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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 of incorporation) (IRS Employer Identification No.)
16941 KEEGAN AVENUE, CARSON, CALIFORNIA 90746
(Address of principal executive offices) (Zip Code)
(310) 884-2000
(Registrant's telephone number, including area code)
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Title of Each Class
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO PAR VALUE PER SHARE
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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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
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 19, 1998 was approximately $14,520,000 based on the
closing price of such on The Nasdaq Stock Market -SM-.
The number of shares of Registrant's Common Stock outstanding on March
17, 1998 was 7,040,000.
Part III incorporates information by reference from the Registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held on June 26,
1998.
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EDUCATIONAL INSIGHTS INC.
INDEX TO ANNUAL REPORT
ON FORM 10 - K
PART I Page
Item 1: Business 1
Item 2: Properties 9
Item 3: Legal Proceedings 9
Item 4: Submission of Matters to a Vote of Security Holders 9
PART II
Item 5: Market for the Registrant's Common Equity and
Related Stockholder Matters 11
Item 6: Selected Financial Data 12
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 8: Financial Statements and Supplementary Data 17
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17
PART III
Item 10: Directors and Executive Officers of the Registrant 18
Item 11: Executive Compensation 18
Item 12: Security Ownership of Certain Beneficial Owners and
Management 18
Item 13: Certain Relationships and Related Transactions 18
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports
on Form 8 - K 19
Signatures 20
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PART I
ITEM 1: BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED
IN THIS REPORT ARE FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO ECONOMIC, COMPETITIVE,
GOVERNMENTAL AND TECHNOLOGICAL FACTORS AFFECTING THE COMPANY'S OPERATIONS,
MARKETS, PRODUCTS, SERVICES AND PRICES, AND OTHER RISK FACTORS DISCUSSED
HEREIN AND IN THE COMPANY'S FILINGS WITH SECURITIES AND EXCHANGE COMMISSION.
As its core business, Educational Insights, Inc. (Educational Insights
or the Company) designs, develops and markets a variety of supplemental
educational materials including electronic learning aids, activity books,
science kits, board games and other materials for use in both schools and
homes. The Company's many products and related materials cover a broad range
of price points and are designed to supplement and enhance more traditional
textbook methods of teaching while making learning fun. The educational
content of the Company's products appeals to children and students ranging
from pre-kindergarten to adult.
In addition to its core business, Educational Insights entered the mass
market in 1993 with its ExploraToy line of science and activity toys.
The Company was founded and incorporated in the State of California in
1962 to develop and market supplemental educational materials to assist in
the teaching of reading.
MARKET AND INDUSTRY BACKGROUND
The primary market for the Company's core products consists of two broad
market segments - schools and teachers, who purchase the Company's products
for use in the classroom (the "school market"), and parents and children who
purchase the Company's products for use in the home (the "home market", also
referred to as the "specialty retail market"). The targeted users of the
Company's products are the approximately 45 million elementary and high
school students who attend approximately 100,000 elementary and secondary
schools throughout the United States. In addition to the United States
market, the Company's expansion into the international market has exposed its
products to children of all ages in many parts of the world.
The Company believes that a number of changes in elementary and high
school education have resulted in increased use of supplemental educational
materials. Such changes include:
INCREASED PUBLIC CONCERN OVER THE QUALITY OF THE UNITED STATES EDUCATIONAL
SYSTEM. Growing awareness and concern over the quality of public school
education in the United States contributes to an increasing demand for
learning aids that supplement a child's education both in school and at home.
Concerned parents and grandparents are continuing to purchase educational
products for home use to supplement school-based learning in order to improve
the education of their children or grandchildren.
FOCUS ON INDIVIDUAL EDUCATIONAL NEEDS OF STUDENTS. Traditional hard-cover
textbooks are generally written for the "average" student, even though a
large portion of the school population is either ahead or behind in reading
and comprehension ability. In response to this diversity, teachers often
tailor and structure materials to the ability of individual students rather
than classes as a whole. Supplemental educational materials, such as those
offered by the Company, enable teachers to match course materials with the
differing capabilities of their students.
COST-EFFECTIVE SOLUTION TO BUDGETARY CONSTRAINTS. Funding for most
educational materials comes principally from state and local revenues. The
Company believes that budgetary constraints on school districts and local
schools limit purchases of traditional teaching materials and textbooks. As a
result, the Company believes that the lower cost of supplemental materials
makes them an attractive means for teachers to supplement textbook learning.
CHANGING CURRICULA AND TEACHING METHODS. Due primarily to their shorter
development cycle, supplemental educational materials can be updated and
modified to meet new and changing curricula more quickly than textbooks to
reflect changes in subjects such as geography, science and social studies. In
addition, as teaching methods and philosophies change, the Company believes
that supplemental materials provide an effective means for the introduction
of these teaching methods.
SHIFT TO SITE-BASED PURCHASE DECISIONS. Textbook publishers gear their
selling principally to the school district level while supplemental material
publishers generally direct their sales efforts to individual school sites,
making it easier for teachers, principals and school librarians to place
orders and receive personalized service. The Company believes that there has
been a shift in purchasing decisions from the school district level to
individual schools and teachers which has resulted in increased use of
supplemental materials.
BUSINESS STRATEGY
In its core business, the Company's principal business objective is to be a
leading supplier of effective supplemental educational products to both the
school and home markets. The following is a summary of the Company's strategy
to achieve this objective:
OFFER EFFECTIVE EDUCATIONAL PRODUCTS THAT MAKE LEARNING FUN. The Company
employs a combination of educators and developers to design products that
make the learning process fun. Each product is carefully designed to convey
educational
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content that is appropriate for a targeted age group and educational task.
The Company's products use combinations of themes, characters, sound,
graphics and speech in ways which the Company believes are engaging and
entertaining to the user. The educational content of the Company's products
appeals to a wide range of children and students, varying from
pre-kindergarten to adult.
INTRODUCE A WIDE RANGE OF PRODUCTS. The Company currently offers
approximately 750 items and is continuing to develop new products. In 1997,
approximately 120 new products and/or product line extensions were
introduced. In recent years the Company has concentrated an increasing
portion of its research and development money on electronic learning aids and
other higher priced items and this has resulted in longer development lead
times.
DEVELOP PRODUCTS TO BE MARKETED IN BOTH THE SCHOOL AND HOME MARKETS. The
Company develops many of its products to be sold in both the school and home
markets. Home purchasers are often influenced by schools and teachers in
selecting products, and acceptance in the school market can be instrumental
to a product's success in the home market. This cross-over between the school
and home markets allows the Company to avoid incurring substantial
development costs for each market and provides greater total sales potential
for each product.
The Company seeks to expand beyond its traditional products and markets
by marketing software and CD-ROM products to its traditional markets and by
expanding its presence in the mass market and in the international market
employing the following strategies:
LICENSE OR BUY COMPUTER SOFTWARE PRODUCTS FOR DISTRIBUTION INTO THE COMPANY'S
CORE MARKET. In 1993, the Company adopted a strategy of developing software
and CD-ROM products for both the consumer software markets and for the
Company's traditional core markets. By late 1996, changes in the software
market made the internal development of CD-ROM products for the mass market
economically unfeasible for the Company. Accordingly, the Company
discontinued this development at the end of 1996, but incorporates as part of
its strategy the licensing or purchasing of software and CD-ROM products for
distribution to its core markets. The Company seeks quality product with
specific educational objectives aimed at the K-8 market. Although the
Company will continue to sell its existing products in the consumer software
market, its future expansion efforts will concentrate on distribution through
its traditional customer base.
EXPAND EXPLORATOY PRODUCT LINE IN MASS MERCHANT RETAIL MARKET. In 1997,
ExploraToy continued as a supplier of science education toys to most of the
leaders in mass market retailing. The Company maintained its goal of
achieving distribution through most of the leaders in mass market retailing
including Wal-Mart, Kay-Bee Toy Stores, Toys 'R Us, Target Stores, J.C.
Penney, K-Mart and Hills Department Stores. The product line has expanded to
over 35 products in the science and activity area, including several toys
that have earned U.S. Patents. Several of the products developed for the
mass market have been adapted successfully by the Company for its specialty
retail and school supply business.
PURSUE STRATEGIC LICENSING OPPORTUNITIES The Company has entered into
licenses or other agreements with the National Geographic Society, The
National Wildlife Federation and the Smithsonian Institute, each of which has
strong name recognition or access to new markets. In late 1995, the Company
acquired the license for the "Amazing Live SeaMonkeys -Registered Trademark-"
and the products developed based on this license have been well received in
the marketplace. However, the Company does not expect to aggressively pursue
other licenses to drive its expansion into the mass market due to the limited
success of other licenses it had acquired
EXPAND INTERNATIONALLY. In 1990, the Company opened its international
subsidiary in the United Kingdom which provides a distribution base for the
sale of both English and foreign language products into the European Common
Market countries. In addition, several of the Company's electronic learning
aids, including its GeoSafari products, have been licensed to Hausemann en
Hotte, the parent corporation of Jumbo, a Netherlands toy company, for
European sales in French, Dutch and Scandinavian languages. The Company
entered into exclusive agreements for the distribution of its products to the
Italian and Spanish speaking markets in 1996. International sales (i.e.,
sales outside of North America) of the Company's products, including sales of
the Company's United Kingdom subsidiary, totaled approximately $3.8 million
in 1997 or approximately 9.8% of sales. The three foreign countries in which
the Company experienced the highest level of sales in 1997 were the United
Kingdom, Brazil and Korea.
PRODUCTS
The Company offers approximately 750 products and accessories including
electronic learning aids, science kits, board games, reading programs,
activity books and a wide spectrum of other supplemental educational
products. The Company's commitment to results-oriented education has caused
it to diversify its product lines to include a wide variety of educational
content which appeals to children and students ranging from pre-kindergarten
to adult. The Company's products involve a wide spectrum of subject matter,
including phonics and reading, language, literature and writing, mathematics
and critical thinking, creative play, science and nature, social studies and
geography, and arts and crafts.
The Company designs and sells products that meet specifically targeted
educational goals in an entertaining format. Moreover, the Company believes
that because its products are designed to meet specific educational needs,
the typical Company product has a longer life-cycle than those of many other
types of toys, games and puzzles. The following list highlights many of the
Company's key product categories and titles:
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ELECTRONIC LEARNING AIDS Discovery Collections Cliffhangers U.S. History
GeoSafari Nature Collections PHONICS READING PROGRAMS Presidents
GeoSafari Talking Globe Mini Museums Magic Touch FUNTHINKERS
MathSafari Bug Viewers Phonics Factory Thinking Skills
GeoSafari Theater National Wildlife Learning to Read With All Around Fun
Reading Safari Federation Vinyl Sticker Phonics Reading
Albert Books Ready to Read Math
Skillmaster Galaxy Guide Phonics Readers BRAINBOOSTERS
Drillmaster Ant Factory MISCELLANEOUS Amazing Animals
Alphamaster Cosmic Observer Poppums Inventions & Discoveries
Rainbow Light Writer COINstruction Digging into the Past
Charlie RUBBER STAMPS Human Body Kits Worldwide Wonders
Word Arcade Alphabet and Numbers Coin & Stamp Collection Outer Space Adventures
CompuQuizzer Books Story Stamps Plastic Food Undersea Adventures
BOARD GAMES Grading Stamps Plastic Math Counters EXPLORATOY
Dino Checkers Stamp Pads Chalkboards GeoSafari World
Dino Tic Tac Toe Story Maker Stamps Stickers Star Max
Dino Bingo PICTURE BOOKS Letter Perfect Perfect Power Microscope
Not So Scary Things World & U.S. Atlas Picture Perfect I Dig Dinos
Race to the Sun Giant Steps - Science Endangered Animal SeaMonkeys
Name That State Giant Steps - Readers Growth Chart CD-ROM
Presto Change-O Science Safari IQ GAMES GeoSafari Geography
Traverse BOXED READING CARD SETS Animals of the World GeoSafari History
SCIENCE ACTIVITY KITS World of Reading Wonders of the World GeoSafari Science
Buried Treasures Sports U.S. Geography GeoSafari Animals
Adventures in Science Social Studies World Geography
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The following briefly describes six of the Company's top selling product
groups, each of which accounted for more than $1 million in sales in 1997:
ELECTRONIC LEARNING AIDS. Electronic-based devices designed for interactive
play have played an important part in the mix of products sold by the
Company. As indicated in the following table, electronic learning aids, which
include GeoSafari, GeoSafari Jr., GeoSafari Talking Globe, MathSafari,
GeoSafari Theater, Reading Safari, GeoSafari World, Albert, Charlie, Rainbow
and associated learning materials, have been a major source of the Company's
sales over the last five years. As a percentage of sales, electronic learning
aids have decreased to 48% in 1997 from approximately 55% in 1992 primarily
as a result of the decline of the Company's older GeoSafari products.
