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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 March 31, 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 b 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 No / X /
As of May 7, 1997 there were 7,040,000 shares of common stock outstanding.
Total number of sequential pages: 9 There are no Exhibits in this
document; hence no Exhibit Index.
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Page 1 of 9 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>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,404 $ 1,018
Accounts receivable, less allowance for doubtful
accounts of $403 in 1997 and $373 in 1996 5,941 9,779
Inventory 12,690 12,139
Income taxes receivable 429
Other receivables 234 170
Prepaid expenses and other current assets 950 663
Deferred income taxes 808 808
------- -------
Total current assets 22,456 24,577
------- -------
PROPERTY AND EQUIPMENT, Net 5,523 5,446
------- -------
OTHER ASSETS 894 881
------- -------
TOTAL $28,873 $30,904
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 110 $ 110
Line of credit 1,000
Accounts payable 3,130 2,512
Accrued expenses 1,234 1,584
Income taxes payable 440
Deferred income 184 257
------- -------
Total current liabilities 4,658 5,903
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LONG-TERM DEBT 1,158 1,185
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DEFERRED INCOME TAXES 352 352
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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 127 140
Retained earnings 3,934 4,680
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Total shareholders' equity 22,705 23,464
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TOTAL $28,873 $30,904
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------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 2 of 9 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
March 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
SALES $ 6,347 $ 7,666
COST OF SALES 3,056 3,368
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GROSS PROFIT 3,291 4,298
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OPERATING EXPENSES:
Sales and marketing 1,523 2,022
Warehousing and distribution 908 882
Research and development 1,136 1,406
General and administrative 942 1,005
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Total operating expenses 4,509 5,315
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OPERATING LOSS (1,218) (1,017)
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OTHER INCOME (EXPENSE):
Interest expense (36) (36)
Interest income 16 11
Other income, net 32 93
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Total other income (expense) 12 68
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LOSS BEFORE BENEFIT FOR INCOME TAXES (1,206) (949)
BENEFIT FOR INCOME TAXES (460) (365)
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NET LOSS $(746) $(584)
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------- -------
Net Loss Per Share $(0.11) $(0.08)
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Weighted Average Number of
Common and Common Equivalent
Shares Outstanding 7,040 7,040
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------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 9 sequentially numbered pages
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EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (746) $ (584)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for doubtful accounts and sales returns 30 36
Depreciation 255 244
Changes in operating assets and liabilities:
Accounts receivable 3,743 1,341
Inventory (665) (782)
Income taxes receivable (429) (248)
Other receivables (71) (31)
Prepaid expenses and other current assets (287) (646)
Other assets (31) (20)
Accounts payable 815 736
Accrued expenses (350) (2)
Deferred income (73)
Income taxes payable (437)
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Net cash provided by operating activities 1,754 44
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (332) (130)
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Net cash (used in) investing activities (332) (130)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in line of credit (1,000)
Repayments of long-term debt (27) (24)
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Net cash (used in) financing activities (1,027) (24)
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Effect of exchange rate changes on cash (9) (4)
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NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 386 (114)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,018 378
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CASH AND CASH EQUIVALETS, END OF PERIOD $ 1,404 $ (264)
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SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $54 $ 37
Income taxes paid (refunded) $409 $(117)
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 9 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. The results of operations for
the period ended March 31, 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.
Page 5 of 9 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 included in the Company's Form 10-K dated March 26, 1997.
Consolidated sales were $6,347,000 for the first quarter ended March 31,
1997, a decrease of 17.2% or $1,319,000 compared to the same period in 1996.
Net loss was $746,000 or $0.11 per share compared with a net loss of $584,000
or $0.08 per share for the same period in 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. The Company typically experiences losses during the first
quarter. The loss in the first quarter of 1997 was in line with the
Company's internal projections.
SALES.
Sales decreased by 17.2% or $1,319,000 to $6,347,000 in the quarter
ended March 31, 1997 from $7,666,000 in the quarter ended March 31, 1996.
The decreases occurred in all of the Company's primary markets, except in the
Company's mass market ExploraToy sector where sales increased approximately
10.6%, a portion of which increase resulted from the sale of certain excess
product at reduced prices. Decreases in the Company's core, school and
independent toy markets were due primarily to an increase in the rate of
falloff of the Company's older product line and delays in purchases by
certain of the Company's largest customers which may or may not be placed
later in the year. Decreases in the software business were the result of the
Company's strategic decision to reduce its marketing expenditures in the mass
market, while decreases in the Company's international business are believed
to be a matter of timing, with certain sales which occurred in the first
quarter of 1996 not yet having occurred in the first quarter of 1997 but
which are expected in the second quarter of 1997. The Company expects lower
sales volume in the second quarter of 1997 than 1996 but believes that this
trend will be reversed in the latter half of the year, when many of the new
products scheduled for introduction in 1997 begin shipping to the Company's
school supply and specialty retail markets.
