-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BjqLc+xUEb8TRmam0AuuiEVXspRpCjqg3YOaSBeieKQt79N/69YoEmu6t52NMyRi ESmv1h4WTzUjqb2kX0l+sg== 0001011034-98-000100.txt : 19980820 0001011034-98-000100.hdr.sgml : 19980820 ACCESSION NUMBER: 0001011034-98-000100 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980819 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN EDUCATIONAL PRODUCTS INC CENTRAL INDEX KEY: 0000790069 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PUBLISHING [2741] IRS NUMBER: 841012129 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-13799 FILM NUMBER: 98694396 BUSINESS ADDRESS: STREET 1: 6550 GUNPARK DRIVE, SUITE 200 CITY: BOULDER STATE: CO ZIP: 80301 BUSINESS PHONE: 3035273230 MAIL ADDRESS: STREET 1: 6550 GUNPARK DRIVE STREET 2: STE 200 CITY: BOULDER STATE: CO ZIP: 80301 FORMER COMPANY: FORMER CONFORMED NAME: SCOTT CAPITAL RESOURCES INC /CO/ DATE OF NAME CHANGE: 19900228 FORMER COMPANY: FORMER CONFORMED NAME: WTS CAPITAL CORP DATE OF NAME CHANGE: 19870723 10QSB 1 10-QSB FOR 6/30/98 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 June 30, 1998 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 Dr., Suite 200, Boulder, Colorado 80301 - ---------------------------------------------- --------- (Address of principal executive offices) (Zip Code) (303) 527-3230 ------------------ (Issuer's telephone number) ---------------------------- Former name, former address, and former 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 such 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, 1998 the Company had 1,017,023 shares of its $.05 par value common stock outstanding. Transitional Small Business Disclosure Format (Check one): Yes No X INDEX PART I -- FINANCIAL INFORMATION Item 1. Financial Statements Page ---- Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 2 Consolidated Statements of Operations for the three months and six months ended June 30, 1998 and June 30, 1997 3 Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and June 30, 1997 5 Consolidated Statement of Stockholders' Equity from January 1, 1998 through June 30, 1998 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 8 Results of Operations 11 PART II -- OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 16 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of June 30, 1998 and December 31, 1997
June 30, December 31, 1998 1997 (Unaudited) ------------ ------------ ASSETS CURRENT ASSETS Cash $ 158,000 $ 183,000 Trade receivables, net of allowance of $95,000 and $52,000 1,949,000 1,220,000 Royalty receivable 109,000 119,000 Inventories 3,184,000 2,540,000 Prepaid advertising costs 118,000 38,000 Other 137,000 139,000 ------------ ------------ TOTAL CURRENT ASSETS 5,655,000 4,239,000 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $4,284,000 and $3,985,000, respectively 2,746,000 2,247,000 VIDEO LIBRARY, net of accumulated amortization of $642,000 and $580,000, respectively 298,000 359,000 INTANGIBLE ASSETS, net 1,498,000 169,000 OTHER ASSETS 175,000 237,000 ------------ ------------ TOTAL ASSETS $10,372,000 $ 7,251,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Note payable $ 2,362,000 $ 1,855,000 Current maturities of long term debt 282,000 - Accounts payable 580,000 533,000 Accrued expenses 460,000 145,000 TOTAL CURRENT LIABILITIES 3,684,000 2,533,000 LONG TERM DEBT, less current maturities 1,220,000 - 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; 1,005,606 and 922,872 shares issued and outstanding 50,000 46,000 Additional paid in capital 6,919,000 6,504,000 Accumulated deficit (1,501,000) (1,832,000) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 5,468,000 4,718,000 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,372,000 $ 7,251,000 ============ ============
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS for the Three Months ended June 30, 1998 and June 30, 1997 (Unaudited)
June 30, June 30, 1998 1997 ------------ ------------ INCOME: Net sales $ 2,555,000 $ 2,544,000 Cost of goods sold 1,462,000 1,521,000 ------------ ------------ Gross profit 1,093,000 1,023,000 OPERATING EXPENSES: Advertising and catalog costs 53,000 22,000 Other marketing 275,000 223,000 ------------ ------------ Total marketing 328,000 245,000 General and administrative 343,000 380,000 ------------ ------------ Total operating expenses 671,000 625,000 ------------ ------------ OPERATING INCOME 422,000 398,000 Interest expense (70,000) (95,000) ------------ ------------ INCOME BEFORE INCOME TAXES 352,000 303,000 Income tax benefit (expense) - - ------------ ------------ NET INCOME $ 352,000 $ 303,000 ============ ============ Basic earnings per share $ 0.36 $ 0.33 ============ ============ Diluted earnings per share $ 0.32 $ 0.33 ============ ============ Weighted average number of common shares outstanding 980,000 918,000 Effect of dilutive securities 105,000 - ------------ ------------ Weighted average number of common shares outstanding plus dilutive securities 1,085,000 918,000 ============ ============
