<PAGE>
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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from to
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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 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 August 1, 1996 there were 7,040,000 shares of common stock outstanding.
Total number of sequential pages: 10 There are no Exhibits in this
------ document; hence no Exhibit Index.
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PART I. ITEM 1. FINANCIAL STATEMENTS
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited, except for December 31, 1995 balance sheet information)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1996 1995
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 327 $ 378
Accounts receivable, less allowance for doubtful
accounts of $450 in 1996 and $394 in 1995 9,578 9,459
Inventory 11,397 10,309
Income taxes receivable 1,236 749
Other receivables 101 16
Prepaid expenses and other current assets 939 439
Deferred income taxes 716 716
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Total current assets 24,294 22,066
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PROPERTY AND EQUIPMENT, Net 5,641 5,844
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OTHER ASSETS 538 344
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TOTAL $30,473 $28,254
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 2,900
Accounts payable 2,638 $ 2,463
Accrued expenses 1,680 1,522
Current portion of long-term debt 99 99
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Total current liabilities 7,317 4,084
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LONG-TERM DEBT 1,238 1,295
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DEFERRED INCOME TAXES 291 291
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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 1996 and 1995 18,644 18,644
Cumulative translation adjustment 88 89
Retained earnings 2,895 3,851
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Total shareholders' equity 21,627 22,584
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TOTAL $30,473 $28,254
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</TABLE>
See accompanying notes to consolidated financial statements.
Page 2 of 10 sequentially numbered pages
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EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $8,653 $8,278 $16,319 $16,625
COST OF SALES 4,178 3,513 7,546 7,402
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GROSS PROFIT 4,475 4,765 8,773 9,223
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OPERATING EXPENSES:
Sales and marketing 1,745 1,799 3,767 3,370
Warehousing and distribution 929 903 1,811 1,948
Research and development 1,525 1,298 2,931 2,797
General and administrative 939 899 1,944 1,852
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Total operating expenses 5,138 4,899 10,453 9,967
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OPERATING LOSS ( 663) ( 134) ( 1,680) ( 744)
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OTHER INCOME (EXPENSE):
Interest expense (70) ( 106)
Interest income 6 73 17 134
Other income, net 105 105 198 179
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Total other income (expense) 41 178 109 313
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INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES ( 622) 44 (1,571) ( 431)
PROVISON (BENEFIT) FOR INCOME TAXES ( 250) 16 ( 615) ( 173)
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NET INCOME (LOSS) $( 372) $ 28 $ ( 956) $ ( 258)
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Net Income (Loss) Per Share $(0.05) $ 0.00 $ (0.14) $ (0.04)
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Weighted Average Number of
Common and Common Equivalent
Shares Outstanding 7,040,000 7,041,000 7,040,000 7,040,000
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</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 10 sequentially numbered pages.
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EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
June 30,
-----------------------------
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (956) $ (258)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts and
sales returns 78 80
Provision for inventory obsolescence (100)
Depreciation 491 341
Changes in operating assets and liabilities:
Accounts receivable (202) 1,721
Inventory (1,091) (2,749)
Income taxes receivable (487)
Other receivables (85) (280)
Prepaid expenses and other current assets (500) (966)
Other assets (194) 445
Accounts payable 183 419
Accrued expenses 158 (455)
Income taxes payable (696)
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Net cash used in operating activities (2,605) (2,498)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (288) (2,860)
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Net cash used in investing activities (288) (2,860)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase / decrease in line of credit 2,900
Proceeds from long-term debt 1,480
Repayments of long-term debt (57) (41)
Distribution to S corporation shareholders (340)
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Net cash provided by financing
activities 2,843 1,099
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Effect of exchange rate changes on cash (1) 6
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NET DECREASE IN CASH (51) (4,253)
CASH, BEGINNING OF PERIOD 378 4,484
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CASH, END OF PERIOD $ 327 $ 231
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SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 89 $ 59
Income taxes paid (refunded) (127) 880
See accompanying notes to consolidated financial statements.
Page 4 of 10 sequentially numbered pages
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EDUCATIONAL INSIGHTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of Educational Insights, Inc. (the
"Company") include all of the accounts of the Company and its wholly owned
subsidiary. All significant inter-company balances and transactions have
been eliminated in consolidation.
