UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

For the quarterly period ended June 30, 2000

For the transition period from __________ to __________

Commission file number: 0-16310

(Exact Name of Small Business Issuer as Specified in its Charter)

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 July 31, 2000, the Company had 1,087,732 shares of its $0.05 par value common stock outstanding.

Transitional Small Business Disclosure Format (Check one). Yes      No  X  

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

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 June 30, 2000, and the results of operations for the three months and the six months ended June 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.

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.

On March 28, 2000, G.C. Associates Holdings Corp. (GC) purchased 211,731 shares of common stock of American Educational Products, Inc., increasing its ownership percentage from 36% to 57%. On April 20, 2000, GC purchased an additional 34,540 shares, further increasing its ownership to approximately 61%. On April 20, 2000, the Company's Board of Directors was reduced from seven members to three members. Two of the three remaining members are representatives of GC. The Company incurred a special charge of $379,000 principally representing amounts paid to the resigning directors for acquisition of previously granted stock options plus a stipend for services rendered.

The Company has executed a definitive merger agreement with GC pursuant to which all minority shareholders will receive $10.00 in cash per share. Consummation of the merger is contingent upon a number of factors that include (i) completion of due diligence; (ii) execution and delivery of documentation (such as regulatory filings) as may be requisite or appropriate; and (iii) shareholder approval.

Note 4 -- Dividend

The Company has declared a special cash distribution aggregating $780,750 payable to shareholders of record on August 18, 2000. The dividend will be paid on October 30, 2000. The amount per share is dependent upon the number of warrants that are exercised on or prior to August 18, 2000. If no warrants are exercised, the per share dividend will be $0.72. If all outstanding warrants are exercised, the per share dividend will be $0.36.

The Company is involved in litigation regarding its proposed merger with G.C. Associates Holdings Corp. The complaint seeks 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 and it intends to vigorously defend itself.

The Company has been notified by NASDAQ that it no longer meets the requirements for listing. 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.

The provision for deferred income taxes for the six months ended June 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 six months ended June 30, 1999, the Company was able to offset all of its taxable income with its net operating loss carryforward.

The following is a reconciliation of basic and diluted earnings per share:

In conjunction with its year 2000 public relations program, the Company agreed to issue 75,000 warrants. The warrants have an exercise price of $8.00 per share and an expiration date of August 15, 2000. Under the provision of SFAS 123, the Company will impute a monthly expense of $13,333 for each of the nine months ending September 30, 2000.

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.

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.

Six months ended June 30:

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 additional 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.

On August 14, 2000, the Company announced that it had entered into a definitive merger agreement with G.C. Associates Holdings Corp. ("GC"). 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 July 11, 2000, the Board of Directors declared a special cash distribution aggregating $780,750 payable to shareholders of record as of August 18, 2000. The exact per share amount depends on the number of outstanding warrants that are converted into common stock on or prior to the August 18, 2000 record date. If none of the warrants are exercised, the per share dividend will be $0.72. If all of the warrants are exercised, the per share amount will be $0.36. The dividend payment is scheduled for October 30, 2000. It is not contingent upon completion of the merger.

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, 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 following discussion should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto included in this quarterly report.

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 decreased 2% from $3,330,000 as of December 31, 1999 to $3,262,000 on June 30, 2000. The current ratio declined from 1.77 at December 31, 1999 to 1.58 at June 30, 2000. Cash used in operating activities for the six months ended June 30, 2000 was $575,000, all of which was provided by borrowings under the Company's financing arrangement. Earnings before interest, taxes, depreciation, amortization and special charges were $1,023,000 for the first half of 2000.

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 June 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 $3,342,000. 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 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 2000 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.

Current assets increased from $7,678,000 on December 31, 1999, to $8,923,000 on June 30, 2000. During the same period, current liabilities increased from $4,348,000 to $5,661,000.

Total assets increased from $12,631,000 on December 31, 1999, to $13,634,000 on June 30, 2000. During the same period, total liabilities increased from $5,242,000 to $6,126,000.

Accounts receivable increased from $1,952,000 at December 31, 1999, to $2,596,000 at June 30, 2000, an increase of $644,000 or 33%. Inventories increased from $4,108,000 at December 31, 1999, to $5,149,000 at June 30, 2000, an increase of $1,041,000 or 25%. The increase in inventory is due to seasonal build up in preparation for the late summer and early fall peak selling season.

Prepaid advertising costs of $813,000 at June 30, 2000 represent deferred costs associated with mailing the 2000 spring catalogs. The Company commences its spring catalog mailing in late December and continues mailings throughout first 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 $598,000. Included in the net deferred tax asset is 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 were increased from $2,227,000 at December 31, 1999, to $3,342,000 at June 30, 2000, an increase of $1,115,000 or 50%. The Company's borrowing needs typically increase during the first half to fund the seasonal build up of inventory and to fund the spring catalog mailing.

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.

The acquisition of To-Sew affects the comparisons of operating results for the three months ending June 30, 2000 compared to the same period ending June 30, 1999.

The Company reported a net loss of ($3,000) for the second quarter of 2000, compared to a net income of $440,000 for same period of 1999. Basic and diluted loss per share for the second quarter of 2000 was nil. For the second quarter of 1999, basic earnings per share were $0.41 and diluted earnings per share were $0.38. The decline in profits is due primarily to a special charge of $379,000 principally representing amounts paid to the resigning directors for acquisition of previously granted stock options plus a stipend for services rendered. In addition, the Company suffered margin erosion resulting from a sales mix shift to lower margin business and inflationary pressure in the Company's cost structure.

