<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, 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 Drive, Suite 200, Boulder, Colorado 80301
--------------------------------------------------------------
(Address of principal executive officers) (Zip Code)
(303) 527-3230
--------------------------
(Issuer's Telephone Number)
---------------------------------------------------------
Former name, former address, and formal 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 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 10, 1998 the Company had 1,048,190 shares of its $0.05 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, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the three
months ended September 30, 1998 and September 30, 1997 4
Consolidated Statements of Operations for the nine months
ended September 30, 1998 and September 30, 1997 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and September 30, 1997 6
Consolidated Statement of Stockholders' Equity from
January 1, 1998 through September 30, 1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's discussion and analysis of financial
condition and results of operations
Liquidity and Capital Resources 9
Results of Operations 9
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
------------- -------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash $ 277,000 $ 183,000
Trade receivables, net of allowance
of $233,000 and $52,000 2,488,000 1,220,000
Royalty receivable 113,000 119,000
Inventories 3,464,000 2,540,000
Prepaid advertising costs 314,000 38,000
Other 135,000 139,000
------------- -------------
TOTAL CURRENT ASSETS 6,791,000 4,239,000
PROPERTY AND EQUIPMENT, net of accululated
depreciation of $4,456,000 and $3,985,000,
respectively 2,810,000 2,247,000
VIDEO LIBRARY, net of accumulated depreciation
of $673,000 and $580,000, respectively 267,000 359,000
INTANGIBLE ASSETS, net 1,449,000 169,000
OTHER ASSETS 634,000 237,000
------------- -------------
TOTAL ASSETS $ 11,951,000 $ 7,251,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABLITIES
Notes payable $ 2,645,000 $ 1,855,000
Current maturities of long term debt 282,000 -
Accounts payable 1,082,000 533,000
Accrued expenses 611,000 145,000
------------- -------------
TOTAL CURRENT LIABILITIES 4,620,000 2,533,000
LONG TERM DEBT 1,172,000 -
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value;
50,000,000 shares authorized;
none issued or outstanding - -
Common stock; $.05 par value;
100,000,000 shares authorized;
1,034,323 and 922,872 shares
issued and outstanding 51,000 46,000
Additional paid in capital 6,972,000 6,504,000
(Accumulated deficit) (864,000) (1,832,000)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 6,159,000 4,718,000
------------- -------------
TOTAL LIABILTIES AND STOCKHOLDERS' EQUITY $11,951,000 $7,251,000
============= =============
</TABLE>
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Three Months ended September 30, 1998 and September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
INCOME
Net sales $ 4,540,000 $ 2,592,000
Cost of goods sold 2,526,000 1,577,000
------------- -------------
Gross profit 2,014,000 1,015,000
OPERATING EXPENSES
Advertising and catalog costs 446,000 19,000
Other marketing 342,000 221,000
------------- -------------
Total marketing 788,000 240,000
General and administrative 482,000 327,000
------------- -------------
Total operating expenses 1,270,000 567,000
------------- -------------
OPERATING INCOME 744,000 448,000
Interest (expense) (106,000) (91,000)
INCOME BEFORE INCOME TAXES 638,000 357,000
Income tax benefit (expense) - -
------------- -------------
NET INCOME $ 638,000 $ 357,000
============= =============
Basic earnings per share $ 0.63 $ 0.39
============= =============
Diluted earnings per share $ 0.57 $ 0.36
============= =============
Weighted average number of common shares
outstanding 1,009,000 918,000
Effect of dilutive securities 116,000 78,000
------------- -------------
Weighted average number of common shares
outstanding plus dilutive securities 1,125,000 996,000
============= =============
</TABLE>
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Nine Months ended September 30, 1998 and September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
INCOME
Net sales $ 8,944,000 $ 6,757,000
Cost of goods sold 5,181,000 4,208,000
------------- -------------
Gross profit 3,763,000 2,549,000
OPERATING EXPENSES
Advertising and catalog costs 534,000 52,000
Other marketing 824,000 628,000
------------- -------------
Total marketing 1,358,000 680,000
General and administrative 1,194,000 1,016,000
------------- -------------
Total operating expenses 2,552,000 1,696,000
------------- -------------
OPERATING INCOME 1,211,000 853,000
Interest (expense) (244,000) (248,000)
INCOME BEFORE INCOME TAXES 967,000 605,000
Income tax benefit (expense) - -
------------- -------------