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS for the Six Months ended June 30, 1998 and June 30, 1997 (Unaudited)
June 30, June 30, 1998 1997 ------------ ------------ INCOME: Net sales $ 4,402,000 $ 4,165,000 Cost of goods sold 2,655,000 2,632,000 ------------ ------------ Gross profit 1,747,000 1,533,000 OPERATING EXPENSES: Advertising and catalog costs 88,000 32,000 Other marketing 485,000 408,000 ------------ ------------ Total marketing 573,000 440,000 General and administrative 705,000 688,000 ------------ ------------ Total operating expenses 1,278,000 1,128,000 ------------ ------------ OPERATING INCOME 469,000 405,000 Interest expense (138,000) (157,000) ------------ ------------ INCOME BEFORE INCOME TAXES 331,000 248,000 Income tax benefit (expense) - - ------------ ------------ NET INCOME $ 331,000 $ 248,000 ============ ============ Basic earnings per share $ 0.34 $ 0.27 ============ ============ Diluted earnings per share $ 0.31 $ 0.27 ============ ============ Weighted average number of common shares outstanding 960,000 917,000 Effect of dilutive securities 93,000 - ------------ ------------ Weighted average number of common shares outstanding plus dilutive securities 1,053,000 917,000 ============ ============
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the Six Months ended June 30, 1998 and June 30, 1997 (Unaudited)
June 30, June 30, 1998 1997 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 331,000 $ 248,000 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 299,000 365,000 Amortization 109,000 150,000 Bad debt expense 17,000 5,000 Changes in operating assets and liabilities: Decrease (increase) in operating assets: Accounts receivable (738,000) (997,000) Inventories (633,000) 54,000 Prepaid advertising (118,000) (37,000) Other 108,000 8,000 Increase (decrease) in operating liabilities: Accounts payable (45,000) (18,000) Accrued expenses 97,000 (1,000) ------------ ------------ Net cash provided (used) by operating activities (573,000) (223,000) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (219,000) (138,000) Cash paid for acquisitions (250,000) - ------------ ------------ Net cash provided (used) by investing activities (469,000) (138,000) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable and long term debt 796,000 1,275,000 Payments on notes payable and long term debt (197,000) (910,000) Net proceeds from the sale of stock 418,000 4,000 ------------ ------------ Net cash provided (used) by financing activities 1,017,000 369,000 ------------ ------------ NET INCREASE (DECREASE) IN CASH (25,000) 8,000 Cash, at beginning of period 183,000 107,000 ------------ ------------ Cash, at end of period $ 158,000 $ 115,000 ============ ============
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY January 1, 1998 through June 30, 1998 (Unaudited)
COMMON STOCK Additional Number Paid of Common in (Accumulated Shares Stock Capital Deficit) Total ------------ ----------- ------------ ------------- ------------- Balance as of January 1, 1998 922,872 $ 46,000 $6,504,000 $(1,832,000) $ 4,718,000 Sale of common stock under the employee stock purchase plan 517 - 3,000 - 3,000 Exercise of options 25,284 1,000 139,000 - 140,000 Exercise of warrants 56,933 3,000 273,000 - 276,000 Net income - - - 331,000 331,000 ------------ ----------- ------------ ------------- ------------- Balance as of June 30, 1998 1,005,606 $ 50,000 $6,919,000 $(1,501,000) $ 5,468,000 ============ =========== ============ ============= =============
AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 -- Presentation - ---------------------- In the opinion of the Company, these unaudited consolidated financial statements contain all adjustments (consisting of normal accruals) necessary to present fairly the financial position as of June 30, 1998, and the results of operations for the three months and the six months ended June 30, 1998 and 1997. 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, 1997. Note 2 -- Forward-Looking Statements - ------------------------------------ In addition to historical information, this Quarterly Report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and are thus prospective. