UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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, 80301
Boulder, Colorado
(Address of principal executive (Zip Code)
officers)
(303) 527-3230
(Issuer's
Telephone Number)
Former name, former address, and formal fiscal year, if changed
since last report
Check whether the Issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the Issuer was
required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 31, 2000, the Company had 1,210,640 shares of its
$0.05 par value common stock outstanding.
Transitional Small Business Disclosure Format (Check one).
Yes No X
<PAGE>
INDEX
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Page
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 (unaudited) 2
Consolidated Statements of Operations for the three months
ended
September 30, 2000 and September 30, 1999
(unaudited) 3
Consolidated Statements of Operations for the
nine months ended
September 30, 2000 and September 30, 1999
(unaudited) 4
Consolidated Statements of Cash Flows for the
nine months ended
September 30, 2000 and September 30, 1999
(unaudited) 5
Consolidated Statement of Stockholders' Equity
from January 1, 2000
through September 30, 2000 (unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's discussion and analysis of financial
condition and results of operations
Liquidity and Capital Resources 13
Results of Operations 14
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6.Exhibits and Reports on Form 8-K 18
1
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of September 30, 2000 and December 31, 1999
September 30, December 31,
2000 1999
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 953,000 $ 94,000
Trade receivables, net of
allowance of $127,000
and $95,000 2,598,000 1,952,000
Inventories 4,941,000 4,108,000
Prepaid advertising costs 550,000 1,171,000
Other 248,000 353,000
---------- ----------
TOTAL CURRENT ASSETS 9,290,000 7,678,000
PROPERTY AND EQUIPMENT, net 2,207,000 2,459,000
INTANGIBLE ASSETS, net 1,565,000 1,732,000
DEFERRED TAXES, net 634,000 575,000
VIDEO LIBRARY, net 24,000 94,000
OTHER ASSETS 84,000 93,000
---------- ----------
TOTAL ASSETS $13,804,000 $12,631,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 3,066,000 $ 2,227,000
Current maturities of
long-term debt 418,000 430,000
Accounts payable 1,081,000 1,349,000
Cash dividend payable 781,000 -
Accrued expenses and taxes 265,000 342,000
---------- ----------
TOTAL CURRENT LIABILITIES 5,611,000 4,348,000
---------- ----------
LONG-TERM DEBT, less current
maturities 449,000 894,000
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Preferred stock; $0.01 par
value; 50,000,000 shares
authorized; none issued or
outstanding - -
Common stock; $0.05 par value;
100,000,000 shares authorized;
1,210,640 and 1,076,070 shares
issued and outstanding 60,000 54,000
Additional paid in capital 8,439,000 7,215,000
Retained earnings (accumulated
deficit) (755,000) 120,000
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 7,744,000 7,389,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $13,804,000 $12,631,000
========== ==========
2
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Three Months ended September 30, 2000 and 1999
(Unaudited)
Three Months Ended
September 30, September 30,
2000 1999
REVENUE
Net sales $4,643,000 $4,624,000
Cost of goods sold 2,700,000 2,737,000
--------- ---------
Gross profit 1,943,000 1,887,000
OPERATING EXPENSES
Advertising and catalog costs 680,000 497,000
Other marketing 345,000 293,000
--------- ---------
Total marketing 1,025,000 790,000
General and administrative 512,000 557,000
--------- ---------
Total operating expenses 1,537,000 1,347,000
--------- ---------
OPERATING INCOME 406,000 540,000
SPECIAL CHARGES (386,000) -
INTEREST EXPENSE, net (113,000) (91,000)
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (93,000) 449,000
INCOME TAXES 36,000 -
--------- ---------
NET INCOME (LOSS) $ (57,000) $ 449,000
========= =========
Basic Earnings (Loss) per Share $ (0.05) $ 0.42
========= =========
Diluted Earnings (Loss) per Share $ (0.05) $ 0.39
========= =========
3
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Nine Months ended September, 30, 2000 and 1999
(Unaudited)
Nine Months Ended