NET INCOME $ 967,000 $ 605,000
============= =============
Basic earnings per share $ 1.01 $ 0.66
============= =============
Diluted earnings per share $ 0.91 $ 0.64
============= =============
Weighted average number of common shares
outstanding 960,000 917,000
Effect of dilutive securities 104,000 26,000
------------- -------------
Weighted average number of common shares
outstanding plus dilutive securities 1,064,000 943,000
============= =============
</TABLE>
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months ended September 30, 1998 and September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 967,000 $ 605,000
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 470,000 525,000
Amortization 191,000 223,000
Bad debt expense 28,000 8,000
Changes in operating assets and liabilities:
Decrease (increase) in operating assets:
Accounts receivable (625,000) (787,000)
Inventories 45,000 39,000
Prepaid advertising costs (126,000) (58,000)
Other 200,000 59,000
Increase (decrease) in operating
liabilities:
Accounts payable 451,000 (195,000)
Accrued expenses 255,000 6,000
------------- -------------
Net cash provided (used) by operating
activities 1,856,000 425,000
CASH FLOWS FROM INVESTING ACTIVITIES ACTIVITIES:
Purchase of property and equipment (497,000) (210,000)
Cash paid for acquisitions,
net of cash acquired (525,000)
------------- -------------
Net cash provided (used) by investing
activities (1,022,000) (210,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and
long term debt 1,096,000 2,800,000
Payments on notes payable and long term debt (2,309,000) (2,919,000)
Proceeds from the sale of stock 473,000 9,000
------------- -------------
Net cash provided (used) by financing
activities (740,000) (110,000)
------------- -------------
NET INCREASE IN CASH 94,000 105,000
Cash, at beginning of period 183,000 107,000
------------- -------------
Cash, at end of period $ 277,000 $ 212,000
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Debt incurred in connection
with acquisitions 2,907,000
</TABLE>
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
January 1, 1998 through September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
Additional
Number of Common Paid 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 1,367 - 4,000 - 4,000
Exercise of options 48,151 2,000 190,000 - 192,000
Exercise of warrants 61,933 3,000 275,000 - 278,000
Net income - - - 967,000 967,000
------------- ------------- ------------- ------------- -------------
Balance as of
September 30, 1998 1,034,323 $ 51,000 $ 6,972,000 $ (865,000) $ 6,159,000
============= ============= ============= ============= =============
</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, 1998, and the
results of operations for the three months and the nine months ended September
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 1998, American Educational Products, Inc. (the "Company" or "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 was 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 $237,000 plus accrued
interest at 7.5%, a license agreement requiring four annual payments $100,000
each, and consulting contracts requiring quarterly payments through June 30,
2000 of $37,500 each. Results of operations of NTA are included in the
consolidated financial statements commencing June 1, 1998.
Note 4 -- Acquisition of Summit Learning
- ----------------------------------------
On August 4, 1998, SL Distribution, Inc. ("SL"), a wholly owned subsidiary of
AMEP, completed the acquisition of certain assets of SV Distribution Company
("SV"), a wholly owned subsidiary of Steck-Vaughn Publishing Company ("Steck-
Vaughn"), a unit of Harcourt General, Inc. Pursuant to the definitive Asset
Purchase and Sale Agreement (the "Agreement") dated as of August 4, 1998, SL
purchased substantially all of the tangible and intangible assets (the
"Assets") used in connection with the distribution of supplemental educational
products through the direct mailing of catalogs under the names "Summit
Learning" and "Young Explorers" (the "Business").
The purchase price paid by the Company to Steck-Vaughn for the Assets of the
Business was $1,621,743 (subject to future adjustments), of which $300,000 was
paid in cash at closing and the balance of the purchase price, with interest
at the rate of 8.5% per annum, was evidenced by a Promissory Note payable in
monthly principal installments of $125,000 each which, together with interest
thereon, commence on August 1, 1998 and continue until July 1, 1999 when the
entire outstanding principal balance, together with any accrued and unpaid
interest shall be due and payable in full. The down payment was funded by
AMEP's available working capital resources. Subsequent to August 4, 1998, the
consumer catalog portion of the business known as Young Explorers was sold to
a third party.
