<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-16310
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AMERICAN EDUCATIONAL PRODUCTS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Colorado 84-1012129
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification number)
6550 Gunpark Drive, Suite 200, Boulder, Colorado 80301
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(303) 527-3230
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.05 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B (Sec. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
The Registrant's revenues for the year ended December 31, 1998, were
$11,675,000.
As of March 31, 1999, the aggregate market value of the Common Stock of the
Registrant based upon the closing prices of the Common Stock as quoted by
NASDAQ (symbol "AMEP") held by non-affiliates of the Registrant was
approximately $6,082,000. As of March 31, 1999, there were 1,072,064
shares of the Common Stock of the Registrant outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant hereby incorporates herein by reference the following
documents:
Part III
Item 9. Directors and Executive Officers of the Registrant.
Item 10. Executive Compensation.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
Item 12. Certain Relationships and Related Transactions.
The foregoing are incorporated by reference from the Registrant's
definitive Proxy Statement relating to its annual meeting of
stockholders, which will be filed in an amendment within 120 days of
December 31, 1998.
Item 13. Exhibits
1. Incorporated by reference in the Registrant's Post Effective
Amendment No. 5 to Registration Statement on Form S-18 filed with
the Securities and Exchange Commission and declared effective on
July 1, 1987.
2. Incorporated by reference from the Registrant's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission, and declared effective on August 4, 1992.
3. Incorporated by reference from the Registrant's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on March 17, 1998.
4. Incorporated by reference from the Registrant's Current Report on
Form 8-K dated March 11, 1994 and filed with the Commission on
March 24, 1994.
5. Incorporated by reference from the Registrant's Current Report on
Form 8-K dated December 20, 1995 and filed with the Commission on
January 4, 1996.
6. Incorporated by reference from the Registrant's Current Report on
Form 8-K dated June 17, 1996, and filed with the Commission on
July 3, 1996.
7. Incorporated by reference from the Registrant's Current Report on
Form 8-K dated April 17, 1998 and filed with the Commission on
May 1, 1998.
8. Incorporated by reference from the Registrant's Current Report on
Form 8-K dated August 4, 1998 and filed with the Commission on
August 17, 1998.
9. Incorporated by reference from the Registrant's Statement on Form
S-3/A-2, Securities and Exchange Commission File No. 333-67401,
as filed with the Commission on January 21, 1999.
Forward-Looking Statements
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In addition to historical information, this Annual 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, factors 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 management. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company undertakes no obligation
to publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof. Readers should refer to
and carefully review the information described in future documents the
Company files with the Securities and Exchange Commission.
PART I
Item 1. Description of Business
Business Development
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American Educational Products, Inc. ("AMEP" or the "Company") was organized
in 1986 with the primary purpose of merging with or acquiring one or more
businesses. It completed an initial public offering that same year. Its
first acquisition was of an educational products manufacturer, Scott
Resources, Inc. ("Scott"). Since that first acquisition, the Company has
focused its efforts on the education industry. AMEP is a developer of
hands-on educational materials for students, teachers, and parents. The
Company has a broad base of proprietary products which are primarily used
to educate students from pre-school through high school (the "K-12"
market).
The Company's mission is to manufacture and distribute products that help
teachers increase their effectiveness in the classroom, facilitate
students' learning through the joy of inquiry and discovery, and encourage
parental participation in their children's education. The Company's
manipulative products allow teachers a hands-on approach to education,
consistent with a major industry trend away from exclusive reliance on
textbooks.
In 1986, the Company adopted an acquisition strategy to develop its product
lines and strengthen its market position. The Company actively seeks
acquisition opportunities that complement its existing business. It
believes that the consolidation of a fragmented industry is the appropriate
long-term strategy.
During 1996, 1995, and 1994, the Company experienced significant net losses
and did not have capital available to make acquisitions. During that
period, AMEP focused on its core function, the competent manufacture of
manipulative products. It has subsequently returned to profitability and
has used some of its cash flow from operations to fund acquisition
activities. Should additional funds be required, it intends to pursue
outside sources of capital.
The Company completed two significant acquisitions during 1998. In a stock
purchase transaction, it acquired the business known as National Teaching
Aids ("NTA"). NTA developed and manufactures the Microslide(-TM-) System.
Microslide(-TM-) viewers are a low cost alternative to traditional
microscopes. The accompanying Microslide(-TM-) sets are 35mm photographic
images produced under ideal laboratory conditions. The sets illustrate
various scientific topics that include biology and astronomy.
The sellers provided financing for the purchase. The terms of the
financing include, among other things, a convertible promissory note in the
face amount of $950,000, bearing interest at 7.5%, payable in four annual
principal payments of $237,500, plus accrued interest. Under certain
conditions, the Company can convert all or part of the note into common
stock at a rate of $10 per share.
In an asset purchase transaction, the Company reacquired the assets of
Summit Learning ("Summit"). Summit is a mail order distributor of math and
science manipulative products. AMEP had previously owned and operated
Summit, but sold the business in 1995 to raise capital. The company that
purchased Summit in 1995 was subsequently purchased by Harcourt General.
Summit did not fit into Harcourt General's long term plans, so it was
offered for sale under attractive terms and conditions.
The seller provided financing for a portion of the purchase price under a
secured promissory note in the principal amount of $1,182,000. The note
requires monthly principal payments of $125,000 plus accrued interest at
8.5%.
On March 11, 1994, the Company completed the acquisition of certain assets
of Churchill Films, Inc., a producer and distributor of educational
videotapes, videodiscs, and films. In connection with the acquisition, the
Company formed a multi-media subsidiary, AEP Media Corporation, which
assimilated the assets and did business as Churchill Media ("Churchill").
The acquisition was financed primarily through bank debt. Churchill's
performance was not satisfactory and in June 1996, the assets of Churchill
were sold.
In August 1994, the Company acquired a raised relief map line previously
owned by Kistler, Inc. d.b.a. Kistler Graphics of Denver, Colorado. The
product line includes 27 maps that complement the Company's existing line
of raised relief maps. The acquisition was financed by bank debt.
Effective December 31, 1992, the Company acquired certain assets of Redco
Science, Inc. ("Redco"). During 1993, the manufacturing operations of
Redco were assimilated into the Hubbard facility in Chippewa Falls,
Wisconsin. Proceeds from the secondary public offering provided funds for
the acquisition.
To add to its existing line of science products, the Company acquired
Hubbard Scientific, Inc. ("Hubbard") in August 1991. This leveraged asset
acquisition was completed through a two-tiered, asset-based financing
agreement. The Company increased its senior secured revolving credit
facility by $700,000, borrowed $3,000,000 under a senior subordinated term
note bearing interest at the rate of 23% per annum, and issued $500,000 in
redeemable preferred stock to the seller. With the proceeds of its
secondary public offering in September 1992, the Company prepaid and
retired the term note, redeemed the preferred stock, and reduced the
revolving line of credit.
In September 1992, the Company completed a secondary public offering of
common stock, realizing net proceeds of approximately $4,763,000. Most of
the proceeds were used to retire the debt and redeemable preferred stock
incurred in connection with its Hubbard acquisition.
Industry
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The Company develops, manufactures, and distributes educational products to
parents, teachers, principals, public and private schools, and school
districts throughout the United States and in some international locations.
Generally, the Company's products are supplemental instructional aids,
products that present educational content in a format different than
traditional textbooks. Specifically, the Company produces manipulative
products that students can physically touch and examine to gain additional
understanding.
Supplemental institutional materials, such as those marketed by AMEP, are
utilized by educators who believe that youth at the elementary and middle
school levels learn best by the active use of material that they can
manipulate physically. During the past thirty years, teaching methods have
evolved. In general, teachers now emphasize active learning over passive
learning. The traditional school model of lectures, workbooks, written
assignments and text memorization has been increasingly criticized as
inefficient for failing to engage the students. A report of the
Association of American Publishers ranked hands-on tools the "most
effective (out of ten) in terms of student learning." Textbooks were
ranked fifth out of ten. Statistics compiled by the National Center for
Education Statistics (a unit of the U.S. Department of Education) indicate
that 73% of teachers demonstrate a concept using manipulatives, models, or
other tools and objects at least once a week.
The educational market has grown steadily over the past two decades. The
most recent figures published by the National Center for Education
Statistics ("NCES") show that the number of domestic elementary and
secondary schools increased by 4,700 since 1981 and now total 106,655.
There are approximately 16,000 public school districts in the United
States.
Domestic expenditures on education continue to increase. Over the past ten
years, annual expenditures for public and private educational for grades K
through 12 have increased from $160 billion to $350 billion. The NCES
estimates an additional 27% increase during the next ten years. The
increase will result from increasing enrollments and an increase in the
average annual expenditure per pupil from $6,376 to $7,622.
Enrollments are also increasing. The NCES in conjunction with the U.S.
Census Bureau have tracked a "baby boom echo," an increase in the birth
rate that corresponds to the prime child bearing years of the original post
war baby boom. Relying on birth rate data, they have projected an increase
of the K through 12 student population from its current level of 51 million
to 54 million in the 2007-2008 school year. Similarly, the number of
classroom teachers is expected to increase from 3.03 million to 3.46
million by the year 2008.
The success of the Company relies on government funding for educational
programs. State and local governments provide most of the funding,
although about 7% of the funds come from the federal government. The
Company believes that governmental units will continue to increase
educational funding in order to meet an increasing school population.
However, there can be no assurance that such funding will continue to
increase.
Several factors are contributing to the current state of change in school
markets. First is the growth in enrollment cited above; second are
societal demands for improvements. America's educational system continues
to be the target of increased scrutiny and concern. Continued poor student
achievement, despite reform efforts and increased funding, has kept
education in the national spotlight since the 1983 release of the National
Commission on Excellence in Education's widely acclaimed report, "A Nation
at Risk." Fueled by media attention, the public has become increasingly
aware of the need for improvement in the education system. Educators and
the public are constantly monitoring test scores and industry
accountability.
School systems are being reformed. Reforms include, among other things,
creation of charter schools and magnet schools, alternative education
facilities and instructional methods, provision of care before and after
the school day, and year-round schools. There is a clear trend toward
school system decentralization in which more decisions will be made at the
school building level ("site-based management"). In prior years, decisions
about instruction and about school purchases would often be made for a
school district as a whole, and, in some cases, for an entire state.
Currently, teachers are choosing the curricular materials they need to
effectively convey educational concepts. Site-based management is forcing
the industry to rethink its sales and marketing strategies. The industry
faces evolving challenges and increasing costs in delivering goods and
services to an increasingly decentralized marketplace.