September 30, September 30,
2000 1999
REVENUE
Net sales $12,827,000 $12,157,000
Cost of goods sold 7,568,000 7,102,000
---------- ----------
Gross profit 5,259,000 5,055,000
OPERATING EXPENSES
Advertising and catalog costs 1,522,000 1,157,000
Other marketing 1,099,000 1,020,000
---------- ----------
Total marketing 2,621,000 2,177,000
General and administrative 1,681,000 1,639,000
---------- ----------
Total operating expenses 4,302,000 3,816,000
---------- ----------
OPERATING INCOME 957,000 1,239,000
SPECIAL CHARGES (765,000) -
INTEREST EXPENSE, net (345,000) (285,000)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (153,000) 954,000
INCOME TAXES 59,000 -
---------- ----------
NET INCOME (LOSS) $ (94,000) $ 954,000
========== ==========
Basic Earnings (Loss) per Share $ (0.09) $ 0.89
========== ==========
Diluted Earnings (Loss) per Share $ (0.09) $ 0.84
========== ==========
4
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months ended September 30, 2000 and 1999 (Unaudited)
Nine Months Ended
September 30, September 30,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (94,000) $ 954,000
Expenses not requiring cash
outlays:
Depreciation 464,000 492,000
Amortization 237,000 248,000
Provision for bad debts 71,000 72,000
Provision for inventory
obsolescence 63,000 59,000
Imputed interest expense 31,000 46,000
Imputed cost of warrants
issued 120,000 -
Provision for deferred taxes (59,000) -
Changes in working capital items:
Accounts receivable (717,000) (901,000)
Inventories (896,000) (29,000)
Prepaid advertising costs 621,000 729,000
Accounts payable (268,000) 73,000
Accrued expenses (77,000) 69,000
Other 69,000 (110,000)
--------- ---------
Net cash provided (used) by
operating activities (435,000) 1,702,000
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (197,000) (393,000)
Cash paid for acquisitions - (1,251,000)
--------- ---------
Net cash (used) by
investing activities (197,000) (1,644,000)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable
and long term debt 1,229,000 1,059,000
Payments on notes payable
and long term debt (848,000) (1,141,000)
Net proceeds from common stock
transactions 1,110,000 113,000
--------- ---------
Net cash provided (used) by
financing activities 1,491,000 31,000
--------- ---------
NET INCREASE (DECREASE) IN CASH 859,000 89,000
Cash, at beginning of period 94,000 124,000
--------- ---------
Cash, at end of period $ 953,000 $ 213,000
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 330,000 $ 263,000
========= =========
Income taxes $ - $ -
========= =========
Non-Cash investing and financing activities:
Capital leases incurred
in exchange for equipment
purchases $ 15,000 $ 72,000
========= =========
5
<PAGE>
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
January 1, 2000 through September 30, 2000 (Unaudited)
COMMON STOCK Additional Retained
Number Paid Earnings
of Common in (Accumulated
Shares Stock Capital Deficit) Total
Balance as of January 1,
2000 1,076,070 $54,000 $7,215,000 $120,000 $7,389,000
Sale of common stock
under the employee
stock purchase plan 2,362 18,000 18,000
Exercise of options 9,300 31,000 31,000
Imputed cost of warrants
issued 120,000 120,000
Exercise of warrants 122,908 6,000 1,055,000 1,061,000
Cash dividend (781,000) (781,000)
Net loss (94,000) (94,000)
--------------------------------------------------
Balance as of
September 30, 2000 1,210,640 $60,000 $8,439,000 $(755,000) $7,744,000
==================================================
6
<PAGE>
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of
American Educational Products, Inc. ("AMEP" or the "Company")
have been prepared in accordance with generally accepted
accounting principles for interim financial information. In the
opinion of the Company, these unaudited consolidated financial
statements contain all adjustments (consisting of normal
accruals) necessary to present fairly the financial position as
of September 30, 2000, and the results of operations for the
three months and the nine months ended September 30, 2000 and
1999. The results for interim periods are not necessarily
indicative of results that may be expected for any other interim
period or for the full year. 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, 1999.
