<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A-1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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 August 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 June 30, 1999 and
December 31, 1998 2
Consolidated Statements of Operations and Comprehensive
Income for the three months ended June 30, 1999 and
June 30, 1998 3
Consolidated Statements of Operations and Comprehensive
Income for the six months ended June 30, 1999 and June 30, 1998 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and June 30, 1998 5
Consolidated Statement of Stockholders' Equity from
January 1, 1999 through June 30, 1999 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 10
Results of Operations 12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 104,000 $ 124,000
Trade receivables, net of allowance
of $105,000 and $95,000 2,505,000 1,876,000
Royalty receivable 116,000 116,000
Inventories 3,963,000 3,733,000
Prepaid advertising costs 537,000 1,114,000
Other 179,000 167,000
------------ -----------
TOTAL CURRENT ASSETS 7,404,000 7,130,000
PROPERTY AND EQUIPMENT, net 2,651,000 2,596,000
VIDEO LIBRARY, net 156,000 217,000
INTANGIBLE ASSETS, net 1,061,000 1,160,000
OTHER ASSETS 54,000 99,000
------------ -----------
TOTAL ASSETS $11,326,000 $11,202,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,851,000 $1,614,000
Current maturities of long term debt 449,000 895,000
Accounts payable 1,119,000 1,135,000
Accrued expenses 227,000 261,000
Income taxes payable 33,000 59,000
------------ -----------
TOTAL CURRENT LIABILITIES 3,679,000 3,964,000
LONG TERM DEBT, less current maturities 882,000 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 7,188,000 7,081,000
(Accumulated deficit) (477,000) (982,000)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 6,765,000 6,151,000
------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $11,326,000 $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 June 30, 1999 and June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
June 30, June 30,
1999 1998
----------- -----------
<S> <C> <C>
INCOME
Net sales $ 4,232,000 $2,555,000
Cost of goods sold 2,368,000 1,462,000
------------ -----------
Gross profit 1,864,000 1,093,000
OPERATING EXPENSES
Advertising and catalog costs 354,000 53,000
Other marketing 413,000 275,000
------------ -----------
Total marketing 767,000 328,000
General and administrative 561,000 343,000
------------ -----------
Total operating expenses 1,328,000 671,000
------------ -----------
OPERATING INCOME 536,000 422,000
Interest (expense) (96,000) (70,000)
------------ -----------
INCOME BEFORE INCOME TAXES 440,000 352,000
Income tax benefit (expense) - -
------------ -----------
NET INCOME AND COMPREHENSIVE INCOME $ 440,000 $ 352,000
============ ===========
Basic earnings per share $ 0.41 $ 0.36
============ ===========
Diluted earnings per share $ 0.44 $ 0.32
============ ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
for the Six Months ended June 30, 1999 and June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
--------------------------
June 30, June 30,
1999 1998
----------- -----------
<S> <C> <C>
INCOME
Net sales $ 7,533,000 $4,402,000
Cost of goods sold 4,365,000 2,655,000
----------- -----------
Gross profit 3,168,000 1,747,000
OPERATING EXPENSES
Advertising and catalog costs 660,000 88,000
Other marketing 726,000 485,000
----------- -----------
Total marketing 1,386,000 573,000
General and administrative 1,082,000 705,000
----------- -----------
Total operating expenses 2,468,000 1,278,000
----------- -----------
OPERATING INCOME 700,000 469,000
Interest (expense) (195,000) (138,000)
----------- -----------
INCOME BEFORE INCOME TAXES 505,000 331,000
Income tax benefit (expense) - -
----------- -----------
NET INCOME AND COMPREHENSIVE INCOME $ 505,000 $ 331,000
============ ===========
Basic earnings per share $ 0.47 $ 0.34
============ ===========
Diluted earnings per share $ 0.41 $ 0.31
============ ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Six Months ended June 30, 1999 and June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
--------------------------
June 30, June 30,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 505,000 $ 331,000
Items not requiring cash outlays:
Depreciation 322,000 299,000
Amortization 160,000 109,000
Bad debt expense 51,000 17,000
Imputed interest expense 32,000 -
Changes in:
Accounts receivable (680,000) (738,000)
Inventories (230,000) (633,000)
Prepaid advertising costs 577,000 (118,000)
Accounts payable (16,000) (45,000)
Accrued expenses (34,000) 97,000
Other 4,000 108,000
----------- -----------
Net cash provided (used) by
operating activities 691,000 (573,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (304,000) (219,000)
Cash paid for acquisitions - (250,000)
----------- -----------
Net cash provided (used) by
investing activities (304,000) (469,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long term debt 401,000 796,000
Payments on notes payable and long term debt (917,000) (197,000)
