<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, 1999
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 11, 1999 the Company had 1,076,030 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, 1999
and December 31, 1998 4
Consolidated Statements of Operations and Comprehensive
Income for the three months ended September 30, 1999
and September 30, 1998 6
Consolidated Statements of Operations and Comprehensive
Income for the nine months ended September 30, 1999
and September 30, 1998 8
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and September 30, 1998 10
Consolidated Statement of Stockholders' Equity from
January 1, 1999 through September 30, 1999 12
Notes to Consolidated Financial Statements 13
Item 2. Management's discussion and analysis of financial condition and
results of operations
Liquidity and Capital Resources 17
Results of Operations 22
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
As of September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited) ___________
------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
Cash $ 213,000 $ 124,000
Trade receivables, net of allowance
of $124,000 and $95,000 2,705,000 1,876,000
Royalty receivable 128,000 116,000
Inventories 4,269,000 3,733,000
Prepaid advertising costs 445,000 1,114,000
Other 195,000 167,000
----------- -----------
TOTAL CURRENT ASSETS 7,955,000 7,130,000
PROPERTY AND EQUIPMENT, net 2,569,000 2,596,000
VIDEO LIBRARY, net 125,000 217,000
INTANGIBLE ASSETS, net 1,775,000 1,160,000
OTHER ASSETS 15,000 99,000
----------- ----------
TOTAL ASSETS $12,439,000 $11,202,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,205,000 $1,614,000
Current maturities of long term debt 421,000 895,000
Accounts payable 1,274,000 1,135,000
Accrued expenses 330,000 261,000
Income taxes payable 31,000 59,000
------------ ------------
TOTAL CURRENT LIABILITIES 4,261,000 3,964,000
LONG TERM DEBT, less current maturities 960,000 1,087,000
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;
1,076,030 and 1,045,524 shares
issued and outstanding 54,000 52,000
Additional paid in capital 7,192,000 7,081,000
(Accumulated deficit) (28,000) (982,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 7,218,000 6,151,000
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY
$12,439,000 $11,202,000
============ ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
for the Three Months ended September 30, 1999 and September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
September 30, September 30,
1999 1998
-------------- -------------
<S> <C> <C>
INCOME
Net sales $4,624,000 $4,540,000
Cost of goods sold 2,737,000 2,526,000
------------ -----------
Gross profit 1,887,000 2,014,000
OPERATING EXPENSES
Advertising and catalog costs 497,000 446,000
Other marketing 293,000 342,000
------------ -----------
Total marketing 790,000 788,000
General and administrative 557,000 482,000
------------ -----------
Total operating expenses 1,347,000 1,270,000
------------ -----------
OPERATING INCOME 540,000 744,000
Interest (expense) (91,000) (106,000)
------------ -----------
INCOME BEFORE INCOME TAXES 449,000 638,000
============ ===========
Income tax benefit (expense) - -
------------ -----------
NET INCOME AND COMPREHENSIVE INCOME $449,000 $ 638,000
============ ===========
Basic earnings per share $ 0.42 $ 0.63
============ ============
Diluted earnings per share $ 0.39 $ 0.57
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
for the Nine Months ended September 30, 1999 and September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30, September 30,
1999 1998
------------- --------------
<S> <C> <C>
INCOME
Net sales $12,157,000 $8,944,000
Cost of goods sold 7,102,000 5,181,000
------------ -----------
Gross profit 5,055,000 3,763,000
OPERATING EXPENSES
Advertising and catalog costs 1,157,000 534,000
Other marketing 1,020,000 824,000
Total marketing 2,177,000 1,358,000
---------- ----------
General and administrative 1,639,000 1,194,000
---------- ----------
Total operating expenses 3,816,000 2,552,000
---------- ----------
OPERATING INCOME 1,239,000 1,211,000
Interest (expense) (285,000) (244,000)
----------- -----------
INCOME BEFORE INCOME TAXES 954,000 967,000
Income tax benefit (expense) - -
----------- -----------
NET INCOME AND COMPREHENSIVE INCOME $ 954,000 $ 967,000
=========== ===========