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YEARS ENDED DECEMBER 31,(1)
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1997 1996 1995 1994 1993
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(IN THOUSANDS)
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Electronic Learning Aids........................ $18,645 $20,185 $21,445 $27,147 $26,066
All Other Products.............................. 19,797 21,091 18,345 18,493 15,987
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Total........................................... $38,442 $41,276 $39,790 $45,640 $42,053
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The Company currently sells a total of seventeen electronic learning
aids that retail from $29.95 to $400.00. Two new electronic learning aids
were introduced in 1997, including the GeoSafari World. This portable quiz
unit asks more than 6,000 geography questions and was designed for and
specifically marketed to the Company's mass market customers. Sales of the
ExploraToy GeoSafari World and the Educational Insights' GeoSafari Talking
Globe, which was introduced in 1996, accounted for approximately $6 million
or 16% of sales in 1997. The GeoSafari Electronic Learning Games, which
include GeoSafari and GeoSafari Jr. product lines, are portable plastic
electronic devices which accommodate a wide range of separately sold lesson
sets for interactive play with more than 36 lesson sets currently available.
GeoSafari is targeted to children ages 8 and up while GeoSafari Jr. is
targeted to ages 3 through 7. Sales of GeoSafari products accounted for
approximately $7 million or 18% of sales in 1997. Like GeoSafari,
MathSafari, first introduced in 1993, consists of a portable electronic
device and a choice of 17 lesson sets that are sold separately. Sales of
MathSafari products accounted for approximately $2 million or 5% of sales in
1997. Six of the Company's electronic learning aids, Drillmaster,
Alphamaster, Skillmaster, Rainbow, Charlie and the new GeoSafari Theater,
which was introduced in 1995, are sold exclusively to the Company's school
supply market. The Company has more electronic learning aids in development
with introductions planned for 1998 and 1999.
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(1) Sales of electronic learning aids by the Company's United Kingdom
subsidiary of $1.9 million, $2.2 million and $2.1 million for the years ended
December 31, 1997, 1996 and 1995, respectively, are presented gross of sales
discounts. The Company's United Kingdom subsidiary does not account for sales
discounts by product categories.
(3)
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Many of the Company's electronic learning aids have been widely
recognized as effective, well-designed educational products by various
organizations. Following is a partial list of awards that have been granted
to GeoSafari, MathSafari and/or GeoSafari Talking Globe:
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AWARD ORGANIZATION
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Gold Award Parents' Choice Foundation, USA
Seal of Approval National Parenting Center, USA
Best Toy The Toy Guide, UK
Top Ten Best Games Dr. Toy's 100 Best Children's Products, USA
Teachers' Choice Award Learning Magazine, USA
Gold Award What Toy, UK
Platinum Award Oppenheim Toy Portfolio, USA
Best Bet Award Canadian Toy Testing Council
Gold Award National Association of Parenting Publications, USA
Best Learning Toys Family Fun Magazine and Family Life Magazine
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BOOKLETS. The Company sells over 100 saddle-stitched booklet products. These
include a series of "big books" and corresponding "little books" which are
intended for use by teachers and students, respectively. The Company's
booklets include products such as science picture booklets, children's
atlases and reading materials designed for "whole language" reading and
phonics readers.
MISCELLANEOUS. Under the Amazing Live Sea-Monkeys -Registered
Trademark-license agreement, ExploraToy has developed a product line of over
8 items. These mass market items along with those marketed to the Company's
core business customers accounted for approximately $2 million or 5% of sales
in 1997.
SCIENCE ACTIVITY KITS. The Company currently markets sixteen families of
science activity kits, the most popular of which is its line of twelve
"Adventures in Science" kits that retail for $9.95. Each "Adventures in
Science" kit contains a booklet describing more than 20 experiments as well
as an assortment of materials required for each experiment. This line is sold
in both the school and home markets. The ExploraToy line of products also
featured six similar products ("Test Tube Science" products) that featured
names and characters from the "Beakman's World" television show. The
"Beakman's World" license agreement expired in 1997 and will not be renewed.
RUBBER STAMPS. The Company sells approximately 100 different varieties of
rubber stamps and stamp pads, of which approximately half are sold in the
school market. These items retail from $3.95 to $16.95 and include grading
stamps for use by teachers in the classroom, and animal and nature stamps
which are used by both children and teachers.
BOARD GAMES. The Company sells twenty-one board games in both the school and
home markets which teach math, geography and other subjects. Popular board
games sold by the Company include Dino Checkers, Name That State and Presto
Change-O. Retail prices for the Company's board games range from $14.95 to
$29.95.
PRODUCT DEVELOPMENT
The Company believes that one of its greatest strengths is its ability
to develop new products. Since January 1996, the Company has introduced
approximately 175 new products and accessories. Products introduced in 1996
or 1997 accounted for approximately 45% of the Company's sales in 1997 as
compared to 1996 when approximately 37% of sales were generated from products
introduced in 1996 and 1995. In 1997, the Company spent approximately 11% of
sales on research and development and has spent an average of approximately
12% of its annual sales on research and development since 1995.
The Company employs approximately 36 full-time staff members in the
product development process. The 36 staff members consist of 8 editors, many
of whom were former classroom teachers, 5 concept developers, an 11 person
graphic arts department, 5 project managers and a variety of additional
engineering, design and support personnel. The Company also retains
freelance artists, editors, designers and engineers for product development
activities. Over 95% of the Company's sales are derived from products
developed internally by the Company.
Product development is directed by a five-person Product Planning Group
(PPG) comprised of the Company's top management which (i) reviews proposed
products submitted from inside and outside the Company, (ii) analyzes and
reviews the Company's products to target product line extensions or
deficiencies and identify new opportunities, and (iii) reviews and updates
products that can be repackaged or modified to maintain or improve sales
levels.
Once a basic product idea is agreed upon by the PPG, multi-functional
teams consisting of production, art, editorial, and technical personnel
research, write, illustrate, draft, engineer, make models, and graphically
design each product. During this process, step-by-step progress is monitored
directly by executive, operating and marketing officers of the Company. A
product development team can generally produce most products within a nine to
twelve month period. The Company typically works on 50 to 100 development
projects simultaneously in order to provide a steady flow of new products for
introduction.
The Company continued the development of computer software products for
release in 1996 and released its "GeoSafari Animals" CD-ROM product in the
fourth quarter. By late 1996, the Company determined that changes in the
development and marketing of software products, particularly CD-ROM products,
made continuing internal development economically unfeasible and its efforts
in this area were discontinued. The Company plans to continue the marketing
and distribution of its existing products but its development effort will
focus on the customization of products purchased or licensed from others for
distribution
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into its traditional school supply and specialty retail markets. During 1997,
the Company licensed eleven CD-ROM products for such distribution.
DISTRIBUTION CHANNELS AND CUSTOMERS
The Company believes that a key element to its success is its multiple
distributor network which enables the Company to broadly penetrate both the
school and home markets. The Company's products are sold through four basic
distribution channels: (i) school supply dealers and parent/teacher stores,
(ii) specialty retail stores, (iii) specialty catalog companies, and (iv)
mass merchant retailers.
SCHOOL SUPPLY DEALERS AND PARENT/TEACHER STORES. The school market is served
by approximately 1,300 independent dealers who sell the Company's products
directly to school districts, individual schools, teachers and a growing
number of parents through supply stores. Many of these dealers have been
selling the Company's products for over twenty years. No individual dealer
accounted for more than 4% of the Company's 1997 sales. Approximately 48% of
the Company's sales, excluding sales made by its United Kingdom subsidiary,
("North American sales") were derived from the school market in 1997.
Traditionally, teacher supply dealers sold primarily to teachers and
many school administrators. However, to address parental interest in and
concern over the quality of education in public schools, many school supply
dealers have opened their own retail stores to serve both the school and home
markets. These stores have become "parent/teacher" stores, with as much as
50% of annual sales coming from parents.
SPECIALTY RETAIL STORES AND CATALOG COMPANIES. Specialty retail stores and
catalog companies serve as the primary distribution source for the Company's
products in the home market. In recent years the specialty retail market has
seen the emergence of up-scale stores featuring premium products. The Company
estimates that its products are available in approximately 2,900 of such
specialty retail outlets. The Company derived approximately 31% of its 1997
North American sales from sales through specialty retail stores and catalog
companies.
Specialty retail stores in the United States are primarily comprised of
single store retailers but also include a number of multiple-location
specialty stores such as Natural Wonders, The Nature Company and Rand
McNally. The latter two are also catalog companies. Other catalog companies
through which the Company's products are offered include Spiegel, Childcraft,
Toys to Grow On, JC Penney and Neiman Marcus. In 1997, Dayton-Hudson's
Dillards department store chain became a very significant new account in this
category. Parents, grandparents and children constitute the substantial
majority of purchasers of the Company's products from specialty retail stores
and catalog companies. However, as is the case with respect to the teacher
supply stores in the school market, there is some degree of cross-over
between the school and home markets from teachers and school administrators
who may purchase supplemental educational products at specialty retail stores
for use in the classroom.
MASS MERCHANT RETAILERS. The Company currently sells certain of its products
through mass merchant retail stores, such as Wal-Mart, Toys 'R' Us, Hills
Department Stores and Target under the ExploraToy name. The Company focuses
its sales efforts in the science and activity toy segment of the mass
merchant retail toy market. This includes building sets, model kits and art
sets and supplies. The science and activity segment of the market is
generally supplied by small companies with more narrowly focused product
lines which are not promotionally oriented in nature, have a longer than
average product life, and are less seasonal than the market as a whole.
Approximately 14% of the Company's sales in 1997 were made through mass
merchant retailers compared to approximately 10% in 1996 and 7% in 1995.
SOFTWARE CD-ROM. The Company sells its GeoSafari Platinum version directly to
its traditional markets. In addition, in 1994, the Company entered an
agreement with Maxis to distribute its software and CD-ROM products to
computer/software oriented retail stores such as CompUSA and Egghead.
However, in early 1997, Maxis discontinued their affiliate label program in
anticipation of the sale of their company to Electronic Arts. When Maxis
provided their retailers a deadline for return of all affiliates' product for
credit, all wholesale and retail sales activity essentially ended with the
exception of returns. As a result, the Company ended 1997 with only minor
sales via this channel. While the Company views its sale of both its
proprietary and licensed CD-ROM products to its traditional customer base as
very important, it has discontinued sales to mass market software resellers.
SALES AND MARKETING
The Company has developed separate sales and marketing programs for each
of the major markets which it serves. These are described by market as
follows:
SCHOOL SUPPLY AND PARENT/TEACHER STORE MARKETS. The Company's sales to the
school supply and parent/teacher store market are made primarily through the
Company's management and in-house sales people who target dealers that own
school supply stores and/or publish school supply catalogs. These sales
people work to make certain that the Company's products are included in the
catalogs and retail outlets utilized by school supply dealers for sales to
schools, teachers and parents. The Company added three new full-time
positions in this category in 1997.
The Company advertises and promotes to the school supply and
parent/teacher store market primarily through catalog and promotional
mailings and participation in trade shows. The Company mails its Educational
Dealer's Buyers Catalog each year to its approximately 1,300 independent
school supply dealers. Other mailings are sent to these dealers throughout
the year including new terms announcements, new pricing/order forms, special
literature program promotions, mid-year new product introductions, and ad
slicks for use in local advertising.
(5)
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In addition, the Company participates in major school dealer trade
shows including the National School Supply and Equipment Association and the
Educational Dealers and Suppliers Association, as well as selected key
educator shows such as National Association for the Education of Young
Children, National Council of Teachers of Mathematics, the International
Reading Association, and the National Educational Computing Conference.
During 1997, in support of the school supply and parent-teacher store
markets, the Company mailed 160,000 K-8 Catalogs and Electronic Classroom
Catalogs directly to individual teachers and administrators. In order to
promote dealer loyalty, these catalogs were imprinted with the name of nearby
dealers encouraging teachers to visit their local teacher supply store in
search of the Company's products.