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, competitive pressures, changing economic conditions, those discussed in the Section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," and other factors, some of which will be outside the control of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should refer to and carefully review the information in future documents the Company files with the Securities and Exchange Commission. Note 3 -- Acquisition of National Teaching Aids, Inc. - ----------------------------------------------------- During the second quarter, AMEP acquired all of the outstanding stock of Learning and Leisure, Inc., a New York corporation, and its wholly owned subsidiary, National Teaching Aids, Inc. ("NTA"). The acquisition will be recorded using the purchase method of accounting in accordance with APB 16. The total purchase price approximated $2,000,000 including liabilities assumed. Payments for the acquisition included $250,000 cash at closing; a promissory note with a principal balance of $950,000 requiring annual principal payments of $237,500 plus accrued interest at 7.5%; a license agreement requiring four annual payments of $100,000 each; and consulting contracts requiring quarterly payments through June, 2000 of $37,500 each. Results of operation of NTA are included in the consolidated financial statements commencing June 1, 1998. Note 4 -- Subsequent Event - -------------------------- Subsequent to June 30, 1998, AMEP acquired substantially all the assets of Summit Learning, a direct mail distributor of educational products. The purchase price will approximate $1,600,000 and required a down payment of $300,000 plus a promissory note bearing interest at 8.5% annually for the balance. The note requires monthly principal payments of $125,000 plus accrued interest. Results of operation of Summit Learning will be included in the Company's consolidated financial statement commencing July 1, 1998. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion addresses the financial condition and results of operation for American Educational Products, Inc. and Subsidiaries ("AMEP" or the "Company"). AMEP currently has three operating subsidiaries: Hubbard Scientific, Inc. ("Hubbard"), Scott Resources, Inc. ("Scott"), and National Teaching Aids, Inc. ("NTA"). Effective April 17, 1998, AMEP acquired NTA for a cash payment of $250,000 plus future payments approximating $1,650,000. During April and May, 1998, the operation of NTA was relocated to the Company's existing facility in Chippewa Falls, WI. The Company was able to resume NTA operation in June and, accordingly, the operating results of NTA were consolidated with the Company commencing June 1, 1998. The following discussion should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included in this quarterly report. Liquidity and Capital Resources -- June 30, 1998, Compared to December 31, 1997 - ---------------------------------------------------------------------------- The Company continued to improve its liquidity and capital resources during the first half of 1998. Earnings before interest, taxes, depreciation, and amortization were $877,000. The Company's asset based financing arrangement with U. S. Bancorp Republic Commercial Finance, Inc. 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 June 30,1998, the borrowing base formula limited total borrowings to $2,800,000. 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. The borrowing agreement contains a demand provision such that the lender can demand repayment at any time. Accordingly, the entire balance of outstanding payments is reflected as a current liability. The lender has not indicated that it will demand payment during 1998 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 1998 will be adequate to meet its operating requirements. The source of these 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 during 1998. Substantially all of the arrangements required to finance that installation were completed during 1997. Any acquisition activity undertaken by the Company during 1998 would be contingent upon obtaining the necessary financing. Effective April 17, 1998, AMEP acquired all of the outstanding stock of Learning and Leisure, Inc., a New York corporation, ("L & L"). L & L owns 100% of the common stock of National Teaching Aids, Inc., a developer and manufacturer of science products for the K - 12 market. The purchase price of approximately $2,000,000 consists of a $250,000 cash down payment and long term financing provided by the seller. Subsequent to June 30, 1998, AMEP acquired substantially all the assets of Summit Learning, a direct mail distributor of educational products. The purchase price of approximately $1,600,000 