Basic earnings per share $ 0.89 $ 1.01
=========== ===========
Diluted earnings per share $ 0.84 $ 0.91
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months ended September 30, 1999 and September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30, September 30,
1999 1998
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 954,000 $ 967,000
Items not requiring cash outlays:
Depreciation 492,000 470,000
Amortization 248,000 191,000
Bad debt expense 72,000 28,000
Imputed interest expense 46,000 -
Changes in:
Accounts receivable (901,000) (625,000)
Inventories 30,000 45,000
Prepaid advertising costs 729,000 (126,000)
Accounts payable 73,000 451,000
Accrued expenses 69,000 255,000
Other (110,000) 200,000
---------- ----------
Net cash provided (used) by
operating activities 1,702,000 1,856,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (393,000) (497,000)
Cash paid for acquisitions (1,251,000) (525,000)
----------- ----------
Net cash provided (used) by
investing activities (1,644,000) (1,022,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and
long term debt 1,059,000 1,096,000
Payments on notes payable and long
term debt (1,141,000) (2,309,000)
Net proceeds from common stock
transactions 113,000 473,000
----------- -----------
Net cash provided (used) by
financing activities 31,000 (740,000)
NET INCREASE (DECREASE) IN CASH 89,000 94,000
Cash, at beginning of period 124,000 183,000
----------- -----------
Cash, at end of period $ 213,000 $ 277,000
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 263,000 $ 209,000
============ ===========
Income taxes $ - $ -
============ ===========
Non-cash investing and financing
activities:
Capital leases incurred in exchange
for equipment purchases $ 72,000 $ -
============ ============
Acquisition of companies with debt $ - $2,907,000
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
January 1, 1999 through September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK Additional
Number Paid Accumu-
of Common in lated
shares Stock Capital Deficit) Total
---------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance as of
January 1, 1999 1,045,524 $52,000 $7,081,000 $(982,000) $6,151,000
Sale of common stock
under the employee
stock purchase plan 757 - 5,000 - 5,000
Exercise of options 29,749 2,000 106,000 - 108,000
Net income - - - 954,000 954,000
----------- --------- ---------- --------- -----------
Balance as of
September 30, 1999 1,076,030 $54,000 $7,192,000 $(28,000) $7,218,000
</TABLE>
See accompanying notes to financial statements.
<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, 1999, and the
results of operations for the three months and the nine months ended September
30, 1999 and 1998. 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, 1998.
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 To-Sew
- -------------------------------
On September 1, 1999, AEP California, Inc. ("AEPCAL"), a wholly owned
subsidiary of American Educational Products, Inc. ("AMEP"), completed the
acquisition of certain assets of To-Sew, Inc., a California corporation.
Pursuant to the definitive Asset Purchase and Sale Agreement dated as of
September 1, 1999, AEPCAL purchased substantially all of the tangible and
intangible assets used in the manufacture and distribution of sewing kits
under the name "To-Sew." The sewing kits are supplemental educational
manipulative products primarily used in Family and Consumer Science
classrooms.
The purchase price paid by the Company to To-Sew, Inc. for the assets was
$1,300,000. Substantially all of the purchase price was paid in cash at
closing.
In conjunction with this acquisition, AMEP negotiated an increase in the
maximum borrowings permissible under its bank lending agreement. Funds for
the acquisition were provided by the bank and by cash flow generated from
operations.
The acquisition was recorded using the purchase method of accounting in
accordance with APB 16. Total acquisition costs approximating $1,350,000
(including legal, accounting, and other expenses incurred) were allocated to
various assets based on their estimated fair value. Goodwill of approximately
$770,000 will be amortized over fifteen years. The results of operations from
the acquisition were included in the Company's consolidated financial
statements commencing September 1, 1999.
