<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________________________________
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 June 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
incorporation or organization) Identification No.)
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 August 7, 1997 there were 7,040,000 shares of common stock outstanding.
Total number of sequential pages: 20 Exhibit Index is on page 11
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Page 1 of 20 sequentially numbered pages
<PAGE>
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>
JUNE 30 DECEMBER 31,
1997 1996
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 441 $ 1,018
Accounts receivable, less allowance for doubtful
accounts of $443 in 1997 and $375 in 1996 7,814 9,779
Inventory 13,369 12,139
Income taxes receivable 493
Other receivables 263 170
Prepaid expenses and other current assets 976 663
Deferred income taxes 808 808
------- -------
Total current assets 24,164 24,577
------- -------
PROPERTY AND EQUIPMENT, Net 5,432 5,446
------- -------
OTHER ASSETS 757 881
------- -------
TOTAL $30,353 $30,904
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 110 $ 110
Line of credit 1,700 1,000
Accounts payable 2,964 2,512
Accrued expenses 1,298 1,584
Income taxes payable 440
Deferred Income 175 257
------- -------
Total current liabilities 6,247 5,903
------- -------
LONG-TERM DEBT 1,131 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; 18,644 18,644
7,040,000 shares issued in 1997 and 1996
Cumulative translation adjustment 128 140
Retained earnings 3,851 4,680
------- -------
Total shareholders' equity 22,623 23,464
------- -------
TOTAL $30,353 $30,904
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 2 of 20 sequentially numbered pages
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
1997 1996 1997 1996
------- ------ ------- -------
<S> <C> <C> <C> <C>
SALES $8,473 $8,653 $14,820 $16,319
COST OF SALES 4,130 4,178 7,186 7,546
------ ------ ------- -------
GROSS PROFIT 4,343 4,475 7,634 8,773
------ ------ ------- -------
OPERATING EXPENSES:
Sales and marketing 1,668 1,745 3,191 3,767
Warehousing and distribution 928 929 1,836 1,811
Research and development 1,050 1,525 2,186 2,931
General and administrative 926 939 1,868 1,944
------ ------ ------- -------
Total operating expenses 4,572 5,138 9,081 10,453
------ ------ ------- -------
OPERATING LOSS (229) (663) (1,447) ( 1,680)
------ ------ ------- -------
OTHER INCOME (EXPENSE):
Interest expense (51) (70) (87) (106)
Interest income 21 6 37 17
Other income, net 112 105 144 198
------ ------ ------- -------
Total other income (expense) 82 41 94 109
------ ------ ------- -------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES (147) (622) (1,353) (1,571)
PROVISON (BENEFIT) FOR INCOME TAXES (64) (250) (524) (615)
------ ------ ------- -------
NET INCOME (LOSS) $ (83) $( 372) $ (829) $ (956)
------ ------ ------- -------
------ ------ ------- -------
Net Income (Loss) Per Share $(0.01) $(0.05) $ (0.12) $ (0.14)
------ ------ ------- -------
------ ------ ------- -------
Weighted Average Number of
Common and Common Equivalent
Shares Outstanding 7,040 7,040 7,040 7,040
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 20 sequentially numbered pages
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (829) $ (956)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts and sales returns 59 78
Depreciation 519 491
Changes in operating assets and liabilities:
Accounts receivable 1,850 (202)
Inventory (1,328) (1,091)
Income taxes receivable (493) (487)
Other receivables (99) (85)
Prepaid expenses and other current assets (313) (500)
Other assets 106 (194)
Accounts payable 623 183
Accrued expenses (286) 158
Income taxes payable (437)
Deferred Income (82)
-------- -------
Net cash used in operating activities (710) (2,605)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (505) (288)
-------- -------
Net cash used in investing activities (505) (288)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase / decrease in line of credit 700 2,900
Repayments of long-term debt (54) (57)
-------- -------
Net cash provided by financing activities 646 2,843
-------- -------
Effect of exchange rate changes on cash (8) (1)
-------- -------
NET DECREASE IN CASH (577) (51)
CASH, BEGINNING OF PERIOD 1,018 378
-------- -------
CASH, END OF PERIOD $ 441 $ 327
-------- -------
-------- -------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 96 $ 89
Income taxes paid (refunded) $ 409 $(127)
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 20 sequentially numbered pages
<PAGE>
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. The results of operations for
the period ended June 30, 1997, are not indicative of the results that might
be expected for the full fiscal year.
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.
Page 5 of 20 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 2.1% or $180,000 to $8,473,000 in the quarter
ended June 30, 1997, from $8,653,000 in the quarter ended June 30, 1996.