The acquisition was recorded using the purchase method of accounting in
accordance with APB 16. Total acquisition costs approximating $1,700,000
(including legal, accounting, and other expenses incurred) were allocated to
various assets based upon their estimated fair value. Pursuant to a
management contract under which AMEP assumed operational control over the
Summit Learning business on July 1, 1998, the results of operations of Summit
Learning were included in the Company's consolidated financial statements
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 four operating subsidiaries: Hubbard
Scientific, Inc. ("Hubbard"), Scott Resources, Inc. ("Scott"), National
Teaching Aids, Inc. ("NTA"), and SL Distribution, Inc. dba Summit Learning
("Summit").
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.
Effective August 4, 1998, AMEP acquired the business known as Summit Learning
for a cash payment of $300,000 plus future payments approximating $1,300,000.
Pursuant to a management contract, AMEP assumed operational control of the
Summit Learning business effective July 1, 1998. Accordingly, the operating
results of Summit were consolidated with the Company commencing July 1, 1998.
Comparisons between 1998 and 1997 are affected by these acquisitions.
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, 1998 Compared to December 31,
1997
- -----------------------------------------------------------------------------
The Company continued to improve its liquidity and capital resources during
the first nine months of 1998. Earnings before interest, taxes, depreciation,
and amortization were $1,872,000 for the nine month period. In addition, the
Company increased its equity as various option and warrant holders exercised
their rights to purchase additional shares of Company stock.
The Company has an asset based financing arrangement with U.S. Bancorp
Republic Commercial Finance, Inc. that expires on April 30, 2000. It 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
September 30, 1998, the borrowing base formula limited total borrowings to
$2,300,000. 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 in 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 may
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 installed new computer software and hardware
during 1998. Substantially all of the arrangements required to finance that
installation were completed during 1997.
For the acquisitions completed during the first nine months of 1998, the
Company's working capital resources were sufficient to fund the down payments
that were due on the date of closing. The remainder of the purchase price for
each acquisition was provided by the respective sellers.
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
$1,900,000 consists of a $250,000 cash down payment plus long term financing
provided by the seller.
Effective August 4, 1998, AMEP acquired the business known as Summit Learning.
AMEP had originally started this business in 1987 and had sold it to Steck-
Vaughn Publishing Company in 1995. Steck-Vaughn decided to dispose of the
business after they were acquired by Harcourt General, Inc. in 1997. Sales
proceeds from the 1995 sale approximated $3,982,000. The 1998 purchase price
of approximately $1,600,000 consists of $300,000 cash down payment plus short
term financing provided by the seller.
The operation of Summit Learning during 1999 will require the Company to
finance the spring catalog that is expected to be mailed on or about January
1, 1999. Management believes that the existing working capital resources will
be sufficient to finance that mailing.
The Company reported a 27% working capital increase during the first nine
months of 1998. Current assets of $6,791,000 increased by $2,552,000 from
December 31, 1997 and current liabilities increased by $2,087,000 from
$2,533,000 to $4,620,000. As a result, working capital increased from
$1,706,000 to $2,171,000. The current ratio (calculated as total current
assets divided by total current liabilities) was 1.5 at September 30, 1998 and
1.7 at December 31, 1997. The declining current ratio was caused by the
additional short term debt incurred in connection with the two acquisitions.
Total assets increased by $4,700,000 from $7,251,000 at December 31, 1997 to
$11,951,000 at September 30, 1998, an increase of 65%. During the same
period, total liabilities increased by $3,259,000 from $2,533,000 to
$5,792,000, an increase of 129%. Stockholders' equity increased $1,441,000,
or 31%, from $4,718,000 to $6,159,000. 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
$2,488,000 at September 30, 1998, an increase of $1,268,000 or 104%.
Approximately $600,000 of the increase relates to the Summit acquisition. The
remaining increase is consistent with seasonal sales patterns under which
third quarter sales exceed fourth quarter sales.
The royalty receivable of $113,000 as of September 30, 1998 represents
Churchill royalties expected to be received in the next twelve months.
Inventories increased from $2,540,000 at the end of 1997 to $3,464,000 at
September 30, 1998, an increase of $924,000 or 36%. Substantially all of the
increase is related to the acquisitions of Summit and NTA.
Prepaid advertising costs increased from $38,000 at December 31, 1997, to
$314,000 at September 30, 1998. This increase represents the prepaid
advertising costs of Summit.
Net property and equipment increased from $2,247,000 at December 31, 1997, to
$2,810,000 at September 30, 1998, an increase of $563,000 or 25%. The
increase resulted from the acquisitions of NTA and Summit plus the costs of
the new computer system installed by the Company during 1998. The increase
was offset by depreciation expense of $470,000.