SPECIALTY RETAILERS. The Company reaches the specialty retailers through
eighteen independent sales firms which together field approximately 56 sales
representatives. Advertising and promotional efforts consist of trade shows
and catalog presentations. The 1997 Toys and Games Trade catalog was mailed
to all dealers and was given to retailers at the annual New York
International Toy Fair in February.
In addition, the Company participates in many of the major toy, book and
gift fairs throughout the world, including the Canadian Toy Fair, the
Frankfurt International Book Fair and the Nuremburg Toy Show.
Through Company literature programs promoted directly to dealers, over
1.6 million brochures and catalogs promoting the Company's products were
distributed nationally in 1997.
CATALOG COMPANIES. Sales to catalog companies are made using a combination
of in-house sales staff and non-exclusive independent sales representatives,
depending upon specifics of the account.
MASS MERCHANT RETAILERS. The Company's mass merchant retailers are reached
through a combination of independent sales representatives and direct
presentations made by ExploraToy's General Manager. The non-exclusive
independent sales force consists of eleven firms, employing approximately 35
sales personnel. Direct presentations are made to major prospective customers
in the United States. In addition, the Company independently presents its
ExploraToy products at the Hong Kong Toy Fair, the Dallas Import Show in
January and the New York International Toy Fair in February.
The 1997 ExploraToy line was principally comprised of " The Lost World:
Jurassic Park-TM-" products licensed from Universal Studios, the Amazing Live
Sea-Monkeys -Registered Trademark-, licensed from Transcience Corp., and
Beakman's World -TM- licensed from Sony Corporation which license expired at
the end of 1997. Licenses are used for packaging, promotion and sale of the
ExploraToy product line in mass market in lieu of direct consumer advertising
but will be used on a more limited basis in the foreseeable future.
In addition, ExploraToy started its own line of branded products,
anchored by the electronic learning aid GeoSafari World which was derived
from the already successful Educational Insights GeoSafari Talking Globe. In
all, more than 35 items were offered to mass market customers. Revenue from
the Amazing Live Sea- Monkeys -Registered Trademark- product line increased
by approximately 50% in volume in 1997 compared to 1996.
BACKLOG
The Company normally ships within two days of receiving an order and,
therefore, does not customarily have a significant backlog.
MANUFACTURING
Most of the Company's sales are generated from products supplied
complete by contract manufacturers. The remaining products are assembled or
completed from components provided by other vendors. In excess of 85% of the
Company's purchases of products and/or components are from vendors based in
Taiwan, China, Hong Kong, Thailand, Korea, Japan, Singapore, and Indonesia.
The balance are purchased from a variety of vendors located primarily in the
United States. The Company has approximately 70 international vendors. For
certain products the Company has alternate vendors in the event that any one
of its vendors is unable to meet its requirements. The terms of the Company's
arrangements with its contract manufacturers are negotiated individually as
to price and quantity and vary from purchase order to purchase order
depending on the size of the particular order, the speed in which the Company
requires the order to be completed, and other factors. Purchase order
quantities vary depending on the product type and the Company's anticipated
demand for such product. Payment terms generally consist of either letters of
credit, wire transfers or 30 to 60 day payment terms.
The Company receives most of its products in finished form at its
distribution facility in Columbia, Tennessee. At this facility products are
inspected, any necessary final assembly is completed and shipment is made to
customers.
Certain ExploraToy customers purchase products that are shipped directly
to them from the Company's Asian vendors.
(6)
<PAGE>
TRADEMARKS, COPYRIGHTS AND PATENTS
The Company relies primarily on a combination of patents, copyrights,
trademarks, trade secret laws, and employee and third-party nondisclosure
agreements to protect its proprietary rights. While the Company believes that
these protections are important, they are less significant to the Company's
success than factors such as breadth and quality of its products, the
knowledge, ability and experience of its personnel, its relationship with
distributors and specialty retail stores and its product development
procedures.
COMPETITION
The markets for the Company's products are both highly competitive and
highly fragmented. The Company competes for shelf and catalog space with a
number of suppliers of educational games and toys, some of which have greater
financial and marketing resources than the Company. The Company believes that
the principal competitive factors in the markets it serves are breadth and
quality of product offering, price, and market responsiveness. Although the
Company believes that it competes favorably on the basis of these factors,
there are competitors in each of the Company's major markets with significant
financial and marketing resources.
As the Company expands its ExploraToy mass market division it is
penetrating markets which are intensely competitive and where it will
continue to compete with larger, more experienced companies offering a
broader line of products. The Company intends to limit its risk in these
markets by concentrating a narrowly defined product group dealing with
science activity and related products where competition is typically less
severe. There can be no guarantees however, that this strategy will be
successful.
The Company has yielded to competitive pressure in the mass market
software and CD-ROM markets and, at the end of 1996, stopped the internal
development of products for this market. It will continue to seek product to
be purchased or licensed from others for sale and distribution through its
core customer base. The Company believes that it can compete favorably in
its traditional markets within the parameters of its revised strategy,
however, with changes occurring in the intensely competitive software market,
new competitors may broaden their product lines or increase their focus on
the Company's traditional markets resulting in greater competition for the
Company.
EMPLOYEES
As of December 31, 1997, the Company had approximately 190 full-time
employees. In addition, the Company periodically hires part-time employees to
meet seasonal market demands. Approximately 36 of the Company's full-time
employees are engaged in the Company's product development and creative
efforts, designing, writing, editing, drafting and developing the Company's
products. An additional 39 employees are involved in sales and marketing; 29
are involved in general administrative duties; and approximately 81 are
involved in warehousing and distribution activities. The Company believes
that its relationships with its employees are good. The employees of the
Company are not parties to any collective bargaining agreements.
Renewed growth will depend, in part, on the Company's ability to attract
and retain qualified personnel. The Company has not conducted any efforts to
determine the feasibility of expanding its staff, but in the past has
generally found qualified personnel available to satisfy its growth
requirements.
RISK FACTORS
The Company believes the following factors present risks to the
Company's business:
DEPENDENCE ON NEW PRODUCTS. The Company's ability to maintain and
expand its sales base depends in part on its continued successful development
of new products. Although the Company introduced over 100 new products in
1997, it was unsuccessful in completing one major new product, Big Talk,
which the Company considered important for its revenue growth in 1997. This
product experienced unacceptably high failure rates during its production run
in 1997 and has now been reassigned to a new manufacturer. It is unknown
whether or not this product will be ready for initial shipment during 1998.
In 1997, approximately 45% of the Company's revenues were derived from
products introduced in 1996 or 1997. While the Company makes substantial
investments in product development and is continually developing ideas for
new products, there is no assurance that it will be successful in these
efforts in the future. If new products or upgrades to existing products are
not introduced or accepted in the marketplace, the Company's operating
results could be materially adversely affected.
CONTINUED ACCEPTANCE OF EXISTING PRODUCTS. In 1997, approximately 18%
of the Company's sales were generated by GeoSafari and related products.
Approximately 20% of the Company's 1996 sales were generated by GeoSafari and
related products. If sales of the Company's leading products decline at a
rate greater than sales increases generated by the introduction of new
products, the Company's operating results could be materially adversely
affected.
(7)
<PAGE>
SEASONALITY AND FLUCTUATIONS IN QUARTERLY PERFORMANCE. A large portion
of the Company's business is highly seasonal, with operating results varying
substantially from quarter to quarter. Sales tend to be lowest in the first
and second quarters and highest in the third and fourth quarters of the
calendar year. The Company has typically experienced losses during the first
quarter and may experience such seasonal losses in the future. Products are
generally shipped as orders are received and accordingly the Company has
historically operated with little backlog. As a result, sales in any quarter
are dependent on orders booked and shipped in that quarter. If sales or
timing of orders fall below the Company's expectations, operating results
could be adversely affected for relevant quarters and for the year if
expenses based on these expectations have already been incurred. Further, due
to the seasonality of the business, cash flow tends to be negative during the
second and third quarters when inventory and accounts receivable have
historically increased in anticipation of the seasonally higher product sales
in the third and fourth quarters. Cash flow requirements during these
periods are funded by the revolving line of credit that the Company has with
a bank. See further discussion of said line of credit at "Liquidity and
Capital Resources" in Item 7. Should the Company not have a sufficient line
of credit available during the year, it could have a material adverse effect
on the Company's results of operations due to its limited ability to
internally finance the growth in inventory and accounts receivables necessary
to generate the seasonally high net income the Company typically experiences
in the third and fourth quarters. . See "Quarterly Information and
Seasonality" section in Item 7 for discussion of seasonality risks and
quantification of quarterly sales and net income amounts exemplified therein.
DEPENDENCE ON CONTRACT MANUFACTURERS. The Company conducts
substantially all of its manufacturing operations through contract
manufacturers, many of which are located in the People's Republic of China
(the "PRC"), Hong Kong, Singapore and Taiwan. The Company does not have
long-term contracts with any of its manufacturers. Foreign manufacturing is
subject to a number of risks, including but not limited to transportation
delays and interruptions, political and economic disruptions, the impositions
of tariffs and import and export controls and changes in governmental
policies. While the Company to date has not experienced any material adverse
effects due to such risks, there can be no assurance that such events will
not occur in the future and possibly result in increases in costs and delays
of, or interferences with, product deliveries resulting in losses of sales
and goodwill.
GOVERNMENTAL REGULATION. In the United States, the Company is subject
to the provisions of, among other laws, the Federal Consumer Product Safety
Act and the Federal Hazardous Substances Act (the "Acts"). The Acts empower
the Consumer Product Safety Commission (the "Consumer Commission") to protect
the public against unreasonable risks of injury associated with consumer
products, including toys and other articles. The Consumer Commission has the
authority to exclude from the market articles which are found to be hazardous
and can require a manufacturer to repair or repurchase such toys under
certain circumstances. Any such determination by the Consumer Commission is
subject to court review. Violations of the Acts may also result in civil and
criminal penalties. Similar laws exist in some states and cities in the
United States and in many jurisdictions throughout the world. The Company
maintains a quality control program (including the retention of independent
testing laboratories) to ensure compliance with applicable laws. The Company
believes it currently is in substantial compliance with these laws. In
general, the Company has not experienced difficulty complying with such
regulations, and compliance has not had an adverse effect on the Company's
business.
COMPETITION. The market for educational products is highly fragmented
and competitive. In the home and school markets, the Company competes for
shelf and catalog space with a number of suppliers of educational games and
toys, many of which have greater financial and marketing resources than the
Company. Existing competitors may continue to broaden their product lines and
potential competitors, including large toy manufacturers, entertainment
companies and publishers, may enter or increase their focus on the
supplemental educational products market, resulting in greater competition
for the Company. Expenditures in the market for educational products are
shifting towards a higher degree of reliance on software and computer-based
products. While the Company has changed its strategy to concentrate on the
sale of computer software and CD-ROM products purchased or licensed from
others thus capitalizing on its relative distribution strength in its key
markets, there is no assurance that changes in the broader software market
which are driving competitors from the consumer software market into the
educational software market will not produce such intense competition that
the Company will not be able to successfully complete its plans for software
products.
DEPENDENCE ON NEW DISTRIBUTION CHANNELS. There is no guarantee that the
Company will continue to be successful in its attempts to expand its
distribution into the mass merchant retail channels with its ExploraToy line
of science products.
ACCOUNTS RECEIVABLE RISKS. Certain of the Company's customers
participate in an accounts receivable dating program pursuant to which payments
for products are delayed for up to 120 days. Although no customer accounted for
more than 4% of the Company's sales in 1997, the insolvency or business failure
of any customer with a large account receivable could have a material adverse
affect on the Company.
DEPENDENCE ON KEY PERSONNEL. The Company's future success depends in
large part on the continued service of key technical, marketing, sales and
management personnel and on its ability to continue to attract, motivate and
retain highly qualified employees. The Company's key employees include Jay
Cutler, Reid Calcott, James Whitney, Dennis Graham, Kelly Cole and George
Atamian. The Company has no employment agreement with any of its employees, any
of whom may voluntarily terminate employment with the Company at any time.
Competition for such employees is intense and the process of locating key
technical and management personnel with the combination of skills and
attributes required to execute the Company's strategy is often lengthy.
Accordingly, the loss of the services of and the unavailability of replacements
for key personnel could have material adverse effect upon the Company's results
of operations and on research and development efforts. The Company does not
have key-person insurance covering its management personnel or other key
employees.
