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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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
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EDUCATIONAL INSIGHTS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2392545
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16941 KEEGAN AVENUE
CARSON, CA 90746
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 884-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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As of August 5, 1998 there were 7,040,000 shares of common stock outstanding.
Total number of sequential pages: 10
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There are no Exhibits, hence no Index page.
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Page 1 of 10 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
June 30, December 31,
1998 1997
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CURRENT ASSETS:
Cash and cash equivalents $ 24 $ 235
Accounts receivable, less allowance for doubtful
accounts of $443 in 1997 and $375 in 1996 8,140 10,478
Inventory 15,968 12,086
Income taxes receivable 677
Other receivables 134 193
Prepaid expenses and other current assets 925 593
Deferred income taxes 750 750
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Total current assets 26,618 24,335
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PROPERTY AND EQUIPMENT, Net 5,212 5,218
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OTHER ASSETS 1,167 577
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TOTAL $32,997 $30,130
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 121 $ 121
Line of credit 3,500 500
Accounts payable 4,191 3,045
Accrued expenses 1,350 1,391
Income taxes payable 34
Deferred Income 20 101
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Total current liabilities 9,182 5,192
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LONG-TERM DEBT 1,004 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
Cumulative translation adjustment 134 130
Retained earnings 3,678 4,745
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Total shareholders' equity 22,456 23,519
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TOTAL $32,997 $30,130
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See accompanying notes to consolidated financial statements.
Page 2 of 10 sequentially numbered pages
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
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1998 1997 1998 1997
------ ------ ------- -------
SALES $8,875 $8,473 $14,797 $14,820
COST OF SALES 4,557 4,130 7,499 7,186
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GROSS PROFIT 4,318 4,343 7,298 7,634
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OPERATING EXPENSES:
Sales and marketing 1,819 1,668 3,257 3,191
Warehousing and distribution 798 928 1,649 1,836
Research and development 1,138 1,050 2,250 2,186
General and administrative 941 926 1,845 1,868
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Total operating expenses 4,696 4,572 9,001 9,081
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OPERATING LOSS (378) (229) (1,703) (1,447)
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OTHER INCOME (EXPENSE):
Interest expense (73) (51) (109) (87)
Interest income 7 21 13 37
Other income, net (19) 112 61 144
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Total other income (expense) (85) 82 (35) 94
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LOSS BEFORE BENEFIT FOR INCOME TAXES (463) (147) (1,738) (1,353)
BENEFIT FOR INCOME TAXES (179) (64) (671) (524)
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NET LOSS (284) (83) (1,067) (829)
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OTHER COMPREHENSIVE INCOME -
Foreign currency translation
adjustments (Net of tax of $(1)
and $0, $2 and $(6) for the three
and six month periods ended
June 30, 1998 and 1997,
respectively.) (2) 1 4 (12)
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COMPREHENSIVE INCOME $ (286) $ (82) $(1,063) $ (841)
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Net Loss Per Share - Basic and Diluted $(0.04) $(0.01) $ (0.15) $ (0.12)
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Weighted Average Number of
Common and Common Equivalent
Shares Outstanding - Basic and Diluted 7,040 7,040 7,040 7,040
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See accompanying notes to consolidated financial statements.
Page 3 of 10 sequentially numbered pages
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
June 30,
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,067) $ (829)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts and sales returns 112 59
Provision for inventory obsolescence (241)
Depreciation 531 519
Changes in operating assets and liabilities:
Accounts receivable 2,234 1,850
Inventory (3,628) (1,328)
Income taxes receivable (690) (493)
Other receivables 60 (99)
Prepaid expenses and other current assets (331) (313)
Other assets (587) 106
Accounts payable 1,125 623
Accrued expenses (41) (286)
Income taxes payable (21) (437)
Deferred Income (82) (82)
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Net cash used in operating activities (2,626) (710)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (526) (505)
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Net cash used in investing activities (526) (505)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase / decrease in line of credit 3,000 700
Repayments of long-term debt (59) (54)
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Net cash provided by financing activities 2,941 646
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Effect of exchange rate changes on cash (8)
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NET DECREASE IN CASH (211) (577)
CASH, BEGINNING OF PERIOD 235 1,018
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CASH, END OF PERIOD $ 24 $ 441
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SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $98 $96
Income taxes paid $43 $409
See accompanying notes to consolidated financial statements.