Net proceeds from common stock transactions 109,000 418,000
----------- -----------
Net cash provided (used) by
financing activities (407,000) 1,017,000
----------- -----------
NET INCREASE (DECREASE) IN CASH (20,000) (25,000)
Cash, at beginning of period 124,000 183,000
----------- -----------
Cash, at end of period $ 104,000 $ 158,000
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 264,000 $ 135,000
============ ===========
Income taxes $ - $ -
============ ===========
Non-cash investing and financing activities:
Capital leases incurred in exchange
for equipment purchases $ 72,000 $ 138,000
============ ===========
Acquisition of companies with debt $ - $1,432,000
============ ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
January 1, 1999 through June 30, 1999
(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, 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 2,000 102,000 - 104,000
Net income - - - 505,000 505,000
------------- ------------ ------------ ------------ -------------
Balance as of
June 30, 1999 1,076,030 $ 54,000 $7,188,000 $ (477,000) $ 6,765,000
============= ============ ============ ============ =============
</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 June 30, 1999, and the results
of operations for the three months and six months ended June 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 - Notes Payable and Long Term Debt
The Company has a $3,250,000 revolving line of credit pursuant to an
asset-based financing agreement that expires April 30, 2002. Borrowing under
this line of credit bears interest at a floating rate plus 1% (totaling 8.75%
as of June 30, 1999). Interest is payable monthly. The amounts available to
be borrowed under the agreement are derived from a borrowing base formula as
defined in the agreement relating to allowable inventory and accounts
receivable. There are times during the year when the borrowing base formula
limits borrowing to less than $3,250,000. However, at June 30, 1999, the
Company could have borrowed the entire $3,250,000 had it needed to do so. The
line of credit is collateralized by substantially all of the Company's assets.
The Company's long-term debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------
<S> <C>
Note Payable, principal due in four annual installments
of $237,500. Accrued interest is payable annually
at 7.5%. At the option of the Company, can be converted
into common stock at a rate of $10 per share. Face
value of $712,500 less imputed interest at 10%.
Collateralized by intellectual property. $ 701,000
License agreement, due in four annual installments of
$100,000. Face value of $400,000 less imputed interest
at 10%. Collateralized by intellectual property. 320,000
Non-compete agreement, due in quarterly installments
of $29,500. Non-collateralized. 118,000
Capital lease obligations, due in monthly installments
of $8,000 with varying maturities. Collateralized by
computer, telephone, and manufacturing equipment. 192,000
------------
Total 1,331,000
Less current maturities (449,000)
------------
Long-term debt $ 882,000
============
</TABLE>
Note 4 - Earnings per Share
The following is a reconciliation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended June 30, 1999
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ----------- ------------
<S> <C> <C> <C>
Basic EPS
Income available to common
shareholders $ 440,000 1,074,000 $ 0.41
Effect of dilutive securities
Stock options 59,000
Convertible debt 20,000 79,000
----------- ----------- ------------
Diluted EPS
Income available to common
stockholders plus assumed
conversions $ 460,000 1,212,000 $ 0.38
=========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 30, 1998
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ----------- ------------
<S> <C> <C> <C>
Basic EPS
Income available to common
shareholders $ 352,000 980,000 $ 0.36
Effect of dilutive securities
Stock options 95,000
Warrants 10,000
----------- ----------- ------------
Diluted EPS
Income available to common
stockholders plus assumed
conversions $ 352,000 1,085,000 $ 0.32
=========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1999
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ----------- -------------
<S> <C> <C> <C>
Basic EPS
Income available to common
shareholders $ 505,000 1,068,000 $ 0.47
Effect of dilutive securities
Stock options 66,000
Convertible debt ** **
----------- ----------- ------------
Diluted EPS
Income available to common
stockholders plus assumed
conversions $ 505,000 1,134,000 $ 0.44
=========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1998
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ----------- -------------
<S> <C> <C> <C>
Basic EPS
Income available to common
shareholders $ 331,000 960,000 $ 0.34
Effect of dilutive securities
Stock options 83,000
Warrants 10,000
----------- ----------- -------------
Diluted EPS
Income available to common
stockholders plus assumed
conversions $ 331,000 1,053,000 $ 0.31
=========== =========== ============
** For the six months ended June 30, 1999, conversion of the convertible
debt would be anti-dilutive.
