275,000 223,000
------------ ------------
Total marketing 328,000 245,000
General and administrative 343,000 380,000
------------ ------------
Total operating expenses 671,000 625,000
------------ ------------
OPERATING INCOME 422,000 398,000
Interest expense (70,000) (95,000)
------------ ------------
INCOME BEFORE INCOME TAXES 352,000 303,000
Income tax benefit (expense) - -
------------ ------------
NET INCOME $ 352,000 $ 303,000
============ ============
Basic earnings per share $ 0.36 $ 0.33
============ ============
Diluted earnings per share $ 0.32 $ 0.33
============ ============
Weighted average number of common shares
outstanding 980,000 918,000
Effect of dilutive securities 105,000 -
------------ ------------
Weighted average number of common shares
outstanding plus dilutive securities 1,085,000 918,000
============ ============
</TABLE>
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Six Months ended June 30, 1998 and June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
------------ ------------
<S> <C> <C>
INCOME:
Net sales $ 4,402,000 $ 4,165,000
Cost of goods sold 2,655,000 2,632,000
------------ ------------
Gross profit 1,747,000 1,533,000
OPERATING EXPENSES:
Advertising and catalog costs 88,000 32,000
Other marketing 485,000 408,000
------------ ------------
Total marketing 573,000 440,000
General and administrative 705,000 688,000
------------ ------------
Total operating expenses 1,278,000 1,128,000
------------ ------------
OPERATING INCOME 469,000 405,000
Interest expense (138,000) (157,000)
------------ ------------
INCOME BEFORE INCOME TAXES 331,000 248,000
Income tax benefit (expense) - -
------------ ------------
NET INCOME $ 331,000 $ 248,000
============ ============
Basic earnings per share $ 0.34 $ 0.27
============ ============
Diluted earnings per share $ 0.31 $ 0.27
============ ============
Weighted average number of common shares
outstanding 960,000 917,000
Effect of dilutive securities 93,000 -
------------ ------------
Weighted average number of common shares
outstanding plus dilutive securities 1,053,000 917,000
============ ============
</TABLE>
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Six Months ended June 30, 1998 and June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 331,000 $ 248,000
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 299,000 365,000
Amortization 109,000 150,000
Bad debt expense 17,000 5,000
Changes in operating assets and
liabilities:
Decrease (increase) in operating
assets:
Accounts receivable (738,000) (997,000)
Inventories (633,000) 54,000
Prepaid advertising (118,000) (37,000)
Other 108,000 8,000
Increase (decrease) in operating
liabilities:
Accounts payable (45,000) (18,000)
Accrued expenses 97,000 (1,000)
------------ ------------
Net cash provided (used) by operating
activities (573,000) (223,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (219,000) (138,000)
Cash paid for acquisitions (250,000) -
------------ ------------
Net cash provided (used) by investing
activities (469,000) (138,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long
term debt 796,000 1,275,000
Payments on notes payable and long
term debt (197,000) (910,000)
Net proceeds from the sale of stock 418,000 4,000
------------ ------------
Net cash provided (used) by financing
activities 1,017,000 369,000
------------ ------------
NET INCREASE (DECREASE) IN CASH (25,000) 8,000
Cash, at beginning of period 183,000 107,000
------------ ------------
Cash, at end of period $ 158,000 $ 115,000
============ ============
</TABLE>
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
January 1, 1998 through June 30, 1998
(Unaudited)
<TABLE>
<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, 1998 922,872 $ 46,000 $6,504,000 $(1,832,000) $ 4,718,000
Sale of common stock under the
employee stock purchase plan 517 - 3,000 - 3,000
Exercise of options 25,284 1,000 139,000 - 140,000
Exercise of warrants 56,933 3,000 273,000 - 276,000
Net income - - - 331,000 331,000
------------ ----------- ------------ ------------- -------------
Balance as of June 30, 1998 1,005,606 $ 50,000 $6,919,000 $(1,501,000) $ 5,468,000
============ =========== ============ ============= =============
</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, 1998, and the results
of operations for the three months and the six months ended June 30, 1998 and
1997. 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, 1997.
Note 2 -- 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
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.
Note 3 -- Acquisition of National Teaching Aids, Inc.
