<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-16310
AMERICAN EDUCATIONAL PRODUCTS, INC.
---------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Colorado 84-1012129
- - --------------------------- ------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
6550 Gunpark Drive, Suite 200, Boulder, Colorado 80301
------------------------------------------------------------------
(Address of principal executive officers) (Zip Code)
(303) 527-3230
-----------------------
(Issuer's Telephone Number)
----------------------------------------------------------------------
Former name, address, and fiscal year, if changed since last report
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Issuer was required to file such reports), and (2) has been
subject to filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: Check whether the Registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS: As of May 12, 1999, the Company had
1,072,064 shares of its $0.05 par value common stock outstanding.
Transitional Small Business Disclosure Format (Check one). Yes No X
<PAGE>
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 2
Consolidated Statements of Operations and Comprehensive
Income for the three months ended March 31, 1999 and
March 31, 1998 3
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and March 31, 1998 4
Consolidated Statement of Stockholders' Equity from
January 1, 1999 through March 31, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's discussion and analysis of financial
condition and results of operations
Liquidity and Capital Resources 7
Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 1999 and December 31, 1998
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash $ 95,000 $ 124,000
Trade receivables, net of allowance
of $83,000 and $63,000 2,433,000 1,876,000
Royalty receivable 95,000 116,000
Inventories 4,094,000 3,733,000
Prepaid advertising costs 888,000 1,114,000
Other 223,000 167,000
------------ ------------
TOTAL CURRENT ASSETS 7,828,000 7,130,000
PROPERTY AND EQUIPMENT, net 2,645,000 2,596,000
VIDEO LIBRARY, net 186,000 217,000
INTANGIBLE ASSETS, net 1,111,000 1,160,000
OTHER ASSETS 101,000 99,000
------------ ------------
TOTAL ASSETS $11,871,000 $11,202,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Notes payable $ 2,032,000 $ 1,614,000
Current maturities of long term debt 647,000 895,000
Accounts payable 1,511,000 1,135,000
Accrued expenses 250,000 261,000
Income taxes payable 33,000 59,000
------------ ------------
TOTAL CURRENT LIABILITIES 4,473,000 3,964,000
LONG TERM DEBT, less current maturities 1,061,000 1,087,000
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 50,000,000
shares authorized; none issued or outstanding - -
Common stock; $.05 par value; 100,000,000
shares authorized; 1,072,064 and 1,045,524
shares issued and outstanding 53,000 52,000
Additional paid in capital 7,201,000 7,081,000
(Accumulated deficit) (917,000) (982,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 6,337,000 6,151,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,871,000 $11,202,000
============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
for the Three Months ended March 31, 1999 and March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
------------ ------------
<S> <C> <C>
INCOME
Net sales $ 3,301,000 $ 1,847,000
Cost of goods sold 1,998,000 1,193,000
------------ ------------
Gross profit 1,303,000 654,000
OPERATING EXPENSES
Advertising and catalog costs 306,000 34,000
Other marketing 313,000 211,000
------------ ------------
Total marketing 619,000 245,000
General and administrative 521,000 363,000
------------ ------------
Total operating expenses 1,140,000 608,000
------------ ------------
OPERATING INCOME 163,000 46,000
Interest (expense) (98,000) (67,000)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 65,000 (21,000)
Income tax benefit (expense) - -
------------ ------------
NET INCOME (LOSS) AND COMPREHENSIVE
INCOME (LOSS) $ 65,000 $ (21,000)
============ ============
Basic earnings per share $ 0.06 $ (0.02)
============ ============
Diluted earnings per share $ 0.05 $ (0.02)
============ ============
Weighted average number of common shares
outstanding 1,060,000 935,000
Effect of dilutive securities 141,000 -
------------ ------------
Weighted average number of common shares
outstanding plus dilutive securities 1,201,000 935,000
============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Three Months ended March 31, 1999 and March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 65,000 $ (21,000)
Items not requiring cash outlays:
Depreciation 161,000 149,000
Amortization 79,000 49,000
Bad debt expense 21,000 4,000
Changes in:
Accounts receivable (577,000) (120,000)
Inventories (361,000) (300,000)
Prepaid advertising costs 226,000 (131,000)
Accounts payable 376,000 (5,000)
Accrued expenses 39,000 31,000
Other (96,000) 50,000
------------ ------------
Net cash provided (used) by operating
activities (67,000) (294,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (210,000) (62,000)
------------ ------------
Net cash provided (used) by investing
activities (210,000) (62,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long term debt 499,000 189,000
Payments on notes payable and long term debt (372,000) (84,000)
Net proceeds from common stock transactions 121,000 169,000
------------ ------------
Net cash provided (used) by financing
activities 248,000 274,000
------------ ------------
NET INCREASE (DECREASE) IN CASH (29,000) (82,000)
Cash, at beginning of period 124,000 183,000
------------ ------------
Cash, at end of period $ 95,000 $ 101,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash payments for:
Interest $ 61,000 $ 59,000
============ ============
Income taxes $ - $ -
============ ============
Non-cash investing and financing activities:
Acquisition of equipment for debt $ - $ 135,000
============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
January 1, 1999 through March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- Additional
Number Paid
of Common in (Accumulated
shares Stock Capital Deficit) Total
---------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance as of
January 1, 1999 1,045,524 $52,000 $7,081,000 $(982,000) $ 6,151,000
Sale of common stock
under the employee
stock purchase plan 757 - 6,000 - 6,000
Exercise of options 25,783 1,000 114,000 - 115,000
Net income - - - 65,000 65,000
---------- --------- ----------- ---------- -----------
Balance as of
March 31, 1999 1,072,064 $53,000 $7,201,000 $(917,000) $ 6,337,000
========== ========= =========== ========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 -- Presentation
- - ----------------------
In the opinion of the Company, these unaudited consolidated financial
statements contain all adjustments (consisting of normal accruals) necessary
to present fairly the financial position as of March 31, 1999, and the results
of operations for the three months ended March 31, 1999 and 1998. These
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1998.