Sales decreased in the independent toy, private label and software sectors of
the Company's business. The decrease in sales to the independent toy
retailers was due primarily to lower sales to three large customers. One of
these, which represented approximately $1,000,000 of sales in 1996, has
discontinued the sale of educational products in its stores. The other two
remain active customers and are expected to increase purchases later in the
year. The decrease in the software business is associated with the Company's
change in strategic direction, de-emphasizing mass-market software
development and sales, while the decrease in the private label business is
believed to be a matter of the timing of the placement of orders by one of
the Company's key private label customers. These sales decreases were
partially offset by increases in the Company's school and mass-market
businesses.
Sales decreased 9.2% to $14,820,000 for the six months ended
June 30, 1997 compared to $16,319,000 for the six months ended June 30, 1996,
for the same reasons described above. The decrease in sales was in line with
the Company's expectations because its newer products were scheduled for
delivery toward the end of the second quarter and will not affect sales until
the third and fourth quarters.
GROSS PROFIT.
Gross profit margin as a percentage of sales remained essentially
unchanged at 51.3% for the quarter ended June 30, 1997 compared to 51.7% for
the same period in 1996.
Gross profit margin decreased to 51.5% for the six month period
ended June 30, 1997 from 53.8% for the six month period ended June 30, 1996.
This decrease resulted primarily from the sale of certain excess ExploraToy
product at significantly reduced margins, write-off of inventory items
considered obsolete and a one-time expenditure for the conversion of CD-ROM
products for sale to the school market, all of which occurred in the first
quarter. The Company now expects its ExploraToy sales, which are at margins
lower than those experienced in its core markets, to be proportionally higher
during the remainder of 1997 than it was in 1996.
SALES AND MARKETING EXPENSE.
Sales and marketing expense decreased by $77,000 to $1,668,000 or
19.7% of sales for the quarter ended June 30, 1997 from $1,745,000 of 20.2%
of sales during the same quarter of 1996.
Sales and marketing expense decreased by $576,000 to $3,191,000
or 21.5% of sales during the first half of 1997 from $3,767,000 or 23.1% of
sales during the corresponding period in 1996. The Company is continuing to
emphasize expense reduction and anticipates that sales and marketing costs
expressed as a percentage of sales will continue to be lower than 1996 in the
third and fourth quarters of 1997.
Page 6 of 20 sequentially numbered pages
<PAGE>
WAREHOUSING AND DISTRIBUTION EXPENSE.
Warehousing and distribution expense for the quarter ended June
30, 1997 remained essentially unchanged at $928,000 compared to $929,000 for
the same quarter of 1996 and remained essentially unchanged when expressed as
a percentage of sales at 11% for the quarter ended June 30, 1997 compared to
10.7% of sales for the quarter ended June 30, 1996.
Warehousing and distribution expense also remained essentially
unchanged for the six month period ended June 30, 1997 at $1,836,000 or 12.4%
of sales compared to $1,811,000 or 11.1% of sales for the corresponding
period of 1996. The Company expects no significant changes in its warehousing
and distribution activities but anticipates that these expenses, when
expressed as a percentage of sales, will decrease due to seasonal increases
in volume during the third and fourth quarters.
RESEARCH AND DEVELOPMENT EXPENSE.
Research and development expense decreased by $475,000 to
$1,050,000 or 12.4% of sales for the quarter ended June 30, 1997 from
$1,525,000 or 17.6% of sales for the corresponding period in 1996. This
decrease was due primarily to the Company's discontinuation of internal
development of CD-ROM software.
Research and development expense for the six month period ended
June 30, 1997 decreased by $745,000 to $2,186,000 or 14.8% of sales compared
to $2,931,000 or 18% of sales for the same period in 1996. The Company
expects research and development expenditures to decrease as a percentage of
sales during the remainder of the year because of the discontinuation of
internal software development and seasonal increases in sales volumes
expected in the third and fourth quarters.
GENERAL AND ADMINISTRATIVE EXPENSE.
General and administrative expense for the quarter ended June 30,
1997 remained essentially unchanged at $926,000 compared to $939,000 for the
same quarter in 1996.
General and administrative expense decreased by $76,000 to
$1,868,000 or 12.6% of sales for the six month period ended June 30, 1997
from $1,944,000 or 11.9% for the same quarter in 1996.
INTEREST EXPENSE
Interest expense decreased $19,000 to $51,000 for the second
quarter and decreased $19,000 to $87,000 for the six month period ended June
30, 1997 primarily as a result of average borrowings under the Company's line
of credit facility in 1997 being lower than said borrowings in 1996.
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 7 of 20 sequentially numbered pages
<PAGE>
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.
