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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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: 0-23606
EDUCATIONAL INSIGHTS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2392545
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16941 KEEGAN AVENUE
CARSON, CA 90746
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 884-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of October 30, 1997 there were 7,040,000 shares of common stock outstanding.
Total number of sequential pages: 10 There are no Exhibits in this document;
hence no Exhibit Index.
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Page 1 of 10 sequentially numbered pages.
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PART I. ITEM 1. FINANCIAL STATEMENTS
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited, except for December 31, 1996 balance sheet information)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 450 $ 1,018
Accounts receivable, less allowance for doubtful
accounts of $473 in 1997 and $375 in 1996 10,115 9,779
Inventory 13,784 12,139
Income taxes receivable 313
Other receivables 206 170
Prepaid expenses and other current assets 857 663
Deferred income taxes 808 808
--------- ---------
Total current assets 26,533 24,577
--------- ---------
PROPERTY AND EQUIPMENT, Net 5,329 5,446
--------- ---------
OTHER ASSETS 811 881
--------- ---------
TOTAL $32,673 $ 30,904
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 110 $ 110
Line of credit 3,800 1,000
Accounts payable 2,578 2,512
Accrued expenses 1,582 1,584
Income Taxes Payable 440
Deferred Income 179 257
--------- ---------
Total current liabilities 8,249 5,903
--------- ---------
LONG-TERM DEBT 1,104 1,185
--------- ---------
DEFERRED INCOME TAXES 352 352
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 10,000,000 shares authorized;
no shares issued
Common stock, no par value; 30,000,000 shares authorized;
7,040,000 shares issued in 1997 and 1996 18,644 18,644
Cumulative translation adjustment 126 140
Retained earnings 4,198 4,680
--------- ---------
Total shareholders' equity 22,968 23,464
--------- ---------
TOTAL $32,673 $30,904
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 2 of 10 sequentially numbered pages.
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EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $10,900 $11,751 $25,720 $28,070
COST OF SALES 5,423 5,612 12,609 13,158
---------- ---------- --------- ----------
GROSS PROFIT 5,477 6,139 13,111 14,912
---------- ---------- --------- ----------
OPERATING EXPENSES:
Sales and marketing 2,147 2,189 5,338 5,956
Warehousing and distribution 834 751 2,670 2,562
Research and development 975 1,205 3,161 4,136
General and administrative 812 971 2,680 2,915
---------- ---------- --------- ----------
Total operating expenses 4,768 5,116 13,849 15,569
---------- ---------- --------- ----------
OPERATING INCOME (LOSS) 709 1,023 (738) (657)
---------- ---------- --------- ----------
OTHER INCOME (EXPENSE):
Interest expense (104) (99) (191) (205)
Interest income 9 5 46 22
Other income (expense), net (51) 44 93 242
---------- ---------- --------- ----------
Total other income (expense) (146) (50) (52) 59
---------- ---------- --------- ----------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 563 973 (790) (598)
PROVISON (BENEFIT) FOR INCOME TAXES 216 380 (308) (235)
---------- ---------- --------- ----------
NET INCOME (LOSS) $ 347 $ 593 $ (482) $ (363)
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Net Income (Loss) Per Share $0.05 $0.08 $(0.07) ($0.05)
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Weighted Average Number of
Common and Common Equivalent
Shares Outstanding 7,070 7,040 7,050 7,040
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 10 sequentially numbered pages.
