UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31,1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from __________ to __________
Commission File Number: 0-23606
EDUCATIONAL INSIGHTS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2392545
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16941 KEEGAN AVENUE
CARSON, CA 90746
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 884-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to b filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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As of May 6, 1998 there were 7,040,000 shares of common stock outstanding.
Total number of sequential pages: 19 Exhibit Index is on page 10
Page 1 of 19 sequentially numbered pages
PART I. ITEM 1. FINANCIAL STATEMENTS
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited, except for December 31, 1997 balance sheet information)
ASSETS
March 31, December 31,
1998 1997
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CURRENT ASSETS:
Cash and cash equivalents $ 295 $ 235
Accounts receivable, less allowance for doubtful
accounts of $375 in 1998 and $412 in 1997 6,338 10,478
Inventory 13,374 12,086
Income taxes receivable 495
Other receivables 191 193
Prepaid expenses and other current assets 991 593
Deferred income taxes 750 750
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Total current assets 22,434 24,335
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PROPERTY AND EQUIPMENT, Net 5,331 5,218
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OTHER ASSETS 659 577
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TOTAL $28,424 $ 30,130
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 121 $ 121
Line of credit 500
Accounts payable 2,741 3,045
Accrued expenses 1,318 1,391
Income taxes payable 14 34
Deferred Income 99 101
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Total current liabilities 4,293 5,192
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LONG-TERM DEBT 1,034 1,064
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DEFERRED INCOME TAXES 355 355
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SHAREHOLDERS' EQUITY
Preferred stock, no par value; 10,000,000 shares authorized;
no shares issued
Common stock, no par value; 30,000,000 shares authorized;
7,040,000 shares issued in 1998 and 1997 18,644 18,644
Accumulated other comprehensive income - foreign currency
translation adjustments 136 130
Retained earnings 3,962 4,745
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Total shareholders' equity 22,742 23,519
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TOTAL $28,424 $ 30,130
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See accompanying notes to consolidated financial statements.
Page 2 of 19 sequentially numbered pages
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
---------------------
1998 1997
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SALES $5,922 $6,347
COST OF SALES 2,942 3,056
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GROSS PROFIT 2,980 3,291
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OPERATING EXPENSES:
Sales and marketing 1,438 1,523
Warehousing and distribution 851 908
Research and development 1,112 1,136
General and administrative 904 942
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Total operating expenses 4,305 4,509
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OPERATING LOSS (1,325) (1,218)
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OTHER INCOME (EXPENSE):
Interest expense (36) (36)
Interest income 6 16
Other income, net 80 32
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Total other income (expense) 50 12
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LOSS BEFORE BENEFIT
FOR INCOME TAXES (1,275) (1,206)
BENEFIT FOR INCOME TAXES (492) (460)
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NET LOSS (783) (746)
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OTHER COMPREHENSIVE INCOME -
Foreign currency translation adjustments
(Net of tax of $4 in 1998 and $(8) in 1997) 6 (13)
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COMPREHENSIVE INCOME $ (777) $ (759)
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Net Income (Loss) Per Share - Basic and Diluted $(0.11) $(0.11)
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Weighted Average Number of
Common and Common Equivalent
Shares Outstanding - Basic and Diluted 7,040 7,040
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See accompanying notes to consolidated financial statements.
Page 3 of 19 sequentially numbered pages
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
March 31,
---------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (783) $ (746)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts and sales returns (37) 30
Depreciation 214 255
Changes in operating assets and liabilities:
Accounts receivable 4,185 3,743
Inventory (1,272) (665)
Income taxes receivable (495) (429)
Other receivables 3 (71)
Prepaid expenses and other current assets (398) (287)
Other assets (79) (31)
Accounts payable (328) 815
Accrued expenses (74) (350)
Deferred Income (2) (73)
Income Taxes Payable (20) (437)
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Net cash provided by operating activities 914 1,754
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (327) (332)
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Net cash used in investing activities (327) (332)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in line of credit (500) (1,000)
Repayments of long-term debt (30) (27)
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Net cash used in financing activities (530) (1,027)
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Effect of exchange rate changes on cash 3 (9)
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NET DECREASE IN CASH 60 386
CASH, BEGINNING OF PERIOD 235 1,018
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CASH, END OF PERIOD $ 295 $1,404
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SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $46 $54
Income taxes paid $16 $409
See accompanying notes to consolidated financial statements.