During the quarter ended June 30, 1997, the Company's sources of
funds were primarily from the collection of outstanding accounts receivable
and the net increase in borrowings under the Company's line of credit.
The principal uses of cash during the period ended June 30, 1997
were the funding of operating losses net of depreciation of $310,000, an
increase in inventory of $1,328,000, an increase in prepaid expenses of
$313,000 and an increase in taxes receivable of $493,000.
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 June 30,
1997, the Company had $1,700,000 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.
Page 8 of 20 sequentially numbered pages
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 27, 1997 the Company held its Annual Meeting of
Shareholders. The selection of Deloitte & Touche LLP as the Company's
independent auditors was ratified. 6,885,882 shares were voted in favor of
ratification. 31,400 shares were voted against ratification and no shares
abstained.
Shareholders elected the incumbents as Directors with the
nominees receiving the votes indicated below:
VOTES FOR VOTES FOR
--------- ---------
Burt Cutler 6,846,732
Jay Cutler 6,847,132
Courtney V. Moe 6,847,132
Gerald Bronstein 6,847,132
G. Reid Calcott 6,847,132
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Amended and Restated Loan Agreement, dated May 27, 1997 between
the Company and Union Bank of California.
(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 20 sequentially numbered pages
<PAGE>
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.
(Registrant)
Date 8/4/97 By: /s/ JAY CUTLER
----------------------------------------
Jay Cutler
President and Chief Executive Officer
Date 8/4/97 By: /s/ G. REID CALCOTT
----------------------------------------
G. Reid Calcott
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
Page 10 of 20 sequentially numbered pages
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------- ----------- -------------
<S> <C> <C>
10.17 Amended and Restated Loan Agreement dated May 27,1997 between 12
the Company and Union Bank of California.
</TABLE>
Page 11 of 20 sequentially numbered pages
<PAGE>
LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT ("Agreement") is made
and entered into as of May 27, 1997 by and between EDUCATIONAL INSIGHTS,
INC., a California corporation ("Borrower") and UNION BANK OF CALIFORNIA,
N.A., ("Bank"). This Agreement amends and restates in its entirety that
certain loan agreement dated September 29, 1994 between Bank and Borrower.
SECTION 1. THE LOAN
1.1.1 THE REVOLVING LOAN. Bank will loan to Borrower an
amount not to exceed Eight Million Dollars ($8,000,000) outstanding in the
aggregate at any one time (the "Revolving Loan"). Borrower may borrow, repay
and reborrow all or part of the Revolving Loan in amounts of not less than
One Hundred Thousand Dollars ($100,000) in accordance with the terms of the
Revolving Note; provided, however, that for at least thirty (30) consecutive
days during each twelve (12)-month period, the principal amount outstanding
under the Revolving Loan must be zero ($0). All borrowings of the Revolving
Loan must be made before June 8, 1998 at which time all unpaid principal and
interest of the Revolving Loan shall be due and payable. The Revolving Loan
shall be evidenced by a promissory note (the "Revolving Note") on the
standard form used by Bank for commercial loans. Bank shall enter each
amount borrowed and repaid in Bank's records and such entries shall be deemed
to be the amount of the Revolving Loan outstanding. Omission of Bank to make
any such entries shall not discharge Borrower of its obligation to repay in
full with interest all amounts borrowed.
1.1.1.1 THE COMMERCIAL LETTER OF CREDIT SUBLIMIT. As a
sublimit to the Revolving Loan, Bank shall issue, for the account of
Borrower, one or more irrevocable commercial letters of credit (individually,
an "L/C" and collectively, the "L/Cs") and calling for drafts at sight or
usance up to ninety (90) days covering the importation or purchase of
inventory from overseas suppliers. The aggregate amount available to be
drawn under all outstanding L/Cs and the aggregate amount of unpaid
reimbursement obligations under drawn L/Cs shall not exceed Two Million
Dollars ($2,000,000) and shall reduce, dollar for dollar, the maximum amount
available under the Revolving Loan. All such commercial L/Cs shall be drawn
on such terms and conditions as are acceptable to Bank and shall be governed
by the terms of (and Borrower agrees to execute) Bank's standard form for
commercial L/C applications and reimbursement agreement and shall not have an
expiration date more than 360 days from its date of issuance. No letter of
credit shall expire after October 8, 1998.