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 is thus
prospective. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause
actual results to differ materially from those reflected in the
forward-looking statements. Factors that might cause such a
difference include, but are not limited to, competitive
pressures, changing economic conditions, those discussed in the
section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and other
factors, some of which will be outside the control of the
Company. Readers are cautioned not to place undue reliance on
these forward-looking statements to reflect events or
circumstances that arise after the date hereof. Readers should
refer to and carefully review the information in future documents
the Company files with the Securities and Exchange Commission.
Note 3 - Change in Beneficial Ownership and Pending Merger
On March 28, 2000, G.C. Associates Holdings Corp. ("GC")
purchased 211,731 shares of AMEP common stock, increasing its
ownership to approximately 57% of outstanding shares. On April
20, 2000, GC purchased 34,540 common shares, which increased its
ownership percentage to approximately 61%. In conjunction
therewith, the Company's Board of Directors was restructured from
seven to three members, two of whom represent GC. The Company
agreed to redeem common stock options owned by the departing
directors and to pay the departing directors a stipend as part of
the restructuring. Special charges of $379,000 were incurred in
this regard.
On August 14, 2000, the Company entered into a definitive merger
agreement with G.C. Pursuant to the merger, all minority
shareholders of AMEP will receive $10.00 per share in cash.
Consummation of the merger is subject to, among other conditions:
(i) satisfactory completion of a due diligence review by GC of
AMEP's business, assets, and liabilities; and (ii) execution and
delivery of such documentation (including regulatory filings) as
may be requisite or appropriate; further, GC has the right to
terminate the merger at any time prior to closing if there exists
litigation which challenges any aspect of the merger. AMEP
intends to convene a shareholders' meeting to vote upon the
merger as soon as practicable following review of a proxy and
other materials by regulatory authorities.
7
<PAGE>
Note 4 -- Dividend
On October 30, 2000, the Company paid a special cash dividend
aggregating $780,750 (equivalent to $0.645 per share) to
shareholders of record as of August 18, 2000.
Note 5 - Pending Litigation
The Company is involved in litigation regarding its proposed
merger with GC. The complaints seek an order preventing AMEP
from proceeding with the GC merger or any other business
combination until an auction or other procedure designed to
obtain the highest possible price for shareholders is held, and
other relief. GC and its parent company, Geneve Corporation, and
members of AMEP's Board of Directors also are named as defendants
in the suit. The Company believes that the allegations are
without merit.
The Company has announced that an agreement-in-principle has been
reached by all parties to settle the litigation. The agreement-in-
principle provides in material part that: (i) the Merger
Agreement dated as of August 14, 2000 between AMEP and GC will be
amended so that the vote necessary to approve the proposed merger
includes a majority of the votes cast by shareholders other than
GC or Geneve Corporation, GC's parent company; (ii) the class
action plaintiffs and their counsel will be entitled to express
their views on materials concerning the proposed merger which are
mailed to the public shareholders of AMEP and filed with the
Securities and Exchange Commission (the "SEC"); and (iii) the
Company will pay plaintiffs' counsel fees and expenses. The
agreement-in-principle is subject to court approval of a formal
settlement agreement and consummation of the merger unless
consummation does not occur by reason of the failure of a
majority of votes of shareholders other than GC or Geneve to vote
in favor of the merger at a meeting of the Company held for that
purpose.
Note 6 - Possible Delisting
The Company has been notified by NASDAQ that it no longer meets
the requirements for continued listing on the NASDAQ SmallCap
Market. Specifically, the number of common shares available for
"public float" is less than the required minimum of 500,000
shares. Should the pending merger be completed, the Company will
become a private company and will no longer attempt to maintain
its NASDAQ listing. Should the pending merger fail, the Company
may take steps to increase its public float so that it meets the
NASDAQ requirements. There is no guarantee that it will be able
to do so.
Note 7 - Income Taxes
The provision (benefit) for deferred income taxes for the nine
months ended September 30, 2000 was computed at the effective
rate that the Company expects to use for the entire year. The
effective rate of 38% is greater than the statutory federal rate
of 34% primarily because of the addition of state taxes. For the
three and nine months ended September 30, 1999, the Company was
able to offset all of its taxable income with its net operating
loss carryforward.