Note 2 -- Forward-Looking Statements
- - ------------------------------------
In addition to historical information, this Quarterly Report contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, and are thus prospective. The forward-looking
statements contained herein are subject to certain risks and uncertainties
that could cause actual results to differ materially from those reflected in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, competitive pressures, changing economic
conditions, those discussed in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and other
factors, some of which will be outside the control of the Company. Readers
are cautioned not to place undue reliance on these forward-looking statements
to reflect events or circumstances that arise after the date hereof. Readers
should refer to and carefully review the information in future documents the
Company files with the Securities and Exchange Commission.
<PAGE>
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion addresses the financial condition and results of
operations for American Educational Products, Inc. and its Subsidiaries
("AMEP" or the "Company"). AMEP currently uses several tradenames in
marketing its products, including Hubbard Scientific ("Hubbard"), National
Teaching Aids ("NTA"), Scott Resources ("Scott"), and Summit Learning
("Summit").
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.
The foregoing acquisitions affect comparisons among 1999 and 1998.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto included in this quarterly
report.
Liquidity and Capital Resources - March 31, 1999 Compared to December
31, 1998
The Company's liquidity and capital resources continued to improve during
the first quarter of 1999. Net income for the first quarter of 1999 was
$65,000. Earnings before interest, taxes, depreciation and amortization, was
$403,000.
During first quarter 1999, cash flow from operations plus borrowings
under the revolving line of credit were sufficient to fund all of the
Company's operating cash requirements. Working capital increased 6.0% from
$3,166,000 as of December 31, 1998 to $3,355,000 at March 31, 1999.
The Company has an 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 March 31, 1999, the borrowing base formula limited total
borrowings to $2,402,000. 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 and new telephone equipment 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 a 6.0% working capital increase for quarter
ended March 31, 1999. Current assets of $7,828,000 increased $698,000 from
December 31, 1998, and current liabilities increased $509,000 to $4,473,000.
Total assets increased from $11,202,000 on December 31, 1998, to
$11,871,000 on March 31, 1999. During the same period, total liabilities
increased from $5,051,000 to $5,534,000.
Accounts receivable increased from $1,876,000 at December 31, 1998, to
$2,433,000 at March 31, 1999, an increase of $557,000 or 30%. The increase is
attributable to the seasonal nature of sales.
Inventories increased from $3,733,000 at December 31, 1998, to $4,094,000
at March 31, 1999, an increase of $361,000 or 10%. This increase can be
attributed primarily to preparation for seasonal increases in sales and the
inventory ramp-up for new product introductions.
Prepaid advertising costs of $888,000 at March 31, 1999 represent
deferred costs associated with mailing the 1999 spring catalogs. The
comparable amount from December 31, 1998 was $1,114,000.
The Company mails its spring catalogs in late December or early January.
The costs of the mailings are charged against income on a pro-rata basis using
estimated revenues for each catalog.
Net property and equipment increased from $2,596,000 at December 31,
1998, to $2,645,000 at March 31, 1999, an increase of $49,000 or 2%. The
Company recorded depreciation expense of $161,000 for first quarter 1999.
Capital expenditures for the quarter of $210,000 consisted primarily of new
information system hardware and software.
Video and film library costs decreased from $217,000 at December 31, 1998
to $186,000 at March 31, 1999, a decrease of $31,000 or 14%. All of the
decrease represented normal amortization expense.