Buying decisions within the school industry are reflected in several ways,
i.e. direct purchase by districts, purchases controlled by district
"subject coordinators" or committees, individual school purchases made by
school administrators, media specialists and classroom teachers, or
combinations of the above. Mail order purchases are also on the rise and
are made by administrators in charge of budgets as well as individual
classroom teachers. It appears that educators are increasing their use of
the Internet as a purchasing mechanism. Again, industry sources agree that
individual school administrators in both elementary and secondary schools
are often the ones who authorize purchases in their particular school.
These same administrators play key roles in how schools run and how
educational moneys are allocated at local levels.
Many school systems are converting or modifying curriculum to establish
programs that are in line with standards developed by national educational
authorities. These trends include integrating curriculums to overlap
several areas of study, developing programs that correlate funding with the
accomplishment of educational goals, and revising the methods by which
instructional material (textbooks, manipulatives, software, etc.) is
evaluated. Thus, suppliers are required to revise their materials in
accordance with the new standards.
Tradenames and Products
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In its marketing and product identification efforts, the Company uses
several of the various trade names it has acquired. Scott Resources,
Hubbard Scientific, National Teaching Aids, and Summit Learning are the
names currently in use.
The Scott product line includes mathematics and earth science products that
are used by elementary, middle, and high school students and teachers.
Most of the math products are manipulatives; products that illustrate a
particular mathematical concept by providing a concrete or physical object
as the focus of instruction. Thirteen major math product lines
manufactured under the Scott name are:
Fraction Bars(-Registered Mark-) program is a comprehensive series of
manipulatives that introduce and teach fraction concepts.
Decimal Squares(-Registered Mark-) program teaches decimals and
percents through a complete series of objectives, manipulatives,
activities, and tests.
Chip Trading(-Registered Mark-) activities program uses manipulatives
to teach the basic skills of addition, subtraction, multiplication,
and division.
Scott Geoboards are wooden or plastic tiles with pin arrays that teach
basic geometric concepts.
Pattern Blocks and Color Cubes are painted wooden or plastic blocks of
various shapes that teach shapes, counting, and sorting to younger
students. They teach angles, fractions, areas, and volumes to older
students.
Color Tiles are plastic, square tiles that demonstrate basic
operations with whole numbers for primary age learners and develop
patterns and relationships for problem solving skills for intermediate
and middle school learners.
Fraction Interaction(-Registered Mark-) video series includes three
videos for teaching fractions. The videos are developed for middle
school learners. Videolabs, a package that combines a video and Scott
manipulatives for student activities, and Teacher Packs are also
available.
Clever Catch(-Registered Mark-) is a series of beach balls that
illustrate math, geography, money, time, and phonics skills.
Checks + Balances(-Registered Mark-) is a kit designed to teach
personal finance skills.
Math Chase(-Registered Mark-) is a set of three games that reinforce
and extend math skills at multiple levels.
AlgeBits(-TM-) a set of manipulatives for teaching pre-algebra
concepts to middle school learners. Scott also develops instruction
guides.
Stretch & Shape(-Registered Mark-) is a package with Geoboards and
activities for an introduction to geometry concepts.
Terrific Triangles(-Registered Mark-) activities program uses
manipulatives to teach whole number concepts and operations at the
kindergarten and early elementary levels.
Other math products developed under the Scott tradename include mathematics
games, reproducible resource books, and teaching aids such as overhead
materials.
Scott also manufactures approximately 150 different earth science products
that are sold to distributors or directly to schools throughout this
country and internationally. The products include rock, mineral, and
fossil collections, charts, classroom activity sets, and videolabs. In
addition, Scott has produced 25 earth science videotape and videodisc
titles. Over 250 different varieties of rocks, minerals, and fossils are
sold to customers in bulk quantities or as individual specimens.
The Company uses the Hubbard tradename to market a comprehensive line of
high quality earth science, life science, and physical science materials
that are specifically designed for classroom use. These products include
three-dimensional models of animal and human anatomy, a wide variety of
astronomy and earth science experiments and models, and the Jewel line of
Plant Mobiles, animal cages, and fresh and salt water aquariums.
Additionally, the Company is the largest U.S. producer of high quality
raised relief maps. These maps are marketed to consumers through a number
of sales channels, including map dealers, specialty stores, independent
sales representatives, and direct mail. Hubbard produces approximately 250
different maps.
The acquisition of National Teaching Aids (NTA) in 1998 added a completely
new product line to the Company. The NTA Microslide(-TM-) system consists
of a durable, easy to use viewer that resembles a microscope, over 150
different sets of Microslides(-TM-) for use with the viewer, and detailed
lesson plans and teacher guides for each of the slide sets. Some of the
slide sets are also available in CD-ROM versions. Other NTA products
include a series of Science Made Easy(-TM-) Kits that demonstrate core
concepts in organic and inorganic chemistry, photosynthesis, and various
topics in human biology. In addition, the NTA product line includes a
Human Skeleton Model that students can assemble and reassemble.
The raw materials and components the Company uses are purchased from a
large number of domestic and foreign suppliers. There are a few major
vendors that the Company relies on to supply materials and services. If a
disruption in supply occurred, alternate vendors could be found; however,
delays in production could result. The Company has not experienced
significant raw material cost increases during the last two years.
The educational industry is inherently seasonal. There are wide variations
in sales from month to month and, as a result, accounts receivable,
inventories, and accounts payable also vary. The summer months are the
most active as educational institutions restock their supplemental
materials for the next school year. Sale terms are typically net 30 days
and orders are normally filled within 14 days.
As of December 31, 1998, the Company had a backlog of orders of $800,000,
compared to backlogs of $136,000 at December 31, 1997 and $161,000 at
December 31, 1996. Historically, the order backlog at year-end has not
been indicative of future sales.
Markets and Marketing
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The Company reaches its target market primarily through the use of 300
distributors who publish and circulate educational product catalogs that
feature AMEP products, among other merchandise. The Company's
relationships with its key dealers are critical to its success. It has
remained flexible in order to meet key dealers' needs for custom products,
packaging, shipping, and invoicing. The Company also sells through direct
mail catalogs and independent sales representatives. The Company maintains
several separate brand-name identifications, including Scott Resources,
Hubbard Scientific, National Teaching Aids, and Summit Learning.
Marketing efforts include attending national and regional trade shows and
teacher's conferences such as the National Council of Teachers of
Mathematics (NCTM), the National Science Teachers Association (NSTA), the
National School Supply and Educators Association (NSSEA), and the
Educational Dealers and Suppliers Association (EDSA). Marketing efforts
for maps includes attendance at the International Map Trade Association and
Outdoor Retailer Association. Attendance at these exhibitions increases
the Company's visibility in the market, provides the Company an opportunity
to meet end users, and allows the Company to evaluate the competition.
The Company believes that demand for manipulative products is increasing in
several international locations. Although the Company does not own or
operate any overseas locations, it has established relationships with
certain large foreign educational dealers. Approximately 9% of its sales
are exported to locations outside the U.S. It has experienced some success
in Europe, the Pacific Rim, and the Middle East. However, the
international marketplace is subject to extremely competitive pricing and
to politically motivated decision making. The vice president of marketing
and the international sales manager direct international sales efforts.
Competition
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The Company's marketplace is fragmented and highly competitive. The
Company faces competition from many businesses that range in size from sole
proprietorships to large corporations. The products manufactured by these
competitors range from textbooks to manipulatives and models. Many of
these entities publish catalogs and also list their products in dealer
catalogs. Some of the competitors are larger and have greater financial
resources than AMEP. The Company believes that its competitive advantages
include the ability to provide custom orders and specialized products.
There are no guarantees that the Company's products will continue to
receive a favorable reception from classroom educators.
During the last several years, there has been increasing competition from
foreign manufacturers of educational products. These products are often
priced lower than the Company's products. While the Company can provide
its customers with better delivery schedules and more comprehensive teacher
manuals, foreign competition may adversely affect the Company in the
future.
The Company's math products directly compete with products such as
Attribute Blocks, Cuisinaire Rods, and Base 10 Blocks. In earth science
and geology products, the principal direct competitors in the market are
Ward's Natural Science Establishment and Geo-Science, although some hobby
outlets and science supply houses have begun to enter this market. In
recent years, NTA's Microslide(-TM-) System has been the target of direct
competition from Learning resources.
The Hubbard brand encounters a significant amount of direct competition for
many of its classroom products. Some of the product lines are similar in
quality and price to items manufactured by others. Two product lines,
Jewel and raised relief maps, occupy a special market niche. The Jewel
product line of high quality aquariums, cages, and botany apparatus is
designed to meet extreme requirements of scientific experimentation and
demonstration. The Company is not aware of any competitors producing
comparable quality items for the school market. However, these products
are priced significantly higher than lower quality alternatives.
Similarly, Hubbard produces raised relief maps, which provide a unique
cartographic perspective. However, raised relief maps are significantly
more expensive than flat maps of the same cartographic image.
The Company believes that the educational marketplace is becoming more
competitive. Some companies within the industry are consolidating in order
to become more formidable competitors. Sales of technology-related
products are growing at a faster rate than sales of manipulatives and
videos. The Company does not manufacture technology-related products and
has no such products currently under development. Technology products
often require large amounts of capital for their development and
introduction. Many of the Company's competitors are larger, have greater
financial resources, and spend more money on product development.
Product Development
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To maintain and improve its position in the market, the Company has made a
commitment to develop new products. A key component to product development
is regular revisions of existing products to keep them up-to-date with
changing educational standards.
When developing new products, the Company uses both internal and external
sources. External sources include independent contractors, teachers, and
other educators. They submit prototypes and suggestions for the Company to
consider. The Company reviews the submissions, obtains the rights to
worthy products, and pays royalties on product sales over the life of the
copyright.
The product development process includes prototype development and formal
field testing. The Company developed 31 new products in 1998, including
the International Space Station Model, five new Clever Catch(-TM-) Balls,
two NTA Microslide(-TM-) sets, three posters, two world globes, Pre-Algebra
II(-TM-), and five new raised relief maps.
Intellectual Property
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Copyrights, trademarks, and trade secrets are the principal protection
sources for the Company's products. The Company holds numerous copyrights
that cover its published materials such as teachers' guides, manuals, game
boards, and videos. Each manipulative and model is accompanied by
published material. Approximately one-half of these copyrights are derived
directly from original works created by employees of the Company or by
independent contractors hired under agreement for a specific project. The
remaining copyrights are held by the Company through licensing arrangements
with the authors.