Page 4 of 19 sequentially numbered pages
EDUCATIONAL INSIGHTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of Educational Insights, Inc. (the
"Company") include all of the accounts of the Company and its wholly owned
subsidiary. All significant inter-company balances and transactions have
been eliminated in consolidation.
The interim consolidated financial statements are not audited, but include
all adjustments (including normal recurring adjustments) which are, in the
opinion of management, necessary for a fair representation of the financial
position, results of operations and cash flows for the period.
The consolidated financial statements as presented herein should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto as filed with the Securities and Exchange Commission and
included in the Company's Form 10-K for the year ended December 31, 1997.
The Company's fiscal year ends December 31. The results of operations for
the period ended March 31, 1998, are not indicative of the results that might
be expected for the full fiscal year.
2. INVENTORY
Inventory consists principally of finished goods held for sale and are stated
at the lower of cost or market. Cost is determined using the first-in,
first-out method.
3. NEW ACCOUNTING STANDARDS
In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income, which is effective for period beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income by their nature in the financial statements. In addition, the
accumulated balance of other comprehensive income must be displayed
separately from retained earnings and additional paid-in capital in the
equity section of the statement of financial position. Reclassification of
financial statements for earlier periods, provided for comparative purposes,
is required.
Page 5 of 19 sequentially numbered pages
PART I. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and accompanying notes, included
in Part I -Item 1 of this Quarterly Report, and the audited consolidated
financial statements and accompanying notes and Management's Discussion and
Analysis of Financial Condition and Results of operations for the year ended
December 31, 1997 included in the Company's Annual Report on Form 10-K.
Consolidated sales were $5,922,000 for the first quarter ended March 31,
1998, a decrease of 6.7% or $425,000 compared to the same period in 1997.
Net loss was $783,000 or $0.11 per share compared with a net loss of $746,000
or $0.11 per share for the same period in 1997. The Company's business is
highly seasonal. Typically, sales and operating income are highest during
the third and fourth quarters and lowest during the first and second
quarters, This seasonal pattern is primarily due to the increased demand for
the Company's products during the "Back-to-school" and year-end holiday
selling seasons. The Company typically experiences losses during the first
quarter. The loss in the first quarter of 1998 was in line with the
Company's internal projections.
SALES
Sales decreased by 6.7% or $425,000 to $5,922,000 in the quarter ended
March 31, 1998 from $6,347,000 in the quarter ended March 31, 1997. The
decrease occurred primarily in the Company's specialty toy business where
there were decreases in purchases by seven of the Company's larger customers.
The Company believes these decreases were the result of delays in the
placing of orders by these larger customers and the fact that the Company
made no major product introductions that significantly impacted the first
quarter of 1998 while in 1997 its GeoSafari Talking Globe, which was
introduced in late 1996, was continuing to produce carryover sales in the
first quarter of 1997. Overall, sales in the Company's other businesses
remained essentially unchanged with sales in the Company's school supply,
mass market and private label business increasing slightly while sales in the
International and direct businesses declined slightly.
GROSS PROFIT
Gross profit margin as a percentage of sales decreased to 50.3% for the
quarter ended March 31, 1998 from 51.9% for the same period in 1997. This
decrease resulted primarily from a continuing increase in the in the
proportion of ExploraToy sales which are at margins lower than those
experienced in the Company's core markets and the result of a one-time
adjustment that resulted in relatively higher costs of goods sold in 1998
compared to 1997 in the Company's ExploraToy division. The Company does not
anticipate a significant change in gross profit margin from that experienced
in the first quarter of 1998.
SALES AND MARKETING EXPENSE
Sales and marketing expense decreased $85,000 to $1,438,000 from
$1,523,000 for the same period in 1997. When expressed as a percentage of
sales, sales and marketing expense increased slightly to 24.3% from 24.0% as
a result of the decrease in sales volume. Because of the seasonal nature of
the Company's business, sales and marketing expense when expressed as a
percentage of sales are normally higher during the first two quarters of the
year than they are in the last two quarters of the year. The Company expects
sales and marketing expense when expressed as a percentage of sales to
decrease in the latter half of the year.