The Company's revenues in the second quarter 2000 were $4,401,000, an increase of $169,000 or 4% from the $4,232,000 of second quarter 1999. The sales increase is primarily the result of the acquisition of To-Sew. The cost of goods sold for second quarter ended June 30, 2000, was $2,534,000, an increase of 7% over $2,368,000 in second quarter 1999. Consolidated gross profits for second quarter 2000 were $1,867,000, an increase of $3,000 from $1,864,000 in second quarter 1999.

Operating expenses increased 3% from $1,328,000 in 1999 to $1,365,000 in 2000. Operating expenses were 31% of sales in 2000 and 31% of sales in 1999.

Manufacturing Segment - For the manufacturing segment, revenues were $2,908,000 in 2000 and $3,252,000 in 1999. There were no unusual revenue items in either year. Manufacturing gross margins declined to $1,267,000 in 2000 from $1,442,000 in 1999. Substantially all general and administrative services are provided by the Company to the segments without charge. Operating expenses increased to $405,000 from $397,000 in 1999. As a result, operating income for the manufacturing segment declined from $1,045,000 in 1999 to $862,000 in 2000.

Distribution Segment - Revenues for the distribution segment increased from $1,025,000 in 1999 to $1,547,000 in 2000. The increased gross margins of $189,000 (from $413,000 in 1999 to $602,000 in 2000) are the result of the To-Sew acquisition and increased Summit Learning catalog sales. Similarly, operating expenses increased from $371,000 to $405,000 because of the To-Sew acquisition. As a percentage of sales, operating expenses were 26% in 2000 and 36% in 1999. Operating income for the distribution segment increased $155,000 in 2000 to $197,000 from $42,000 in 1999.

Consolidated interest expense increased 33% from $96,000 in 1999 to $128,000 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 $2,000 on a loss before tax of $5,000 for the three months ended June 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 second 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 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 1999 acquisition is 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.

The acquisition of To-Sew affects the comparisons of operating results for the six months ending June 30, 2000 compared to the same period ending June 30, 1999.

The Company reported a net loss of ($37,000) for the first half of 2000, compared to a net income of $505,000 for same period of 1999. Basic and diluted loss per share for the first half of 2000 was ($0.03) per share. For the first half of 1999, basic earnings per share were $0.47 and diluted earnings per share were $0.44. The decline in profits is due primarily to a special charge of $379,000 principally representing amounts paid to the resigning directors for acquisition of previously granted stock options plus a stipend for services rendered. In addition, the Company suffered margin erosion resulting from a sales mix shift to lower margin business and inflationary pressure in the Company's cost structure.

The Company's revenues in the first half 2000 were $8,185,000, an increase of $652,000 or 9% from the $7,533,000 of first half 1999. The sales increase is primarily the result of the acquisition of To-Sew. The cost of goods sold for first half ended June 30, 2000, was $4,869,000, an increase of 12% over $4,365,000 in first half 1999. Consolidated gross profits for first half 2000 were $3,316,000, an increase of $148,000 or 5% from $3,168,000 in first half 1999.

Operating expenses increased 12% from $2,468,000 in 1999 to $2,765,000 in 2000. Operating expenses were 34% of sales in 2000 and 33% of sales in 1999.

Manufacturing Segment - For the manufacturing segment, revenues were $4,994,000 in 2000 and $5,352,000 in 1999. There were no unusual revenue items in either year. Manufacturing gross margins declined to $2,057,000 in 2000 from $2,321,000 in 1999. Inflationary pressure in labor costs, transportation (particularly fuel), and production supplies reduced current year margins. Substantially all general and administrative services are provided by the Company to the segments without charge. Operating expenses increased to $730,000 from $682,000 in 1999 primarily because of an increased catalog mailing program. As a result, operating income for the manufacturing segment declined from $1,639,000 in 1999 to $1,327,000 in 2000.

Distribution Segment - Revenues for the distribution segment increased from $2,181,000 in 1999 to $3,191,000 in 2000. The increased gross margins of $412,000 (from $847,000 in 1999 to $1,259,000 in 2000) are the result of the To-Sew acquisition and increased Summit Learning catalog sales. Similarly, operating expenses increased from $704,000 to $866,000 because of the To-Sew acquisition. As a percentage of sales, operating expenses were 27% in 2000 and 32% in 1999. Operating income for the distribution segment increased $250,000 in 2000 to $393,000 from $143,000 in 1999.

Consolidated interest expense increased 19% from $195,000 in 1999 to $232,000 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 $23,000 on a loss before tax of $60,000 for the six months ended June 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 second 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 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 1999 acquisition is 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.

As previously reported in its Form 10-KSB, the Company did not experience any Year 2000 related incidents and continues to operate without any apparent negative impact from the Year 2000 Issue. Furthermore, the Company has not received any reports from its customers, suppliers, or other business counterparts related to Year 2000 incidents.

1. On April 24, 2000, the Registrant filed a Current Report on Form 8-K dated April 20, 2000, related to a change in control and restructuring of the Board of Directors. The report included:

   Item 1. Changes in Control of Registrant

   Item 7. Exhibits - Indemnification Agreements and Releases

2. On May 4, 2000, the Registrant filed a Current Report on Form 8-K dated April 28, 2000, related to a change in control and commitment to acquire certain exercisable stock options. The report included:

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.

Dated: August 14, 2000 By: /s/ Clifford C. Thygesen

Clifford C. Thygesen, President

Dated: August 14, 2000 By: /s/ Frank L. Jennings

Frank L. Jennings, Chief Financial Officer

and Vice President of Finance