(8)
<PAGE>
INTERNATIONAL EXPANSION. In 1990, the Company established a
distribution subsidiary in the United Kingdom. Approximately 9.8% of the
Company's fiscal 1997 sales, including sales by the United Kingdom
subsidiary, were generated from sales to customers outside of North America.
The Company's success in Europe and elsewhere is dependent upon a number of
factors, including the Company's ability to successfully convert the textual
portions of its products into foreign languages and the Company's ability to
successfully develop a market for its products. The Company is also subject
to the attendant risks of doing business abroad, including delays in
shipments, adverse fluctuations in currency exchange rates, increases in
duties and tariffs, anges in foreign regulations, political turmoil and
deterioration in international economic conditions. There can be no assurance
that the Company will be able to successfully expand its international sales.
DEPENDENCE ON GOVERNMENT FUNDING. Approximately 48% of the Company's
North American sales comes directly or indirectly from the school market.
This market is, to a degree, dependent upon government support from one or
more sources. Future constraints on education funding by federal, state and
local governments could have a material adverse effect on the Company's
business.
CONCENTRATION OF STOCK OWNERSHIP. Members of the Cutler family and
certain family trusts controlled by them beneficially own approximately 70%
of the outstanding stock. As a result, such persons will have the ability to
control the Company and direct its affairs and business. Such concentration
of ownership may have the effect of delaying or preventing change in control
of the Company. In addition, the Company's bylaws include provisions that
eliminate cumulative voting in the event the Company's Common Stock is listed
for trading as a Nasdaq National Market security and the Company has at least
800 shareholders of record as of the record date of the Company's most recent
annual meeting of shareholders. Although cumulative voting has not been
eliminated with respect to any shareholder vote of the Company to date, these
provisions might have the effect of discouraging a third party from making a
tender offer or otherwise attempting to gain control of the Company.
POSSIBLE ADVERSE IMPACT OF ISSUANCE OF PREFERRED STOCK. The Board of
Directors of the Company has authority to issue up to 10,000,000 shares of
Preferred Stock and to fix the rights, preferences, privileges and
restrictions of those shares without any further vote or action by the
shareholders. The potential issuances of Preferred Stock may have the effect
of delaying, deferring or preventing a change in control of the Company, may
adversely affect the market price of, and the voting and other rights of, the
holders of Common Stock. The Company currently has no plans to issue shares
of Preferred Stock.
ITEM 2: PROPERTIES
In September 1995, the Company moved its headquarters to a
building, which it purchased in January of 1995, in Carson, California. This
facility comprises approximately 54,000 square feet, essentially all of which
is office space. The Company's product development, marketing, finance and
customer service personnel are located in this facility. Until September
1995, the Company was headquartered in Dominguez Hills, California where it
leased approximately 38,000 square feet from Diana P. and Burton Cutler, the
Company's Chairman.
The Company's Tennessee distribution facility comprises approximately
162,000 square feet and includes approximately 9,000 square feet of offices.
The Tennessee facility is owned by Karen M. Duncan Cutler and Jay Cutler, the
Company's President, and is leased by them to the Company. This facility was
expanded by 42,000 square feet in 1995. This expansion was financed and paid
for by Jay and Karen Cutler. Lease payments by the Company were adjusted to
reflect this expansion. The Company believes that there is adequate
warehousing space available for expansion near the Tennessee facility should
the need arise.
ITEM 3: LEGAL PROCEEDINGS
The Company is involved from time to time in litigation incidental to
its business. The Company is not currently involved in any pending litigation
matters which would have a material adverse effect on the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of securities holders during the
fourth quarter of the fiscal year ended December 31, 1997.
(9)
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
Company's executive officers, and key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Burton Cutler................... 71 Chairman of the Board
Jay A. Cutler................... 46 President, Chief Executive Officer
G. Reid Calcott................. 59 Vice Chairman, Chief Operating and
Financial Officer
James B. Whitney................ 46 Vice President, Marketing
Dennis J. Graham................ 42 Vice President, Business Development
Kelly A. Cole................... 46 Vice President, Warehousing and
Distribution
George C. Atamian............... 60 Vice President, General Manager,
ExploraToy
</TABLE>
Burton Cutler is one of the founders of the Company and has been
Chairman of the Board of Directors since the Company's inception in 1962. Mr.
Cutler also served as the Company's principal executive officer from its
formation until 1992. Since 1991, Mr. Cutler has been providing part-time
services to the Company and expects to continue that degree of effort into
the foreseeable future.
Jay A. Cutler has been employed by the Company since 1975, became a
director in 1982 and began serving as President of the Company in 1991. In
1992, he also became Chief Executive Officer. Prior to 1991, Mr. Cutler
served as the Company's Vice President, Production, and was responsible for
overseeing and controlling the development, introduction and production of
the Company's products. In 1997, Mr. Cutler announced his intention to resign
as President of the Company pendind the successful search for a suitable
replacement. Said search is expected to be completed by mid-1998. Jay A.
Cutler, the Company's President and Chief Executive Officer, is the son of
Burton and Diana P. Cutler.
G. Reid Calcott was appointed as Chief Operating Officer of the Company
in 1996. Prior to that Mr. Calcott had been appointed as Chief Financial
Officer in 1993 and was elected a director effective January 1, 1994. From
1988 until 1993, Mr. Calcott served as a general management consultant to the
Company. Mr. Calcott owns and monitors the business operations of California
Quality Plastics, Inc., a producer of plastic products, and provides
consulting services to and owns an interest in Robertson American of
Mississippi, Inc., a ceramic casting company. Although he devotes
substantially all of his time to serving as a director and the Chief
Operating Officer of the Company, he is an officer and director of each of
these two corporations.
James B. Whitney has been the Company's Vice President, Marketing since
1987 and served as the Company's Director of Marketing from 1985 until 1987.
He is responsible for marketing to all domestic and Canadian customers other
than mass merchant retailers. Prior to joining the Company in 1985, Mr.
Whitney was a classroom teacher and spent 14 years in sales and marketing of
products in the school market.
Dennis J. Graham has been an employee of the Company since 1984 and has
served as the Company's Vice President, Business Development from 1988. In
this capacity, he is responsible for all foreign sales and for the
development of certain major product development programs. Prior to 1988, Mr.
Graham served as the Company's Director of Product Development and as the
Company's advertising manager. Prior to joining the Company, Mr. Graham
served as advertising manager for Modern Curriculum Press, a publishing
division of Simon & Schuster.
Kelly A. Cole has been employed by the Company since 1986 and has served
as Vice President, Warehouse and Distribution since 1990. Prior to joining
the Company, Mr. Cole served in Operations and Material Management with Terry
Hinge, Inc., a manufacturer and importer of hardware.
George C. Atamian joined the Company in 1993 as General Manager of the
ExploraToy line which develops and markets products to mass merchant
retailers. Prior to April 1993, Mr. Atamian served as an independent
consultant to the Company. From 1989 to 1992, Mr. Atamian was an officer of
Super Science, Ltd., a science toy company. Prior to 1989, Mr. Atamian served
as Vice President of Educational Science Products for the Bushnell division
of Bausch and Lomb, a producer of optical products.
Each officer serves at the discretion of the Board of Directors.
(10)
<PAGE>
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Prior to the consummation of the initial public offering of the
Company's Common Stock in April of 1994, there was no established market for
the Company's Common Stock. Since April 15, 1994, the Common Stock has
traded on The Nasdaq Stock Market ("Nasdaq") under the symbol "EDIN".
The following table sets forth the high and low sales prices per share
for the Common Stock as reported by Nasdaq for fiscal years 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
March 31 $2 5/8 $1 3/4 $5 $3 1/4
June 30 2 1/4 1 3/8 4 1/8 3
September 30 2 3/8 1 9/16 3 3/8 1 7/8
December 31 2 5/8 1 3/4 3 1 1/2
</TABLE>
As of March 19, 1998, the approximate number of shareholders of record
of the Common Stock was 115.
The Company does not anticipate paying cash dividends in the foreseeable
future. Any future determination as to payments of dividends will be at the
discretion of the Company's Board of Directors and will depend on the
Company's results of operations, financial condition, contractual
restrictions and other factors deemed relevant by the Board of Directors.
(11)
<PAGE>
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales................................................ $38,442 $41,276 $39,790 $45,640 $42,053
Cost of sales........................................ 19,143 19,526 18,150 21,354 18,526
------- ------- ------- ------- -------
Gross profit......................................... 19,299 21,750 21,640 24,286 23,527
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.................................. 7,770 8,216 9,242 6,943 6,179
Warehousing and distribution......................... 3,327 3,321 3,994 3,929 4,646
Research and development............................. 4,328 5,289 5,166 4,422 3,705
General and administrative........................... 3,640 3,809 3,830 3,719 3,823
------- ------- ------- ------- -------
Total operating expenses......................... 19,065 20,635 22,232 19,013 18,353
------- ------- ------- ------- -------
Operating income (loss).............................. 234 1,115 (592) 5,273 5,174
Interest expense, net................................ 207 281 21 104 374
Other income, net.................................... 135 479 346 208 301
------- ------- ------- ------- -------
Income (loss) before provision (benefit) for
income taxes........................................ 162 1,313 (267) 5,377 5,101
Provision (benefit) for income taxes................. 97 484 (95) 881 196
------- ------- ------- ------- -------
Net income (loss).................................... $65 $829 $(172) $4,496 $4,905
------- ------- ------- ------- -------
------- ------- ------- ------- -------
NET INCOME DATA (PRO FORMA FOR YEARS PRIOR TO 1995):
Net income (loss) (1)............................... $65 $829 $(172) $3,280 $3,050
Net income (loss) per share- basic and
diluted (1), (3).................................. $0.01 $0.12 $(0.02) $0.49 $0.51
Weighted average shares outstanding -
basic (2), (3)..................................... 7,040 7,040 7,040 6,725 5,950
Weighted average shares outstanding -
diluted (2), (3)................................... 7,082 7,042 7,040 6,748 6,002
BALANCE SHEET DATA (AT PERIOD END):
Working capital..................................... $19,143 $18,674 $17,982 $19,432 $8,168
Total assets........................................ 30,130 30,904 28,254 28,282 22,136
Total debt.......................................... 1,685 2,295 1,394 0 7,000
Shareholders' equity................................ 23,519 23,464 22,584 22,828 10,659
</TABLE>
- ----------------
(1) The Company was taxed as an S Corporation for federal and state income
tax purposes from June 1, 1986 to April 15, 1994. For years prior to 1995,
pro forma net income and pro forma net income per share reflect the pro forma
effect of income taxes as if the Company had been taxed as a C Corporation.
Upon the Company's Initial Public Offering, the Company became subject to
federal and state income taxes.
(2) Assumes as outstanding, during the 1993 period, 1,000,000 shares which
represent the approximate number of shares deemed to have been sold by the
Company to fund the $10 million S Corporation distribution to persons who
were shareholders of the Company prior to the Company's initial public
offering in April of 1994.
(3) The earnings per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE. For further discussion of earnings per share and the
impact of Statement No. 128, see the notes to the consolidated financial
statements.
(12)
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was founded in 1962 to develop and market supplemental
educational materials to assist in the teaching of reading. Initially, the
Company's product development and marketing efforts were concentrated on
products for use primarily within the school environment. As sales of the
Company's products for use at home increased, products were packaged for the
home market and sales to this market began to grow rapidly through specialty
retail stores. Sales peaked at $45,640,000 in 1994 by which time the Company
had achieved distribution in most of the nation's specialty retail stores.
Sales decreased to $38,442,000 in 1997 as sales of the Company's leading
GeoSafari product line had matured and subsequently declined and the Company
was unsuccessful in launching enough new products to offset this decline.
The Company experienced an unusually high level of difficulty in bringing new
products to market in 1997. Four products which, on a combined basis, were
expected to add significantly to the Company's revenue, were introduced late
or with technical difficulties which, though correctable, significantly
diminished their contribution to 1997 revenue.
In 1990, the Company formed Educational Insights Limited, a United
Kingdom company, to market and distribute the Company's products throughout
the United Kingdom and other foreign countries. Sales of Educational
Insights Limited were $3.0 million, $2.8 million and $2.7 million and income
before taxes for the subsidiary was $60,000, $250,000 and $28,000 for the
years ended December 31, 1997, 1996 and 1995 respectively. Income before
taxes in 1997 includes foreign exchange losses of $45,000 while income before
taxes in 1996 included foreign exchange rate gains of $193,000. Foreign
exchange gains/losses are reported in Other Income, net in the Company's
consolidated financial statements.