WAREHOUSING AND DISTRIBUTION EXPENSE
Warehousing and distribution expense decreased $57,000 to $851,000 from
$908,000 for the same period in 1997. Warehousing and distribution expense
remained essentially unchanged as a percentage of sales at 14.4%. The
Company believes that warehousing and distribution expense expressed as a
percentage of sales will decrease in conjunction with the seasonal increase
in sales during the last half of 1998.
RESEARCH AND DEVELOPMENT EXPENSE
In absolute dollars, research and development expense remained
essentially unchanged at $1,112,000 for the quarter ended March 31, 1998
compared to $1,136,000 for the same period in 1997. When expressed as a
percentage of sales, research and development expense increased to 18.8% from
17.9% as a result of the decrease in sales volume.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense remained essentially unchanged at
$904,000 for the quarter ended March 31, 1998 compared to $942,000 for the
same period in 1997. When expressed as a percentage of sales, general and
administrative expense increased to 15.3% from 14.8% as a result of the
decrease in sales volume.
INTEREST EXPENSE
Interest expense remained unchanged at $36,000 for the first quarter of
1998.
Page 6 of 19 sequentially numbered pages
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, this Report
contains forward-looking statements which involve a number of risks and
uncertainties, including but not limited to continued successful development
and acceptance of new products, dependence on education funding by Federal,
State and local governments, dependence on key development and marketing
personnel, general economic conditions and the risk factors listed from
time-to-time in the Company's filings with the Securities and Exchange
Commission.
LIQUIDITY & CAPITAL RESOURCES
In recent years, the Company's working capital needs have been met
through funds generated from operations and from the Company's revolving line
of credit. The Company's principal need for working capital has been to meet
peak inventory and accounts receivable requirements associated with its
seasonal sales patterns. The Company increases inventory levels during the
spring and summer months in anticipation of increasing shipments in the
summer and fall. Accounts receivable have historically increased during the
summer and fall because of the Company's use of "dating" programs wherein
sales are made to the Company's customers for which payment is deferred for
one to three months based on the size of the sales orders. Due to these
sales patterns, the largest customer orders are shipped during the summer and
fall, hence increasing accounts receivable balances during the third and
fourth quarters.
During the quarter ended March 31,1998, the Company's source of funds
was net cash provided by operating activities, primarily from the collection
of outstanding accounts receivable.
The principal uses of cash during the period ended March 31, 1998 were
the funding of operating losses (net of depreciation) of $569,000, an
increase in inventory of $1,272,000, an increase in prepaid expenses of
$398,000 and an increase in taxes receivable of $495,000 and repayment of
outstanding borrowings under the Company's revolving line of credit of
$500,000. Capital spending of $327,000 during the quarter was primarily for
tooling relating to new products and for the purchase of a show exhibit booth.
The Company currently has a revolving line of credit with a bank which
is collateralized by substantially all of the Company's assets. Under the
revolving line of credit agreement, which expires June 8, 1998, the Company
may borrow up to $8 million. The agreement requires the maintenance of
certain financial ratios, minimum annual net income amounts and tangible net
worth amounts, and provides for various restrictions including limitations on
capital expenditures and additional indebtedness. At March 31, 1998, the
Company had no outstanding borrowings against this line of credit.
The Company believes that borrowings available under the revolving line
of credit, if and when renewed, and anticipated funds from operations will
satisfy the Company's projected working capital and capital expenditure
requirements for at least the next 12 months.
Page 7 of 19 sequentially numbered pages
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Directors Stock Option Plan No. 1, and form of Stock Option Agreement
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the period in
question.
Page 8 of 19 sequentially numbered pages
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDUCATIONAL INSIGHTS, INC.
(Registrant)
Date: May 6, 1998 By: /s/ Jay Cutler
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Jay Cutler
President and Chief Executive Officer
Date: May 6, 1998 By: /s/ G. Reid Calcott
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G. Reid Calcott
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
Page 9 of 19 sequentially numbered pages
INDEX TO EXHIBITS
Exhibit Sequentially
Number Description Numbered Page
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10.19 Directors Stock Option Plan No. 1 and form of Stock Option Agreement 11
Page 10 of 19 sequentially numbered pages