The Company owns federally registered Trademarks for the following product
names: Fraction Bars(-Registered Mark-), Decimal Squares(-Registered Mark-
), Chip Trading(-Registered Mark-), Math Chase(-Registered Mark-), Math in
Brief(-Registered Mark-), Clever Catch(-Registered Mark-), Fraction
Interaction(-Registered Mark-), Earth Science VideoLab(-Registered Mark-),
Nature Finders(-Registered Mark-), Stretch & Shape(-Registered Mark-), and
Checks and Balances(-Registered Mark-). The Company claims common law
Trademark protection in all of its proprietary marks and is extremely
diligent in its efforts to develop and protect new marks.
The Company considers all of the copyrights, licenses, and trademarks to be
valuable property rights. The Company believes that the protection
afforded by these intellectual property rights and the law of trade secrets
is adequate protection for its products. However, it is possible for a
competitor to develop near imitations of the Company's products without
violating those rights.
Personnel
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The Company has 90 employees in full time regular positions. Personnel are
located in Boulder, Colorado; Fort Collins, Colorado; and Chippewa Falls,
Wisconsin. There are 30 persons employed in direct manufacturing
positions; 15 persons employed in factory supervisory, clerical,
purchasing, and product development positions; 12 persons employed in
shipping and receiving positions; 18 persons employed in sales, marketing
and customer service positions; and 15 persons employed in general and
administrative positions.
The Company is not part of any collective bargaining agreement. There have
been no work stoppages and the Company believes its employee relations are
good.
Item 2. Description of Property
The Company owns 3.5 acres of land and five buildings in Fort Collins,
Colorado. This facility houses earth science and math product
manufacturing, customer service, marketing, and accounting operations. The
buildings total 18,500 square feet, of which 14,200 is manufacturing and
warehousing. The remaining 4,300 is office space.
The Company also leases 22,500 square feet of space in Fort Collins,
Colorado to provide additional warehouse and office space. Monthly lease
payments are $8,438 and the lease expires in April 2002.
The Wisconsin manufacturing facilities are located in Chippewa Falls,
Wisconsin. The main plant is approximately 37,000 square feet and is
leased at $8,150 per month. The lease is subject to annual renewal. The
smaller facility houses light assembly and warehousing in a leased area
comprising 10,000 square feet. Monthly lease payments are $3,000 and the
lease expires in September 2000.
The Company leases space in Boulder, Colorado for its corporate
headquarters. This property consists of 1,400 square feet and is currently
leased at $2,000 per month, expiring September 2000.
The Company believes that all of its facilities are adequate for their
intended purpose and does not plan any significant investment in additional
facilities during the next year.
Item 3. Legal Proceedings
Neither the Company, nor any of its subsidiaries, is currently a party to
any material pending litigation or other legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to a vote of its security holders
during the fourth quarter of its fiscal year ending December 31, 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Price Range of Common Stock
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The Company's Common Stock trades on the NASDAQ SmallCap Market under the
symbol AMEP and on the Pacific Exchange under the symbol EP.
The following table has been adjusted to reflect the one-for-five reverse
stock split that became effective on April 22, 1997.
<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
1997
First Quarter 5.31 2.94
Second Quarter 6.75 2.38
Third Quarter 7.75 5.63
Fourth Quarter 8.00 5.13
1998
First Quarter 8.38 5.38
Second Quarter 10.63 8.25
Third Quarter 10.63 7.88
Fourth Quarter 10.81 9.00
1999
First Quarter 12.31 9.00
</TABLE>
The bid price of the Company's common stock as of March 31, 1999 was $9.375
per share. The prices presented are bid prices that represent prices
between broker-dealers and do not include retail markups and markdowns or
any commissions to the broker-dealer. The prices may not reflect prices in
actual transactions.
As of March 31, 1999, there were approximately 300 shareholders of record
and approximately 1,700 beneficial shareholders.
Dividends
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The Company has paid no cash dividend on its common stock during the last
two fiscal years, and the Company's Board of Directors has determined that
no cash dividend on common stock will be paid for 1998. Future dividend
policy is subject to the discretion of the Board of Directors and is
dependent on a number of factors, including future earnings, capital
requirements, and the financial condition of the Company.
During 1997, the Company issued a warrant dividend to existing
shareholders. The warrant dividend consists of one warrant for each share
of common stock owned by shareholders of record on June 5, 1997. Each
warrant entitles its holder for a period of three years to purchase one
additional share of the Company's common stock at an exercise price of
$10.00 per share. No voting rights have been attached to the warrant. The
Company retains the right to redeem the warrants upon 30 days notice for a
redemption price of $0.01 per warrant in the event that public trading of
the Company's common stock equals or exceeds 110% of the then current
exercise price of the warrant for twenty consecutive days.
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").
On April 4, 1997, the Company's shareholders approved a one-for-five
(1-for-5) reverse split of its $0.01 par value common stock. The reverse
split became effective on April 22, 1997. As of that date, the par value
of the Company's common stock was increased to $0.05 per share and the
number of common shares outstanding was reduced from 4,580,794 to 916,298.
The reverse split has been shown in this discussion and in the accompanying
financial statements, including notes thereto, as a retroactive adjustment
giving effect to the split for all periods presented.
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(-TM-) 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.
Effective June 17, 1996, AMEP sold the assets of AEP Media Corporation,
d.b.a. Churchill Media ("Churchill"), for a cash payment of $1,000,000 plus
future royalties. AMEP purchased Churchill in 1994. Accordingly, the
operating results of Churchill were consolidated with the Company
commencing March 1, 1994, and ending on June 17, 1996.
The foregoing divestiture and acquisitions affect comparisons among 1998,
1997, and 1996.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements, including the explanatory notes,
beginning on page F-1 in this annual report.
Liquidity and Capital Resources - December 31, 1998 Compared to December
31, 1997
- -------------------------------------------------------------------------
The Company's liquidity and capital resources continued to improve during
1998. Net income for the year was $850,000, compared to net income of
$514,000 in 1997 and a net loss of $(1,095,000) in 1996. Earnings before
interest, taxes, depreciation and amortization were $2,117,000 in 1998 and
$1,846,000 in 1997.
During 1998, cash flow from operations was sufficient to fund all of the
Company's operating cash requirements. A majority of the funding for
acquisitions was in the form of debt. Accordingly, total liabilities
increased 99% from $2,533,000 to $5,051,000. During 1997, cash flow from
operations was similarly sufficient to fund all of the Company's operating
cash requirements. In 1996, cash flow from operations was not sufficient
to meet the Company's needs, and the Company took corrective actions that
included restructuring operations, selling certain assets, and obtaining
proceeds from a private equity placement.
In May 1998, the Company purchased all of the common stock of Learning &
Leisure, Inc. and its wholly owned subsidiary, National Teaching Aids, Inc.
(collectively, "NTA") for a total of $1,984,000 including costs and
liabilities assumed. NTA produces the Microslide(-TM-) System.
Microslides(-TM-) are 35mm photographs taken through a microscope. Each
set of photographs is designed to teach a specific scientific concept. The
35mm images are viewed through a Microslide(-TM-) Viewer, a specially
designed plastic device that resembles a microscope.
The sellers provided financing for the transaction under a $950,000
convertible note payable, a $400,000 licensing agreement, and consultation/
non-compete agreements requiring aggregate payments of $300,000. All
additional acquisition costs were financed via the Company's existing line
of credit.
The NTA acquisition has been recorded using the purchase method of
accounting and the operating results of NTA were included in the Company's
consolidated results of operations commencing June 1, 1998. Excess of cost
over fair value of assets acquired (goodwill) of $980,000 is being
amortized on a straight-line basis over 15 years.
Effective July 1, 1998, AMEP acquired certain operating assets of Summit
Learning ("Summit") for a total purchase cost of $1,550,000 including costs
and liabilities assumed.
Summit distributes math and science supplemental teaching aids via direct
mail catalogs. The seller provided financing for the acquisition in the
form of a promissory note with a principal amount of $1,182,000. In
addition, certain assets acquired in the Summit transaction were sold in
September 1998. Summit sold the assets that it had previously used in a
Christmas season mail order catalog targeted at parents and grandparents.
Sales proceeds were $50,000 cash plus a long term note receivable. Since
collection of the note receivable is dependent on the future successful
operations of the buyer, the Company will recognize future collections, if
any, as they are received. The Company's existing capital resources
financed all other acquisition costs.
The Summit acquisition was recorded using the purchase method of accounting
and the operating results of Summit were included in the Company's
consolidated results of operations commencing July 1, 1998. The fair value
of assets acquired exceeded the acquisition costs by approximately $100,000
(negative goodwill), which is being amortized on a straight-line basis over
15 years.
Effective June 17, 1996, the Company sold substantially all of the assets
of Churchill to an unaffiliated company. Total cash proceeds of the sale
were $1,000,000. In addition, the Company has the right to receive future
royalties on Churchill titles sold by the purchaser during the following
four years. Royalties are calculated at 10% of sales and are subject to an
aggregate ceiling of $750,000. Future royalties to be received have been
assigned to the lender as payments under the note payable. The Company
utilized the cash proceeds to pay trade creditors and reduce the
outstanding balance on the long-term debt. The Company recognized a loss
of $384,000 on the sale. Revenue of $905,000 and operating losses of
$215,000 were attributable to Churchill during the six-month period ending
June 30, 1996. In 1997, the Company recorded an additional $38,000 loss
from Churchill related to a decline in estimated future royalty receipts.
In July 1996, the Company sold some of its real estate. The sale of the
real estate provided approximately $1,000,000 in net proceeds that were
used to pay trade creditors and reduce bank debt. A gain on the sale of
approximately $77,000 is reflected in the financial statements.
During 1997 the Company consolidated all of its previously existing debt
into one asset based financing arrangement with Republic Commercial
Finance, an affiliate of U.S. Bancorp. The arrangement expires on April
30, 2000, and provides for borrowings up to $2,800,000. Certain amounts
available to be borrowed under the agreement are derived from a borrowing
base as defined in the agreement relating to allowable inventory and
accounts receivable. As of December 31, 1998, the borrowing base formula
limited total borrowings to $2,399,000. 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. During 1999, the
Company negotiated an increase in maximum borrowings up to $3,250,000 and a
reduction in the interest rate.
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 at Summit during 1999. Substantially all of
the arrangements required to finance that installation will be completed
during 1999. Any acquisition activity undertaken by the Company during
1999 would be contingent upon obtaining the necessary financing.
The Company experienced an 86% working capital increase in the year ended
December 31, 1998. Current assets of $7,130,000 increased $2,891,000 from
December 31, 1997, and current liabilities increased $1,431,000 from
$2,533,000 to $3,964,000. As a result, working capital increased from
$1,706,000 to $3,166,000 and the current ratio increased from 1.67 to 1.80.
Working capital improved because of funds generated by operations.