1.1.2 REAL ESTATE TERM LOAN. Bank previously made a certain
term loan ("Real Estate Term Loan") to Borrower in the principal amount of
One Million Four Hundred and Eighty Thousand Dollars ($1,480,000), which
matures on January 1, 2005 and bears an interest rate provided in the Real
Estate Term Note. The current outstanding principal amount of the Real
Estate Term Loan is One Million Two Hundred and Fifty Thousand Seventy-One
Dollars and Seventy-Four cents ($1,250,071.74). This Real Estate Term Loan
is evidenced by a promissory note ("Real Estate Term Note") in favor of the
Bank on the standard form used by Bank for commercial loans. In the event of
a prepayment of principal and any resulting fees, any prepaid amounts shall
be applied to the scheduled principal payments in the reverse order of their
maturity.
1.2 TERMINOLOGY.
As used herein the word "Loan" shall mean, collectively, all
the credit facilities described above.
As used herein the word "Note" shall mean, collectively, all
the promissory notes described above.
As used herein, the words "Loan Documents" shall mean all
documents executed in connection with this Agreement.
Page 12 of 20 sequentally numbered pages
<PAGE>
1.3 PURPOSE OF LOAN. The proceeds of the Revolving Loan shall
be used for general working capital purposes.
1.4 INTEREST. The unpaid principal balance of the Revolving
Loan shall bear interest at the rate or rates provided in the Revolving Note
and selected by Borrower. The Revolving Loan may be prepaid in full or in
part only in accordance with the terms of the Revolving Note and any such
prepayment shall be subject to the prepayment fee provided for therein.
1.5 BALANCES. Borrower shall maintain its major depository
accounts with Bank until the Note and all sums payable pursuant to this
Agreement have been paid in full.
1.6 DISBURSEMENT. Upon execution hereof, Bank shall disburse
the proceeds of the Loan as provided in Bank's standard form Authorization
executed by Borrower.
1.7 SECURITY. Prior to any disbursement of the Loan, Borrower
shall have executed a security agreement, on Bank's standard form, and a
financing statement, suitable for filing in the office of the Secretary of
State of the State of California and any other state designated by Bank,
granting to Bank a first priority security interest in such of Borrower's
property as is described in said security agreement. Exceptions to Bank's
first priority, if any, are permitted only as otherwise provided in this
Agreement. At Bank's request, Borrower will also obtain executed landlord's
and mortgagee's waivers on Bank's form covering all of Borrower's property
located on leased or encumbered real property. In regards to the Real Estate
Term Loan, Bank will maintain a First Trust Deed on the Property located at
16941 Keegan Avenue, Carson, CA 90746.
1.8 CONTROLLING DOCUMENT. In the event of any inconsistency
between the terms of this Agreement and any Note or any of the other Loan
Documents, the terms of such Note or other Loan Documents will prevail over
the terms of this Agreement.
SECTION 2. CONDITIONS PRECEDENT
Bank shall not be obligated to disburse all or any portion of the
proceeds of the Loan unless at or prior to the time for the making of such
disbursement, the following conditions have been fulfilled to Bank's
satisfaction:
2.1 COMPLIANCE. Borrower shall have performed and complied with
all terms and conditions required by this Agreement to be performed or
complied with by it prior to or at the date of the making of such
disbursement and shall have executed and delivered to Bank the Note and other
documents deemed necessary by Bank.
2.2 BORROWING RESOLUTION. Borrower shall have provided Bank
with certified copies of resolutions duly adopted by the Board of Directors
of Borrower. Such resolutions shall also designate the persons who are
authorized to act on Borrower's behalf in connection with this Agreement and
to do the things required of Borrower pursuant to this Agreement.
2.3 TERMINATION STATEMENTS. Borrower shall have provided Bank
with UCC-2 termination statements executed by such secured creditors as may
be required by Bank suitable for filing with the Secretary of State in each
state designated by Bank.
2.4 CONTINUING COMPLIANCE. At the time any disbursement is to
be made, there shall not exist any event, condition or act which constitutes
an event of default under Section 6 hereof or any event, condition or act
which with notice, lapse of time or both would constitute such event of
default; nor shall there be any such event, condition, or act immediately
after the disbursement were it to be made.
Page 13 of 20 sequentally numbered pages
<PAGE>
SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that:
3.1 BUSINESS ACTIVITY. The principal business of Borrower is a
developer and distributor of supplemental educational material .
3.2 AUTHORITY TO BORROW. The execution, delivery and
performance of this Agreement, the Note and all other agreements and
instruments required by Bank in connection with the Loan are not in
contravention of any of the terms of any indenture, agreement or undertaking
to which Borrower is a party or by which it or any of its property is bound
or affected.
3.3 FINANCIAL STATEMENTS. The financial statements of Borrower,
including both a balance sheet at December 31, 1996, together with supporting
schedules, and an income statement for the twelve (12) months ended December
31, 1996, have heretofore been furnished to Bank, and are true and complete
and fairly represent the financial condition of Borrower during the period
covered thereby. Since December 31, 1996, there has been no material adverse
change in the financial condition or operations of Borrower.