In 1993, the Company established its ExploraToy Division to develop and
market science activity products to the mass market. In 1997, this
Division's revenue increased approximately 37% above 1996.
The Company's cost of sales includes amounts paid to its vendors for
products and components purchased, the cost of freight and duty to land such
goods at the Company's distribution facility in Columbia, Tennessee, plus the
cost of assembly labor for certain of the Company's products. Research and
development expenses include costs associated with the identification and
validation of the educational content of the Company's products and the
incorporation of new technology as well as expenses relating to engineering
and quality assurance. All product development costs have been expensed as
incurred.
RESULTS OF OPERATIONS:
The following table sets forth certain data as a percentage of sales:
<TABLE>
<CAPTION>
PERCENTAGE OF SALES PERCENTAGE INCREASE
YEARS ENDED DECEMBER 31, (DECREASE)
--------------------------------------- ----------------------------
1997 1996
OVER OVER
1997 1996 1995 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales................................................. 100.0% 100.0% 100.0% (6.9%) 3.7%
Cost of sales......................................... 49.8 47.3 45.6 (2.0) 7.6
Gross profit...................................... 50.2 52.7 54.4 (11.3) .5
Operating expenses:
Sales and marketing.................................. 20.2 19.9 23.2 (5.4) (11.1)
Warehousing and distribution......................... 8.7 8.1 10.1 0.2 (16.9)
Research and development............................. 11.2 12.8 13.0 (18.2) 2.4
General and administrative........................... 9.5 9.2 9.6 (4.4) (.6)
Total operating expenses............................. 49.6 50.0 55.9 (7.8) (7.2)
Operating income (loss)............................... 0.6 2.7 (1.5) (79.0) 288.3
Interest expense, net................................. 0.6 0.7 0.1 (26.3) 1238.1
Other income, net..................................... 0.4 1.2 0.9 (71.8) 38.4
Income (loss) before provision (benefit)for
income taxes......................................... 0.4 3.2 (0.7) (87.7) 591.8
</TABLE>
1997 COMPARED TO 1996
SALES. Sales decreased by 6.9% or $2.8 million to $38.4 million in
1997 from $41.3 million in 1996. Sales in the school market remained
essentially unchanged, sales in the specialty retail market decreased 18.3%
while sales in the ExploraToy Division increased 36.9%. Sales in the
Company's mass market software division which was closed at the end of 1996
were not significant; however, the Company continued to sell software in its
traditional markets.
The Company continued to experience a decline in the sale of its leading
product line, GeoSafari, in 1997. GeoSafari sales declined to $6.5 million
from $8.3 million in 1996. In addition, one of the Company's larger
customers in 1996, PetsMart, discontinued the sale of products in the
category which included Educational Insights products thereby producing a
one-time decline in the Company's specialty market business of approximately
$700,000. Moreover, the Company's development and introduction of new
products specifically aimed to offset this decline were not executed as
planned. The company experienced manufacturing difficulties with several
products and although these difficulties were relatively short-term in
nature, the products did not contribute to 1997 revenue as expected. In
addition, one product, the Big Talk electronic vocabulary builder, was
delayed indefinitely due to technical difficulties.
(13)
<PAGE>
Although the Company's new product introductions did not meet
expectations, new products introduced in 1997 did produce revenue of
approximately $4.8 million. Most notable among the new product successes were
the ExploraToy Division's GeoSafari World and the Company's COINstruction,
Galactic Explorer and Poppums product lines sold into its traditional markets.
GROSS PROFIT. The Company's gross profit declined $2.5 million to $19.3
million in 1997 compared to $21.8 million in 1996. When expressed as a
percentage of sales, gross margins decreased to 50.2% in 1997 from 52.7% in
1996. This decrease was primarily the result of a proportional increase in
sales made in the Company's ExploraToy line and other products with
lower-than-average gross margins, and the provision of certain items of
inventory considered excess or obsolete.
SALES AND MARKETING EXPENSE. Sales and marketing expense decreased by
5.4% or $0.4 million to $7.8 million in 1997 from $8.2 million in 1996.
Sales and marketing expense increased to 20.2% of sales in 1997 from 19.9% of
sales in 1996 because the decrease in sales and marketing expense, when
expressed as a percentage, was less than the decrease in revenue. The
decrease in actual spending was primarily due to the elimination of marketing
expenses associated with the Company's mass market software division which
was discontinued at the end of 1996.
WAREHOUSING AND DISTRIBUTION EXPENSE. Warehousing and distribution
expense remained essentially unchanged at $3.3 million in both 1997 and 1996.
Expressed as a percentage of sales, warehousing and distribution expense
increased to 8.7% compared to 8.1% in 1996. The Company expects warehousing
and distribution costs to remain near the current levels in the foreseeable
future.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development decreased
18.2% or $1.0 million to $4.3 million in 1997 compared to $5.3 million in
1996. Research and development expense as a percentage of sales decreased to
11.2% in 1997 from 12.8% in 1996. The decrease in 1997 was due primarily to
the discontinuation of development of CD-ROM products.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
remained relatively unchanged at $3.6 million in 1997 compared to $3.8
million in 1996. Although general and administrative expense actually
declined by $200,000 in 1997, when expressed as a percentage of sales general
and administrative expense increased to 9.5% of sales from 9.2% of sales in
1996 because sales declined proportionally more than general and
administrative expense.
INTEREST EXPENSE, NET. Net interest expense decreased by $26,000 to
$207,000 in 1997 from $233,000 in 1996. This decrease was due primarily to a
decrease in average borrowings on the Company's revolving line of credit used
to finance inventory and accounts receivable.
OTHER INCOME, NET. Net other income is primarily comprised of royalty
income received by the Company from licenses of certain of its products and
exchange rate gains/losses from its international operations. Net other
income decreased by 68.7% or $296,000 to $135,000 in 1997 from $431,000 in
1996. This decrease was principally due to foreign exchange rate losses
totaling $45,000 in 1997 as compared to foreign exchange rate gains of
$193,000 in 1996 experienced by the Company's subsidiary in the UK due to the
relative weakness of the Pound Sterling in 1997 as compared to 1996.
1996 COMPARED TO 1995
SALES. Sales increased by 3.7% or $1.5 million to $41.3 million in 1996
from $39.8 million in 1995. Sales in the school market declined 10.8%, sales
in the specialty retail market increased 8.1% while sales in the ExploraToy,
private label, software and international markets, excluding Canada increased
32.1%. The largest increase was in the ExploraToy market, which increased
49.8%.
The Company continued to experience a decline in the sale of its leading
product line, GeoSafari in 1996; however, the Company's development efforts
were successful in producing new products to off-set the decline in older
product and produce an overall increase of 3.7% in revenue. However, the
decline in school market revenue, which was primarily due to continuing
gradual decline in older product, was not off-set by new product
introductions aimed primarily at the school market.
Most notable among the new product successes were the Company's GeoSafari
Talking Globe and its Reading Safari. In addition, the SeaMonkey product
line, which was licensed in 1995, produced over $1 million in revenue. The
SeaMonkey product line is sold in both the Company's ExploraToy division and
in its school supply and specialty retail divisions.
GROSS PROFIT. The Company's gross profit remained essentially unchanged
at $21.8 million in 1996 compared to $21.6 million in 1995. When expressed
as a percentage of sales, gross margins decreased to 52.7% in 1996 from 54.4%
in 1995. This decrease was primarily the result of a proportional increase
in sales made of the Company's ExploraToy line and other products with
lower-than-average gross margins, and discounting during the first half of
the year associated with the sale of certain discontinued products.
SALES AND MARKETING EXPENSE. Sales and marketing expense decreased by
11.1% or $1.0 million to $8.2 million in 1996 from $9.2 million in 1995.
Sales and marketing expense decreased to 19.9% of sales in 1996 from 23.2% of
sales in 1995. This decrease was primarily due to decreases in literature
costs, promotional expense, trade-show expense, the Company's direct market
mailing costs in its traditional markets and a decrease in the cost of
software marketing expense associated with the change in the Company's
strategy in this market segment. These decreases were off-set in part by an
increase in marketing costs in the ExploraToy division associated primarily
with the increase in sales volume in this division. The Company expects to
achieve further decreases in sales and marketing expense when expressed as a
percentage of sales in 1997.
(14)
<PAGE>
WAREHOUSING AND DISTRIBUTION EXPENSE. Warehousing and distribution
expense decreased by 16.9% or $0.7 million to $3.3 million in 1996 from $4.0
million in 1995. Expressed as a percentage of sales, warehousing and
distribution expense decreased to 8.1% compared to 10.1% in 1995. The
primary reason for the decrease expressed a percentage of sales was the
Company's ability to adjust warehousing and distribution costs downward in
proportion to the decrease in volume which occurred in 1995. The Company
expects warehousing and distribution costs, as a percentage of sales, to
remain near the current levels.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
remained relatively unchanged at $5.3 million in 1996 compared to $5.2
million in 1995. Likewise, research and development expense as a percentage
of sales remained relatively unchanged at 12.8% in 1996 compared to 13.0% in
1995.
Software development expense continued at an annual rate of approximately
$1 million through 1996, but is expected to decrease significantly in 1997 as
the Company shifts its emphasis from internal development of new product to
the licensing and sale of product developed by others.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
remained unchanged at $3.8 million in both 1996 and 1995. General and
administrative expense decreased to 9.2% of sales in 1996 from 9.6% of sales
in 1995 as sales volume increased while expenses remained constant.
INTEREST EXPENSE, NET. Net interest expense increased by $212,000 to
$233,000 in 1996 from $21,000 in 1995. This increase was due primarily to
interest paid on the Company's long term loan associated with the purchase of
its new office facility which was occupied in August, 1995 and an increase in
borrowings on the Company's revolving line of credit to finance increases in
inventory associated with the purchase of new product in 1996.
OTHER INCOME, NET. Net other income is primarily comprised of royalty
income received by the Company from licenses of certain of its products and
exchange rate gains/losses from its international activities. Net other
income increased by 38.4% or $133,000 to $479,000 in 1996 from $346,000 in
1995. This increase was primarily a result of abnormally high foreign
exchange rate gains from the Company's subsidiary in the UK due to the
relative strength of the Pound Sterling during the fourth quarter of 1996.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Except for the historical information contained herein, the matters
discussed in this Report are forward-looking statements which involve risks
and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices, and other risk factors discussed
herein and in the Company's filings with Securities and Exchange Commission.
QUARTERLY INFORMATION AND SEASONALITY
The Company's business is highly seasonal. Typically, sales and operating
income are highest during the third and fourth quarters and are 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 has typically experienced
losses during the first quarter in the past and may experience such seasonal
losses in the future, including the first quarter of 1998.
The following table sets forth unaudited statement of operations data for
each of the Company's last eight quarters. This unaudited quarterly
financial information was prepared on the same basis as the annual
information presented elsewhere in this Report and, in management's opinion,
reflects all the adjustments (of normal recurring entries) necessary for a
fair presentation of the information presented. The earnings per share
amounts prior to 1997 have been restated as required to comply with Statement
of Financial Accounting Standards No. 128, EARNINGS PER SHARE. For further
discussion of earnings per share and the impact of Statement No. 128, see the
notes to the consolidated financial statements. The operating results for any
quarter are not necessarily indicative of results for any future period. Net
income per share computations for each quarter are independent of the
year-end computations. Accordingly, the sum of said net income per share
amounts for the four quarters of 1997or 1996 which are based on average
shares outstanding during each quarter, may not equal net income per share
for the year which is based on average shares outstanding during the year.