8
<PAGE>
Note 8 - Earnings per Share
The following is a reconciliation of basic and diluted earnings
per share:
Three months ended September 30, 2000
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS
Net loss ($57,000) 1,151,000 ($0.05)
=========
Effect of dilutive
securities
Stock options *
Warrants *
Convertible debt * *
Diluted EPS
-------- ---------
Net loss plus assumed
conversions ($57,000) 1,151,000 ($0.05)
======== ========= =========
Three months ended September 30, 1999
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS
Net income $449,000 1,076,000 $0.42
Effect of dilutive =========
securities
Stock options 59,000
Warrants *
Convertible debt 20,000 79,000
Diluted EPS
------- --------- ---------
Net income plus
assumed conversions $469,000 1,214,000 $0.39
======= ========= =========
*For the three months ending September 30, 2000 all
potentially dilutive securities were excluded as they were
anti-dilutive. The outstanding securities so excluded were
123,000 stock options, 944,000 common stock warrants, and
47,000 shares to be issued upon debt conversion. For the
three months ended September 30, 1999 only the outstanding
common stock warrants (amounting to 992,000 shares) were
excluded as they were anti-dilutive.
9
<PAGE>
Nine months ended September 30, 2000
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS
Net loss ($94,000) 1,106,000 ($.09)
Effect of dilutive =========
securities
Stock options **
Warrants **
Convertible debt ** **
Diluted EPS --------- --------- ---------
Net loss plus assumed
conversions ($94,000) 1,106,000 ($.09)
========= ========= =========
Nine months ended September 30, 1999
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS
Net income $954,000 1,070,000 $0.89
=========
Effect of dilutive
securities
Stock options 66,000
Warrants **
Convertible debt ** **
Diluted EPS
Net income plus -------- --------- --------
assumed conversions $954,000 1,136,000 $0.84
======== ========= ========
**For the nine months ending September 30, 2000, all
potentially dilutive securities were excluded as they were
anti-dilutive. The outstanding securities so excluded were
166,000 stock options, 976,000 common stock warrants, and
55,000 shares to be issued upon debt conversion. For the
nine months ending September 30, 1999, the potentially
dilutive securities excluded because they were anti-dilutive
amounted to 992,000 common stock warrants and 82,000 shares
issuable upon debt conversion.
During 2000, the Company issued 75,000 common stock warrants with
an exercise price of $8.00 and an expiration date of August 15,
2000. Those warrants were exercised during the third quarter.
Under the provisions of SFAS 123, the Company recorded an imputed
cost of $120,000 during the first nine months of the year.
In connection with its pending merger, the Company has agreed to
redeem stock options held by its employees. Costs for the
redemption approximating $98,000 were included in special charges
for the quarter ended September 30, 2000.
Note 9 - Segment Information
The Company's reportable segments are integrated business units
that design, develop, assemble and distribute similar products.
The difference between the two segments is the type of customer.
The manufacturing segment sells primarily to wholesalers. The
distribution segment sells primarily to the end user. Although
all segments are managed as part of an integrated enterprise,
they are reported herein in a manner consistent with the internal
reports prepared for management.
10
<PAGE>
Transactions between reportable segments are recorded at cost.
Substantially all general and administrative services are
provided by the Company to the segments without charge.
Acquisition related expenses, including amortization of
acquisition costs, are considered a corporate expense. All of
the Company's assets are located in the United States of America.
AMEP is operated as an integrated enterprise and the segment
amounts reported herein would not necessarily be indicative of
operating results if the segments were operated independently.
Nine months ended September 30:
Description Manufacturing Distribution Corporate Total
Net sales 2000 $7,774,000 $5,053,000 $0 $12,827,000
1999 8,503,000 3,654,000 0 12,157,000
Operating 2000 1,749,000 494,000 (1,286,000) 957,000
Income(loss) 1999 2,154,000 259,000 (1,174,000) 1,239,000
Interest 2000 183,000 75,000 87,000 345,000
expense 1999 131,000 32,000 122,000 285,000
Assets 2000 1,862,000 236,000 109,000 2,207,000
1999 2,210,000 259,000 100,000 2,569,000
Depreciation 2000 395,000 44,000 262,000 701,000
and
Amortization 1999 465,000 10,000 265,000 740,000
11
<PAGE>
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion addresses the financial condition and
results of 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"), Summit Learning ("Summit"), and To-Sew ("To-
Sew").