Note 4 - Earnings per Share
- ---------------------------
The following is a reconciliation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three months ended September 30, 1999
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ --------
<S> <C> <C> <C>
Basic EPS
- ---------
Income available to common
shareholders $ 449,000 1,076,000 $0.42
Effect of dilutive securities
- -----------------------------
Stock options 59,000
Convertible debt 20,000 79,000
Diluted EPS
- ----------- ----------- ---------- ---------
Income available to common
stockholders plus assumed
conversions $ 469,000 1,214,000 $0.39
=========== =========== ==========
Three months ended September 30, 1998
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ------
Basic EPS
- ---------
Income available to common
shareholders $ 638,000 1,020,000 $0.63
Effect of dilutive securities
- -----------------------------
Stock options 43,000
Convertible debt 20,000 95,000
Diluted EPS
- ----------- ----------- ----------- ----------
Income available to common
stockholders plus assumed
conversions $ 658,000 1,158,000 $0.57
========== ========= ==========
Nine months ended September 30, 1999
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
- ---------
Income available to common
shareholders $ 954,000 1,070,000 $0.89
Effect of dilutive securities
- -----------------------------
Stock options 66,000
Convertible debt ** **
Diluted EPS
- ----------- ----------- ---------- ----------
Income available to common
stockholders plus assumed
conversions $ 954,000 1,136,000 $0.84
============ ========== ===========
Nine months ended September 30, 1998
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------- -------
Basic EPS
- ---------
Income available to common
shareholders $ 967,000 955,000 $1.01
Effect of dilutive securities
- -----------------------------
Stock options 78,000
Convertible debt 20,000 57,000
Diluted EPS
- ----------- ----------- ----------- ---------
Income available to common
stockholders plus assumed
conversions $987,000 1,090,000 $0.91
=========== =========== ==========
</TABLE>
** For the nine months ended September 30, 1999, conversion of the convertible
debt would be anti-dilutive.
<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 five operating subsidiaries: Hubbard
Scientific, Inc. ("Hubbard"), Scott Resources, Inc. ("Scott"), National
Teaching Aids, Inc. ("NTA"), SL Distribution, Inc. dba Summit Learning
("Summit"), and AEP California, Inc. dba To-Sew ("To-Sew").
Effective September 1, 1999, AMEP acquired the business known as To-Sew for a
cash payment of $1,250,000. Subsequent to September 1, 1999, an additional
$50,000 was paid in cash to reflect the final inventory valuation. The source
of funds for the acquisition was borrowings under the Company's working
capital line of credit plus cash flow from operations. During the fourth
quarter, the operations of To-Sew were relocated to one of the Company's
existing facilities in Fort Collins, Colorado. AMEP assumed control of To-Sew
on September 1, 1999 and accordingly, the operating results of To-Sew were
consolidated with the Company commencing September 1, 1999.
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.
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.
Comparisons between 1999 and 1998 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, 1999 COMPARED TO DECEMBER 31,
1998
The Company improved its liquidity and capital resources during the first nine
months of 1999. Earnings before interest, taxes, depreciation, and
amortization were $1,979,000 for the nine-month period.
The Company has an asset based financing arrangement with U.S. Bancorp
Republic Commercial Finance, Inc. that expires on April 30, 2002. It provides
for borrowings up to $4,050,000. Certain amounts available to be borrowed
under the agreement are utilized as a working capital line of credit and are
derived from a borrowing base as defined in the agreement relating to
allowable inventory and accounts receivable. Borrowings are collateralized by
substantially all the Company's assets. Interest, computed at a floating rate
plus 1%, is payable monthly. In addition, the Company is required to make
minimum monthly principal payments of $36,000.
The borrowing agreement contains a demand provision such that the lender can
demand repayment at any time. Accordingly, the entire outstanding balance is
reflected as a current liability. The lender has not indicated that it will
demand payment in 1999 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 1999 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 completed its installation of new computer
software and hardware during 1999 and installed a new telephone system at
Summit. All of the arrangements required to finance the installations have
been completed.
On September 1, 1999, the Company increased its borrowings under the financing
agreement to fund the acquisition of To-Sew. By September 30, 1999, the
Company's cash flow from operations had allowed it to repay $450,000 of the
additional borrowings.