Total assets increased 55% from $7,251,000 at December 31, 1997, to
$11,202,000 at December 31, 1998. During the same period, total
liabilities increased 99% from $2,533,000 to $5,051,000. Both assets and
liabilities increased as a result of the acquisitions.
Accounts receivable increased from $1,220,000 at December 31, 1997, to
$1,876,000 at December 31, 1998, an increase of $656,000 or 54%. The
increase is attributable to increased fourth quarter sales in 1998 compared
to 1997, as well as increased revenues related to the acquisitions.
Inventories increased from $2,540,000 at December 31, 1997, to $3,733,000
at December 31, 1998, an increase of $1,193,000 or 47%. This increase can
be attributed primarily to acquisitions and to the inventory ramp-up for
new product introductions. In addition, the Company increased its
inventory of certain products in anticipation of a major fourth quarter
retail sales promotion. Retail sales were less than expected. The Company
believes that it can dispose of the additional inventory during the normal
course of business in 1999.
Prepaid advertising costs of $1,114,000 at December 31, 1998 represent
costs associated with mailing the 1999 spring catalogs. The comparable
amount from December 31, 1997 was $38,000. The Summit acquisition plus an
early mailing date caused the increase. Most of the 1999 spring catalogs
were mailed before December 31, 1998 to avoid increased postage costs that
went into effect on January 10, 1999.
Net property and equipment increased from $2,247,000 at December 31, 1997,
to $2,596,000 at December 31, 1998, an increase of $349,000 or 16%. The
Company recorded depreciation expense of $603,000 for 1998. Capital
expenditures other than acquisition related property and equipment were
$537,000, which consisted of new information system hardware and software,
reproduction masters, and production tooling. Acquisition related
expenditures for property and equipment were $415,000.
Video and film library costs decreased from $359,000 at December 31, 1997
to $217,000 at December 31, 1998, a decrease of $142,000 or 40%. All of
the decrease represented normal amortization expense.
Intangible and other assets increased from $406,000 at December 31, 1997,
to $1,259,000 at December 31, 1998, an increase of $853,000 or 210%.
Acquisitions increased these assets by $1,116,000 and normal amortization
reduced these assets by $133,000. The remaining difference primarily
represents collections of the long-term royalty receivable arising from the
sale of Churchill.
Accounts payable and accrued expenses increased from $678,000 at December
31, 1997, to $1,396,000 at December 31, 1998, an increase of $718,000 or
106%. This increase is related to the acquisitions and to spending on the
1999 catalog program.
Borrowings under the Company's working capital line of credit were reduced
from $1,855,000 at December 31, 1997, to $1,614,000 at December 31, 1998, a
decrease of $241,000 or 13%. The reduction was achieved by utilizing cash
flow from operations.
Stockholders' equity increased from $4,718,000 at December 31, 1997 to
$6,151,000 at December 31, 1998, an increase of $1,433,000 or 30%. The
increase consists of 1998 net income of $850,000, plus proceeds from the
exercise of warrants and options.
During 1996, the Company sold 78,000 equity units for total proceeds of
$390,000. The proceeds were used to reduce bank debt and to provide
additional working capital. The equity units consisted of one share of the
Company's common stock plus a warrant to purchase one additional share of
common stock at a price of $4.50 per share. All of the warrants were
exercised during 1998.
During 1997, the Company issued a warrant dividend to existing
shareholders. The warrant dividend consists of one warrant for each share
of common stock owned by shareholders of record on June 5, 1997. Each
warrant entitles its holder for a period of three years to purchase one
additional share of the Company's common stock at an exercise price of
$10.00 per share. No voting rights have been attached to the warrant. The
Company retains the right to redeem the warrants upon 30 days notice for a
redemption price of $0.01 per warrant in the event that public trading of
the Company's common stock equals or exceeds 110% of the then current
exercise price of the warrant for twenty consecutive days.
A registration statement under the Securities Act of 1933 was filed
regarding the warrants and was declared effective by the Securities and
Exchange Commission in December 1997. The warrants were issued and began
trading on December 5, 1997 on the NASDAQ Small Cap Market System under the
symbol AMEPW. NASDAQ informed the Company that, in its opinion, the
ex-dividend date for these warrants should be December 5, 1997, the day
that trading commenced. As a result of the delayed ex-dividend date, the
Company plans to issue additional warrants to disenfranchised shareholders
who sold shares between June 5, 1997, and December 5, 1997. The Company
believes that approximately 75,000 warrants were effected by the delayed
date. Issuing additional warrants would not have a material adverse impact
on the financial statements.
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 -- 1998 Compared to 1997 and 1996
- -------------------------------------------------------
As previously discussed, the comparisons of operating results for 1998 to
1997 and 1996 are affected by the divestiture and acquisitions made by the
Company.
The Company reported net income of $850,000 for 1998, compared to a net
income of $514,000 for 1997 and a net loss of ($1,095,000) in 1996. After
adjusting the per share calculation for the one-for-five reverse split and
the retroactive implementation of SFAS 128, 1998 income was $0.85 per
share, 1997 income was $0.56 per share, and the 1996 loss was ($1.29) per
share.
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings per Share". SFAS 128 establishes new standards for computing and
presenting earnings per share ("EPS"). Specifically, SFAS 128 replaces the
previous primary EPS with basic EPS, which requires dual presentation of
basic and diluted EPS on the income statement for all entities with complex
capital structures. It requires a reconciliation of the numerator and
denominator of the basic and diluted EPS computations to the financial
statements issued for periods ending after December 15, 1997, and early
application is not permitted. Upon adoption, SFAS 128 requires restatement
of prior period EPS presented to conform to the requirements of SFAS 128.
The adoption of SFAS 128 as of December 31, 1997 did not have a material
effect on the Company's previously issued financial statements.
The Company's revenues in 1998 were $11,675,000, an increase of $3,283,000
or 39% from the prior year revenues of $8,392,000 and an increase of
$3,174,000 or 37% above 1996. Sales increased primarily because of the
acquisitions of Summit and NTA. Partial year revenues from the
acquisitions were $3,169,000. Churchill's revenues for 1996 were $905,000.
A comparison of the Scott and Hubbard revenues indicates that 1998 revenues
of $8,506,000 were 1% greater that 1997 revenues of $8,392,000 and 12%
greater than 1996 revenues of $7,596,000.
The cost of goods sold for the year ended December 31, 1998, was
$6,843,000, an increase of 31% from the prior year figure of $5,232,000 and
23% more than 1996. Cost of goods sold increased primarily because of the
acquisitions of Summit and NTA. Partial year costs of goods sold for the
acquisitions were $1,571,000. Churchill's cost of goods sold for 1996 were
$447,000. A comparison of the Scott and Hubbard cost of goods sold
indicates that 1998 costs of goods sold of $5,272,000 were 1% greater than
1997 costs of goods sold of $5,232,000 and 3% greater than 1996 costs of
goods sold of $5,139,000.
Consolidated gross profits for 1998 were $4,832,000, an increase of
$1,672,000 or 53% from the prior year gross profit of $3,160,000, and an
increase of $1,917,000 or 66% above 1996. As a percentage of sales, the
gross margin increased from 38% in 1997 to 41% in 1998. Partial year gross
profits from the acquisitions were $1,598,000 with a gross margin of 50%.
Churchill's gross profits for 1996 were $458,000 with a gross margin of
51%. The changes in both gross profit and gross margin percent are
primarily the result of the acquisition of Summit and NTA. For the core
business that continued to operate throughout 1998 and 1997, the gross
margin percent remained constant at 38% for both years.
The advertising component of marketing costs increased $579,000 or 610%
from 1997 and increased $347,000 or 106% from 1996. The 1998 increase is
the direct result of the acquisitions of Summit and NTA. Summit's
advertising costs for 1998 were $442,000. During 1998, Summit received the
benefit from catalogs mailed prior to July 1, 1998. The Company currently
expects that 1999 catalog costs for Summit will approximate $1,000,000.
Churchill's advertising costs were $58,000 for 1996.
Other marketing costs increased by $284,000 or 33% from 1997 and decreased
by $445,000 or 28% from 1996. As a percentage of sales these costs were
10% in 1998, 10% in 1997, and 19% in 1996. Churchill's other marketing
costs were $476,000 for 1996.
General and administrative expenses increased by $407,000 or 30% from 1997
and increased by $406,000 or 30% from 1996. As a percentage of sales,
general and administrative expenses were 15% in 1998 and 16% in both 1997
and 1996. Churchill's general and administrative expense for 1996 was
$138,000.
Interest expense increased from $323,000 in 1997 (11% increase) and
decreased from $418,000 in 1996 (14% reduction) to $358,000 in 1998. The
decrease in interest expense from 1996 resulted from reductions to debt
made possible primarily through improved cash flow from operations and
proceeds from the 1996 asset sales. The increase in interest expense from
1997 resulted from increases in debt related to the acquisitions of Summit
and NTA.
Included in 1996 is the previously mentioned loss on the sale of assets in
the amount of $384,000 resulting from the sale of Churchill and a gain on
the sale of assets in the amount of $77,000 resulting from sale of real
estate. No similar gains or losses on asset sales were recorded in 1998 or
1997.
The Company recorded $31,000 of income tax expense in 1998 representing
alternative minimum taxes and state taxes that cannot be offset by the net
operating loss (NOL) carryover.
At December 31, 1998, the Company had 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 did not have any material effect on the Company's operations for
1998 and 1997. The Company attempts to mitigate the impact of cost
increases by evaluating its suppliers, by increasing its 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 is scheduled for
completion during the second quarter of 1999. The upgrade includes both
software and hardware replacements and will utilize the AIX operating
system.
Non-IT Systems
- --------------
The Company is continuing its inventory and assessment of systems with
embedded technology. As of March 15, 1999, 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
- -----
As of December 31, 1998, the Company had incurred total costs of
approximately $380,000 related to its Year 2000 Issue, including the repair
and replacement of various systems. In accordance with AICPA Statement of
Position 98-1, approximately $346,000 of the costs had been capitalized.
The estimated additional costs to complete the project are expected to be
approximately $275,000, of which $239,000 is expected to be capitalized.
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.
Item 7. Financial Statements
The following financial statements are filed as part of this report
beginning on page F-1:
1. Independent Auditor's Report
2. Consolidated Balance Sheets as of December 31, 1998, and December
31, 1997
3. Consolidated Statements of Operations and Comprehensive Income
(Loss) for the Years ended December 31, 1998, 1997, and 1996
4. Consolidated Statement of Stockholders' Equity for the period of
January 1, 1996, through December 31, 1998
5. Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997, and 1996
6. Notes to Consolidated Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
There were neither changes in accountants nor disagreements of the type
required to be reported under this Item between the Company and its
independent accountants, Hein + Associates LLP, during the fiscal years
ended December 31, 1998, or December 31, 1997.