</TABLE>
<PAGE>
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion addresses the financial condition and results of
operations for American Educational Products, Inc. and its Subsidiaries
("AMEP" or the "Company"). AMEP currently uses several tradenames in
marketing its products, including Hubbard Scientific ("Hubbard"), National
Teaching Aids ("NTA"), Scott Resources ("Scott"), and Summit Learning
("Summit").
The Company completed two acquisitions during 1998. In May, it acquired
NTA for a total purchase price cost of $1,984,000, including costs and
liabilities assumed. NTA produces the Microslide(-trademark-) system. The NTA
acquisition was recorded using the purchase method of accounting and the
operating results of NTA were consolidated with the Company commencing June 1,
1998.
Effective July 1, 1998, AMEP acquired certain operating assets known as
Summit Learning for a total purchase cost of $1,550,000, including costs and
liabilities assumed. Summit is a direct mail marketer of math and science
supplemental teaching aids. The Summit acquisition was recorded using the
purchase method of accounting and the operating results of Summit were
consolidated with the Company's commencing July 1, 1998.
The Company has actively pursued acquisitions that have enabled the
Company to provide a broader product line and expand its presence in the
educational marketplace. Acquisitions involve numerous risks in assimilating
the acquired company's personnel, know-how, and products and services. Other
risks include limited experience in new markets and competition from companies
that have stronger positions in those markets. There can be no assurance that
the Company will be able to successfully integrate newly acquired businesses.
Such a failure could have a material adverse effect on the Company's financial
condition and results of operations. In undertaking any acquisition,
management resources will be partially diverted from the day-to-day business
of the Company.
The foregoing acquisitions affect comparisons among 1999 and 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, 1999 Compared to December 31, 1998
- -------------------------------------------------------------------------
The Company's liquidity and capital resources continued to improve during
the first half of 1999. Net income for the first two quarters of 1999 was
$505,000. Earnings before interest, taxes, depreciation and amortization, was
$1,182,000.
The Company has an asset based financing arrangement with Republic
Commercial Finance, an affiliate of U.S. Bancorp. The arrangement expires on
April 30, 2002, and provides for borrowings up to $3,250,000. 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. 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 $20,000.
The borrowing arrangement contains a demand provision such that the
lender can demand repayment at any time. Accordingly, the entire balance of
outstanding borrowings is reflected as a current liability. The lender has
not indicated that it will demand payment during 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 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 1999 will be
adequate to meet its operating requirements. The source of those 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 and new telephone equipment during 1999. Substantially
all of the arrangements required to finance that installation were completed
during 1999. Any acquisition activity undertaken by the Company during 1999
would be contingent upon obtaining the necessary financing.
During the first and second quarters of 1999, cash flow from operations
plus borrowings under the asset based financing arrangement were sufficient to
fund all of the Company's operating cash requirements. Working capital
increased 18% from $3,166,000 as of December 31, 1998 to $3,725,000 at June
30, 1999.
Current assets of $7,404,000 increased $274,000 from December 31, 1998,
and current liabilities decreased 7.2% to $3,679,000.
Total assets increased from $11,202,000 on December 31, 1998, to
$11,326,000 on June 30, 1999. During the same period, total liabilities
decreased from $5,051,000 to $4,561,000.
Accounts receivable increased from $1,876,000 at December 31, 1998, to
$2,505,000 at June 30, 1999, an increase of $629,000 or 33.5%. This increase
is consistent with higher sales levels in the second quarter when compared to
fourth quarter sales.
Inventories increased from $3,733,000 at December 31, 1998, to $3,963,000
at June 30, 1999, an increase of $230,000 or 6.2%. This buildup of inventory
is necessary to meet third quarter demand.
Prepaid advertising costs of $537,000 at June 30, 1999 represent deferred
costs associated with mailing the 1999 spring catalogs. The comparable amount
from December 31, 1998 was $1,114,000.
The Company mails its spring catalogs in late December or early January.
The costs of the mailings are charged against income on a pro-rata basis using
estimated revenues for each catalog.
Net property and equipment increased from $2,596,000 at December 31,
1998, to $2,651,000 at June 30, 1999, an increase of $55,000 or 2.1%. The
Company recorded depreciation expense of $322,000 for the first two quarters
of 1999. Capital expenditures for the two quarters of $376,000 consisted
primarily of new information system hardware and software at Summit Learning,
additional information system hardware and software at other locations, and
new telephone equipment at Summit Learning.
Video and film library costs decreased from $217,000 at December 31, 1998
to $156,000 at June 30, 1999, a decrease of $61,000 or 28%. All of the
decrease represented normal amortization expense.