(15)
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales $6,347 $8,473 $10,900 $12,722
Gross profit 3,291 4,343 5,477 6,188
Operating expenses:
Sales and marketing 1,523 1,668 2,147 2,432
Warehousing and distribution 908 928 834 657
Research and development 1,136 1,050 975 1,167
General and administrative 942 926 812 960
Operating income (loss) (1,218) (229) 709 972
Income (loss) before provision (benefit) for
income taxes (1,206) (147) 563 952
Net income (loss) (746) (83) 347 547
Net income (loss) per share - basic and diluted $(0.11) $(0.01) $0.05 $0.08
<CAPTION>
QUARTER ENDED
-------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales $7,666 $8,653 $11,751 $13,206
Gross profit 4,298 4,475 6,139 6,838
Operating expenses:
Sales and marketing 2,022 1,745 2,189 2,260
Warehousing and distribution 882 929 751 759
Research and development 1,406 1,525 1,205 1,153
General and administrative 1,005 939 971 894
Operating income (loss) (1,017) (663) 1,023 1,772
Income (loss) before provision (benefit) for
income taxes (949) (622) 973 1,911
Net income (loss) (584) (372) 593 1,192
Net income (loss) per share - basic and diluted $(0.08) $(0.05) $0.08 $0.17
</TABLE>
Quarterly sales and operating results are also affected by the timing of new
product introductions, the product mix, the timing of orders placed by the
Company's distributors and dealers, and the timing of marketing expenditures.
The Company's quarterly gross profit margins have fluctuated as a result of
such factors as customer and product mix. Products are generally shipped as
orders are received and accordingly the Company has historically operated
with little backlog. As a result, sales in any quarter are dependent on
orders booked and shipped in that quarter. A significant portion of the
Company's operating expenses are relatively fixed and are budgeted based
primarily on the Company's annual sales forecast.
LIQUIDITY AND 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 pattern. The Company increases inventory levels during the
spring and summer months in anticipation of increasing shipments in the late
summer and fall. Accounts receivable typically increase 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.
Net cash provided by operating activities increased $0.4 million to $0.6
million in 1997 compared to $0.2 million in 1996. This increase was
primarily due to a combination two factors. First, inventory levels only
increased by $0.1 million in 1997 versus increasing by $1.5 million in 1996
(due primarily to a lower growth rate of ExploraToy inventory in 1997).
Second, income taxes receivable of $0.7 million was received in 1996,
however, income taxes of $0.4 million were paid in 1997. Additionally, cash
was provided in 1997 by the reduction of Other Assets by $0.3 million from
$0.9 million in 1996 to $0.6 million in 1997. This reduction was primarily
the result of the collection of the long-term receivable established pursuant
to the affiliated label sales program for the Company's CD-ROM products.
This program was terminated in 1997 resulting in the Company receiving full
payment of said receivable earlier than originally anticipated. In 1996, net
cash provided by operating activities was $0.2 million compared to cash used
in operating activities of $1.2 million in 1995. This decrease in the use of
cash by operations was primarily due to the Company achieving net income of
$0.8 million in 1996 compared to a net loss of $0.2 million in 1995. A $1.8
million increase in inventory in 1996 was largely off-set by the decrease in
income taxes receivable of $1.2 million.
Financing activities used $0.6 million of cash in 1997 compared to cash
provided of $0.9 million in 1996. This was principally due to the $0.5
million decrease in the line of credit outstanding at December 31, 1997
compared to the increase in the line of credit experienced in 1996 necessary
to fund the inventory growth during 1996. Financing activities provided cash
of $0.9 million in 1996 compared to $1.0 million in 1995. Financing
activities consisted primarily of borrowings under the Company's revolving
line of credit in order to fund higher levels of inventory primarily related
to the growing ExploraToy product line.
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 pre-tax income amounts and tangible
net worth amounts, and provides for various restrictions including
limitations on capital expenditures and additional indebtedness. The Company
had outstanding borrowings of $0.5 million and $1 million under its line of
credit at December 31, 1997 and 1996, respectively. At December 31, 1995,
the Company had no outstanding borrowings against its line of credit. The
Company's capital expenditures were $0.8 million in 1997, $0.5 million in
1996, and $3.9 million in 1995. The Company anticipates that 1998 capital
expenditures will be less than $1 million with these expenditures primarily
in the areas of new product tooling. The Company believes that borrowings
available under the revolving line of credit and anticipated funds from
(16)
<PAGE>
operations will satisfy the Company's projected working capital and capital
expenditure requirements for at least the next 12 months.
The Company has an outstanding commitment in conjunction with the lease of
its Tennessee warehouse facility. In 1992, a shareholder of the Company
entered into a loan agreement with the Industrial Development Board of Maury
County, Tennessee, for Industrial Development Revenue Bonds Series 1992, in
the amount of $1,000,000 at 8% interest per annum, to construct a building
being leased to the Company. The Company has guaranteed the loan with the
Industrial Development Board of Maury County, Tennessee. Should the
shareholder default on said loan the Company would be required to make the
applicable loan payments but would offset such payments against the lease
payments due to said shareholder.
YEAR 2000 COMPLIANCE
As is the case with most other companies using computers in their
operations, the Company is in the process of addressing the year 2000
problem. The Company is currently engaged in a comprehensive project to
modify and/or upgrade its management information, manufacturing and
facilities computer software so that these programs will consistently and
properly recognize the Year 2000.
The Company will use primarily external resources to reprogram or
replace and test all of its software for Year 2000 compliance. The Company
expects to complete the project by the end of 1998. The total cost to the
Company of these Year 2000 compliance activities have not been and is not
anticipated to be material to its results of operations in any given year.
Management has determined that due to the nature of the Company's
business, any failure by the Company's vendors to complete Year 2000
compliance activities in a timely manner would not likely have a material
adverse affect on the Company's financial results.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information, other than quarterly information, required by this item
is incorporated herein by reference to the consolidated financial statements
and supplementary data listed in Item 14 of Part IV of this report.
ITEM 9: CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
(17)
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors is
incorporated herein by reference to the information contained under the
caption "Nomination and Election of Directors" in the Proxy Statement
relating to the Annual Meeting of Shareholders to be held on June 26, 1998,
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the year ended December 31, 1997. Information
with respect to executive officers is included in Part I of this report. The
information required by this Item with respect to compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated herein by
reference to the information contained under the caption "Compliance with
Section 16(a) of the Securities exchange Act of 1934" in the Proxy Statement
relating to the Annual Meeting of Shareholders to be held on June 26, 1998,
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the year ended December 31, 1997.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the information contained under the caption "Executive Compensation and
Other Information" in the Proxy Statement relating to the Annual Meeting of
Shareholders to be held on June 26, 1998, which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of
the year ended December 31, 1997.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the information contained under the captions "Voting Securities and
Principal Shareholders" and "Stock Ownership of Management" in the Proxy
Statement relating to the Annual Meeting of Shareholders to be held on June
26, 1998, which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the year ended December 31, 1997.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the information contained under the caption "Certain Transactions" in the
Proxy Statement relating to the Annual Meeting of Shareholders to be held on
June 26, 1998, which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the year ended December
31, 1997.
(18)
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 - K
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
(a)(1) Financial Statements:
Report of Deloitte & Touche LLP, Independent Auditors F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1997 F-4
Consolidated Statements of Shareholders' Equity for each of the
three years in the period ended December 31, 1997 F-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1997 F-6
Notes to Consolidated Financial Statements F-8
(a)(2) Financial Statement Schedule *
Independent Auditors' Report 21
Schedule II - Valuation and Qualifying Accounts 22
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
quarter ended December 31, 1997.
(c) Index to Exhibits 23
</TABLE>
* All other schedules and notes specified under Regulation S-X are omitted
because they are either not applicable,not required or the information called
for therein appears in the consolidated financial statements or notes thereto.
(19)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Educational Insights, Inc. has duly caused this annual
report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, on March 24, 1998.
EDUCATIONAL INSIGHTS, INC.
(Registrant)
By: /s/ Jay Cutler
-----------------------------
Jay Cutler, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Educational Insights, Inc. and in the capacities indicated on March 24, 1998.
Signature Title
--------- -----
/s/ Burton Cutler Chairman of the Board
- -----------------------------
Burton Cutler
/s/ Jay Cutler President and Chief Executive Officer
- -----------------------------
Jay Cutler
/s/ G. Reid Calcott Vice Chairman and Chief Operating and
- ----------------------------- Financial Officer (Principal Financial
G. Reid Calcott Officer)
/s/ Stephen E. Billis Controller and Secretary
- ----------------------------- (Principal Accounting Officer)
Stephen E. Billis
/s/ Gerald Bronstein Director
- -----------------------------
Gerald Bronstein
(20)
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Educational Insights, Inc.:
We have audited the accompanying consolidated balance sheets of
Educational Insights, Inc. (the "Company") and subsidiary as of
December 31, 1997 and 1996 and the related consolidated statements
of operations, shareholders' equity, and cash flows for each of
the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Educational Insights, Inc. and subsidiary as of December 31, 1997
and 1996 and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 4, 1998
F-1
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 235,000 $ 1,018,000
Accounts receivable, net of allowance for doubtful
accounts of $412,000 in 1997 and $373,000 in 1996 10,478,000 9,779,000
Inventory 12,086,000 12,139,000
Prepaid expenses and other assets 593,000 663,000
Other receivables 193,000 170,000
Deferred income taxes 750,000 808,000
----------- -----------
Total current assets 24,335,000 24,577,000
----------- -----------
PROPERTY AND EQUIPMENT, Net 5,218,000 5,446,000
----------- -----------
OTHER ASSETS:
Deposits 23,000 23,000
Other 554,000 858,000
----------- -----------
Total other assets 577,000 881,000
----------- -----------
TOTAL $30,130,000 $30,904,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
F-2
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1997 1996
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 121,000 $ 110,000
Line of credit 500,000 1,000,000
Accounts payable 3,045,000 2,512,000
Accrued expenses 1,391,000 1,584,000
Income taxes payable 34,000 440,000
Deferred income 101,000 257,000
----------- -----------
Total current liabilities 5,192,000 5,903,000
----------- -----------
LONG-TERM DEBT 1,064,000 1,185,000
----------- -----------
DEFERRED INCOME TAXES 355,000 352,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
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 18,644,000 18,644,000
Cumulative translation adjustment 130,000 140,000
Retained earnings 4,745,000 4,680,000
------------ -----------
Total shareholders' equity 23,519,000 23,464,000
------------ -----------
TOTAL $30,130,000 $30,904,000
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
(Concluded)
F-3
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
SALES $38,442,000 $41,276,000 $39,790,000
COST OF SALES 19,143,000 19,526,000 18,150,000
----------- ----------- -----------
GROSS PROFIT 19,299,000 21,750,000 21,640,000
----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing 7,770,000 8,216,000 9,242,000
Warehousing and distribution 3,327,000 3,321,000 3,994,000
Research and development 4,328,000 5,289,000 5,166,000
General and administrative 3,640,000 3,809,000 3,830,000
----------- ----------- -----------
Total operating expenses 19,065,000 20,635,000 22,232,000
----------- ----------- -----------
OPERATING INCOME (LOSS) 234,000 1,115,000 (592,000)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (273,000) (304,000) (159,000)
Interest income 66,000 71,000 138,000
Other income, net 135,000 431,000 346,000
----------- ----------- -----------
Total other income (expense) (72,000) 198,000 325,000
----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 162,000 1,313,000 (267,000)
PROVISION (BENEFIT) FOR INCOME TAXES 97,000 484,000 (95,000)
----------- ----------- -----------
NET INCOME (LOSS) $ 65,000 $ 829,000 $ (172,000)
----------- ----------- -----------
----------- ----------- -----------
NET INCOME (LOSS) PER SHARE - Basic and Diluted $ 0.01 $ 0.12 $ (0.02)
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 7,040,000 7,040,000 7,040,000
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED 7,082,000 7,042,000 7,040,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
CUMULATIVE
COMMON TRANSLATION RETAINED
STOCK ADJUSTMENT EARNINGS TOTAL
----------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $18,644,000 $ 65,000 $ 4,119,000 $22,828,000
Translation adjustment 24,000 24,000
Distributions to shareholders (96,000) (96,000)
Net loss (172,000) (172,000)
----------- -------- ----------- ------------
BALANCE, DECEMBER 31, 1995 18,644,000 89,000 3,851,000 22,584,000
Translation adjustment 51,000 51,000
Net Income 829,000 829,000
----------- -------- ----------- ------------
BALANCE, DECEMBER 31, 1996 18,644,000 140,000 4,680,000 23,464,000
Translation adjustment (10,000) (10,000)
Net income 65,000 65,000
----------- -------- ----------- ------------
BALANCE, DECEMBER 31, 1997 $18,644,000 $130,000 $4,745,000 $23,519,000
----------- -------- ----------- ------------
----------- -------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 65,000 $ 829,000 $ (172,000)
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts and sales returns 110,000 133,000 191,000
Provision for inventory obsolescence 24,000 (240,000) (129,000)
Deferred income taxes 61,000 (31,000) 330,000
Depreciation and amortization 1,018,000 903,000 794,000
Changes in operating assets and liabilities:
Accounts receivable (860,000) (317,000) 1,469,000
Inventory (78,000) (1,493,000) (2,256,000)
Prepaid expenses and other current assets 70,000 (224,000) (147,000)
Other receivables (30,000) (139,000) (6,000)
Other assets 286,000 (506,000) 484,000
Accounts payable 712,000 (202,000) 569,000
Accrued expenses (193,000) 87,000 (868,000)
Deferred income (156,000) 257,000
Income taxes payable / receivable (403,000) 1,157,000 (1,474,000)
----------- ----------- -----------
Net cash provided by (used in) operating activities 626,000 214,000 (1,215,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (790,000) (505,000) (3,930,000)
----------- ----------- -----------
Net cash used in investing activities (790,000) (505,000) (3,930,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayment of) line of credit (500,000) 1,000,000
Proceeds from long-term debt 1,480,000
Repayment of long-term debt (110,000) (99,000) (86,000)
Cash distributions to shareholders (353,000)
----------- ----------- -----------
Net cash (used in) provided by financing activities (610,000) 901,000 1,041,000
----------- ----------- -----------
Effect of exchange rate changes on cash (9,000) 30,000 (2,000)
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
F-6
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH $ (783,000) $ 640,000 $(4,106,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 1,018,000 378,000 4,484,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 235,000 $ 1,018,000 $ 378,000
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ 281,000 $ 288,000 $ 218,000
Income taxes $ 349,000 $ 1,049,000
Cash received during the year from income taxes $ 672,000
Non Cash Investing Activities:
Disposal of leasehold improvements with
no book value $ 266,000
</TABLE>
See accompanying notes to consolidated financial statements.