consisted of a $300,000 down payment plus short term financing provided by the seller. The Company reported a 15% working capital increase during the first six months of 1998. Current assets of $5,655,000 increased by $1,416,000 from December 31, 1997 and current liabilities increased by $1,151,000 from $2,533,000 to $3,684,000. As a result, working capital increased from $1,706,000 to $1,971,000 and the current ratio fell from 1.7 to 1.5. Total assets increased by $3,121,000 from $7,251,000 at December 31, 1997, to $10,372,000 at June 30, 1998, an increase of 43%. During the same period, total liabilities increased by $2,371,000 from $2,533,000 to $4,904,000, an increase of 94%. The increase in assets and liabilities reflects the acquisition of NTA plus normal seasonal increases in business activity. Stockholders' equity increased $750,000, or 16%, from $4,718,000. The increase in equity reflects proceeds from the exercise of outstanding stock warrants and stock options plus net income for the period. Accounts receivable increased from $1,220,000 at December 31, 1997, to $1,949,000 at June 30, 1998, an increase of $729,000 or 60%. This increase is consistent with seasonal sales patterns under which second quarter sales exceed fourth quarter sales. The royalty receivable of $109,000 as of June 30, 1998 results from the sale of Churchill and represents royalties expected to be received during the next twelve months. Inventories increased from $2,540,000 at the end of 1997 to $3,184,000 at June 30, 1998, an increase of $644,000 or 25%. Inventories increased because of the NTA acquisition plus increased purchasing and production activity in anticipation of third quarter sales. Prepaid advertising costs increased from $38,000 at December 31, 1997, to $118,000 at June 30, 1998. This increase is due to investment in the spring 1998 catalog program offset by partial amortization of this program. Net property and equipment increased from $2,247,000 at December 31, 1997, to $2,746,000 at June 30, 1998, a increase of $499,000 or 22%. The increase resulted from the acquisition of NTA plus the costs of the new computer system installed by the Company during 1998. The increase was offset by depreciation expense of $299,000. Video and film library costs decreased from $359,000 at December 31, 1997, to $298,000 at June 30, 1998, a decrease of $61,000 or 17%. The decrease consists entirely of regular monthly amortization. Intangible assets increased from $169,000 at December 31, 1997, to $1,498,000 at June 30, 1998, an increase of $1,329,000 . The increase resulted from the acquisition of NTA. Other assets decreased from $237,000 at December 31, 1997, to $175,000 at June 30, 1998. Other assets declined because of royalty payments received from the purchaser of Churchill Media. Accounts payable and accrued expenses increased by $362,000 from $678,000 at December 31, 1997, to $1,040,000 at June 30, 1998, reflecting the increased needs generated by second quarter activity and to reflect the acquisition of NTA. At June 30, 1998, the Company had increased its borrowings under its working capital line of credit facility by $507,000 to reflect the increased needs and borrowing capacity generated by second quarter sales and to reflect the acquisition of NTA. Long-term debt, including current maturities, increased $1,502,000 primarily to reflect the acquisition of NTA. 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. Year 2000 Issue - --------------- The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the year. Any of the Company's computer programs 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. Based upon a recent assessment, the Company determined that it was required to upgrade or replace certain portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. During 1998, the Company continued its implementation of computer hardware and software that is Year 2000 compliant. Resources were devoted to the installation of computer systems and training related to the new system. It is expected that the new system will be fully installed and operational during 1998. The Company presently believes that with upgrades of existing software and conversions to new software, the Year 2000 Issue can be mitigated. However, if such upgrades and conversions are not made, or are not completed or available timely, the Year 2000 Issue could have a material impact on the operations of the Company. Furthermore, the Company could be adversely effected by the failure of various third parties, such as customers and suppliers, to remediate their own Year 2000 Issue. Although the Company has initiated formal communications