Page 4 of 10 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 June 30, 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 periods 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 10 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.
The Company's business is highly seasonal. Typically, sales and
operating income are highest during the third and fourth quarters and lowest
during the first and second quarters. This seasonal pattern is primarily due
to the increased demand for the Company's products during the
"back-to-school" and year end holiday selling seasons.
SALES.
Sales increased by 4.7% or $402,000 to $8,875,000 in the quarter ended
June 30, 1998, from $8,473,000 in the quarter ended June 30, 1997. Sales
increased in the mass market and private label sectors of the Company's
business. This increase was partially offset by sales decreases in the
independent toy and school supply businesses.
Sales remained essentially unchanged at $14,797,000 for the six month
period ended June 30, 1998 compared to $14,820,000 for the six months ended
June 30, 1997.
GROSS PROFIT.
Gross profit margin as a percentage of sales decreased 2.6% to 48.7% for
the quarter ended June 30, 1998 compared to 51.3% for the same period in
1997.
Gross profit margin decreased to 49.3% for the six month period ended
June 30, 1998 from 51.5% for the six month period ended June 30, 1997. The
decrease on both a quarterly and year-to-date basis resulted primarily from a
continuing increase in the proportion of ExploraToy and private label sales
which are at margins lower than those experienced in the Company's core
markets and, for the six month period, the result of one-time adjustments
reported at the end of the first quarter.
SALES AND MARKETING EXPENSE.
Sales and marketing expense increased 9.1% or $151,000 to $1,819,000 for
the quarter ended June 30, 1998 from $1,668,000 for the same period in 1997.
The increase was primarily due to increased sales commissions and advertising
expense in the Company's mass market business. Sales commissions increased
as sales volume increased while advertising expense increases were incurred
both in support of the current quarter's sales and sales expected during the
third and fourth quarters.
Sales and marketing expense remained essentially unchanged at $3,257,000
or 22.0% of sales during the first half of 1998 from $3,191,000 or 21.5% of
sales during the corresponding period in 1997. Because of the seasonal
nature of its business, the Company expects sales and marketing costs
expressed as a percentage of sales to decrease during the third and fourth
quarters of 1998.
WAREHOUSING AND DISTRIBUTION EXPENSE.
Warehousing and distribution expense for the quarter ended June 30, 1998
decreased 14.0% or $130,000 to $798,000 compared to $928,000 for the same
period of 1997.
Warehousing and distribution expense decreased 10.2% or $187,000 to
$1,649,000 for the six month period ended June 30, 1998 compared to
$1,836,000 or 12.4% of sales for the corresponding period of 1997. The
decreases in warehousing costs for both the quarterly and six month periods
were due in part to increased efficiency resulting from the Company's
implementation of more modern, automated warehousing management systems.
Page 6 of 10 sequentially numbered pages
GENERAL AND ADMINISTRATIVE EXPENSE.
General and administrative expense for both the quarter ended June 30,
1998 and the six month period ended June 30, 1998 remained essentially
unchanged compared to the same periods in 1997.
Quarterly general and administrative expense was $941,000 in 1998
compared to $926,000 in 1997 while general administrative expense for the six
month period ended June 30, 1998 was $1,845,000 compared to $1,868,000 for
the same period in 1997.
INTEREST EXPENSE
Interest expense increased 43.1% or $22,000 to $73,000 for the second
quarter and increased 25.3% or $22,000 to $109,000 for the six month period
ended June 30, 1998. The increase in interest expense is due primarily to an
increase in borrowings under the Company's line of credit facility which was
used to finance increases in inventory associated with the expected growth of
the sales of products in the Company's mass market division.