The Company reported a 17% working capital increase during the first nine
months of 1999. Current assets of $7,955,000 increased by $825,000 from
December 31, 1998 and current liabilities increased by $297,000 from
$3,964,000 to $4,261,000. As a result, working capital increased from
$3,166,000 to $3,694,000. The current ratio (calculated as total current
assets divided by total current liabilities) was 1.9 at September 30, 1999 and
1.8 at December 31, 1998.
Total assets increased by $1,237,000 from $11,202,000 at December 31, 1998 to
$12,439,000 at September 30, 1999, an increase of 11%. During the same
period, total liabilities increased by $170,000 from $5,051,000 to $5,221,000,
an increase of 3%. Stockholders' equity increased $1,067,000, or 17%, from
$6,151,000 to $7,218,000. The increase in equity primarily reflects net
income for the period.
Accounts receivable increased from $1,876,000 at December 31, 1998 to
$2,705,000 at September 30, 1999, an increase of $829,000 or 44%. The
increase is consistent with the Company's seasonal sales pattern and the
Company's increased level of business. Approximately $200,000 of the increase
is associated with acquisition of To-Sew.
Inventories increased from $3,733,000 at the end of 1998 to $4,269,000 at
September 30, 1999, an increase of $536,000 or 14%. Substantially all of the
increase is related to the acquisition of To-Sew.
Prepaid advertising costs decreased from $1,114,000 at December 31, 1998 to
$445,000 at September 30, 1999. The Company expects to spend approximately
$1,500,000 during calendar 1999 on direct mail order catalogs. Those costs
are expensed on a pro-rata basis over the course of the year based upon
expected sales. The balance of $445,000 at September 30, 1999 represents
catalog costs that will be expensed in future months.
Net property and equipment decreased from $2,596,000 at December 31, 1998 to
$2,569,000 at September 30, 1998, a decrease of $27,000. The net decrease
resulted from asset purchases (primarily computer and telephone equipment)
offset by depreciation expense of $492,000.
Video and film library costs decreased from $217,000 at December 31, 1998 to
$125,000 at September 30, 1999, a decrease of $92,000 or 42%. The decrease
consists entirely of regular monthly amortization.
Intangible assets increased from $1,160,000 at December 31, 1998 to $1,775,000
at September 30, 1999, an increase of $615,000 or 53%. The increase results
from the acquisition of To-Sew, offset by amortization of $151,000.
Accounts payable and accrued expenses increased by $208,000 from $1,396,000 at
December 31, 1998 to $1,604,000 at September 30, 1999, reflecting the
increased activity levels generated by the acquisitions.
For the nine-month period ending September 30, 1999, bank borrowings increased
by $591,000. The increase resulted from additional borrowings of $1,240,000
related to the To-Sew acquisition, offset by payments to the bank out of cash
flow from operations. Borrowings by the Company fluctuate with the
seasonality of its business. Management anticipates borrowing reductions
during the fourth quarter. Consistent with prior years, borrowings are
expected to increase during the first quarter of 2000.
Long-term debt, including both the current portion of $421,000 and the
non-current portion of $960,000, primarily represents acquisition financing
and equipment financing.
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 essentially the result of computer programs being
written using two digits rather than four to define the year. Any of the
Company's information technology ("IT") systems 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. The problem has the potential to affect "non-IT" systems, that
is, operating and control systems that rely on embedded microprocessors.
Embedded microprocessors have interfaces that are inaccessible to the user and
which may contain a date function that could trigger a malfunction. In
addition, like every other business enterprise, the Company is at risk from
Year 2000 Issue failures on the part of its major business counterparts,
including suppliers, distributors, and customers, as well as potential
failures in public and private infrastructure services, including electricity,
water, gas, communications, and financial services. System failures could
adversely affect operations and financial results throughout the Company.
Management has implemented a multi-phase program to address the Year 2000
Issue. These efforts are coordinated through a senior level task force and by
local task forces at each operating location.
Primary IT Systems - Manufacturing and Accounting
- -------------------------------------------------
During 1996 and 1997, the Company assessed its manufacturing and accounting
computing system, including hardware and software. The Company determined
that its system had significant deficiencies with regard to ongoing
maintenance costs, processing speeds, and integration with new generation
software. It was also determined that some of the Company's software was not
Year 2000 compliant. Accordingly, the Company commenced a project in 1997 to
evaluate and install new integrated manufacturing, customer service and
accounting software. This project was substantially completed during 1998.