- -----------------------------------------------------
During the second quarter, AMEP acquired all of the outstanding stock of
Learning and Leisure, Inc., a New York corporation, and its wholly owned
subsidiary, National Teaching Aids, Inc. ("NTA"). The acquisition will be
recorded using the purchase method of accounting in accordance with APB 16.
The total purchase price approximated $2,000,000 including liabilities
assumed. Payments for the acquisition included $250,000 cash at closing; a
promissory note with a principal balance of $950,000 requiring annual
principal payments of $237,500 plus accrued interest at 7.5%; a license
agreement requiring four annual payments of $100,000 each; and consulting
contracts requiring quarterly payments through June, 2000 of $37,500 each.
Results of operation of NTA are included in the consolidated financial
statements commencing June 1, 1998.
Note 4 -- Subsequent Event
- --------------------------
Subsequent to June 30, 1998, AMEP acquired substantially all the assets of
Summit Learning, a direct mail distributor of educational products. The
purchase price will approximate $1,600,000 and required a down payment of
$300,000 plus a promissory note bearing interest at 8.5% annually for the
balance. The note requires monthly principal payments of $125,000 plus
accrued interest. Results of operation of Summit Learning will be included in
the Company's consolidated financial statement commencing July 1, 1998.
<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 three operating subsidiaries: Hubbard
Scientific, Inc. ("Hubbard"), Scott Resources, Inc. ("Scott"), and National
Teaching Aids, Inc. ("NTA").
Effective April 17, 1998, AMEP acquired NTA for a cash payment of $250,000
plus future payments approximating $1,650,000. During April and May, 1998,
the operation of NTA was relocated to the Company's existing facility in
Chippewa Falls, WI. The Company was able to resume NTA operation in June and,
accordingly, the operating results of NTA were consolidated with the Company
commencing June 1, 1998.
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, 1998, Compared to December 31,
1997
- ----------------------------------------------------------------------------
The Company continued to improve its liquidity and capital resources during
the first half of 1998. Earnings before interest, taxes, depreciation, and
amortization were $877,000.
The Company's asset based financing arrangement with U. S. Bancorp Republic
Commercial Finance, Inc. expires on April 30, 2000, and provides for
borrowings up to $2,800,000. 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. As of June 30,1998,
the borrowing base formula limited total borrowings to $2,800,000. Borrowings
are collateralized by substantially all the Company's assets. Interest,
computed at a floating rate plus 2%, is payable monthly. In addition, the
Company is required to make minimum monthly principal payments of $20,000.
The borrowing agreement contains a demand provision such that the lender can
demand repayment at any time. Accordingly, the entire balance of outstanding
payments is reflected as a current liability. The lender has not indicated
that it will demand payment during 1998 and management does not expect to
receive such a demand. Should such a demand be made, the Company would not
have the funds available. However, the Company's improved financial condition
should allow it to obtain the necessary funds via either an equity placement
or alternate borrowing arrangements.
The Company believes that the funds available to it in 1998 will be adequate
to meet its operating requirements. The source of these funds will be cash
flow from operations and additional borrowings available under the arrangement
with its lender. The Company intends to install new computer software and
hardware during 1998. Substantially all of the arrangements required to
finance that installation were completed during 1997. Any acquisition
activity undertaken by the Company during 1998 would be contingent upon
obtaining the necessary financing.
Effective April 17, 1998, AMEP acquired all of the outstanding stock of
Learning and Leisure, Inc., a New York corporation, ("L & L"). L & L owns
100% of the common stock of National Teaching Aids, Inc., a developer and
manufacturer of science products for the K - 12 market. The purchase price of
approximately $2,000,000 consists of a $250,000 cash down payment and long
term financing provided by the seller.
Subsequent to June 30, 1998, AMEP acquired substantially all the assets of
Summit Learning, a direct mail distributor of educational products. The
purchase price of approximately $1,600,000 consisted of a $300,000 down
payment plus short term financing provided by the seller.
The Company reported a 15% working capital increase during the first six
months of 1998. Current assets of $5,655,000 increased by $1,416,000 from
December 31, 1997 and current liabilities increased by $1,151,000 from
$2,533,000 to $3,684,000. As a result, working capital increased from
$1,706,000 to $1,971,000 and the current ratio fell from 1.7 to 1.5.