OTHER INCOME AND EXPENSE
Net Other Income/(Expense) increased to an expense of $19,000 for
quarter ended June 30, 1998 compared to income of $112,000 for the same
period in 1997. The primary reason for the change was foreign exchange
losses incurred in connection with the Company's business in the UK and
Canada compared to foreign exchange gains in these areas during 1997.
Other income decreased 57.6% or $83,000 to $61,000 for the six month
period ended June 30, 1998 compared to $144,000 for the same period in 1997.
The majority of the change occurred in the second quarter for the reason
explained above.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Except for the historical information contained herein, this Report
contains forward-looking statements which involve a number of risks and
uncertainties, including but not limited to continued successful development
and acceptance of new products, dependence on off-shore contract
manufacturers, competitive factors, dependence on new distribution channels,
dependence on education funding by Federal, State and local governments,
dependence on key development and marketing personnel, general economic
conditions and the risk factors listed from time-to-time in the Company's
filings with the Securities and Exchange Commission.
Page 7 of 10 sequentially numbered pages
LIQUIDITY & CAPITAL RESOURCES
In recent years, the Company's working capital needs have been met
through funds generated from operations and from the Company's revolving line
of credit. The Company's principal need for working capital has been to meet
peak inventory and accounts receivable requirements associated with its
seasonal sales patterns. The Company increases inventory levels during the
spring and summer months in anticipation of increasing shipments in the
summer and fall. Accounts receivable have historically increased during the
summer and fall because of the Company's use of "dating" programs wherein
sales are made to the Company's customers for which payment is deferred for
one to three months based on the size of the sales orders. Due to said sales
patterns, the largest customer orders are shipped during the summer and fall,
hence increasing accounts receivable balances during the third and fourth
quarters.
During the period ended June 30, 1998, the Company's sources of funds
were primarily from the collection of outstanding accounts receivable and the
net increase in borrowings under the Company's line of credit.
The principal uses of cash during the period ended June 30, 1998 were
the funding of operating losses net of depreciation of $531,000, an increase
in inventory of $3,628,000, and an increase in taxes receivable of $690,000.
The increase in other assets of $587,000 was not a use of cash as it was
primarily the result of the Company bartering certain inventory (principally
excess ExploraToy products) for credit towards the future purchase of various
goods and services. The dollar value recorded in other assets relating to
this transaction of approximately, $500,000 is the net realizable value of
said inventory. This barter arrangement entitles the Company to acquire up
to approximately $1,200,000 of goods and services, however, there can be no
assurance that the Company will utilize all of said credits.
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 September 4, 1998, the
Company may borrow up to $8 million. The agreement requires the maintenance
of certain financial ratios, minimum annual net income amounts and tangible
net worth amounts, and provides for various restrictions including
limitations on capital expenditures and additional indebtedness. At June 30,
1998, the Company had $3,500,000 outstanding 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 8 of 10 sequentially numbered pages
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 26, 1998 the Company held its Annual Meeting of Shareholders.
The selection of Deloitte & Touche LLP as the Company's independent auditors
was ratified. 6,326,485 shares were voted in favor of ratification. 5,575
shares were voted against ratification and 4,200 shares abstained.
Shareholders elected the incumbents as Directors with the nominees
receiving the votes indicated below:
Votes For Votes For
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Burt Cutler 6,274,580
Jay Cutler 6,279,580
Courtney V. Moe 6,274,580
Gerald Bronstein 6,279,580
G. Reid Calcott 6,279,580
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the period in
question.
Page 9 of 10 sequentially numbered pages
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDUCATIONAL INSIGHTS, INC.
(Registrant)
Date 8/4/98 By: /s/ Jay Cutler
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Jay Cutler
President and Chief Executive Officer
Date 8/4/98 By: /s/ G. Reid Calcott
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G. Reid Calcott
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
Page 10 of 10 sequentially numbered pages