with its significant suppliers and large customers to determine the potential impact upon the Company, it has not completed its preliminary assessment. Total costs of upgrades, replacements and related training are estimated to be $300,000. Substantially all of those expenditures will occur during 1998. Financing for the costs is available under the Company's various financing arrangements. In view of the foregoing, there is reasonable assurance that the Year 2000 Issue will not have a material adverse effect upon the Company. However, there can be no guarantee that the systems of other companies on which the Company relies will be timely converted, or that failure to convert by another company or organization, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. Impact of Recently Issued Accounting Standards - ---------------------------------------------- Statement of Financial Accounting Standards 130 "Reporting Comprehensive Income" and Statement of Financial Accounting Standards 131 "Disclosures About Segments of an Enterprise and Related Information" were recently issued. Statement 130 establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, Statement 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that displays with the same prominence as other financial statements. Statement 131 supersedes Statement of Financial Accounting Standards 14 "Financial Reporting for Segments of a Business Enterprise". Statement 131 establishes standards on the way that public companies report financial information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. Statement 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Statements 130 and 131 are effective for financial statements for fiscal periods beginning after December 15, 1997, and require comparative information for earlier years to be restated. The implementation of these new standards has not had a material effect on the financial statements and is not expected to have a material effect in future financial statements. Results of Operations -- Three months ended June 30, 1998, Compared to the Three months ended June 30, 1997 - ---------------------------------------------------------------------------- The Company's revenues were $2,555,000 in the second quarter of 1998, compared to the same period 1997 revenues of $2,544,000. Sales for 1998 are similar to 1997 sales primarily because increased sales to domestic distributors were offset by a decrease in international shipments. The cost of goods sold for the quarter ended June 30, 1998, was $1,462,000, a decrease of $59,000 or 4% from the same period 1997 amount of $1,521,000. Consolidated gross profits for the second quarter of 1998 were $1,093,000, an increase of $70,000 or 7% from the same period 1997 gross profits of $1,023,000. As a percentage of sales, the second quarter gross margin increased from 40% in 1997 to 43% in 1998. Actual gross margin percent is sensitive to actual production levels and can vary significantly between periods. The Company incurs certain operating expenses, such as depreciation, occupancy, and indirect personnel costs each period. When production levels are low, such costs are not applied to inventory and the result is an unfavorable cost variance in cost of sales. Similarly, when production levels are high, such costs are applied to inventory and the result is a favorable cost variance in cost of sales. During the second quarter of 1998, production levels were higher than those of the second quarter of 1997, resulting in improved margins. In addition, the margin improved because certain selling prices were increased for 1998. The advertising component of marketing costs for the second quarter of 1998 was $53,000, an increase of $31,000 or 141% from the same period 1997 cost of $22,000. Advertising costs as percent of sales were 2% of sales in the second quarter of 1998 and 1% of sales in the second quarter of 1997. Hubbard and Scott produce direct mail catalogs featuring their manufactured products. Other marketing costs for the second quarter of 1998 were $275,000, an increase of $52,000 or 23% from the same period 1997 cost of $223,000. Other marketing costs as a percentage of sales were 11% in the second quarter of 1998, and 9% in the second quarter of 1997. General and administrative expenses were $343,000, a decrease of $37,000 or 10% from the second quarter 1997 G & A expense of $380,000. G & A costs as a percent of sales were 13% in the second quarter of 1998 and 15% in the second quarter of 1997. Total operating costs increased 7% from $625,000 in the second quarter of 1997 to $671,000 in the second quarter of 1998. Operating