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EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (482) $ (363)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts and sales returns 110 133
Provision for inventory obsolescence 47
Depreciation 769 657
Changes in operating assets and liabilities:
Accounts receivable (521) (1,867)
Inventory (1,822) (1,817)
Income taxes receivable (311) 437
Other receivables (45) (159)
Prepaid expenses and other current assets (194) (279)
Other assets 52 (231)
Accounts payable 293 901
Accrued expenses (2) 358
Deferred income (78) 255
Income taxes payable (437)
----------- ----------
Net cash used in operating activities (2,621) (1,975)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (653) (296)
----------- ----------
Net cash used in investing activities (653) (296)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase / decrease in line of credit 2,800 2,350
Repayments of long-term debt (81) (73)
----------- ----------
Net cash provided by financing activities 2,719 2,277
----------- ----------
Effect of exchange rate changes on cash (13) 1
----------- ----------
NET INCREASE (DECREASE) IN CASH (568) 7
CASH, BEGINNING OF PERIOD 1,018 378
----------- ----------
CASH, END OF PERIOD $ 450 $ 385
----------- ----------
----------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 185 $ 188
Income taxes paid (refunded) $ 444 $ (672)
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 10 sequentially numbered pages.
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EDUCATIONAL INSIGHTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of Educational Insights, Inc. (the
"Company") include all of the accounts of the Company and its wholly owned
subsidiary. All significant inter-company balances and transactions have been
eliminated in consolidation.
The interim consolidated financial statements are not audited, but include all
adjustments (including normal recurring adjustments) which are, in the opinion
of management, necessary for a fair representation of the financial position,
results of operations and cash flows for the period.
The consolidated financial statements as presented herein should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto as filed with the Securities and Exchange Commission and included
in the Company's Form 10-K for the year ended December 31, 1996. The Company's
fiscal year ends December 31.
2. INVENTORY
Inventory consists principally of finished goods held for sale and are stated at
the lower of cost or market. Cost is determined using the first-in, first-out
method.
3. NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 , which is effective for the
periods ending after December 15, 1997. SFAS No. 128 replaces the presentation
of primary earnings per share with a presentation of basic earnings per share
based upon the weighted average number of common shares for the period. It also
requires dual presentation of basic and fully diluted earnings per share for
companies with complex capital structures. Adoption of the provisions of SFAS
No. 128 would not significantly affect reported earnings per share for any of
the periods presented.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income by their nature in that financial statement. In addition,
the accumulated balance of other comprehensive income must be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial position. Reclassification of financial
statements for earlier periods, provided for comparative purposes, is required.
SFAS No. 131 establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Operating segments are defined as
components of an enterprise 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. SFAS No. 131
requires reporting segment profit or loss, certain specific revenue and expense
items and segment assets. It also requires reconciliations of total segment
profit or loss, total segment assets, and other amounts disclosed for segments
to corresponding amounts reported in the financial year of application. Interim
information is not required until the second year of application, at which time
comparative information is required. The Company will adopt SFAS No. 130 and
No. 131 on January 1, 1998, as required.
Page 5 of 10 sequentially numbered pages.
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PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and accompanying notes, included in Part I -
Item 1 of this Quarterly Report, and the audited consolidated financial
statements and accompanying notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1996.
The Company's business is highly seasonal. Typically, sales and operating
income are highest during the third and fourth quarters and lowest during the
first and second quarters. This seasonal pattern is primarily due to the
increased demand for the Company's products during the "back-to-school" and year
end holiday selling seasons.
SALES.
Sales decreased by 7.2% or $851,000 to $10,900,000 in the quarter ended
September 30, 1997, from $11,751,000 in the quarter ended September 30, 1996.
Sales decreased in the independent toy, school supply, software and
international markets, and increased in the mass and private label markets.
Sales decreased by 8.4% or $2,350,000 to $25,720,000 for the nine month
period ended September 30, 1997 from $28,070,000 for the nine months ended
September 30, 1996.
For the quarter and the nine month period, the decreased sales in the
specialty toy market was due to a combination of a decrease in buying by a small
number of large customers and delays in introducing new products into the trade
in a timely fashion. The decreased sales in the software markets was associated
with the Company's exit from the traditional consumer software business, while
the decrease in the international business was due to decreased purchases by a
large international customer.
Increased sales in the mass market were the result of the successful
introduction of several new products including GeoSafari World. The increase in
the private label business was due to initial shipment of products being
manufactured for a new private label customer.