The new software provides many new benefits, as it is "Windows" based and
includes numerous capabilities not available in the systems that it replaced.
It is also Year 2000 compliant.
Simultaneous with the selection of the new software, the Company elected to
migrate from its existing "UNIX" servers to a "Windows NT" platform, and to
replace substantially all of its computer hardware. The Company found that
switching from UNIX to Windows NT would substantially reduce future costs for
computer hardware and operating systems support. Preparation, testing, and
training for the new system commenced early in 1998 and was substantially
completed by the end of the year.
Primary IT Systems - Warehouse
- ------------------------------
During its assessment of the computer software and hardware used in its
distribution warehouse, the Company determined that existing systems were not
Year 2000 compliant. The provider of those systems has developed an upgrade
path that is represented to provide full Year 2000 compatibility. In 1998,
the Company commenced work on the upgrade, which was completed during the
second quarter of 1999. The upgrade includes both software and hardware
replacements and utilizes the AIX operating system.
Non-IT Systems
- --------------
The Company is continuing its inventory and assessment of systems with
embedded technology. It has completed its review of production and
manufacturing equipment and does not believe that any of its critical
manufacturing equipment is dependent on date sensitive programming. Its
review of other systems is being conducted with manufacturers and suppliers of
the other systems. Most of the equipment has been certified by the supplier
to be Year 2000 compliant. Certain telephone messaging equipment was
identified as non-compliant. The equipment was upgraded with replacement
parts that were certified by the manufacturer as Year 2000 compliant.
Products
- --------
Substantially all of the Company's products function without regard to the
date. A few of the current CD-ROMS sold by the Company contain a two-digit
date field. The Company is continuing its testing of its CD-ROMS to determine
whether functionality will be impaired after 1999. It does not currently
appear that these products will be impaired. With regard to discontinued
products, some of the software previously distributed may have date sensitive
functions. Should any of these products fail, the Company would look to the
software developer for remediation.
Third Parties
- -------------
Further, the Company has initiated formal communications with its significant
suppliers, customers, and critical business partners to determine the extent
to which the Company may be vulnerable in the event those parties fail to
properly remediate their own Year 2000 Issues. While the Company is not
presently aware of any such significant exposure, there can be no guarantee
that the systems of third parties on which the Company relies will be
converted in a timely manner, or that a failure to properly convert by another
company would not have a material adverse effect on the Company.
Costs
- -----
The Company has incurred total costs of approximately $775,000 related to its
Year 2000 Issue, including the repair and replacement of various computer and
telephone systems. In accordance with AICPA Statement of Position 98-1,
approximately $650,000 of the costs had been capitalized. No additional
expenditures are planned. All of these costs include both incremental costs
incurred plus internal costs that have been redeployed from other activities.
The Company also relies, both domestically and internationally, upon
government agencies, utility companies, telecommunications services, and other
service providers outside the Company's control. There is no assurance that
such suppliers, governmental agencies, or other third parties will not suffer
Year 2000 business disruption. Such failures could have a material adverse
effect on the Company's financial conditional and results of operations.
The Company's program calls for the development of contingency plans if the
results of testing mission-critical systems identify a business function risk.
In addition, as a normal course of business, the Company maintains and deploys
contingency plans to address various other potential business interruptions.
These plans may be applicable to address the interruption of support provided
by third parties resulting from their failure to be Year 2000 ready.
The Company may periodically revise its Year 2000 plans as interim steps are
completed and as new information is learned. In addition, this description of
the Company's efforts involves estimates and projections of future events and
activities. These estimates and projections are subject to change as work
continues, and such changes could be substantial.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
There are no recently issued accounting standards that are expected to have a
material impact on the Company.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1998
The comparisons of operating results for the three months ended September 30,
1999 to the three months ended September 30, 1998 are affected by the
acquisitions made by the Company.