Intangible and other assets decreased from $1,259,000 at December 31,
1998, to $1,212,000 at March 31, 1999, an decrease of $47,000 or 4%. The
decrease was primarily the result of normal amortization expense.
Accounts payable increased from $1,135,000 at December 31, 1998, to
$1,511,000 at March 31, 1999, an increase of $376,000 or 33%. The increase
was due to increased purchases in preparation for anticipated seasonal sales.
Borrowings under the Company's working capital line of credit were
increased from $1,614,000 at December 31, 1998, to $2,032,000 at March 31,
1999, an increase of $418,000 or 26%. The Company's borrowing needs typically
increase during the first quarter to fund the mailing of spring catalogs and
the seasonal increase in business.
Stockholders' equity increased from $6,151,000 at December 31, 1998 to
$6,337,000 at March 31, 1999, an increase of $186,000 or 3%. The increase
consists of 1999 first quarter net income of $65,000, plus proceeds from
common stock transactions.
Management continually assesses the Company's need for capital resources.
From time to time, the Company may evaluate and pursue additional sources of
capital.
Other than the foregoing, management knows of no trends, demands, or
uncertainties that are reasonably likely to have a material impact on the
Company's short-term liquidity or capital resources.
Results of Operations - March 31, 1999 Compared to March 31, 1998
- - -----------------------------------------------------------------
As previously discussed, the comparisons of operating results for three
months ending March 31, 1999, to three months ending March 31, 1998 are
affected by the acquisitions made by the Company.
The Company reported net income of $65,000 for the first quarter of 1999,
compared to a net loss of ($21,000) for same period of 1998. Basic earnings
per share for the first quarter of 1998 was $0.06 per share. Basic loss per
share for the first quarter of 1998 was ($0.02) per share.
The Company's revenues in first quarter 1999 were $3,301,000, an increase
of $1,454,000 or 79% from the $1,847,000 of first quarter 1998. Sales
increased due to the acquisitions of Summit and NTA.
The cost of goods sold for first quarter ended March 31, 1999, was
$1,998,000, an increase of 68% over $1,193,000 in first quarter 1998.
Substantially all of the increase was due to the acquisitions.
Consolidated gross profits for first quarter 1999 were $1,303,000, an
increase of $649,000 or 99% from $654,000 in first quarter 1998. As a
percentage of sales, the gross margin increased from 35.4% in first quarter
1998 to 39.5% in first quarter 1999. The changes in both gross profit and
gross margin percent are partially the result of the acquisition of Summit and
NTA. For comparative purposes, the portion of the business that operated
continuously throughout the first quarter of both 1999 and 1998 reported a
gross margin percent of 37% in 1999 and 35% in 1998.
The advertising component of marketing costs increased $272,000 or 800%
from first quarter 1998. The increase is the direct result of the
acquisitions of Summit and NTA. Summit's advertising costs for first quarter
1999 were $245,000. The Company currently expects that 1999 catalog costs for
Summit will be approximately $1,000,000.
Other marketing costs increased by $102,000 or 48% from first quarter
1998. As a percentage of sales these costs were 10% in first quarter 1999 and
11% in 1998.
General and administrative expenses increased by $158,000 or 44% from
first quarter 1998 to first quarter 1999. As a percentage of sales, general
and administrative expenses were 16% in first quarter 1999 and 20% in first
quarter 1998.
Interest expense increased $31,000, or 46%, to $98,000 in first quarter
1999 compared to $67,000 in first quarter 1998. The increase in interest
expense from first quarter 1998 resulted from increases in debt related to the
acquisitions of Summit and NTA.
The Company recorded no income tax expense in first quarter 1999 due to
the net operating loss (NOL) carryover.
The Company has NOL carryforwards and contribution carryforwards for
income tax purposes of approximately $4,000,000, which expire beginning in
2009. Under the Tax Reform Act of 1986, the amounts of and the benefits from
NOL carryforwards and contribution carryforwards are subject to certain
limitations in the amount of carryforwards that the Company may utilize to
offset future taxable income, if any. Because ultimate realization of any
benefit from the NOL and contribution carryforwards is uncertain, the Company
has not recognized the future benefit of these loss carryforwards in its
financial statements. The potential future benefits are subject to periodic
review and can be recorded as a reduction of income tax expense at such time
as their utilization is probable. For 1999, it appears that the carryforwards
will allow the company to eliminate substantially all income tax expense that
might be incurred.
Inflation did not have any material effect on the Company's operations
for first quarter 1999 and 1998. The Company attempts to mitigate the impact
of cost increases by evaluating its purchasing strategies, by increasing its
manufacturing effectiveness, and by adjusting its selling prices. While the
Company does not expect inflation to have a material impact on 1999
operations, there are no guarantees that future cost increases would not have
an adverse impact.