PART III
Part III, Items 9, 10, 11, and 12, are incorporated herein by reference
from the Registrant's definitive proxy statement relating to its Annual
Meeting of Shareholders which will be filed in an amendment within 120 days
of December 31, 1998.
Item 13. Exhibits and Reports on Form 8-K
Exhibits Exhibit No Title
-------- ---------- -----
1. 3.1 Articles of Incorporation
1. 3.2 Articles of Amendment to Articles
of Incorporation
1. 3.2(b) Articles of Amendment to Articles
of Incorporation dated April 21,
1987
2. 3.2(c) Articles of Amendment to Articles
of Incorporation dated February 19,
1990
1. 3.3 By-Laws
2. 4.1 American Educational Products, Inc.
1987 Incentive Stock Option Plan,
together with Option Agreement
2. 4.2 American Educational Products, Inc.
1990 Incentive Stock Option Plan,
together with Option Agreement
2. 4.3 American Educational Products, Inc.
1990 Employee Stock Purchase Plan,
together with Subscription
Agreement
3. 4.4 American Educational Products, Inc.
1997 Stock Incentive Plan, together
with Option Agreement
4. 10.1 Asset Purchase Agreement dated
March 1, 1994, with Churchill
Films, Inc.
9. 4.5 Form of Warrant Agreement
(including form of warrant)
5. 10.2 Asset Purchase Agreement dated
December 20, 1995, with
Steck-Vaughn Publishing Corporation
relating to the sale of Summit
Learning, Inc. assets
6. 10.3 Asset Purchase Agreement dated June
17, 1997, with New SVE, Inc.
relating to the sale of AEP Media
Corporation assets
7. 10.4 Stock Purchase Agreement dated
April 13, 1998, with National
Teaching Aids, Inc., et al relating
to the purchase of National
Teaching Aids, Inc.
8. 10.5 Asset Purchase and Sale Agreement
dated August 4, 1998, with SV
Distribution Company relating to
the purchase of operating assets
known as Summit Learning
1. Incorporated by reference from the Registrant's Post-Effective
Amendment No. 5 to Registration Statement on Form S-18 filed with the
Securities and Exchange Commission and which was declared effective on
July 1, 1987.
2. Incorporated by reference from the Registrant's Registration Statement
on Form S-8 filed with the Securities and Exchange Commission which
was declared effective on August 4, 1992.
3. Incorporated by reference from the Registrant's Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on March
17, 1998.
4. Incorporated by reference from the Registrant's Current Report on Form
8-K dated March 11, 1994 and filed with the Commission on March 24,
1994.
5. Incorporated by reference from the Registrant's Current Report on Form
8-K dated December 20, 1995 and filed with the Commission on January
4, 1997.
6. Incorporated by reference from the Registrant's Current Report on Form
8-K dated June 17, 1997, and filed with the Commission on July 3,
1997.
7. Incorporated by reference from the Registrant's Current Report on Form
8-K dated April 17, 1998, and filed with the Commission on May 1,
1998.
8. Incorporated by reference from the Registrant's Current Report on Form
8-K dated August 4, 1998, and filed with the Commission on August 17,
1998.
9. Incorporated by reference from the Registrant's Statement on Form
S-3/A-2, Securities and Exchange Commission File No. 333-67401, as
filed with the Commission on January 21, 1999.
Reports on Form 8-K
- -------------------
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>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
-----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
PAGE
INDEPENDENT AUDITOR'S REPORT F-2
CONSOLIDATED BALANCE SHEETS - December 31, 1998, and 1997 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) - For the Years Ended
December 31, 1998, 1997, and 1996 F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY -
From January 1, 1996, through December 31, 1998 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years
Ended December 31, 1998, 1997, and 1996 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED BALANCE SHEETS
----------------------------
as of December 31, 1998, and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 124,000 $ 183,000
Trade receivables, net of allowance of
$63,000 and $52,000 1,876,000 1,220,000
Royalty receivable 116,000 119,000
Inventories 3,733,000 2,540,000
Prepaid advertising costs 1,114,000 38,000
Other 167,000 139,000
TOTAL CURRENT ASSETS 7,130,000 4,239,000
PROPERTY AND EQUIPMENT, net 2,596,000 2,247,000
VIDEO LIBRARY, net 217,000 359,000
INTANGIBLE ASSETS, net 1,160,000 169,000
OTHER ASSETS 99,000 237,000
TOTAL ASSETS $11,202,000 $7,251,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note $1,614,000 $1,855,000
Current maturities of long-term debt 895,000 -
Accounts payable 1,135,000 533,000
Accrued expenses 261,000 145,000
Income taxes payable 59,000 -
TOTAL CURRENT LIABILITIES 3,964,000 2,533,000
LONG - TERM DEBT, less current maturities 1,087,000 -
COMMITMENTS (Note 5)
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; 1,045,524 and 922,872
shares issued and outstanding 52,000 46,000
Additional paid in capital 7,081,000 6,504,000
Accumulated deficit (982,000)(1,832,000)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 6,151,000 4,718,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,202,000 $7,251,000
----------- ----------
</TABLE>
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
- -----------------------------------------------------
for the Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INCOME:
Net sales $11,675,000 $8,392,000 $8,501,000
Cost of goods sold 6,843,000 5,232,000 5,586,000
----------- ---------- ----------
Gross profit 4,832,000 3,160,000 2,915,000
OPERATING EXPENSES:
Advertising and catalog 674,000 95,000 327,000
costs
Other marketing 1,135,000 851,000 1,580,000
---------- ---------- ----------
Total marketing 1,809,000 946,000 1,907,000
General and administrative 1,784,000 1,377,000 1,378,000
---------- ---------- ----------
Total operating expenses 3,593,000 2,323,000 3,285,000
---------- ---------- ----------
OPERATING INCOME (LOSS) 1,239,000 837,000 (370,000)
OTHER INCOME (EXPENSE):
Gain (loss) on sale of - - (307,000)
assets
Interest expense (358,000) (323,000) (418,000)
------------ ----------- -----------
Net other (expense) (358,000) (323,000) (725,000)
INCOME (LOSS) BEFORE
INCOME TAXES 881,000 514,000 (1,095,000)
Income tax (expense) (31,000) - -
------------ ----------- -----------
NET INCOME (LOSS) AND
COMPREHENSIVE INCOME
(LOSS) $ 850,000 $ 514,000 $(1,095,000)
----------- ---------- ------------
Basic Earnings (Loss) per $0.85 $0.56 $(1.29)
Share ----------- ---------- -----------
Diluted Earnings (Loss) per
Share $0.79 $0.53 $(1.29)
------------ ----------- ------------
</TABLE>
<PAGE> AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
January 1, 1996, through December 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK Additional Retained
Number Paid Earnings
of Common in (Accumulated
Shares Stock Capital Deficit) Total
------ ----- ------- ------------ ------
<S> <C> <C> <C> <C>
Balance as of
January 1, 1996 830,271 $42,000 $6,048,000 $(1,251,000) $4,839,000
Sale of common
stock under
the employee
stock purchase
plan 5,023 - 28,000 - 28,000
Exercise of
options 2,155 - 6,000 - 6,000
Sale of equity
units 78,000 4,000 386,000 - 390,000
Net loss - - - (1,095,000) (1,095,000)
-------- -------- ---------- ----------- ----------
Balance as of
December 31, 1996 915,449 46,000 6,468,000 (2,346,000) 4,168,000
Sale of common stock
under the employee
stock purchase plan 1,423 - 6,000 - 6,000
Exercise of options 3,000 - 12,000 - 12,000
Issuance of common
stock for services 3,000 - 18,000 - 18,000
Net income - - - 514,000 514,000
------- ------- --------- ----------- ---------
Balance as of
December 31, 1997 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 - 7,000 - 7,000
Exercise of options 43,285 2,000 229,000 - 231,000
Exercise of warrants 78,000 4,000 341,000 - 345,000
Net income - - - 850,000 850,000
------ ------ --------- ---------- ---------
Balance as of
December 31, 1998 1,045,524 $ 52,000 $7,081,000 $ (982,000) $6,151,000
--------- -------- ---------- -----------
</TABLE>
<PAGE>
<PAGE> AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $850,000 $514,000 $(1,095,000)
Items not requiring cash outlays:
Depreciation 603,000 665,000 780,000
Amortization 275,000 344,000 412,000
Bad debt expense 67,000 13,000 11,000
Imputed interest expense 37,000 - -
Loss on sale of assets - - 307,000
Changes in:
Accounts receivable 199,000 (368,000) 653,000
Income tax refunds
receivable - - 304,000
Inventories (164,000) (65,000) (313,000)
Prepaid advertising costs (888,000) (38,000) 2,000
Accounts payable 492,000 (219,000) (183,000)
Accrued expenses (109,000) (76,000) (392,000)
Other (35,000) 65,000 (82,000)
-------- -------- ---------
Net cash provided by
operating activities 1,327,000 835,000 404,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net cash paid (550,000) - -
Proceeds from sale of assets - - 1,989,000
Purchase of property and equipment(351,000) (235,000) (280,000)
Cost incurred for video production - - (138,000)
-------- --------- ----------
Net cash provided (used) by
investing activities (901,000) (235,000) 1,571,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable
and long term debt 677,000 3,186,000 1,228,000
Payments on notes payable
and long term debt (1,745,000) (3,746,000) (3,666,000)
Net proceeds from common
stock transactions 583,000 36,000 424,000
----------- ---------- ----------
Net cash (used) by
financing activities (485,000) (524,000) (2,014,000)
NET INCREASE (DECREASE) IN CASH (59,000) 76,000 (39,000)
Cash, at beginning of period 183,000 107,000 146,000
---------- ---------- --------
Cash, at end of period $124,000 $183,000 $107,000
</TABLE>
<PAGE>
<PAGE>
American Educational Products, Inc.
Summary of Selected Financial Data
(amounts in thousands, except per share data and number of employees)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $11,675 $8,392 $8,501 $20,333 $21,101
Operating
income (loss) $1,239 $837 $(370) $(3,898) $(2,229)
Net income (loss) $850 $514 $(1,095) $(2,976) $(1,858)
Basic earnings
(loss) per share $0.85 $0.56 $(1.29) $(3.61) $(2.29)
Weighted average
number of common
shares outstand-
ing 1,000 918 852 825 812
Dividends per
share nil nil nil nil nil
Total assets $11,202 $7,251 $7,556 $11,240 $19,331
Total long term
debt $1,087 $- $907 $2,360 $3,703
Total stockholders'
equity $6,151 $4,718 $4,168 $4,839 $7,671
Number of
employees 90 66 61 92 161
</TABLE>
<PAGE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Hein & Associates
717 - 17th Street
Suite 1600
Denver, CO 80202
Board of Directors
American Educational Products, Inc.