On March 28, 2000, G.C. Associates Holdings Corp. ("GC")
purchased 211,731 shares of AMEP common stock, increasing its
ownership to approximately 57% of outstanding shares. On April
20, 2000, GC purchased 34,540 common shares, which increased its
ownership percentage to approximately 61%. In conjunction
therewith, the Company's Board of Directors was restructured from
seven to three members, two of whom represent GC. The Company
agreed to redeem common stock options owned by the departing
directors and to pay the departing directors a stipend as part of
the restructuring. Special charges of $379,000 were incurred in
this regard.
On August 14, 2000, the Company entered into a definitive merger
agreement with G.C. Pursuant to the merger, all minority
shareholders of AMEP will receive $10.00 per share in cash.
Consummation of the merger is subject to, among other conditions:
(i) satisfactory completion of a due diligence review by GC of
AMEP's business, assets, and liabilities; and (ii) execution and
delivery of such documentation (including regulatory filings) as
may be requisite or appropriate; further, GC has the right to
terminate the merger at any time prior to closing if there exists
litigation which challenges any aspect of the merger. AMEP
intends to convene a shareholders' meeting to vote upon the
merger as soon as practicable following review of a proxy and
other materials by regulatory authorities.
On October 30, 2000, the Company paid a special cash dividend
aggregating $780,750 (equivalent to $0.645 per share) to
shareholders of record as of August 18, 2000. Funds for the
dividend were provided by equity transactions, primarily the
exercise of stock options and warrants during the third quarter.
Effective September 1, 1999, the Company acquired To-Sew for a
purchase price of $1,270,000. To-Sew is a mail order
manufacturer and distributor of sewing kits. The To-Sew
acquisition was recorded using the purchase method of accounting
and the operating results of To-Sew were consolidated with the
Company commencing September 1, 1999.
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, 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 following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and notes thereto
included in this quarterly report.
12
<PAGE>
Liquidity and Capital Resources - September 30, 2000 Compared to
December 31, 1999
The Company's operations are highly seasonal. Educational
institutions purchase the majority of their curriculum materials
during the summer months in anticipation of the new school year
commencing in September. Thus, the Company records the majority
of its sales during its second and third quarters.
Working capital increased 10% from $3,330,000 as of December 31,
1999 to $3,679,000 on September 30, 2000. The current ratio
declined from 1.77 at December 31, 1999 to 1.66 at September 30,
2000. Cash used in operating activities for the nine months
ended September 30, 2000 was $435,000, which was provided by cash
flow from operations, and borrowings under the Company's
financing arrangement.
The Company has an asset based financing arrangement with U.S.
Bank Business Finance, an affiliate of U.S. Bancorp. The
arrangement expires on April 30, 2002, and provides for
borrowings up to $4,050,000. Certain amounts available to be
borrowed under the agreement are derived from a borrowing base as
defined in the agreement relating to allowable inventory and
accounts receivable. As of September 30, 2000, the borrowing
base formula allowed for borrowing up to the limit of $4,050,000
and the loan balance on that date was $3,066,000. Borrowings are
collateralized by substantially all the Company's assets.
Interest, computed at a floating rate plus 1%, is payable
monthly. In addition, the Company is required to make minimum
monthly principal payments of $36,000.
The borrowing 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 2000 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
financial condition should allow it to obtain the necessary funds
via alternate borrowing arrangements.
The Company believes that the funds available to it for the
remainder of 2000 will be adequate to meet its operating
requirements. The source of those funds will be cash flow from
operations and additional borrowings.
Current assets increased from $7,678,000 on December 31, 1999, to
$9,290,000 on September 30, 2000. Cash, accounts receivable, and
inventory all increased during the period. During the same
period, current liabilities increased from $4,348,000 to
$5,611,000. The note payable and the cash dividend payable
contributed to the increase.
Total assets increased from $12,631,000 on December 31, 1999, to
$13,804,000 on September 30, 2000. During the same period, total
liabilities increased from $5,242,000 to $6,060,000.