The Company historically has experienced significant seasonality in its
sales primarily due to the purchasing cycle of educational institutions.
Historical trends indicate that the first and fourth fiscal quarters will each
generate approximately 20% of annual sales and the second and third fiscal
quarters will each generate approximately 30% of annual sales. The 1998
acquisitions are not expected to change this pattern.
Other than the foregoing, management knows of no trends, demands, or
uncertainties that are reasonably likely to have a material impact on the
Company's results of operations.
Year 2000 Issue
- - ---------------
The Year 2000 Issue is essentially the result of computer programs being
written using two digits rather than four to define the year. Any of the
Company's information technology ("IT") systems that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the Year
2000. This could result in a system failure or miscalculation causing
disruption of operations; including among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. The problem has the potential to affect "non-IT" systems, that
is, operating and control systems that rely on embedded microprocessors.
Embedded microprocessors have interfaces that are inaccessible to the user and
which may contain a date function that could trigger a malfunction. In
addition, like every other business enterprise, the Company is at risk from
Year 2000 Issue failures on the part of its major business counterparts,
including suppliers, distributors, and customers, as well as potential
failures in public and private infrastructure services, including electricity,
water, gas, communications, and financial services. System failures could
adversely affect operations and financial results throughout the Company.
Management has implemented a multi-phase program to address the Year 2000
Issue. These efforts are coordinated through a senior level task force and by
local task forces at each operating location.
Primary IT Systems - Manufacturing and Accounting - During 1996 and 1997,
the Company assessed its manufacturing and accounting computing system,
including hardware and software. The Company determined that its system had
significant deficiencies with regard to ongoing maintenance costs, processing
speeds, and integration with new generation software. It was also determined
that some of the Company's software was not Year 2000 compliant. Accordingly,
the Company commenced a project in 1997 to evaluate and install new integrated
manufacturing, customer service and accounting software. This project was
substantially completed during 1998. The new software provides many new
benefits, as it is "Windows" based and includes numerous capabilities not
available in the systems that it replaced. It is also Year 2000 compliant.
Simultaneous with the selection of the new software, the Company elected
to migrate from its existing "UNIX" servers to a "Windows NT" platform, and to
replace substantially all of its computer hardware. The Company found that
switching from UNIX to Windows NT would substantially reduce future costs for
computer hardware and operating systems support. Preparation, testing, and
training for the new system commenced early in 1998 and was substantially
completed by the end of the year.
Primary IT Systems - Warehouse - During its assessment of the computer
software and hardware used in its distribution warehouse, the Company
determined that existing systems were not Year 2000 compliant. The provider
of those systems has developed an upgrade path that is represented to provide
full Year 2000 compatibility. In 1998, the Company commenced work on the
upgrade, which 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 - The Company has incurred total costs of approximately $500,000
related to its Year 2000 Issue, including the repair and replacement of
various systems. In accordance with AICPA Statement of Position 98-1,
approximately $450,000 of the costs had been capitalized. The estimated
additional costs to complete the project are expected to be approximately
$175,000, of which $150,000 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.
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
No legal proceedings have been filed on behalf of or against the Company
nor have any claims been made.
Item 2. Changes in Securities
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
--------
None.
Reports on Form 8-K:
-------------------
None.
<PAGE>
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities and Exchange Act,
the Registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN EDUCATIONAL PRODUCTS, INC.
Dated: May 14, 1999 By: /s/ Clifford C. Thygesen
------------ ------------------------------------
Clifford C. Thygesen, President
Dated: May 14, 1999 By: /s/ Frank L. Jennings
------------ ------------------------------------
Frank L. Jennings, Chief Financial
Officer and Vice President of Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-QSB FOR THE THREE MONTHS MARCH 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 95
<SECURITIES> 0
<RECEIVABLES> 2,516
<ALLOWANCES> (83)
<INVENTORY> 4,094
<CURRENT-ASSETS> 7,828
<PP&E> 7,394
<DEPRECIATION> (4,749)
<TOTAL-ASSETS> 11,871
<CURRENT-LIABILITIES> 4,473
<BONDS> 1,061
0
0
<COMMON> 53
<OTHER-SE> 6,284
<TOTAL-LIABILITY-AND-EQUITY> 11,871
<SALES> 3,301
<TOTAL-REVENUES> 3,301
<CGS> 1,998
<TOTAL-COSTS> 1,998
<OTHER-EXPENSES> 1,140
<LOSS-PROVISION> 21
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> 65
<INCOME-TAX> 0
<INCOME-CONTINUING> 65
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65
<EPS-PRIMARY> .06
<EPS-DILUTED> .05
</TABLE>