costs as a percentage of sales approximated 26% in the second quarter of 1998 and 25% during the same period in 1997. Interest expense decreased from $95,000 in the second quarter of 1997 to $70,000 in the second quarter of 1998, a decrease of $25,000 or 26%. The decreased interest expense is the result of lower debt levels made possible by cash flow from operations and proceeds from the exercise of common stock warrants and stock options. The Company did not recognize any income tax expense for the second quarter of 1998. During preceding quarters, all income tax liabilities had been offset against operating losses. The Company has net operating loss carryovers of approximately $3,500,000 available for income tax purposes. Subject to certain restrictions imposed by the Internal Revenue Code, the Company will be able to offset those carryforwards against future taxable income, if any, and will be able to record a benefit from those carryforwards when they appear to be realizable. For 1998, it appears that the carryover will allow the Company to eliminate substantially all income tax expense that might be incurred. Net income for the second quarter of 1998 was $352,000, compared with net income of $303,000 in the same period of 1997. The income per share was $0.36 for the second quarter of 1998, compared to income per share of $0.33 for the second quarter of 1997. Inflation has not had any material effect on the Company's operations during 1998. The Company attempts to reduce the impact of cost increases through design changes, improved factory efficiencies, and sales price increases. There is no guarantee that it will be successful in these attempts. The Company historically has experienced significant seasonality in its sales primarily due to the purchasing cycle of educational institutions. Typically, the first and fourth fiscal quarters each generate approximately 20% of annual sales, with the second and third fiscal quarters each generating approximately 30% of annual sales. This distribution of sales is likely to continue throughout 1998. 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 -- Six months ended June 30, 1998, Compared to the Six months ended June 30, 1997 - ---------------------------------------------------------------------------- The Company's revenues were $4,402,000 in the first half of 1998, an increase of $237,000 or 6% from the same period 1997 revenues of $4,165,000. The cost of goods sold for the six months ended June 30, 1998, was $2,655,000, an increase of $23,000 or 1% from the same period 1997 amount of $2,632,000. Consolidated gross profits for the first six months of 1998 were $1,747,000, an increase of $214,000 or 14% from the same period 1997 gross profits of $1,533,000. As a percentage of sales, gross margin increased from 37% in the first six months of 1997 to 40% in the first six months of 1998. Actual gross margin percent is sensitive to actual production levels and can vary significantly between periods. The Company incurs certain operating expenses, such as depreciation, occupancy, and indirect personnel costs each period. When production levels are low, such costs are not applied to inventory and the result is an unfavorable cost variance in cost of sales. Similarly, when production levels are high, such costs are applied to inventory and the result is a favorable cost variance in cost of sales. During the first half of 1998, production levels were slightly higher than those of the first half of 1997, resulting in improved margins. In addition, the margin improved because certain selling prices were increased for 1998. The advertising component of marketing costs for the first six months of 1998 was $88,000, an increase of $56,000 or 175% from the same period 1997 cost of $32,000. Advertising costs as percent of sales were 2% of sales in the first six months of 1998 and 1% of sales in the first six months of 1997. Hubbard and Scott produce direct mail catalogs featuring their manufactured products. Other marketing costs for the first six months of 1998 were $485,000, an increase of $77,000 or 19% from the same period 1997 cost of $408,000. Other marketing costs as a percentage of sales were 11% in the first six months of 1998, and 10% in the first six months of 1997. General and administrative expenses were $705,000, an increase of $17,000 or 3% from the same period 1997 G & A expense of $688,000. G & A costs as a percent of sales were 16% in the first six months of 1998 and 17% in the first six months of 1997. Total operating costs increased 13% from $1,128,000 in the first six months of 1997 to $1,278,000 in the first six months of 