3.4 TITLE. Except for assets which may have been disposed of in
the ordinary course of business, Borrower has good and marketable title to
all of the property reflected in its financial statements delivered to Bank
and to all property acquired by Borrower since the date of said financial
statements, free and clear of all liens, encumbrances, security interests and
adverse claims except those specifically referred to in said financial
statements.
3.5 LITIGATION. There is no litigation or proceeding pending or
threatened against Borrower or any of its property which is reasonably likely
to affect the financial condition, property or business of Borrower in a
materially adverse manner or result in liability in excess of Borrower's
insurance coverage.
3.6 DEFAULT. Borrower is not now in default in the payment of
any of its material obligations, and there exists no event, condition or act
which constitutes an event of default under Section 6 hereof and no
condition, event or act which with notice or lapse of time, or both, would
constitute an event of default.
3.7 ORGANIZATION. Borrower is duly organized and existing under
the laws of the state of its organization, and has the power and authority to
carry on the business in which it is engaged and/or proposes to engage.
3.8 POWER. Borrower has the power and authority to enter into
this Agreement and to execute and deliver the Note and all of the other Loan
Documents.
3.9 AUTHORIZATION. This Agreement and all things required by
this Agreement have been duly authorized by all requisite action of Borrower.
3.10 QUALIFICATION. Borrower is duly qualified and in good
standing in any jurisdiction where such qualification is required.
3.11 COMPLIANCE WITH LAWS. Borrower is not in violation with
respect to any applicable laws, rules, ordinances or regulations which
materially affect the operations or financial condition of Borrower.
3.12 ERISA. Any defined benefit pension plans as defined in the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), of
Borrower meet, as of the date hereof, the minimum funding standards of
Section 302 of ERISA, and no Reportable Event or Prohibited
Page 14 of 20 sequentally numbered pages
<PAGE>
Transaction as defined in ERISA has occurred with respect to any such plan.
3.13 REGULATION U. No action has been taken or is currently
planned by Borrower, or any agent acting on its behalf, which would cause
this Agreement or the Note to violate Regulation U or any other regulation of
the Board of Governors of the Federal Reserve System or to violate the
Securities and Exchange Act of 1934, in each case as in effect now or as the
same may hereafter be in effect. Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock as
one of its important activities and none of the proceeds of the Loan will be
used directly or indirectly for such purpose.
3.14 CONTINUING REPRESENTATIONS. These representations shall be
considered to have been made again at and as of the date of each disbursement
of the Loan and shall be true and correct as of such date or dates.
SECTION 4. AFFIRMATIVE COVENANTS
Until the Note and all sums payable pursuant to this Agreement or
any other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
4.1 USE OF PROCEEDS. Borrower will use the proceeds of the Loan
only as provided in subsection 1.4 above.
4.2 PAYMENT OF OBLIGATIONS. Borrower will pay and discharge
promptly all taxes, assessments and other governmental charges and claims
levied or imposed upon it or its property, or any part thereof, provided,
however, that Borrower shall have the right in good faith to contest any such
taxes, assessments, charges or claims and, pending the outcome of such
contest, to delay or refuse payment thereof provided that adequately funded
reserves are established, as determined by Borrower, by it to pay and
discharge any such taxes, assessments, charges and claims.
4.3 MAINTENANCE OF EXISTENCE. Borrower will maintain and
preserve its existence and assets and all rights, franchises, licenses and
other authority necessary for the conduct of its business and will maintain
and preserve its property, equipment and facilities in good order, condition
and repair. Bank may, at reasonable times, visit and inspect any of the
properties of Borrower.
4.4 RECORDS. Borrower will keep and maintain full and accurate
accounts and records of its operations according to generally accepted
accounting principles and will permit Bank to have access thereto, to make
examination and photocopies thereof, and to make audits during regular
business hours.
4.5 INFORMATION FURNISHED. Borrower will furnish to Bank:
(a) Within forty-five (45) days after the close of each
fiscal quarter, except for the final quarter of each fiscal year, its
unaudited balance sheet as of the close of such fiscal quarter, its unaudited
income and expense statement with supportive schedules and statement of
retained earnings for that fiscal quarter, prepared in accordance with
generally accepted accounting principles;
(b) Within ninety (90) days after the close of each fiscal
year, a copy of its statement of financial condition including at least its
balance sheet as of the close of such fiscal year, its income and expense
statement and retained earnings statement for such fiscal year, examined and
prepared on an audited basis by independent certified public accountants
selected by Borrower and reasonably satisfactory to Bank, in accordance with
generally accepted accounting principles applied on a basis consistent with
that of the previous year;
(c) Borrower agrees to deliver or cause to be delivered to
Bank, as soon as available and in any event within ninety (90) days after the
end of each fiscal year, a copy of the financial statement of Educational
Insights U.K. for such fiscal year.