Boulder, Colorado
We have audited the accompanying consolidated balance sheets of American
Educational Products, Inc. and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
American Educational Products, Inc. and Subsidiaries as of December 31,
1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Denver, Colorado
March 1, 1999
<PAGE>
<PAGE>
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------------------
Nature of Business - American Educational Products, Inc. (AMEP or the
Company) was organized as a Colorado corporation in 1986.
The Company sells a wide variety of educational products through multiple
sales channels. The Company's products include those developed and
manufactured by the Company, as well as products manufactured by other
companies. The Company's customers include educational institutions,
wholesalers, individual educators, and consumers. Approximately 91% of the
Company's 1998 sales were in the United States and the remainder were
exported to various locations throughout the world.
The Company utilizes several trade names in its marketing efforts. Scott
Resources (Scott) specializes in manufacturing math products and earth
science (geology) products. Hubbard Scientific (Hubbard) specializes in
manufacturing science products for teaching life science (biology and
chemistry) and physical science (physics and astronomy). National Teaching
Aids (NTA) specializes in manufacturing Microslide(-TM-) Viewers and the
related Microslides(-TM-). Summit Learning (Summit) distributes a wide
array of math and science products primarily through the use of direct mail
advertising.
A summary of the Company's significant accounting policies follows:
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Estimates that have a significant impact are a) future collectibility of
accounts receivable, b) net realizable value of inventory, c) future sales
to be derived from catalog mailings, d) useful life and salvage value of
property and equipment, e) future sales of videos, f) useful life of
intangible assets, g) future recoverability of all long-lived assets, h)
fair value of financial instruments, and i) future value of net operating
loss carryforward. Actual results could differ from those estimates.
Revenue Recognition
- -------------------
Sales are recorded at time of shipment and an allowance is provided for
estimated future returns.
Inventories - Inventories are valued at the lower of cost [using costing
systems that approximate a first-in, first-out (FIFO) basis] or market, and
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---------- --------
<S> <C> <C>
Raw materials $1,908,000 $ 968,000
Work in process 48,000 243,000
Finished goods 2,092,000 1,562,000
less Valuation allowance (315,000) ( 233,000)
----------- ----------
Total $3,733,000 $2,540,000
</TABLE>
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over estimated useful lives ranging generally from 3
to 32 years. Depreciation expense was $603,000, $665,000, and $780,000,
for the years ended December 31, 1998, 1997, and 1996, respectively.
Maintenance and repairs are charged to expenses when incurred. Property
replacements and betterments that extend the life of assets, including
reproduction masters for significant, non-routine product updates, are
capitalized and subsequently depreciated. During 1998, the Company
implemented the provisions of AICPA Statement of Position No. 98-1
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use ("SOP 98-1"). SOP 98-1 specifies the types of costs that must
be capitalized and the types for costs that must be expensed during the
development and implementation phases of software installation.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---------- ---------
<S> <C> <C>
Reproduction masters $3,437,000 $3,150,000
Plant machinery and equipment 1,971,000 1,650,000
Office furniture and equipment 279,000 279,000
Land and buildings 737,000 737,000
Computer hardware and software 724,000 395,000
Vehicles and other 36,000 21,000
---------- ----------
7,184,000 6,232,000
---------- ----------
Less accumulated depreciation (4,588,000) (3,985,000)
----------- -----------
$2,596,000 $2,247,000
</TABLE>
Video Library
- -------------
The Company capitalizes costs incurred relating to the development of
educational video products. These costs are amortized over the estimated
future unit sales of the video products on an individual film forecast
computation method. Estimated future unit sales of each video represent a
significant estimate and are reviewed quarterly by the Company.
Amortization expense was $142,000, $138,000, and $262,000 for the years
ended December 31, 1998, 1997, and 1996, respectively.
As of December 31, 1998, and 1997, the video library consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---------- ----------
<S> <C> <C>
Production costs - completed
videos $ 940,000 $ 940,000
Accumulated amortization (723,000) (581,000)
----------- -----------
$ 217,000 $ 359,000
</TABLE>
Intangibles - In the various acquisitions made by the Company, an
allocation was made to copyrights for proprietary products acquired. These
costs are amortized over the shorter period of the estimated remaining
lives of the products or the estimated remaining lives of their related
copyrights. The lives range from 2 years to 6 years.
The Company had a covenant not to compete from the former owners of
Hubbard. The amount allocated to the covenant was amortized over the
six-year life of the covenant. As of December 31, 1998, this covenant was
fully amortized.
In addition, the Company has a covenant not to compete from the former
owners of NTA. The amount allocated to the covenant is being amortized
over the four year life of the covenant.
A portion of the NTA purchase price was allocated to goodwill. This cost
is being amortized over 15 years.
As of December 31, 1998, and 1997, intangible assets consist of:
<TABLE>
<CAPTION>
ACCUMULATED COST
AMORTIZATION NET
-------- ---------- --------
<S> <C> <C> <C>
1998
Copyrights $650,000 $(544,000) $106,000
Covenants 890,000 (688,000) 202,000
Goodwill 879,000 (27,000) 852,000
--------- ---------- --------
$2,419,000 $(1,259,000) $1,160,000
1997
Copyrights $650,000 $(491,000) $159,000
Covenants 653,000 (643,000) 10,000
---------- ----------- --------
$1,303,000 $(1,134,000) $169,000
</TABLE>
Prepaid Advertising Costs
- -------------------------
Substantially all of the Company's advertising is through the mailing of
catalogs. The printing and mailing costs of catalogs are recorded as a
current prepaid cost. These costs are amortized to expense based upon
individual cost pools using actual and estimated future revenues for each
catalog.
All other advertising costs are expensed when the advertising first takes
place.
Long-Lived Assets
- -----------------
Management periodically assesses recoverability of all long-lived assets,
including intangibles. The assessment for impairment is performed whenever
events or changes in circumstance indicate that the carrying value of an
asset may not be recoverable. The assessment compares the carrying value
of the assets to the estimated future cash flows of the assets, exclusive
of interest. If an impairment is indicated, a provision is made to reduce
the asset's carrying value to its estimated fair value.
Fair Value of Financial Instruments and Concentration of Credit Risk
- --------------------------------------------------------------------
The carrying value of the Company's trade receivables and trade payables
are considered to approximate fair value due to their short maturities.
The fair value of the Company's notes payable are considered to approximate
fair value because the effective interest rates on the obligations
approximate the Company's current cost of borrowing.
The Company has a concentration of credit risk because substantially all of
its sales are either direct to educational institutions or to distributors
who sell to educational institutions. Management believes that the
allowance for doubtful accounts is sufficient to cover the related credit
risk.
Stock-Based Compensation
- ------------------------
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 Accounting for Stock-Based Compensation ("SFAS 123").
SFAS 123 requires disclosure of the fair value and other characteristics of
stock options granted to employees. Under the provisions of SFAS 123, the
Company has elected to continue using the intrinsic value method of
accounting for employee stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25").
Income Taxes
- ------------
The Company accounts for income taxes under the liability method of SFAS
109. Deferred income taxes reflect the effect of temporary differences
between the tax basis of assets and liabilities and the carrying value of
those assets and liabilities for financial reporting purposes. Deferred
income taxes also reflect the value of net operating losses and an
offsetting valuation allowance. Tax effects are computed using the tax
rates and laws enacted as of the balance sheet date.
Earnings Per Share
- ------------------
The earnings per share is presented in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("FAS 128"). FAS 128 specifies the method of computation, presentation,
and disclosure for earnings per share ("EPS"). It requires the
presentation of the two EPS amounts, basic and diluted. Basic EPS is
calculated by dividing net income by the weighted average number of common
shares outstanding for the period. Diluted EPS includes the dilution that
would occur if outstanding stock options and other dilutive securities were
exercised. Under certain circumstances, the calculation results in an
anti-dilutive impact. An anti-dilutive impact means that the calculation
increases earnings per share or reduces losses per share. All securities
with an anti-dilutive impact are excluded from the diluted EPS calculation.
All prior periods have been restated to conform to the requirements of SFAS
128. Earnings per share amounts have been adjusted, for all years
presented, to reflect the five for one stock split effective April, 1997.
Supplemental Disclosures of Cash Flow Information -
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Cash payments for:
Interest $297,000 $306,000 $428,000
Income Taxes $ 21,000 $ 0 $ 0
Non-cash investing and
financing activities:
Capital leases incurred in
exchange for equipment
purchases $186,000 $ 0 $ 0
Acquisition of companies
with debt $ 2,609,000 $ 0 $ 0
</TABLE>
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In June 1998, Statement of Financial Accounting Standards No. 133
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133")
was 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.
Reporting Comprehensive Income
- ------------------------------
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("FAS 130") became effective during 1998. FAS 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. Since its inception, the Company has
not entered into any transactions that meet the definition of comprehensive
income other than net income or net loss. Accordingly, the balance of
accumulated comprehensive income at December 31, 1998 was nil and total
comprehensive income (loss) for each of the three years ending December
31,1998 was equal to the net income or net loss reported for the year.
Segment Reporting
- -----------------
All of the Company's activities are contained within one operating segment,
the manufacture and distribution of supplemental teaching materials.
2. ACQUISITIONS:
------------
In May 1998, the Company purchased all of the common stock of Learning &
Leisure, Inc. and its wholly owned subsidiary, National Teaching Aids, Inc.
(collectively, "NTA") for a total of $1,984,000 including costs and
liabilities assumed. NTA produces the Microslide(-TM-) System.
Microslides(-TM-) are 35mm photographs taken through a microscope. Each
set of photographs is designed to teach a specific scientific concept. The
35mm images are viewed through a Microslide(-TM-) Viewer, a specially
designed plastic device that resembles a microscope.
The sellers provided financing for the transaction under a $950,000
convertible note payable, a $400,000 licensing agreement, and consultation/
non-compete agreements requiring aggregate payments of $300,000. All
additional acquisition costs were financed via the Company's existing line
of credit.
The NTA acquisition has been recorded using the purchase method of
accounting and the operating results of NTA were included in the Company's
consolidated results of operation commencing June 1, 1998. Excess of cost
over fair value of assets acquired (goodwill) of $980,000 is being
amortized on a straight line basis over 15 years.
Effective July 1, 1998, AMEP acquired certain operating assets of Summit
Learning ("Summit") for a total purchase cost of $1,550,000 including costs
and liabilities assumed.