1998. Operating costs as a percentage of sales approximated 29% in the first six months of 1998 and 27% during the same period of 1997. Interest expense decreased from $157,000 in the first six months of 1997 to $138,000 in the first six months of 1998, a decrease of $19,000 or 12%. The decreased interest expense is the result of lower debt levels made possible by cash flow from operations and proceeds from the exercise of common stock warrants and stock options. The Company did not recognize any income tax expense for the first half of 1998. During preceding quarters, all income tax liabilities had been offset against operating losses. The Company has net operating loss carryovers of approximately $3,500,000 available for income tax purposes. Subject to certain restrictions imposed by the Internal Revenue Code, the Company will be able to offset those carryforwards against future taxable income, if any, and will be able to record a benefit from those carryforwards when they appear to be realizable. For 1998, it appears that the carryover will allow the Company to eliminate substantially all income tax expense that might be incurred. Net income for the first six months of 1998 was $331,000, compared with net income of $248,000 in the same period of 1997. Income per share was $0.34 for the first six months of 1998, compared to income per share of $0.27 for the first six months of 1997. Inflation has not had any material effect on the Company's operations during 1998. The Company attempts to reduce the impact of cost increases through design changes, improved factory efficiencies, and sales price increases. There is no guarantee that it will be successful in these attempts. The Company historically has experienced significant seasonality in its sales primarily due to the purchasing cycle of educational institutions. Typically, the first and fourth fiscal quarters each generate approximately 20% of annual sales, with the second and third fiscal quarters each generating approximately 30% of annual sales. This distribution of sales is likely to continue throughout 1998. 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. 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 The Registrant held its annual meeting of stockholders on June 9, 1998. At that meeting, the stockholders voted upon the following matters: 1. Election of Directors --------------------- The following persons were elected to serve as directors of the Registrant:
VOTES VOTES FOR WITHHELD -------- --------- Clifford C. Thygesen 832,007 25,410 Dr. Robert A. Scott 831,942 25,475 Clifford L. Neuman 831,942 25,475 Dr. Wayne R. Kirschling 832,213 25,204 Stephen G. Calandrella 832,213 25,204 Steven B. Lapin 832,213 25,204 Richard J. Ciurczak 832,213 25,204
2. 1997 Stock Incentive Plan - Additional Shares --------------------------------------------- A proposal to increase the total number of shares that may be issued pursuant to the exercise of options granted under the Company's 1997 Stock Incentive Plan by an additional 200,000 shares was defeated by the following votes:
FOR 213,426 AGAINST 335,206 ABSTAIN 1,080
Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K Exhibits: None. Reports on Form 8-K: 1. On May 1, 1998, the Registrant filed a Current Report on Form 8-K dated April 17, 1998, related to the acquisition of Learning and Leisure, Inc., a New York corporation, and its wholly owned subsidiary, National Teaching Aids, Inc. The report included: Item 2: Acquisition of Assets Exhibits: Stock Purchase Agreement dated April 13, 1998 2. On June 30, 1998, the Registrant filed a Current Report on form 8-K dated June 30, 1998, related to the acquisition of Learning and Leisure Inc., a New York corporation, and its wholly owned subsidiary, National Teaching Aids, Inc. The report included: Item 7: Financial Statements and Exhibits. SIGNATURE In accordance with the requirements of the Securities and Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN EDUCATIONAL PRODUCTS, INC. Dated: August 17, 1998 By: /s/ Clifford C. Thygesen ---------------- ----------------------------------------- Clifford C. Thygesen, President Dated: August 17, 1998 By: /s/ Frank L. Jennings ---------------- ----------------------------------------- Frank L. Jennings, Chief Financial Officer and Vice President of Finance EX-27 2 FINANCIAL DATA SCHEDULE
5 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 SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1998 JUN-30-1998 158 0 2,044 (95) 3,184 5,655 7,030 (4,284) 10,372 3,684 1,220 0 0 50 5,418 10,372 2,555 2,555 1,462 1,462 671 0 70 352 0 352 0 0 0 352 0.36 0.32
-----END PRIVACY-ENHANCED MESSAGE-----