The interim consolidated financial statements are not audited, but include
all adjustments (including normal recurring adjustments) which are, in the
opinion of management, necessary for a fair representation of the financial
position, results of operations and cash flows for the period.
The consolidated financial statements as presented herein should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto as filed with the Securities and Exchange Commission and
included in the Company's Form 10-K for the year ended December 31, 1995.
The Company's fiscal year ends December 31. The results of operations for
the period ended March 31, 1996, 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 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. 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 will continue to apply
APB Opinion No. 25 to its stock based compensation awards to employees and
will disclose the required pro forma effect on net income and earnings per
share.
Page 5 of 10 sequentially numbered pages
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PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and accompanying notes, included in Part I
- - - Item 1 of this Quarterly Report, and the audited consolidated financial
statements and accompanying notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1995.
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 4.5% or $375,000 to $8,653,000 in the quarter ended
June 30, 1996, from $8,278,000 in the quarter ended June 30, 1995. Sales
decreased in the Company's school and direct sales markets, remained
essentially unchanged in the mass market sector and increased in the
independent toy, private label, software and international markets producing
the net increase of 4.5%.
Sales decreased 1.8% to $16,319,000 for the six months ended June 30,
1996 compared to $16,625,000 for the six months ended June 30, 1995.
The Company expects a gradual continuing decline in the sales of certain
of its older products which it plans to offset through the introduction of
new products most of which are expected to begin shipping in the third
quarter of 1996.
GROSS PROFIT.
Gross profit margin decreased to 51.7% for the quarter ended June 30,
1996 from 57.6% for the quarter ended June 30, 1995. This decrease was
primarily due to a shift in product mix away from higher margin product and
discounting associated with the sale of certain discontinued products.
Gross profit margin decreased to 53.8% for the six month period ended
June 30, 1996 from 55.5% for the six month period ended June 30, 1995. The
reasons for this decrease are the same as the reasons for the decrease in the
second quarter. The Company anticipates that the sales of lower margin
products including private label and ExploraToy products will increase as a
percentage of total sales during the last half of the year compared to 1995.
It does not anticipate a further decrease in gross profit margins resulting
from the sale of discontinued products.
SALES AND MARKETING EXPENSE.
Sales and marketing expense decreased by $54,000 to $1,745,000 or
20.2% of sales for the quarter ended June 30, 1996 from $1,799,000 or 21.7%
of sales during the same quarter of 1995. Sales and marketing expense
decreased marginally in the Company's traditional markets but increased in
its software market where it is participating for the first full year after
launching its first CD-ROM title late in 1995.
Sales and marketing expense increased by $397,000 to $3,767,000 or 23.1%
of sales during the first half of 1996 from $3,370,000 or 20.3% of sales
during the corresponding period in 1995. The increase for the six month
period was due primarily to increases in promotional and literature expense
during the first quarter and the addition of marketing expense associated
with the Company's software division.
WAREHOUSING AND DISTRIBUTION EXPENSE.
Warehousing and distribution expense for the quarter ended June 30, 1996
remained essentially the same at $929,000 compared to $903,000 for the same
quarter of 1995 and remained essentially
Page 6 of 10 sequentially numbered pages
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unchanged when expressed as a percentage of sales at 10.7% for the quarter
ended June 30, 1996 compared to 10.9% of sales for the quarter ended June 30,
1995.
Warehousing and distribution expense decreased $137,000 to $1,811,000 or
11.1% of sales for the six month period ended June 30, 1996 from $1,948,000
or 11.7% of sales for the corresponding period of 1995. The Company does not
anticipate any material changes in its warehousing and distribution
activities.
RESEARCH AND DEVELOPMENT EXPENSE.
Research and development expense increased by $227,000 to $1,525,000 or
17.6% of sales during the second quarter of 1996 from $1,298,000 or 15.7% of
sales for the corresponding period in 1995. This increase was due to
increases in the development of electronic learning aids and in continuing
high levels of research and development expenditures in the Company's
software/CD-ROM market where it expects to release its second title in late
1996.
Research and development expense for the six month period ended June 30,
1996 increased by $134,000 to $2,931,000 or 17.8% of sales from $2,797,000 or
16.8% of sales for the same period in 1995. The Company anticipates
continuing high levels of research and development expenditures but expects
research and development costs for the remainder of the year, when expressed
as a percentage of sales, to be lower than the 17.8% experienced during the
first six months of the year.