GROSS PROFIT.
Gross profit margin decreased to 50.3% for the quarter ended September 30,
1997 from 52.2% for the quarter ended September 30, 1996.
Gross profit margin decreased to 51% for the nine month period ended
September 30, 1997 from 53.1% for the nine month period ended September 30,
1996.
The decrease in gross profit margins resulted primarily from the sale of
certain excess mass market "ExploraToy" product at significantly reduced
margins, write-off of inventory items considered obsolete and an increase in the
proportion of mass market "ExploraToy" sales which are at margins lower than
those experienced in the Company's core markets.
SALES AND MARKETING EXPENSE.
Sales and marketing expense decreased by $42,000 to $2,147,000 for the
quarter ended September 30, 1997 compared to $2,189,000 during the same quarter
of 1996, but increased as a percentage of sales from 18.6% for the quarter ended
September 30,1996 to 19.6% for the same period in the current year due to lower
sales volume.
Sales and marketing expense decreased by $618,000 to $5,338,000 for the
nine month period ended September 30, 1997 compared to $5,956,000 for the same
period in 1996.
The decrease was due primarily to the reduction in marketing expense
associated with the Company's mass market CD-ROM product line. Said marketing
effort was discontinued at the end of 1996.
WAREHOUSING AND DISTRIBUTION EXPENSE.
Warehousing and distribution expense increased $83,000 to $834,000 or 7.7%
of sales for the quarter ended September 30, 1997 compared to $751,000 or 6.4%
for the same quarter of 1996.
Warehousing and distribution expense increased $108,000 to $2,670,000 or
10.4% of sales for the nine month period ended September 30, 1997 compared to
$2,562,000 or 9.1% of sales for the same period in 1996.
Page 6 of 10 sequentially numbered pages.
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The increase in warehousing and distribution expense was due to the
establishment of a new materials management group whose objective is to improve
the Company's procurement practices; particularly those associated with the
sourcing and purchasing of new products.
RESEARCH AND DEVELOPMENT EXPENSE.
Research and development expense decreased $230,000 to $975,000 or 8.9% of
sales for the quarter ended September 30, 1997 compared to $1,205,000 or 10.3%
of sales for the same quarter of 1996.
Research and development expense for the nine month period ended September
30, 1997 decreased $975,000 to $3,161,000 or 12.3% of sales compared to
$4,136,000 or 14.7% of sales for the same period in 1996.
The decrease in research and development expenditure is primarily the
result of the Company's decision to discontinue the internal development of
CD-ROM products.
GENERAL AND ADMINISTRATIVE EXPENSE.
General and administrative expense decreased by $159,000 to $812,000 or
7.5% from $971,000 or 8.3% of sales during the third quarter of 1996. The
decrease was principally due to the partial reversal of the Company's accrual
for discretionary profit sharing and bonus plans.
General and administrative expense decreased by $235,000 to $2,680,000 or
10.4% of sales for the nine month period ended September 30, 1997 compared to
$2,915,000 or 10.4% of sales during the same period of 1996. The decrease in
general and administrative expense is primarily due to decreases in compensation
related costs and professional service expenses which in 1996 included costs for
general management consultants who were assisting the Company in developing its
profit improvement program.
INTEREST EXPENSE.
Interest expense remained essentially unchanged at $104,000 for the quarter
ended September 30, 1997 compared to $99,000 for the same quarter of 1996.
For the nine month period ended September 30, 1997 interest expense
decreased by $14,000 to $191,000 compared to $205,000 for same period of 1996.
OTHER INCOME, NET.
Other income, net decreased by $95,000 to a net expense amount of $51,000
for the quarter ended September 30, 1997 from a net other income amount of
$44,000 for the same quarter in 1996. The decrease is principally due to
royalty income in the third quarter of 1997 being approximately $40,000 less
than the comparable period in 1996.