(Concluded)
F-7
<PAGE>
EDUCATIONAL INSIGHTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - Educational Insights, Inc. (the "Company") designs, develops
and markets educational materials intended for use in both homes and
schools. The Company sells its products to school districts, independent
toy dealers, and mass merchandisers principally located throughout the
United States and Canada.
CONSOLIDATION POLICY - The consolidated financial statements include the
accounts of Educational Insights, Inc. and its wholly owned subsidiary.
All significant inter-company transactions and balances have been
eliminated in consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
for the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS - The Company's policy is to maintain its
uninvested cash at minimum levels. All highly liquid instruments
purchased with a maturity of three months or less are classified as cash
equivalents.
ACCOUNTS RECEIVABLE - Accounts receivable are principally from school
supply distributors, specialty retail stores, toy superstores, and
individuals. Certain of the Company's customers participate in an
account receivable dating program where payment is delayed for up to 120
days. The Company performs ongoing credit evaluations of its customers
and maintains reserves which estimate the potential for doubtful
accounts and future product returns. Allowance for sales returns
approximated $200,000 and $75,000 at December 31, 1997 and 1996,
respectively. Such reserves have been included in the allowance for
doubtful accounts.
INVENTORY - Inventory consists principally of finished goods held for
sale and is stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost
and include interest on funds borrowed to finance construction of
building and improvements in 1995. Capitalized interest was $82,000 in
1995. Depreciation and amortization is computed on the straight-line
method over the following estimated useful lives:
<TABLE>
<S> <C>
Building and improvements 39 years
Furniture, fixtures and equipment 5 years
Molds, tools and dies 3 years
Leasehold improvements 5 years
</TABLE>
REVENUE RECOGNITION - The Company recognizes revenue from product sales at
the time of shipment. The Company also has license and royalty
agreements with international manufacturers to license certain products.
The agreements typically provide for continuing royalties based on unit
sales by the licensee. Royalties are recognized when reported by the
licensee. Royalties received in advance are deferred until shipments are
reported by licensees. License fees and royalty revenues earned during
1997, 1996 and 1995, which are included in other income in the
accompanying consolidated statements of income, were $293,000, $267,000,
and $346,000, respectively.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs related to
the designing, developing and testing of new educational products are
charged to expense as incurred.
INCOME TAXES - Deferred tax assets and liabilities are recognized based
on differences between the financial statement and tax bases of assets
and liabilities using presently enacted rates.
OTHER INCOME, NET - Other income is presented in the accompanying
consolidated statements of income net of other expenses of $110,000,
$169,000 and $175,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
F-8
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist primarily of cash and cash equivalents, accounts receivable and
payable, and a debt instrument. The book values of all financial
instruments, other than the debt instrument, are representative of their
fair values due to short-term maturity. The book value of the Company's
debt instrument is not materially different from its fair value because
the interest rate of this instrument approximates the current rates
offered to the Company.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company evaluates long-lived assets
for impairment whenever events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable. If the estimated
future cash flows (undiscounted and without interest charges) from the
use of an asset are less than the carrying value, a write-down would be
recorded to reduce the related asset to its estimated fair value.
CONCENTRATIONS OF CREDIT RISK - Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily
of cash equivalents, short-term investments and trade receivables. The
Company places its cash equivalents with high credit quality
institutions. While no one customer accounted for more than 5% of sales
in any year presented, the Company's aforementioned accounts receivable
dating program has resulted in a limited number of customers whose
accounts receivable balances have comprised up to 8% of the total
accounts receivable balance at certain times of the year.
FOREIGN CURRENCY TRANSLATION - Assets and liabilities of the Company's
foreign subsidiary are translated into U.S. dollars at the exchange rate
prevailing at the balance sheet date, and income and expense accounts at
the average rate in effect during the year. The aggregate effect of
translating the financial statements of the foreign subsidiary is
included in a separate component of shareholders' equity. Foreign
exchange losses for the year ended December 31, 1997 were $96,000 of
which $45,000 were recorded by the Company's foreign subsidiary. Foreign
exchange gains for the year ended December 31, 1996 were $208,000 of
which $193,000 were recorded by the Company's foreign subsidiary. Said
gains were abnormally high due to the significant strength experienced
by the Pound Sterling during the fourth quarter of 1996. Foreign
exchange gains (losses) were not material in the year ended December 31,
1995.
NET INCOME PER SHARE - In 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share exclude any dilutive effects of stock
options. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share
amounts for all periods presented have been restated, where appropriate,
to conform to the SFAS No. 128 requirements.
STOCK OPTION PLAN - In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation," which was effective for the
Company beginning January 1, 1996. SFAS No. 123 requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based
on the fair value of the equity instrument awarded. Under SFAS No. 123,
the fair value of stock-based awards to employees is calculated through
the use of option pricing models, even though such models were developed
to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from
the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time
to exercise, which greatly affect the calculated values. Companies are
permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company has elected to continue to apply APB
Opinion No. 25 in accounting for its stock-based compensation
arrangements. Had the Company elected to measure compensation cost based
on the fair value of stock options awarded in 1997, 1996 and 1995, the
net income and net income per share - basic and diluted would have been
$1,000 and $0.0, respectively, for the year ended December 31, 1997, the
net income and net income per share - basic and diluted would have been
$655,000 and $0.09, respectively, for the year ended December 31, 1996
and net loss and net loss per share - basic and diluted would have been
$295,000 and $0.04, respectively, for the year ended December 31, 1995.
Vested and non-vested stock options repriced during 1997 were assumed to
be valued using the Black-Scholes model using a remaining expected life
of 2 years and 4 years, respectively, a risk-free interest rate of 6.15%
and 6.32%, respectively, expected volatility of 78% and expected
dividends of zero. Stock options issued during 1996 and 1995 were assumed
to be valued using the Black-Scholes model using a risk-free interest
rate of 6.2% and 5.4%, respectively, expected life of 60 months, expected
volatility of 68% and 69%, respectively, and expected dividends of zero.
However, because options vest over several years and grants prior to
1995 are excluded from these calculations, these amounts may not be
representative of the impact on future years earnings, assuming grants
are made in those years.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1996
amounts to conform with the current year's presentation.
F-9
<PAGE>
2. PROPERTY AND EQUIPMENT
The following are the components of property and equipment:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 676,000 $ 676,000
Building and improvements 2,066,000 2,047,000
Machinery and equipment 905,000 899,000
Office furniture and fixtures 2,491,000 2,086,000
Vehicles 22,000 22,000
Molds, tools and dies 3,430,000 3,126,000
Leasehold improvements 236,000 233,000
---------- -----------
Total 9,826,000 9,089,000
Less accumulated depreciation and amortization 4,608,000 3,643,000
---------- -----------
Property and equipment - net $5,218,000 $5,446,000
---------- -----------
---------- -----------
</TABLE>
3. LINE OF CREDIT
The Company has a revolving line of credit agreement with a bank that is
collateralized by substantially all of the Company's assets. Under the
credit facility, the Company may borrow up to $8,000,000. Advances bear
interest at the Bank's reference rate (8.50% at December 31, 1997) or
1.65 % above the London Interbank Offer Rate (at the Company's option).
The line of credit agreement expires June 8, 1998. The agreement
requires the maintenance of certain financial ratios, annual pre-tax
income amounts and tangible net worth amounts, and provides for various
restrictions, including limitations on capital expenditures and
additional indebtedness.
Outstanding letters of credit, primarily related to imports from
off-shore manufacturers, amounted to $195,000 at December 31, 1997.
4. LONG-TERM DEBT
Long-term debt represents a note payable bearing interest at 10%
which matures in 2005, payable in equal monthly installments and
collateralized by land and building. Scheduled principal payments of
long-term debt are $121,000 in 1998, $134,000 in 1999, $148,000 in 2000,
$165,000 in 2001, $182,000 in 2002 and $435,000 thereafter.
F-10
<PAGE>
5. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Federal
Current $ (3,000) $469,000 $(425,000)
Deferred 74,000 (27,000) 342,000
-------- -------- ---------
71,000 442,000 (83,000)
-------- -------- ---------
State
Current 8,000 46,000
Deferred (3,000) (4,000) (12,000)
-------- -------- ---------
5,000 42,000 (12,000)
-------- -------- ---------
Foreign
Current 21,000
Deferred 0
--------
21,000
--------
$97,000 $484,000 $ (95,000)
-------- -------- ---------
-------- -------- ---------
</TABLE>
Deferred taxes arise from the recognition of certain items of revenue
and expense for tax purposes in years different from those in which they
are recognized in the financial statements. The major components of
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Inventory allowances $244,000 $ 254,000
Inventory capitalization 172,000 118,000
Accounts receivable allowance 174,000 159,000
State taxes 55,000 58,000
Vacation accrual 90,000 84,000
Other accrued liabilities 16,000 101,000
Prepaid expenses (74,000) (66,000)
Foreign tax credit 33,000 0
Deferred revenue 40,000 100,000
-------- ---------
Deferred tax assets $750,000 $ 808,000
-------- ---------
-------- ---------
Deferred tax liability - depreciation $355,000 $(352,000)
-------- ---------
-------- ---------
</TABLE>
F-11
<PAGE>
A reconciliation of income tax expense (benefit) to the federal
statutory rate follows;
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1996 1995
<S> <C> <C> <C>
Federal income tax at the statutory rate $74,000 $446,000 $(91,000)
State taxes, net of federal benefit 2,000 33,000 (8,000)
Foreign taxes and other 21,000 5,000 4,000
------- -------- --------
$97,000 $484,000 $(95,000)
------- -------- --------
------- -------- --------
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company's warehouse facility is leased from a significant shareholder
for a term expiring April 2002. In addition to the base rent, the
Company is responsible for property taxes, insurance and maintenance of
the buildings. Until September 1995, the Company leased its principal
office facility from the majority shareholder. Rent expense for the
years ended December 31, 1997, 1996 and 1995 was $317,000, $320,000 and
$462,000, respectively, of which $304,000, $304,000 and $428,000,
respectively, resulted from leases with related parties.
Future minimum cash lease payments under non-cancelable operating leases
as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1998 $ 304,000
1999 276,000
2000 262,000
2001 262,000
2002 91,000
----------
$1,195,000
----------
</TABLE>
In 1992, a shareholder of the Company entered into a loan agreement
with the Industrial Development Board of Maury County, Tennessee, for
Industrial Development Revenue Bonds Series 1992, in the amount of
$1,000,000 at 8% interest per annum, to construct a building being
leased to the Company. The Company has guaranteed the loan with the
Industrial Development Board of Maury County, Tennessee.