GENERAL AND ADMINISTRATIVE EXPENSE.
General and administrative expense increased $40,000 to $939,000 during
the second quarter from $899,000 during the corresponding quarter of 1995 but
remained essentially unchanged as a percentage of sales at 10.9% of sales for
the second quarter of both 1996 and 1995.
General and administrative expense increased by $92,000 to $1,944,000
during the six month period ended June 30, 1996 from $1,852,000 for the
corresponding period in 1995 but remained essentially unchanged as a
percentage of sales.
INTEREST EXPENSE
Interest expense increased to $70,000 during the second quarter of 1996
compared to $0 during the second quarter of 1995 and increased to $106,000
for the six month period ended June 30,1996 compared to $0 for the same
period of 1995. This increase was due primarily to interest paid on the
Company's long-term loan associated with its purchase of a new office
facility which it occupied in August 1995.
Page 7 of 10 sequentially numbered pages
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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 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.
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
spring and summer because of the Company's use of "dating" programs wherein
sales are made to the Company's customers in the spring and summer with
payment due in the latter part of the year -- usually in September and
December.
For the six month period ended June 30, 1996, the Company's primary
source of funds were increased borrowings under its revolving line of credit
in the amount of $2,900,000.
The principal uses of cash during the period ended June 30, 1996 were the
funding of operating losses net of depreciation of $465,000, an increase in
inventory of $1,091,000, an increase in prepaid expenses of $500,000 and an
increase of taxes receivable of $487,000.
For the period ended June 30, 1996 the Company spent $288,000 on the
purchase of property and equipment compared to $2,860,000 for the same period
of 1995. The unusually high level of capital spending in 1995 was associated
with the Company's purchase of a new office building and its relocation to
this site. The Company believes capital expenditures have returned to
traditional levels and should approximate depreciation charges during 1996.
The Company currently has a revolving line of credit with a bank which is
collateralized by substantially all of the Company's assets. Under the
revolving line of credit agreement, which expires June 3, 1997, the Company
may borrow up to $8 million. The agreement requires the maintenance of
certain financial ratios, minimum annual net income amounts and tangible net
worth amounts, and provides for various restrictions including limitations on
advances to the Company's subsidiary, capital expenditures and additional
indebtedness. At June 30, 1996, the Company had $2,900,000 outstanding
against this line of credit.
The Company believes that borrowings available under the revolving line
of credit and anticipated funds from operations will satisfy the Company's
projected working capital and capital expenditure requirements for at least
the next 12 months.
Page 8 of 10 sequentially numbered pages
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 21, 1996 the Company held its Annual Meeting of Shareholders.
The selections of Deloitte & Touche LLP as the Company's independent auditors
was ratified. 5,619,399 shares were voted in favor of ratification. 3,021
shares were voted against ratification and 2,500 shares abstained.
Shareholders elected the incumbents as Directors with the nominees
receiving the votes indicated below:
VOTES FOR VOTES AGAINST
--------- -------------
Burt Cutler 5,610,270 14,650
Jay Cutler 5,610,270 14,650
Courtney V. Moe 5,610,270 14,650
Gerald Bronstein 5,610,270 14,650
G. Reid Calcott 5,610,270 14,650
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 0f 10 sequentially numbered pages
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDUCATIONAL INSIGHTS, INC.
(Registrant)
Date By:
-----------------------------------
Jay Cutler
President and Chief Executive Officer
Date By:
-----------------------------------
G. Reid Calcott
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
Page 10 of 10 sequentially numbered pages
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SEC FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 327
<SECURITIES> 0
<RECEIVABLES> 10,028
<ALLOWANCES> 450
<INVENTORY> 11,397
<CURRENT-ASSETS> 24,294
<PP&E> 5,641
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,473
<CURRENT-LIABILITIES> 7,317
<BONDS> 1,238
0
0
<COMMON> 18,644
<OTHER-SE> 2,983
<TOTAL-LIABILITY-AND-EQUITY> 30,473
<SALES> 16,319
<TOTAL-REVENUES> 16,319
<CGS> 7,546
<TOTAL-COSTS> 7,546
<OTHER-EXPENSES> 10,453
<LOSS-PROVISION> 78
<INTEREST-EXPENSE> 106
<INCOME-PRETAX> (1,571)
<INCOME-TAX> (615)
<INCOME-CONTINUING> (956)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (956)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