Total assets increased by $3,121,000 from $7,251,000 at December 31, 1997, to
$10,372,000 at June 30, 1998, an increase of 43%. During the same period,
total liabilities increased by $2,371,000 from $2,533,000 to $4,904,000, an
increase of 94%. The increase in assets and liabilities reflects the
acquisition of NTA plus normal seasonal increases in business activity.
Stockholders' equity increased $750,000, or 16%, from $4,718,000. The
increase in equity reflects proceeds from the exercise of outstanding stock
warrants and stock options plus net income for the period.
Accounts receivable increased from $1,220,000 at December 31, 1997, to
$1,949,000 at June 30, 1998, an increase of $729,000 or 60%. This increase is
consistent with seasonal sales patterns under which second quarter sales
exceed fourth quarter sales.
The royalty receivable of $109,000 as of June 30, 1998 results from the sale
of Churchill and represents royalties expected to be received during the next
twelve months.
Inventories increased from $2,540,000 at the end of 1997 to $3,184,000 at June
30, 1998, an increase of $644,000 or 25%. Inventories increased because of
the NTA acquisition plus increased purchasing and production activity in
anticipation of third quarter sales.
Prepaid advertising costs increased from $38,000 at December 31, 1997, to
$118,000 at June 30, 1998. This increase is due to investment in the spring
1998 catalog program offset by partial amortization of this program.
Net property and equipment increased from $2,247,000 at December 31, 1997, to
$2,746,000 at June 30, 1998, a increase of $499,000 or 22%. The increase
resulted from the acquisition of NTA plus the costs of the new computer system
installed by the Company during 1998. The increase was offset by depreciation
expense of $299,000.
Video and film library costs decreased from $359,000 at December 31, 1997, to
$298,000 at June 30, 1998, a decrease of $61,000 or 17%. The decrease
consists entirely of regular monthly amortization.
Intangible assets increased from $169,000 at December 31, 1997, to $1,498,000
at June 30, 1998, an increase of $1,329,000 . The increase resulted from the
acquisition of NTA.
Other assets decreased from $237,000 at December 31, 1997, to $175,000 at June
30, 1998. Other assets declined because of royalty payments received from the
purchaser of Churchill Media.
Accounts payable and accrued expenses increased by $362,000 from $678,000 at
December 31, 1997, to $1,040,000 at June 30, 1998, reflecting the increased
needs generated by second quarter activity and to reflect the acquisition of
NTA.
At June 30, 1998, the Company had increased its borrowings under its working
capital line of credit facility by $507,000 to reflect the increased needs and
borrowing capacity generated by second quarter sales and to reflect the
acquisition of NTA.
Long-term debt, including current maturities, increased $1,502,000 primarily
to reflect the acquisition of NTA.
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.
Year 2000 Issue
- ---------------
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the year. Any of the Company's computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruption of operations; including among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. Based upon a recent assessment,
the Company determined that it was required to upgrade or replace certain
portions of its software so that its computer systems will properly utilize
dates beyond December 31, 1999.
During 1998, the Company continued its implementation of computer hardware and
software that is Year 2000 compliant. Resources were devoted to the
installation of computer systems and training related to the new system. It
is expected that the new system will be fully installed and operational during
1998.
The Company presently believes that with upgrades of existing software and
conversions to new software, the Year 2000 Issue can be mitigated. However,
if such upgrades and conversions are not made, or are not completed or
available timely, the Year 2000 Issue could have a material impact on the
operations of the Company. Furthermore, the Company could be adversely
effected by the failure of various third parties, such as customers and
suppliers, to remediate their own Year 2000 Issue. Although the Company has
initiated formal communications with its significant suppliers and large
customers to determine the potential impact upon the Company, it has not
completed its preliminary assessment.
Total costs of upgrades, replacements and related training are estimated to be
$300,000. Substantially all of those expenditures will occur during 1998.
Financing for the costs is available under the Company's various financing
arrangements.
In view of the foregoing, there is reasonable assurance that the Year 2000
Issue will not have a material adverse effect upon the Company. However,
there can be no guarantee that the systems of other companies on which the
Company relies will be timely converted, or that failure to convert by another
company or organization, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
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" were recently issued.