Approximately 124,000 options and warrants were exercised during
the quarter ended September 30, 2000. Net proceeds approximating
$1,070,000 were utilized to purchase short-term cash equivalent
investments. The funds will be used for general corporate
expenses, including expenditures for the special cash dividend,
debt reduction, and general operating expenses.
Accounts receivable increased from $1,952,000 at December 31,
1999, to $2,598,000 at September 30, 2000, an increase of
$646,000 or 33%. The increase in accounts receivable is
consistent with the seasonal nature of the business. Inventories
increased from $4,108,000 at December 31, 1999, to $4,941,000 at
13
<PAGE>
September 30, 2000, an increase of $833,000 or 20%. The increase
in inventory is due the ramp up of new products introduced at To-
Sew and Summit Learning. In addition, the manufacturing segment
purchased inventory in anticipation of future sales requirements.
Prepaid advertising costs of $550,000 at September 30, 2000
represent deferred costs associated with mailing the 2000
catalogs. The Company commences its spring catalog program early
in the first quarter and its fall catalog program in the middle
of the third quarter. The costs of the mailings are charged
against income on a pro-rata basis using estimated monthly
revenues for each catalog.
The Company has a deferred tax asset of $634,000. Included in
the net deferred tax asset at September 30, 2000 is the future
tax benefit of a net operating loss carryforward approximating
$2,450,000, which can be used to offset future taxable income.
Under the Tax Reform Act of 1986, the amounts of and the benefits
from NOL carryforwards are subject to certain limitations. Thus,
ultimate realization of the NOL carryforward is not guaranteed.
Nevertheless, the Company believes that it is more likely than
not to be able to utilize the NOL carryforwards before they
expire in 2009, 2010, and 2011.
Borrowings under the Company's working capital line of credit
increased from $2,227,000 at December 31, 1999, to $3,066,000 at
September 30, 2000, an increase of $839,000 or 38%. The increased
borrowings are attributed to the seasonal increases in accounts
receivable, inventories, expenditures on the fall catalog
program, and certain special charges related to the pending
merger.
Other than the foregoing, management knows of no trends, demands,
or uncertainties that are reasonably likely to have a material
impact on the Company's short-term liquidity or capital
resources.
Results of Operations - Three months ending September 30, 2000
Compared to the Three months ending September 30, 1999
The acquisition of To-Sew affects the comparisons of operating
results for the three months ending September 30, 2000 compared
to the same period ending September 30, 1999.
The Company reported a net loss of ($57,000) for the third
quarter of 2000, compared to net income of $449,000 for the same
period of 1999. Basic and diluted loss per share for the third
quarter of 2000 was ($0.05). For the third quarter of 1999,
basic earnings per share were $0.42 and diluted earnings per
share were $0.39. The third quarter of 2000 was negatively
affected by special charges related to the pending merger and by
the decline in operating income discussed below.
The Company's revenues in the third quarter of 2000 were
$4,643,000, an increase of $19,000 from the $4,624,000 reported
in the third quarter of 1999. The cost of goods sold for the
third quarter ended September 30, 2000, was $2,700,000, a
decrease of 1% from $2,737,000 in the third quarter of 1999.
Consolidated gross profits for the third quarter of 2000 were
$1,943,000, an increase of $56,000 from $1,887,000 in the third
quarter of 1999.
Manufacturing Segment - For the manufacturing segment, revenues
were $2,813,000 in the third quarter of 2000 compared to
$3,180,000 in 1999. The sales decline is attributed to lower
volume shipments to a few major institutional customers and to a
general slowdown in international business. Although the
manufacturing segment was able to improve its gross margin
percent to 41% in 2000 from 40% in 1999, the lower sales volume
reduced gross profits to $1,168,000 in 2000 from $1,289,000 in
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1999. During 2000, the manufacturing segment increased its
catalog advertising program. Third quarter advertising costs were
$157,000 in 2000 and $92,000 in 1999, an increase of 71%.
Manufacturing segment operating income declined from $822,000 in
1999 to $686,000 in 2000.