Summit distributes math and science supplemental teaching aids via direct
mail catalogs. The seller provided financing for the acquisition in the
form of a promissory note with a principal amount of $1,182,000. In
addition, certain assets acquired in the Summit transaction were sold in
September, 1998. Summit sold the assets that it had previously used in a
Christmas season mail order catalog targeted at parents and grandparents.
Sales proceeds were $50,000 cash plus a long term note receivable. Since
collection of the note receivable is dependent on the future successful
operations of the buyer, the Company will recognize future collections, if
any, as they are received. The Company's existing capital resources
financed all other acquisition costs.
The Summit acquisition was recorded using the purchase method of accounting
and the operating results of Summit were included in the Company's
consolidated results of operations commencing July 1, 1998. The fair value
of assets acquired exceeded the acquisition costs by approximately $100,000
(negative goodwill), which is being amortized on a straight line basis over
15 years.
The following pro-forma presentation has been prepared as if both
acquisitions had occurred on January 1, 1997.
<TABLE>
<CAPTION>
Pro-forma Results of Operations For the year ended
December 31,
1998 1997
------------- ------
<S> <C> <C>
Net sales $15,010,000 $17,410,000
Net income (loss) $ 181,000 $ (640,000)
Basic earnings (loss) per share $ 0.18 $ (0.70)
Diluted earnings (loss) per share $ 0.17 $ (0.70)
</TABLE>
The pro-forma amounts presented above include adjustments to historical
amounts for interest on acquisition debt incurred, amortization of
goodwill, and depreciation of revalued furniture and equipment. The
pro-forma information is not necessarily indicative of the results of
operation of the combined company had these events occurred on January 1,
1997. Furthermore, AMEP made substantial changes to the operations of NTA
and Summit subsequent to their acquisitions. Specifically, a duplicative
facility acquired with NTA was closed and the number of catalogs mailed by
Summit was substantially reduced. None of these changes are reflected in
the pro-forma amounts above. Therefore, the amounts presented above are
not indicative of future results.
3. DIVESTITURES:
------------
Effective June 17, 1996, the Company sold substantially all of the assets
of AEP Media Corporation, dba Churchill Media ("Churchill") to a non-public
Company. The sale comprised all the assets used by Churchill for video
production and distribution. Total cash proceeds of the sale were
$1,000,000. In addition, the Company has the right to receive future
royalties on Churchill titles sold by the purchaser through June 2000.
Royalties are calculated at 10% of sales and are subject to an aggregate
ceiling of $750,000. The Company recorded a $490,000 royalty receivable
based upon its estimate of future sales (using historical sales decline
curves) less a discount factor of 11.5% for the time value of money. The
Company utilized the proceeds to pay trade creditors and to reduce the
outstanding balance on the Company's bank debt. The Company recognized a
loss of $384,000 on the sale. Revenue of $905,000 and operating losses of
$215,000 were attributable to Churchill's operations during the six months
ended June 30, 1996. Royalty payments received during 1997 were less than
originally estimated and, accordingly, the Company reduced the royalty
receivable carrying value by $38,000 to reflect its revised estimate of
future royalties.
Effective July 31, 1996, the Company sold one of its warehouses. The sale
of the real estate provided approximately $1,000,000 in net proceeds that
were used to pay trade creditors and reduce bank debt. A gain of
approximately $77,000 was realized on the sale.
4. NOTES PAYABLE AND LONG-TERM DEBT:
--------------------------------
The Company has a $2,800,000 revolving line of credit pursuant to an
asset-based financing agreement that expires April 30, 2000. Borrowing
under this line of credit bears interest at a floating rate plus 2%
(totaling 9.75% as of December 31, 1998). Interest is payable monthly.
The principal balance was $1,614,000 at December 31, 1998. 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. As of December 31, 1998, the borrowing base
formula would have limited borrowings to $2,399,000. The line of credit is
collateralized by substantially all of the Company's assets. Subsequent to
December 31, 1998, the terms of the revolving line of credit were revised
to increase maximum borrowings up to $3,250,000 and reduce the interest
rate to a floating rate plus 1%.
The Company's long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------------ ----------
<S> <C> <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 $950,000 less imputed
interest at 10%. Collateralized by
intellectual property $ 905,000 $ -
License agreement, due in four annual
installments of $100,000. Face value
of $400,000 less imputed interest
at 10%. Collateralized by intellectual
property. 323,000 -
Non-compete agreement, due in quarterly
installments of $29,500. Non-
collateralized. 177,000 -
Note Payable, principal due in monthly
installments of $125,000. Accrued
interest is payable monthly at 8.5%.
Collateralized by Summit's operating
assets. 431,000 -
Capital lease obligations, due in
monthly installments of $7,000 with
varying maturities. Collateralized by
information system hardware and
manufacturing equipment. 146,000 -
---------- ----------
Total 1,982,000 -
Less current maturities (895,000) -
----------- ----------
Long-term debt $1,087,000 $ -
</TABLE>
At December 31, 1998, the future minimum principal payments on long term
debt and capitalized lease obligations were as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 895,000
2000 425,000
2001 334,000
2002 328,000
---------
Total $1,982,000
</TABLE>
5. COMMITMENTS:
-----------
The Company leases office space, equipment, and warehouse facilities under
noncancellable operating leases. Total rental expense for each of the last
three years was $240,000 in 1998, $133,000 in 1997, and $184,000 in 1996.
Future minimum rental commitments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $315,000
2000 175,000
2001 156,000
2002 45,000
2003 1,000
---------
Total $692,000
</TABLE>
The Company has certain royalty agreements with third parties on various
products. Total royalty expense for each of the last three years was
$115,000 in 1998, $109,000 in 1997, and $207,000 in 1996.
6. STOCKHOLDERS' EQUITY:
--------------------
Preferred Stock - The Company has authorized 50,000,000 shares of preferred
stock. These shares may be issued in series with such rights and
preferences as may be determined by the Board of Directors. None of the
shares are issued and outstanding.
Common Stock - On April 4, 1997, the Company's shareholders approved a
one-for-five (1-for-5) reverse split on its $0.01 par value common stock.
The reverse split became effective on April 22, 1997. As of that date, the
par value of the Company's common stock was increased to $0.05 per share
and the number of common shares outstanding was reduced from 4,580,794 to
916,298. The reverse split has been shown in the accompanying financial
statements and notes as a retroactive adjustment giving effect to the split
for all periods presented.
During 1997, the Company issued a warrant dividend to existing
shareholders. The warrant dividend consists of one warrant for each share
of common stock owned by shareholders of record on June 5, 1997. Each
warrant entitles its holder for a period of three years to purchase one
additional share of the Company's common stock at an exercise price of
$10.00 per share. No voting rights have been attached to the warrant. The
Company retains the right to redeem the warrants upon 30 days notice for a
redemption price of $0.01 per warrant in the event that public trading of
the Company's common stock equals or exceeds 110% of the then current
exercise price of the warrant for twenty consecutive trading days. All of
these warrants, amounting to 916,000, were outstanding at December 31, 1998
and December 31, 1997.
A registration statement under the Securities Act of 1933 was filed
regarding the warrants and was declared effective by the Securities and
Exchange Commission in December, 1997. The warrants were issued and began
trading on December 5, 1997, on the NASDAQ Small Cap Market System under
the symbol AMEPW. NASDAQ informed the Company that, in its opinion, the
ex-dividend date for these warrants should be December 5, 1997, the day
that trading commenced. As a result of the delayed ex-dividend date, the
Company believes that it is required to issue additional warrants to
disenfranchised shareholders who sold shares between June 5, 1997 and
December 5, 1997. As of December 31, 1998, the Company had commenced the
registration process. The additional warrants will be issued immediately
after the registration statement is declared effective by the Securities
and Exchange Commission.
During 1996, the Company sold 78,000 equity units for total proceeds of
$390,000. The proceeds were used to reduce bank debt and to provide
additional working capital. The equity units consist of one share of the
Company's common stock plus a warrant to purchase one additional share of
common stock. During 1997, the exercise price of the warrants was adjusted
from $5.00 per share to $4.50 per share to reflect updated market
valuations. The common stock was registered under the Securities Act. All
78,000 warrants were exercised during the year ended December 31, 1998.
Earnings per Share
- ------------------
The following is a reconciliation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
For the year ended December 31, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ----------
<S> <C> <C> <C>
Basic EPS
Income available to common
shareholders $ 850,000 1,000,000 $0.85
Effect of dilutive securities
Stock options 64,000
Warrants 11,000
Convertible debt 47,000 63,000
Diluted EPS
Income available to common
stockholders plus assumed
conversions $ 897,000 1,138,000 $0.79
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1997
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ----------
<S> <C> <C> <C>
Basic EPS
Income available to common
shareholders $514,000 918,000 $0.56
Effect of dilutive securities
Stock options 29,000
Warrants 15,000
Diluted EPS
Income available to common
stockholders plus assumed
conversions $514,000 962,000 $0.53
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1996
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ----------
<S> <C> <C> <C>
Basic and Diluted EPS
(Loss) available to common
shareholders $(1,095,000) 852,000 $(1.29)
</TABLE>
Options to purchase 172,450 shares of common stock were outstanding at
December 31, 1998. All of them had a dilutive effect on the 1998 earnings
per share calculation. For purposes of calculating diluted EPS,
outstanding options resulted in 64,000 incremental shares determined using
the treasury stock method.
Options to purchase 172,450 shares of common stock were outstanding at
December 31, 1998. All of them had a dilutive effect on the 1998 earnings
per share calculation. For purposes of calculating diluted EPS,
outstanding options resulted in 64,000 incremental shares determined using
the treasury stock method.
The Company also had warrants outstanding at December 31, 1998 to purchase
916,000 shares of common stock. The 916,000 warrants had an anti-dilutive
effect and were therefore excluded from the calculation of diluted EPS.
The excluded warrants had an exercise price of $10.00 per share.
Options to purchase 161,700 shares of common stock were outstanding at
December 31, 1997. Of that total, 159,000 options had a dilutive effect on
the 1997 earnings per share calculation. For purposes of calculating
diluted EPS, outstanding options resulted in 29,000 incremental shares
determined using the treasury stock method. The remaining 2,700 options
had an anti-dilutive effect and were therefore excluded from the
calculation of diluted EPS. The excluded options had an exercise price of
$7.125 per share.
The Company also had warrants outstanding at December 31, 1997 to purchase
994,000 shares of common stock. Of that total, 78,000 warrants had a
dilutive effect on the 1997 earnings per share calculation. For purposes
of calculating diluted EPS, those warrants resulted in 15,000 incremental
shares determined using the treasury stock method. The remaining 916,000
warrants had an anti-dilutive effect and were therefore excluded from the
calculation of diluted EPS. The excluded warrants had an exercise price of
$10.00 per share.