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 fiscal
periods beginning after December 15, 1997, and require comparative information
for earlier years to be restated. The implementation of these new standards
has not had a material effect on the financial statements and is not expected
to have a material effect in future financial statements.
Results of Operations -- Three months ended June 30, 1998, Compared to the
Three months ended June 30, 1997
- ----------------------------------------------------------------------------
The Company's revenues were $2,555,000 in the second quarter of 1998, compared
to the same period 1997 revenues of $2,544,000. Sales for 1998 are similar to
1997 sales primarily because increased sales to domestic distributors were
offset by a decrease in international shipments.
The cost of goods sold for the quarter ended June 30, 1998, was $1,462,000, a
decrease of $59,000 or 4% from the same period 1997 amount of $1,521,000.
Consolidated gross profits for the second quarter of 1998 were $1,093,000, an
increase of $70,000 or 7% from the same period 1997 gross profits of
$1,023,000. As a percentage of sales, the second quarter gross margin
increased from 40% in 1997 to 43% in 1998.
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 1998, production levels were higher than those of
the second quarter of 1997, resulting in improved margins. In addition, the
margin improved because certain selling prices were increased for 1998.
The advertising component of marketing costs for the second quarter of 1998
was $53,000, an increase of $31,000 or 141% from the same period 1997 cost of
$22,000. Advertising costs as percent of sales were 2% of sales in the second
quarter of 1998 and 1% of sales in the second quarter of 1997. Hubbard and
Scott produce direct mail catalogs featuring their manufactured products.
Other marketing costs for the second quarter of 1998 were $275,000, an
increase of $52,000 or 23% from the same period 1997 cost of $223,000. Other
marketing costs as a percentage of sales were 11% in the second quarter of
1998, and 9% in the second quarter of 1997.
General and administrative expenses were $343,000, a decrease of $37,000 or
10% from the second quarter 1997 G & A expense of $380,000. G & A costs as a
percent of sales were 13% in the second quarter of 1998 and 15% in the second
quarter of 1997.
Total operating costs increased 7% from $625,000 in the second quarter of 1997
to $671,000 in the second quarter of 1998. Operating costs as a percentage of
sales approximated 26% in the second quarter of 1998 and 25% during the same
period in 1997.
Interest expense decreased from $95,000 in the second quarter of 1997 to
$70,000 in the second quarter of 1998, a decrease of $25,000 or 26%. The
decreased interest expense is the result of lower debt levels made possible by
cash flow from operations and proceeds from the exercise of common stock
warrants and stock options.
The Company did not recognize any income tax expense for the second quarter of
1998. During preceding quarters, all income tax liabilities had been offset
against operating losses. The Company has net operating loss carryovers of
approximately $3,500,000 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 1998, 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 1998 was $352,000, compared with net
income of $303,000 in the same period of 1997. The income per share was $0.36
for the second quarter of 1998, compared to income per share of $0.33 for the
second quarter of 1997.
Inflation has not had any material effect on the Company's operations during
1998. 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 1998.
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, 1998, Compared to the Six
months ended June 30, 1997
- ----------------------------------------------------------------------------
The Company's revenues were $4,402,000 in the first half of 1998, an increase
of $237,000 or 6% from the same period 1997 revenues of $4,165,000.
The cost of goods sold for the six months ended June 30, 1998, was $2,655,000,
an increase of $23,000 or 1% from the same period 1997 amount of $2,632,000.
Consolidated gross profits for the first six months of 1998 were $1,747,000,
an increase of $214,000 or 14% from the same period 1997 gross profits of
$1,533,000. As a percentage of sales, gross margin increased from 37% in the
first six months of 1997 to 40% in the first six months of 1998.
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 1998, production levels were slightly higher than
those of the first half of 1997, resulting in improved margins. In addition,
the margin improved because certain selling prices were increased for 1998.
The advertising component of marketing costs for the first six months of 1998
was $88,000, an increase of $56,000 or 175% from the same period 1997 cost of
$32,000. Advertising costs as percent of sales were 2% of sales in the first
six months of 1998 and 1% of sales in the first six months of 1997. Hubbard
and Scott produce direct mail catalogs featuring their manufactured products.
Other marketing costs for the first six months of 1998 were $485,000, an
increase of $77,000 or 19% from the same period 1997 cost of $408,000. Other
marketing costs as a percentage of sales were 11% in the first six months of
1998, and 10% in the first six months of 1997.