Distribution Segment - Revenues for the distribution segment
increased from $1,474,000 in 1999 to $1,862,000 in 2000. The
acquisition of To-Sew provided $130,000 of the increase, and
expanded catalog sales at Summit Learning provided the remainder.
The increased sales volume produced increased gross profits for
2000, an increase of $177,000 from $598,000 in 1999 to $775,000
in 2000. Similarly, catalog advertising and other marketing
expenses increased from $482,000 in 1999 to $674,000 in 2000. A
complete three months of To-Sew operations accounted for $37,000
of the increase and the remainder is attributed to increased
marketing activities at Summit Learning. Operating income for the
distribution segment declined from $116,000 in 1999 to $101,000
in 2000.
Corporate Segment - Substantially all general and administrative
services are provided by corporate to the operating segments. The
cost of general and administrative services declined from
$557,000 in 1999 to $512,000 in 2000.
Consolidated interest expense increased 24% from $91,000 in 1999
to $113,000 in 2000 reflecting both higher average balances on
the Company's borrowings and an increase in the interest rate.
The Company recorded a deferred tax benefit of $36,000 on a loss
before tax of ($93,000) for the three months ended September 30,
2000. The 38% effective tax rate is consistent with the rate
expected to be in effect for the entire year and includes Federal
taxes at the statutory rate of 34% plus the net impact of state
taxes.
Operating cost increases had a negative effect on the Company
during the third quarter of 2000. Although there has been little
inflation in the cost of raw materials, operating margins were
decreased by inflationary pressures in fuel and transportation,
wages, employee benefits, and packaging. While the Company
attempts to mitigate the impact of cost increases, there are no
guarantees that cost increases will not have an adverse impact on
the year 2000. Inflation did not have a material effect on the
Company's operations for 1999.
The Company has generally 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.
Other than the foregoing, management knows of no trends, demands,
or uncertainties that are reasonably likely to have a material
impact on the Company's results of operations.
Results of Operations - Nine months ending September 30, 2000
Compared to the Nine months ending September 30, 1999
The acquisition of To-Sew affects the comparisons of operating
results for the nine months ending September 30, 2000 compared to
the same period ending September 30, 1999.
The Company reported a net loss of ($94,000) for the three
quarters of 2000, compared to net income of $954,000 for same
period of 1999. Basic and diluted loss per share for nine months
15
<PAGE>
of 2000 was ($0.09) per share. For nine months of 1999, basic
earnings per share were $0.89 and diluted earnings per share were
$0.84. The first nine months of 2000 were negatively affected by
special charges related to the pending merger ($765,000) and by
the decline in operating income discussed below.
The Company's revenues for three quarters of 2000 were
$12,827,000, an increase of $670,000 or 6% from the $12,157,000
in three quarters 1999. The cost of goods sold for the three
quarters ended September 30, 2000, was $7,568,000, an increase of
7% over $7,102,000 for the three quarters of 1999. Consolidated
gross profits for the three quarters of 2000 were $5,259,000, an
increase of $204,000 or 4% from $5,055,000 in the three quarters
of 1999.
Manufacturing Segment - For the manufacturing segment, revenues
were $7,774,000 in 2000 and $8,503,000 in 1999. The revenue
decline is attributed to lower volume shipments to a few major
institutional customers and to a general slowdown in
international business. The manufacturing gross margin percent
declined from 42.5% in 1999 to 41.5% in 2000. Inflationary
pressure in labor costs and benefits, transportation
(particularly fuel), and production supplies also reduced current
year margins. Furthermore, the manufacturing segment incurred
unfavorable production variances in 2000. Manufacturing gross
profits declined to $3,225,000 in 2000 from $3,610,000 in 1999 (a
decrease of 11%) as a result of the sales volume decline and cost
increases. Catalog advertising costs increased $405,000 in 2000
from $239,000 in 1999, an increase of 69%. Other marketing costs
decreased to $676,000 in 2000 from $753,000 in 1999, a decrease
of 10%. Operating income for the manufacturing segment declined
to $1,749,000 in 2000 from $2,154,000 in 1999.