The diluted earnings per share calculations for 1996 excluded the effect of
all options and warrants as the net loss for that year resulted in an
anti-dilutive effect for all such securities.
ESPP - Substantially all of the Company's regular full-time employees are
eligible to participate in an employee stock purchase plan (ESPP), except
those owning more than 5% of the Company's common stock or more than
$25,000 in value of the Company's common stock. Stockholders have
authorized issuance of up to 60,000 shares under the ESPP. Under the ESPP,
employees may purchase shares at 85% of the NASDAQ quoted market value on
either the beginning or ending date of the six month enrollment period,
whichever is less. The number of shares purchased under the ESPP for each
of the three years ending December 31 was 1,367 in 1998, 1,423 in 1997, and
5,023 in 1996. The remaining shares available to be issued under the ESPP
totaled 18,000 as of December 31, 1998. Expenses related to the ESPP are
not material.
Stock Options
- -------------
On June 2, 1997, the shareholders approved the 1997 Stock Incentive Plan.
The 1997 Stock Incentive Plan (the "1997 Plan") superseded the previously
existing plan, the 1990 Incentive Stock Option Plan, and all activity under
the 1990 was merged into the 1997 Plan. The 1997 Plan was created to
conform to recent changes in securities and tax laws and regulations and to
conform to new requirements of the NASDAQ Stock Market.
The 1997 Plan authorizes the Board of Directors to issue incentive stock
options to executive officers and key employees and to grant non-qualified
stock options and/or stock purchase rights to officers, employees, former
employees, directors, and consultants. The options are generally granted
for a five-year period, with the exercise price based upon the market price
of the Company's freely traded common stock on the date of the grant. The
total number of options authorized for issuance under the Plan is 179,300.
During 1997, the Board of Directors determined that 99,400 incentive and
non-qualified stock options contained exercise prices in excess of amounts
that were appropriate given the financial condition of the Company.
Accordingly, 50,900 incentive stock options and 48,500 non-qualified stock
options were terminated and subsequently re-issued with an exercise price
of $4.50 per share.
At December 31, 1998, the 69,450 incentive stock options outstanding under
the 1997 Plan had exercise prices ranging from $3.875 to $7.125,
exercisable as follows:
<TABLE>
<CAPTION>
EXERCISABLE IN YEAR NUMBER OF WEIGHTED
SHARES AVERAGE EXERCISE PRICE
- ------------------- ------------ -----------------
<S> <C> <C>
1999 60,100 $4.35
2000 9,350 $4.11
</TABLE>
At December 31, 1998, there were 16,485 shares authorized for future grants
of incentive stock options under the existing Plan.
The Company has issued non-qualified stock options under the terms of the
1997 Plan (and its predecessor plan). During 1996, the Company issued
22,400 non-qualified stock options to its directors at 100% of fair value
at the date of the grant. During 1997, the Company issued 36,500
non-qualified stock options to its directors at 100% of fair value at the
date of the grant. During 1998, the Company issued 59,000 non-qualified
stock options to its employees and directors at 100% of fair value at the
date of the grant. All 103,000 non-qualified options outstanding at
December 31, 1998, were exercisable.
The following is a summary of the number of shares under option:
<TABLE>
<CAPTION>
NUMBER OF SHARES
INCENTIVE NON- WEIGHTED
STOCK QUALIFIED AVERAGE
OPTION STOCK EXERCISE
PLAN OPTIONS TOTAL PRICE
------------ --------- -------- ---------
<S> <C> <C> <C> <C>
Balance, Jan. 1, 1996 124,600 26,100 150,700 $10.50
Options granted 31,300 22,400 53,700 $ 6.30
Options exercised (2,160) 0 (2,160) $ 2.95
Options terminated (100,540) 0 (100,540) $10.15
Balance, Dec. 31, 1996 53,200 48,500 101,700 $ 7.90
Options granted 81,800 85,000 166,800 $ 4.40
Options exercised (1,000) (2,000) (3,000) $ 4.00
Options expired (1,300) 0 (1,300) $11.25
Options terminated (54,000) (48,500) (102,500) $ 7.82
Balance, Dec. 31, 1997 78,700 83,000 161,700 $ 4.40
Options granted 0 59,000 59,000 8.00
Options exercised (7,385) (29,000) (36,385) $ 4.50
Options terminated (1,865) (10,000) (11,865) $ 5.20
Balance, Dec. 31, 1998 69,450 103,000 172,450 $ 5.59
</TABLE>
For all options granted during the last three years, the weighted average
market price of the Company's common stock on the grant date was equal to
the weighted average exercise price. The weighted average remaining
contractual life for all options as of December 31, 1998, was approximately
4.0 years. If not previously exercised or terminated, options outstanding
at December 31, 1998, will expire as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
YEAR OF SHARES EXERCISE PRICE
- ----- ---------- -----------------
<S> <C> <C>
1999 16,350 $4.50
2000 6,900 $4.50
2001 44,200 $4.50
2002 48,000 $4.01
2003 57,000 $8.00
</TABLE>
Pro Forma Stock-Based Compensation Disclosures
- ----------------------------------------------
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock options that are granted to employees and
directors. Accordingly, no compensation cost has been recognized for
grants of options where the exercise price is not less than the quoted
market value of the Company's common stock on the grant date. Had
compensation cost been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of SFAS 123,
the Company's net income (loss) and earnings (loss) per share would have
changed to the pro forma amounts indicated in the following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Net income (loss)
As reported $ 850,000 $ 514,000 $(1,095,000)
Pro forma $ 512,000 $ 306,000 $(1,220,000)
Basic earnings (loss) per
common share
As reported $0.85 $0.56 $(1.29)
Pro forma $0.51 $0.33 $(1.43)
Diluted earnings (loss) per
common share
As reported $0.79 $0.53 $(1.29)
Pro forma $0.49 $0.32 $(1.43)
</TABLE>
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense
over the vesting period and additional options may be granted in future
years.
The fair value of each option granted was estimated as of the date of grant
using the Black - Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Estimated fair value/
share of options
granted $4.41 $2.23 $3.65
Expected volatility 58% 59% 64%
Risk free interest
rate 5.2% 5.6% 6.0%
Expected dividends $0.00 $0.00 $0.00
Expected term
(in years) 5.0 5.0 5.0
</TABLE>
7. INCOME TAXES:
------------
The composition of income tax expense for the years ended December 31 was
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current $31,000 $0 $0
Deferred 0 0 0
------- ---- ----
Total $31,000 $0 $0
</TABLE>
The percentage tax rates recorded for 1998, 1997, and 1996 were
approximately 4%, 0%, and 0%, respectively. Generally, the difference
between the recorded percentages and the Federal statutory rate of 34% is
primarily caused by the addition of state taxes (2% - 3%) offset by the
utilization of net operating loss (NOL) carryforwards. Specifically, the
tax expense recorded in 1998 represents alternative minimum federal taxes
and state taxes that cannot be offset against the NOL. The Company
recorded no income tax expense in 1997, as it was able to utilize NOL
carryforwards to offset its taxable income. In 1996, the Company did not
recognize any income tax benefit as it had exhausted loss carryback
provisions and was prohibited under SFAS 109 from recognizing uncertain
future benefits of the NOL carryforwards.
The Company has the ability to carryforward its net operating losses and
offset them against future taxable income, if any. The NOL carryforwards
approximate $3,600,000 and expire in the years 2009, 2010, and 2011.
Similarly, the Company has charitable contribution carryforwards of
approximately $400,000 that expire in the same years.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
significant components of deferred tax assets and liabilities as of
December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Deferred tax assets
(liabilities):
Current
Accounts receivable $ 23,000 $20,000
Inventories 117,000 98,000
Prepaid advertising costs (412,000) (14,000)
Net operating losses 272,000 -
Other - (17,000)
Long-term
Property, plant and
equipment (472,000) (515,000)
Net operating losses 1,060,000 1,218,000
Charitable contributions 150,000 150,000
-------- ---------
Net deferred tax asset 738,000 940,000
Valuation allowance (738,000) (940,000)
--------- ----------
Total $0 $0
========= ==========
</TABLE>
Based upon past performance and statutory expiration dates, the ultimate
realization of the NOL carryforwards is uncertain. Accordingly, the
Company has established a full valuation allowance against these
carryforward benefits and will recognize the benefits only as reassessment
indicates that they are realizable. The need for this valuation allowance
is subject to periodic review. Should the allowance be reduced in a future
period, the tax benefits of the carryforwards will be recorded at that time
as a reduction of the Company's income tax expense. The decrease of
$202,000 in the valuation allowance during 1998 is primarily due to
increase in deferred tax credits related to prepaid advertising costs.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to
be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN EDUCATIONAL PRODUCTS, INC.
Date: April 14, 1999 /s/ Clifford C. Thygesen
------------------------------
Clifford C. Thygesen, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Robert A. Scott Chairman of the Board, April 14, 1999
- ------------------- Secretary and Director
Robert A. Scott
/s/ Clifford C. Thygesen President and Director April 14, 1999
- ------------------------ (Chief Operating Officer)
Clifford C. Thygesen
/s/ Frank L. Jennings Vice President and April 14, 1999
- --------------------- Assistant Secretary
Frank L. Jennings (Chief Accounting Officer)
/s/ Stephen G. Calandrella Director April 14, 1999
- --------------------------
Stephen G. Calandrella
/s/ Richard J. Ciurczak Director April 14, 1999
- -----------------------
Richard J. Ciurczak
/s/ Wayne R. Kirschling Director April 14, 1999
- -----------------------
Wayne R. Kirschling
/s/ Steven B. Lapin Director April 14, 1999
- --------------------
Steven B. Lapin
/s/ Clifford L. Neuman Assistant Secretary and April 14, 1999
- ----------------------- Director
Clifford L. Neuman
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND ON PAGES 30 THROUGH 40 OF THE COMPANY'S
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] DEC-31-1998
[CASH] 124
[SECURITIES] 0
[RECEIVABLES] 1939
[ALLOWANCES] (63)
[INVENTORY] 3733
[CURRENT-ASSETS] 7130
[PP&E] 7184
[DEPRECIATION] (4588)
[TOTAL-ASSETS] 11202
[CURRENT-LIABILITIES] 3964
[BONDS] 1087
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 52
[OTHER-SE] 6099
[TOTAL-LIABILITY-AND-EQUITY] 11202
[SALES] 11675
[TOTAL-REVENUES] 11675
[CGS] 6843
[TOTAL-COSTS] 3526
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 67
[INTEREST-EXPENSE] 358
[INCOME-PRETAX] 881
[INCOME-TAX] 31
[INCOME-CONTINUING] 850
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 850
[EPS-PRIMARY] 0.85
[EPS-DILUTED] 0.79
</TABLE>