Page 15 of 20 sequentally numbered pages
<PAGE>
(d) At Bank's request, as soon as available, copies of
such financial statements and reports as Borrower may file with any state or
federal agency, including all state and federal income tax returns;
(e) Such other financial statements and information as Bank
may reasonably request from time to time;
(f) In connection with each financial statement provided
hereunder, a statement executed by authorized signer of Borrower, certifying
that no default has occurred and no event exists which with notice or the
lapse of time, or both, would result in a default hereunder;
(g) Prompt written notice to Bank of all events of default
under any of the terms or provisions of this Agreement or of any other
agreement, contract, document or instrument entered, or to be entered into
with Bank; and of any litigation which, if decided adversely to Borrower,
would have a material adverse effect on Borrower's financial condition; and
of any other matter which has resulted in, or is likely to result in, a
material adverse change in its financial condition or operations; and
(h) Prior written notice to Bank of any changes in
Borrower's officers and other senior management; Borrower's name; and
location of Borrower's assets, principal place of business or chief executive
office; and
(I) Within thirty (30) days after each fiscal year end, a
copy of Borrower's accounts receivable aging. Borrower will permit Bank to
audit Bank's collateral upon reasonable notice and during regular business
hours.
4.6 TANGIBLE NET WORTH. Borrower will at all times
maintain Tangible Net Worth of not less than Twenty-Two Million Dollars
($22,000,000). "Tangible Net Worth" shall mean net worth increased by
indebtedness of Borrower subordinated to Bank and decreased by patents,
licenses, trademarks, trade names, goodwill and other similar intangible
assets, organizational expenses, and monies due from affiliates (including
officers, shareholders and directors).
4.7 DEBT TO TANGIBLE NET WORTH. Borrower will at all times
maintain a ratio of total liabilities to tangible net worth of not greater
than 1.0:1.0.
4.8 PROFITABILITY. Borrower will maintain its net profit, after
provision for income taxes, at not less than One Million Dollars ($1,000,000)
for any fiscal year.
4.9 QUICK RATIO. Borrower shall maintain at all times a ratio
of cash, accounts receivable and marketable securities to current liabilities
of not less than 1.0:1.0 as such terms are defined by generally accepted
accounting principles.
4.10 INSURANCE. Borrower will keep all of its insurable
property, real, personal or mixed, insured by companies and in amounts
approved by Bank against fire and such other risks, and in such amounts, as
is customarily obtained by companies conducting similar business with respect
to like properties. Borrower will furnish to Bank statements of its
insurance coverage, will promptly furnish other or additional insurance
deemed reasonable by and upon reasonable request of Bank, and to the extent
that such insurance may be available and hereby assigns to Bank, as security
for Borrower's obligations to Bank, the proceeds of any such insurance.
Prior to any disbursement of the Loan, Bank will be named loss payee on all
policies insuring collateral and such policies shall require at least ten
(10) days' written notice to Bank before any policy may be altered or
canceled. Borrower will maintain adequate worker's compensation insurance
and adequate insurance against liability for damage to persons or property.
4.11 ADDITIONAL REQUIREMENTS. Borrower will promptly, upon
demand by Bank, take such further action and execute all such additional
documents and instruments in connection with this Agreement as Bank in its
reasonable discretion deems necessary, and promptly supply Bank with such
Page 16 of 20 sequentally numbered pages
<PAGE>
other information concerning its affairs as Bank may reasonably request from
time to time.
4.12 LITIGATION AND ATTORNEYS' FEES. Borrower will pay promptly
to Bank upon demand, reasonable attorneys' fees (including but not limited to
the reasonable estimate of the allocated costs and expenses of in-house legal
counsel and legal staff) and all costs and other expenses paid or incurred by
Bank in collecting, modifying or compromising the Loan or in enforcing or
exercising its rights or remedies created by, connected with or provided for
in this Agreement or any of the Loan Documents, whether or not an
arbitration, judicial action or other proceeding is commenced. If such
proceeding is commenced, only the prevailing party shall be entitled to
attorneys' fees and court costs.
4.13 BANK EXPENSES. Borrower will pay or reimburse Bank for all
costs, expenses and fees incurred by Bank in preparing and documenting this
Agreement and the Loan, and all amendments and modifications thereof,
including but not limited to all filing and recording fees, costs of
appraisals, insurance and attorneys' fees, including the reasonable estimate
of the allocated costs and expenses of in-house legal counsel and legal staff.