General and administrative expenses were $705,000, an increase of $17,000 or
3% from the same period 1997 G & A expense of $688,000. G & A costs as a
percent of sales were 16% in the first six months of 1998 and 17% in the first
six months of 1997.
Total operating costs increased 13% from $1,128,000 in the first six months of
1997 to $1,278,000 in the first six months of 1998. Operating costs as a
percentage of sales approximated 29% in the first six months of 1998 and 27%
during the same period of 1997.
Interest expense decreased from $157,000 in the first six months of 1997 to
$138,000 in the first six months of 1998, a decrease of $19,000 or 12%. The
decreased interest expense is the result of lower debt levels made possible by
cash flow from operations and proceeds from the exercise of common stock
warrants and stock options.
The Company did not recognize any income tax expense for the first half of
1998. During preceding quarters, all income tax liabilities had been offset
against operating losses. The Company has net operating loss carryovers of
approximately $3,500,000 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 1998, 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 1998 was $331,000, compared with net
income of $248,000 in the same period of 1997. Income per share was $0.34 for
the first six months of 1998, compared to income per share of $0.27 for the
first six months of 1997.
Inflation has not had any material effect on the Company's operations during
1998. 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 1998.
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
The Registrant held its annual meeting of stockholders on June 9, 1998.
At that meeting, the stockholders voted upon the following matters:
1. Election of Directors
---------------------
The following persons were elected to serve as directors of the
Registrant:
<TABLE>
<CAPTION>
VOTES VOTES
FOR WITHHELD
-------- ---------
<S> <C> <C>
Clifford C. Thygesen 832,007 25,410
Dr. Robert A. Scott 831,942 25,475
Clifford L. Neuman 831,942 25,475
Dr. Wayne R. Kirschling 832,213 25,204
Stephen G. Calandrella 832,213 25,204
Steven B. Lapin 832,213 25,204
Richard J. Ciurczak 832,213 25,204
</TABLE>
2. 1997 Stock Incentive Plan - Additional Shares
---------------------------------------------
A proposal to increase the total number of shares that may be issued
pursuant to the exercise of options granted under the Company's 1997
Stock Incentive Plan by an additional 200,000 shares was defeated by
the following votes:
<TABLE>
<CAPTION>
<S> <C>
FOR 213,426
AGAINST 335,206
ABSTAIN 1,080
</TABLE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits: None.
Reports on Form 8-K:
1. On May 1, 1998, the Registrant filed a Current Report on Form 8-K
dated April 17, 1998, related to the acquisition of Learning and Leisure,
Inc., a New York corporation, and its wholly owned subsidiary, National
Teaching Aids, Inc. The report included:
Item 2: Acquisition of Assets
Exhibits: Stock Purchase Agreement dated April 13, 1998
2. On June 30, 1998, the Registrant filed a Current Report on form 8-K
dated June 30, 1998, related to the acquisition of Learning and Leisure Inc.,
a New York corporation, and its wholly owned subsidiary, National Teaching
Aids, Inc. The report included:
Item 7: Financial Statements and Exhibits.
<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: August 17, 1998 By: /s/ Clifford C. Thygesen
---------------- -----------------------------------------
Clifford C. Thygesen, President
Dated: August 17, 1998 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 INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-QSB FOR THE SIX MONTHS ENDED JUNE 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 158
<SECURITIES> 0
<RECEIVABLES> 2,044
<ALLOWANCES> (95)
<INVENTORY> 3,184
<CURRENT-ASSETS> 5,655
<PP&E> 7,030
<DEPRECIATION> (4,284)
<TOTAL-ASSETS> 10,372
<CURRENT-LIABILITIES> 3,684
<BONDS> 1,220
0
0
<COMMON> 50
<OTHER-SE> 5,418
<TOTAL-LIABILITY-AND-EQUITY> 10,372
<SALES> 2,555
<TOTAL-REVENUES> 2,555
<CGS> 1,462
<TOTAL-COSTS> 1,462
<OTHER-EXPENSES> 671
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> 352
<INCOME-TAX> 0
<INCOME-CONTINUING> 352
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 352
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.32
</TABLE>