Video and film library costs decreased from $359,000 at December 31, 1997, to
$267,000 at September 30, 1998, a decrease of $92,000 or 26%. The decrease
consists entirely of regular monthly amortization.
Intangible assets increased from $169,000 at December 31, 1997, to $1,449,000
at September 30, 1998, an increase of $1,280,000 or 757%. The increase
results from the acquisition of NTA.
Other assets increased from $237,000 at December 31, 1997, to $634,000 at
September 30, 1998. The increase is primarily related to the acquisitions
made by the Company.
Accounts payable and accrued expenses increased by $1,014,000 from $678,000 at
December 31, 1997, to $1,692,000 at September 30, 1998, reflecting the
increased activity levels generated by the acquisitions of NTA and Summit.
For the nine month period ending September 30, 1998, bank borrowings decreased
by $156,000. Other notes payable of $946,000 represent financing related to
the acquisition of Summit. 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 1999.
Long-term debt, including both the current portion of $282,000 and the non-
current portion of $1,172,000, primarily represents financing related to 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 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 in time, the Year 2000 Issue could have a material impact on the
operations of the Company. Furthermore, the Company could be adversely
affected 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 on the Company, it has not
completed its preliminary assessment.
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 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 on future financial statements.
Results of Operations - Three months ended September 30, 1998 Compared to the
Three months ended September 30, 1997
- -----------------------------------------------------------------------------
The Company's revenues were $4,540,000 in the third quarter of 1998, an
increase of $1,948,000 or 75% from the same period 1997 revenues of
$2,592,000. The increase includes $1,900,000 attributed to Summit and
$360,000 attributed to NTA.
The cost of goods sold for the quarter ended September 30, 1998, was
$2,526,000, an increase of $949,000 or 60% from the same period 1997 amount of
$1,577,000. The increase includes $976,000 attributed to Summit and $127,000
attributed to NTA.
Consolidated gross profits for the third quarter of 1998 were $2,014,000, an
increase of $999,000 or 98% from the same period 1997 gross profits of
$1,015,000. As a percentage of sales, the gross margin percent was 44% for
1998 and 39% for 1997. The overall gross margin of 44% was composed of 41%
margin from manufacturing operations and 49% margin from distribution
operations. The Company expects that competitive pricing pressures will
reduce margins for distribution operations in future periods.
The advertising component of marketing costs for the third quarter of 1998 was
$446,000, an increase of $427,000 from the same period 1997 cost of $19,000.
Approximately $334,000 of the increase relates to the acquisition of Summit
and the remainder relates to increased catalog mailings for Scott and Hubbard.
Other marketing costs for the third quarter of 1998 were $342,000, an increase
of $121,000 or 55% from the same period 1997 cost of $221,000. Substantially
all of the increase relates to the acquisition of Summit.
General and administrative expenses were $482,000, an increase of $155,000 or
47% from the third quarter 1997 G & A expense of $327,000. Most of the
increase can be attributed to the acquisitions.
Total operating costs increased 124% from $567,000 in the third quarter of
1997 to $1,270,000 in the third quarter of 1998.
Interest expense increased from $91,000 in the third quarter of 1997 to
$106,000 in the third quarter of 1998, an increase of $15,000 or 16%. The
increase relates to debt incurred in connection with the Company's
acquisitions.
The Company did not recognize any income tax benefit or expense for the third
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 third quarter of 1998 was $638,000, compared with net
income of $357,000 in the same period of 1997. Basic earnings per share were
$0.63 for the third quarter of 1998 compared to basic earnings per share of
$0.39 for the third 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 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 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 -- Nine months ended September 30, 1998 Compared to the
Nine months ended September 30, 1997
- -----------------------------------------------------------------------------
The comparison of operating results for the first nine months of 1998 to the
first nine months of 1997 is affected by the acquisitions of NTA and Summit in
1998.
The Company's revenues were $8,944,000 in the first nine months of 1998, an
increase of $2,187,000 or 32% from the same period 1997 revenues of
$6,757,000. The increase includes $1,900,000 attributed to Summit and
$595,000 attributed to NTA.
The cost of goods sold for the nine months ended September 30, 1998, was
$5,181,000, an increase of $973,000 or 23% from the same period 1997 amount of
$4,208,000. The increase includes $976,000 attributed to Summit and $215,000
attributed to NTA.