The Company reported net income of $449,000 for the third quarter of 1999,
compared to net income of $638,000 in the same period of 1998. Basic earnings
per share for the 1999 third quarter were $0.42 per share and were $0.63 per
share in the 1998 third quarter. The 1998 third quarter reflected benefits
realized in the acquisition of Summit, effective July 1, 1998. Summit had
mailed a large number of catalogs prior to the acquisition. Those catalogs
had a residual value that carried into the post-acquisition period.
The Company's consolidated revenues were $4,624,000 in the third quarter of
1999, an increase of 2% from the same period 1998 revenues of $4,540,000. The
To-Sew acquisition contributed $224,000 to 1999 revenues. Sales for Summit
were $1,250,000 in the third quarter of 1999 verses $1,900,000 in the third
quarter of 1998. During the third quarter of 1998, Summit revenues benefited
from the residual value of catalogs mailed by Summit prior to its acquisition.
The cost of goods sold for the quarter ended September 30, 1999, was
$2,737,000, an increase of $211,000 or 8% from the same period 1998 amount of
$2,526,000. The increase includes $113,000 attributed to To-Sew.
Consolidated gross profits for the third quarter of 1999 were $1,887,000, a
decrease of $127,000 or 6% from the same period 1998 gross profits of
$2,014,000. As a percentage of sales, the gross margin percent was 41% for
1999 and 44% for 1998. Competitive pricing pressures for distribution
operations and for international sales reduced margins.
The advertising component of marketing costs for the third quarter of 1999 was
$497,000, an increase of $51,000 from the same period 1998 cost of $446,000.
A majority of the increase relates to the To-Sew acquisition.
Other marketing costs for the third quarter of 1999 were $293,000, a decrease
of $49,000 or 14% from the same period 1998 cost of $342,000. The
consolidation of the map marketing function into Fort Collins reduced
marketing personnel costs.
General and administrative expenses were $557,000, an increase of $75,000 or
16% from the third quarter 1998 G & A expense of $482,000. Most of the
increase can be attributed to the acquisitions.
Total operating costs increased 6% from $1,270,000 in the third quarter of
1998 to $1,374,000 in the third quarter of 1999. Substantially all of the
increase relates to the acquisitions.
Interest expense decreased from $106,000 in the third quarter of 1998 to
$91,000 in the third quarter of 1999, a decrease of $15,000 or 14%. Average
borrowings for the 1999 third quarter were less than average borrowings during
the 1998 third quarter. Borrowings were increased near the end of the 1999
third quarter to fund the acquisition of To-Sew.
The Company did not recognize any income tax benefit or expense for the third
quarter of 1999. During preceding quarters, all income tax liabilities had
been offset against operating losses. The Company has net operating loss
carryovers and contribution carryovers of approximately $3,700,000 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 1999, it
appears that the carryover will allow the Company to eliminate substantially
all income tax expense that might be incurred.
Inflation has not had any material effect on the Company's operations during
1999. 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 1999.
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, 1999 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1998
The comparison of operating results for the first nine months of 1999 to the
first nine months of 1998 is affected by the Company's acquisitions.
Net income for the first nine months of 1999 was $954,000, compared with net
income of $967,000 in the same period of 1998. Basic earnings per share were
$0.89 for the first nine months of 1999, compared to basic earnings per share
of $1.01 for the first nine months of 1998. In 1998, the acquisition of
Summit had a favorable impact on net income because of the residual impact of
catalogs mailed by Summit prior to the acquisition.
The Company's revenues were $12,157,000 in the first nine months of 1999, an
increase of $3,213,000 or 36% from the same period 1998 revenues of
$8,944,000. The increase includes $2,395,000 attributed to the acquisitions
completed during 1999 and 1998.
The cost of goods sold for the nine months ended September 30, 1999, was
$7,102,000, an increase of $1,921,000 or 37% from the same period 1998 amount
of $5,181,000. The increase includes $1,517,000 attributed to the
acquisitions completed during 1999 and 1998.