4.14 REPORTS UNDER PENSION PLANS. Borrower will furnish to Bank,
as soon as possible and in any event within 15 days after Borrower knows or
has reason to know that any event or condition with respect to any defined
benefit pension plans of Borrower described in Section 3 above has occurred,
a statement of an authorized officer of Borrower describing such event or
condition and the action, if any, which Borrower proposes to take with
respect thereto.
SECTION 5. NEGATIVE COVENANTS
Until the Note and all other sums payable pursuant to this
Agreement or any other of the Loan Documents have been paid in full, unless
Bank waives compliance in writing, Borrower agrees that:
5.1 ENCUMBRANCES AND LIENS. Borrower will not create, assume
or suffer to exist any mortgage, pledge, security interest, encumbrance, or
lien (other than for taxes not delinquent and for taxes and other items being
contested in good faith) on property of any kind, whether real, personal or
mixed, now owned or hereafter acquired, or upon the income or profits
thereof, except to Bank and except for minor encumbrances and easements on
real property which do not affect its market value, and except for existing
liens on Borrower's personal property and future purchase money security
interests encumbering only the personal property purchased. All of such
permitted personal property liens shall not exceed, in the aggregate, Two
Hundred Fifty Thousand Dollars ($250,000) at any time.
5.2 FREE OF LIENS. All material Inventory is and shall remain
free from all liens, claims, encumbrances and purchase money security
interests, except those in favor of or approved in writing by Bank.
5.3 BORROWINGS. Borrower will not sell, discount or otherwise
transfer any account receivable or any note, draft or other evidence of
indebtedness, except to Bank or except to a financial institution at face
value for deposit or collection purposes only and without any fee other than
fees normally charged by the financial institution for deposit or collection
services.
5.4 SALE OF ASSETS, LIQUIDATION OR MERGER. Borrower will
neither liquidate nor dissolve nor enter into any consolidation, merger,
partnership or other combination, nor convey, nor sell, nor lease all or the
greater part of its assets or business, nor purchase or lease all or the
greater part of the assets or business of another not in excess of One
Million Dollars ($1,000,000) per year.
5.5 LOANS, ADVANCES AND GUARANTIES. Borrower will not, except
in the ordinary course of business as currently conducted, make any loans or
advances, become a guarantor or surety, pledge its credit or properties in
any manner or extend credit not in excess of One Million Dollars ($1,000,000)
per year.
Page 17 of 20 sequentally numbered pages
<PAGE>
5.6 INVESTMENTS. Borrower will not purchase the debt or equity
of another person or entity except for savings accounts and certificates of
deposit of Bank, direct U.S. Government obligations and commercial paper
issued by corporations with the top ratings of Moody's or Standard & Poor's,
provided all such permitted investments shall mature within one year of
purchase.
5.7 PARENT AND SUBSIDIARY PROPERTY. Borrower will not transfer
any property at less than cost to its parent or any affiliate of its parent,
except for value received in the normal course of business as business would
be conducted with an unrelated or unaffiliated entity.
5.8 CAPITAL EXPENDITURES. Borrower will not make capital
expenditures in excess of One Million Five Hundred Thousand Dollars
($1,500,000) in any fiscal year; and shall only make such expenditures as are
necessary for Borrower in the conduct of its ordinary course of business.
Expenditures as used in this subsection shall include the current expense
portion of all leases whether or not capitalized and shall also include the
current portion of any debt used to finance capital expenditures.
5.9 LEASE OBLIGATIONS. Borrower will not incur new lease
obligations as lessee which would result in aggregate lease payments for any
fiscal year exceeding One Hundred Thousand Dollars ($100,000). Each said
lease shall be of equipment or real property needed by Borrower in the
ordinary course of its business.
SECTION 6. EVENTS OF DEFAULT
The occurrence of any of the following events ("Events of
Default") shall terminate any obligation on the part of Bank to make or
continue the Loan and automatically, unless otherwise provided under the
Note, shall make all sums of interest and principal and any other amounts
owing under the Loan immediately due and payable, without notice of default,
presentment or demand for payment, protest or notice of nonpayment or
dishonor, or any other notices or demands:
6.1 Borrower shall default in the due and punctual payment of
the principal of or the interest on the Note or any of the other Loan
Documents; or
6.2 Any default shall occur under the Note; or
6.3 Borrower shall default in the due performance or
observance of any covenant or condition of the Loan Documents; or
6.4 Any guaranty or subordination agreement required hereunder
is breached or becomes ineffective, or any Guarantor or subordinating
creditor dies, disavows or attempts to revoke or terminate such guaranty or
subordination agreement; or
6.5 There is a change in ownership whereas Burton Cutler,
Jay Cutler, Diana Cutler, Karen Duncan Cutler, Carol Cutler Csapo and Corey
Cutler Moncado, and children thereof collectively own or control of less than
fifty-one percent (51%) or more of the issued and outstanding stock of
Borrower.