Consolidated gross profits for the first nine months of 1998 were $3,763,000,
an increase of $1,214,000 or 48% from the same period 1997 gross profits of
$2,549,000. As a percentage of sales, the gross margin percent was 42% for
1998 and 38% for 1997. The overall gross margin of 42% was composed of 40%
margin from manufacturing operations and 49% margin from distribution
operations. The Company expects that competitive pricing pressures will
reduce margins for distribution operations in future periods.
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 1998, production levels were slightly higher
than those of the first nine months of 1997, resulting in improved margins.
The advertising component of marketing costs for the first nine months of 1998
was $534,000, an increase of $482,000 or 927% from the same period 1997 cost
of $52,000. The increase includes $335,000 attributed to Summit and the
remainder is attributed to increased mailings of the Scott and Hubbard
catalogs.
Other marketing costs for the first nine months of 1998 were $824,000, an
increase of $196,000 or 31% from the same period 1997 cost of $628,000.
Approximately $100,000 of the increase can be attributed to Summit and the
remainder is attributed to additional travel costs and trade show costs.
General and administrative expenses were $1,194,000, an increase of $178,000
or 18% compared to the first nine months of 1997 G & A expense of $1,016,000.
Approximately $66,000 of the increase can be attributed to Summit and
approximately $45,000 can be attributed to NTA. There have also been
increases in certain regulatory and filing activities, especially with regard
to listing the Company's stock on the Pacific Exchange.
Total operating costs increased 50% from $1,696,000 in the first nine months
of 1997 to $2,552,000 in the first nine months of 1998.
There was no significant change in interest expense, which was $244,000 for
the nine months of 1998 and $248,000 for the nine months of 1997. Although
the Company reduced its borrowings under its working capital line of credit
and reduced its effective interest rate on those borrowings, it incurred
additional debt in connection with the acquisitions of Summit and NTA.
The Company did not recognize any income tax expense for the first nine months
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 nine months of 1998 was $967,000, compared with a net
income of $605,000 in the same period of 1997. Basic earnings per share were
$1.01 for the first nine months of 1998, compared to basic earnings per share
of $0.66 for the first nine 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 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 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
-----------------
On August 10, 1998, a complaint was filed against the Company for
copyright infringement. The Company denied the allegations contained in the
complaint and expects that the ultimate resolution of the matter will not have
a material adverse effect on the financial statements of the Company.
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 (filed during the quarter):
1. On August 17, 1998, the Registrant filed a Current Report
on Form 8-K dated August 4, 1998, related to the
acquisition of certain assets from SV Distribution, Inc.
(a subsidiary of Steck-Vaughn Publishing Company, which is
a unit of Harcourt General, Inc.). The assets purchased
were the operating assets of the business known as Summit
Learning. The report included:
Item 2: Acquisition of Assets
Exhibits: Asset Purchase and Sale Agreement dated August
4, 1998
Reports on Form 8-K (filed subsequent to end of quarter):
1. On October 19, 1998, the Registrant filed a Current Report
on Form 8-K/A dated August 4, 1998 to amend the Form 8-K
filed August 17, 1998 to include unaudited pro forma
information, unaudited interim financial statements, and
audited financial statements relative to the acquisition
of certain operational assets known as Summit Learning.
The report included:
Item 2: Acquisition of Assets
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: November 18, 1998 By: /s/ Clifford C. Thygesen
----------------- ----------------------------------
Clifford C. Thygesen, President
Dated: November 18, 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 STATEMENTS OF OPERATIONS FOUND ON
PAGES 3-5 OF THE COMPANY'S FORM 10-QSB FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 277
<SECURITIES> 0
<RECEIVABLES> 2,721
<ALLOWANCES> (233)
<INVENTORY> 3,464
<CURRENT-ASSETS> 6,791
<PP&E> 7,266
<DEPRECIATION> (4,456)
<TOTAL-ASSETS> 11,951
<CURRENT-LIABILITIES> 4,620
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0
0
<COMMON> 51
<OTHER-SE> 6,108
<TOTAL-LIABILITY-AND-EQUITY> 11,951
<SALES> 8,944
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<CGS> 5,181
<TOTAL-COSTS> 5,181
<OTHER-EXPENSES> 2,552
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 244
<INCOME-PRETAX> 967
<INCOME-TAX> 0
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</TABLE>