Intangible and other assets decreased from $1,259,000 at December 31,
1998, to $1,115,000 at June 30, 1999, an decrease of $144,000 or 11%. The
decrease was primarily the result of normal amortization expense and royalty
receivable receipts.
Accounts payable decreased from $1,135,000 at December 31, 1998, to
$1,119,000 at June 30, 1999, a decrease of $16,000.
Borrowings under the Company's asset based financing arrangement were
increased from $1,614,000 at December 31, 1998, to $1,851,000 at June 30,
1999, an increase of $237,000 or 15%. The increased borrowings were necessary
to fund increased inventory and accounts receivable levels.
Stockholders' equity increased from $6,151,000 at December 31, 1998 to
$6,765,000 at June 30, 1999, an increase of $614,000 or 10%. The increase
consists of 1999 net income of $505,000, plus proceeds from common stock
transactions.
Management continually assesses the Company's need for capital resources.
From time to time, the Company may evaluate and pursue additional sources of
capital.
Other than the foregoing, management knows of no trends, demands, or
uncertainties that are reasonably likely to have a material impact on the
Company's short-term liquidity or capital resources.
Results of Operations - Three months ending June 30, 1999 Compared to the
Three months ending June 30, 1998
- -------------------------------------------------------------------------
As previously discussed, the comparisons of operating results for three
months ending June 30, 1999, to three months ending June 30, 1998 are
affected by the acquisitions made by the Company.
The Company reported net income of $440,000 for the second quarter of
1999, compared to net income of $352,000 for same period of 1998. Basic
earnings per share for the second quarter of 1999 were $0.41 per share
compared to basic earnings per share for the second quarter of 1998 of $0.36
per share.
The Company's revenues in second quarter 1999 were $4,232,000, an
increase of $1,677,000 or 66% from the $2,555,000 of second quarter 1998.
Sales increased primarily due to the acquisitions of Summit and NTA.
The cost of goods sold for second quarter ended June 30, 1999, was
$2,368,000, an increase of 62% over $1,462,000 in second quarter 1998.
Substantially all of the increase was due to the acquisitions. Cost of goods
sold as a percentage of sales decreased 1% to 56% in second quarter 1999.
Consolidated gross profits for second quarter 1999 were $1,864,000, an
increase of $771,000 or 71% from $1,093,000 in second quarter 1998. As a
percentage of sales, the gross margin increased from 43% in second quarter
1998 to 44% in second quarter 1999. The changes in both gross profit and
gross margin percent are the result of the acquisition of Summit and NTA.
The advertising component of marketing costs increased $301,000 or 568%
from second quarter 1998. The increase is the direct result of the
acquisition of Summit Learning.
Other marketing costs increased by $138,000 or 50% from second quarter
1998. As a percentage of sales these costs were 10% in second quarter 1999 and
11% in 1998.
General and administrative expenses increased by $218,000 or 64% from
second quarter 1998 to second quarter 1999. As a percentage of sales, general
and administrative expenses were 13% in both second quarter 1999 and 1998.
Interest expense increased $26,000, or 37%, to $96,000 in second quarter
1999 compared to $70,000 in second quarter 1998. The increase in interest
expense from second quarter 1998 resulted from increases in debt related to
the acquisitions of Summit and NTA.
Results of Operations - Six months ending June 30, 1999 Compared to the Six
months ending June 30, 1998
- -------------------------------------------------------------------------
As previously discussed, the comparisons of operating results for the six
months ending June 30, 1999 to the six months ending June 30, 1998 are
affected by the acquisitions made by the Company.
The Company reported net income of $505,000 for the first half of 1999,
compared to net income of $331,000 for same period of 1998. Basic earnings
per share for the first half of 1999 was $0.47 per share compared to basic
earnings per share for the first half of 1998 of $0.34 per share.
The Company's revenues in first half 1999 were $7,533,000, an increase of
$3,131,000 or 71% from the $4,402,000 of first half 1998. Sales increased due
to the acquisitions of Summit and NTA.
The cost of goods sold for first half 1999, was $4,365,000, an increase
of 64% over $2,655,000 in first half 1998. Substantially all of the increase
was due to the acquisitions. Cost of goods sold as a percentage of sales has
dropped 2% from first half 1998 to 58% in the first half 1999.
Consolidated gross profits for first half 1999 were $3,168,000, an
increase of $1,421,000 or 81% from $1,747,000 in first half 1998. As a
percentage of sales, the gross margin increased from 40% in first half 1998 to
42% in first half 1999. The changes in both gross profit and gross margin
percent are the result of the acquisition of Summit and NTA.