Distribution Segment - Revenues for the distribution segment
increased from $3,654,000 in 1999 to $5,053,000 in 2000. Revenues
attributed to To-Sew were $1,054,000 in 2000 (nine months) versus
$224,000 in 1999 (only one month of operation). The remaining
revenue increase was the result of expanded catalog mailings for
Summit Learning. The distribution segment was also able to
increase its gross margin percent to 40%, primarily as a result
of the acquisition of the high margin To-Sew products. Overall
gross profits increased to $2,034,000 from $1,445,000, reflecting
the higher sales volume and the improved margin percent. Catalog
advertising and other marketing costs increased to $1,540,000 in
2000 from $1,186,000 in 1999. The portion of the increase that
related to a full nine months of To-Sew operations was $176,000.
The remaining cost increase is primarily the result of the
increased Summit catalog mailings.
Corporate Segment - Substantially all general and administrative
services are provided by corporate to the operating segments. The
costs of general and administrative services increased to
$1,681,000 in 2000 from $1,639,000 in 1999. Included in the year
2000 expenses in a non-cash expense of $120,000 incurred when the
Company issued common stock warrants.
Consolidated interest expense increased 21% from $285,000 in 1999
to $345,000 in 2000 reflecting both higher average balances on
the Company's borrowings and an increase in the interest rate.
The Company recorded a deferred tax benefit of $59,000 on a loss
before tax of $153,000 for the nine months ended September 30,
2000. The 38% effective tax rate is consistent with the rate
expected to be in effect for the entire year and includes Federal
taxes at the statutory rate of 34% plus the net impact of state
taxes.
Operating cost increases had a negative effect on the Company
during nine months of 2000. Although there has been little
inflation in the cost of raw materials, operating margins were
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decreased by inflationary pressures in fuel and transportation,
wages, employee benefits, and packaging. While the Company
attempts to mitigate the impact of cost increases, there are no
guarantees that cost increases will not have an adverse impact on
the year 2000. Inflation did not have a material effect on the
Company's operations for 1999.
The Company has generally 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.
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.
17
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in litigation regarding its proposed
merger with GC Associates Holdings Corp., (GC). The complaints
seek an order preventing AMEP from proceeding with the GC merger
or any other business combination until an auction or other
procedure designed to obtain the highest possible price for
shareholders is held, and other relief. GC and its parent
company, Geneve Corporation, and members of AMEP's Board of
Directors also are named as defendants in the suit. The Company
believes that the allegations are without merit.
The Company has announced that an agreement-in-principle has been
reached by all parties to settle the litigation. The agreement-in-
principle provides in material part that: (i) the Merger
Agreement dated as of August 14, 2000 between AMEP and GC will be
amended so that the vote necessary to approve the proposed merger
includes a majority of the votes cast by shareholders other than
GC or Geneve Corporation, GC's parent company; (ii) the class
action plaintiffs and their counsel will be entitled to express
their views on materials concerning the proposed merger which are
mailed to the public shareholders of AMEP and filed with the
Securities and Exchange Commission (the "SEC"); and (iii) the
Company will pay plaintiffs' counsel fees and expenses. The
agreement-in-principle is subject to court approval of a formal
settlement agreement and consummation of the merger unless
consummation does not occur by reason of the failure of a
majority of votes of shareholders other than GC or Geneve to vote
in favor of the merger at a meeting of the Company held for that
purpose.
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:
Company filed one report on Form 8-K, as follows:
1. On August 29, 2000, the Registrant filed a Current Report on
Form 8-K dated August 14, 2000, related to a definitive merger
agreement and commencement of defense of merger related lawsuit.
The report included:
Item 5. Other Events
Item 7. Financial Statements, Pro-Forma Financial
Information and Exhibits.
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SIGNATURE
In accordance with the requirements of the Securities and
Exchange Act, the Registrant caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
AMERICAN EDUCATIONAL PRODUCTS, INC.
Dated: November 13, 2000 By: /s/ Clifford C. Thygesen
-------------------------
Clifford C. Thygesen, President
Dated: November 13, 2000 By: /s/ Frank L. Jennings
----------------------
Frank L. Jennings, Chief
Financial Officer
and Vice President of Finance
19
