<PAGE>
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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 September 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 __________
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
incorporation or organization) Identification No.)
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
------ -----
As of October 30, 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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Page 1 of 10 sequentially numbered pages.
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PART I. ITEM 1. FINANCIAL STATEMENTS
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited, except for December 31, 1995 balance sheet information)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 385 $ 378
Accounts receivable, less allowance for doubtful
accounts of $502 in 1996 and $394 in 1995 11,206 9,459
Inventory 12,129 10,309
Income taxes receivable 312 749
Other receivables 175 16
Prepaid expenses and other current assets 718 439
Deferred income taxes 716 716
------- -------
Total current assets 25,641 22,066
------- -------
PROPERTY AND EQUIPMENT, Net 5,483 5,844
------- -------
OTHER ASSETS 575 344
------- -------
TOTAL $31,699 $28,254
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 2,350
Accounts payable 3,379 $ 2,463
Accrued expenses 1,880 1,522
Current portion of long-term debt 99 99
Deferred income 255
------- -------
Total current liabilities 7,963 4,084
------- -------
LONG-TERM DEBT 1,222 1,295
------- -------
DEFERRED INCOME TAXES 291 291
------- -------
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 91 89
Retained earnings 3,488 3,851
------- -------
Total shareholders' equity 22,223 22,584
------- -------
TOTAL $31,699 $28,254
------- -------
------- -------
</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 Nine Months Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
-------- ------- -------- --------
<S> <C> <C> <C> <C>
SALES $11,751 $12,004 $28,070 $28,629
COST OF SALES 5,612 5,668 13,158 13,070
-------- ------- -------- --------
GROSS PROFIT 6,139 6,336 14,912 15,559
-------- ------- -------- --------
OPERATING EXPENSES:
Sales and marketing 2,189 2,170 5,956 5,540
Warehousing and distribution 751 986 2,562 2,934
Research and development 1,205 1,180 4,136 3,977
General and administrative 971 1,220 2,915 3,072
-------- ------- -------- --------
OP
Total operating expenses 5,116 5,556 15,569 15,523
-------- ------- -------- --------
OPERATING INCOME (LOSS) 1,023 780 (657) 36
-------- ------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (99) (38) (205) (38)
Interest income 5 2 22 136
Other income, net 44 76 242 255
-------- ------- -------- --------
Total other income (expense) (50) 40 59 353
-------- ------- -------- --------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES 973 820 (598) 389
PROVISON (BENEFIT) FOR INCOME TAXES 380 309 (235) 136
-------- ------- -------- --------
NET INCOME (LOSS) $ 593 $ 511 $ (363) $ 253
-------- ------- -------- --------
-------- ------- -------- --------
Net Income (Loss) Per Share $0.08 $0.07 $ (0.05) $0.04
-------- ------- -------- --------
-------- ------- -------- --------
Weighted Average Number of
Common and Common Equivalent
Shares Outstanding 7,040 7,041 7,040 7,042
-------- ------- -------- --------
-------- ------- -------- --------
</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)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1996 1995
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (363) $ 253
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts and sales returns 133 135
Provision for inventory obsolescence (100)
Depreciation 657 547
Changes in operating assets and liabilities:
Accounts receivable (1,867) (484)
Inventory (1,817) (4,455)
Income taxes receivable 437
Other receivables (159) (109)
Prepaid expenses and other current assets (279) (444)
Other assets (231) 514
Accounts payable 901 1,850
Accrued expenses 358 (368)
Deferred income 255
Income taxes payable (676)
--------- --------
Net cash used in operating activities (1,975) (3,337)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (296) (3,484)
--------- --------
Net cash used in investing activities (296) (3,484)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase / decrease in line of credit 2,350 1,697
Proceeds from long-term debt 1,480
Repayments of long-term debt (73) (63)
Distribution to S corporation shareholders (353)
--------- --------
Net cash provided by financing activities 2,277 2,761
--------- --------
Effect of exchange rate changes on cash 1 4
--------- --------
NET INCREASE IN CASH 7 (4,056)
CASH, BEGINNING OF PERIOD 378 4,484
--------- --------
CASH, END OF PERIOD $ 385 $ 428
--------- --------
--------- --------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 188 $ 121
Income taxes paid (refunded) $ (672) $ 912
</TABLE>
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.
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 decreased by 2.1% or $253,000 to $11,751,000 in the quarter ended
September 30, 1996, from $12,004,000 in the quarter ended September 30, 1995.
Sales decreased in the Company's school and direct sales market and in the
Company's subsidiary in the UK but, they increased in the mass market and
private label market.
Sales decreased by 2.0% or $559,000 to $28,070,000 for the nine months
ended September 30, 1996, from $28,629,000 for the nine months ended
September 30, 1995.
For the quarter and the nine month period the decrease was primarily due
to the fact that the decline in sales of certain of the Company's older
products exceeded the rate of sales from new products which were introduced
in the third quarter. Although the sales of these new products are meeting
expectations, they were introduced too late in the third quarter to
completely offset the decline in older products for the quarter or year to
date.
The Company's performance for the fourth quarter depends heavily on the
continued acceptance of its newly introduced products.
GROSS PROFIT.
Gross profit margin decreased to 52.2% for the quarter ended September
30, 1996 from 52.8% for the quarter ended September 30, 1995.
Gross profit margin decreased to 53.1% for the nine month period ended
September 30, 1996 from 54.3% for the nine month period ended September 30,
1995.