The advertising component of marketing costs increased $572,000 or 650%
from first half 1998. The increase is the direct result of the acquisition of
Summit Learning.
Other marketing costs increased by $241,000 or 50% from first half 1998.
As a percentage of sales these costs were 10% in first half 1999 and 11% in
1998.
General and administrative expenses increased by $377,000 or 54% from
first half 1998 to first half 1999. As a percentage of sales, general and
administrative expenses were 14% in first half 1999 compared to 16% in first
half 1998.
Interest expense increased $57,000, or 41%, to $195,000 in first half
1999 compared to $138,000 in first half 1998. The increase in interest expense
from second quarter 1998 resulted from increases in debt related to the
acquisitions of Summit and NTA.
The Company recorded no income tax expense in the first six months of
1999 due to the net operating loss (NOL) carryover.
The Company has NOL carryforwards and contribution carryforwards for
income tax purposes of approximately $4,000,000, which expire beginning in
2009. Under the Tax Reform Act of 1986, the amounts of and the benefits from
NOL carryforwards and contribution carryforwards are subject to certain
limitations in the amount of carryforwards that the Company may utilize to
offset future taxable income, if any. Because ultimate realization of any
benefit from the NOL and contribution carryforwards is uncertain, the Company
has not recognized the future benefit of these loss carryforwards in its
financial statements. The potential future benefits are subject to periodic
review and can be recorded as a reduction of income tax expense at such time
as their utilization is probable.
Inflation has not materially affected the Company's operations for either
1999 or 1998. The Company attempts to mitigate the impact of cost increases
by evaluating its purchasing strategies, by increasing its manufacturing
effectiveness, and by adjusting its selling prices. While the Company does
not expect inflation to have a material impact on 1999 operations, there are
no guarantees that future cost increases would not have an adverse impact.
The Company historically has experienced significant seasonality in its
sales primarily due to the purchasing cycle of educational institutions.
Historical trends indicate that the first and fourth fiscal quarters will each
generate approximately 20% of annual sales and the second and third fiscal
quarters will each generate approximately 30% of annual sales. The 1998
acquisitions are not expected to change this pattern.
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.
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. The potential of a Year 2000 Issue
has been identified in certain telephone messaging equipment. Appropriate
remediation strategy is currently being developed.
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 $750,000
related to its Year 2000 Issue, including the repair and replacement of
various systems. In accordance with AICPA Statement of Position 98-1,
approximately $625,000 of the costs had been capitalized. The estimated
additional costs to complete the project are expected to be approximately
$25,000. 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
- ----------------------------------------------
Statement of Financial Accounting Standards 133 Accounting for Derivative
Instruments and Hedging Activities (SFAS 133) was recently issued. SFAS 133
establishes accounting and reporting standards for derivative financial
instruments and for hedging activities. The Company does not currently engage
in any activities that would be covered by SFAS 133.
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
No legal proceedings have been filed on behalf of or against the Company
nor have any claims been made.
Item 2. Changes in Securities
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits: None.
Reports on Form 8-K: None.
<PAGE>
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities and Exchange Act,
the Registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN EDUCATIONAL PRODUCTS, INC.
Dated: August 25, 1999 By: /s/ Clifford C. Thygesen
-------------------------------
Clifford C. Thygesen, President
Dated: August 25, 1999 By: /s/ Frank L. Jennings
-------------------------------
Frank L. Jennings, Chief Financial
Officer and Vice President of Finance
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES 3, 4 AND 5 OF THE COMPANY'S FORM 10-QSB/A-1 FOR THE SIX MONTHS ENDED JUNE
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
[/LEGEND]
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] JUN-30-1999
[CASH] 104
[SECURITIES] 0
[RECEIVABLES] 2,610
[ALLOWANCES] (105)
[INVENTORY] 3,963
[CURRENT-ASSETS] 7,404
[PP&E] 7,560
[DEPRECIATION] (4,909)
[TOTAL-ASSETS] 11,326
[CURRENT-LIABILITIES] 3,679
[BONDS] 882
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 54
[OTHER-SE] 6,711
[TOTAL-LIABILITY-AND-EQUITY] 11,326
[SALES] 4,232
[TOTAL-REVENUES] 4,232
[CGS] 2,368
[TOTAL-COSTS] 2,368
[OTHER-EXPENSES] 1,328
[LOSS-PROVISION] 30
[INTEREST-EXPENSE] 96
[INCOME-PRETAX] 440
[INCOME-TAX] 0
[INCOME-CONTINUING] 0
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 440
[EPS-BASIC] .41
[EPS-DILUTED] .44
</TABLE>