GROSS PROFIT.
Gross profit margin as a percentage of sales decreased to 51.9% for the
quarter ended March 31, 1997 from 56.1% for the same period of 1996. This
decrease resulted primarily from a higher proportion of ExploraToy sales
which are at margins lower than those experienced in the Company's core
markets, the sale of certain excess ExploraToy product at significantly
reduced margins, a write-off of certain inventory items considered obsolete,
and a one-time expenditure for conversion of certain CD-ROM products for sale
to the school market.
SALES AND MARKETING EXPENSE.
Sales and marketing expense decreased by $499,000 to $1,523,000 from
$2,022,000 for the same period in 1996. This decrease was due primarily to
decreases in the cost of literature and co-op advertising. The Company has
reduced its expenditures in co-op advertising and literature in part to fund
deployment of a field sales force to increase its school supply business. The
Company expects sales and marketing expense expressed as a percentage of
sales to decrease during the latter part of the year as a result of the
increase in sales which typically occurs in the second half of the year.
WAREHOUSING AND DISTRIBUTION EXPENSE.
In absolute dollars, warehousing and distribution expense remained
essentially unchanged at $908,000 or 14.3% of sales for the quarter ended
March 31, 1997 compared to $882,000 or 11.5% of sales for the same period of
1996. The Company believes that warehousing and distribution expense
expressed as a percentage of sales will decrease in conjunction with the
Company's seasonal increase in sales during the last half of 1997, as was
experienced in 1996.
RESEARCH AND DEVELOPMENT EXPENSE.
Research and development expense decreased 19.2% or $270,000 to
$1,136,000 in the first quarter of 1997 compared to $1,406,000 for the same
period in 1996. Expressed as a percentage of sales, research and development
expense remained essentially unchanged between 1997 and 1996. During the
first quarter of 1997, the Company's research and development efforts
concentrated primarily on completing new products for introduction later in
1997 and early 1998. The Company has discontinued its internal research and
development effort in the CD-ROM sector of its business which was the primary
reason for the aforementioned expense decrease. It is now focusing on the
development of products for its core business, particularly electronic
learning aids.
Page 6 of 9 sequentially numbered pages
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GENERAL AND ADMINISTRATIVE EXPENSE.
General and administrative expense decreased by 6.3% or $63,000 to
$942,000 or 14.8% of sales in the first quarter of 1997 compared to
$1,005,000 or 13.1% of sales for the same period in 1996. This decrease was due
primarily to a reduction in professional services expenses, as the first
quarter of 1996 included costs for the general management consultants who
were assisting the Company in developing its profit improvement program. The
Company expects general and administrative expense, when expressed as a
percentage of sales, to decrease during the remainder of the year and
approximate last year's level by year end as a result of the increase in
sales which typically occurs in the second half of the year.
INTEREST EXPENSE
Interest expense remained unchanged at $36,000 for the first quarter of
1997.
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.
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 March 31, 1997, the Company's source of funds
was net cash provided by operating activities, primarily from the collection
of outstanding accounts receivable.
The principal uses of cash during the quarter were the funding of
operating losses of $746,000, an increase in inventory of $665,000 and
repayment of outstanding borrowings under the Company's revolving line of
credit of $1,000,000. During the quarter, capital spending was $332,000,
primarily for tooling relating to new products.
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 3, 1997, 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
advances to the Company's subsidiary, capital expenditures and additional
indebtedness. Although there can be no assurances as to the availability or
terms of credit, the Company expects to renew this agreement at comparable
terms prior to the above expiration date. The Company had no outstanding
borrowings against its line of credit at March 31, 1997.
The Company believes that borrowings available under the revolving line
of credit, if and when renewed, 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 7 of 9 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 8 of 9 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.
(Registrant)
Date: 5/2/97 By: /s/ JAY CUTLER
-------------------------------------
Jay Cutler
President and Chief Executive Officer
Date: 5/2/97 By: /s/ G. REID CALCOTT
-------------------------------------
G. Reid Calcott
Vice Chairman and Chief Operating and
Financial Officer
(Principal Financial Officer)
Page 9 of 9 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,404
<SECURITIES> 0
<RECEIVABLES> 6,344
<ALLOWANCES> 403
<INVENTORY> 12,690
<CURRENT-ASSETS> 22,456
<PP&E> 5,523
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,873
<CURRENT-LIABILITIES> 4,658
<BONDS> 1,158
0
0
<COMMON> 18,644
<OTHER-SE> 4,061
<TOTAL-LIABILITY-AND-EQUITY> 28,873
<SALES> 6,347
<TOTAL-REVENUES> 6,347
<CGS> 3,056
<TOTAL-COSTS> 3,056
<OTHER-EXPENSES> 4,509
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> (1,206)
<INCOME-TAX> (460)
<INCOME-CONTINUING> (746)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (746)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> 0
</TABLE>