Consolidated gross profits for the first nine months of 1999 were $5,055,000,
an increase of $1,292,000 or 34% from the same period 1998 gross profits of
$3,763,000. As a percentage of sales, the gross margin percent declined
slightly from 42.1% in 1998 to 41.6% in 1999. The Company had anticipated a
margin decline during 1999 because of competitive pricing pressures that exist
in the mail order catalog business and in international sales.
The advertising component of marketing costs for the first nine months of 1999
was $1,157,000, an increase of $623,000 or 117% from the same period 1998 cost
of $534,000. Substantially all of the increase can be attributed to the
acquisitions.
Other marketing costs for the first nine months of 1999 were $1,020,000, an
increase of $196,000 or 24% from the same period 1998 cost of $824,000.
Substantially all of the increase can be attributed to the acquisitions.
General and administrative expenses were $1,639,000, an increase of $445,000
or 37% compared to the first nine months of 1998 G & A expense of $1,194,000.
Substantially all of the increased cost can be attributed to the acquisitions
and to the implementation of a new computer system.
As detailed above, total operating costs increased 50% from $2,552,000 in the
first nine months of 1998 to $3,816,000 in the first nine months of 1999.
There was an increase of $41,000, or 17%, in interest expense, which was
$285,000 for the first nine months of 1999 and $244,000 for the first nine
months of 1998. The increase reflects additional borrowings incurred to
finance the acquisitions.
The Company did not recognize any income tax expense for the first nine months
of 1999. During preceding quarters, all income tax liabilities had been
offset against operating losses. The Company has net operating loss
carryovers and contribution carryovers of approximately $3,700,000 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 1999, it
appears that the carryover will allow the Company to eliminate substantially
all income tax expense that might be incurred.
Inflation has not had any material effect on the Company's operations during
1999. 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 1999.
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
None.
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 July 21, 1999.
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 1,002,426 1,358
Dr. Robert A. Scott 1,002,426 1,358
Clifford L. Neuman 1,002,226 1,558
John J. Crawford 1,002,522 1,262
Richard J. Ciurczak 1,002,342 1,442
Dr. Wayne R. Kirschling 1,002,562 1,222
Stephen G. Calandrella 1,002,226 2,558
</TABLE>
2. Incentive Stock Option Plan
To increase the number of shares that may be issued pursuant to
the exercise of options granted under the Company's 1997
Incentive Stock Option Plan by an additional 200,000 shares.
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Withheld
------ ------- --------
<S> <C> <C> <C>
185,853 480,908 21,590
</TABLE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits: None.
Reports on Form 8-K:
1. On September 14, 1999, the Registrant filed a Current Report on
Form 8-K dated September 1, 1999, related to the acquisition of
certain assets from To-Sew, Inc. (a California corporation).
The assets purchased were the operating assets used in
connection with the manufacture and distribution of
supplemental educational products under the name "To-Sew." The
report included:
Item 2: Acquisition of Assets
Exhibits: Asset Purchase and Sale Agreement dated
September 1, 1999.
<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 19, 1999 By: /s/ Clifford C. Thygesen
----------------- -------------------------------
Clifford C. Thygesen, President
Dated: November 19, 1999 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 EXTRACED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 4, 6 AND 7 OF THE COMPANY'S FORM 10-QSB FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 213
<SECURITIES> 0
<RECEIVABLES> 2,829
<ALLOWANCES> (124)
<INVENTORY> 4,269
<CURRENT-ASSETS> 7,955
<PP&E> 7,649
<DEPRECIATION> (5,080)
<TOTAL-ASSETS> 12,439
<CURRENT-LIABILITIES> 4,261
<BONDS> 960
0
0
<COMMON> 54
<OTHER-SE> 7,164
<TOTAL-LIABILITY-AND-EQUITY> 12,439
<SALES> 4,624
<TOTAL-REVENUES> 4,624
<CGS> 2,737
<TOTAL-COSTS> 2,737
<OTHER-EXPENSES> 1,347
<LOSS-PROVISION> 21
<INTEREST-EXPENSE> 91
<INCOME-PRETAX> 449
<INCOME-TAX> 0
<INCOME-CONTINUING> 449
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 449
<EPS-BASIC> 0.42
<EPS-DILUTED> 0.39
</TABLE>