The Company anticipates that the sale of lower margin products including
private label and ExploraToy products will continue to be a larger percentage
of total sales during the remainder of 1996 than in previous years.
SALES AND MARKETING EXPENSE.
Sales and marketing expense increased by $19,000 to $2,189,000 or 18.6%
of sales for the quarter ended September 30, 1996 compared to $2,170,000 or
18.1% of sales during the same quarter of 1995.
Sales and marketing expense increased by $416,000 to $5,956,000 or 21.2%
of sales for the nine month period ended September 30, 1996 compared to
$5,540,000 or 19.4% of sales for the same period in 1995. The increase was
due in part to the increase in marketing expense associated with the
Company's CD-ROM product line where selling and marketing costs, when
expressed as a percentage of sales, significantly exceed selling and
marketing costs in the Company's other markets.
Page 6 of 10 sequentially numbered pages.
<PAGE>
WAREHOUSING AND DISTRIBUTION EXPENSE.
Warehousing and distribution expense decreased $235,000 to $751,000 or
6.4% of sales for the quarter ended September 30, 1996 compared to $986,000
or 8.2% for the same quarter of 1995.
Warehousing and distribution expense decreased $372,000 to $2,562,000 or
9.1% of sales for the nine month period ended September 30, 1996 compared to
$2,934,000 or 10.3% of sales for the same period in 1995.
The Company has continued to achieve efficiencies in its warehousing and
distribution operation in Tennessee and anticipates that warehousing and
distribution expense expressed as a percentage of sales will remain below the
level achieved in 1995.
RESEARCH AND DEVELOPMENT EXPENSE.
Research and development expense increased $25,000 to $1,205,000 or
10.3% of sales for the quarter ended September 30, 1996 compared to
$1,180,000 or 9.8% of sales for the same quarter of 1995.
Research and development expense for the nine month period ended
September 30, 1996 increased $159,000 to $4,136,000 or 14.7% of sales
compared to $3,977,000 or 13.9% of sales for the same period of 1995.
The Company has continued high levels of research and development
spending in its effort to develop a range of new products to replace the
gradually decreasing sales of its more mature products. This increase has
been concentrated in electronic learning aids such as the Company's Talking
Globe and Reading Safari products and in the expansion of the Company's
CD-ROM product line.
GENERAL AND ADMINISTRATIVE EXPENSE.
General and administrative expense decreased by $249,000 to $971,000 or
8.3% of sales during the third quarter compared to $1,220,000 or 10.2% of
sales for the same period of 1995.
The decrease was due in part to the partial reversal of the Company's
accrual for its discretionary profit sharing plan.
General and administrative expense decreased by $157,000 to $2,915,000
or 10.4% of sales for the nine month period ending September 30, 1996
compared to $3,072,000 or 10.7% of sales during the same period of 1995. The
most significant reasons for the decrease in general and administrative
expense include decreases in accounting and consulting fees, rent, telephone
expense and the previously mentioned decrease in profit sharing accruals.
The decrease in rent, which is partially offset by an increase in
depreciation and interest expense, is the result of the relocation of the
Company's headquarters from rented facilities to facilities owned by the
Company.
INTEREST EXPENSE.
Interest expense increased $63,000 to $99,000 for the quarter ended
September 30, 1996 compared to $38,000 for the quarter ended September 30,
1995. The increase was due to increased borrowing under the Company's line
of credit required to finance inventory and accounts receivable growth and
interest relating to the Company's long-term debt associated with the
purchase of its new office facility.
For the nine month period ended September 30, 1996 interest expense
increased by $167,000 to $205,000 compared to $38,000 for the same period in
1995.
The reasons for the increase for the nine month period are the same as
the reasons for the increase for the third quarter.
Page 7 of 10 sequentially numbered pages.
<PAGE>
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 nine month period ended September 30, 1996, the Company's
primary sources of funds were borrowings under its revolving line of credit
in the amount of $2,350,000 and an increase in accounts payable of $901,000.
During the quarter ended September 30, 1996, borrowings under the line of
credit decreased $550,000 from June 30, 1996.
The principal uses of cash during the period ended September 30, 1996
were for the funding of an increase in inventory in the amount of $1,817,000
and accounts receivable in the amount of $1,867,000.
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 September 30, 1996, the Company had $2,350,000 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.
<PAGE>
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.
<PAGE>
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.
Date: Nov. 1, 1996 By: /s/ Jay Cutler
--------------------- -----------------------------------------
Jay Cutler
President and Chief Executive Officer
Date: Nov. 1, 1996 By: /s/ G. Reid Calcott
--------------------- -----------------------------------------
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 384
<SECURITIES> 0
<RECEIVABLES> 11,708
<ALLOWANCES> 502
<INVENTORY> 12,129
<CURRENT-ASSETS> 25,641
<PP&E> 5,483
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,699
<CURRENT-LIABILITIES> 7,963
<BONDS> 1,222
0
0
<COMMON> 18,644
<OTHER-SE> 3,579
<TOTAL-LIABILITY-AND-EQUITY> 31,699
<SALES> 28,070
<TOTAL-REVENUES> 28,070
<CGS> 13,158
<TOTAL-COSTS> 13,158
<OTHER-EXPENSES> 15,569
<LOSS-PROVISION> 133
<INTEREST-EXPENSE> 205
<INCOME-PRETAX> (598)
<INCOME-TAX> (235)
<INCOME-CONTINUING> (363)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (363)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