For the nine month period ended September 30, 1997 other income net
decreased by $149,000 to $93,000 from $242,000 for the same period in 1996.
Year-to-date, the decrease in other income, net is primarily due to currency
exchange losses generated from sales to Canada in 1997 compared to currency
exchange gains experienced in 1996 and one-time adjustments relating to
inter-company reconciliations with the Company's foreign subsidiary.
LIQUIDITY & CAPITAL RESOURCES
In recent years, the Company's working capital needs have been met through
funds generated from operations and from the Company's revolving line of credit.
The Company's principal need for working capital has been to meet peak inventory
and accounts receivable requirements associated with its seasonal sales
patterns. The Company increases inventory levels during the spring and summer
months in anticipation of increasing shipments in the summer and fall. Accounts
receivable have historically increased during the summer and fall because of the
Company's use of "dating" programs wherein sales are made to the Company's
customers for which payment is deferred for one to three months based on the
size of the sales orders. Due to said sales patterns, the largest customer
orders are shipped during the summer and fall, hence increasing accounts
receivable balances during the third and fourth quarters.
For the nine month period ended September 30, 1997, the Company's primary
source of funds was the net increase in borrowings under its revolving line of
credit in the amount of $2,800,000.
The principal uses of cash during the period ended September 30, 1997 were
for the funding of an increase in accounts receivable of $521,000, an increase
in inventory in the amount of $1,822,000 and a reduction in income taxes payable
of $437,000.
Page 7 of 10 sequentially numbered pages.
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The Company currently has a revolving line of credit with a bank, which is
collateralized by substantially all of the Company's assets. Under the
revolving line of credit agreement, which expires June 8, 1998, the Company may
borrow up to $8 million. The agreement requires the maintenance of certain
financial ratios, minimum annual net income amounts and tangible net worth
amounts, and provides for various restrictions including limitations on capital
expenditures and additional indebtedness. At September 30, 1997, the Company
had $3,800,000 outstanding against this line of credit.
The Company believes that borrowings available under the revolving line of
credit and anticipated funds from operations will satisfy the Company's
projected working capital and capital expenditure requirements for at least the
next 12 months.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, this Report
contains forward-looking statements which involve a number of risks and
uncertainties, including but not limited to continued successful development and
acceptance of new products, dependence on off-shore contract manufacturers,
competitive factors, dependence on new distribution channels, dependence on
education funding by Federal, State and local governments, dependence on key
development and marketing personnel, general economic conditions and the risk
factors listed from time-to-time in the Company's filings with the Securities
and Exchange Commission.
Page 8 of 10 sequentially numbered pages.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
None
(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the period in
question.
Page 9 of 10 sequentially numbered pages.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDUCATIONAL INSIGHTS, INC.
Date: 11/03/97 By: /s/ Jay Cutler
--------------------- -----------------------------------
Jay Cutler
President and Chief Executive Officer
Date: 11/03/97 By: /s/ G. Reid Calcott
--------------------- -----------------------------------
G. Reid Calcott
Chief Operating and Financial Officer
Page 10 of 10 sequentially numbered pages.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 450
<SECURITIES> 0
<RECEIVABLES> 10,115
<ALLOWANCES> 473
<INVENTORY> 13,784
<CURRENT-ASSETS> 26,533
<PP&E> 5,329
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,673
<CURRENT-LIABILITIES> 8,249
<BONDS> 0
0
0
<COMMON> 18,644
<OTHER-SE> 4,324
<TOTAL-LIABILITY-AND-EQUITY> 32,673
<SALES> 25,720
<TOTAL-REVENUES> 25,720
<CGS> 12,609
<TOTAL-COSTS> 12,609
<OTHER-EXPENSES> 13,849
<LOSS-PROVISION> 98
<INTEREST-EXPENSE> 191
<INCOME-PRETAX> (790)
<INCOME-TAX> (308)
<INCOME-CONTINUING> (482)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (482)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> 0
</TABLE>