A family member of a shareholder receives royalties from the
Company based on sales of electronic products that were developed with
the family member's assistance. Under the terms of the royalty
agreement, as amended, the family member was guaranteed to receive
royalties of $150,000 for the year ended December 31, 1995 (see Note
10). Thereafter, the family member is to receive royalties equal to 1%
of net sales of certain products up to a maximum of $150,000 per year.
The agreement expires on December 31, 2010. Royalty expense under this
agreement for the years ended December 31, 1997, 1996 and 1995 was
$71,000, $88,000 and $150,000, respectively. In addition, this family
member provides certain consulting services relating to the Company's
new product development activities. Compensation expense for said
services amounted to $50,000 in each of the years ended December 31,
1997 and 1996. There was no such compensation for the year ended
December 31, 1995.
During 1996, the Company's subsidiary entered into a loan agreement
with a company that is owned by the general manager of said subsidiary.
The loan is collateralized by accounts receivable and bears interest at
the rate of 8%. The outstanding balance at December 31, 1997 and 1996 of
$309,000 and $277,000, respectively is included in other assets in
the accompanying consolidated balance sheet.
7. PROFIT SHARING PLANS
The Company has a noncontributory profit sharing plan covering
substantially all of its employees who are eligible to participate after
one year of service. There was no contribution expense in 1997 or 1995.
Contribution expense for the year ended December 31, 1996, was $50,000.
The 1996 amount is included in accrued expenses in the accompanying
consolidated balance sheet. Participants vest in the Company's
contributions over a period of six years.
F-12
<PAGE>
The Company has a salary savings and profit sharing plan which is available
to all employees (the "Plan"). The Plan provides that all employees become
eligible to participate after one year of service. Participants may elect
to contribute up to 15% of their salary to the Plan. The Company is
required to make a matching contribution equal to a minimum of 25% of
each employee's contribution up to 4% of each employee's salary. The
Company's contributions to this Plan for the years ended December 31, 1997,
1996, and 1995 were $42,000, $44,000, $40,000, respectively. All
participants vest 100% in Company contributions each December 31.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Numerator for basic earnings (loss) per share--
income available to common stockholders:
Net income (loss) $ 65,000 $ 829,000 $ (172,000)
---------- ---------- ----------
Denominator for basic earnings per share--
weighted-average shares outstanding: 7,040,000 7,040,000 7,040,000
Effect of dilutive securities:
Stock options 42,000 2,000 0
---------- ---------- ----------
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 7,082,000 7,042,000 7,040,000
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share $ 0.01 $ 0.12 $(0.02)
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per share $ 0.01 $ 0.12 $(0.02)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
9. EMPLOYEE STOCK AWARDS PLAN
The Company has reserved 600,000 shares of common stock for issuance
pursuant to an employee Stock Awards Plan (the "Plan"). Under the Plan,
the exercise price of each option equals the market price of the
Company's stock on the date of grant. The options are exerciseable in
annual one-third increments beginning two years from the date of grant,
and expire ten years from the date of grant. On June 6, 1997 all
outstanding options granted prior to that date were repriced to an
excise price of $1.75 per share which equaled the market price on said
date. On December 22, 1995 all outstanding options granted prior to that
date were repriced to an exercise price of $3.31 per share which equaled
the market price on said date.
A summary of the status of the Company's Stock Awards Plan as of
December 31, 1997, 1996 and 1995 and changes during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 276,910 $2.98 253,680 $3.31 248,620 $6.88
Granted 63,500 1.87 12,500 3.31
Canceled 276,910 2.98 40,270 3.31 248,620 6.88
Repriced 276,910 1.75 241,180 3.31
------- ----- ------- ----- ------- -----
Outstanding at December 31 276,910 1.75 276,910 2.98 253,680 3.31
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
Options exerciseable at year-end 193,910 122,773 60,060
Weighted average fair value
of options granted during
the year $0.95 $1.16 $2.04
</TABLE>
F-13
<PAGE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exerciseable
-------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exerciseable Exercise
Exercise Prices at 12/31/97 Life Price at 12/31/97 Price
--------------- ----------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
1.75 276,910 6.9 1.75 193,160 1.75
</TABLE>
10. ROYALTY LICENSE AGREEMENTS
Under the terms of various license agreements, the Company is obligated
to pay the licensors royalties equal to specified percentages of the
sales of the Company's products subject to the license agreements.
Certain license agreements require the Company to pay an advance against
future royalties which would be due based on a units sold basis. Such
advances have been included in other assets in the accompanying
consolidated balance sheets and amounted to approximately $160,000 at
December 31, 1997 and $350,000 at December 31, 1996.
*********
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Educational Insights, Inc.:
We have audited the consolidated financial statements of Educational
Insights, Inc. as of December 31, 1997 and 1996, and for each of the three
years in the period ended December 31, 1997, and have issued our report
thereon dated March 4, 1998; such report is included elsewhere in this Annual
Report on Form 10-K. Our audits also included the financial statement
schedule listed in Item 14. The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 4, 1998
(21)
<PAGE>
SCHEDULE II
EDUCATIONAL INSIGHTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
THREE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS DEDUCTIONS BALANCES
BEGINNING OF CHARGED TO FROM AT END OF
YEAR OPERATIONS RESERVES YEAR
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowances for doubtful accounts year ended:
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . 274,000 191,000 146,000 319,000
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . 319,000 133,000 154,000 298,000
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . 298,000 86,000 212,000
Reserve for sales returns year ended:
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . 100,000 -- 25,000 75,000
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . 75,000 -- -- 75,000
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . 75,000 125,000 -- 200,000
Reserve for inventory obsolescence year ended:
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . 1,004,000 -- 129,000 875,000
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . 875,000 -- 240,000 635,000
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . 635,000 282,000 306,000 611,000
</TABLE>
(22)
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
<S> <C> <C>
3.1 Restated Articles of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
4 Specimen Stock Certificate of the Company (1)
10.1* Stock Awards Plan and form of stock option agreement (1)
10.2 Lease, dated March 25, 1985, between the Company and Burton and Diana
P. Cutler for the facility in Dominguez Hills, California (1)
10.3 Real Estate Lease, dated April 27, 1992, between the Company and Jay
A. and Karen D. Cutler for the facility in Columbia, Tennessee (1)
10.4 Loan and Security Agreement, dated August 31, 1993, between the
Company and Union Bank (1)
10.5 Merchandising License Agreement, dated August 24, 1993, between the
Company and ELP Communications Merchandising (1)
10.6 Royalty Agreement, dated May 12, 1993, between the Company and
Stanley Cutler (1)
10.7 Form of Indemnification Agreement (1)
10.8 Promissory Note, dated April 27, 1992, by Jay A. Cutler in favor of
the Company (1)
10.9 Agreement of Unconditional Guaranty, dated April 27, 1992, between
the Company and The Industrial Development Board of Maury County,
Tennessee (1)
10.10 Form of Employee Non-Disclosure Agreement (1)
10.11 Form of Tax Allocation and Indemnification Agreement (1)
10.12 Development and Distribution Agreement, dated July 9, 1992, between
the Company and the National Geographic Society (1)
10.13 License Agreement, dated January 31, 1991, between the Company and
the Smithsonian Institution (1)
10.14 Amended and Restated Loan and Security Agreement, dated September 29,
1994 between the Company and Union Bank (2)
10.15 First Amendment to Amended and Restated Loan and Security Agreement,
dated December 15, 1994 between the Company and Union Bank for
financing the purchase of Carson, California facility (2)
10.16 Second Amendment to Amended and Restated Loan and Security Agreement,
dated August 29, 1994 to delete accounts receivable borrowing base
limitation
10.17 Amended and Restated Loan Agreement dated May 27, 1997 between the
Company and Union Bank of California (3)
10.18 First Amendment to Amended and Restated Loan Agreement dated December
29, 1997 between the Company and Union Bank of California to provide
security interest in all inventory and to reduce minimum
profitability requirement.
16 Letter Re Change in Certifying Accountant (1)
27 Subsidiaries of the Company (1)
</TABLE>
* Management contract or compensating plan or arrangement
(1) Incorporated by reference to the exhibits to the Registration statement
on Form S-1 (Registration No. 33-75672) filed on February 25, 1994, as
amended by Amendment No. 1 filed on April 8, 1994, and Amendment No. 2
filed on April 15, 1994.
(2) Incorporated by reference to the exhibits to Form 10-K for the fiscal
year ended December 31, 1994.
(3) Incorporated by reference to the exhibit to Form 10-Q for the quarterly
period ended June 30, 1997.
(23)
<PAGE>
FIRST AMENDMENT TO THE AMENDED AND RESTATED LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT (this "First Amendment") dated as of
December 29, 1997, is made and entered into by and between EDUCATIONAL
INSIGHTS, INC., a California Corporation ("Borrower"), and UNION BANK OF
CALIFORNIA, N.A. ("Bank").
RECITALS:
A. Borrower and Bank are parties to that certain Loan Agreement dated May 27,
1997, (the "Agreement"), pursuant to which Bank agreed to extend credit to
Borrower.
A. Borrower and Bank desire to amend the Agreement subject to the terms and
conditions of this First Amendment.
AGREEMENT:
In consideration of the above recitals and of the mutual covenants and
conditions contained herein, Borrower and Bank agree as follows:
1. DEFINED TERMS. Initially capitalized terms used herein which are not
otherwise defined shall have the meanings assigned thereto in the
Agreement.
2. AMENDMENTS TO THE AGREEMENT.
(a) Section 4.8 shall be deleted in its entirety and a new section 4.8
shall be added as follows:
4.8 PROFITABILITY Borrower will maintain its pre-tax profit, before
provision for income taxes, at not less than four hundred thousand dollars
($400,000) for any fiscal year.
3. EFFECTIVENESS OF THE FIRST AMENDMENT. This First Amendment shall become
effective as of the date hereof when, and only when, Bank shall have
received all of the following, in form and substance satisfactory to Bank:
(a) The counterpart of this First Amendment, duly executed by Borrower;
(b) The Security Agreement and UCC-1, duly executed by Borrower;
(c) Such other documents, instruments or agreements as Bank may reasonably
deem necessary.
4. RATIFICATION. Except as specifically amended hereinabove, the Agreement
shall remain in full force and effect and is hereby ratified and confirmed.
5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as
follows:
(a) Each of the representations and warranties contained in the Agreement,
as may be amended hereby, is hereby reaffirmed as of the date hereof,
each as if set forth herein;
(b) The execution, delivery and performance of the First Amendment and any
other instruments or documents in connection herewith are within
Borrower's power, have been duly authorized, are legal, valid and
binding obligations of Borrower, and are not in conflict with the
terms of any charter, bylaw or other organization papers of Borrower
or
<PAGE>
with any law, indenture, agreement or undertaking to which Borrower
is a party or by which Borrower is bound or affected.
(c) No event has occurred and is continuing or would result from this
First Amendment which constitutes or would constitute an Event of
Default under the Agreement.
6. GOVERNING LAW. This First Amendment and all other instruments or documents
in connection herewith shall be governed by and construed according to the
laws of the State of California.
7. COUNTERPARTS. This First Amendment may be executed in two or more
counterparts, which shall be deemed an original and all of which together
shall constitute one and the same instrument.
WITNESS the due execution hereof as of the date first above written.
EDUCATIONAL INSIGHTS, INC. UNION BANK OF CALIFORNIA, N.A.
By: /s/ Stephen E. Billis By: /s/ Ronald L. Watterworth
---------------------------- --------------------------
Title: Controller and Secretary Title: Vice Pres.
-------------------------- ------------------------
By: By: /s/ Cheryl L. Gage
---------------------------- --------------------------
Title: Title: Vice President
-------------------------- ------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 235
<SECURITIES> 0
<RECEIVABLES> 10,890
<ALLOWANCES> 412
<INVENTORY> 12,086
<CURRENT-ASSETS> 24,335
<PP&E> 9,826
<DEPRECIATION> 4,608
<TOTAL-ASSETS> 30,130
<CURRENT-LIABILITIES> 5,192
<BONDS> 1,064
0
0
<COMMON> 18,644
<OTHER-SE> 4,875
<TOTAL-LIABILITY-AND-EQUITY> 30,130
<SALES> 38,442
<TOTAL-REVENUES> 38,442
<CGS> 19,143
<TOTAL-COSTS> 19,143
<OTHER-EXPENSES> 19,065
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 273
<INCOME-PRETAX> 162
<INCOME-TAX> 97
<INCOME-CONTINUING> 65
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