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 ADDITIONAL REMEDIES. The rights, powers and remedies given
to Bank hereunder shall be cumulative and not alternative and shall be in
addition to all rights, powers and remedies given to Bank by law against
Borrower or any other person, including but not limited to Bank's rights of
setoff or banker's lien.
7.2 NONWAIVER. Any forbearance or failure or delay by Bank in
exercising any right, power or remedy hereunder shall not be deemed a waiver
thereof and any single or partial exercise of any right, power or remedy
shall not preclude the further exercise thereof. No waiver shall be
effective unless it is in writing and signed by an officer of Bank.
Page 18 of 20 sequentally numbered pages
<PAGE>
7.3 INUREMENT. The benefits of this Agreement shall inure to
the successors and assigns of Bank and the permitted successors and assignees
of Borrower, and any assignment by Borrower without Bank's consent shall be
null and void.
7.4 APPLICABLE LAW. This Agreement and all other agreements and
instruments required by Bank in connection therewith shall be governed by and
construed according to the laws of the State of California.
7.5 SEVERABILITY. Should any one or more provisions of this
Agreement be determined to be illegal or unenforceable, all other provisions
nevertheless shall be effective. In the event of any conflict between the
provisions of this Agreement and the provisions of any note or reimbursement
agreement evidencing any indebtedness hereunder, the provisions of such note
or reimbursement agreement shall prevail.
7.6 INTEGRATION CLAUSE. Except for documents and instruments
specifically referenced herein, this Agreement constitutes the entire
agreement between Bank and Borrower regarding the Loan and all prior
communications verbal or written between Borrower and Bank shall be of no
further effect or evidentiary value.
7.7 CONSTRUCTION. The section and subsection headings herein
are for convenience of reference only and shall not limit or otherwise affect
the meaning hereof.
7.8 AMENDMENTS. This Agreement may be amended only in writing
signed by all parties hereto.
7.9 COUNTERPARTS. Borrower and Bank may execute one or more
counterparts to this Agreement, each of which shall be deemed an original,
but when together shall be one and the same instrument.
SECTION 8. SERVICE OF NOTICES
8.1 Any notices or other communications provided for or allowed
hereunder shall be effective only when given by one of the following methods
and addressed to the respective party at its address given with the
signatures at the end of this Agreement and shall be considered to have been
validly given: (a) upon delivery, if delivered personally; (b) upon receipt,
if mailed, first class postage prepaid, with the United States Postal
Service; (c) on the next business day, if sent by overnight courier service
of recognized standing; and (d) upon telephoned confirmation of receipt, if
telecopied.
8.2 The addresses to which notices or demands are to be given
may be changed from time to time by notice delivered as provided above.
Page 19 of 20 sequentally numbered pages
<PAGE>
THIS AGREEMENT is executed on behalf of the parties by duly
authorized officers as of the date first above written.
UNION BANK OF CALIFORNIA, N.A.
By: Gail Boyle /s/
Title: Vice President
By:
Title:
Address: Harbor Gateway Commercial Banking Office
970 West 190th Street, Suite 995
Torrance, CA 90502
Attention: Cheryl Gage, Vice President
Telecopier: (310) 767-5872
Telephone: (310) 767-5866
EDUCATIONAL INSIGHTS, INC.
By: Stephen E. Billis /s/
Title: Controller
Address: Educational Insights, Inc.
16941 Keegan Avenue
Carson, CA 90746
Attention: Stephen E. Billis
Telecopier: (310) 605-5048
Telephone: (310) 884-2000
<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 FINANACIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 441
<SECURITIES> 0
<RECEIVABLES> 7,814
<ALLOWANCES> 443
<INVENTORY> 13,369
<CURRENT-ASSETS> 24,164
<PP&E> 5,432
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,353
<CURRENT-LIABILITIES> 6,247
<BONDS> 1,131
0
0
<COMMON> 18,644
<OTHER-SE> 3,979
<TOTAL-LIABILITY-AND-EQUITY> 30,353
<SALES> 14,820
<TOTAL-REVENUES> 14,820
<CGS> 7,186
<TOTAL-COSTS> 7,186
<OTHER-EXPENSES> 9,081
<LOSS-PROVISION> 68
<INTEREST-EXPENSE> 87
<INCOME-PRETAX> (1,353)
<INCOME-TAX> (524)
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